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

Q1 2014 Earnings Conference Call

May 15, 2014 11:00 ET

Executives

Saf Dhillon - Director, Investor Relations

Dennis Gilles - Chief Executive Officer

Kerry Hawkley - Chief Financial Officer

Doug Glaspey - President and Chief Operating Officer

Analysts

John McIlveen - Jacob Securities

Jared Alexander - Canaccord Genuity

Chip Richardson - Wedbush Securities

Operator

Greetings. And welcome to the U.S. Geothermal First Quarter 2014 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Saf Dhillon, Director of Investor Relations. Thank you, Mr. Dhillon. You may begin.

Saf Dhillon - Director, Investor Relations

Thank you, operator, and good morning everyone. I’d like to welcome you to U.S. Geothermal’s Investor Update Conference Call covering our first quarter 2014 results. Today’s call is being broadcast live over the phone and via webcast which can be found on our website at www.usgeothermal.com. You will find the access to the webcast on our website under our upcoming events on our Homepage and under our News Tab.

Joining me for this morning’s call are Dennis Gilles, our Chief Executive Officer, Doug Glaspey, our President and Chief Operating Officer, and Kerry Hawkley, our Chief Financial Officer.

Before we begin we would like to remind you that the information provided during this call may contain forward-looking statements relating to current expectations, estimates, forecast and projections about future events that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995.

These forward-looking statements generally relate to the company’s plans, objectives and expectations for future operations and are based on management’s current estimates and projections of future results or trends. Actual future results may differ materially from those projected as a result of certain risks and uncertainties. For additional information please refer to our most recent SEC filings which are on file with the SEC and on U.S. Geothermal’s website. After the summaries by our executive team we’ll open the line for questions.

I’ll now turn the call over to Dennis to lead our presentation.

Dennis Gilles - Chief Executive Officer

Thank you, Saf and good morning everyone. And thank you for joining today’s call and your continuing interest and support of U.S. Geothermal. As you will soon hear, we have started 2014 with a very strong first quarter with EBITDA rising approximately 20% over the prior-year quarter. Our generation, our revenue, EBITDA, and net income, all exceeded our pre-year projections. Our facilities are now performing excellently with very high availabilities and our growth plans are well underway.

I would now like to have Kerry Hawkley, our Chief Financial Officer provide you with a summary of our first quarter 2014 financials, highlighting as well the items of particular interest. Kerry?

Kerry Hawkley - Chief Financial Officer

Thank you, Dennis, and thank you everyone for being on the call. During the call, we will present non-GAAP financial measures such as EBITDA and adjusted EBITDA. Reconciliations to the most directly comparable GAAP measures and management’s reason for presenting such information is set forth in the press release that was issued last night. Because these measures are not calculated in accordance with U.S. GAAP, it should not be considered in isolation from our financial statements prepared in accordance with GAAP.

On our balance sheet as of March 31, 2014, we have total assets of $219.8 million. You’ll note that the assets are down, and it’s primarily attributable to our cash which is now at $18.4 million. A portion of the cash has been paid to our partner at Neal Hot Springs, Enbridge, and to make required note payments at both the Neal and San Emidio facilities. Our total liabilities are $102.4 million. Our non-controlling interests are down to $46.0 million, and our net stockholders’ equity is up to $71.4 million. On our income statement as of March 31, 2014, we have a three-month net income of $2.5 million. Our revenues are up 20% from Q1 of 2013. Our energy production is up 16% if you compare 2014 to 2013. At our plants, we have certain costs that have increased; insurance, taxes, and refrigerant costs were up if you compare 2014 to 2013 by approximately $400,000.

Drilling costs in 2014 are capitalized at both our El Ceibillo and San Emidio Phase 2 projects. Interest expenses at San Emidio for the quarter were $517,000. In 2013, this was a capitalized cost, so the interest expense for 2014 of $517,000 has a direct impact to the net income attributable to USGEO as this is a 100% USGEO board cost. EBITDA for Q1 of 2014 was $5.1 million versus $4.4 million in quarter one of 2013.

Cash flow; our first quarter cash generated by operations for 2014 was $5.0 million. We have paid notes, reduced our notes payable by $2.3 million during Q1, and we have made payments of $13.3 million to our non-controlling interest, Enbridge during Q1. This results in our cash and cash equivalents at quarter end of $18.4 million. Our statement of stockholders’ equity as of March 31, 2014; we’ve added net income of $2.5 million, and you’ll note the exercise of options and stock purchase warrants during Q1 that resulted in the issuance of 859,771 shares. This is a very good benefit for our employees and provides incentives to them.

