Greetings. Welcome to the U.S. Geothermal 2012 First Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Daniel Kunz, CEO. Thank you. Mr. Kunz, you may now begin.
Daniel J. Kunz
Thank you, operator, and thank you for being on the call this morning. We appreciate your attendance. What I'm going to do is take you through the financial statements, make a few observations and draw your attention to a few items, and then I'm going to turn it over to Q&A so that we can make sure that anyone has questions, we can address those.
One thing I do want to point out, these financial statements reflect a couple of things. One, there is a -- we are now consolidating the accounts of Raft River and then eliminating those minority interests both at Raft River and we have minority interests at Neal Hot Springs in Oregon. So everything has been restated to reflect that so that the comparatives, all are compared on that basis. So these won't be comparable to previous financial statements you may have seen for that reason. So that's point one. And the other item I'd like to draw your attention to is, this is our first quarter of 2012, but that's because we have an accounting fiscal year that ended in March. What we've decided to do when this change has been made effective and approved by the board is we're going to a calendar year-end. So for this year, we will have only 3 quarters of financial information. It will end in -- at the end of this year in December, and then we start 2013 with a full calendar year. So we've gotten rid of this quarter stub that we've always dealt with. Anyway, so we hope that, that makes it easier for you to look at these financial statements going forward.
I'd like to draw your attention first to the balance sheet. We -- just going through it. I have a few things I want to point out. The cash and cash -- restricted cash of about $11 million, we've got a reduction in other current assets there that is what -- if you look quarter-to -- year-to-year -- quarter-to-quarter in this case and compare those, we had $713,000 that was put on deposit for a PPA that we have, a power purchase agreement at San Emidio in Nevada. That account has now been adjusted, and we now have added to that an additional $713,000. And these are cash deposits that are now on operating security, and you'll see that down below in assets, operating security deposit for PPA. So that adjustment of adding $700,000 and moving $700,000 approximately makes up the $1.4 million there, and that's currently the amount that is held by NV Energy for our -- should we hold on their behalf, for our PPA performance deposit at San Emidio, Nevada.
The other thing I would point out is that we have increase in our property plant and equipment. That's starting to reflect the state of our construction underway at Neal Hot Springs, about $118 million of it is that, another approximately $38 million of it is San Emidio. That's construction in progress, and then hopefully, that will be turned into depreciable assets. We are not currently showing any depreciation for Neal Hot Springs or San Emidio. San Emidio is in commercial production. However, for a tax purpose, we haven't actually priced it in service yet until we complete these final adjustments, which I'm going to address here shortly.
You can also see a change under current liabilities. There's a $28 million item last quarter that has been moved to a $6.8 million quarter -- amount this quarter. Once again, those are similar in that those are normal trade payables for our construction. And we account for them as a current liability when they're due, but we're still working on the process of drawing the Department of Energy loan. And so these are normal amounts that are ultimately cleared once the monthly draw is made. So I just would point out that those are temporary and they'll ultimately end up in the construction account and then finally into the assets.
I would also point out the increase in the construction loan payable. Again, along the same lines, we have amounts drawn from each of the construction loans. We have 2 loans underway today. $65 million of that $92 million under construction loan payable is this Neal Hot Springs loan for its construction and $27 million is the San Emidio loan for its construction. So as these accounts show from quarter-to-quarter, we've been increasing the construction loan size to its near maturity. San Emidio is nearly complete on the loan draw, and the Department of Energy loan is something like 80-some percent complete on the draw. I don't know the exact figure there, but we're getting closer and closer every single day there.
So if we move then to the consolidated statement of operations, what I'd like to point out there is it isn't entirely obvious, but from quarter -- this is now a year-end comparison for the 3 months ended June of the 2 years. And what we're starting to see with these accounts is that we've got, of course, Raft River in there on an income basis, and then that performance has improved at Raft River because we've completed some well repairs there. The Well 7 and Well 2 went through a couple of activities that repaired a leaking lap joint in those wells. You might recall, those wells are some 30 years old. They were drilled by the Department of Energy back in the late '70s, early '80s. So when we encountered these issues, we have to deal with them because they were essentially cooling down the feed grade into the plant, allowing cooler water to leak into the wellborn and be pumped into the plant. So those repairs have been made and showing up in the income there. And then on top of that, we reflect income coming in, revenues from the new plant at San Emidio. It's a partial amount for April and May but then a pretty substantial amount for June. And then what you will see in the next quarter is we're down a bit at San Emidio, so we're going to have a little less revenue because of these adjustments. I'll talk about those in a minute. But however, overall, we're very, very pleased with the direction that this income statement is taking. It's consistent with our expectation, and we're excited about having, really, 2013 being a very good year with everything online operating the way it should be and no more of these absences of revenues from our operating plants.
