U.S. Geothermal continues to provide decent financial results.
Two projects under development are delayed again.
The third project under development (Geysers) faces some risks.
With no price catalysts visible, in my opinion, the company is still fairly valued.
In my last article on U.S. Geothermal Inc. (NYSEMKT:HTM), I put a thesis that this utility company was fairly valued. Since publishing this article, HTM's share prices have been in the range of $0.52-$0.84 a share.
On August 14, the company published its results for the first half of the year. In my opinion, this report confirms that the company's fundamentals are sound. On the other hand, the company's projects under development concern me a little bit.
But firstly, let me start with the current operations.
The table 1 summarizes the basic measures:
As the table shows, the second quarter 2014 results are better than those recorded in second quarter 2013. It is worth mentioning because, traditionally, due to maintenance outages taking place in the second quarter of each year, during these periods the company records the weakest results.
Now, let me focus on some details, namely, how each of the three operating plants were working. To get some knowledge on that topic I have analyzed the operational expenses incurred by HTM's plants. To remind readers, the company currently operates three geothermal plants:
- San Emidio in Nevada - net capacity: 9 megawatt
- Raft River in Idaho - net capacity: 13 megawatt
- Neal Hot Springs in Nevada- net capacity: 22 megawatt.
To illustrate the efficiency of the company's plants, I have calculated four basic measures for each of them. The first two are quite simple - revenue and plant production expenses per one megawatt hour generated (to have a better comparison between the plants, amortization and depletion are excluded from plant production expenses). The third measure, margin, measures the difference between revenue and expenses. The fourth measure, margin (%), is calculated as a ratio between margin and revenue.
After calculating all these measures, we can position the plants from the best one to the worst one. The best, i.e. the most efficient plant is Neal Hot Springs. This plant incurs the lowest expenses and has the highest margin. What is more, of all three plants, Neal Hot Spring has the biggest capacity and generates the biggest amount of electricity - therefore its input into HTM's results is the biggest. On the other hand, this project is shared with Enbridge, which holds 40% interest in the project, which diminishes the positive impact of Neal Hot Spring on HTM shareholders. The second most efficient plant is San Emidio with a margin of 43% in the second quarter 2014. The least efficient plant is Raft River, which recorded the negative margin in second quarter 2014 (but the margin was still better than in the same quarter in 2013).
Neal Hot Spring, Oregon
revenue / MWh
expenses / MWh
San Emidio, Nevada
revenue / MWh
expenses / MWh
Raft River Unit I, Idaho
revenue / MWh
expenses / MWh
Delays in projects under development.
In its second-quarter report, the company noted that two projects under development would be delayed:
- San Emidio Phase II, scheduled for the fourth quarter 2015, now is delayed by four quarters (with a planned opening expected in fourth quarter 2016). As the company noted (second-quarter report, page 40): "As a result of the delays experienced in permitting additional wells on BLM administered leases, it has been determined that it is not possible to complete the development of the Phase II project within the development time frame required in the existing 19.9 megawatt NV Energy PPA". It means that the Power Purchase Agreement (PPA), signed with NV Energy, has expired. Now HTM has to find a replacement PPA. It may take some time so this project should be monitored closely by HTM investors. Please, remember that it is not the first time this project is delayed - for example in its second quarter 2011 report, HTM reported that the project would start its operations in the second quarter 2013.
- El Ceibillo I - this project, located in Guatemala, initially scheduled for the first quarter 2015 (March 2012 report), now is scheduled for the third quarter 2016. As in the case of San Emidio Phase II, this project is delayed again. The company still performs drilling and delineates resources.
The third project under development, Geysers, is facing some problems. This is a new project in the company's portfolio. In the second quarter 2014, HTM acquired Ram Powers's Geyser project for $6.4 million. The project, located in Sonoma County, California, is a part of a broader Geysers geothermal resource, which is the largest producing geothermal field in the world. The previous owner of the project, Ram Power, invested into the acquired property around $90 million so it seems that HTM made quite a good deal. But there are some risks. Although, according to Geothermal Energy Association, there were 32 geothermal projects at some stage of development in California (as of April 2013), the HTM plant is supposed to be the first new facility at Geysers since 1989. But before starting the construction, HTM has to determine whether 26 net megawatt capacity planned for the project by Ram Power is realistic or not. To get some knowledge on that, additional flow tests are required. Another problem is the signing the reasonable power purchase agreement required to advance the project. And it is not as obvious matter as the most people think. According to "The Street" article, more and more utilities in California prefer other sources of renewable energy than geothermal. Therefore, if HTM faces some serious problems to sign the PPA, the company would have to consider selling steam to existing power plants or even abandoning the project. As the company notifies in its second quarter report, a 12-month extension for the Sonoma County Conditional Use Permit to construct the 26 megawatt power plant was applied for and was approved on June 12th so HTM does not have too much time to take its decision.
2014 and 2015 guidance
With its second-quarter report, the company provided the financial guidance for the years 2014 and 2015. With no new projects going into operations, the financial results are expected to be nearly the same in 2014 and 2015. Taking into account the current HTM enterprise value of $133.15 million and the average yearly EBITDA of $15 million, it may be concluded that currently the market values HTM shares at 8.87x EBITDA. With no catalysts to be seen in the nearest future, in my opinion, the company is quite fairly valued.
U.S. Geothermal Inc. continues providing decent financial results. The last report confirms that the company is on the right track. Unfortunately, two projects under development (El Ceibillo and San Emidio Phase II) are delayed once again. The third project, the recently acquired Geysers, at first glance looks very interesting but it faces some risks described above. Taking into account the stagnant financial results expected by the company's management in 2014 and 2015, I think that HTM is fairly valued at the moment.
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