Us Geothermal 10-Q 2014 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedJune 30, 2013

or

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________

Commission File Number:001-34023

U.S. GEOTHERMAL INC.
(Exact Name of Registrant as Specified in Its Charter)

Delaware	84-1472231
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)
1505 Tyrell Lane
Boise, Idaho	83706
(Address of Principal Executive Offices)	(Zip Code)

208-424-1027
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]     No [    ]

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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X]     No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [   ]	Accelerated filer [   ]
Non-accelerated filer   [   ] (Do not check if a smaller reporting company)	Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ]     No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Shares Outstanding as of August 12, 2013
Common stock, par value	102,094,542
$ 0.001 per share

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U.S. Geothermal Inc.
Form 10-Q
For the Second Quarter Ended June 30, 2013

INDEX

PART I – Financial Information
Item 1– Financial Statements (Unaudited)		5
	Interim Consolidated Balance Sheet at June 30, 2013 and Consolidated Balance Sheet at December 31, 2012	6
	Interim Consolidated Statements of Operations – Three Months Ended and Six Months Ended June 30, 2013 and 2012	7
	Interim Consolidated Statements of Cash Flow – Six Months Ended June 30, 2013 and 2012	8
	Interim Consolidated Statement of Stockholders’ Equity – Nine Months Ended December 31, 2012 and Six Months Ended June 30, 2013	9
	Notes to Interim Consolidated Financial Statements	10
Item 2– Management’s Discussion and Analysis of Financial Condition and Results of Operations		35
	– General Background and Discussion	36
	– Operating Results	43
	– Off Balance Sheet Arrangements	52
	– Liquidity and Capital Resources	52
	– Potential Acquisitions	55
	– Critical Accounting Policies	55
Item 3– Quantitative and Qualitative Disclosures about Market Risk		55
Item 4– Controls and Procedures		56
PART II – Other Information
Item 1– Legal Proceedings		57
Item 1A– Risk Factors		57
Item 2– Unregistered Sales of Equity Securities and Use of Proceeds		57
Item 3– Defaults Upon Senior Securities		57
Item 4– Mine Safety Disclosures		57
Item 5– Other Information		57
Item 6– Exhibits		57

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Part I - Financial Information

Item 1 - Financial Statements

The financial statements included herein have been prepared by U.S. Geothermal Inc. (the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles may have been condensed or omitted. However, in the opinion of management, all adjustments (which include only normal recurring accruals) necessary to present fairly the financial position and results of operations for the periods presented have been made. These financial statements should be read in conjunction with the accompanying notes, and with the audited financial statements and notes to the financial statements included in the Company’s transition report on Form 10-K for the nine months ended December 31, 2012. The results of operations for the three and six months ended June 30, 2013 are not necessarily indicative of the results to be expected for the year ending December 31, 2013.

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U.S. GEOTHERMAL INC.
________
Consolidated Financial Statements
June 30, 2013

U.S. GEOTHERMAL INC.
CONSOLIDATED BALANCE SHEETS
(Stated in U.S. Dollars)

		(Unaudited)
		June 30, 2013			December 31, 2012
ASSETS
Current:
Cash and cash equivalents (note 2)	$	48,282,655		$	12,908,779
Restricted cash (note 3)		2,995,000			2,995,000
Trade accounts receivable		1,924,542			3,296,890
Grant proceeds receivable (note 4)		7,364,200			42,884,200
Other current assets		901,768			839,104
Total current assets		61,468,165			62,923,973
Investment in equity securities (note 5)		45,004			65,551
Operating security deposit for Power Purchase Agreement		1,426,700			1,426,700
Property, plant and equipment, net of accumulateddepreciation (note 6)		161,850,269			160,589,254
Intangible assets, net of accumulated amortization (note 7)		15,365,938			15,490,618
Total assets	$	240,156,076		$	240,496,096
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and accrued liabilities	$	1,212,952		$	1,481,959
Construction accounts payable		3,079,722			1,122,746
Related party accounts payable		9,461			3,391
Convertible loan payable (note 10)		2,125,000			-
Construction loan payable (note 11)		-			1,000,000
Retention payable (note 16)		5,245,000			8,089,704
Current portion of capital lease obligations (note 9)		46,672			45,278
Current portion of construction loans payable (note 11)		13,446,479			1,576,342
Total current liabilities		25,165,286			13,319,420
Long-term Liabilities:
Convertible loan payable (note 10)		-			2,125,000
Long-term portion of capital lease obligations (note 9)		45,342			69,039
Construction loans payable, less current portion (note 11)		91,652,500			102,124,167
Total long-term liabilities		91,697,842			104,318,206
Total liabilities		116,863,128			117,637,626
Commitments and Contingencies (note 16)		-			-
STOCKHOLDERS’ EQUITY
Capital stock (authorized: 250,000,000 common shares with a $0.001 par value;    issued and outstanding shares at June 30, 2013 and December 31, 2012 were: 101,516,764)		101,516			101,516
Additional paid-in capital		99,767,310			99,524,850
Accumulated other comprehensive loss		(24,491	)		(3,944	)
Accumulated deficit		(32,832,985	)		(32,845,150	)
		67,011,350			66,777,272
Non-controlling interests (note 17)		56,281,598			56,081,198
Total stockholders’ equity		123,292,948			122,858,470
Total liabilities and stockholders’ equity	$	240,156,076		$	240,496,096

The accompanying notes are an integral part of these interim consolidated financial statements.
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U.S. GEOTHERMAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Stated in U.S. Dollars)

		(Unaudited)						(Unaudited)
		For the Three Months Ended						For the Six Months Ended
		June 30,						June 30,
		2013			2012			2013			2012
Plant Revenues:
Energy sales	$	4,886,839		$	1,193,185		$	11,875,498		$	2,250,277
Energy credit sales		86,237			87,764			184,567			189,759
Total plant operating revenues		4,973,076			1,280,949			12,060,065			2,440,036
Plant Expenses:
Plant production expenses		2,309,007			1,297,532			3,634,963			2,786,693
Depreciation and amortization		1,651,842			660,835			3,310,242			1,392,536
Total plant operating expenses		3,960,849			1,958,367			6,945,205			4,179,229
Net Income (Loss) from Plant Operations		1,012,227			(677,418	)		5,114,860			(1,739,193	)
Expenses (Income):
Corporate administration		204,557			270,553			496,868			449,492
Professional and management fees		432,190			263,538			731,350			375,701
Salaries and wages		553,655			313,017			1,118,143			518,767
Stock based compensation		204,390			162,975			263,753			467,106
Travel and promotion		68,559			48,321			119,214			81,677
Leases and well testing		414,377			93,125			576,386			118,145
Interest expense		1,123,883			-			1,604,185			-
Other (income) expenses		(22,757	)		(1,790	)		(63,492	)		492,934
Total expenses (income)		2,978,854			1,149,739			4,846,407			2,503,822
Net Income (Loss) Before Income Tax Expense		(1,966,627	)		(1,827,157	)		268,453			(4,243,015	)
Net Income Tax Expense (note 8):
Income taxes		-			-			102,500			-
Effect of net deferred tax assets		-			-			(102,500	)		-
Net income tax expense		-			-			-			-
Net Income (Loss) Before Net Income (Loss)   Attributable to U.S. Geothermal, Inc.		(1,966,627	)		(1,827,157	)		268,453			(4,243,015	)
Net (income) loss attributable to the non-                   controlling interests		590,268			896,287			(256,288	)		1,668,422
Net Income (Loss) Attributable to U.S.Geothermal Inc.		(1,376,359	)		(930,870	)		12,165			(2,574,593	)
Other Comprehensive Income (Loss):
Unrealized income (loss) on investment                   in equity securities		(882	)		(24,996	)		(20,547	)		6,555
Comprehensive Loss Attributable toU.S. Geothermal Inc.	$	(1,377,241	)	$	(955,866	)	$	(8,382	)	$	(2,568,038	)
Basic Net Income (Loss) Per Share Attributable      to U.S. Geothermal Inc.	$	(0.01	)	$	(0.01	)	$	0.00		$	(0.03	)
Diluted Net Income (Loss) Per Share Attributable      to U.S. Geothermal Inc.	$	(0.01	)	$	(0.01	)	$	0.00		$	(0.03	)
Weighted Average Number of Shares      Outstanding for Basic Calculations		101,516,764			87,890,014			101,516,764			86,453,373
Weighted Average Number of Shares, Stock      Options and Warrants Outstanding for        DilutedCalculations		122,654,045			100,834,602			122,611,539			100,262,575

