US Geothermal Inc. (NYSEMKT:HTM) Q3 2017 Earnings Conference Call November 10, 2017 11:00 AM ET
Scott Anderson - Director of IR & Corporate Communications
Douglas Glaspey - Interim CEO, President & COO
Kerry Hawkley - CFO
Christopher Souther - Cowen and Company
Bhakti Pavani - Euro Pacific Capital
James McIlree - Chardan Capital Markets
Greetings, and welcome to the U.S. Geothermal Third Quarter 2017 Earnings Results Conference Call. As a reminder, this conference is being recorded. A replay of this conference call will be available until November 17, 2017 by dialing 877-481-4010 from the United States and Canada, and by dialing 919-882-2331 internationally, please use replay ID 21666.
I’d now like to turn the conference over to Mr. Scott Anderson, Director of Investor Relations. Thank you. Please go ahead.
Thank you, Tim. Hello, everyone, and welcome to our third quarter 2017 financial results conference call. This is Scott Anderson, Director of Investor Relations and Corporate Communications. Today, I’m joined by Doug Glaspey, our Interim Chief Executive Officer, President and Chief Operating Officer; and by Kerry Hawkley, our Chief Financial Officer.
Our earnings release was issued yesterday and can be found on our website at www.usgeothermal.com under the tab News, and a slide presentation is accompanying today’s call, and that can be accessed on our company website on our homepage, under Upcoming Events.
We would like to remind you that information provided during this call may contain forward-looking statements related to current expectations, estimates, forecasts 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.
During the call, we will present non-GAAP financial measures such as EBITDA, adjusted EBITDA and adjusted net income. Reconciliations to the most directly comparable GAAP measures and management’s reasons for presenting such information are set forth in the press release that was issued yesterday. 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. After our prepared remarks, we will conduct a question-and-answer session.
At this time, I’d like to introduce Doug Glaspey, our Interim Chief Executive Officer, President and Chief Operating Officer to provide an overview of the highlights of the third quarter of 2017. Doug?
Thank you, Scott. Good morning, everyone, and welcome to the presentation of the third quarter 2017 results. I’d like to call your attention to slide four. We are pleased to have produced our 20th straight quarter of positive EBITDA and cash flow from operations.
Our operating revenue for the nine months of $21.5 million exceeded the revenue from the same period in 2016 of $20.9 million. We completed a multi-well flow test from the Southwest Zone as we continue to define the resource that will support our San Emidio 2 development, and work continued on engineering, design and transmission for both San Emidio 2 and WGP Geysers as we prepare these projects for construction.
We’re also successful on acquiring two grants to help advance the El Ceibillo project. One from the U.S. Trade Development Agency and second from the German Development Fund. And the last round of geophysical data was collected under our $1.5 million grant from the Department of Energy to test innovative resource exploration technologies.
I will now turn the meeting over to our CFO, Kerry Hawkley, for an update on our financials. Kerry?
Thank you, Doug, and good morning to our listeners on the call. I will now discuss the financial statements of U.S. Geothermal for the quarter ended September 30, 2017. Our financial statements and MD&A were prepared in a condensed format.
On slide six, our balance sheet. Total assets were $237.7 million, total liabilities were $108.4 million, net stockholders equity was $104.5 million, and total non-controlling interest was $24.8 million. Our issued an outstanding shares of common stock at September 30, totaled 19,274,683 shares.
Our statement of operations, are on slide seven. Our results of operations for the first nine-months were down slightly from our expectations. Revenues for the nine-months were $21.6 million, up 3.2% from the same period in 2016. Plant expenses were $13.5 million, an increase of 16% from 2016. Gross profits or income from operations were $8.1 million, a reduction of 13% from 2016. The loss revenue associated with the loss and repair of the vaporizer tubes at Unit 1 at Neal Hot Springs plus the completion of our three year State of Oregon property tax abatement contributed to the decline.
The one-time impact for loss revenue is $0.69 million, and the property taxes, which will continue was $0.71 million for the first nine months, it will be $1.06 million per year estimate. Professional and management fees are 48% lower than the same period in 2016, primarily because in Q1 of 2016, we had a one-time charge of $753,000 for the review of strategic alternatives.
Employee compensation cost were up $1.1 million, when comparing 2017 to the prior year, due to the accrual of a termination fee associated with the non-renewal of the employment contract of Dennis Gilles, our former CEO.
