US Geothermal (HTM)

[rechnerhand]

U.S. Geothermal profits heat up
Now in the black, the Boise company is looking to add to its energy portfolio

Six months of retirement was enough for Dennis Gilles.

He took overseas trips he'd had no time for in 23 years as an executive at California energy company Calpine Corp. He tinkered with his 1967 Ford Mustang at his home in Sonoma County. But drinks by the pool got old. He was bored.

So Gilles accepted a position in 2011 on the board at U.S. Geothermal, a tiny company in Boise.

"I was still antsy, still feeling I had a lot to contribute," he said. "I was well known and well connected in the geothermal world. I wasn't done by any means."

Less than two years later, Gilles succeeded founder Daniel Kunz as U.S. Geothermal's CEO.

The groundwork was already laid for the company to turn its first profit in 11 years when Gilles took over in 2013. Now, Gilles says he plans to build U.S. Geothermal into a large-scale power company.

The company reported a $4.1 million profit in 2013 after having lost $20 million since 2010 developing power plants near Vale, Ore., and San Emidio in northern Nevada. Those plants, which together cost $172 million to build, are now making money.

Sales nearly tripled to $27.4 million last year as Idaho Power began buying power from the Oregon plant. The company is developing additional projects, including one in Northern California and a plant in Guatemala that could become its best producer.

"Now that we're profitable, we don't have to go out and sell shares - and further dilute our shares - in order to keep the lights on," Gilles said. "We're not in that boat anymore."

FOOT IN THE DOOR

Geothermal plants don't take much manpower to operate. U.S. Geothermal employs just 48 workers spread among its three operating plants and its headquarters at 390 E. ParkCenter Blvd.

The trick to making money starts with finding a spot that has an abundance of water more than 3,000 feet down that is heated to hundreds of degrees by the Earth's molten core. Finding those spots is hit or miss, said John Van Haren, who oversees U.S. Geothermal plant operations.

"Once science is able to say, 'Drill right there,' then it'll be a no-brainer," Van Haren said.

The second trick is scraping together tens of millions of dollars for drilling from banks or investors who can't be sure that the location will work.

U.S. Geothermal found a less risky first project by buying Idaho's first and only geothermal plant near Raft River, about 50 miles west of Pocatello. The U.S. Department of Energy invested $44 million drilling wells and built a test plant there during President Jimmy Carter's administration in the late 1970s, Kunz said.

The Energy Department ran the plant for a year before shutting it down and shipping its equipment to a site in Nevada, Kunz said. Gilles said the department's only goal for the plant was to test a new design that transfers heat from geothermal water to a refrigerant to power generators, instead of using steam. Afterward, the department closed the plant and shipped its equipment elsewhere. Sagebrush grew in its stead.

Kunz had developed mining sites before starting U.S. Geothermal. He liked the idea of a mininglike venture that would do little environmental damage. He saw Raft River as a chance to acquire a proven site without paying the average drilling cost of $5 million per well.

"The idea was to build something that's profitable, that is attractive to investors," he said. "But it's also this whole green energy thing, creating electricity that we all need. It's like the air we breathe, and it should be done in a way that doesn't have a huge impact on the earth."

Kunz launched U.S. Geo-thermal in 2002. The company leased the property and invested $40 million building a plant on top of the existing wells.

"I was financing the whole damn thing in those early stages," Kunz said. "I want low risk. I don't want to be drilling holes. I don't want to be guessing what resource is there. We were blessed with the Raft River site."

The plant went online in 2008 and now produces 10 megawatts of electricity, which the company sells to Idaho Power - enough to power about 10,000 homes. A 1978 federal law requires electric utilities to buy power from independent producers. U.S. Geothermal partnered with Goldman Sachs on the project and secured an $11 million Energy Department loan.

It is the formula that U.S. Geothermal has employed since by acquiring its San Emidio and California plants. Future acquisitions - which Gilles said are on the way - likely will follow the Raft River template.

FIRST ONE'S HARDEST

The geothermal industry is littered with bankrupt companies that ran into problems building their first power plant, industry analyst Alex Richter said. He is a former board member of the Geothermal Energy Association, a former energy analyst for an Icelandic investment bank and founder of ThinkGeoEnergy Magazine.

The industry mirrors mining and natural gas drilling, Richter said. Their companies search for a resource. They require speculators to invest millions to start projects. They offer high-risk investments.

Many geothermal executives come from sister industries, including Kunz, who left a job as president and chief operations officer at Ivanhoe Mines Ltd. to found U.S. Geothermal, and then returned to mining last year.

