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U.S. Geothermal, Inc. (NYSEMKT: HTM ) Q1 2015 Results Earnings Conference Call May 19, 2015, 14:00 PM ET Executives Dennis Gilles – Chief Executive Officer Douglas Glaspey – President and Chief Operating Officer Kerry Hawkley – Chief Financial Officer Analysts James McIlree – Chardan Capital Markets, LLC Operator Greetings, and welcome to the U.S. Geothermal’s 2015 First Quarter Earnings 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. I would now like to turn the conference over to Mr. Dennis Gilles, Chief Executive Officer for U.S. Geothermal. Thank you Mr. Gilles, you may now begin. Dennis Gilles Thank you, operator, and hello everyone. Thank you for joining us on today’s call and for your continuing interest in U.S. Geothermal. My name is Dennis Gilles, and I am the Chief Executive Officer of U.S. Geothermal. Joining me today on today’s call is Kerry Hawkley, our Chief Financial Officer; and Doug Glaspey our President and Chief Operating Officer. We are pleased with our company’s performance in this first quarter of 2015. Our plans continue to outperform industry standards for operational reliability and we are focused on bringing the next phase of growth to our shareholders. I would now like Kerry Hawkley, our CFO to provide you with a summary of our financial results for this first quarter of 2015. Kerry Hawkley Thank you Dennis, and good morning to our listeners on this call. Before beginning we would like to remind you that the information provided during this call may contain forward-looking statements relating to current expectations, estimates, forecasts and projections about future events that are forward-looking as described in the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally relates the company’s plans, objectives and expectations of future operations and are based on management’s current estimates and projections of future results or trends. The 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 measure such as EBITDA, adjusted EBITDA, and adjusted net income. Reconciliations to the most directly comparable GAAP measures and management’s reason for presenting such information is set forth in the press release that was issued last Friday. 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. I would like to start first by bringing to your attention that our company has changed its auditors as previously disclosed. The company’s management, audit committee and Board of Directors has determined that it was in the company’s best interest to engage a more nationally recognized accounting firm both in size and breadth of experience with SEC reporting issuers. Effective March 31, 2015, the Company has engaged Moss Adams LLP as the independent, registered, public accounting firm that will audit the Company’s financial statements. Moss Adams is among the 15 largest CPA firms in the United States, works with over 300 SEC registrants, and serves as the auditor of record for over 80 of those registrants. Moss Adams also has experience serving multi-national companies and is part of an international affiliation that provides us with a global reach, including Central America. MartinelliMick PLLC, the company’s former auditor, resigned at the request of the Company effective March 31, 2015. There were no adverse opinions or disclaimers in MartinelliMick’s reports during the two fiscal years ended December 31, 2014 and 2013 and through March 31, 2015. Further, there are no reportable events as defined in the U.S. securities rules. In other words we had no problem with MartinelliMick or their staff, and parted on amiable terms. We are extremely pleased with the transition Moss Adams and feel that this change will assist us greatly as we continue to grow our business both in the U.S. and internationally. I’ll now discuss the financial statements of U.S. Geothermal for the quarter ended March 31, 2015. You’ll notice that the company is now filing your financial statements and MD&A in a convinced format which should be read in conjunction with our audited financial statements and 10-K filings with the year ended December 31, 2014. Our balance sheet as of March 31, 2015, we have total assets of 230.5 million. Our total liabilities are 99.6 million. Non-controlling interests represent 45.3 million, and our net stockholders equity is now $85.6 million. Our statement of operations, revenues for the quarter were 8.5 million which is consistent with 2014. Plant production expenses were 3.9 million, up 140,000 over the same period in 2014 primarily due to the timing of bonuses for plant personnel. Stock-based compensation costs were up 218,000 due to the timing and pricing of restricted shares granted to employees, executives, and directors in April of 2014. These costs are non-cash and align the interest of our employees, officers and directors with shareholders. U.S. Geothermal no longer has a tax valuation allowance as existed in early 2014 due to the recording of the deferred tax asset in December 2014. In 2015 we recognized an income