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Nevada Geothermal Power stock hit after update on Faulkner 1 plant

Blue Mountain Faulkner-1, geothermal power plant, Nevada (source: Nevada Geothermal Power)
Alexander Richter 12 May 2011

In an operational update, Canadian Nevada Geothermal Power announces lower than anticipated power production and forecasted gradual temperature decline at its Faulkner 1 geothermal power plant in Nevada, with potential implications on its debt position.

In a release by the company yesterday, “Nevada Geothermal Power Inc. (TSX-V: NGP) provides an operational update. with the result of a 51% drop in share price yesterday.

According to the release, “NGP has sufficient cash reserves to enable further development of its plans through 2011. The Company is well advanced in its program to acquire three new geothermal properties in the Imperial Valley from IAE and in its resource development in a joint venture at Crump Geyser with Ormat Nevada Inc. The Company is also planning to further pay down mezzanine debt related to the Faulkner 1 plant.

The economics of the Faulkner 1 geothermal plant continue to be adversely affected by lower than anticipated power production and a forecasted gradual temperature decline. The Company is currently further stimulating and testing five wells, as well as re-modeling the reservoir to update its forecast of power production. The Company presently believes the most reasonable power production forecast is 35 MW (net) declining approximately 2.5% per year. If there is no improvement in this forecast the Company will not be able to meet the terms of its loan with EIG Global Energy Partners (EIG), formerly the Trust Company of the West (TCW), and accordingly, in addition to applying for a federal government cash grant and assessing a tax-assisted financing, the Company has begun discussions with EIG in order to make changes to the capital structure.

The current balance on the EIG loan is approximately $88 million. NGP anticipates repaying a portion of the debt with proceeds of approximately $7.5 million from a potential tax grant based on additional $25 million of qualified well field expenditures since the plant was placed in service. In addition, NGP will explore its strategic options and has engaged Marathon Capital to assist with the structuring and potential placement of a $30-50 million tax-assisted financing. The financing requires reaching an agreement with EIG on new terms that include some conversion of debt to Faulkner 1 Holdco equity, or similar adjustments, as well as receiving a satisfactory updated resource report from independent consultants, GeothermEx Inc., upon the completion of current well tests.

The Company is advancing the following development projects:

Blue Mountain, Nevada

Plant production has been steadily improved to current levels of 35-37 MW (net) or 46-48 MW (gross) output by additional well field drilling since October 2009 when the plant was placed in service. Seven full-sized geothermal wells were completed under the supplemental drilling program, and four have been connected to the Faulkner 1 power plant. Three of these wells (55-15, 58-11, and 91-15) are in operation as injection wells and a fourth well (44-14) is connected to the plant and has been used intermittently for both production and injection since its completion. The remaining wells (41-27, 34-23, 86-22) located southwest of the production area showed marginal permeability associated with a weak thermal zone and are not connected to the plant at this time. Wells 34-23 and 86-22, along with previously-drilled, sub-commercial production test wells 38-14, 89-11, and 44-14, are being stimulated by cold water injection and oil field fracturing techniques in an attempt to improve injection capacity/production capacity. Test results will be incorporated into an updated reservoir report needed to support the tax-assisted financing referred to above.

NGP plans to continue with exploration drilling of the “Western” and “South Blue Mountain” geothermal target areas.

Iceland America Asset Purchase, Imperial Valley, California

Imperial Valley is a premier address for geothermal development in the US with 500 MW of power capacity on line. Active new power development projects include the 50 MW Hudson Ranch Project which is under construction and the 50 MW Orita Project where Ram Power has released encouraging results from two deep development test wells.

The agreement to purchase the New Truckhaven, East Brawley and South Brawley high temperature geothermal projects is progressing and is expected to close shortly. NGP believes that commercial reservoirs may be present at the New Truckhaven and the East Brawley Projects based on extensive past work including development test drilling in both areas. Iceland America’s East Brawley leases are centered on a large heat anomaly immediately south of current drilling by Ram at the Orita Project.

NGP project planning has been initiated so that development permit work and infrastructure studies can commence expeditiously after the acquisition is complete.

Crump Geyser, Oregon

Crump Geothermal Company (CGC), a joint venture between Nevada Geothermal Power and Ormat Nevada, Inc., completed and tested a 5000-foot deep exploration well (34-3) at the Crump Geyser property at a location along the range front to the south of Crump Geyser. A shallow thermal outflow zone not suitable for production was intersected; however, results indicate the well can be used for injection. Planning is in progress to drill additional exploratory production test wells.

CGC obtained extensive temperature gradient drilling data over the project area from an earlier exploration program which outlines the shallow thermal anomaly and obviates the need for further shallow gradient drilling work at Crump. Consequently, CGC submitted a revised deep slim well drilling program along with a progress report covering geophysical (gravity, seismic, aeromag) surveys completed, details of the earlier gradient well program, and environmental/permitting work to the Department of Energy (DOE) relative to the on-going $3.4 million, cost- shared exploration program.

A deep well drilling program to test targets down to 5000 feet has commenced. Power market and transmission access feasibility studies are underway.

Pumpernickel, Nevada

The Pumpernickel Project has been extensively explored and is ready for development drilling. Three production test well sites are permitted and a level drill pad has been constructed at one location. A water license has been awarded for future power plant operations enabling a water cooled power plant and increasing power production during summer months. NGP is seeking a financial partner for further project development.

A $3.2 million DOE cost-shared exploration program has been transferred from North Valley to the Pumpernickel Project. NGP will move ahead with environmental studies and a shallow soil-gas sampling program leading to two deep confirmation holes in collaboration with the DOE.

North Valley, Nevada

A $300,000 deep confirmation well program is scheduled to commence shortly pending receipt of access road permits at North Valley in a central location within a 10-square-mile, high grade thermal anomaly. The well is intended to measure subsurface temperatures and to obtain geothermal brine samples and better define the potential geothermal resource temperature and field capacity.”

Source: Company release