U.S. Geothermal's (HTM) CEO Dennis Gilles on Q2 2014 Results - Earnings Call Transcript

| About: US Geothermal (HTM)

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

Q2 2014 Earnings Conference Call

August 15, 2014 11:00 a.m. ET

Executives

Saf Dhillon - Director of IR

Dennis Gilles - CEO

Doug Glaspey - President & COO

Kerry Hawkley - CFO

Analysts

Jim McIlree - Chardan Capital

Chip Richardson - Wedbush

Operator

Greetings, and welcome to the U.S. Geothermal's Second 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. It is now my pleasure to introduce your host, Mr. Saf Dhillon, Director of Investor Relations. Thank you. You may begin.

Saf Dhillon

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 six months 2014 results. Today's call has been broadcast live over the phone and via webcast, which can be found on our Web site at www.usgeothermal.com. You'll find the access to our webcast on our Web site under our Upcoming Events on our homepage as well as 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'd 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 we find 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 Web site. 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

Great, thank you, Saf, and good morning to everybody and thank you for joining today's call and for your continuing interest in U.S. Geothermal. I want to start off by apologizing I have a little bit of a cold, so bear with me, if you'll.

As you assume here, we've reached the midyear 2014 with very strong performance at all of our facilities yielding revenues that were up 19% over the first six months of the prior year. Our EBITDA has risen approximately 22% over the prior year. Our net income has risen approximately 360% over the prior year period. Our facilities are now performing excellently with very high availabilities, and our growth plans are well underway.

I'd now like Kerry Hawkley, our Chief Financial Officer to provide you with a summary of our financial results for the second quarter and the first six months of 2014, highlighting as well the many items of particular interest. Kerry?

Kerry Hawkley

Thank you, Dennis, and good morning to our listeners on this call. Please note that during the call we'll present non-GAAP financial measures such as EBITDA and adjusted EBITDA reported on a consolidated basis. Reconciliation to the most directly comparable GAAP measures and management's reasons for presenting such information as said 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.

To discuss the major items on our balance sheet as of June 30, 2104, the company has total assets of $220.9 million. Total liabilities are 104.1 million. Non-controlling interests of 45.9 million, and a net stockholders equity of 70.9 million.

On our income statement as of June 30, the six-month net income is $1.2 million. Revenues are up 19% from 2013 with energy production up 15% over the same period.

Insurance, taxes and maintenance costs were up slightly at all of our facilities. Professional fees were down due to the signed bonus on the consulting contract with our retired former CEO that were paid last year in 2013.

Drilling cost in 2014 are capitalized at El Ceibillo and San Emidio Phase II. The interest expense at San Emidio is up $410,000. Major portion of the interest in 2013 was capitalized. You should note that this is a direct impact to net income attributable to U.S. Geothermal since San Emidio is 100% owned U.S. Geothermal facility.

Our stock-based compensation is up 513,000 over the prior year period due to the options and shares granted to the employees, executives and directors in April. This is primarily a timing issue as the grants in 2013 were issued during the third quarter.

EBITDA for the first six months of 2014 were $6.4 million as compared to 5.2 million in 2013. Our cash flow statement as of June 30, 2014, we had cash and cash equivalents of 11.6 million at quarter end. The first six months cash generated by operations was 7.9 million. We made 3.9 million in note payments. We made $13.3 million payment to Enbridge, our partner at Neal Hot Springs. And we acquired the Geysers Project from Ram Power for 6.4 million, and we had drilling cost at San Emidio and El Ceibillo that totaled $1.2 million.

Our statement of stockholders equity as of June 30, 2014, we've added net income of 1.2 million during the first six months. We have an exercise of options of 859,636 options and stock purchase warrants during Q1, and we had another 352,500 shares issued on the exercise of stock options in Q2. In addition, in Q2 we granted 559,122 shares of stock to employees, executives and directors with a one year restriction.

With that, I'll turn the call back over to Dennis.

Dennis Gilles

Great, thank you, Kerry. Doug Glaspey, our President and Chief Operating Officer is going to provide the highlights of our operations performance for the second quarter and for the first six months as well as the summary of our development activities. Doug?