Interest expense was up $352,000 when comparing 2017 to the prior year, due primarily to the $20 million prudential loan that was initiated in May of 2016. Income tax expense for 2017 decreased to $147,000, primarily due to an increase in the plant production expenses at all three plants and the accrual of the termination fees for Mr. Gilles. Net income attributable to U.S. Geothermal was a loss of $2.01 million in 2017, compared to a loss of $0.49 million in 2016.
Our statement of cash flows on slide eight, we began the year with cash and cash equivalents of $15.3 million and ended the third quarter with cash and cash equivalence of $10.5 million. Cash generated by operations was $6.3 million, issuance of common stock generated $0.8 million.
Principal payments on notes reduced our total debt by $4.2 million, payments to our partners were $3.2 million, funding of restricted cash reserves was $0.4 million and capitalized development cost at Raft River WGP Geysers and El Ceibillo net of grant reimbursements totaled $4.1 million.
Thank you for your continued interest in U.S. Geothermal. I'll turn the call back to Doug.
Thank you, Kerry. If you would move now to slide nine, for our operations update, and then immediately to slide 10. Generation from all three facilities for the first nine months of 2017 was 228,415 megawatt hours, compared to 228,722 megawatt hours for the same period in 2016.
Despite a couple of mechanical issues that we’ve incurred this year, our generation level was back nearly to our 2016 level. For the third quarter, generation from all three facilities was 62,701 megawatt hours, compared to the same period in 2016 that have generation of 66,055 megawatt hours.
On slide 11, our Neal Hot Springs project generation for the third quarter averaged 14.1 net megawatts per hour with 99.1% availability. As you’ll all recall the summer months especially at Neal with the air-cool condensers are when we have our lowest generation.
On October 1st, we received the final insurance payment related to the extended outage on Unit 1 in January and that payment was $897,150. Our total insurance recovery for property damage and business interruption due to that incident was paid out at $2.467 million. This is why we have insurance.
On slide 12, our San Emidio plant, we had generation for the third quarter that averaged 8.6 net megawatts per hour of operation with the 59.2% availability. As we mentioned on last quarter’s earnings call, a number of refrigerant leaks were identified in the vaporizers on July 21st.
We shut the plant down for 29 days while tubes were tested. Leaking and damaged tubes are identified and then those tubes were plugged. These leaks were caused by scale induced corrosion that is scale formed at the cold end of the last vaporizer bundle and corrosion was reduced under that scale, which attack the metal in the tubes.
We will be replacing those damaged tubes during the 2018 scheduled maintenance outage and are taking steps to alter the operations protocols to ensure we don't repeat this issue. This is a different issue of course than what we experienced at Neal Hot Springs in January. Since restarting the San Emidio plan, it has been meeting its budgeted generation and will do so for the rest of the year.
On slide 13, for Raft River, generation for the third quarter averaged 9.3 net megawatts per hour and it had an availability of 100%. In August we installed an upgraded injection pump and that allowed us to increase the flow rate from our new production well RRG-5. As a result, we’ve increase the generation from Raft River by approximately 1.6 net megawatts. This is really going to help the economics at Raft.
Moving on to slide 14, and then slide 15, we'll now move to our growth plans, which includes both upgrades to our existing power plants and the advancement of our development projects. Several new advancement projects can be constructed in 2018, which can add 3 to 6 net megawatts of generation.
At Neal Hot Springs, of course we're still working on hybrid cooling, the design engineering is nearly final for that system and major equipment bids have been received as we prepare to start construction on a hybrid cooling system in 2018. Finding enough fresh ground water has been a challenge so we are proceeding with the plan to use both ground water and treated brine that will provide a total 200 gallons per minute of water to the hybrid system.
The proposed system will be installed on one unit as our first phase upgrade and will provide enhanced cooling for six to eight months of the year. We will install the system on one of our units and that estimated increase in generation is approximately 7,800 megawatt hours for a full year of operation.
We use a 2019 contract price, this would equate to about $875,000 of additional revenue. After we run this system for a period of time and once the brine treatment portion is confirmed, we plan to expand the system encompass the two remaining units in the future.
At San Emidio I, with the discovery of the high temperature Southwest Zone coupled with the need to better define the ultimate size of that zone, we’re planning on drilling a new production well, which will twin one of our slim hole wells and deliver the fluid to the San Emidio I plant. Our PPA for San Emidio I is approximately 1.5 net megawatts annual average of additional capacity available at full contract price. And there are up to 4 megawatts available at a reduced excess energy price of $50 per megawatt hour.