I'll draw your attention a little bit more through the income statement here on plant production expenses. You can see a drop there from $1 million last year to $874,000. The big thing in there is that in both of those amounts, we had our repair service agreement for the well repairs at Raft River. We will not be incurring those any further, so we expect to see improvements there as well going forward.
I'd also draw your attention to a few other changes here under professional and management fees. We did pay some fees last year for 2 brokerage firms for assisting in the arranging of our construction loans and our partnerships at Neal Hot Springs. So that's a nonrecurring element, and now that's starting to, year in and so forth going forward, start to be a normal amount for us. The same with a few of the other line items, there were some nonrecurring events last year that we haven't -- for example, salary and wages, there was a bonus, and stock comp, there was some granted -- some options granted. So with that, what we're seeing now is a loss per share of about $0.01, and we are expecting to turn that into the positive categories here as we move around, complete the construction, take at Neal Hot Springs due to takeout financing at San Emidio. Those are the 2 big events that are pending. And if you want any more details on this, I would draw your attention to the MD&A under operating results. I think it's around Page 46. It will break these categories down for you.
Moving to the statements of cash flow. Again, I just want to point out a few areas here where we're seeing some improvements year -- this again, a year -- 3 months 2011 June versus 2012. So it compares 3 months a year ago to now. We're seeing the net loss declining because of these various statements we've already made about the repairs at Raft River and some of the costs associated with the various onetime events. We also want to note that the purchase of property plant equipment, that is Neal Hot Springs-related. Also, the PPA security deposit, I mentioned that, we have the increase there for the PPA security deposit at San Emidio.
We also -- from a cash perspective, we want to note that we have proceeds from a noncontrolling interest. Last year, we had a $13 million investment from Enbridge. This year, we have a $7 million investment. I do want to make the point that those funds have been put into the construction account, the $7 million now at Neal Hot Springs. They are meant to cover any expected -- unexpected, rather, overruns. If they're not fully used, they will be returned to Enbridge. We have a pending calculation on their percent ownership. If they were to take the entire amount and we were to use it all, we can expect their ownership to be near 40%. If, however, we do not use it all and return it, we will recalculate that and have a final calculation based on a predetermined model and specific IRR objective of theirs. We run the model, we calculate what it would take to achieve that IRR, then we freeze their percentage and then there's an equity participant thereafter at risk with everything. So that calculation probably will not occur until near year-end. We are very excited about the results.
I would draw your attention to our most recent news release where we updated the company activities. And what we said was in that, that we've had a very successful drilling effort at Neal with the latest injection well, looks like a really good one. So we're achieving one of the major objectives remaining there, the final objective. There is one more well underway. We're targeting a zone that we had a lot of confidence that we're going to be able to put the balance of the fluids in there. So that has been a major accomplishment that may reduce the amount of funding in this account I just mentioned for the Enbridge investment. So that means we're fully funded at Neal, we are near completed construction at San Emidio. I'll get into that in just a minute. And so we're starting to move ahead to think about 2013 and where the company is going to be focusing after our development team has completed these 2 and we turn everything over to our operating group.
I'll make one more statement or comment regarding the financial statements. If you take a look at the consolidated statements of change in the stockholder equity, Page 9, the next page, I just want to point out the stock issuance at market sales agreement. The ATM at market sales has been an effective way for us to keep the cash we need in our company available while we're going through the startup issues at the various projects, specifically at San Emidio. And so we've issued 3.3 million shares and raised nearly $1 million with that facility, and it's been helpful for us to maintain our cash balances that are needed.