Doug Glaspey

Thank you, Dennis. Good morning, everyone. Our total generation for the second quarter from all three plants was 74,384 megawatt hours. And that compares to generation for the second quarter in 2013 of 65,303 hours, which is a 14% increase quarter-over-quarter.

Generation for the first six months of 2014 totaled 173,268 megawatt hours, and that's compared to 150,343 megawatt hours in the first half of [2003] (ph), which as Kerry noted is a 15% increase in generation on a year-over-year basis.

As you mostly are aware, our second quarter generation was affected by our annual maintenance outages, taken at all three facilities and as we're going into the spring and summer we get higher ambient temperatures.

At Neal Hot Springs, generation was 40,629 megawatt hours for the quarter. The facility operated at 91.4% availability, which includes the time taken for our annual scheduled maintenance outages. When those annual maintenance hours are excluded, the plant actually achieved an availability of 98.3%, which is our high availabilities or I think are extraordinary numbers.

The annual scheduled outages were taken on all three units at the facility in April and May for a total of 453 hours or 18.9 days of maintenance time. But I'd note at San Emidio, excuse me, at Neal's since there are multiple units, each unit was removed from service individually. And that allows the other two units to operate during that maintenance work.

The only work done this year that was really out of the ordinary was a rebalance on the turbine of Unit 2. Our average hourly generation for Neal was 20.34 net megawatts per hour of operation. And I'd note that the geothermal reservoir continues to outperform the reservoir model with temperature and flow rates remaining stable.

At San Emidio, our generation was 15,686 megawatt hours for the quarter. It operated at 78.2% availability. And again, this includes 439 hours or 18.3 days of scheduled maintenance. When the maintenance outages are excluded, the San Emidio plant achieved 97.9% availability.

The maintenance outage was taken in April, and this year was almost three times longer than normal due to the installation of a squeeze film damper bearing on the turbine. This installation required a complete dismantling of the turbine and shipping the major components back to the factory for machining. This was a one-time warranty modification at the manufacturer's cost that ultimately results in lower vibration over the turbine life. The same installation of these squeeze film damper bearings was successfully made at our Neal Hot Springs Project in 2013.

Average hourly generation for the second quarter was 9.18 net megawatts per hour of operation, and I'll say the San Emidio plant is running very well. It is a water cooled plant, so it's less affected by temperature, and our reservoir is holding up very well there.

At Raft River, the generation was 18,069 megawatt hours for the second quarter. Rafts operated at 94.0% availability during the second quarter, and it had a maintenance outage of 108 hours or 4.5 days, which is more of a normal timeframe for maintenance outages.

Exploiting those maintenance hours, Raft River operated at 99.1% availability for the quarter. Average hourly generation was 8.78 megawatts per hour of operation. And again Raft River continues operation and consistent, high availability with stable generation.

We are very pleased with the performance of all three plants during the second quarter of 2014. Our operations team continues to produce high client availability which maximizes our generation.

On t development front at San Emidio, as we mentioned in our news releases after extended delays in permitting, we've received drilling permits from the Bureau of Land Management on April 29th. We executed a drilling contract (technical difficulty) shortly thereafter and a drill rig mobilized to the site on June 26th.

The first well, OW-14, was completed on July 29th and we had to do some additional permitting to move the second well site. We expect to start drilling OW-15, the second well around August 21st, the completion near the end of September. Because of the delay caused by permitting the new wells in the Coso. We determined that we cannot complete the development of Phase II under the schedule within the existing 19.9 megawatt NV Energy PPA.

What happen if they will be able to find a new PPA for Phase II? When it is ready to move forward? And we've contacted a number of potential outbackers outside of Nevada. Inside Nevada, NV energy will be issuing new request for proposals for renewable energy PPAs or 100 megawatts per year for the next three years with the first of these RFP is expected in October of this year.

The Phase II expansion continues to be dependent upon the successful drilling and expansion of the geothermal resource provided by additional production and injection well capacity. To continue our Phase II development and to provide early long-term testing of the South Zone resource, a cross tie pipeline is being constructed between the two project areas and a pump will be installed in Well 61-21. This cross tie will allow us to produce from Well 61-21 to the Phase I plant and study the impact of that production on the reservoir.

