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U.S. Geothermal Inc. (NYSEMKT:HTM)

F2Q12 Earnings Call

November 15, 2012 11:00 am ET

Executives

Daniel Kunz – Chief Executive Officer

Analysts

Jared Alexander – Canaccord Genuity

Eric Wu - Fertilemind Capital

Operator

Greetings and welcome to the US Geothermal’s 2012 Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Daniel Kunz, Chief Executive Officer. Thank you. Mr. Kunz, you may begin.

Daniel Kunz

Thank you, operator, and good morning and thank you for attending the conference call this morning on earnings for the second quarter of our fiscal year. I do want to remind everyone our listeners that there will be an accounting change for next year for the calendar year 2013 wherein our quarters each quarter will coincide with the calendar year. So this is the last year we’re referring to this as our second quarter. There will only be three quarters in our filings for 2012.

I would also like to state that I’d make some brief comments about the financial statements that we just filed today and yesterday and I’d point out some of the various notable pieces on the financial statements. I’m also going to address a little bit on the recent announcements that we’ve made, and then I'm going to do a bit of a summary on where I think we’re headed with the company, and then we'll open it up to Q&A.

I’d like to work from the financial statements that you may have in front of you and I draw your attention first to the balance sheet. Under that we have some entries that have changed and I just wanted to point out. One, the cash and cash equivalents is little stronger this quarter compared to this is the sixth month comparison that we do there.

The other thing I wanted to point out is that the cash grant receivable under note 4 has been received. I think that’s one of the announcements this morning that went out and I’ll talk a little bit more about that in detail. But what that does also on the balance sheet is it removes a note payable down in current liabilities of $7.5 million and those two items, the cash grant and the note payable net each other, and then that difference in cash is transferred to the current cash account in the accounting of that transaction.

So we’re very happy to have that ITC cash grant and that was for San Emidio project, that’s one of the programs that the project qualified for a number of years – a year and half or so back and then we’ve been executing on the filing and getting that grant in. That is under Section 1603 and they call it Specified Energy project in lieu of tax credit.

I would also draw your attention on the balance sheet under current assets to the operating securities project that is a cash item for us that we put up as a security deposit for our San Emidio contract and so that is acting as a security device for that PPA that we have there, and that is a notable change. We are increasing our property, plant and equipment investments, which are basically being transferred out of our construction in project or in process account into the property, plant and equipment.

And so as we move toward closing of the construction then we will register those loans. But I think it’s also important to note that we are not incurring any interests associated to the construction loans that’s all being capitalized as of this time.

Under current liabilities, we have a smaller accounts payable under the construction and under the accrued liability, this is fairly normal on the accounts payable accrued liability piece, but the big change on the construction is the timing difference between the time that we incurred the costs and have construction in progress relative to the time we are able to draw upon the loan to pay the contractor.

So that’s improved and now we have a normal payable accounts there. The other item in the retention payable under note 17, the note gives you enough details that are really attractive. But what’s happened there, as we’ve moved the retention portion from a long-term liability into a current, and what that is, is what we owe under our EPC contracts as the final payments to the two contractors, one at Neal Hot Springs and the other at San Emidio. In terms of their retention roughly 10% and that’s the total is a combine between the two contracts and those become the last payments after all of the final milestones are met and delivered on punchless items are complete.

And so the other item on the balance sheet is the construction loan payable. As I mentioned, we’re moving from construction in progress to our capital accounts on the property side, but we’re also increasing the draws that we making on our two loans. These are non-recourse project finance loans as you probably are well aware, one is the Neal Hot Springs is [contracted] [ph] loan from the Department of Energy, and the second is construction loan at San Emidio that is about to be replaced with the term-loan from a premier financial group.

I’ll now move to the [guidance] [ph] statements of operations. I use to call this the income statement. There is really not a lot to be learned in our history here, but there is an important thing I want to point out about the most recent three months ended September 30.

We’re starting to see the improvements in the operations that we’ve been planning for some time. Net income at the plant level and this is for that three quarter, three months ending 2012 is $270,000 in income. You also note that we’ve reorganized a little bit our income statement here, we’re including depreciation and amortization up under plant expenses as the line item that’s been now isolated and you can see that number now that allows you to look at things like EBITDA and those kind of metrics.

In the future, we’re going to enhance the details associated with our interest cost on the loan. As we said now we don’t have a specific interest charge per se other than some normal operating interest associated with our accounts but in the future we will have a interest charge line that’s related to our two non-recourse loans. So that you can see that kind of detail.

We’re pretty pleased with the progress of the company at this point. It’s on track. We’re starting to see these revenues flow through. We’re seeing our cost stabilize and being moved out of development into fewer operating kinds of costs. There are a couple of schedules that show this the detail in the financial statements that have been added, and specifically for Raft and San Emidio, you can look at those tables and gain a little more insight into how the operations are going.