The accompanying notes are an integral part of these interim consolidated financial statements.
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U.S. GEOTHERMAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in U.S. Dollars)

		(Unaudited)
		For the Six Months Ended June 30,
		2013			2012
Operating Activities:
Net Income (Loss)	$	268,453		$	(4,243,015	)
Adjustments to reconcile net income (loss) to total cash provided by operating activities:
Depreciation and amortization		3,371,177			1,427,696
Stock based compensation		263,753			467,106
Loss on disposal of water rights		-			548,700
Net changes in:
Trade accounts receivable, operating		1,372,348			2,347,359
Accounts payable and accrued liabilities		(284,230	)		(1,513,556	)
Prepaid expenses and other		(62,664	)		(8,757	)
Total cash provided by operating activities		4,928,837			(974,467	)
Investing Activities:
Purchases of property, plant and equipment		(618,662	)		(7,177,767	)
Proceeds from ITC cash grants receivable		33,800,784			-
Cash received from consolidation of subsidiary		-			592,330
Cash restricted by regulating agencies		-			(75,000	)
Purchase of PPA Security Bond		-			(1,426,700	)
Total cash provided (used) by investing activities		33,182,122			(8,087,137	)
Financing Activities:
Issuance of share capital, net of share issuance costs		-			1,058,386
Contributions from non-controlling interest		7,460			10,080,901
Distributions to non-controlling interest		(63,348	)		(63,703	)
Principal payments on notes payable		(2,658,892	)		-
Principal payments on capital lease		(22,303	)		(25,682	)
Total cash provided (used) by financing activities		(2,737,083	)		11,049,902
Increase in Cash and Cash Equivalents		35,373,876			1,988,298
Cash and Cash Equivalents, Beginning of Period		12,908,779			6,269,459
Cash and Cash Equivalents, End of Period	$	48,282,655		$	8,257,757
Supplemental Disclosures:
Non-cash investing and financing activities:
Purchase of property and equipment on account	$	1,956,976		$	2,277,599
Construction and development paid directly with construction loans		2,355,316			47,870,884
Net assets and liabilities received from consolidation of subsidiary		-			45,386,103
Equipment purchased with capital leases		-			155,000
Capitalized accrued interest		-			1,697,754
Property and equipment costs reduced by settlement agreement		2,142,658			-
Grants receivable used to decrease construction costs		1,719,216			-
Other Items:
Interest paid		1,105,950			2,645

The accompanying notes are an integral part of these interim consolidated financial statements.
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U.S. GEOTHERMALINC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Six MonthsEnded June 30, 2013 and the Nine MonthsEnded December31, 2012
(Stated in U.S. Dollars)

					Additional					Accumulated			Non-
	Number of		Common		Paid-In		Accumulated			Comprehensive			controlling
	Shares		Shares		Capital		Deficit			Income			Interest			Totals
Balance at March 31, 2012	85,080,445	$	85,080	$	93,475,298	$	(31,530,306	)	$	23,002		$	49,764,445		$	111,817,519
Stock issued under At Market Issuance Sales      agreement and a registered direct       offering agreement (note 12)	16,436,319		16,436		5,413,551		-			-			-			5,429,987
Equity contributions and note conversion      by non-controlling interest Oregon      USG Holdings LLC (note 17)			-		-		-			-			7,005,785			7,005,785
Distributions to non-controlling interest entity	-		-		-		-			-			(88,209	)		(88,209	)
Stock compensation	-		-		636,001		-			-			-			636,001
Unrealized loss on investment	-		-		-		-			(26,946	)		-			(26,946	)
Net loss	-		-		-		(1,314,844	)		-			(600,823	)		(1,915,667	)
Balance at December 31, 2012	101,516,764		101,516		99,524,850		(32,845,150	)		(3,944	)		56,081,198			122,858,470
Non-controlling equity contribution from      Gerlach Green Energy, LLC	-		-		-		-			-			7,460			7,460
Distributions to non-controlling interest entity	-		-		-		-			-			(63,348	)		(63,348	)
Stock compensation	-		-		242,460		-			-			-			242,460
Unrealized loss on investment	-		-		-		-			(20,547	)		-			(20,547	)
Net income (unaudited)	-		-		-		12,165			-			256,288			268,453
Balance at June 30, 2013 (unaudited)	101,516,764	$	101,516	$	99,767,310	$	(32,832,985	)	$	(24,491	)	$	56,281,598		$	123,292,948

The accompanying notes are an integral part of these interim consolidated financial statements.
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U.S. GEOTHERMAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited
June 30, 2013
(Stated in U.S. Dollars)

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

U.S. Geothermal Inc. was incorporated on February 26, 2002 in the State of Idaho. The Company constructs, manages and operates power plants that utilize geothermal resources to produce energy. The Company’s operations have been, primarily, focused in the Western United States of America.

All references to “dollars” or “$” are to United States dollars and all references to CDN are to Canadian dollars.

Basis of Presentation

These unaudited interim consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Such rules and regulations allow the omission of certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America, so long as such omissions do not render the financial statements misleading. Certain prior period amounts have been reclassified to conform to the current period presentation.

In the opinion of management, these financial statements reflect all adjustments that are necessary for a fair statement of the results for the periods presented. All adjustments were of a normal recurring nature. These interim financial statements should be read in conjunction with the annual financial statements of the Company included in its Transition Report on Form 10-K for the nine months ended December 31, 2012.

The Company consolidates subsidiaries that it controls (more-than-50% owned) and entities over which control is achieved through means other than voting rights. These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, as well as three controlling interests. The accounts of the following companies are consolidated in these financial statements:

i)	U.S. Geothermal Inc. (incorporated in the State of Delaware);
ii)	U.S. Geothermal Inc. (incorporated in the State of Idaho);
iii)	U.S. Geothermal Services, LLC (organized in the State of Delaware);
iv)	Nevada USG Holdings, LLC (organized in the State of Delaware);
v)	USG Nevada LLC (organized in the State of Delaware);
vi)	Nevada North USG Holdings, LLC (organized in the State of Delaware);
vii)	USG Nevada North, LLC (organized in the State of Delaware);
viii)	Oregon USG Holdings, LLC (organized in the State of Delaware);
ix)	USG Oregon LLC (organized in the State of Delaware);
x)	Raft River Energy I LLC (organized in the State of Delaware);
xi)	Gerlach Geothermal LLC (organized in the State of Delaware);
xii)	USG Gerlach LLC (organized in the State of Delaware); and
xiii)	U.S. Geothermal Guatemala, S.A. (organized in Guatemala)

All intercompany transactions are eliminated upon consolidation.

In cases where the Company owns a majority interest in an entity but does not own 100% of the interest in the entity, it recognizes a non-controlling interest attributed to the interest controlled by outside third parties. The Company will recognize 100% of the assets and liabilities of the entity, and disclose the non-controlling interest. The statements of operations will consolidate the subsidiary’s full operations, and will separately disclose the elimination of the non-controlling interest’s allocation of profits and losses.

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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following are summarized accounting policies considered to be significant by the Company’s management:

Accounting Method

The Company’s consolidated financial statements are prepared using the accrual basis of accounting in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and have been consistently applied in the preparation of the consolidated financial statements.