The difference between geothermal and mining, Richter said, is that mining offers speculators the potential for a large, quick payout if miners find a mother lode of gold or natural gas. Geothermal plants basically operate as utility companies. Successful geothermal projects reward speculators with metered profits spanning decades.

Banks in the U.S. won't touch many geothermal projects because of the risk, especially from unproven companies, Richter said. Financing foreign projects is simpler because international banks and the federal government's Export-Import Bank are less averse to geothermal, he said.

NEAL HOT SPRINGS

Raising money from bank loans, investors or stock sales becomes easier after geothermal companies can show off a successful project. For U.S. Geothermal, that was Neal Hot Springs.

Located 90 miles northwest of Boise, the site was the company's first start-to-finish development that proved it could find geothermal heat and secure $128 million for drilling and development. Most importantly, the project proved U.S. Geothermal could make money. The site's four wells pump hot water to the surface spin turbines that generate a net of 22 megawatts of electricity, which the company sold for $15.6 million in 2013, again to Idaho Power, under a 25-year contract.

To finish the project, U.S. Geothermal sold a 40 percent share to Canadian energy delivery company Enbridge Inc. The site also received a $97 million low-interest loan from the DOE, a $33 million federal grant and a $7.3 million business energy tax credit from the state of Oregon.

"It's a premium asset, the hallmark going away from the Raft River and San Emidio template," Kunz said. "Neal Hot Springs had a lot more risk, but with a lot more understanding."

U.S. Geothermal was prudent but also lucky that Neal Hot Springs was successful, Richter said. Instead of stumbling like the companies that abandon half-completed projects, U.S. Geo-thermal now has a star in its portfolio that will help the company secure financing for future projects and solicit investors, he said.

The company's newfound profit allowed it to buy a site at the Geysers Steam Field, 75 miles north of San Francisco, in April for $6.4 million. Previous owner Ram Power Corp. invested $96 million developing the site but had to give up after a project in Nicaragua lost money, Richter said.

A BIG-NAME HIRE

Kunz laid much of the groundwork for the company's ascent into profitability: Raft River, Neal Hot Springs and San Emidio started on his watch, as did the development of the El Ceibillo site in Guatemala. It has the potential to produce 50 megawatts of electricity for a regional power company.

Kunz, 62, left in April 2013 to pursue mining projects with his new Boise company, Daniel Kunz & Associates.

"Early-stage development that's extremely high-risk and laden with pitfalls that can cause a company to fail at any point on the road - that's where my expertise is," Kunz said. "At the point it was self-sustaining, it was a perfect time to bring in a new guy who can take this thing to the next level."

Gilles, 56, was the contractor who built Calpine's first geothermal plant in 1989. He later joined the company to manage a plant and eventually became a Calpine vice president. Since then, Calpine has grown into the largest independent producer of natural gas and geothermal energy in the U.S., producing around 26,000 megawatts of electricity. U.S. Geothermal now produces 45.

He retired from Calpine in 2011 at age 53 when the company asked him to move from California to Houston to oversee natural gas operations, a job he didn't want.

Gilles said he turned down several offers to become CEO or a board member before taking the board position with U.S. Geothermal, a company he'd targeted to buy when he was at Calpine.

"To hire Dennis in the last phase of building plants and now running them was very, very smart," Richter said. "He has experience with running plants and not just building them up. It's a classic startup scenario where the actual founder is not the best person to run the company."

Gilles earned $881,342 in 2013. In his last year as CEO in 2012, Kunz earned $279,518. Kunz remained on the payroll as a consultant for the following year with a $94,736 salary.

EMPIRE BUILDING

Gilles took over and promptly looked for sites to buy. He started with Geysers, a site where previous owners drilled five wells. U.S. Geothermal also acquired nearly $70 million in tax credits and $3 million in casing and drill pipe. The company will either develop a steam project to sell to a neighboring power plant in a year or build its own plant in two years, Gilles said.

Gilles relishes the chance to build an empire, which he couldn't do at Calpine. He said the company will announce another site purchase in the same vein as the Geyser acquisition by the end of summer.

The company is studying other sites for additional expansion. It is not considering moving its headquarters from Boise or selling, Gilles said.

"The next step is growing," he said. "There's a whole fleet we're looking at to see if there's something there. With each we look at, is that site just a patch of lawn? Or is it an attractive opportunity?"

Zach Kyle: 377-6464, @IDS_zachkyle

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