Well 61-21 is expected to start delivery included the plant late in the third or early in the fourth quarter of this year. At El Ceibillo, as most of you know, we completed a temperature gradient drilling program which consisted of nine boreholes that was completed during the second quarter with depths ranging from 656 feet to 1,312 feet or 200 meters to 400 meters. Bottom well temperatures found in this drilling program range from 176 degrees Fahrenheit to 413 degrees Fahrenheit, 80 degree C to 211 degree C with two of the wells encountering permeability and flowing brine. The results were complied and were geologic and temperature model for the resource, which increased the size of the known shallow high temperature anomaly and as assisted and identify in our next drilling target.

Based on that drilling information we acquired a second surface lease of approximately 80 acres to provide access to the target bringing our total service lease package up to 97 acres. A 1300 foot to 3300 foot deep or 600 meter to a 1000 meter well has been designed and that will be easy to and is anticipated to be drilled before the end of the year.

Additionally, we're in discussions with the Ministry of Energy and Mines to change the development schedule based on the current status of the project. Just to let everybody know, for this concession we have a development and the original development schedule that we developed over three years ago, that's been modified and the Ministry of Mines has to agree to that.

At the WGP Geysers Project, we completed the acquisition of Ram Power. The Ram Power subsidiaries would constitute the WGP Geysers Project during the second quarter or 6.4 million in cash. This advanced project is located in the Geysers geothermal area in northern California and was previously planned to be developed as a 26 net megawatt steam powered plant by Ram Power.

We're continuing to pursue two paths of development for the project; number one, to secure a power purchase agreement for the sale of electricity, and if successful in that, construct a new power plant and sell energy, or to produce steam only for to one of the other power plant operators in the Geysers. To those ends we applied for and received approval for a 12-month extension for the Sonoma County conditional use permit, which grants us the ability to construct the 26 megawatt power plant that was expanded on June 12th. And additionally in anticipation of conducting longer term floor tests of the existing wells and application was made to the Sonoma County Air Quality Board for a permit, which approved on June 19th.

That's all I have for operations and development. Dennis, back to you.

Dennis Gilles

Great, thank you, Doug. Summarizing our notable highlights for the first quarter of 2014, on the financial performance side, as noted, our revenues were up 19% for the first six months yielding 14.3 million compared to 12.1 million for the prior year period. Our EBITDA was up 22% for the first six months yielding 6.4 million compared to 5.2 million for the prior period.

Our net income was up 360% for the first six months yielding 1.2 million compared to 0.3 million for the prior year. Our cash flow from operations was 7.9 million for the first six months compared to 4.9 million for the prior year period, which was an increase of 60%. And we ended the second quarter with 11.6 million in cash and cash equivalents.

On the operating performance side, generation for the first half of the year was up 15% over the same period last year mostly resulting from our higher unit availabilities. Our fleet-wide average availability for the first six months excluding the annual maintenance dollars that Doug has referred to was an impressive 98.7% with Raft River yielding 99.3% and Emidio yielding 98.8%. And Neal, our newest project yielding 98% even.

These very high availabilities reflect the excellent contribution by our operating fleet team under the leadership of Chris Harriman and John Van Haren, and with their focus on maximizing our generation in the corresponding revenues.

On the growth side, we completed the acquisition of the Geysers Project from Ram. We acquired the new development leases and we dramatically expanded our surface lease position at El Ceibillo Project in Guatemala. At our Guatemala Project, it's noted we completed nine temperature gradient wells, which identify this larger, high temperature anomaly relatively shallow. And we have targeted a location and are preparing to begin drilling our well EC2 down there.

Our San Emidio Project, as Doug had noted, unfortunately we suffered a setback as a result of delay in permitting. This caused us to not be able to move forward under the current PPA, but we are currently out looking for a replacement PPA. And we are optimistic that we should be able to find something at a comparable or even better price to let -- we have under that previous PPA.