Now I will go a few more minutes into why we did that and why we needed to do that. The San Emidio plant, it's a very good plant. We're quite excited about this technology. But I think everyone on this call needs to understand that this is innovative technology, and the innovative elements have produced some delays related to trying to ring out all of these minor issues. And some of them have been in series, one issue cascades to the next and so on. But principally, it's been centered around a few points. One is vibration, unwanted vibration that appears to be showing up in the gearbox that's attached to the turbine. We have the best people in the business on this. Our contractor there is on a fixed-price contract is SAIC Corporation. They have us as a supplier; TAS Energy in Houston. And TAS has component suppliers for turbines and the gearbox; Atlas Copco, under their brand Mafi-Trench; and Lufkin gearbox. And these are some big companies. And what they did is they tested this machine initially in the laboratory using air. And then when we started it up and did the turbine roll in April, May, we actually fueled it with this refrigerant, R134a, which is a heavier fluid. And so they analyzed it and they determined that, that was contributing to some of the unwanted vibration. The vibration only occurs at certain speeds during the startup. As it approaches its operating speed, it goes through a cycle, and there's some vibration there. So that has been addressed. We're currently in a shutdown where they have replaced the main bearings on the shaft. They're normally about a 4-inch bearing. They've gone to a 6.5-inch bearing. And so that will get more surface area on the shaft. And then they've also added what's called a swirl break at the back of the turbine. Effectively, you can think of it as a very minor, almost like a seal or a gasket that is designed to break up a standing wave that is -- that they've modeled and found at the back end of the turbine. Between those 2, these experts are convinced that this is the fix needed to address this heavier fluid that we're operating the machine on.
There were a few other matters we've taken -- we've always taken the opportunity during these key shutdowns to do any of the other sort of [indiscernible] work and all of that, and it's difficult. And we're very, very near the end of all of that in the next week or so, this plant should be back up and fully operational, earning revenues again. We are selling under COD, commercial operation declaration, in late May, and so the revenues are being earned at about just under $90 a megawatt hour. So San Emidio, we're very excited for -- I might add one final point. We have an attractive term sheet from a long-term lender, a very experienced lender in geothermal. So that term sheet has just been accepted by the parties where we will be using it as the basis for taking out this short-term construction loan that we have with our contractor. That short-term loan has been used to construct the plant, and then what we will do is take it out with a 22-year term loan.
Now on top of all that, we do have some performance, liquidated damages with our contractor that have been accruing. Those have been accruing at a rate that currently is about equal to the interest rate charges. So the positive aspect of the way we've constructed this contract is we're about using liquidated damages to pretty well pay for the construction interests that we'll be accruing otherwise on this project. So we're anxious to get that all taken care of. We would expect that the long-term financing for San Emidio will be complete in about 90 days.
So that's San Emidio, that project is going very, very well in terms of the performance when that plant is running. It performs at a very high level, and we're quite excited about what we're seeing in terms of the hot water in and the electricity coming out on that new unit. Also, I would make another point here, that the plant at San Emidio is largely the same technology and plant deployment at Neal Hot Springs. So some of these issues that we found, for example, these bearings I just mentioned, those changes will also be made to Neal Hot Springs. And as a result, there are some learning curve issues on this innovative technology that have been learned at San Emidio and then will be applied to and adjusting the facility at Neal. Neal will have 3 of these modules, and I shouldn't say will have, it does. If you go out there, you will see a nearly constructed plant. We're very excited about potential turbine roll in the next week or so. And so what we will do is schedule with the manufacturer once the bearings are made and so on, the replacement of those, that kind of thing. So we are basically transferring all of the experiences that came up in this innovative technology from San Emidio and making sure that they're picked up in Neal Hot Springs at the 3 units there. The biggest difference between the 2 plants is that San Emidio is a water-cooled facility, whereas Neal Hot Springs is an air-cooled facility. And as a result, there is some differences there related to operating pressure and the performance expectations one over the other. But fundamentally, they're the same turbine setup, gearbox, the whole business, and then they're also operating at nearly the same reservoir temperatures. So we are becoming more and more an expert at this -- around 145 degrees centigrade, 290 degrees Fahrenheit in round figures. Those are our reservoir temperatures at really all 3 of our properties.