tax expense of 444,000 for GAAP purposes and reduced the deferred tax asset by the same amount. You should realize that U.S. Geothermal has no tax liability until the deferred tax asset is fully depleted. This income tax amount represents tax on U.S. Geothermal’s share of net income only. The three months net income of 1.8 million in 2015, if you eliminate the income tax would give you an adjusted net income of 2.2 million in 2015 which compares to 2.5 million for the same period last year. On our statement of cash flows, we began the quarter with cash and cash equivalents of $13.0 million. Cash generated by operations for the quarter were 4.9 million. Note payments reduced our total debt by 1.8 million. Payments to non-controlling interest were 2.1 million. We did capitalize cost at San Emidio, El Ceibillo and Crescent Valley that totaled 1.5 million. Restricted funds totaling 774,000 were released. So we ended the quarter with cash and cash equivalents of $13.3 million. Please note that our exploration and development budget for 2015 requires approximately $5.5 million in cash from U.S. Geothermal, which can be funded internally by cash flows from operations and cash on hand. Our statement of changes in stockholders equity, we’ve added the net income attributable to U.S. Geothermal of 734,000 during the quarter, our accumulated deficit net of tax is now 18.6 million. Shares of common stock issued upon exercise of stock options for the quarter were 45,000. Cash at 2.1 million, again, was distributed to our non-controlling interest on our Neal Hot Springs project which is Enbridge. Shares of common stock issued and outstanding at quarter end totals 107.1 million shares. In response to the apparent confusion noted during the prior earnings calls, we have continued our disclosure on page 39 in the MD&A, regarding the net income attributable to the non-controlling interest and a net income attributable to U.S. Geothermal and its shareholders which we hope provides you the clarity sought. For the quarter, you will see that Neal Hot Springs contributed $1.1 million. San Emidio contributed $346,000, Raft River contributed $42,000; for a total contribution to the U.S. Geothermal of $1.5 million. From that, exploration activities and corporate overhead costs $779,000. All of these figures are net of tax. Cost in this last category includes the company’s cost of existence including being listed on two stock exchanges, legal accounting and professional fees, filings with government agencies, stock-based compensation and the cost of evaluating and developing new projects. These costs are a 100% U.S. Geothermal costs and reduce the net income attributable to U.S. Geothermal. However as we grow the company by adding income generating projects in the future, this category will not increase significantly from current levels, which will allow the net income from the new projects to increase the bottom line almost dollar for dollar. Thank you for your continued interest in U.S. Geothermal. I will turn the call back over to Dennis. Dennis Gilles Thank you, Kerry, for that summary of our quarter. Doug Glaspey, our President and Chief Operating Officer will now provide the highlights of our operating performance for the quarter as well as our current development activities. Doug? Douglas Glaspey Thank you, Dennis, and welcome everybody. Generation for the first quarter from all three plants was 95,926 megawatt hours and that compares to 98,884 megawatt hours in the first quarter of 2014, which is a 3% reduction quarter-over-quarter. The first quarter as many of you know was one of our two best generation quarters of the year due to the cooler winter temperatures, but the weather at all of our sites was 6 degrees to 7 degrees warmer than normal this year and that contributed to the slightly lower output. Additionally, one of the units at Neal Hot Springs had an unplanned outage that reduced availability and output for that facility. I will note that in the second quarter we started into our annual maintenance outages at all of our facilities. At Neal Hot Springs, generation for the quarter was 53,500 megawatt hours with average generation of 25.6 net megawatts per hour of operation. The facility operated at 96.9% availability for the quarter. As I mentioned earlier, the availability at Neal was down slightly during the first quarter and this was due to a one-time event where the vaporizer tubes on Unit 3 became plugged with loose scale and that required 7.5 days of downtime on that unit. Units 1 and 2 have already completed their annual maintenance outages on schedule during the second quarter and Unit 3 is currently in its outage which just began on Sunday. The Geothermal reservoir at Neal continues to outperform the reservoir model with well over two years of stable temperature and flow rate. At San Emidio, our generation for the quarter was 21,754 megawatt hours and our average hourly generation was 10.1 net megawatts per hour. San Emidio operated at 99.9% availability for the quarter and exceptional result by