Value investing

U.S. Geothermal Targets Billion Dollar Growth In Rapidly Growing Renewable Energy

Renewable energy is attracting more attention and more investment because Renewable Portfolio Standards have been implemented in several states to reduce energy produced from traditional fossil fuel energy plants that are known to emit excessive carbon into the atmosphere. Renewable Portfolio Standards require increased production of energy from renewable energy sources, such as windsolar, and geothermal.

A few examples of states taking action to create more energy from renewable sources are California, Nevada, and Oregon. Governor Brown signed into law SB-350 that requires 50% renewable energy by 2030, the closure of 2,200 MW San Onofre nuclear power plant, and the retirement of 19,000 GWh of coal burning power plants. Nevada SB-123 requires closure of ~1200 MW of Coal plants replaced with at least 600 MW of renewables. Oregon SB-1547 requires 50% renewable energy by 2040 and discontinues coal generation by 2030.

Goldman Sachs Group Inc. (NYSE: GS) sees renewable energy replacing fossil fuels. The investment bank’s analysts expect the greatest market dislocations to occur between 2015 and 2025.

One company in the burgeoning renewable energy sector that has consistently under promised and over delivered the kind of growth that savvy and risk averse investors are always searching for is U.S. Geothermal, Inc. (NYSE MKT: HTM). After 5 years of strong growth followed by 2 years of planning and building a larger and stronger foundation, management is now moving forward to accelerate growth to become a billion dollar market cap company in the fast growing sector.

In 2009, U.S. Geothermal reported extraordinary revenue growth of 875 percent; in 2012 the company reported growth of 200 percent; and in 2013 they reported growth of 180 percent. After a short break to consolidate gains, the company is now resuming robust growth again with a target of increasing their core business from 45 Megawatts to 230 Megawatts, and their market cap from $90 million to $1 billion by 2020. Now that the company has a detailed plan for the next leg of high growth, management is not keeping it a secret. The company's web site reads, Our mission is to become the largest pure play independent geothermal power producer, targeting 200 MW by 2020 and a market cap in excess of $1 billion.”

Current And Planned Operations

U.S. Geothermal most recent 10-Q describes 3 power plants in operation, 6 under development, and 9 in exploration phase:

Current Operations

PROJECT
LOCATION
MEGAWATTS
OWNERSHIP
Neal Hot Springs
Oregon
22 MW
60%
San Emidio Unit 1
Nevada
10 MW
100%
Raft River Unit 1
Idaho
13 MW
95%
TOTAL

45 MW

Projects Currently Under Development

PROJECT
LOCATION
MEGAWATTS
OWNERSHIP
OPERATIONAL
Raft River
Idaho
3 MW
100%
Q3 2016
Neal Hot Springs
Oregon
3 MW
60%
Q3 2017
San Emidio
Unit 2
Nevada
10 MW
100%
Q4 2017
WGP Geysers
California
30 MW
100%
Q2 2018
El Ceibillo
Phase 1
Guatemala
25 MW
100%
Q2 2018
Crescent Valley
Phase 1
Nevada
25 MW
100%
Q4 2018
TOTAL

96 MW


Projects Under Exploration for Development

U.S. Geothermal lists 9 new projects being explored for development of which 5 are already well known and under development for earlier phases.

PROJECT
LOCATION
MEGAWATTS
OWNERSHIP
Gerlach
Nevada
10 MW
67.7%
VALE
Oregon
15 MW
100%
El Ceibillo
Phase 2
Guatemala
25 MW
100%
Neal Hot Springs
Oregon
10 MW
100%
Raft River Unit 2
Idaho
13 MW
100%
Crescent Valley
Phase 2
Nevada
25 MW
100%
Crescent Valley
Phase 3
Nevada
25 MW
100%
Lee Hot Springs
Nevada
20 MW
100%
Ruby Hot Springs
Phase 1
Nevada
20 MW
100%
TOTAL

163 MW
 

Total current operations combined with projects under development equal 141 MW by the end of 2018, and if the projects under exploration are developed, U.S. Geothermal has the potential to substantially exceed their 200 MW goal by 2020 with up to 304 MW.

Strong Management

Producing over 30,000 MW, Calpine Corp. (NYSE: CPN) is the largest independent power producer in the United States. Dennis Gilles, the CEO of U.S. Geothermal, worked with Calpine for over 23 years and was with them when they built their very first Megawatt geothermal power plant. Mr. Gilles went on to manage Calpine’s portfolio of 750 geothermal Megawatts, and the entire Western region that generated close to 8,000 Megawatts. Dennis is a senior executive with over 30 years experience in the management, operations, maintenance, engineering, construction and administration of power and petrochemical plants and their related facilities. Mr. Gilles holds an MBA and a Bachelor of Science in Mechanical Engineering. He is also very experienced in the identification, evaluation and acquisition of existing renewable projects or portfolios, as well as heading development of new green-field opportunities that is of high importance to future growth of U.S. Geothermal.