Use of Estimates

The preparation of consolidated financial statements in accordance with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the consolidated financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of the Company’s consolidated financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions and could have a material effect on the reported amounts of the Company’s consolidated financial position and consolidated results of operations.

Cash and Cash Equivalents

The Company considers all unrestricted cash, short-term deposits, and other investments with original maturities of no more than ninety days when acquired to be cash and cash equivalents for the purposes of the statement of cash flows. Under the Loan Guarantee Agreement at Neal Hot Springs with the Department of Energy, all funds for USG Oregon LLC are deposited into PNC Bank subject to certain procedural restrictions on use of the funds. At June 30, 2013, $45.2 million in funds were deposited at PNC Bank and unavailable for immediate corporate needs.Discussion regarding restricted cash is included in Note 3.

Accounts Receivable Allowance for Doubtful Accounts

Trade Accounts Receivable
Management estimates the amount of trade accounts receivable that may not be collectible and records an allowance for doubtful accounts. The allowance is an estimate based upon aging of receivable balances, historical collection experience, and the periodic credit evaluations of our customers’ financial condition. Receivable balances are written off when we determine that the balance is uncollectible. As of June 30, 2013 and December 31, 2012, there were no balances that were over 90 days past due and no balance in allowance for doubtful accounts was recognized.

Grant Accounts Receivable
For receivables expected to be received from grants from Federal or State agencies, the Company records the receivable amounts net of the funds expected to be received which may be less than the total amounts requested on the actual grant applications. Therefore, no allowance accounts are considered to be necessary for receivables from grants at June 30, 2013 and December 31, 2012.

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Concentration of Credit Risk

The Company’s cash and cash equivalents, including restricted cash, consisted of commercial bank deposits, money market accounts, and petty cash. Cash deposits are held in commercial banks in Boise, Idaho and Portland, Oregon. Deposits are guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per legal entity through December 31, 2013. At June 30, 2013, the Company’s total cash balance, excluding money market funds, was $1,518,490, and bank deposits amounted to $1,944,007. The primary difference was due to outstanding checks and deposits. Of the bank deposits, $971,007 was not covered by or was in excess of FDIC insurance guaranteed limits. At fiscal year end, the Company’s money market funds invested in government backed securities totaled $49,745,451 and were not subject to deposit insurance.

Equity Securities

The Company determines the appropriate classification of marketable securities at the time of purchase and reevaluates this designation as of each balance sheet date. The Company classifies these securities as either held-to-maturity, trading, or available-for-sale. All marketable securities and restricted investments were classified as available-for-sale securities. The Company classifies its investments as “available for sale” because it does not intend to actively buy and sell for short-term profits. The Company's investments are subject to market risk, primarily interest rate and credit risk. The fair value of investments is determined using observable or quoted market prices for those securities.

Available-for-sale securities are carried at fair value, with unrealized gains and losses included as a component of accumulated other comprehensive income (loss). Realized gains and losses, declines in value judged to be other than temporary and interest on available-for-sale securities are included in net income. The cost of securities sold is based on the specific identification method.

Property, Plant and Equipment

Property, plant and equipment, including assets under capital lease, are recorded at historical cost. Costs of acquisition of geothermal properties are capitalized in the period of acquisition. Major improvements that significantly increase the useful lives and/or capabilities of the assets are capitalized. A primary factor in determining whether to capitalize construction type costs is the stage of the potential project’s development. Once a project is determined to be commercially viable, all costs directly associated with the development and construction of the project are capitalized. Until that time, all development costs are expensed. A commercially viable project will have, among other factors, a reservoir discovery well or other significant geothermal surface anomaly, a power transmission path that is identified and available, and an electricity off-taker identified. A valid reservoir discovery is generally defined when a test well has been substantially completed that indicates the presence of a geothermal reservoir that has a high probability of possessing the necessary temperatures, permeability, and flow rates. After a valid discovery has been made, the project enters the development stage. Generally, all costs incurred during the development stage are capitalized and tracked on an individual project basis. If a geothermal project is abandoned, the associated costs that have been capitalized are charged to expense in the year of abandonment. Expenditures for repairs and maintenance are charged to expense as incurred. Interest costs incurred during the construction period of defined major projects from debt that is specifically incurred for those projects are capitalized. Funds received from grants associated with capital projects reduce the cost of the asset directly associated with the individual grants. The offset of the cost of the asset associated with grant proceeds is recorded in the period when the requirements of the grant are substantially complete and the amount can be reasonably estimated.

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Direct labor costs, incurred for specific major projects expected to have long-term benefits will be capitalized. Direct labor costs subject to capitalization include employee salaries, as well as, related payroll taxes and benefits. With respect to the allocation of salaries to projects, salaries are allocated based on the percentage of hours that our key managers, engineers and scientists work on each project and are invoiced to the project each month. These individuals track their time worked at each project. Major projects are, generally, defined as projects expected to exceed $100,000. Direct labor includes all of the time incurred by employees directly involved with construction and development activities. General and/or indirect management time and time spent evaluating the feasibility of potential projects are expensed when incurred. Employee training time is expensed when incurred.

Depreciation is calculated on a straight-line basis over the estimated useful life of the asset. Where appropriate, terms of property rights and revenue contracts can influence the determination of estimated useful lives. Estimated useful lives by major asset categories are summarized as follows:

	Estimated Useful
Asset Categories	Lives in Years
Furniture, vehicle and other equipment	3 to 5
Power plant, buildings and improvements	3 to 30
Wells	30
Well pumps and components	5 to 15
Pipelines	30
Transmission lines	30

Intangible Assets

All costs directly associated with the acquisition of geothermal and surface water rights are capitalized as intangible assets. These costs are amortized over their estimated utilization period. There are several factors that influence the estimated utilization periods as well as underlying fair value that include, but are not limited to, the following:

- contractual expiration terms of the right,

- contractual terms of an associated revenue contract (i.e., PPA’s),

- compliance with utilization and other requirements, and

- hierarchy of other right holders who share the same resource.

Currently, amortization expense is being calculated on a straight-line basis over an estimated utilization period of 30 years for assets placed in service. If an intangible water or geothermal right is forfeited or otherwise lost, the remaining unamortized costs are expensed in the period of forfeiture. An impaired right is reduced to its estimated fair market value in the year the impairment is realized. Costs incurred that extend the term of an intangible right are capitalized and amortized over the new estimated period of utilization.

Impairment of Long-Lived Assets

The Company evaluates its long-term assets annually for impairment and when circumstances/events occur that may impact the fair value of the assets. An impairment loss would be recognized if the carrying amount of a capitalized asset is not recoverable and exceeds its fair value. The most recent assessment was performed based upon financial conditions and assumptions as of December 31, 2012, and there have not been any significant changes in financial conditions and assumptions subsequent to that assessment date. Management believes that there have not been any circumstances that have warranted the recognition of losses due to the impairment of long-lived assets.

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Stock Options Granted to Employees and Non-employees

The Company follows financial accounting standards that require the measurement of the value of employee services received in exchange for an award of an equity instrument based on the grant-date fair value of the award. For employees, directors and officers, the fair value of the awards are expensed over the vesting period. The current vesting period for all options is eighteen months.

Non-employee stock-based compensation is granted at the Board of Director’s discretion to reward select consultants for exceptional performance. Prior to issuance of the awards, the Company was not under any obligation to issue the stock options. Subsequent to the award, the recipient was not obligated to perform any services. Therefore, the fair value of these options was expensed on the grant date, which was also the measurement date.

Under the fair value recognition provisions, share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment. In addition, judgment is also required in estimating the amount of share-based awards that are expected to be forfeited. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.

Stock Based Compensation Granted to Employees

The Company recognizes the value of common stock granted to employees and directors over the periods in which the services are received. The value of those services is based upon the estimated fair value of the common stock to be awarded. Estimated fair value is adjusted each reporting period. At the end of each vesting period, estimated fair value is adjusted to fair market value. The adjustment is reflected in the reporting period in which the vesting occurs.