With that I’ll turn it back to Dennis.

Dennis Gilles - Chief Executive Officer

Thanks, Kerry. Now I’m going to ask Doug Glaspey our President and Chief Operating Officer to provide the highlights of the operating performance for the first quarter of 2014 as well as the summary of our development activities. Doug?

Doug Glaspey - President and Chief Operating Officer

Thank you, Dennis. Good morning everybody. For total generation for the first quarter from all three plants, we had 98,884 megawatt hours that’s compared to 85,040 megawatt hours in the first quarter of 2013, which is a 16% increase over that quarter. Our first quarter generation increased slightly compared to the fourth quarter of 2013 due to both the continued high availability of all three facilities and to low winter ambient temperatures.

I’ll note that we have our annual maintenance outages scheduled for the second quarter both to take advantage of the seasonally low power prices under two of our power purchase agreements but also because our customers, the power companies require us to take our scheduled outages during either the spring or the fall during our low power demand seasons.

At Neal Hot Springs, we had generation of 56,047 megawatt hours for the quarter and the plant operated at 97.7% availability. Our average hourly generation for the first quarter at Neal was 26.56 net megawatts per hour. You might recall that Neal is the only plant we have that uses air-cooled condensers which generally produces higher generation in the winter when we have cold temperatures, but it does produce lower generation in the summer with hot weather. And that’s compared to the 22 megawatt designed annual average plant output. So you’ll see that number fluctuate over the year.

The geothermal reservoir is performing better than the reservoir model, and I have to say that Neal has been operating very well, and our operating team is doing a great job. We had no significant outages during the quarter. At San Emidio, we had generation of 21,223 megawatt hours for the quarter, and San Emidio operated at 99.6% availability. The average hourly generation for the first quarter at San Emidio was 9.86 net megawatts per hour. Again, the San Emidio plant has been running very well, and the geothermal reservoir is remaining within the projected parameters of our models.

At Raft River, generation was 21,614 megawatt hours for the first quarter and Raft River operated at 99.5% availability. We’re really proud of these high availabilities, I have to tell you. Our average hourly generation for the first quarter was 10.06 net megawatts, and again Raft River just continues to operate at a consistent high availability with stable generation. We’re very pleased with the performance of all three plants during the first quarter of 2014.

As I mentioned earlier spring at the time of the year we conduct our annual maintenance outages. All of our outages this year will occur during the second quarter specifically during April and May. There is two reasons for the timing on these maintenance schedules. First, all of our utility customers require that scheduled outages take place either in the spring or the fall because these are traditionally their low demand periods and it’s easier for them to take plants offline.

Secondly under our Idaho power purchase agreements and this involves Neal Hot Springs and Raft River, our power price dropped seasonally to 73.5% of the annual average during the spring run-off season which is March, April and May and that reduces the economic impact of our outage on revenue. Neal Hot Springs is completed the annual maintenance outages on two of the three units already and currently we have the third unit down going through its planned outage this week. San Emidio has already completed its planned outage and it was down for 17 days from April 12 through April 29 which is longer than the normal annual outage.

In addition to the normal maintenance during this outage the manufacturer of the turbine generator had committed to a modification at their cost to install an extra bearing on the turbine identical to what was installed at our Neal Hot Springs turbines last year. So we took that outage this year and took the longer outage to make that improvement. Raft River scheduled to begin its outage on May 19 and we expect it will be down to provide the seven days which is more of a normal outage schedule. Needless to say over these two months our operations and maintenance team is very busy.

At San Emidio Phase 2 on the development side permitting and finalization of the drilling program which involves casing, cementing, those kinds of things for the drill holes for drilling four new wells in the South Zone continued through the first quarter. In early May we received both the Bureau of Land Management Drilling Permit and the State of Nevada Drilling Permit and we’ve executed a drilling contract. We expect to start drilling the first well in early June after we had final biological clearance of the well pad area and construction of the pad.

In Guatemala, the temperature gradient drilling program that we had underway which consisted of nine core holes was completed during the first quarter with depths ranging from 650 to 1,300 feet, that’s 200 to 400 meters. And the results were compiled into our geologic and temperature model for the resource. We drilled core holes during this program to improve our understanding of the subsurface structure and geology in addition to gaining that valuable temperature data. Based on these results the significant increase and the size of the known shallow high temperature anomaly was delineated and the new structural target was identified.