On our Geysers Project, we are moving forward with that. And as Doug had outlined we are looking to either have a team sales contract or a power purchase contract to be able to sell the output from that project. And we should hopefully be able to finalize something in the latter part of this year and be able to move forward on that project.

In addition to these opportunities we are continuing to work on a number of other potentially exciting and near-term growth prospects. We look forward to continuing to grow the company. Our focus is going to be on a combination of both internal development and merger and acquisition. We provided guidance in the past. This quarter we updated our guidance. We narrowed the band for 2014 and we now provided guidance for 2015. These figures represent the company on a consolidated basis, therefore caps only, and they are considered forward-looking statements.

Our updated guidance for 2014 is as follows. Our revenues we're projecting 28 million to 31 million by yearend, our EBITDA, 14 million to 16 million, our net income 3.9 million to 5.9 million. And we provided guidance for 2015 as follows. For revenues, we are projecting 27 million to 32 million, for EBITDA 13 million to 17 million and for net income, 3.1 million to 7.1 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 on our ongoing operation and our early stage development efforts. We believe we are appropriately prepared to be responsive to additional growth opportunities as it may become available.

In closing, we're very pleased with our strong operating performance these past six months. We're pleased with the performance of our resources. And we're pleased with the new growth opportunities recently added to our portfolio and we're optimistic regarding the other opportunities we are evaluating. U.S. Geothermal has a solid financial foundation and is poised to respond to the near-term growth opportunities that lie ahead.

And with that, I'd like to thank you. And operator, I'd like to turn this over to you for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from the line of Jim McIlree with Chardan Capital. Please proceed with your question.

Jim McIlree - Chardan Capital

Thank you, and good morning.

Dennis Gilles

Good morning, Jim.

Jim McIlree - Chardan Capital

So, did I hear you right that the Geysers decision point on PPA in construction of the new plant versus (indiscernible), you said that by year end?

Dennis Gilles

That's what we are targeting, Jim.

Jim McIlree - Chardan Capital

And so is anything from Geyser is included in the 2015 guidance?

Dennis Gilles

No, Geysers is not included in the 2015 guidance.

Jim McIlree - Chardan Capital

Okay, great. And then you talked about a change in the development schedule at El Ceibillo but you didn't characterize that. Is that more or less faster, slower?

Dennis Gilles

Doug, I'll let you speak to that.

Doug Glaspey

Jim, we've actually adjusted our expectation for El Ceibillo out to third quarter of 2016. So we are again pushing out further. And just to point how -- we did get an additional question on San Emidio. When is San Emidio going to be constructed on our Web site? That also has been (indiscernible) fourth quarter 2016. In those days we're all contained …

Jim McIlree - Chardan Capital

What is CapEx for the rest of this year and for 2015?

Dennis Gilles

Good question, Jim. Doug and Kerry, I'll let you feel that.

Kerry Hawkley

Good question, Jim. We don't have any sense -- our drilling on capitalize of course at our current development projects. It really depends on how drilling proceeds. It could be a small number of several million or it could be a large number if we go into a serious drilling campaign. We really don't have a number available for you at this time, but we can get back on that.

Jim McIlree - Chardan Capital

Okay. I think that's all I have. Thanks a lot and good luck.

Dennis Gilles

Thank you.

Operator

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

Chip Richardson - Wedbush

Congratulations, guys, on the great operations.

Dennis Gilles

Thank you.

Chip Richardson - Wedbush

Could you help me understand when some of the net earnings are going to be attributable to U.S. Geothermal and the shareholders as opposed to reserves or other partners?

Doug Glaspey

Second quarter is usually a very narrow issue and when we have profits it's usually at Neal Hot Springs, but towards the end of this year the third and fourth quarter there will be more earnings attributable to U.S. Geothermal, but it's going to be small until we add additional projects. Our major project right now is Neal Hot Springs and 40% of it is attributable to Enbridge.

Kerry Hawkley

And Chip, I'd note that the reserves at the project level are all fully funded. So there really is no more money going into reserves.

Chip Richardson - Wedbush

So from $1.24 net income down to $0.19 attributable to U.S. Geothermal, the ownership of Enbridge is 40%, so …

Doug Glaspey

Forty percent of Neal.