Earnings (Losses) Per Share

The Company follows financial accounting standards, which provides for calculation of "basic" and "diluted" earnings (losses) per share. Basic earnings per share includes no dilution and is computed by dividing net income available to common shareholders by the weighted average common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity similar to fully diluted earnings per share. Both basic and diluted were presented for the calculation of the income per share for the periods that reported income. Stock equivalents were not included in the calculation for the periods that reported losses since their inclusion would be considered anti-dilutive. Total common stock equivalents on a fully diluted basis at June 30, 2013 and 2012 were 122,340,811 and 101,400,536; respectively.

Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, trade account and other receivables, refundable tax credits, and accounts payable and accrued liabilities. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. The fair values of these financial instruments approximate their carrying values, unless otherwise noted.

-14-

The Company’s functional currency is the U.S. dollar. Monetary items are converted into U.S. dollars at the rate prevailing at the balance sheet date. Resulting gains and losses are generally included in determining net income for the period in which exchange rates change.

Revenue

Revenue Recognition

Energy Sales
The energy sales revenue is recognized when the electrical power generated by the Company’s power plants is delivered to the customer who is reasonably assured to be able to pay under the terms defined by the Power Purchase Agreements (“PPAs”).

Renewable Energy Credits (“RECs”)
Currently, the Company operates three plants that produce renewable energy that creates a right to a REC. The Company earns one REC for each megawatt hour produced from the geothermal power plant. The Company considers the RECs to be an inventory item held for sale, and outputs that are an economic benefit obtained directly through the operation of the plants. The Company does not currently hold any RECs for our own use. Revenues from RECs sales are recognized when the Company has met the terms and conditions of certain energy sales agreements with a financially capable buyer. At Raft River Energy I LLC, each REC is certified by the Western Electric Coordinating Council and sold under a REC Purchase and Sales Agreement to Holy Cross Energy. At San Emidio and Neal Hot Springs, the RECs are owned by our customer and are bundled with energy sales. At all three plants, title for the RECs pass during the same month as energy sales. As a result, costs associated with the sale of RECs are not segregated on the statement of operations.

Revenue Source
All of the Company’s operating revenues (energy sales and energy credit sales) originate from energy production from its interests in geothermal power plants located in the states of Idaho, Oregon and Nevada.

Reclassification
Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported losses, total assets, or stockholders’ equity as previously reported.

-15-

Recent Accounting Pronouncements

Management has considered all recent accounting pronouncements, and no pronouncements were determined to have a significant impact on the financial statements that have not been disclosed in prior reporting periods.

NOTE 3 – RESTRICTED CASH

The Company maintains cash balances that are restricted under Letter of Credit covenants for State and Federal well bonding requirements. These bonds renew on an annual basis. Restricted cash balances and explanations of the nature of the restrictions are summarized as follows:

		June 30,		December 31,
Agency		2013		2012
Idaho Department of Water Resources, Geothermal Well Bond	$	260,000	$	260,000
Bureau of Land Management, Geothermal Lease Bond – Gerlach Geothermal		10,000		10,000
State of Nevada Division of Minerals, Statewide Drilling Bond		50,000		50,000
Bureau of Land Management, Geothermal Lease Bonds		150,000		150,000
Oregon Department of Geology and Mineral Industries, Mineral Land and      Reclamation Program		400,000		400,000
U.S. Department of Energy – Construction Loan Bond		2,125,000		2,125,000
	$	2,995,000	$	2,995,000

The well bonding requirements ensure that the Company has sufficient financial resources to construct, operate and maintain geothermal wells while safeguarding subsurface, surface and atmospheric resources from unreasonable degradation, and to protect ground water aquifers and surface water sources from contamination. Other future costs of environmental remediation cannot be reasonably estimated and have not been recorded. The construction bond is required by the Loan Guarantee Agreement with the Department of Energy at Neal Hot Springs and will convert to a plant reserve fund upon completion of the plant facility.

NOTE 4 – GRANT PROCEEDS RECEIVABLE

USG Nevada LLC
The Company submitted an application on July 17, 2012, to the United States Department of Treasury for an ITC cash grant for approximately $11.70 million. During the review process, the Company reduced the requested amount to $10.65 million to expedite the collection of the undisputed amount. The reduced (undisputed) amount of the requested funds was collected in November 2012. In March 2013, the remaining cash grant balance of $1.05 million, for items included in the original submission, was received from the Treasury. The total proceeds from this grant offset the construction costs of the new power plant located in San Emidio, Nevada that was placed into service for financial reporting purposes on September 1, 2012. As of June 30, 2013, all proceeds due under this cash grant had been received.

USG Oregon LLC
The Company submitted an application for an ITC cash grant (“ITC grant”) to the United States Department of Treasury in the first quarter of 2013 and submitted an application to Oregon Department of Energy for a Business Energy Tax Credit (“BETC”) for qualified construction purchases related to the project located at Neal Hot Springs, Oregon. Proceeds collected on the ITC grant request totaled $32,749,541, which was reduced by the 8.7% federal sequestration. The Company expects to receive $7,364,200 from the BETC program and has based this estimate upon approved expenditures and rates as stated on the Final Conditional Certificate received on December 31, 2012 from the Oregon Department of Energy, and was completed after the plant inspection that was conducted in February 2013.

-16-

To complete the sale of the BETC credit, the Company must obtain a pass through partner. The Company has retained a marketing consultant to secure the pass through partner, with a potential broker fee of 5% of tax credits sold. These receivable amounts reflect the Company’s estimate of the total eligible grant (excluding possible fees) that are expected prior to year end. The estimated net proceeds from the grants have been used to offset the construction costs of the power plant. The Neal Hot Springs, Oregon plant became commercially operational on November 16, 2012. All of the proceeds are expected to be collected in the calendar year ended December 31, 2013.

NOTE 5 – INVESTMENT IN EQUITY SECURITIES

Investments in equity securities (150,000 shares of Alterra Power Corp, a publicly traded renewable energy company) activities consisted of the following:

		Amount
Available-for-sale equity securities:
Cost basis	$	88,515
Net unrealized losses		(22,355	)
Foreign exchange losses		(609	)
Fair value at December 31, 2012		65,551
Net unrealized losses		(17,553	)
Foreign exchange losses		(2,994	)
Fair value at June 30, 2013	$	45,004

NOTE 6 - PROPERTY, PLANT AND EQUIPMENT

During the three months ended June 30, 2013, additional costs of approximately $3.8 million were incurred at the Neal Hot Springs, Oregon project. These costs were necessary to reach substantial and final completion of the three power units and the facility.

During the three months ended March 31, 2013, the remaining balance of the ITC cash grant related to previously disputed expenditures of approximately $1.05 million was collected. On February 15, 2013, the Company signed a settlement agreement with SAIC (the general contractor and construction loan holder) that reduced the construction liability including construction cost and accrued interest by approximately $2.14 million for the San Emidio, Nevada project. These items reduced the carrying cost of the new San Emidio plant in the current reporting period.

