HTM U.S. Geothermal Inc. (delisted)

Item 1. Business

Information Regarding Forward Looking Statements

This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a number of risks and uncertainties. We caution readers that any forward-looking statement is not a guarantee of future performance and that actual results could differ materially from those contained in the forward-looking statement. These statements are based on current expectations of future events. You can find many of these statements by looking for words like “believes,” “expects,” “anticipates,” “intend,” “estimates,” “may,” “should,” “will,” “could,” “plan,” “predict,” “potential,” or similar expressions in this document or in documents incorporated by reference in this document. These forward-looking statements are based on the current beliefs and expectations of our management and are subject to significant risks and uncertainties. If underlying assumptions prove inaccurate or unknown risks or uncertainties materialize, actual results may differ materially from current expectations and projections.

All subsequent written or oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events, except as may be required under applicable U.S. securities law. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

U.S. Geothermal Inc. (the “Company,” “we” or “us” or words of similar import) is in the renewable “green” energy business. Through our subsidiary, U.S. Geothermal Inc., an Idaho corporation (“Geo-Idaho,” although our references to the Company include and refer to our operations through Geo-Idaho), we are engaged in the acquisition, development and utilization of geothermal resources in the Western United States and the Republic of Guatemala. Geothermal energy is the natural heat energy stored within the earth’s crust. In some areas of the earth, economic concentrations of heat energy result from a combination of geological conditions that allow water to penetrate into hot rocks at depth, become heated, and then circulate to a near surface environment. In these settings, commercially viable extraction of the geothermal energy and its conversion to electricity become possible and a “geothermal resource” is present.

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Development of Business

U.S. Geothermal Inc. was originally incorporated on March 10, 2000 in the State of Delaware. The Company constructs, manages and operates power plants that utilize geothermal resources to produce electricity. The Company’s operations have been, primarily, focused in the Western United States.

The Company currently owns and operates the following geothermal power plant projects: Raft River, Idaho; San Emidio, Nevada; and Neal Hot Springs, Oregon. The Company also has geothermal property interests in the Republic of Guatemala; the Geysers in California; Vale, Oregon; Crescent Valley, Nevada; Ruby Hot Springs, Nevada; Lee Hot Springs, Nevada; and Gerlach, Nevada, some of which are under development or exploration.

History

Geo-Idaho was formed as an Idaho corporation in February 2002 to conduct geothermal resource development.

U.S. Cobalt Inc. entered into a merger agreement with Geo-Idaho on February 28, 2002, which was amended and restated on November 30, 2003, and closed on the reverse take-over on December 19, 2003. In accordance with the merger agreement, the Company acquired Geo-Idaho through the merger of Geo-Idaho with a subsidiary, EverGreen Power Inc., an Idaho corporation formed for that purpose. Geo-Idaho was the surviving corporation and is the subsidiary through which the Company conducts operations. As part of this acquisition, the Company name was changed to U.S. Geothermal Inc.

Plan of Operations

Our business strategy is to identify, evaluate, acquire, develop, and operate geothermal assets and resources economically, safely and efficiently. Our management evaluates our operating projects based on revenues and expenses, and our projects under development, based on costs attributable to each project. We examine different factors when assessing projects at different stages of development or potential acquisitions, such as the internal rate of return of the investment, technical and geological matters and other relevant business considerations.

We intend to execute this strategy in several steps outlined below:

• Maximize Our Operations – Our operating power plants and operations team provide revenue to the Company through both power sales and Operations & Maintenance contracts. We strive to optimize plant operations though high safety standards, quality preventative maintenance programs, operator education, equipment selection and by exceeding our annual budgetary goals.

• Leverage Management Team Capabilities and Experience – Our strategy is focused on the identification and acquisition of resources that can be developed in a cost-effective manner to produce attractive returns. In particular, we seek to acquire projects that have already undergone geothermal resource discovery. In addition, we intend to operate and manage construction of the projects, while using internal personnel and third-party contractors to efficiently and cost-effectively develop those resources. We believe that we have the strategic personnel in place to determine which resources provide the greatest opportunity for efficient development and operation. We have developed relationships and employed personnel that will allow us to develop and utilize geothermal resources as efficiently as possible.

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• Develop Our Pipeline of Quality Projects – Our project pipeline currently consists of several projects that we believe are aligned with our growth strategy. These projects typically have consulting reports from various industry experts supporting our belief in those projects’ potential. We are evaluating the potential of those projects and expect to negotiate Power Purchase Agreements (“PPAs”) for power deliveries with counterparties for some of these growth opportunities. If realized, our identified project pipeline will greatly expand our renewable power generation capacity as we move forward with the development of those opportunities.

• Utilize Production Tax Credits, Investment Tax Credits and Other Incentives – Although geothermal power production can be cost competitive with fossil fuel power generating facilities on a life cycle cost basis, government incentives such as production tax credits (“PTC”) and Investment Tax Credits (“ITC”) available to geothermal power producers help offset the high upfront project capital cost by enhancing the project economics and attracting capital investment. For the Raft River Unit I project, we partnered with Goldman Sachs as a tax equity partner to fully utilize production tax credits available to the project. Our strategy is to structure project ownership to optimize project economics. Under current legislation, a company may elect to take 30% ITC for certain qualified investments (or the PTC) provided construction of the project was started prior to the end of 2016. We believe that the second phase of our San Emidio project, our WGP Geysers project, and our Crescent Valley project each qualify for this credit.

• Pursue Acquisition Strategy – The geothermal market, particularly in the United States, is fragmented and characterized by a few large players and a number of smaller ones. Geothermal exploration and development is capital intensive, technically challenging and requires long lead times before a project will produce revenue. We believe that geothermal technical and managerial talent is limited in the industry and that access to capital to develop projects will not be equally available to all participants. As a result, we believe that there will be opportunities in the future to pursue acquisitions of geothermal projects and/or geothermal development companies with attractive project pipelines.

• Evaluate Other Potential Revenue Streams from Geothermal Resources – In addition to electricity generation, we may evaluate additional applications for our geothermal resources including industrial, agriculture, and aquaculture purposes. These uses generally constitute lower temperature applications where, after driving a turbine generator, residual hot water can be cycled for secondary processes before being returned to the geothermal reservoir by injection wells, which can provide incremental revenue streams. We may evaluate the optimal use for each geothermal resource and determine whether selling heat for industrial purposes or generating and subsequently selling power to a grid will generate the highest return on the asset.

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During the year ended December 31, 2016, the Company was focused on these specific items:

• operating and optimizing the Neal Hot Springs, San Emidio and Raft River power plants;
• conducting annual maintenance outages at all three projects;
• drilling and flow testing two wells at San Emidio II;
• permitting the deepening of three additional temperature gradient wells at San Emidio II;
• continuing to optimize and engineer the power plant/hybrid cooling design, obtaining the Conditional Use Permit, and pursuing PPA opportunities for the WGP Geysers project;
• drilling and flow testing a well at El Ceibillo;
• drilling a second leg on a production well at Raft River
• preparing for and drilling a water well at Neal Hot Springs; and
• evaluating potential new geothermal projects and acquisition opportunities.