our operations team. Flow from the Phase II well number 61-21 continues to go to the Phase I plan and San Emidio has already completed its annual scheduled outage, it was a five day outage from April 20th to the 25th and after the outage the plant came back up on time and is operating smoothly. At Raft River generation was 20,672 megawatt hours for the first quarter with average hourly generation of 9.6 net megawatts per hour. Raft River operated at 99.7% availability for the quarter and continues to operate with consistent stable generation. Raft, did begin an extended maintenance outage for its first turbine overhaul since the plant started in 2008. That outage started on May 4th and was completed on May 16th few days ahead of schedule. We’re very pleased with the performance of all three plants during the first quarter. Our operations team continues to produce outstanding operational availability at all of the facilities which contributes to a high level of power generation. On the development front at the WGP Geysers project, we’re continuing to pursue two paths for development on that project. The first is to potentially secure a new power purchase agreement for the sale of electricity and then if we’re successful with that, we’ll construct a new power plant and sell energy. We’re also pursuing the possibility to produce steam only for sale, with one of the other power plant operators in the Geysers. For either option it’s important for us to fully understand the production capability of the steam reservoir. During the quarter, we commissioned GeothermEx and it’s a kind of Geothermal consulting firm to update their steam reserving estimates that was done in 2012 using the most current well field pressure data and the change in injection from approximately 20% using conventional wet cooling, the 60% injection was our proposed hybrid design. The March report supports path analysis, analysis of the four existing wells, have an initial 30 megawatts of drill steam capacity and then 28.8 net megawatt plant can be supported from the reservoir for 20 to 30 years with the increased injection volume. I do want to note that in our April 29th project update news release, we cited a 27.4 net megawatt plant size that is the summer generation level for this very same plant design at 28.8 megawatts annual average, so I wanted to clarify that point. This preliminary reservoir estimate will be upgraded to a bankable reservoir report after completion of our flow testing program, which is scheduled to begin in early June. The final steam production rates from the reservoir will be determined after the flow testing and reservoir report are completed. The flow test equipment is currently being staged on to the project site in preparation for the test. Engineering optimization is currently underway for the hybrid power plant design, which uses both air and water cooling on a seasonal basis. So that this will use air in the winter when we have cold air and that increases power generation and we used water in this summer for the same reason. Our engineers are working with power plant providers and other engineering firms to finalize the design basis of that plant for maximum efficiency. Our transformation interconnection application was accepted by the California Independent System Operator and is in there evaluation process. And additionally, we are preparing the new conditional use permit application for submitting to Sonoma County that will replace the current permit which expires in July. At San Emidio Phase II project continues to be dependent upon the successful drilling and expansion of the currently non-Geothermal resource. In order for us to make an economic decision to build the project, we have to be successful with drilling additional production and injection wells that will support a second power plant. We drilled two new wells in the south zone during 2014 and extended the high temperature anomaly, farther south from the current well field. Those two wells combined with geophysical and historic data indicate that the high temperature anomaly continues further South. It took a little over four months where we received our permits from the Bureau of Land Management in early May to drill up to five temperature gradient wells in the south zone area. Our driller is ready to mobilize in the site, begin drilling as soon as the area dries out after a recent stretch of rainy weather. Also as you know NV Energy issued Request For Proposal totaling 200 megawatts which we provided a bid for. Our bid was advanced to the initial shortlist on March 3rd, that we were notified on May 12th that the Phase II project did not meet the final shortlist. NV Energy has scheduled to have an RFP out in 2016 for an additional 100 megawatts of renewable energy and we continue to seek other potential up tickers for the project. At El Ceibillo and Guatemala, our modified development schedule that was submitted to the Guatemalan Ministry of Energy and Mines has received approval from their legal technical, environmental and mining