-17-

Property, plant and equipment, at cost, are summarized as follows:

		June 30,			December 31,
		2013			2012
Land	$	1,603,509		$	1,603,509
Power production plant		162,214,485			159,795,806
Grant proceeds for power plants		(52,965,236	)		(54,684,452	)
Wells		66,650,807			66,619,604
Grant proceeds for wells		(2,487,773	)		(2,487,773	)
Furniture and equipment		1,444,370			1,356,143
		176,460,162			172,202,837
Less: accumulated depreciation		(17,737,774	)		(14,491,277	)
		158,722,388			157,711,260
Construction in progress		3,127,881			2,877,994
	$	161,850,269		$	160,589,254

The Company capitalized interest costs as a component of the Neal Hot Springs and San Emidio projects as follows:

		For the Six Months Ended June 30,
		2013		2012
Total interest expense incurred	$	1,604,185	$	1,700,399
Capitalized interest		-		1,697,754

Depreciation expense was charged to plant operations and general expenses for the following periods:

		June 30,
		2013		2012
Three months ended	$	1,620,030	$	670,251
Six months ended		3,246,497		1,337,723

Changes in Construction in Progress are summarized as follows:

				For the Nine
		For the Six Months		Months Ended
		Ended June 30,		December 31,
		2013		2012
Beginning balances	$	2,877,994	$	145,987,128
Development/construction		249,887		64,564,914
Grant reimbursements and rebates		-		(55,244,491	)
Transfers into production		-		(152,429,557	)
Ending balances	$	3,127,881	$	2,877,994

-18-

Construction in Progress, at cost, consisted of the following projects/assets by location are as follows:

		June 30,		December 31,
		2013		2012
Raft River, Idaho:
Unit II, power plant, substation and transmission lines	$	750,493	$	750,493
Unit II, well construction		2,109,840		2,100,862
		2,860,333		2,851,355
Neal Hot Springs, Oregon:
Wells		267,548		26,639
	$	3,127,881	$	2,877,994

NOTE 7 – INTANGIBLE ASSETS

Intangible assets, at cost, are recapped by project location as follows:

		June 30,			December 31,
		2013			2012
In operation:
Neal Hot Springs, Oregon:
Geothermal water and mineral rights	$	625,337		$	-
San Emidio, Nevada:
Geothermal water and mineral rights		4,825,220			4,825,220
Less: accumulated amortization		(889,828	)		(765,147	)
		4,560,729			4,060,073
Inactive:
Raft River, Idaho:
Surface water rights		146,342			146,342
Geothermal water and mineral rights		1,251,540			1,251,540
Granite Creek, Nevada:
Surface water rights		451,299			451,299
Neal Hot Springs, Oregon:
Geothermal water and mineral rights		-			625,337
Guatemala City, Guatemala:
Geothermal water and mineral rights		625,000			625,000
Gerlach, Nevada:
Geothermal water and mineral rights		997,000			997,000
San Emidio, Nevada:
Surface water rights		4,323,520			4,323,520
Geothermal water and mineral rights		3,440,580			3,440,580
Less: prior accumulated amortization		(430,072	)		(430,073	)
		10,805,209			11,430,545
	$	15,365,938		$	15,490,618

-19-

Amortization expense was charged to plant operations for the following periods:

		June 30,
		2013		2012
Three months ended	$	62,361	$	40,206
Six months ended		124,681		89,978

Estimated aggregate amortization expense for the next five years is as follows:

		Projected
		Amounts
Years ending December 31,
2013	$	124,722
2014		249,444
2015		249,444
2016		249,444
2017		249,444
	$	1,122,498

NOTE 8 – PROVISION FOR INCOME TAXES

Income taxes are provided based upon the liability method. Under this approach, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end. A valuation allowance is recorded against deferred tax assets if management does not believe the Company has met the “more likely than not” standard imposed by accounting standards to allow recognition of such an asset.

At June 30, 2013, the Company had net deferred tax assets calculated at an expected rate, noted in the table below, of approximately $9,149,500 (December 31, 2012 - $11,109,000). As management of the Company cannot determine that it is more likely than not that the Company will realize the benefit of the net deferred tax asset, a valuation allowance equal to the net deferred tax asset was recorded at June 30, 2013 and December 31, 2012. For the current period ended June 30, 2013, the Company has recognized the net deferred income tax asset to extent of impact from current book earnings. During the six months ended June 30, 2013, the Company engaged a tax matters consultant to evaluate the value and timing of adjusting the deferred tax valuation allowance. The Company anticipates that any tax obligations will be fully offset by the utilization of prior reserved deferred tax benefits for the year ended December 31, 2013.

-20-

The significant components of the net deferred tax asset calculated with the estimated effective income tax rate at June 30, 2013 and December 31, 2012 were as follows:

		June 30,			December 31,
		2013			2012
Deferred tax assets*:
Net operating loss carry forward	$	13,202,000		$	12,608,000
Stock based compensation		1,709,000			1,532,000
Deferred tax liabilities*:
Depreciation and amortization		(5,659,000	)		(3,031,000	)
Net deferred income tax asset		9,252,000			11,109,000
Estimated deferred tax asset recognized and utilized in current period		(102,500	)		-
Deferred tax asset valuation allowance		(9,149,500	)		(11,109,000	)
Net deferred tax asset	$	-		$	-

* - significant components of deferred assets and liabilities are considered to be long-term.

The Company’s estimated effective income tax rate is summarized as follows:

	For the Years Ended December 31,
	2013	2012
U.S. Federal statutory rate	34.0%	34.0%
Average State income tax, net of federal tax effect	4.2	4.2
Production tax credits	-	(2.0	)
Net effective tax rate	38.2%	36.2%

At June 30, 2013, the Company had net income tax operating loss carry forwards of approximately $34,559,000 ($34,829,000 in December 31, 2012), which expire in the years 2023 through 2033. The change in the allowance account from December 31, 2012 to June 30, 2013 was a decrease of $1,959,500 for the anticipated deferred tax allocations based on 2013 income.

The change in the allowance account is summarized as follows:

		For the Six			For the Nine
		Months Ended			Months Ended
		June 30,			December 31,
		2013			2012
Change in net operating loss	$	588,920		$	3,976,000
Change in estimated effective tax rate		129,000			-
Net change in difference between book and tax stock compensation costs		181,860			230,000
Estimated deferred tax asset recognized and utilized in current period		(102,500	)		-
Change in period book to income tax depreciation		(2,756,780	)		(2,499,000	)
	$	(1,959,500	)	$	1,707,000

-21-

At December 31, 2013, Raft River Energy I LLC has a book-to-tax difference of $35.7 million due to the acceleration of intangible drilling costs and depreciation. By contract, 99% percent of this book-to-tax difference has been allocated to the non-controlling interest and would not be available to the consolidated group to offset future tax liabilities.

Although Management believes that its estimates are reasonable, no assurance can be given that the final tax outcome of these matters will not be different than that which is reflected in our tax provisions. Ultimately, the actual tax benefits to be realized will be based upon future taxable earnings levels, which are very difficult to predict.

Accounting for Income Tax Uncertainties and Related Matters

The Company may be assessed penalties and interest related to the underpayment of income taxes. Such assessments would be treated as a provision of income tax expense on the financial statements. For the nine months ended December 31, 2012 and the fiscal years ended March 31, 2012 and 2011, no income tax expense has been realized as a result of operations and no income tax penalties and interest have been accrued related to uncertain tax positions. The Company files income tax returns in the U.S. federal jurisdiction and in the States of Idaho and Oregon. These filings are subject to a three year statute of limitations. The Company’s evaluation of income tax positions included the nine months ended December 31, 2012 and the fiscal years ended March 31, 2012 and 2011 could be subject to agency examinations as of December 31, 2012. No filings are currently under examination. No adjustments have been made to reduce the estimated income tax benefit at fiscal year end. Any valuations relating to these income tax provisions will comply with U.S. generally accepted accounting principles.

NOTE 9 - CAPITAL LEASE OBLIGATIONS

Effective May 10, 2012, the Company entered into two capital lease obligations for the purchase of a boom lift and a telehandler from Caterpillar Financial Services Corporation. The boom lift contract is payable in 36 monthly payments of $1,094 that began on June 11, 2012 and has an effective annual interest rate of 5.985% . The telehandler contract is payable in 36 monthly payments of $3,155 that began on June 11, 2012 and has an effective annual interest rate of 6.14% . Both contracts with Caterpillar Financial Services Corporation have bargain purchase options at the end of the contracts scheduled for May 2015.