Project Overview

The following are lists of projects that are in operation and projects that are under development or under exploration. Projects in operation currently have producing geothermal power plants. Projects under development have a geothermal resource discovery and have wells in place, but require the drilling of additional production and injection wells in order to supply enough geothermal fluid sufficient to operate a commercial power plant. Projects under exploration may have a discovery well or do not have a geothermal resource discovery occurrence yet, but have significant thermal and other physical evidence that warrants the expenditure of capital in search of the discovery of a geothermal resource. Due to inflation and marketplace increases in the costs of labor and construction materials, estimates provided for project development costs could understate actual costs.

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Neal Hot Springs, Oregon
Neal Hot Springs is located in Eastern Oregon near the town of Vale, the county seat of Malheur County. The Neal Hot Springs facility achieved commercial operation on November 16, 2012, and is designed as a 22 megawatt net annual average power plant. The facility consists of three separate 12.2 megawatt (gross) modules, with each module having a design output of 7.33 megawatts (net) annual average, based on a specific flowrate and temperature of the geothermal brine.

For the fourth quarter of 2016, generation was 57,036 megawatt-hours with an average of 26.3 net megawatts per hour of operation and plant availability was 98.2% . For the same period in 2015, the plant generated 52,641 megawatt-hours with an average of 24.1 net megawatts per hour and plant availability was 97.6% . The total annual generation for 2016 was 179,559 megawatt-hours compared to 176,871 megawatt-hours for 2015.

All three high pressure refrigerant pumps were replaced by the manufacturer under warranty and 70% of the Air Cooled Condenser (ACC) fan motors were rebuilt under the terms of the ESA settlement agreement during the year. The remainder of the ACC motors are scheduled to be rebuilt by the end of the second quarter 2017. The Unit 3 annual maintenance outage was taken in September. Scale was cleaned out of the vaporizers, and the pump in production well NHS-8 was replaced due to declining output. With the replacement of the pump in NHS-8, brine flow was increased through the plant by 7% resulting in an increase in generation.

A third water supply well for the project was drilled in December, but due to extreme winter weather, has not been completed and tested to date. Productive water zones were intersected in the well, but a liner must be installed before the well can be flow tested. A fourth site has been selected and will be drilled once weather allows. The project currently has one well available from drilling in 2015 that can supply approximately 170 gallons per minute. The minimum amount of water needed for a hybrid cooling system is approximately 200-300 gallons per minute for each unit.

Subsequent to the end of the year, on January 5, 2017 the facility tripped off line during extreme cold weather conditions and Unit 1 suffered frozen tubes in the vaporizers. The failed and damaged tubes were plugged, and the unit was restarted on February 12, 2017. Insurance coverage is in place to cover equipment repairs with a deductible level of $50,000. Lost generation is also covered by insurance once the unit was out of service for over 30 days.

The PPA for the project was signed on December 11, 2009 with the Idaho Power Company. It has a 25-year term, and a variable percentage annual price escalation. The PPA has a seasonal pricing structure that pays 120% of the average price for four months (July, August, November, December), 100% of the average price for five months (January, February, June, September, October) and 73.3% of the average price for three months (March, April, May). The annual average price paid under the PPA for 2016 was $109.27 per megawatt-hour and for 2017 the price has increased to $111.83 per megawatt-hour.

San Emidio Unit I, Nevada
The Unit I power plant at San Emidio is located approximately 100 miles north-east of Reno, Nevada near the town of Gerlach, and achieved commercial operation on May 25, 2012. The San Emidio facility is a single 14.7 megawatt (gross) module, with a design output of 9 megawatts (net) annual average based on a specific flow and temperature of geothermal brine.

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For the fourth quarter of 2016, generation was 20,803 megawatt-hours with an average of 9.6 net megawatts per hour of operation and plant availability was 98.2% . For the same period in 2015, the plant generated 20,369 megawatt-hours with an average of 9.4 net megawatts per hour and plant availability was 98.2% . The total annual generation for 2016 was 75,049 megawatt-hours compared to 79,539 megawatt-hours for 2015.

The high pressure refrigerant pump, which had been replaced under warranty during the scheduled spring maintenance outage experienced high vibrations shorty after starting. The plant was able to operate at a reduced generation level for 19 days and required a second outage to replace the faulty pump. The plant went back on line July 1 ^st and has run without incident since.

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 from two units. The option for the second unit expired in December 2015. The PPA has a 25-year term with a base price of $89.75 per megawatt-hour, and an annual escalation rate of 1 percent. The annual average price paid under the PPA for 2016 was $93.01 per megawatt-hour and for 2017 the price has increased to $93.94.

Raft River, Idaho
Raft River Unit I is located in Southern Idaho, near the town of Malta, and achieved commercial operation on January 3, 2008. The Raft River facility is a single 18 megawatt (gross) module, with a design output of 13 megawatts (net) annual average based on a specific flow and temperature of geothermal brine.

For the fourth quarter of 2016, generation was 20,039 megawatt-hours with an average of 9.1 net megawatts per hour of operation and plant availability was 100%. For the same period in 2015, the plant generated 21,755 megawatt-hours with an average of 9.8 net megawatt hours and plant availability was 99.9% . Total annual generation for 2016 was 71,991 megawatt-hours compared to 75,599 megawatt-hours for 2015.

The lower year over year production is primarily due to the breakdown of the production pump in well RRG-2 on February 9, 2016 and the extended length of time the well was kept out of service to allow the planned drilling of a second production leg. Due to a delay in financing, drilling of the second leg began on June 13 ^th and was completed on July 29 ^th to a depth of 5,605 feet. Several small zones of permeability were encountered in the new production leg. After testing the well, a new pump was installed and the well resumed production in early September. The well temperature has plateaued at approximately 277°F, down from the original production temperature of 283°F, and the well is now producing approximately 180 gallons per minute less flow than before drilling. It is believed that during drilling operations, the original production leg of the well was damaged by scale formation, which blinded off its producing fractures. Current production is believed to be coming mostly from the newly drilled production leg. Operations to recover the damaged production leg with an industry standard chemical treatment will be considered in the future. Additionally, on September 27, 2016 the pump in well RRG-1 suffered a sheared coupling and was back on line in early November.

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Additional production is now planned from well RRG-5, an idle well with significant permeability that has been used for injection in the past. Flow testing and reservoir modeling was performed during the 4 ^th quarter of 2016 to evaluate the well for conversion to production. Flow test results showed an initial flowing temperature of over 249°F, which is expected to increase to approximately 265°F once under production. Reservoir modeling shows that RRG-5 is capable of producing up to 1,000 gpm, yielding approximately 1.5 to 2 additional net megawatts of generation from the plant. A production pump has been ordered, and is expected to be installed by the end of the first quarter 2017. Generation is expected to ramp up during the second quarter as the production wellfield is rebalanced to maximize its output. Additional sources of geothermal fluid from other wells on the project are also under study to further increase the generation level of the plant.