departments and the Vice Minister. The final paper work has been prepared for the Minister signature and we expect his approval to come in the near-term. The new scheduled moves are on line date out to the second quarter of 2018. Once we receive the approval we are planning to drill exploration well EC2, which is targeted at the high temperature anomaly that was identified by our 2014 temperature gradient program. EC2 will be a core hole design exactly like the EC1 well and is planned for a depth of 2000 feet to 3300 feet; at 600 meters to 1000 meters in depth. At Neal Hot Springs Oregon drilling for a water supply well with the use for hybrid cooling system at the Neal facilities started yesterday, Monday May 18th. If the well finds adequate water supply we are willing to do a pump test to determine the long term capacity of the aquifer to ensure it can support the installation of a water cooling system for the facility. This system could either be a conventional cooling tower or a mist cooling system. The water cooling during five months or six months of the high temperature seasons will increase power generation on current air cooling experiences of significant reduction in plant output. And finally at Crescent Valley, Nevada, we finished the first well at Crescent Valley that’s CDP 1 during the quarter to a depth of 2,746 feet. The well exhibited modest permeability with the flowing temperature of 213 degrees Fahrenheit. The high temperature in that well was around 230 degrees and it makes that well suited to be an injection well. The next phase of development work is currently in the planning stage. Dennis back to you. Dennis Gilles Thanks Doug. I just wanted to summarize our notable highlights for 2015 for the first quarter. On the financial accounting side, to support our continued growth, we’ve changed our financial auditor to the nationally recognized accounting firm of Moss Adams. They’re a much larger firm with an expanded breadth and we are pleased with the change so far and the level of detailed review that Moss Adams has demonstrated during this first quarter. On the financial performance side, though all of our facilities experienced warmer than normal seasonal temperatures, this first quarter which impacted generation and with our Neal Hot Springs Unit 3 experiencing the unplanned 7 day outage due to the vaporizer failing, we still ended the quarter with excellent results. Our revenues for the quarter ended up at $8.5 million which was right on par with last year. Our adjusted EBITDA for the quarter was 5.13 million which is not far off of the 5.26 million in the prior year and we reduced our total liabilities by 2.5 million and our long term debt we reduced by 1.8 million. Looking at the financial performance of U.S. Geothermal after eliminating minority interest which represents our partner share at Neal Hot Springs and Raft River, our cash flow from operations for the quarter was 4.9 million and that compared with 5 million in the prior year. Our adjusted net income attributable to U.S. Geothermal for the quarter was 1.17 million compared to 1.34 million in the prior year. We ended the quarter with cash and cash equivalents on hand at 13.3 million. On the operating performance side, our fleet wide average availability for the quarter was an impressive 98.8%. We just completed our first major overhaul at Raft after six years of operation and completed it two days ahead of schedule. We also just completed our spring outages at San Emidio and had two of the three units at Neal Hot Springs with the third unit currently going on. On the growth side at El Ceibillo as Doug said, at our El Ceibillo project in Guatemala, we continue to work with the Ministry of Energy and Mines and are very pleased to report that we have now received all the internal approvals needed to modify the construction schedule under our Geothermal concession agreement. We expect to have the new agreement signed shortly and once that agreement is signed, we plan to begin drilling of our well EC2. On the Crescent Valley project, we completed drilling of that first injection well on March 27th and are now planning and permitting the next phase of drilling. On San Emidio II, we just received the permits for the next round of drilling in the South Zone and we’ve mobilized the drill rig and expect to begin drilling shortly. At WGP Geysers, we are preparing for an extended flow test of our production wells and expect to begin that testing later this month. The result of that flow test as Doug mentioned are critical for determining resource capacity and optimal sizing of the new power plant. At Neal Hot Springs, we began drilling on May 18th for the water supply well that will be used for the plant hybrid cooling to increase summer generation. And we continue the evaluation of a number of other potential acquisitions that could drive our growth both in the near term and long term. As far as guidance for the coming year or for this year excuse me our guidance for 2015 is based solely on our existing operations and does not