We’re now in the process of planning for a new 1,950 to 3,250 foot deep well, 600 to 1,000 meters deep and we hope to begin drilling that well yet within the second quarter. And of course that the Geysers project which we acquired after the end of the quarter, we completed that acquisition of the Ram Power subsidiaries that constitute the full Geysers project for $6.4 million in cash. This partially completed development based on a 26 megawatt net power plant is located in the Geysers geothermal area in Northern California which encompasses the largest geothermal resource harnessed for geothermal power generation in the world. This project provides very low risk from a resource standpoint which is one of the areas U.S. Geothermal has always focused on and provides a great value to our company and our shareholders.

That’s 2006 approximately $96.3 million has been invested on this project to advance it to its current level of development. It has four full size production wells drilled at depths ranging between 7,600 feet and 10,000 feet deep. They’ve all been well maintained and kept ready for production. These four wells were tested and produced a steam flow of 462,000 pounds per hour which is roughly 30 megawatts of gross generation. We have full power plant engineering designs and estimates with EPC bids for these projects were both at the 26 megawatt and the 35 megawatt development scenarios. The major permits are in place for the construction and operation of the 26 megawatt plant.

And the project was acquired with an inventory of over $3 million of casing and drill pipe available either for use on this project or on our other geothermal projects. And by acquiring the entities rather than assets alone the original tax position of approximately $70 million has been preserved. Historically during the 10 years this project which was called Unit 15 was operated by a Pacific Gas and Electric. The site have 32 full size production and injection wells drilled on it. 31 of those wells have been plugged and abandoned, but many of those wells have the potential to be reopened for a small fraction of the cost of the new well which would allow us to expand the well field here.

The project has had two PPAs in the past one with Pacific Gas and Electric, and one with the Northern California Power Agency, but both of those are now expired. U.S. Geothermal is pursuing two paths for the development of this project. The first path is to secure a new power purchase agreement for the sale of electricity and if we’re successful in that endeavor we’ll construct a new power plant and sell energy. In parallel with that path, we’re also pursuing the option of producing steam from the well field and selling the steam directly to the adjacent power plants. Of course as we proceed on these lines we’ll make the best economic decision we can but we’re very optimistic for this project and very excited about it.

With that I’ll turn it back over to Dennis.

Dennis Gilles - Chief Executive Officer

Thank you, Doug. Just summarizing our notable highlights from the first quarter of 2014. On the financial performance side, our revenues were up 20% with Q1 at $8.5 million compared to $7.1 million for the prior year period. Our EBITDA was up 16% with Q1 at $5.1 million compared to $4.4 million for the prior year period. Our net income was up 18% with Q1 at $2.6 million compared to $2.2 million for the prior year period. And we ended the quarter with $18.4 million in cash and cash equivalents.

On the operating performance side, generation for the quarter was up 16% over the same quarter last year mostly resulting from the high availabilities. Our fleet wide average availability for the quarter was an impressive 98.9% with San Emidio yielding 99.6%, Raft River 99.5% and Neal coming up close at 97.7%. These are very high availabilities and they reflect the excellent contribution by our operating team led by Chris Harriman maximizing generation and the corresponding revenue.

During the quarter we also finalized the partnership interest at Neal Hot Springs with U.S. Geothermal having 60% ownership in the project and Enbridge 40%. On the development side looking towards the growth of the company our focus is both internal development and M&A. At our El Ceibillo project in Guatemala as Doug noted we continued to drill and are preparing to drill our 11th well with a plant depth roughly between 2,000 feet to 3200 feet. On our San Emidio II expansion we perceived our federal and state permits for drilling of new wells on the (VLM) leases there and have awarded the drilling contract to begin that drilling.

On the M&A front subsequent to the end of the first quarter we completed the acquisition of the collection of Leases associated with the Vale Butte Development Area in Southeast Oregon, an area very similar to near our Neal Hot Springs project. Also subsequent to the end of the first quarter we completed the acquisition of Ram Power’s Geysers project acquiring their three subsidiaries that had helped the project and we acquired that for $6.4 million in cash. This partially completed development of a 26 megawatt net power project in the Geysers field in Northern California, the great addition to our portfolio and one that we’re very excited about.