Well RRG-9, which has been used as part of an $11.4 million thermal stimulation grant funded primarily by the Department of Energy, has significantly increased the injection capacity to 1,200 gallons per minute from an original level of 20 gallons per minute. This increase in injection capacity can provide all of the additional volume needed to accept the flow from well RRG-5 without requiring any new drilling.

The PPA for the project was signed on September 24, 2007 with the Idaho Power Company and allows for the sale of up to 13 megawatts of electricity on an annual average basis. The PPA has a 25 year term with a starting average price for the year 2007 of $52.50 that escalates at 2.1% per year through 2020 and then at 0.6% per year until the end of the contract in 2034. The Idaho Power PPA has a seasonal pricing structure that pays 120% of the average price for four months (July, August, November, December), 100% of the average price for five months (January, February, June, September, October) and 73.5% of the average price for three months (March, April, May). The annual average price paid under the PPA for 2016 was $63.30 per megawatt-hour, and for 2017 the price has increased to $64.63.

In addition to the price paid for energy by Idaho Power, Raft River Unit I currently receives $4.75 per megawatt-hour under a separate contract for the sale of Renewable Energy Credits (“RECs”) to Holy Cross Energy, a Colorado electric cooperative. Starting in calendar year 2018, 51% of the RECs produced by the project will be owned by the Idaho Power Company and 49% by the project. For the 49% of RECs owned by the Raft River project, a new, 10 year REC contract with the Public Utility District No. 1 of Clallam County, Washington will replace the current contract, also in 2018.

Material Projects Under Development/Exploration

In addition to our projects in operation, we have projects under development and under exploration. Projects under development have at least a geothermal resource discovery or may have wells in place, but require the drilling of new or additional production and injection wells in order to supply enough geothermal fluid sufficient to operate a commercial power plant. Projects under exploration do not have a geothermal resource discovery occurrence yet, but have significant thermal and other physical evidence that warrants the expenditure of capital in search of the discovery of a geothermal resource. Due to inflation and marketplace increases in the costs of labor and construction materials, estimates of property development costs may be low.

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A summary of projects under development and under exploration is as follows:

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Binary Cycle Geothermal Power Plants
In a binary cycle geothermal power plant hot water is produced to a piping and gathering system from wells drilled into the geothermal reservoir. The hot water flows, with to a heat exchanger called a vaporizer where it vaporizes a secondary working fluid, with its heat extracted, causing the original hot water to become cool. All of the cooled water is then pumped to injection wells where it is injected back into the reservoir to help recharge the geothermal reservoir. The vaporized working fluid passes through a turbine which drives an electrical generator that is tied into the electrical transmission grid. Upon discharging the turbine the secondary working fluid is condensed before piping it back to the vaporizer where the process is repeated.

Dry Steam Geothermal Power Plants
An example of a vapor dominated geothermal system is at The Geysers in central California. Dry super-heated steam is produced from wells through a piping system and run directly through a turbine. The turbine drives an electrical generator that delivers power to the electrical transmission grid. Steam discharges from the turbine into a condenser where it is condensed forming water. The water is pumped to a cooling tower where it can be used as water for the cooling process. The cooled water from the cooling tower is recycled back to the condenser to repeat the process. Any excess water from the cooling tower is pumped through a piping system to injection wells where it is injected back into the reservoir which helps to recharge the geothermal reservoir.

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Flash Geothermal Power Plants
In hot water geothermal systems (temperatures greater than approximately 400 degrees Fahrenheit), flash production systems are often used. The hot water is produced from wells drilled into the geothermal reservoir. The hot water from the various production wells is piped to a flash tank where the pressure is reduced. The reduction in pressure in the flash tank causes part of the hot water to flash to form steam and part to remain as water. The flash tank also acts a separator, separating the steam from the water. The hot water separated from the steam is pumped through a pipeline system to injection wells and injected into the reservoir for reservoir recharge. The steam coming off the flash tank/separator is piped directly to a turbine where the process is identical to that used for dry steam geothermal power plants.

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El Ceibillo Phase I, Republic of Guatemala
A geothermal energy rights concession, located 14 kilometers southwest of Guatemala City, was awarded to U.S. Geothermal Guatemala S.A., a wholly owned subsidiary of the Company in April 2010. The concession agreement contains a schedule that requires the development and construction of a power plant. In July 2015, the Guatemalan Ministry of Energy and Mines approved a modified construction schedule that extended the development and construction period to June 1, 2018. There are 24,710 acres (100 square kilometers) in the concession, which is at the center of the Aqua and Pacaya twin volcano complex.

Production well EC-5 was completed to a depth of 1,450 feet (442 meters) on August 20, 2016 and intersected a high permeability zone at 1,299 feet (396 meters). EC-5 underwent a series of flow tests, with field wide monitoring, beginning on September 5th and ran until September 13th. Data was collected from three monitoring wells during the test (EC-2A, EC-3, and EC-4) to provide pressure data for the reservoir model. Fluid samples taken at the end of the flow test indicate a potential reservoir temperature of 450 to 523°F (232 to 273°C).

With the shallow, commercial resource now indicated, a deep well is planned in 2017 to test the producing structure down dip from well EC-5 to a projected depth of 1,970 to 2,300 feet (600-800 meters). A deeper intersection in the reservoir could increase the reservoir capacity and production temperature, and change the design of the power plant. Well EC-1, which was drilled in 2013 to a depth of 5,650 feet (1,722 meters) found a measured bottom-hole temperature of 526°F (274°C), but did not intersect permeability. The comparative geology between EC-5 and EC-1 suggests a fault or other structure feeding the reservoir may be located in the area between the two wells.

On January 10, 2017, the Guatemalan government, through the National Electrical Energy Commission (COMISIÓN NACIONAL DE ENERG¥A ELÉCTRICA–“CNEE”), announced that it is preparing to issue an RFP later this year for 420 megawatts of power, of which 40 megawatts is to be reserved specifically for geothermal energy. When the RFP is issued, the El Ceibillo project will be bid into the process.

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San Emidio Phase II, Nevada
The Phase II expansion is dependent on successful development of additional production and injection well capacity. We expect that approximately 75% of the Phase II development may be funded by non-recourse project debt, with the remainder funded through equity financing. We anticipate the project qualifying for the 30% Federal Investment Tax Credit, which when monetized, can meet most of the equity financing requirements.

The updated reservoir model (announced January 11, 2017) resulted in a significant increase in the potential size of the San Emidio Phase II reservoir of up to 47 net megawatts. Data from flow tests that took place in late 2016 from two wells were incorporated into a Probabilistic Power Density model, which estimates the Net generation potential of a reservoir. The power density model is not a Monte Carlo style “heat in place” estimate. Based on the flow rate and temperature produced by the two wells, and by measurement of pressure response both in the wells and across the wellfield, the model estimates that the Most Likely Outcome (50% probability) is 47 net megawatt of generation capacity within a 1.4 square mile area. The Minimum level of generation capacity (90% probability) occurs in a 0.18 square mile area, and has 18.8 net megawatts of generation capacity.