With regard to our cash flow statement, just wanted to draw your attention to a couple of items there. Under financing activities, we did issue $1.3 million worth of stock under a facility known as ATM or At The Market, that facility has allowed us to keep cash balance while we are going through some of these timing differences with our loan draws and those kinds of matters. We are no longer actively using that facility, but it is a credit facility - equity facility available to us and so we did avail ourselves to that during the six months ended September.

In addition, there was a fund of $7 million provided by our partner at San Emidio. This is a fund that is currently partially still remain, there is some $4 million of that is remains in the Hot Springs. And it’s essentially the contingency account, we are looking at, we running all of the numbers for our final sharing at Neal to determine the final equity share between ourselves and our partner, and it will includes returning a portion of that unused capital back prior to running those numbers.

So those are the primary things I wanted to draw your attention to on the financial statement. I will go through the rest of the notes and MD&A and draw a few more things to your attention under no early discussed the cash grant.

And as I said this morning, we issued a news release that seems to be a interesting recourse where we’ve had three major announcements in the same week. We announced the news when it happens, so that’s why those were all cluster this week and certainly the cash back we’ve received the funds yesterday.

I would also draw your attention to number 6. As I said we are capitalizing interest under the construction loans and that note allows you to go through that with a little more detail and look at things like the changes in the construction in progress, accounts for the three projects. So that’s the detail we have enhanced and added to there. As I said the note 8 is the bridge loan disclosure on the $7.5 million loan that as since now has been paid thereof through the transaction this morning.

The other piece that I wanted to draw your attention to is note 12, we’ve added some disclosure there that’s helpful in looking at the advances to date by month for each of the draws that were made on the project loan at Hot Spring.

That’s been drawn down to nearly $72 million, which I think is important to note there is that each of those drives is a separate loan calculation that attracted its own prevailing interest rate at the time. In the aggregate we will pay a composite interest rate for each of those and you can see they are quite attractive.

The August drive was 2.36% annual interest rate. Also recalled that this is a 22 year term-load so that it allows the project to amortize that cost over a longer period of time enjoying a very low cost interest rate and enhanced cash flow of the project.

There is another note there as well under note 12 for the construction load at Sanamedio, which we are working on during this next 60 days period. Before the end of the year, we expect to have that repaid and a term loan in place thereby a premier financial group.

I mentioned under note 13 the capital stock issuances that are detailed there under that facility known as ATM, so you can see the transactions by quarter there. I think the other notes that I wanted to draw your attention to in terms of just a specific means to take a look at with the detail we’ve added note 19. as I said, the new structure of our income statement there allows for some more detail, and then we also break it down by six and three months. we also provided a note 21 on subsequent events.

so I’m going to go through the subsequent events now and talk a little bit about that. First I want to check my other notes on the MD&A, because I wanted to – from the MD&A, I wanted to also show you a few items, which is under page 49, there are some details there by project. So the San Emidio project is detailed there as well as Raft River is detailed in that same area, and what we do there is we show the income statement as well as output of sales. This is not a new note that has been restructured a little bit to show you the depreciation and amortization components relative to those projects. I think the good news there is that the projects are generally cash flow positive. they’re starting to earn income. and as a result, we are on track toward our positive growth period in our company as we’ve been planning for sometime.

So I’m going to conclude that part of the discussion, and provide a little bit of an update on the two announcements this week. I mentioned the cash grant, that’s an ITC cash grant, I just did want to say that we still have a portion of that original application amount that has been satisfied and is under review so there is another approximately $1 million under review having to do with the couple of the other assets that were included in the original brand application, so we’re continuing work on that and hopefully we’ll have a ask rate whether we are entitled to that remaining $1 million portion with some observation wells that we drilled.

The second announcement that actually came before was the increase of output rating on San Emidio. We were pretty excited about this, the plant is currently operating there is still some minor tunings that are going on related to the punch list of activities that the contractors working on this has been a long process as you well know but, what we’ve been focused on is to make sure that the plan operate the way we want with the operational control system during what we want and then the final matters being completed this includes even things like paint and some of the minor final matters under way.

We have the reason in the news release, it is the more important fees that is we’ve taken care, custody and control of the project and our operators are now writing the plan and doing very well. It has averaged about 11.5 megawatts net and so we’ve rated it based on the capacity test that was performed on the plant. We are quite pleased with that. We also need to I think the question remembering here that we’re using an existing well deal, and we’re using a proven reservoir that’s already produced for some 20 years.

