San Emidio Project In-Depth
The San Emidio expansion is planned to take place in three phases. Phase I is a repower, and Phases II and III are planned to be expansions. Phase I utilizes the existing production and injection wells with installation of a new, more efficient 8.6 MW net power plant which achieved commercial operation on May 25, 2012. Phase II is a planned expansion within the bounds of the existing San Emidio geothermal reservoir and is subject to the successful development of additional production wells through exploration and drilling activities. Phase III is planned as a further expansion for 17.2 MW net utilizing two additional power modules similar to Phases I and II.
For Phases I and II, the Company made an application for the DOE’s 1705 loan guarantee program anticipating that 75% of the total project capital may be funded by a Department of Energy loan guarantee, with the remainder funded through equity financing. Due to funding difficulties experienced by the DOE loan guarantee program, a DOE loan guarantee is no longer available to the San Emidio project. Discussions with several senior lenders for a long term loan to take out the SAIC construction loan are ongoing.
On November 14, 2011, U.S. Geothermal Inc.’s wholly owned subsidiary USG Nevada LLC entered into a bridge loan agreement with Ares Capital Corporation. The bridge loan monetized the Section 1603 ITC cash grant associated with the new Phase I power plant at the San Emidio Geothermal Project, located in Washoe County, Nevada. The loan agreement provides for borrowing of up to 90% of the total expected cash grant and consisted of an initial funding of $7.5 million which has been received by the Company. No addition borrowings are expected at this time. The funds are drawn from a loan facility that includes commercial terms for the payment of interest and associated fees. Once the placed in service date has been achieved, an application will be submitted to the United States Department of the Treasury for an estimated $11 million ITC cash grant. The cash grant proceeds will be used to repay the Ares Capital bridge loan facility, with the remaining balance payable to USG Nevada LLC.
The Phase I repower began construction in the third calendar quarter of 2010 and was delayed in the startup due to technical issues related to the new plant. The Phase II expansion began construction in the second calendar quarter of 2011 with commercial operations originally anticipated to commence in the fourth calendar quarter of 2013. Given the delay in getting Phase I online we are not able to accurately determine when Phase II will be completed. The Company expects to utilize the cash grant in lieu of the Investment Tax Credit in connection with both the repower and the Phase II expansion. The Phase II expansion is still dependent on successful development of additional production well capacity.
The capital cost of the Phase I repower is estimated at approximately $32 million, with Phase II at approximately $50 million and Phase III approximately $100 million. We expect that 75% of the Phase I and Phase II development may be funded by project loans, with the remainder funded through equity financing.
Phase I achieved mechanical completion in December 2011 and commercial operation on May 25, 2012. Commissioning was extended due to a series of mechanical issues that include defective capacitors, the mechanical failure of the 2,500 horsepower process pump, and excessive vibration in the turbine gear box. Performance testing of the power plant began in early May. The EPC contractor is providing its services under a fixed price contract that includes financial guarantees for the original completion date and power output of the plant.
Phase II began development in the second calendar quarter of 2010 with commercial operations, subject to successful production well development and timing related to financing availability for the construction of the plant, originally anticipated to commence in the fourth calendar quarter of 2013. The Company anticipated that the project would be granted approximately $16 million for Phase II in ITC cash grant in lieu of PTC in connection with the estimated $50 million of capital cost for Phase II development. There is uncertainty at this time if financing will be available to construct the Phase II plant in time to qualify for a startup prior to the end of 2013.
On June 1, 2011, an amended and restated PPA was signed with Sierra Pacific Power Company d/b/a NV Energy for the sale of up to 19.9 megawatts of electricity on an annual average basis. The PPA has a 25 year term with a base price of $89.75 per megawatt-hour, and a 1 % annual escalation rate. The electrical output from both Phase I and Phase II will be sold under the terms of the amended and restated PPA. The PPA was approved by the Public Utility Commission of Nevada on December 27, 2011.
The Company entered into agreements with Science Applications International Corporation (“SAIC”) for a project loan and an engineering procurement and construction contract for the San Emidio Phase I power plant. SAIC’s design-build subsidiary, SAIC Energy, Environment & Infrastructure LLC, is executing the construction of an 8.6 net megawatt power plant at San Emidio, Nevada. TAS Energy of Houston, Texas will supply a modular power plant to the project. The financing agreement calls for the contractor to provide a non-recourse project loan for the estimated $32 million dollar project. The construction loan is expected to be repaid with a long term project loan.
Two System Feasibility Studies were initiated in July 2008 with Sierra Pacific Power Company to begin the FERC mandated transmission study process for the development of the San Emidio resource. The studies examined two levels of power generation; 15 megawatts and 45 megawatts, several transmission routes and the cost associated with each level of generation. The 15 megawatt study, which was directed at providing transmission for the Phase I and Phase II plants, completed the study process and resulted in an increase of available transmission to 16 megawatts. A Small Generator Interconnection Agreement for 16 megawatts of transmission capacity was executed with Sierra Pacific Power Company on December 28, 2010. An additional System Impact Study was initiated on September 8, 2011 for an additional 3.9 megawatts of transmission to increase the transmission capacity to match the maximum limit of the new PPA. The 3.9 megawatt System Impact Study was completed in April and is being reviewed by the Company.
The 45 megawatt study, which was directed toward the full build out of San Emidio with the addition of the 17.2 megawatt Phase III project, completed the second phase System Impact Study in April. A draft Interconnection Facilities Study, the third and final study, was received on November 22, 2010. The remainder of the 45 megawatt study has been put on hold pending further exploration of the project.
On October 30, 2009, the Company was awarded $3.77 million in Recovery Act funding for the exploration and development of its San Emidio geothermal power project using advanced geophysical exploration techniques. This award was categorized under the “Innovative Exploration and Drilling Projects” section of the American Recovery and Reinvestment Act. The project at San Emidio has applied innovative, seismic and satellite imagery techniques along with state-of-the-art structural modeling, to locate large aperture fractures that represent high-productivity geothermal drilling targets. Two zones along the 4.5 mile long San Emidio fault structure were identified as high quality targets for drilling during the first phase of the DOE program.
The second stage of the DOE program is a cost shared drilling plan that follows up on the targets identified in the first stage. In order to meet construction targets for Phase II plant construction, the drilling stage of the program commenced prior to DOE approval, and two observation/temperature gradient wells were completed by the Company. The proposed drilling program was approved by the DOE in early November 2011. One of the first two wells was deepened and three additional wells have been completed in the South Resource Area under the 50-50 cost share grant.
Three of the five wells exhibit commercial permeability and temperature with well OW-10 producing a flowing temperature of 302°F, well OW-9 exhibited a flowing temperature of 280°F and well OW-6 with a flowing temperature of 279°F. Well OW-9 also has a zone of high permeability at 1,830’ deep, which was put behind casing during drilling operations that has a measured static temperature of 294°F. Additional drilling operations would be required to test this zone. Well OW-8 encountered 320°F fluid, but did not produce commercial quantities during flow testing. The last well drilled, 45A-21, has just been completed and will undergo testing after a heat up period. The North Resource Area has an additional five observation/temperature gradient wells and one production well planned.