These two wells are approximately 1,700 feet apart, along the new structural trend identified in the Southwest Zone which is still open for expansion. Temperature gradient well data and seismic information indicate a potential strike length for the Southwest Zone of up to 2,700 feet. This compares to a strike length for the primary producing wellfield at San Emidio Phase I of 800 feet, suggesting the potential for a much larger resource in this Southwest Zone. Permits to deepen three remaining temperature gradient wells were received from the Bureau of Land Management in December 2016. These three wells will be deepened to the targeted reservoir depth to further explore the Southwest Zone when weather allows. If successful, it could extend the length of the productive reservoir by 1,000 feet.

The three power plant units that were purchased in 2016 are available to provide this project with the major, long lead equipment requirements for 35-45 net megawatts of power (depending upon cooling system used). The increased San Emidio II reservoir capacity with a 320°F+ temperature fits the design range of the equipment. These new, unused components represent approximately 70% of the equipment needed for a complete facility similar to the Company’s Neal Hot Springs operation.

Given the larger resource capacity at San Emidio II, we have cancelled our Small Generator Interconnection Agreement that was completed in 2016, and are preparing to apply for a Large Generator Interconnection Agreement in support of the higher expected output. Additionally, transmission studies that contemplate power sales into Southern California will also be conducted, since there is now a transmission path from Northern Nevada going south on the new 500KV, 800 megawatt transmission line that was completed in January 2014.

In July 2016, the Company was awarded a $1.5 million Department of Energy cost share grant under the “Development of Technologies for Sensing, Analyzing, and Utilizing Novel Subsurface Signals in Support of the Subsurface Technology and Engineering (“SubTER”) Crosscut Initiative”. The program approved under the grant includes using new subsurface technologies at both San Emidio and Crescent Valley to identify fluid flow paths in the geothermal resource. The data collection phase of the program was completed at San Emidio in December. The data is being interpreted to determine whether viable targets have been identified. Upon approval from the DOE, a second phase of the grant program is designed to confirm the findings by drilling. The total program cost is $1.9 million with the Company providing $400,000 in cost share.

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WGP Geysers, California
The WGP Geysers project is located in the broader Geysers geothermal field located approximately 75 miles north of San Francisco, California. The broader Geysers geothermal field is the largest producing geothermal field in the world generating more than 850 megawatts of power for more than 30 years. Acquisition of the WGP Geysers Project from Ram Power was completed on April 22, 2014 for $6.4 million. We expect that approximately 75% of the development may be funded by non-recourse project debt, with the remainder funded through equity financing. We anticipate the project qualifying for the 30% Federal Investment Tax Credit, which when monetized can meet most of the equity financing requirements.

The Conditional Use Permit from Sonoma County, which approves the construction plan for the WGP Geysers power plant, was received on December 16, 2016. Combined with the Large Generator Interconnection Agreement that was received from the California Independent System Operator and Pacific Gas & Electric, this completes the long lead permits and agreements that are needed for the project. Once final engineering design is finished, and a PPA is executed, an air quality permit and building permit will be needed before on site construction will begin.

We received the signed Large Generator Interconnection Agreement for the project on March 6, 2016 with the California Independent System Operator and Pacific Gas & Electric (PG&E). This agreement allows the project to connect to the transmission grid and deliver up to 35 megawatts of energy. The Company has paid the total interconnection cost of $1.9 million for the grid operator’s portion of the work in the substation. An additional 1.7 mile long transmission line will be required to connect from the plant to the substation. PG&E has undertaken engineering studies to determine the cost for the line.

Engineering optimization of the new, hybrid power plant design is continuing and budgetary quotes for the major equipment have been received. Our engineers and consultants are working in concert with EPC contractors to examine all aspects of the construction cycle with a focus on reducing construction costs. The hybrid design will dramatically increase the volume of water available for injection back into the reservoir, which will result in increased power generation over the life of the project. Traditional water cooled geothermal steam plants re-inject approximately 20 to 25% of the water that is extracted from the steam, while a hybrid design may re-inject 65% or more of the water. This higher injection rate will provide longer term, stable steam production, and will result in increased power generation over the life of the project.

Based on flow test data generated from well flow testing performed in mid-2015, a third party expert reported in September 2015, that the four production wells already drilled are capable of delivering an initial capacity of 28.1 MW (gross) or 25.4 MW (net) based on current power plant steam conversion rates from a detailed design for a 28.8 MW (net) power plant. These tests show the wells would initially produce a combined total of 458,000 pounds per hour. Using the average steam production rate from these wells and an assumed interference factor of 30%, the third party expert estimates that an additional two to three production wells would be needed to support the long term operation of a 28.8 MW (net) plant.

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Recent discussions have been held with a number of potential power purchasers in California for the generation from the WGP Geysers plant and are continuing. Interest has been expressed by a number of them for base load, renewable power to replace fossil fuel based power generation that is being phased out of some of their portfolios.

Crescent Valley Phase I, Nevada
The Crescent Valley prospect consists of approximately 21,300 acres (33.3 square miles) of private and Federal geothermal leases. It is located in Eureka County, Nevada, approximately 15 miles south of the Beowawe geothermal power plant and about 33 miles southeast of Battle Mountain. The project was acquired as part of the Earth Power Resources merger which was completed in December 2014.

In light of federal legislation that extended the qualification for the 30% Investment Tax Credit to projects that began construction prior to December 31, 2014, drilling of the first production/injection well CVP-001 (67-3) was initiated in December of 2014, following completion of gravity surveys, and analysis of prior temperature gradient drilling data. Well CVP-001 was completed on March 27, 2015 to a depth of 2,746 feet. The well exhibited modest permeability with a flowing temperature of 213°F, which makes the well suited for duty as an injection well. The next phase of development work is in the planning stages and is currently on hold due to market conditions.

This project is expected to benefit from the Department of Energy cost share grant awarded in July 2016. The details of this award are discussed in the San Emidio Phase II project discussion above.

Gerlach, Nevada
The Gerlach Joint Venture, located adjacent to the town of Gerlach in Washoe County, Nevada is made up of both private and BLM geothermal leases. The Peregrine well, a historic exploration slim hole that encountered a lost circulation zone at a depth of 975 feet, was redrilled in 2010 and the hole was opened from a 6.5 inch diameter well to a 12.5 inch diameter well. Lost circulation was confirmed within three zones through the 900 to 1,024 foot interval. The well was stopped at 1,070 feet total depth. Temperature surveys and a short clean out flow test were conducted on the well. The well flowed at an estimated 300-400 gallons per minute and the flowing temperature was 208°F. Geochemistry indicates an average potential source temperature of 374°F for the Gerlach site.