The scheduled future lease payments for the three contracts are presented as follows:

		Capital Leases
Years ending December 31,		Amounts
2013	$	25,499
2014		50,997
2015		21,249
Total future payments		97,745
Less: imputed interest portion		(5,731	)
	$	92,014
Allocation of capital lease obligations:
Current portion	$	46,672
Long-term portion		45,342
	$	92,014

-22-

At June 30, 2013, the net book value of the equipment under capital lease amounted to $104,575 ($155,000, less $50,425 accumulated amortization).

NOTE 10 – CONVERTIBLE NOTE PAYABLE

On August 5, 2011, the Oregon USG Holdings, LLC (“Oregon Holdings”), a subsidiary of the Company, signed a convertible note agreement with our equity partner (Enbridge Inc.). The principal of the loan totaled $2,125,000, and will accrue interest at a rate of 4.75% per annum. The loan balance plus accrued interest will convert to an equity interest in Oregon Holdings upon the earliest of a conversion event or April 1, 2014, if unpaid. Conversion events include the failure to obtain the Section 1603 ITC cash grant funds by the Project. The converted balance would increase Enbridge Inc.’s ownership at a ratio of 1.5% for each $1 million contributed. In April 2013, the grant funds were collected and the note balance and all accrued interest is considered to be due; therefore, the loan balance of $2,125,000 is considered short-term at June 30, 2013. See Note 18.

NOTE 11 – CONSTRUCTION NOTES PAYABLE

U.S. Department of Energy
On August 31, 2011, USG Oregon LLC (“USG Oregon”), a subsidiary of the Company, completed the first funding drawdown associated with the U.S. Department of Energy (“DOE”) $96.8 million loan guarantee (the “Loan Guarantee”) to construct its planned power plant at Neal Hot Springs in Eastern Oregon (the “Project”). The U.S. Treasury’s Federal Financing Bank, as lender for the Project, issues payments direct to vendors. Future advances covered by the Loan Guarantee will carry interest at a rate of 0.375% per annum over the U.S. Treasury bill rate of comparable maturities as of the date of each advance. All advances will be made under the Future Advance Promissory Note (“the Note”) dated February 23, 2011. The maximum principal amount of the Note is approximately $93.8 million. No advances may be made under the Note after July 31, 2013. Upon the occurrence and continuation of an event of default under the transaction documents, all amounts payable under the Note may be accelerated. In connection with the Loan Guarantee, the DOE has been granted a security interest in all of the equity interests of USG Oregon, as well as in the assets of USG Oregon, including a mortgage on real property interests relating to the Project site. A contractual principal payment of $11,870,137 is scheduled for August 2013, as a part of the ITC Cash Grant distribution. The estimated principal portion of the loan balance based upon scheduled monthly payments through June 30, 2014 will amount to $866,342.

-23-

Loan advances and effective annual interest rates are details as follows:

			Annual Interest
Description		Amount	Rate %
Advances by date:
August 31, 2011	$	2,328,422	2.997
September 28, 2011		10,043,467	2.755
October 27, 2011		3,600,026	2.918
December 2, 2011		4,377,079	2.795
December 21, 2011		2,313,322	2.608
January 25, 2012		8,968,019	2.772
April 26, 2012		13,029,325	2.695
May 30, 2012		19,497,204	2.408
August 27, 2012		7,709,454	2.360
December 28, 2012		2,567,121	2.396
June 10, 2013		2,355,316	2.830
		76,788,755
Interest paid by loan		1,587,522
Loan balance at June 30, 2013	$	78,376,277

Based upon the terms of applicable agreements and expected conditions that may impact some of those terms, the estimated annual principal payments were calculated as follows:

For the Year Ended		Principal
December 31,		Payments
2013	$	12,736,479
2014		3,402,000
2015		3,421,000
2016		3,421,000
2017		3,421,000
Thereafter		51,974,798
	$	78,376,277

SAIC Constructors LLC
Effective August 27, 2010, the Company’s wholly owned subsidiary (USG Nevada LLC) signed a construction loan agreement with SAIC Constructors LLC (“SAIC”). The new 9.0 net megawatt power plant was considered complete and operational for financial reporting purposes on September 1, 2012. Interest accrued on the outstanding balance at 9.5% per annum. On February 15, 2013, USG Nevada LLC signed a second settlement agreement with SAIC. The settlement agreement reduced the construction cost and accrued interest liability incurred under the construction loan agreement from approximately $31.1 million to $29,525,000. The agreement defined the remaining liability as consisting of three components. The first component was a $1.0 million non-interest bearing note that was paid in full by June 30, 2013. The second component was a $2,000,000 obligation that is to be repaid in quarterly installments of $119,382, including interest at 7.0% per annum to begin July 31, 2013. The third component was a balloon payment of $26,525,000 due upon obtaining long-term permanent financing.

Effective May 1, 2013, the Company’s subsidiary entered into a third credit addendum with SAIC. This addendum superseded the prior credit addendum and replaced the third component of obligation with a new aggregate indebtedness that totaled $26,350,000. The new obligation consisted of two components. The first component of $1,350,000 was paid in full as of the effective date of third credit addendum.

-24-

The remaining portion of $25,000,000 is a note incurs interest at 10% per annum, which will be repaid beginning on the effective date of the third addendum in 7 monthly installments of $300,000 through November 1, 2013. With the remaining principal of the obligation due in full on November 15, 2013. At June 30, 2013, the loan balance totaled $26,722,702 ($26,012,702 long-term, plus $710,000 short term). Since the long-term financing agreement for the major component of the obligation has not been finalized, a 5 year maturities schedule was not presented. The long-term replacement loan is expected be repaid over up to a 25 year term, plus interest incurred at approximate annual interest rate between 6.5% and 7.5% .

NOTE 12 - CAPITAL STOCK

The Company is authorized to issue 250,000,000 shares of common stock. All shares have equal voting rights, are non-assessable and have one vote per share. Voting rights are not cumulative and, therefore, the holders of more than 50% of the common stock could, if they choose to do so, elect all of the directors of the Company.

During the six months ended June 30, 2013, the Company did not issue any additional common stock.

On December 21, 2012, the Company issued 11,810,816 common stock shares at $0.37 under a registered direct offering agreement with Kuhns Brothers Securities Corporation and collected $4,087,802, net of broker fees and other costs of $282,200.

During the quarter ended September 30, 2012, the Company issued 1,250,000 common stock shares at prices between $0.312 and $0.355 under an At Market Issuance Sales agreement with Lincoln Park Capital.

During the quarter ended June 30, 2012, the Company issued 3,375,503 common stock shares at prices between $0.341 and $0.536 under an At Market Issuance Sales agreement with Lincoln Park Capital.

During the year ended March 31, 2012, the Company issued 76,500 common shares to employees of the Company upon exercise of stock options at a strike price of $1.00 CDN.

NOTE 13 - STOCK BASED COMPENSATION

The Company has a stock incentive plan (the “Stock Incentive Plan”) for the purpose of attracting and motivating directors, officers, employees and consultants of the Corporation and advancing the interests of the Corporation. The Stock Incentive Plan is a 15% rolling plan approved by shareholders in December 2009, whereby the Company can grant options to the extent of 15% of the current outstanding common shares. Under the plan, all forfeited and exercised options can be replaced with new offerings. As of June 30, 2013, the Company can issue stock option grants totaling up to 15,227,515 shares. Options are typically granted for a term of up to five years from the date of grant. Stock options granted generally vest over a period of eighteen months, with 25% vesting on the date of grant and 25% vesting every six months thereafter. The Company recognizes compensation expense using the straight-line method of amortization. Historically, the Company has issued new shares to satisfy exercises of stock options and the Company expects to issue new shares to satisfy any future exercises of stock options. At June 30, 2013, the Company had 10,018,250 options granted and outstanding.

On August 24, 2012, the Company granted 2,917,000 stock options to employees exercisable at a price of $0.31 until August 24, 2017.