So with that, the commercial operation date at Neal Hot Springs is still targeted for the late Q3, so either late September, early October, right around in there. We are sticking with that. Our construction contractor there has updated the schedules. We have a very detailed review weekly with our lender, and so we're staying right on top of that. So those are the 2 big events. So what this means is we're still going to have these kinds of financial statements in the next 2 quarters where they will get better and better, we'll have more revenues coming in. But what it means for the company is that we really are excited about what 2013 will look like for us. We fully expect that all 3 units are running. The revenues, I can give you some general guidance, we'll be around $30 million as a company. We expect quality earnings there between $14 million and $15 million range, and we expect cash flows, free flowing cash somewhere between $7 million and $8 million. So this is what we've been working very diligently as a team toward this event horizon that we're entering as we come around the corner here in the next 2 quarters and then look ahead to the 2013.
One more comment I'd like to make is that our focus, we'll eventually transfer the 3 operating facilities over to U.S. Geothermal Services Inc. Chris Harriman runs that for us. It's a operating subsidiary that focuses on and has a skilled group of folks who run these plants. They will be operating all 3 of them. We expect there will be some efficiencies that can accrue from the management point of view, the manpower, the skill levels of our operating group, maybe there are some efficiencies in parts pooling and those kinds of things. The U.S. Geothermal Services will be operating at under contract to each of the legal entities that own the properties, and they'll be earning a fee for those services. And that allows our development team who have successfully put together now these 3 plants. This is the same group that brought online in 2008, Raft River, then in May, made a commercial at San Emidio and now in the fall for Neal Hot Springs these 3 projects. And now we can start to focus a little bit.
And I just want to mention one word and that's Guatemala. We are starting to turn our attention there. We're negotiating on a long-term PPA there. Guatemala is a country with a high energy cost. They burn fuels from developed coast oil. They burn coals from Colombia, and so they're very supportive of geothermal. They have 2 operating geothermal power plants now in the country, and we're working on a PPA that will be quite attractive, much higher than the levels that we would expect here in the U.S. in the next couple of years, given the natural gas prices that are out there. So our focus on Guatemala will be to complete the PPA, look for a key strategic partner, which we've had some discussions on, and start to move our development team in that direction. That is potentially a steam plant because this is a very attractive resource. It already has been discovered. The reservoir has 5 production wells drilled into it. It's near transmission, it's 14 kilometers south of the city, Guatemala City, the largest in Central America. So there's a lot of positive aspects for this, and that will be our focus in 2013. I'll be providing more information and update on Guatemala in the months ahead as we know more about our strategic discussions for the PPA.
So with that, I would like to open this discussion up for questioning. So I'll pass it back to the operator, and we'll take it from there.
[Operator Instructions] Our first question is from the line of Jared Alexander with Canaccord Genuity.
Jared Alexander - Canaccord Genuity, Research Division
Just a first question here on Neal. I think, Dan, you mentioned that you're still looking at a late Q3 COD. But I'm noticing in the filing, it's actually been moved to Q4, and the capacity has been reduced just slightly from 23 to 22 megawatts. I was just wondering if you could kind of provide some color on what's driving these changes.
Daniel J. Kunz
Sure. Jared, we want to be conservative, of course, in our -- and provide you with the most conservative dates possible, so that's why I said potentially late Q3 or early Q4. The written information says Q4. We just want to make sure that if you're modeling us, that you probably use the Q4 number rather than the Q3. We're going to hope to stay on schedule, however, and beat that. So that's to the date. The second point, we had analyzed the -- how much injection pumping we would need to pump the flowback into the reservoir, and that's moved this number around from 23 to 22 and then from 22 back to 23. There's a megawatt in the difference. As we analyzed with this most recent injection well and the pressures we need, we're going back to needing that extra injection in line pump. So we've reduced the 23 back to 22. Now, of course, Jared, you know that's net, so that's net against all other parasitic events and that's delivered to our customer.
Jared Alexander - Canaccord Genuity, Research Division
Great. Okay. So I guess if I'm understanding you correctly, there really hasn't been any change to the timeline. It's just going to be in that late Q3, early Q4.
Daniel J. Kunz
Jared Alexander - Canaccord Genuity, Research Division
Okay. Great. And maybe if I can just ask you on San Emidio here. So I know you talked about the vibration problem, and we all know this has been going on for a little bit here. Can you give any idea as to how confident the EPC contractor is that this current outage will ultimately fix that problem or are there other potential problems in the months ahead?