Drilling commenced on observation well 18-10a on October 30, 2014. 18-10a is a twin well to a well originally drilled in 1994 (the 18-10 well). The upper section of the well was drilled to 826 feet deep and an 8 inch liner was cemented in place. Temperature measurements in the well have provided the highest measured temperature in the field to date at 268°F within 160 feet of surface and a temperature gradient of 6.4°F per 100’ in the bottom section of the hole. There are two previously identified lost circulation targets from the original well at 1,600 and 2,800 feet deep that will be targeted when drilling is resumed.

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Drilling resumed on well 18-10a on April 14, 2012 and was stopped on April 18, 2012 at 1,943 feet deep. Circulation was lost in minor zones at 1,530 and 1,595 feet deep. Drilling resumed again on well 18-10a on August 14, 2014, and was completed in late November. The well was drilled to a total depth of 2,889 feet and encountered a maximum temperature of 275°F. Further work is dependent upon additional funding from the partners.

Vale, Oregon
The property consists of 368 acres of geothermal energy and surface rights located in Malheur County, located approximately one-half mile east of the town of Vale, Oregon. The property is within the Vale Butte geothermal resource area and provides the opportunity to evaluate development of a known resource. A prolific, shallow reservoir located along the north edge of the leasehold area has been used for many years in an agricultural drying facility and a mushroom growing operation.

An extensive database of geophysical and geological information from previous geothermal exploration in the Vale Butte area was used in the evaluation of the prospect. Geochemical analysis of samples taken from shallow hot wells results in a calculated geothermometer that indicates a potential reservoir temperature of 311°F to 320°F. Past exploration drilling near the site by Trans Pacific Geothermal and Sandia National Laboratory encountered temperatures in excess of 300°F in the basement rocks. The leases for this project were acquired in January and February 2014.

Raft River Phase II, Idaho
In 2011, the Raft River Phase II project was awarded an $11.4 million cost-shared, thermal stimulation program grant from the Department of Energy with the University of Utah Energy And Geoscience Institute as the project lead. The goal of the project is to create an Enhanced Geothermal System (“EGS”) by creating thermal fractures and developing a corresponding increase in permeability in the low permeability rock. Well RRG-9 was made available for the program and the first stage of injection into the well began in June 2013.

Initially the well was only capable of receiving 20 gallons per minute (“gpm”) of water due to the low permeability of the rock. After several moderate pressure stimulations, the injection of cold power plant discharge fluid was started and has continued to date. The lower temperature fluid causes thermal fracturing within the higher temperature host rock of the reservoir. At the current plant generation level, the flow into the well has continued to increase and is now approximately 1,200 gpm.

Well RRG-9 continues to be used temporarily as an injection well as an extension of the DOE EGS program, which is expected at this time to continue through until mid-2017. The Company’s contributions for the thermal stimulation program are made in-kind by the use of the RRG-9 well, well field data provided by the Company, and through ongoing monitoring support.

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Lee Hot Springs, Nevada
Lee Hot Springs is in Churchill County, 18 miles south of Fallon. The area was originally explored by Occidental Geothermal Company, a subsidiary of the oil company Occidental Petroleum Corporation. The project is comprised of 2,560 acres (four square miles) of BLM leases. ENEL Green Energy, a subsidiary of ENEL Group, the Italian based, multi-national power company, has completed a 15 megawatt binary plant at Salt Wells, 6 miles to the east of Lee. The project was acquired as part of the Earth Power Resources merger which was completed in November 2014.

Dating back to 1930, the area has had numerous water wells, thermal gradient holes, and geothermal slim hole tests. From 1977-1982 Occidental Geothermal, Inc. drilled four temperature gradient holes to depths of 500 feet, two stratigraphic test wells’ to 2,000-3,000 feet, and one large-diameter production test to 3,000 feet (well 72-33). The 3,000 foot test well flowed 280°F hot water from a zone at 1,200 ft. The A33-4 well, 1,000 feet southwest of well 72-33, was drilled to 2,400 feet and reportedly had temperatures in excess of 300°F and a steadily increasing temperature gradient.

The Great Basin Research Institute has had the leasehold mapped in detail, showing several large silica deposits. The reservoir temperature has been estimated using geochemistry as ranging from 320°F to 340°F by the US Geological Survey and other sources in the 1970s.

Ruby Hot Springs, Nevada
The property is located 30 miles southwest of Elko. EPR filed a BLM lease application for 2,140 acres in February 2001 and the lease application was rejected by the BLM in December 2005 due to cultural issues. The decision was appealed to the Interior Board of Land Appeals (“IBLA”) and the IBLA remanded the application back to the BLM for further action. No further action has been taken by BLM on issuance of the lease pending the completion of cultural and ethnographic studies that are required for further review. The project was acquired as part of the Earth Power Resources merger which was completed in November 2014.

The area around Ruby was first leased by Union Oil Company (now Chevron) in the late 1970s. A 3,149 foot test well was drilled and reportedly flowed at over 300°F. A second well in the area, Ruby Valley 65-10, was drilled to 1,075 feet deep and encountered lost circulation zones, but no temperature data is available. In the early 1980s, Aminoil drilled twelve 500 foot deep temperature gradient wells and two 1,000 foot stratigraphic test wells. Data from these wells have been incorporated into generalized heat-flow contour maps of the area.

Employees

At December 31, 2016, the Company had 48 full-time and one part time employees (14 administrative and project development, and 35 field and plant operations). The Company continuously considers acquisition opportunities, and if the Company is successful in making acquisitions, additional management and administrative staff may be added.

The Company did not experience any labor disputes or labor stoppages during the current fiscal year.

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Principal Products

The principal product is based upon activities related to the production of electrical power from the utilization of the Company’s geothermal resources. The primary product will be the direct sale of power generated by our interests in our geothermal power plants. Currently, our principal revenues consist of energy sales and energy credit sales. All power plants currently in operation, as well as all sites under exploration or development, are sites located in the Western United States or in the Republic of Guatemala in Central America.

Sources and Availability of Raw Materials

Geothermal energy is natural heat energy stored within the Earth’s crust at economically accessible depth. In some areas of the Earth, economic concentrations of heat energy result from a combination of geological conditions that allow water to penetrate into hot rocks at depth, become heated, and then circulate to a near surface environment. In these settings, commercially viable extraction of the geothermal energy and its conversion to electricity become possible and a “geothermal resource” is present.

There are four major components (or factors) to a geothermal resource:

Electrical power is directly produced through the utilization of geothermal resources; however, these resources are not a direct component of the final product.

Unless major geological changes occur that impact the geothermal reservoirs, the condition of the existing resources is expected to remain relatively consistent over time.

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Significant Government Permits

The Company maintains all permits necessary for operating its three plants located in Idaho, Nevada and Oregon. In addition, in December 2016 the Company received the primary operating permit necessary for construction and operation of the WGP Geysers project.