Each megawatt at the full contract price is worth about $800,000 in revenue per year and each megawatt of excess energy is worth approximately $425,000 annually. For relatively low capital cost and a minimal additional operating cost we can increase our revenue quickly at San Emidio, while we continue to develop the San Emidio II project. Our plan is to have this new well in production, feeding the San Emidio I plant during the third quarter of 2018.
On slide 16, these are some of our advanced projects of course, excuse me, still on slide 16 yes, our Raft River project, we had solid success this year improving generation at Raft River with the addition of production well RRG-5 in an upgraded injection pump. With the increased injection capacity we have room left now to add another 400 to 500 GPM of fluid to the plant without any other well field changes.
Reservoir modeling has shown the production pump RRG-4 can be upgraded by adding bolts to the pump and setting it 400 feet deeper in the well to produce another 500 gallons per minute of fluid, which represents another half of a net megawatt of generation. Luckily that pump in RRG-4 is scheduled to be pulled for replacement in 2018 anyway since it’s been in service for over eight years, which is well beyond the average five year life of a geothermal pump. We’re also evaluating several other improvements at Raft River with a target of achieving the full 13 megawatt capacity for the project within the next year or two.
Now moving to slide 17, at WGP Geysers our final design engineering for the plant continues and we’ve received bids for all of the major pieces of equipment, which allow us to improve the accuracy of our capital cost estimates.
The key to success at Geysers is our ability to get a PPA and that is our number one focus. As new request for offers come out in California we will be submitting the project to them. There is no fix schedule of when the numerous offtakers will be asking for power, but we track them all and will respond when our project fits the request.
As we’ve progressed our engineering and operating cost estimates, we’ve enabled to sharpen our pencil on PPA price and remained confident that we will be successful. The California market is ever-changing and in general we see it moving back toward valuing base loan renewable energy as they increase our overall renewable energy procurement moving toward their 50% RPS requirement. We’re in a great position at the Geysers. We’re the only geothermal project that has the Cal-ISO interconnection approval in the entire state of California.
And on the subject of interconnection we will be modifying our interconnection agreement for the project where the change in the location of the point of interconnection to a substation that will be constructed right on the plant site. The cost for our new substation has been included in our project capital for the past several months.
This change may push our available online data out, but since it was the interconnection choice included in the original Western Geo Power, LGIA or Large Generator Interconnection Agreement, we believe that the change won’t be significant. We have to ensure that we have a solid plan to interconnect the project to the transmission grid.
Moving to San Emidio II during September 2017 we conducted a multi-well flow test using three of the recently drilled Southwest Zone wells. The total flow from the wells was approximately 1,590 GPM and the flowing temperature in the three wells range from 319 to 325 degrees Fahrenheit.
Pressure response was monitored across the well field to provide additional reservoir modeling data. This data has confirmed the current probabilistic power density reservoir estimate at 25.9 megawatts with the 90% probability and this is within the relatively small area that these five wells reside.
The 50% probability level of 47 megawatts remains unchanged until we can drill wells outside of that resource area. Further exploration drilling, which will be designed to expand the size of the resource will be undertaken after the environmental assessment is complete. The Bureau of Land Management permitting process for the San Emidio II facility is continuing. This is an environment assessment or EA level NEPA study and our expectation is that this permit will take until spring or summer of 2018 at the earliest to get a record of decision.
Additional environmental surveys have been undertaken during the quarter to include the route of the transmission line from the new plant site to the NV Energy substation, which is the point of interconnection for the project. This study could be further modified depending upon the transmission route that is determined by the NV Energy interconnection process.
The Large Generator Interconnection Application or LGIA that we submitted to NV Energy on June 26 has been accepted as complete. And an initial meeting to review the application was held in August. The first phase study is underway and is expected to be completed in January 2018.
At El Ceibillo, we are awarded a German Development Fund drilling grant of $3.42 million on September 28. So that $3.42 million represents the grant amount. This grant represents a 40% cost share of the total program cost for drilling of three production size wells. The remaining 60% would be our obligation.
If the GDF funding is used on the project and a power plant is constructed, the grant would be converted into a loan. Of course, if a plant is not constructed and the wells are not successful that grant would stay as a grant, and we would not owe any money.
Additionally, we were awarded a U.S. Trade Development Agency grant for a feasibility study of El Ceibillo that's worth $825,319. The study is being led by power engineers at the Hailey, Idaho in a consortium of professional geothermal contractors are involved. It's scheduled to be completed by the end of 2018.