Daniel J. Kunz
We don't expect that there'll be other problems in the months ahead, but -- and we're very confident about our contractor. If you -- one of the elements that is really a plus for the shareholders of U.S. Geothermal is that we have a fixed price, performance-driven contract with one of the largest EPC firms in the U.S., a very deep pocket $12 billion company. They're standing behind this fully. But what I think is fair to say is that the -- there's a learning curve that's related to some of these issues, and one issue will, in series, cause something else to happen. For example, you get this extra vibration, it might cause something else to become an issue. And so they're trying to address all of that in the aggregate and make sure that when they turn this over to us, it's complete. We're not willing to accept it any sooner than we think it has to be. So it's really -- they've been wanting to say it's complete, but we have a very strict performance criteria in the EPC contract. The other piece of that is that after it's handed over, everything is under a 1-year warranty. So we have both a guarantee from the EPC contractors, as well as a warranty from all the components and manufacturers that will be still available to us. So I think that we're all expecting that this will be it, but this is -- as we are saying, this is innovative. And so as a result, we do expect that these are not uncommon things we've been going through since -- really, since January, February. However, we think that we're very near the end of that entire process.
[Operator Instructions] Our next question is from the line of Chris Cosmos [ph] with DAC Properties.
I'm just curious, I came in a little late. Any comments about the possibility of the second plant at San Emidio or have you guys kind of run out of time on that?
Daniel J. Kunz
Chris, I didn't mention that and I'm glad that you brought that up. The situation with the Unit 2 at San Emidio is this, we've been working diligently to make sure that, that's an optionality available to us from several points of view. One, the PPA provides for it. So we have PPA capacity, we have transmission capacity, we've got under the TSA, transmission agreement, as well as the physical wires and all of that, although there is some issue about how much additional power in the second unit could be distributed. We even qualified the project for the ITC cash grant. So it's under construction, given that we've been drilling production wells and prequalified the project for the eligibility. The next element though is that it has to be online before the end of next year, and there is -- lies the issue. And I think as we stated in our discussions in the MD&A and so on is that the decision on that is really dependent upon getting this first unit up, running and financed. So we are continuing to maintain that as an option. We have the equipments potentially that could be supplied rather quickly, but we're not going to really be in any position to know any more than on this topic until we complete this issue we're going through right now with Unit 1 and then have the -- pick up financing in place.
So I guess your go -- no-go decision is what, 90 days out or so?
Daniel J. Kunz
That's about right.
Our next question is from the line of Tim Ross [ph] with [indiscernible].
Yes, I was wondering if you were planning on expanding to the East Coast by any chance for the geothermal energy program.
Daniel J. Kunz
Tim, no, we're not. Right now, our focus will be very narrow and very laser-like in the Western U.S. with what we have. We have some properties we just mentioned, the second unit at San Emidio. It's a much more mature reservoir situation there and the project development situation. We have a couple of properties north of that, one called Gerlach, and the other Granite Creek. They will be focusing more on the future because they really require a PPA that perhaps will go into California. And we -- as I said, we will be focusing in the near term in Guatemala simply because of the PPA prices are so much better there, and the reservoir potential is steam energy. And it could have a very, very attractive economics. In fact, preliminary runs we've made are quite attractive. So given that, we have to stay focused. Obviously, we would be open to discussions for advanced properties, but -- and discussions for M&A activity and those kinds of things to continue to find strategic ways to grow our company. But we really don't see it in the Eastern U.S., Tim.
The second question I have is, do you cross -- of course, here in the East Coast, there isn't a lot of surface geothermal activity. So presumably, you'd have to drill down 2 or 3 miles into the ground in order to attain that. Is that a possibility?
Daniel J. Kunz
Well, I don't know specifically. Everything is quite specific, site-specific. For example, you have to really understand what geologic environment the hot springs, the hot water exists. I know there are hot springs throughout the Appalachians. I know that, that particular mountain building activity has contributed to hot waters and hot rocks, but I probably have exhausted my knowledge with that statement. So you really have to look at a specific location and say -- have a geologist look at it and say what are the potential there and where you could drill and so on.
There are no further questions at this time. I would now like to turn the floor back over to Mr. Kunz for closing comments.
Daniel J. Kunz
Okay. Well, you guys have let me off easy today on the questions, but I sure appreciate your attendance. And very much, I look forward to being able to have these calls in the next couple of quarters with an increasingly better news for the performance of these 2 construction projects, getting them online and looking ahead to a very robust 2013. So thanks again, and we will see you on the next call.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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