Neal Hot Springs, Oregon. The Neal Hot Springs project has four primary permits governing power plant operations. The permits include:

San Emidio, Nevada. The San Emidio project has five primary permits governing power plant operations. The permits include:

Raft River, Idaho. The Raft River project has four primary permits governing power plant operations. The permits include:

WGP Geysers, California . Western GeoPower had previously been issued all necessary permits for construction and operation of up to a 38.5 megawatt geothermal power plant. The Sonoma County Conditional Use Permit administratively expired in 2015. A new Conditional Use was issued in December 2016 for an initial term of 10 years including administrative extensions of 5 years. The primary permits include:

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Seasonality of Business

The Company has been producing energy revenues under the terms of three PPAs. Two of these contracts specify favorable rate periods and all three plants experience changes in levels of production through the year. The Raft River Energy I LLC (Raft River, Idaho) and USG Oregon LLC (Neal Hot Springs, Oregon) contracts pay higher rates in the months of July/August and November/December. Energy production can be influenced by the seasonal temperatures. The Company’s binary geothermal plants can operate more efficiently in cooler temperatures. Cooler temperatures facilitate the cooling process of the secondary fluid that is used to power the turbines. The Neal Hot Springs plant, since it utilizes air cooling rather than water cooling, is impacted more in the summer (lower generation) than the Raft River or San Emidio plants. Neal Hot Springs produces higher generation in the winter. Drilling and other construction activities can be negatively impacted by inclement weather that can occur, primarily, during the winter months.

Industry Practices/Needs for Working Capital

The Company is heavily involved in exploration and development operations. Once the decision is made to construct a project, high levels of working capital are committed, either directly or indirectly to the construction efforts. After a plant becomes commercially operational and the necessary operating reserves have been funded, the needs for working capital are typically low. The Company is expecting to be significantly involved in exploration and development activities for the next 5 to 10 years.

Dependence on a Few Customers

Ultimately, the market for electrical power is vast; however, the numbers of entities that can physically, logistically and economically purchase the commodity in large quantities are limited. The Company’s primary revenues originate from energy sales and the sale of energy credits. Currently, the Company generates energy revenues and energy credits from three sources. Idaho Power Company purchases energy generated by both Raft River Energy I LLC and USG Oregon LLC. NV Energy purchases energy from USG Nevada LLC. Energy credits earned by Raft River plant are sold to Holy Cross Energy. Under the current PPAs, energy credits that are earned by USG Oregon LLC and USG Nevada LLC plants are bundled with energy sales. Based upon current operations and expected project completions, it is expected that the Company will have a small number of direct customers that may amount to less than 10 over the next 5 to 10 years.

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Competitive Conditions

Although the market for different forms of energy is large and dominated by very powerful players, we perceive our industrial competition to be independent power producers and in particular those producers who provide “green” renewable power. Our definition of green power is electricity derived from a source that does not pollute the air, water or earth. Sources of green power, in addition to geothermal, include wind, solar, biomass and run-of-the river hydroelectric. A number of states have instituted renewable portfolio standards (“RPS”) that require utilities and retail sellers of electricity to purchase a minimum percentage of their power from renewable sources. For example, RPS statutes in California require 50% by 2030, Oregon requires 50% by 2040 and Nevada requires 25% by 2015. According to the Department of Energy’s Energy Efficiency and Renewable Energy department, approximately 38 states nationwide have established renewable portfolio standards or goals encouraging the procurement of green, renewable power. As a result, we believe green power is an important sub-market in the broader electric market, in which many power purchasers are increasing or committing to increase their investments. Accordingly, the conventional energy producers do not provide direct competition.

In the Pacific Northwest there are currently only two commercial geothermal facilities, both operated by the Company. There are a number of wind farms, as well as biomass and run-of-the river hydroelectric facilities. However, the Company believes that the combination of greater reliability and the baseload generation profile provided by geothermal power, with access to infrastructure for deliverability, and a low "full life" cost of power will allow geothermal to successfully compete for long term PPAs.

Factors that can influence the overall market for our product include some of the following:

• number of market participants buying and selling electricity;
• availability and cost of transmission;
• availability of low cost natural gas as an alternate fuel source
• amount of electricity normally available in the market;
• fluctuations in electricity supply due to planned and unplanned outages of competitors’ generators;
• fluctuations in electricity demand due to weather and other factors;
• cost of fuel used by generators, which could be impacted by efficiency of generation technology and fluctuations in fuel supply;
• environmental regulations that impact us and our competitors;
• availability of production tax credits and other benefits allowed by tax law;
• relative ease or difficulty of developing and constructing new facilities; and
• credit worthiness and risk associated with buyers.

Environmental Compliance

Geothermal drilling, construction and power plant operations are subject to federal, state and local environmental requirements and construction oversight. Applicable laws may include but are not limited to the Clean Air Act, the Clean Water Act, the Emergency Planning and Community Right-to-Know Act, the Endangered Species Act, the National Environmental Policy Act, state specific geothermal drilling rules, state and federal injection well requirements and standards and local building codes.

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Prior to acquiring an existing geothermal development, USG retains an independent, licensed engineer or geologist to conduct a Site Assessment and evaluate the property and performs detailed due diligence to minimize the potention of an unrecognized financial liability from being passed to U.S. Geothermal Inc. or our subsidiaries.

Our geothermal operations involve significant quantities of geothermal brine that is returned to the local subsurface, geologic formation. We also use isopentane and R-134A refrigerant working fluids, and numerous industrial lubricants that are considered contaminants if released or spilled. We are not aware of any mismanagement of these materials and we are required to promptly report any release of specified volumes of oil, lubricants, and chemicals used in our operations.

The requisite approvals and permits for our operations have been independently reviewed and verified prior to obtaining project financing. Independent legal reviews have verified that USG and our subsidiaries are operated in accordance with applicable laws. Existing laws and regulations may be revised or reinterpreted, or new laws and regulations may become applicable to us. Under those circumstances we work with the appropriate agency or entity to ensure that our operations remain in compliance with the applicable rules. As of the date of this memorandum, all of the permits and approvals required to operate our plants have been obtained and are valid.

Neal Hot Springs, Oregon
The Neal Hot Springs project is situated approximately 12 miles west of Vale, Oregon in an area with two nearby residents. There are no unique plants or animal communities in the area and no unique cultural or environmental constraints.

Because the power plant is air-cooled the only environmental reporting required is a monthly production and injection report and an annual water quality summary. Both reports are sent to the Oregon Department of Environmental Quality and Oregon Department of Geology and Mineral Industries. Semi-annual water monitoring has been conducted since 2008 and will continue throughout power plant operations. The Neal project files a quarterly energy generation report with the Federal Energy Regulatory Commission. An independent legal team has reviewed all regulatory requirements, permits and approvals for the project.

Adjoining rangelands are privately and federally managed and there are no rangeland or cropland management obligations.

The Neal project is in compliance with all environmental permitting, monitoring and reporting requirements and has received no formal or informal notices from any local, state, or federal agency.

San Emidio, Nevada
The San Emidio project is located approximately 14 miles south of Gerlach Nevada. The nearest residence is over four miles from the plant site.

