U.S. Geothermal (NYSEMKT:HTM) owns and operates three geothermal power plants that are fully operational. It also has additional projects under development. Based on the three existing plants being close to fully operational the full year in 2013, the company has provided guidance of revenue and EBITDA of $26.35M and $13.1M (midpoint) for 2013. Based on the three plants being fully operational in 2014 the company has provided guidance of $28.7M and $14M (midpoint) for 2014.
Because the largest plant has a JV partner Enbridge with a 30% to 40% interest that has not yet been finalized, Enbridge's share has not been deducted from the EBITDA guidance. Assuming a 35% interest in the Neil Hot Springs plant for Enbridge, 2014 EBITDA guidance is then adjusted to about $10.85M. After deducting $4.1M in interest expense, because HTM is not a cash taxpayer, FCF should reach almost $7M in 2014 with a market cap of just $46M, giving HTM a projected 2014 FCF yield of almost 15%. Note again this is based on the three existing plants that are already fully operational simply running for the full year with a normal level of maintenance and outages.
Included in this EBITDA number is Lease and well testing expenses and other expenses which are related to future projects. The total spending relating to existing projects is about $3.5M per year. If we back this out, then adjusted EBITDA for the existing plants (including corporate overhead) in 2014 should be about $14.25M and existing plant FCF should be $10.25M. The adjusted 2014 FCF yield on the existing plants grows to 22%. HTM is essentially a utility, but rather than a boring low growth utility, it offers growth and "green" energy.
Once the new projects feasibility become reasonably assured, these development expenses get capitalized much like software development costs. If you believe, as I do, that the spending on new projects is a good investment, and you like a 20% + forward FCF yield ex development expenses (similar to backing out growth capex) on a "green" utlility with pricing locked in for 20 years with large blue chip customers, then you should like HTM as an investment at the current price.
HTM's customers are large power companies and it has long term supply contracts in pace. There are 25 year supply contracts in the case of Neil Hot Springs and San Emidio and 20 year supply contract on Raft River. All have annual price escalators.
With long term contracts of 20 years or more in place on the fully operational plants, HTM's future cash flows on these plants could be valued like an electric power company that trade at about 14x forward EPS. But HTM is trading at under 7x 2014 FCF and under 5x after backing out the $3.5M of development expenses. I back these out because most other utilities are not spending anywhere near this amount as a percentage of their EBITDA on development projects. HTM is a "growth utility", which is unusual, so it should be looked at a bit differently. This development spending should pay off in future years.
HTM is also very cheap on a price to tangible book basis, selling at under .5x tangible book, which consists mostly of PP&E of $161M. PP&E should be conservatively valued because investment tax credits for geothermal, amounting to 30% of the investment for some projects, are accounted for as a credit to PP&E. So, at the current price, you can buy the stock for less than 50 cents on the dollar spent on PP&E, the cash on its balance sheet and other assets.
Because of green utility government incentives, HTM also enjoys loan guarantees from the DOE and therefore a favorable interest rate on its debt of generally under 3%.
HTM sold off almost 30% after its Q2 report due to maintenance outages, a turbine repair at a plant and higher corporate expenses. I don't believe the outages are recurring or indicative of future performance. HTM sold off a bit further after Q3 perhaps because it reduced the mid point of its 2014 EBITDA guidance by $500k. I believe the current price provides an excellent entry point.
HTM has projects in development, the nearest term of which are San Emidio Phase 2 with a projected completion date of Q215 and El Ceibillo phase I in Guatamala, with a projected completion date of Q415. San Emidio phase II already has NV Energy as a power purchaser and the company has already negotiated a MOU for the Guatamala project with a 15 year term. On September 18, Guatamala issued an environmental license for the construction and operation of the first phase (25 megawatt) of the plant. The Guatamala plant is a big growth opportunity of 50 megawatt total and phase 1 of 25 megawatt compares to existing net production of 29 megawatt (note HTM would bring in a joint venture partner so it would not add the full 25 megawatt to its production). The Guatamala development alone has the potential to increase HTM's production by over 50% even after taking on a joint venture partner as current net capacity is about 29 megawatts. The two projects could provide significant growth for the company beginning in 2015. There is no guarantee that these projects will come to fruition as it depends on the results of the drill testing and other variables, but the company has a good track record in project development.
The Guatamala project is also likely to be higher margin as it is a flash steam system while the other plants use binary technology, which lowers capital costs, and pricing will be more favorable. The target date for production for Guatamala phase 1 is Q415, so investors should start paying attention to this in about a year. For those investors who feel this opportunity is too far out in the future as one of the reasons own the stock today, you should look elsewhere.
Conclusion: HTM is a growth utility offering clean power with a 15% free cash flow yield. The growth is obscured because currnent investment spending wont result in a step up in growth until 2H15, when the Guatamala and San Emidio 2 projects kick in. Therein lies the opportunity. Alternatively, one could view HTM as having a 22% free cash yield before development spending (similar to growth capex). Either way, HTM is attractively valued and provides a very favorable risk/reward profile.
Thanks for reading, Barry Posternak
Disclosure: I am long HTM.