The following table reflects the summary of stock options outstanding at March 31, 2012 and changes during for the nine months ended December 31, 2012, and the six months ended June 30, 2013:

-25-

				Weighted
				Average		Weighted
	Number of			Exercise		Average		Aggregate
	shares under			Price Per		Fair		Intrinsic
	options			Share		Value		Value
Balance outstanding, March 31, 2012	7,975,125		$	1.38	$	0.70	$	5,613,510
Forfeited/Expired	(652,500	)		2.41		0.71		(460,975	)
Exercised	-			-		-		-
Granted	2,917,000			0.31		0.16		453,774
Balance outstanding, December 31, 2012	10,239,625			0.91		0.55		5,606,309
Forfeited/Expired	(1,471,375	)		2.21		1.22		(1,790,922	)
Exercised	-			-		-		-
Granted	1,250,000			0.35		0.27		338,000
Balance outstanding, June 30, 2013	10,018,250		$	0.65	$	0.41	$	4,153,387

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model using the assumptions noted in the following table. Expected volatilities are based on historical volatility of the Company’s stock. The Company uses historical data to estimate option volatility within the Black-Scholes model. The expected term of options granted represents the period of time that options granted are expected to be outstanding, based upon past experience and future estimates and includes data from the Plan. The risk-free rate for periods within the expected term of the option is based upon the U.S. Treasury yield curve in effect at the time of grant. The Company currently does not foresee the payment of dividends in the near term.

The fair value of the stock options granted was estimated using the Black-Scholes option-pricing model and is amortized over the vesting period of the underlying options. The assumptions used to calculate the fair value are as follows:

		Nine Months
	Six Months Ended	Ended December
	June 30, 2013	31, 2012
Dividend yield	0	0
Expected volatility	65-81%	65-70%
Risk free interest rate	0.19-0.81%	0.19-0.33%
Expected life (years)	7.00	3.17

Changes in the subjective input assumptions can materially affect the fair value estimate and, therefore, the existing models do not necessarily provide a reliable measure of the fair value of the Company’s stock options.

-26-

The following table summarizes information about the stock options outstanding at June 30, 2013:

OPTIONS OUTSTANDING
		REMAINING	NUMBER OF
EXERCISE	NUMBER OF	CONTRACTUAL	OPTIONS
PRICE	OPTIONS	LIFE (YEARS)	EXERCISABLE		INTRINSIC VALUE
$               1.78	95,000	0.24	95,000	$	81,172
0.92	1,698,250	0.90	1,698,250		1,200,208
1.58	68,000	1.23	68,000		26,435
0.86	1,300,000	2.20	1,300,000		752,207
0.83	2,590,000	2.93	2,590,000		1,269,100
0.60	100,000	3.20	100,000		36,072
0.31	2,917,000	4.15	1,458,500		226,888
0.35	1,250,000	9.80	312,500		84,500
$               0.65	10,018,250	3.67	7,622,250	$	3,676,582

The following table summarizes information about the stock options outstanding at December 31, 2012:

OPTIONS OUTSTANDING
		REMAINING	NUMBER OF
EXERCISE	NUMBER OF	CONTRACTUAL	OPTIONS
PRICE	OPTIONS	LIFE (YEARS)	EXERCISABLE		INTRINSIC VALUE
$               2.22	1,465,000	0.63	1,465,000	$	1,786,417
1.78	95,000	0.74	95,000		81,172
0.92	1,704,625	1.40	1,704,625		1,204,713
1.58	68,000	1.73	68,000		26,435
0.86	1,300,000	2.70	1,300,000		752,207
0.83	2,590,000	3.43	2,590,000		1,269,100
0.60	100,000	3.70	75,000		27,054
0.31	2,917,000	4.65	729,250		113,444
$               0.91	10,239,625	2.80	8,026,875	$	5,260,542

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A summary of the status of the Company’s nonvested stock options outstanding at March 31, 2012 and changes during the nine months ended December 31, 2012, and the six months ended June 30, 2013 are presented as follows:

				Weighted		Weighted
				Average Grant		Average
	Number of			Date Fair Value		Grant Date
	Options			Per Share		Fair Value
Nonvested, March 31, 2012	1,345,000		$	0.82	$	0.49
Granted	2,917,000			0.31		0.16
Vested	(2,049,250	)		0.64		0.37
Forfeited/Expired	-			-		-
Nonvested, December 31, 2012	2,212,750			0.31		0.16
Granted	1,250,000			0.35		0.27
Vested	(1,066,750	)		0.33		0.20
Forfeited/Expired	-			-		-
Nonvested, June 30, 2013	2,396,000		$	0.33	$	0.20

As of June 30, 2013, there was $253,500 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 1.5 years. The total fair value of options vested at June 30, 2013 and December 31, 2012 was $242,461 and $636,001; respectively.

Stock Compensation Plan (Restricted Shares)

On September 10, 2010, the Company granted officers, directors and select employees 705,000 common shares that will be distributed in three six-month vesting periods. The recipients meet the vesting requirements by maintaining employment and good standing with the Company through the vesting periods. After vesting, there are no restrictions on the shares. On March 10, 2011, the 705,000 common shares were issued to the recipients and held by the Company. All of these shares were considered to be issued and outstanding. On March 11, 2011, 235,000 common shares vested valued at $0.99 per share, and the shares were released to the qualified recipients. On September 11, 2011, 235,000 common shares vested valued at $0.60 per share and the shares were released to the qualified recipients. The final 235,000 shares valued at $0.58 vested and were released on March 11, 2012.

On April 19, 2013, the Company granted an officer and director 300,000 common shares valued at $0.35 per share, will be distributed at the end of a one-year vesting period. The recipient meets the vesting requirements by maintaining employment and good standing with the Company through the vesting period. After vesting, there are no restrictions on the shares. These shares will be issued in July 2013 to the recipient and held by the Company until vested. The total fair value of options at the grant date was $105,000 and the recognized cost through June 30, 2013 was $21,292.

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Stock Purchase Warrants

At June 30, 2013, the outstanding broker warrants and share purchase warrants consisted of the following:

			Broker
			Warrant	Share		Warrant
	Broker		Exercise	Purchase		Exercise
Expiration Date	Warrants		Price	Warrants		Price
September 16, 2015	246,285	$	1.250	4,104,757	$	1.250
May 31, 2017	255,721		0.437	-		-
December 21, 2017	-		-	5,905,408		0.50

On March 4, 2012, 2,500,000 stock purchase warrants and 56,000 broker warrants at an exercise price of $1.075 expired without exercise.

NOTE 14 – FAIR VALUE MEASUREMENT

Current U.S. generally accepted accounting principles establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).

The three levels of the fair value hierarchy are as follows:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities. Active markets are those in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

Level 3 – Pricing inputs include significant inputs that are generally unobservable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. Level 3 instruments include those that may be more structured or otherwise tailored to the Company’s needs.

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

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The following table discloses by level within the fair value hierarchy the Company’s assets and liabilities measured and reported on its Consolidated Balance Sheet as of June 30, 2013 at fair value on a recurring basis:

		Total		Level 1		Level 2		Level 3
Assets:
Money market accounts *	$	49,745,451	$	49,745,451	$	-	$	-
Investment in equity securities		45,004		-		45,004		-
	$	49,790,455	$	49,745,451	$	45,004	$	-

* - Money market accounts include both restricted and unrestricted funds.

As allowed by current financial reporting standards, the Company has elected not to implement fair value recognition and reporting for all non-financial assets and non-financial liabilities, except for those that are recognized or disclosed at fair value in the financial statements on a recurring basis, that is, at least annually.

NOTE 15 - RELATED PARTY TRANSACTIONS

At June 30, 2013 and December 31, 2012 the amounts of $9,461 and $3,391; respectively, were payable to the officers of the Company for routine expense reimbursement. These amounts are unsecured and due on demand.

The Company paid directors’ fees for the six months ended June 30, 2013 and 2012 amounted to $54,000 and $60,000; respectively.