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The San Emidio staff files monthly, quarterly and annual water reports with the Department of Environmental Protection and Department of Water Resources. Similar to other projects San Emidio’s monthly geothermal production and injection volumes are submitted the Division of Minerals and Division of Environmental Protection. Water quality reporting is also submitted regularly to the Division of Environmental Protection.

San Emidio is in compliance with all environmental permitting, monitoring and reporting requirements and has received no formal or informal notices from any local, state, or federal agency.

Raft River, Idaho
The Raft River project is located approximately 12 miles south of Malta, Idaho in a rural agricultural area with the nearest residence approximately two miles from the plant site. There are no unique plants or animal communities in the area and no unique cultural or environmental constraints.

Wastewater reuse requires a significant level of environmental reporting and data management. Water quality data is collected a minimum of four times annually. Monthly production and injection reports are filed with the Idaho Department of Water Resources, a land application and cooling water quality reports filed with the Idaho Department of Environmental Quality and Idaho Department of Water Resources annually. The Project’s private lands are managed on an ongoing basis for weed control, water management, irrigation, and fencing infrastructure.

The Raft River project is in compliance with all environmental permitting, monitoring and reporting requirements and has received no formal or informal notices from any local, state, or federal agency.

WGP Geysers, California
The Geysers project is located approximately 30 minutes north-east of the city of Healdsburg, CA. The property encompasses a ridgetop and a north facing hillside that has been developed and used for geothermal operations from l979 to l989. There are no unique plant or animal communities on the project site and no unique cultural or environmental constraints. The North Coast Regional Water Quality Board (NCRWQB) has required, prior to new construction, that WGP submit a plan to remove or reuse existing steam pipelines. The pipelines may contain mineral scale that has arsenic levels that exceed 150 parts per million.

WGP’s ongoing environmental reports include a monthly well report that is filed with the California Department of Oil, Gas and Geothermal Resources and an annual water quality report that is filed with the California Regional Water Board.

The Geysers project is in compliance with all environmental permitting, monitoring and reporting requirements and has received no formal or informal notices from any local, state, or federal agency.

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Gerlach, El Ceibillo, Crescent Valley, Lee Hot Springs, Ruby Hot Springs, and Vale
No power plant operations are being conducted on these properties at this time. The Company is in compliance with all environmental and regulatory requirements and has received no formal or informal notices from any local, state, or federal agency. There are no monthly, quarterly, or annual reporting requirements associated with these projects.

Financial Information about Geographic Areas

The Company has interests in operational power plants in three locations in the Western United States. The Raft River Energy I LLC power plant is located in the southeastern part of the State of Idaho. Raft River Unit I became operational on January 3, 2008. USG Nevada LLC constructed a new power plant located in the northwestern part of the State of Nevada in the San Emidio Desert. This power plant owned by USG Nevada LLC became commercially operational May 25, 2012. The three units owned by USG Oregon LLC became commercially operational November 16, 2012. These units are located in the Eastern part of the State of Oregon near the Idaho border. A summary of total energy and energy credit sales by location is as follows:

Financial Information about Business Segments

The Company has two reporting segments: operating plants and corporate and development. For more information about the business segments, please see Note 15 to our consolidated financial statements.

Available Information

We file annual, quarterly and periodic reports, proxy statements and other information with the U.S. Securities and Exchange Commission (“SEC”). You may obtain and copy any document we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580;Washington D.C. 20549. You may obtain information on the operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet website at http://www.sec.gov that contains reports, proxy and other information statements and other information regarding issuers that file electronically with the SEC. Our SEC filings are accessible via the internet at that website.

We make available, free of charge through our Internet website at http://www.usgeothermal.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Information on our website is not incorporated into this report and is not a part of this report.

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Governmental Approvals and Regulations

The geothermal energy industry in the United States is regulated by federal, state and local agencies and commissions. Those agencies and commissions regulate geothermal drilling, power generation activities and environmental protection through permitting, licensing and bonding requirements. The following information is a general summary of the electric utility industry and applicable regulations in the United States and is not a full statement of the law or all issues pertaining to electric industry requirements.

Regulatory oversight of the industry can be broadly divided between rules governing geothermal exploration and rules governing actual energy generation, power sales and delivery. Geothermal fluid production is regulated under federal and state rules and regulations that require permits for drilling operations, geothermal fluid production and injection, and well abandonment. Prior to drilling agencies will review plans and ensure that natural resource values such as air, water, wildlife and vegetation are protected. Geothermal energy generation is regulated under federal, state and local rules and regulations. Permits are required for power plant construction and operation and ensure that a project site is suitable and that natural resource values and community concerns, if any, are evaluated and mitigated during the planning and design phase.

Federal Electric Utility Industry Regulation . Electricity production and public utilities are regulated by both the federal government and state utility commissions. State utility commissions traditionally exercise their jurisdiction over an electric utility’s retail operations. There are two primary pieces of federal legislation that have governed public utilities since the 1930s, the Federal Power Act (“FPA”) and Public Utility Holding Company Act of 1935 (“PUHCA”). These statutes have been amended and supplemented by subsequent legislation, including Public Utility Regulatory Protection Act (“PURPA”), the Energy Policy Act of 1992, and Energy Policy Act of 2005 (“EPAct 2005”).

Federal Power Act . Pursuant to the FPA the Federal Energy Regulatory Commission (“FERC”) has exclusive jurisdiction over the rates for most wholesale sales of electricity and transmission in interstate commerce. These rates may be based on a cost of service approach or may be determined on a market basis through competitive bidding or negotiation. FERC's regulations under PURPA exempt owners of small power production Qualifying Facilities that use geothermal resources as their primary source and other Qualifying Facilities that are 30 megawatts or under in size from many provisions of the FPA.

Under the FPA and FERC’s regulations, the wholesale sale of power at market-based or cost-based rates requires that the seller have authorization issued by FERC to sell power at wholesale pursuant to a FERC-accepted rate schedule. FERC grants market-based rate authorization based on several criteria, including a showing that the seller and its affiliates lack market power in generation and transmission, that the seller and its affiliates cannot erect other barriers to market entry and that there is no opportunity for abusive transactions involving regulated affiliates of the seller. All of the Company’s facilities are qualifying facilities and have been granted market-based rate authority to make wholesale sales of electrical energy by FERC. For the Neal Hot Springs power plant, USG Oregon files electronic quarterly reports of the contract and transaction data.

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Energy Policy Act of 2005 . EPAct 2005 contains provisions to prohibit the manipulation of the electric energy and natural gas markets and increase the ability of FERC to enforce and promote compliance with the statutes, orders, rules, and regulations that FERC administers. To implement the market manipulation provision of EPAct 2005, FERC amended its regulations to prohibit a company, in connection with the purchase or sale of natural gas, electric energy, or transportation or transmission services subject to FERC’s jurisdiction, from (1) using or employing any device, scheme, or artifice to defraud, (2) declaring any untrue statement of a material fact or omitting to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (3) engaging in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any person. The EPAct 2005 made a number of other changes to laws affecting the regulation of electricity. These include, but are not limited to, giving FERC explicit authority to proscribe and enforce rules governing market transparency, giving FERC authority to oversee and enforce electric reliability standards, requiring FERC to promulgate rules providing for incentive ratemaking to encourage investments that promote transmission reliability and reduce congestion, giving FERC certain siting authority for transmission lines in critical transmission corridors, requiring FERC to promulgate rules granting incentives for transmission owners to join Regional Transmission Organizations, authorizing FERC to require unregulated utilities to provide open access transmission, and ensuring that load serving entities can retain transmission rights necessary to serve native load requirements. EPAct 2005 promulgated PUHCA 2005, which repeals PUHCA 1935, effective as of February 8, 2006.