In addition to these opportunities we continue to work on a number of other potential exciting near term growth prospects which we hope to share with you in the future. As far as guidance we’re providing guidance for 2014, these figures are forecasts only and considered forward-looking statements. We have provided the guidance for 2014 to assist you in making your own projections, 2013 was a transition year and 2014 is the first full year of all three plants fully commissioned and running at their higher availabilities. Our guidance for 2014 is as follows; revenues were projecting $27 million to $31 million for the year, EBITDA $13 million to $16 million, net income $2.5 million to $5.5 million.

In summary with our announced cash on our balance sheet with our strong cash flows from operations we have adequate cash on hand to support both our ongoing operations and our early stage development efforts. We believe we’re appropriately prepared to be responsive to additional growth opportunities that may come available. In closing we’re very pleased with the strong operating performance this past quarter. We’re pleased with the performance of our resources and we’re pleased with the new growth opportunities recently added to our portfolio. U.S. Geothermal has a solid financial foundation and is poised to respond to near term growth opportunities that lie ahead.

And with that I thank you and operator I’d like to open the call for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of John McIlveen from Jacob Securities. Please proceed with your question.

John McIlveen - Jacob Securities

Yes, good morning. Just a couple of questions on the seasonality, I missed the outage days that Neal has, 17 for San Emidio and 7 for Raft River?

Doug Glaspey

Yes. The – we’re probably John averaging 7 days at – for each unit at Neal.

John McIlveen - Jacob Securities

Okay.

Doug Glaspey

One unit went a little bit longer, and the rest will be shorter.

John McIlveen - Jacob Securities

Okay. And then just lastly for the summer, can you expressed the reduced availability of megawatt hours in the summer at Neal versus say the winter months?

Doug Glaspey

Yes. Of course, we’ve only had one summer season to run through, John. But as you know, that’s an air-cooled condenser, so we rely on the ambient temperature of the air to recondense the R-134a. I think what we typically see in the summer time is going to be a 14 to 16 megawatt average type days versus this 26 plus in the winter time. Of course, we get to the 22 megawatt average.

John McIlveen - Jacob Securities

Okay. Very good. That’s my questions. Thanks.

Dennis Gilles

Thanks, John.

Operator

Our next question comes from the line of Jared Alexander from Canaccord Genuity. Please proceed with your question.

Jared Alexander - Canaccord Genuity

Good morning guys and congratulations on the quarter. I was wondering if you could just start with Geysers, and I know so you’re pursuing the two options there. And I’m sure there isn’t a firm timeline, but do you have any kind of general guidance you could give to us on when you think you’d be able to make a decision on which option to pursue, and I don’t know if that’s related to if there is any upcoming PPA or RFP opportunities for PPAs in California? Yes, so basically just any color you had on that would be great?

Dennis Gilles

You’re exactly right, Jared. One of the factors is whether or not we’re able to negotiate a bilateral agreement outside of the normal procurement process or alternatively are we limited to the procurement process with the respective utilities -- utilities and munis. So that’s going to set the timing. We have not delved into that as yet. I would anticipate we’re probably looking at over the next six months that we will be trying to put into place that power purchase agreement or alternatively steam sale agreement depending on which route we end up going. But having – our target would be within the next six months to have that in place.

Jared Alexander - Canaccord Genuity

Okay, great. Thanks for that. And then maybe just getting back to the previous question. So, it looks like all the maintenance is going to be in Q2 this year. So. I guess just in terms of year-over-year production, should we be kind of thinking about Q2 being a little lower than last year and Q3 maybe a dash higher?

Dennis Gilles

No, in Q2 we took outages last year as well. So, I would say you would look at Q2 as being a little lower than Q1 for two reasons. It’s affected by the temperatures that are starting to warm up right now, and it’s affected by those short-term outages, the spring cleaning as we call it.

Jared Alexander - Canaccord Genuity

Okay, great. And then for Q3, I can’t recall if you had any outages last year in Q3, but this year it sounds like you won’t. So, should Q3 kind of come in similar do you think to 2013?

Dennis Gilles

Q3 should come in better than 2013 for a couple of reasons. We have higher availabilities or we anticipate higher availabilities. We also took some outages in Q3 that were corrective maintenance to the plants to fix warranty issues and things like that, which we don’t anticipate for this year.

Jared Alexander - Canaccord Genuity

Okay, great. Thanks. And then just one final question. Can you just remind me on your guidance for net income, that is before non-controlling interest, is that correct?