We're really trying to control our expenditures at El Ceibillo until we see that that energy market is opening up in Guatemala. We still have no indication of when the Guatemalan Government will issue the 420 megawatt RFP they announced earlier this year.
Moving to slide 18, our revenues for the third quarter are above the same period last year at $6.81 million compared to $6.73 million. Gross profit fell slightly and our net income attributable to U.S. Geothermal dropped due to non-reoccurring cost and the onetime maintenance expenses we incurred.
Our EBITDA on a consolidated basis for this quarter was $1.49 million compared to $3.01 million for the same quarter last year and our EBITDA U.S. Geothermal only portion for the quarter was negative $0.17 million compared to $1.66 million for the same quarter of last year.
Moving to slide 19. This slide shows our historical performance over the last three years, as well as our updated guidance for 2017. We are modifying our consolidated guidance for 2017 primarily due to several non-reoccurring items. Based on our current operations we expect our operating revenue to remain in the $30 million to $34 million range, adjusted EBITDA $17 million to $21 million. EBITDA of $14 million to $18 million, and net income as adjusted of $5 million to $9 million.
We are also updating our guidance for U.S. Geothermal only less our minority interest. Based on the same criteria, for which we expect operating revenue of $18 million to $22 million, adjusted EBITDA of $11 million to $13 million, EBITDA of $8 million to $11 million, and net income as adjusted of $2 million to $5 million.
Moving to slide 20, in summary, we are continuing to diligently work on our expansion and development projects to increase revenue and grow company. As we wait for our PPA, we are going to be focused more now on developing additional revenue at our existing projects. These operating plants continue to be improved and the development projects should be a moved forward in the anticipation of acquiring a PPA.
While the power market in the Western United States continues to undergo significant changes, the demand for renewable energy is still growing in every state. We remain optimistic about the opportunities that lie ahead for U.S. Geothermal.
Operator, we are now ready to open the call for questions.
Thank you. [Operator Instruction]. Our first question comes from the line of Chris Souther of Cowen and Company. Please proceed with your question.
Hi, thanks for taking the call. I just want to check and see how many active RFPs from CCAs in commercial on these who responding to for Geysers?
Good morning, Chris, and thanks for the question. There are active -- there is one active RFP right now, actually there is two. We have responded the one I think what we are going to do in the future though is probably not detail on a blow-by-blow basis RFPs and where they are at, one we get a PPA we will be sure and let you know.
That makes sense. And then, one of the things discussed at the Geothermal Resource Council Meeting with the dispatchability of Geothermal, are you seeing any RFPs written in that way and kind of what you guys think about that concept?
We haven’t yet seen that written into an RFP, we are of course looking at that it’s something we believe we can achieve best with binary cycle plans because they do have certain amount of flexibility built-in, it gets a little bit harder with flash team, to be able to control the well and control the turbine. But it is certainly something that they’re interest in what we are seeing interestingly enough in RFPs now is that for the solar components that are being bid the offtakers are asking for that to come with storage and not just PV standalone projects.
So that is starting to tell us that I think the offtakers are starting to pay attention to the intermit problem they have in California.
Alright. And then last one just on the termination fees for the former CEO, would you expect to see anything like that in fourth quarter or is that just a third quarter?
That is the only termination fee.
Okay, I’ll hop back in the queue. Thanks.
Our next question comes from the line of Bhakti Pavani of Euro Pacific Capital. Please proceed with your question.
Good morning guys, thanks for taking my question.
Good morning, Bhakti.
Just kind of curious on the Geysers project I know that you had about two RFPs that you bid on and you did mention in your prepared remarks that you guys have updated the PPA pricing. So just kind of wondering was the PPA pricing the reason for you guys not getting shortlisted or was it that you guys lost to solar guys?
Well, that’s a good question, and unfortunately the offtakers when they go through that process never call you back and tell you what the problem was or why you aren’t shortlisted. I think, it’s probably a combination myself Bhakti, as everybody knows of the course Geothermal pricing is above solar, it could also depend on what the actual demand is from that particular offtaker.
We are going to able to make a significant move in our PPA price, became more competitive and the other -- just so you know the other competition we have out there is from installed Geothermal capacity that is being re-contracted. So we have to get down to that level and we think we can do that for our Geysers project.