Chip Richardson - Wedbush

Right.

Doug Glaspey

We've got 100% of San Emidio. We've got 50% of Raft, but things like the stock comp, that's all U.S. Geothermal, none of that's shared. So ultimately when you put it all together in order to get that bottom line increased, we're going to have to have an additional critical mass of projects on a positive basis. Right now, unfortunately we don't have that. Well, you calculate it out.

Chip Richardson - Wedbush

All right. Thank you for the information, and congratulations on such good operations.

Doug Glaspey

Great. Thank you, Chip.

Operator

Thank you. And we're seeing no further audio questions at this time. I would now like to turn the floor back to management for any additional remarks.

Dennis Gilles

Well, thank you, operator and thank you, everybody, for calling in. As Chip noted, it was a very strong first six months. We're very pleased with the performance of the units. One of the things though I do wish to point out to everybody on the call is the seasonality of our generation, looking back at 2013 as an example, our revenues that were generated through the year; 26% of them were generated in Q1, 18% in Q2, 21% in Q3, and then 35% in Q4. The reason I want to point that out is -- EBITDA and the net income follow as well in a similar fashion. The reason I wanted to point it out is due to the seasonality of our generation particularly at our Neal Hot Springs Project where that project is dry cooled, produces very heavy in Q4 and Q1, and the output of the plant is off substantially during Q2 and Q3, which is typically why we'll take and do any of our maintenance work or anything along that lines during those two months.

So, I didn't want to point that out, just as kind of a refresher for you. I thank you all for your continued support in the company. I think the company is doing really well. We're in a solid position, and the performance continues to improve and I look forward to what lies ahead for the company. I think it's a great foundation for growth and growth opportunities that we're looking at to pursue I think are very attractive.

So with that, I thank you for your time today. Yes.

Saf Dhillon

We do have one question; well, we actually have two questions that have come in via email.

Dennis Gilles

Oh, thank you.

Saf Dhillon

So, give us an opportunity to respond to them. The first question is with the recent profitability of the company, why hasn't the credit facility been established with a bank or other financial institution to fund our acquisition and expansion instead of relying on stock issuance like in the past?

Dennis Gilles

Well, I guess to respond to that is we have not done a stock issuance to support our growth. As we've seen with the Geysers transaction, we were able to conduct that transaction with cash on our balance sheet. We intend to, and have talked to a number of financial institutions regarding the availability of additional capital to support our ongoing growth, but for the smaller growth properties and smaller growth opportunities, we'll fund those off our balance sheet. For larger opportunities, then we'll look to other funding mechanisms, but to whoever wrote that in, I do want to point out that there has not been any dilution of the stock as to support any of the growth that's occurred since 2012.

Saf Dhillon

We have a second question, Dennis, which I can cover. It's from (indiscernible) City, I guess. With the addition of wells from San Emidio Phase II development to San Emidio I later in the year, do you expect higher productivity from San Emidio 1 at that time?

The well we're going to be connecting to the Phase I plant 51-21 is a higher temperature well that has moderate flow. We'll be using that for the balance of our production field and test the south zone. We'd like to see a slightly higher generation out of the Phase I plant that remains to be seen. This is primarily being done to test the south zone, but as I said, it is a harder well. We'll do some balancing in the field and of course we'd like to see a little higher generation.

And then, we've got one more question that came in. When will the second installment payment from Enbridge occur, will the entire amount of 1.6 million be distributed?

We have no additional payments coming in from Enbridge. They made all of their capital contributions that are required under the agreement. And what we'll be doing is we'll be giving them normal cash distributions on a semi-annual basis as the funds come back from the Department of Energy. So, they'll get 40% of our normal cash distributions going forward on a semi-annual basis.

Dennis Gilles

But we do have a distribution of the revenues from Neal that will be occurring later this far.

Saf Dhillon

Yes. That's the normal cash distribution that we'll have.

Operator

And that's all we have, Dennis.

Dennis Gilles

Okay. Again, I thank everybody for your time today and your continued support for our company. Thank you, operator; I'll turn it back to you.

Operator

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time.

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