Dennis Gilles

That is correct.

Jared Alexander - Canaccord Genuity

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

Dennis Gilles

Great. Thanks, Jared.

Operator

(Operator Instructions) Our next question comes from the line of Chip Richardson from Wedbush Securities. Please proceed with your question.

Chip Richardson - Wedbush Securities

Thank you very much. Congratulations on such great operating uptime. My question is, I’d like a little more color on the situation down at the Geysers. Can you give us an idea of what percentage completion there is on the power plant down there? And also, why were so many wells plugged, and it was stated I believe that at one time there was a 60-megawatt plant on the site, and what happened with that and were some of the plugged wells used for that?

Dennis Gilles

There’s a number of questions in there. But to give you an answer to hopefully all of that, as far as the history of that project, that project had a separate power plant operator and steam field operator back in the 1980s. The project ran for pretty much the decade of the 80s. And PG&E owned the power plant and a separate company called GEO had this steam field. GEO ran into financial distress. They had a number of different geothermal fields throughout California. They ran into financial distress, eventually went bankrupt is my understanding. When that happened, the power plant lost its steam supply and the power plant was eventually 10 years later or so dismantled by PG&E.

At the time that it seized the operation 32 wells had been drilled in total, those wells were providing the steam flow and the injection capability for that project. That project when it initially started up was in fact was a 60 megawatt sized approximate power plant and at the time it shutdown 10 years later it was producing in the neighborhood of the high 30s for megawatts of generation. So the plant was oversized for the continued capability of that – deliverability of that field at that point in time. So that’s a little bit of the history on the project.

As far as the field being capable of delivering we strongly believe as to the geothermal consultants that have provided reports on the field and those that have come before us that the field is definitely capable of producing – it’s capable of producing something in the neighborhood of 25 to 35 megawatts on an initial basis and then on a sustained basis, this sustained basis was dependent upon the availability to inject fluid into the field to keep the production up. What the projects suffered from previously was the drying out of the field over that 10 years that was in production. They were putting very little fluid back into the reservoir, it was all going up and being lost to evaporation. I think that answered all the questions that you had, but Chip let me know if there is something I missed.

Chip Richardson - Wedbush Securities

Well just what percentage completion there is of the plant that’s partially complete there?

Dennis Gilles

The plant that – that power project that had a power purchase agreement at one point in time had actually purchased the turbine and generators that it had purchased the condenser, they had placed an order for a number of the rest of the equipment. Some of those orders were canceled, they were partially constructed, partially fabricated, some of them were relocated by Ram down to their San Jacinto project down in Guatemala excuse me down in Nicaragua. So as far as the power plant itself on the site other than being designed and permitted there is no power plant on the site at present. What we do have on the site is the wells, these four wells that have been drilled with it tested initial output of approximately 30 megawatts gross. So that’s our starting point as those four brand new wells and then the existing wells that are P&A’ed that are in the field as well as that and then one well that’s an orphaned well that is suspended right now but not P&A’ed.

Chip Richardson - Wedbush Securities

Great. And also when would you expect to begin and maybe finalize the potential joint ventures on the project down in Guatemala?

Dennis Gilles

On Guatemala before we would finalize or even and as you say begin our discussions on joint ventures we had a number of discussions and we have a number of interested parties. What we first need to do is confirm the resource, the drilling that we’re getting ready to gear up for now that we completed our temperature gradient work is set up to do that. So our hope would be here within the next three months probably three, four months that we should have the answer to that question, we should have confirmed up the capability of the resource and we’ll begin those discussions and negotiations in earnest.

Chip Richardson - Wedbush Securities

Very good. Thank you. And again congratulations on a wonderful quarter.

Dennis Gilles

Thank you. I appreciate it.

Operator

There are no further questions in the queue. I’d like to hand the call back over to management for closing comments.

Dennis Gilles - Chief Executive Officer

Well thank you. We appreciate everybody’s continuing interest in U.S. Geothermal. I think what lies ahead for the company is very exciting. I think the performance of the plants that we have where there were some initial concerns in the early part of last year given it was new equipment, new designs. Those designs are turning out to perform very well, you don’t get these kinds of high availabilities unless the equipment is performing well and unless the team that’s managing and operating it is attentive to the plants which is clearly the case here. I’m really pleased with the results that we’re getting so far and look forward to what lies ahead. I thank you all for joining us today and appreciate you participating in today’s call. Thank you.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.

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