We took out an old plant down. We put this new plant up, hooked this new product to the existing well deal. So we’re really doing a remarkable thing here in that what converting – we’re getting about three times as much electricity out of the same well deal that was being utilizing before and it’s a very positive thing not only for company because of the enhanced revenues, but reservoir itself and preserves and utilize it more efficiently for the long-term. So we are pretty pleased with that.

Let me also now just do a quick summary and then I’ll open it up to some question. The events I think that we’ve seen in the last month or so and most recently in the last several days, we think bode very well for renewable energy in this country. The election results promise to show that the current administration will retain the focus on clean energy.

We see in California yesterday the cap-and-trade on carbon being initiated and that’s bound to have an impact on valuable assets like ours that produce clean energy without any appreciable carbon emission and therefore enhancing the value of clean energy over the longer term.

We also I think have the view that the marketplace has been pretty rough on small cap stocks on most declarative stocks like our own, but we are about to turn the corner. In 2013, we expect to have all three projects operating, earnings and cash flow from the projects on a sustainable basis. And it would allow us to have a stronger putting, have a more core value based on those earnings as well as we have a strong growth profile.

We’ve been quite focused on our growth opportunities. We see some around the existing trends (inaudible) where we also see the major growth for the company in the very near term in our project in Guatemala at the steam project. We are in discussions for a final PPA there at a very attractive price.

And so for our company, it’s the team that put together these last two projects we have been quite successful in putting all three of these power plants online, we will now start to turn our attention towards Guatemala. That doesn’t reduce our interest in our assets, we do have other properties nearby, they are quite near the California border and for us the market finally does change. We will reinvigorate our focus on the California market, and in particular utilizing our San Emidio assets. (inaudible) assets, which we are very near the California border and we hope we can get prior to there in the future.

So with that I would turn it back over to the operator, and then we will go for some quick Q&A here.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Thank you. Our first question comes from the line Jared Alexander with Canaccord Genuity. Please proceed with your question.

Jared Alexander – Canaccord Genuity

Good morning.

Daniel Kunz

Good morning, Jared.

Jared Alexander – Canaccord Genuity

Just a few quick questions here, I am wondering if I can just get your thoughts on San Emidio II, whether you think that’s still doable by the end of ’13 or you kind of going to shift your focus to Guatemala and put it on the back burner for the time being?

Daniel Kunz

Yeah, Jared, it’s the latter; we are - in terms of it qualifying for the ITC cash grant in time, we got to qualify, we’re just not be able to construct and have the plant online. So given the risk of missing the ITC, we readjusted our planning there. A lot of it has to do with the delays in the first unit and getting that one plant up and running. So we are now shifting our focus, that doesn’t diminish our interest in the second unit. In fact we have active discussions going on with investors to move toward a development plan there. We’ll have to wait and see on the final economics because of the potential for an ITC extension whether we engage in a PCC kind of structure there we don’t know yet. We do know however that we have three things we’re excited about there, Jared.

One, we have a PPA for that second unit in place and attractive one that’s our existing PPA. We have the option to increase the output. We have transmission there in place. We’ll have to expand the capacity a little bit, but transmission agreements [and lines] [ph] can be utilized for the second unit.

And then third, we have a remaining exploration grant there, we’ve been doing some drilling for additional well field capacity there. We’re quite bullish on what we are finding, there is both the well field capacity to the south that we are working on permitting some new well pads and then there is of course an entire development area to the north that we have high degree of confidence in these days. But for the near-term because of the ability to access cash [grant] [ph] since that expired, our focus will be wait and see how the economics turn on tax incentives and then focus on Guatemala.

Jared Alexander – Canaccord Genuity

Okay, great. Thanks for that. I wanted to again shift gears here a little bit on the San Emidio, the permanent financing that you’re expecting here soon, can you provide us any kind of range or what kind interest rate may come with that loan?

Daniel Kunz

Yeah, our term sheet would put it below a fixed rate of 8%, and so somewhere between 7% and 8% and we’re expecting it would be a 25 year term loan.

Jared Alexander – Canaccord Genuity

Okay, great. That’s helpful. And then I guess on my last question here on Neal. So in your opening remarks there you talked a little bit about how there is the $4 million of the contingency still sitting there. So does that mean, I guess going forward we should assume that Enbridge’s interest will be something less than the 44% or should we be staying at 44%?

Daniel Kunz

We’re using less than 44%. We are anticipating – the way that works Jared, is we run a model, once we have commercial operation which is soon we’ll be running a model, that model is predetermined; we put in the variables which are – they’re investment based and then their repayment dates. We are anticipating to use part of the cash grant, the ITC cash grant to repay - pay down their investments, to get in the IRR. Those upfront repayments including the return on this $4 million should be such that we can then require less of the total project to service a returns criteria. So it’s rather sophisticated way to do it, but once that model is run then it’s torn up and the parties forever have their equity interests, they are at risk, equity partners like we are, so this is one final adjustment. So it’s likely that it will be somewhere around let’s say between 30% and 40%, probably 35% or so percent is what we’re looking at right now.