Public Utility Holding Company Act . Under PUHCA 2005, the books and records of a utility holding company, its affiliates, associate companies, and subsidiaries are subject to FERC and state commission review with respect to transactions that are subject to the jurisdiction of either FERC or the state commission or costs incurred by a jurisdictional utility in the same holding company system. However, if a company is a utility holding company solely with respect to Qualifying Facilities, exempt wholesale generators, or foreign utility companies, it will not be subject to review of books and records by FERC under PUHCA 2005. Qualifying Facilities that make only wholesale sales of electricity are not subject to state commissions’ rate, financial, and organizational regulations and, therefore, would not be subject to any review of their books and records by state commissions pursuant to PUHCA 2005 as long as the Qualifying Facility is not part of a holding company system that includes a utility subject to regulation in that state.

Our power plants are Qualifying Facilities that make only wholesale sales of electricity and are not subject to rate, financial and organizational regulations applicable to electric utilities in those states. The power plants each sell their electrical output under power purchase agreements to electric utilities. The utilities are regulated by their respective state public utilities commissions. Neither USG nor our subsidiaries are considered utility holding companies under FPA, FERC, the EPAct2005, or PUHCA2005 and those regulations have had no direct adverse impact on our ability to develop geothermal resources or deliver power under our contracts.

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Geothermal Development Concession in Guatemala . The following summary of certain aspects of the electric industry in Guatemala should not be considered a full statement of the laws of Guatemala or all of the issues pertaining thereto.

In Guatemala, the General Electricity Law of 1996, Decree 93-96, created a wholesale electricity market and established a new regulatory framework for the electricity sector. The law created a regulatory commission, the CNEE, and a new wholesale power market administrator, the AMM, for the regulation and administration of the sector. The AMM is a private not-for-profit entity. The CNEE functions as an independent agency under the Ministry of Energy and Mines and is in charge of regulating, supervising, and controlling compliance with the electricity law, overseeing the market and setting rates for transmission services, and distribution to medium and small customers. All distribution companies must supply electricity to such customers pursuant to long-term contracts with electricity generators. Large customers can contract directly with the distribution companies, electricity generators or power marketers, or buy energy in the spot market. Guatemala has approved a Law of Incentives for the Development of Renewable Energy Power plants, Decree 52-2003, in order to promote the development of renewable energy power plants. This law provides certain benefits to companies utilizing renewable energy, including a 10-year exemption from corporate income tax and an import tax exemption for generation equipment, transmission lines and substation equipment. In September 2008, CNEE issued a resolution which approved the Technical Norms for the Connection, Operation, Control and Commercialization of the Renewable Distributed Generation and Self-producers Users with exceeding amounts of energy. This technical norm was created to regulate all aspects of generation, connection, operation, control and commercialization of electric energy produced with renewable sources to promote and facilitate the installation of new generation plants, and to promote the connection of existing generation plants which have exceeding amounts of electric energy for commercialization. It is applicable to projects with a capacity of up to 5 megawatts.

Environmental Credits

In the past several years, there has been increased demand for energy generated from geothermal resources in the United States as production costs for electricity generated from geothermal resources have become competitive relative to fossil fuel generation. This is partly due to newly enacted legislative and regulatory incentives, such as production tax credits and state renewable portfolio standards. State renewable portfolio standards laws require that an increasing percentage of the electricity supplied by electric utility companies operating in states with such standards will be derived from renewable energy resources until certain pre-established goals are met. We expect increasing demand for energy generated from geothermal and other renewable resources in the United States as additional states adopt or extend renewable portfolio standards.

As a “green” power producer, environmental-related credits, such as renewable energy credits or carbon credits, are also available for sale to power companies (to allow them to meet their “green” power requirements) or to businesses which produce carbon based pollution. In all of the Company’s projects, these credits have been sold separately, or bundled with the electricity to provide an additional source of revenue.

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We expect the following key incentives to influence our results of operations:

Production Tax Credits and Investment Tax Credits . A PTC provides project owners with a federal tax credit for the first ten years of plant operation. The PTC enhances the annual revenues of the projects by as much as 25 percent per year for the first 10 years. Facilities that begin construction after December 31, 2016 will not be eligible to use this production tax credit. The federal production tax credit available for geothermal energy in 2014 was 2.3 cents per kilowatt-hour. Alternatively, certain projects under construction before the end of 2016, are eligible to elect to take a 30% ITC in lieu of the PTC. The ITC may be taken after the plant has gone into operation and may be monetized. Both PTC and ITC credits require a tax equity partner to monetize.

The WGP Geysers project, San Emidio II project, and the Crescent Valley project all began construction prior to December 31, 2014, and the Company believes all three projects currently qualify for the 30% ITC in lieu of the PTC.

Renewable Energy Credits . Renewable Energy Certificates, or RECs, are tradable environmental commodities that represent proof that one megawatt-hour of electricity was generated from an eligible renewable energy resource. A renewable energy provider is credited with one REC for every 1,000 kilowatt-hours or one megawatt-hour of electricity it produces. The electrical energy is fed into the electrical grid and the accompanying REC can either be delivered to the purchaser of the power (“bundled”) or can be sold on the open market providing the renewable energy producer with an additional source of income.

On July 29, 2006, the Company signed a $4.6 million renewable energy credits purchase and sales agreement with Holy Cross Energy, a Colorado cooperative electric association. The agreement is capped at 87,600 RECs (10 megawatt s average over the year). Holy Cross Energy began purchasing the renewable energy credits associated with the RREI power production on October 2007, and is expected to continue purchasing through 2017. Under the revised RREI agreement, Idaho Power keeps all RECs above 87,600 RECs per year. In addition, we retain 49% of the renewable energy credits associated with power production from RREI after 2017 and Idaho Power retains the other 51%. We expect to receive a majority of the annual revenue from the ten-year renewable energy credits sales arrangement with Holy Cross Energy.

On December 10, 2010, a second REC contract was signed with Public Utility District No. 1 of Clallam County, Washington. The term of the agreement is from 2018 to 2034 and includes sales of an estimated 50,000 megawatt hours of RECs annually, representing the 49% ownership in RECs retained by RREI under the Idaho Power PPA.

The PPAs for the existing San Emidio and Neal Hot Springs power plants require the bundling of power sales and RECs. Therefore, under these contracts all RECs are delivered with the net power sold to the utility.

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