include any projections of revenue that maybe provided by any acquisition that we are considering. These figures are forecast only and are considered forward looking statements. Our guidance for 2015 is as follows. Our revenues, we’re projecting between $28 million and $33 million, our adjusted EBITDA between 15 million and 19 million, our EBITDA between 12 million to 16 million and net income of 1.9 million and 5.9 million. In summary with our strong cash flow from operations, we continue to have adequate cash on hand to support both our ongoing operations and early stage developments efforts and we continue to add cash to our balance sheet in preparation for our next construction project or acquisition. We also believe we are appropriately prepared to be responsive to many of the additional growth opportunities that we are currently evaluating. In closing, we have now had ten consecutive quarters of positive EBITDA and cash flow. Our fleet of power plants continues to perform well. We are pleased with the performance of our resources and we are pleased with the new growth opportunities recently added to our portfolio and we’re optimistic regarding the other growth opportunities that we are still evaluating. We thank you for your continuing support and operator, I’d like to now turn the call back to you for questions. Question-and-Answer Session Operator We will now be conducting a question-and-answer session. [Operator Instructions] First question is from Jim McIlree, Chardan Capital. Please go ahead. James McIlree Doug, why didn’t you make their shortlist at San Emidio? Douglas Glaspey Well, that’s good question. Unfortunately Jim they don’t tell us why. They just notify us that we either have or haven’t made the list, and I wish they did tell us more. Sooner or later we’ll find out who did make the shortlist. Dennis Gilles Well the final shortlist, we did make the initial short list on two of our… Douglas Glaspey Our suspicion is, and the matter right now is most of that RFP if not all, is going to go to Solar, because it was for Southern Nevada, but that’s yet to be seen. But we will see the signed contract eventually. They don’t always make their contracts public but we will know who signed. James McIlree And who are the other or what are the other potential options then, is it Nevada Power or nobody else, do you have to wait for next year? Dennis Gilles Yes, NV Energy has two halves of course, Nevada Power in the south and Sierra Pacific in the north, our current contract at San Emidio is with Sierra Pacific. We also have the ability to wheel power into the California market. So California is always an option as well as Utah is a potential option I guess travelling against the flow back towards Utah and some of the southern states, Arizona has been buying power as well. So those are all things we have to look at as we develop that resource. James McIlree And I’m still trying, I think I ask this every time, but I feel trying to understand the input that go into producing steam or electricity at WGP. Is that, can you just walk me through that one more time and I’m sorry to pest you with this? Dennis Gilles Yes, WGP site, just to give a little history was the home of a 55 megawatt net power plant during the 1980s. The plant was built, the plant operated for the 10 years and then the plant was shut down and eventually dismantled. So it’s a fairly sizeable resource. The four wells that have been drilled to date will support 30 megawatts. And so the question for us is what is the appropriate sized facility to put on that site. Now the previous project there used wet cooling as Doug noted only had 20% of the injection going back into the reservoir the other 80% was lost to evaporation. With our hybrid cooling we’ll have 60% going back into the reservoir. So the ability to recharge that reservoir is at a percentage that’s similar to what the rest of the geysers is doing and the rest of the geysers since moving from a 20% level up to a 60% level has seen a rapid degradation and decline, they’ve seen it stabilized and be flat for the last, I believe, it’s 12 years. So what we’re identifying and the purpose of the flow test, the long term flow test, is to determine the reservoir response and to determine what is the optimal size plant to put on that resource that maximizes the production from the resource without putting ourselves at risk of not being able to deliver over the contracted life that we would enter into. So really before we end up entering into a power purchase agreement which is going to require us to commit to a certain output, we need to make sure we know what is that output that we’re willing to commit to. Douglas Glaspey And the same thing is essentially true for steam sale. We have to know what amount of steam we’re going to deliver to the potential buyer and then it’s a question of economics, what are the two different capital cost and operating cost associated with that steam delivery rate and what’s best for U.S. Geothermal and its shareholders. James McIlree Great. That’s very