Jared Alexander – Canaccord Genuity

Okay. That’s great. Thank you very much. Those are my questions.

Daniel Kunz

Thanks Jerry.

Operator

Thank you. (Operator Instructions) Thank you. Our next question comes from the line of Eric Wu with Fertilemind Capital. Please proceed with your question.

Eric Wu - Fertilemind Capital

Hi, there. Just a quick question on the ITC shortfall, can you give us little more details on the timeline you expect that will be resolved or have any kind of different outcome?

Daniel Kunz

Yeah, thanks Eric. There is about $1 million worth of this observation wells that we've originally made the application for; we pulled them out of the application to streamline the payment of the amount that we announced this morning. So we’ve reapplied for the difference that’s going through a technical review and inside of the system if you will, and so it's hard to say when but it is in process now and we would hopefully see something within a couple of months.

Eric Wu - Fertilemind Capital

And the progress on getting a PPA in Guatemala, do you have a rough timeline on that at all?

Daniel Kunz

Well, actually the MOU is a binding MOU that puts together a lot of the key, let's say components of an agreement, but what we've done now is, we're working on the details of the actual agreement itself, and so we're working from a document that we are very comfortable with as a good base to start, and that's just beginning, if I were to try to say, it's hard for me to predict given the – just the pace of things, but I would put it somewhere in the second quarter.

Eric Wu - Fertilemind Capital

Okay, that's helpful. Are there any milestones there anything at all or just the discussion?

Daniel Kunz

It’s ongoing discussions, there’s no real penalties or anything of those nature, in fact there is (inaudible) if we don't want to move forward, but the biggest thing is that there are a number of conditions proceeding to it actually becoming effective so what we would do is get all the basic agreement in place, sign it if you will and activate it and then it becomes incumbent upon us to achieve some of the milestones thereafter, and for us that means securing a commitment for the project funding. And then we’re also looking, seeking strategic equity investments, which we are having discussions on and we look forward to advancing those discussions such that we have our equity piece organized, we have the debt commitment lined up, and then the PPA then becomes effective, and then there might be some dates in there that we have to start meeting after that.

Eric Wu - Fertilemind Capital

Got it, okay. And I think the last question, I guess just real quickly at Neal Hot Springs, COD still expected in some time next month or so?

Daniel Kunz

Well, it will be sooner than that. We made application; I don’t know what the internal process is for a customer there but we expect to be able to announce that just as soon as we hear something. The plant - there are two modules that are operating. We also want to make it clear to everyone that those modules are going through the typical tuning if you will that, there is operational, those are computer controlled systems that can control one module then when two come on, they want to control, when one is up and one is down, when they’re both on, when they’re both off, and they will add the third one. But our contract with commercial operations at Idaho Power for the COD date only really required us to have one on. So we’ve made application and we should be, it could be as early as next week we will be making that announcement.

Eric Wu - Fertilemind Capital

Okay. But then the actual 22 megawatts is probably not going to come…

Daniel Kunz

So the way to think about that is once we go commercial, the power we re generating and this will be off to two units and it might be intermittent for another 30 or so days. But that power is being sold at the commercial rate, instead of right now at a excess power rate. And then the third unit will be added, that third unit is going to this typical start up issues or situation and we are looking at probably some time early December that unit will be up and generating power.

So the month of December will be one where all three units will be operating together, there will be some turn up issues. Again integrating the software so that now there is the permutations of one up, two up, three up, one down, two down, three down, all up, all down and the computer system has to be able to address all of the variables and the valves and the control systems for all that. But we’re getting very, very closer and I would say for your planning purposes figure that should be up and running pretty well January.

Eric Wu - Fertilemind Capital

Sounds good, okay those are my questions.

Daniel Kunz

Thanks Eric.

Operator

(Operator Instructions) Since there are no questions at this time, I would like to turn the call back over to you for closing comments.

Daniel Kunz

Okay very good. Well I still appreciate your interest this morning in our call. This is an important quarter for us, as I said we’re starting to see the effects of our business plan being executed and executed well. We have a very hard working team here who have kept their head down so to speak and work on our projects, deliver them, we put out our new releases when the information is available to us, and becomes material, and we will continue to do so. We’re starting to see earnings level of income coming in from the operations.

So we really look forward to the next couple of quarters to show you the investors and our shareholders, what we’re doing here, and how that’s translating into operating income and cash flow. Thank you very much for attending this call, we will see you next quarter.

Operator

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time, and thank you for your participation.

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