Perfect, that’s great color. Thank you very much. Moving back to Neal Hot Springs, in your prepared remarks you did mention that you guys are considering the combination of both hybrid cooling and so just from the CapEx standpoint, I am assuming would that be entire CapEx be spent in next year even though you guys are going to just test run into one unit, how should we think about it?
The bulk of that CapEx will be spent next year, Bhakti, we may have short of some relatively minor engineering cost, we may have some equipment reservation cost late this year, but it’s not going to be a lot of money. The actual construction will take place next year. We’ll have to order equipment. Some of that equipment has 26 to 28 week delivery. Of course, we’ll always try and shorten that and then get into construction in earnest in the spring time.
Okay. And with regards to San Emidio I, you do plan to drill a new well, do you have kind of time line in mind, when you would like to do that?
Yes, we actually have the permit, permitting is taking place right now. We believe we could have that well in production in the late, late second quarter, early third quarter timeframe would be our goal.
Perfect, that’s it from my side, I’ll hop back in queue.
[Operator instructions] Our next question comes from the line of Jim McIlree of Chardan Capital Markets. Please proceed with your question.
Thank you. Good morning everybody.
Good morning Jim.
Hey, I’m trying to figure out on Neal, what additional permits if any you need in order to implement the hybrid fresh water brine solution?
Well, we probably need two Jim. There’s a typically an air quality permit, even though west cooling tower, really, the only mission it has is a PM10, small particulate those kinds of permits are pretty easy to get. Another permit we’ll have to get is a -- because we’ll have blow-down out of the cooling tower, we operate our other plants with that blow-down. So that would be a disposal permit for that blow-down. It’s probably just going to go into shallow wind filtration at this point.
And I don’t want to characterize any potential permit is easy to get, but it sounds like these are more ordinary course of business kind of things?
That’s correct, we’ve already started that process, and they’re pretty much ordinary course of business.
And so, if everything stays on schedule at Neal, this would impact revenue in what quarter? Would it be in the 2019?
I hope is to catch some of this in the third quarter of next year. I’d like to have the plant constructed, get it up and running, we may only run it for a month or two, but that allows us to make sure everything operates correctly, workout any bugs. And then we would have full operation in 2019.
When the summer season begins or the hotter months begins?
Yes, and we’re actually looking at -- we’ll actually gain megawatts starting as early as March-April, depending on temperature of course.
Right. Okay. And a similar question for San Emidio, are there any extraordinary or unusual permits that you need to obtain in order to increase capacity there?
Actually no, there are not. All we need is drilling permits, so we can drill at well. We won’t have to construct a interconnecting pipeline that will connect us into one of our well pipelines and feed that to that the plant. But we have the transmission capacity available and of course the PPA covers any additional generation at this time.
And that’s a year around increase, that’s unlike Neal, that’s going to be something that is available for the entire year, is that right?
Yes, that is correct. We’ll actually be able to push that -- we’re currently producing that facility at about 277 degrees F, brine temperature. We’re going to push this up to over 290 to 295 degrees F, with that harder fluid that’s coming in. So, we’re going to -- with some program, we’re going to see -- we hope a pretty significant boost out there at San Emidio.
Right. And when you say, you’re targeting completion in Q3 of ‘18, is that the one megawatt at the full price, and plus the 1 megawatt of excess energy or just the full price megawatt?
I think the first thing we’ll capture is we’ll be able to capture that 1.5 or 1.6 megawatts right away and that would be the full price of the contract. And then the question is how much more do we get above that. As I said, we have some programming that we have to change in the current plant. That would allow more we can pump all the fluid through it we just have to open up the turbine a little bit more. The current turbine is restricted at about 77% open on the IGBs which are the control veins that determine how much refrigerant you can put through the turbine. We can open those up to the 100% level and flow a lot more refrigerant through the turbine.
Okay. I think that's it for me. Thanks a lot, appreciate it.
Thank you, Jim.
[Operator Instructions]. Our next question comes from the line of Paul Sillier, a Private Investor. Please proceed with your question.
Good morning, Paul.
Paul, your line is open. Once again Paul, your line is open.
Paul, are you there? [Operator Instructions] At this time we have no further questions over the audio portion of the conference. I would like to turn the conference back over to Scott for closing remarks.
Thanks, Tim. And thank you to everyone for participating in our call today. If you have any further questions, please feel free to call to us at area code 208-424-1027. Thanks again for your interest in U.S. Geothermal. Goodbye.
Thank you, gentlemen. And this concludes today's conference call. Thank you for participating. You may now disconnect.