helpful. Although I do reserve the rights to ask the exact same question again. Dennis Gilles No, you can Jim, no problems. Douglas Glaspey Of course, you might realize Jim there is a significant difference in capital costs between building pipelines and delivering steam versus building a power plant. James McIlree So is it fair to say that you’ll probably reach a decision sometime by year-end or is that something that’s pushed into next year? Dennis Gilles No, I would say that what we’re anticipating that the decision will be in the second half of this year. James McIlree And then finally on the water cooling for Neal, I’m just trying to puzzle through all of the pieces. Doesn’t the price that you get for electricity drop during those months that you get the water cooling or do I have it backwards, if that’s when your electricity prices are higher? Douglas Glaspey Actually a little backwards. We have our low prices in the – are in the shoulder season which is right now, which is typically for Idaho Power when they get the spring runoffs through their hydro turbines so the price goes down. Two of our peak months which pay a 120% of our average price are summer months, July and August, so those months are very important. Of course we take maximum advantage of those the two peak months in the winter time because we have that cold temperature. We like to have that same advantage in the summer. James McIlree I thought I had it backwards. And so when you said that it could result in – I forget what words you used – substantial, significant increase in power, can you tell me just kind of ballpark what that means, is that in terms of percent, either a range or what you’re targeting? Douglas Glaspey Well I think going from dry cooling in the summer to wet cooling in the summer could make a 5 megawatt to 8 megawatt difference on a daily average basis. Dennis Gilles Yes, and important thing to note Jim, that project, the Neal project, during the winter months we produce as high as 30 megawatts out of the project. The project is rated currently as a 22 megawatt net annual average and what causes that 22 is taking that 30 in the winter and offsetting it with the low teens in the summer. And so if we can take that low teens and move it up towards that 30, it’s going to dramatically increase the generation from that plant. Operator Thank you. It seems gentlemen, we’ve no further questions in the phone queue at this time. Would you like to make any additional or closing remarks? Douglas Glaspey Yes operator, we did received one question that came in via the computer. The question was there’s a fairly wide difference in the estimated net income for 2015, could you explain what the factors are that create that large variation? The guidance that we gave for 2015 for net income in order to derive those numbers, we look at what our budget is for the year and then we modify that budget to the high side by looking at what’s a reasonable optimistic case that could occur. For example, higher availability on the plant shorter outages, things of that nature. Going to opposite direction, we look at what are the things that could be detrimental to our performance, the loss of a pump, the loss of a turbine and the required downtime associated with that or falling of a condenser. Now there were some unforeseen event that could create a shortfall in our production and so we factor that into our projections and based on those we come up with the range that we provide for net income. What we will find as the year progresses, you will see us tight up that band, probably following after quarter two with the results obtained from our outages and the costs from the outages, that the costs run as anticipated or they run higher, did the outage duration run longer than anticipated or were they shorter? We will factor those and come up with the new projection of net income. So you can expect to see that here after Q2. Douglas Glaspey And with that if there is no further questions, which I am assuming there is not, I just want to thank everybody for your support for the company. We are optimistic that the growth is coming, we have not been idle. I do want to point out that in this past year in 2014, we actually had four projects that we have bid on and we’re successful in two of those. The other two that we did not obtain, we have the opportunity to obtain at a higher price, but it wasn’t price that we feel was supported and we didn’t feel it would be in the shareholder’s best interest for us to pursue that and we left those projects to somebody else. So we are actively pursuing a whole suite of opportunities and we hope to be able to advance those to the point of success over the next many months. Thank you for your continued support and look forward to what’s ahead. And thank you operator I’ll turn it back to you. Operator Thank you. Ladies and gentlemen this does conclude today’s teleconference. You may disconnect your lines at this time and thank you for your participation. Scalper1 News
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