Doug Glaspey, a co founder of U.S. Geothermal, has served as a director since March 2000, Chief Operating Officer of the Company since December 2003, and President of the Company since September 2011. Mr. Glaspey has 38 years of operating and management experience in the natural resources industry and holds a Bachelor of Science in Mineral Processing Engineering and an Associate of Science in Engineering Science. His experience includes public company financing and administration, production management, planning and directing resource exploration programs, preparing feasibility studies and environmental permitting.

As illustrated in the project descriptions above, management has a clear vision and a detailed plan to achieve their goals of meeting 200 MW and a market cap of $1 billion by 2020.

Geothermal Advantages Over Wind and Solar

Geothermal is by far the most reliable form of renewable energy. Unlike the intermittent sunshine and wind, geothermal energy taps into the hot water and steam from below the surface of the earth that is continuously being generated from the earth’s magma and provides the most consistent and continually available base load power 24 hours a day, and every day except for short maintenance down times in the spring.

Geothermal Power Availability exceeds 90% compared to 25% for solar at 6 hours per day, and 34% for wind at 8.25 hours per day.

Geothermal power plants have a smaller land footprint compared to wind and solar and have a minimal impact to wildlife.

Geothermal Disadvantages Compared To Wind and Solar

Geothermal has longer development lead times, and higher exploration risks and costs than wind and solar.

Geothermal Provides Lower Cost And More Stable Power To Utilities Compared To Wind and Solar

The following table compiled by California Public Utilities Commission for 2013 illustrates the low cost of geothermal energy paid by electric utilities compared to all other renewable sources.

Large IOU RPS Costs (cents per kWh) for 2013

PG&E
SCE
SDG&E
Average
Biogas
5.94
6.82
7.93
6.98
Biomass
9.73
-
9.25
9.67
Geothermal
7.19
6.75
Confidential
7.03
Small Hydro
8.72
8.91
5.30
8.66
Solar PV
15.18
11.90
10.39
13.96
Solar Thermal
14.23
13.48
-
13.52
Wind
8.40
9.77
6.10
8.68
UOG Small Hydro
4.60
12.38
-
5.71
UOG Solar PV
16.21
47.00
-
21.65

Source: Section 910, CPUC

Geothermal plants have no fuel costs, and over a typical 30-year plant life the fuel costs for a natural gas or coal plant can represent twice their initial capital cost. Over the life of the plant, when capital costs and total fuel costs are weighed, geothermal projects are proving to be a sound investment.

Also consider that while solar and wind technology may continue to advance in efficiency and decrease in capital cost, geothermal operates 24 hours a day and every day of the year while solar and wind are intermittent and deliver far less availability.

Financing U.S. Geothermal Growth Plan

Financing management’s goals is critical to success.  U.S. Geothermal has strong banking relationships, and is on schedule with the announcement that a $50 million debt facility from Prudential Capital was just closed with the first $20 million drawn down to support project developments.

"U.S. Geothermal has proven itself to be one of the leading developers and operators of geothermal projects," said Wendy Carlson, Managing Director of Prudential Capital Group's Energy Finance Group - Power. "We are excited to provide capital, which will in turn be used to support the Company's growth prospects. This investment reflects our strategy of being a reliable provider of capital to high quality developers with proven track records in the North American power industry."

Today’s low interest rates are very attractive to U.S. Geothermal as the initial $20 million loan has a fixed interest rate of 5.8% per annum. The loan principal amortizes over twenty years, with a seven-year term. Principal and interest payments are made semi-annually. With low interest rates forecast for the foreseeable future, debt financing is working in this company’s favor.

Conclusion

U.S. Geothermal enjoys strong success in the renewable energy sector that is poised for major growth over the next decade. The company has announced its billion-dollar growth plan with a pipeline that is well understood. Revenues are fixed and predictable, and are guaranteed by 25-year contracts with utilities.

Compared to the leader Calpine Corp.'s Revenues Per Share and Price Earnings Ratio, U.S. Geothermal shares are undervalued. With approximately 112 million shares outstanding, and a current market share price of $.85, U.S. Geothermal currently carries a market cap of about $92 million. To achieve a billion dollar market cap means a tenfold increase from todays $92 million. Knowing that debt financing will be necessary to fund growth and that equity financing at higher share prices will also very likely be part of the equation, U.S. Geothermal shares are very attractive at these levels.

Investors are encouraged to visit the company’s web site. For more information see www.usgeothermal.com