NOTE 16 - COMMITMENTS AND CONTINGENCIES

Operating Lease Agreements
The Company has entered into several lease agreements with terms expiring up to December 1, 2034 for geothermal properties in Washoe County Nevada; Republic of Guatemala; Neal Hot Springs, Oregon and adjoining the Raft River properties in Raft River, Idaho. The Company incurred total lease expenses for the six months ended June 30, 2013 and 2012, of $49,285 and $66,664; respectively.

BLM Lease Agreements

The Company believes that it is in compliance with all of the following lease terms.

Idaho
On August 1, 2007, the Company signed a geothermal resources lease agreement with the United States Department of the Interior Bureau of Land Management (“BLM”). The contract requires an annual payment of $3,502 including processing fees. The primary term of the agreement is 10 years. After the primary term, the Company has the right to extend the contract. BLM has the right to terminate the contract upon written notice if the Company does not comply with the terms of the agreement.

San Emidio
The lease contracts are for approximately 21,905 acres of land and geothermal rights located in the San Emidio Desert, Nevada. The lease contracts have primary terms of 10 years. Per federal regulations applicable for the contracts, the lessee has the option to extend the primary lease term another 40 years if the BLM does not need the land for any other purpose and the lessee is maintaining production at commercial quantities. The leases require the lessee to conduct operations in a manner that minimizes adverse impacts to the environment.

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Gerlach
The Gerlach Geothermal LLC assets are comprised of two BLM geothermal leases and one private lease totaling 3,615 acres. Both BLM leases have a royalty rate which is based upon 10% of the value of the resource at the wellhead. The amounts are calculated according to a formula established by Minerals Management Service (“MMS”). One of the two BLM leases has a second royalty commitment to a third party of 4% of gross revenue for power generation and 5% for direct use based on BTUs consumed at a set comparable price of $7.00 per million BTU of natural gas. The private lease has a 10 year primary term and would receive a royalty of 3% gross revenue for the first 10 years and 4% thereafter.

Granite Creek
The Company has three geothermal lease contracts with the BLM for the Granite Creek properties. The lease contracts are for approximately 2,443.7 acres of land and geothermal water rights located in North Western Nevada. The lease contracts have primary terms of 10 years. Per federal regulations applicable for the contracts, the lessee has the option to extend the primary lease term another 40 years if the BLM does not need the land for any other purpose and the lessee is maintaining production at commercial quantities. The leases state annual lease payments of $2,444, not including processing fees, and expire October 2017.

Raft River Energy I LLC
The Company has entered into several lease contracts for approximately 1,298 acres of land and geothermal water rights located in the Raft River area located in Southern Idaho. The contracts expire from March 2013 to December 2033. The contracted lease payments are scheduled for $31,287 for the year ended December 31, 2013.

Office Lease
The Company exercised its one-year renewal option in January 2013. The lease payments are due in monthly installments of $6,535. The Company incurred total office lease expenses under the current contract and the prior contract for six months ended June 30, 2013 and 2012, totaled $39,211 and $38,069; respectively.

The following is the total contracted lease operating obligations (operating leases, BLM lease agreements and office lease) for the next five fiscal years:

Year Ending
December 31,		Amount
2013	$	100,154
2014		98,375
2015		98,462
2016		96,570
2017		60,397
Thereafter		551,424

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Power Purchase Agreements

Raft River Energy I LLC
The Company signed a power purchase agreement with Idaho Power Company for sale of power generated from its joint venture Raft River Energy I LLC. The Company also signed a transmission agreement with Bonneville Power Administration for transmission of electricity from this plant to Idaho Power, and from the Phase Two plants to other purchasers. These agreements will govern the operational revenues for the initial phases of the Company’s operating activities.

USG Nevada LLC
As a part of the purchase of the assets from Empire Geothermal Power, LLC and Michael B. Stewart acquisition (“Empire Acquisition”), a power purchase agreement with Sierra Pacific Power Company was assigned to the Company. The contract had a stated expected output of 3,250 kilowatts maximum per hour and extended through 2017. During the year ended March 31, 2012, the power purchase agreement was replaced by a new 25 year contract signed in December of 2011 that sets the new set rate at $89.70 per megawatt hour with a 1% annual escalation rate. The new contract allows for a maximum of 71,300 megawatt hours annually. Upon declaration of commercial operation under the PPA, an Operating Security Deposit of $1,426,700 is required to be maintained at NV Energy for the full term of the PPA. During the year ended December 31, 2012, the Company paid a security bond of $1,426,700 under the terms of this agreement.

USG Oregon LLC
In December of 2009, the Company’s subsidiary (USG Oregon LLC), signed a power purchase agreement with Idaho Power Company for the sale of power generated by the Neal Hot Springs, Oregon project. The agreement has a term of 25 years and provides for the purchase of power up to 25 megawatts (22 megawatt planned annual average output level). Beginning 2012, the flat energy price is $96 per megawatt hour. The price escalates annually by 3.9% in the initial years and by 1.0% during the latter years of the agreement. The approximate 25-year levelized price is $117.65 per megawatt hour.

401(k) Plan
The Company offers a defined contribution plan qualified under section 401(k) of the Internal Revenue Code to all its eligible employees. All employees are eligible at the beginning of the quarter after completing 3 months of service. The plan requires the Company to match 25% of the employee’s contribution up to 6%. Subsequent to June 30, 2013, the Company will match 50% of the employee’s contribution up to 6%. Employees may contribute up to the maximum allowed by the Internal Revenue Code. The Company made matching contributions to the plan that totaled $19,456 and $19,029 for the six months ended June 30, 2013 and 2012, respectively.

Retention Liability on USG Oregon LLC Construction Contracts
The Company signed contracts with several major contractors involved in construction activities for USG Oregon LLC. Contracts for two of these major contractors allow for the Company to retain a portion of incurred costs to guarantee certain performance specifications. The retention levels generally amount to 10% of incurred costs. At June 30, 2013, the retention payable balance was $5,245,000. Currently, management does not have any performance concerns on these contracts.

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NOTE 17 – JOINT VENTURES/NON-CONTROLLING INTERESTS

Non-controlling interests included on the consolidated balance sheets of the Company are detailed as follows:

		June 30,		December 31,
		2013		2012
Gerlach Geothermal LLC interest held by Gerlach Green Energy, LLC	$	409,857	$	404,434
Oregon USG Holdings LLC interest held by Enbridge Inc.		34,105,924		33,078,744
Raft River Energy I LLC interest held by Raft River i Holdings, LLC		21,765,817		22,598,020
	$	56,281,598	$	56,081,198

Gerlach Geothermal LLC
On April 28, 2008, the Companyformed Gerlach Geothermal, LLC (“Gerlach”) with our partner,Gerlach Green Energy, LLC (“GGE”). The purpose of the joint venture is the exploration of the Gerlach geothermal system, which is located in northwestern Nevada, near the town of Gerlach. Based upon the terms of the members’ agreement, the Company owns a 60% interest and GGE owns a 40% interest in Gerlach Geothermal, LLC. The agreement gives GGE an option to maintain its 40% ownership interest as additional capital contributions are required. If GGE dilutes to below a 10% interest, their ownership position in the joint venture would be converted to a 10% net profits interest. The Company has contributed $757,190 in cash and $300,000 for a geothermal lease and mineral rights; and the GGE has contributed $704,460 of geothermal lease, mineral rights and exploration data.

The consolidated financial statements reflect 100% of the assets and liabilities of Gerlach, and report the current non-controlling interest of GGE. The full results of Gerlach’s operations are reflected in the statement of operations with the elimination of the non-controlling interest identified.

Oregon USG Holdings LLC
In September 2010, the Company’s subsidiary, Oregon USG Holdings LLC (“Oregon Holdings”), signed an Operating Agreement with Enbridge Inc. (“Enbridge”) for the right to participate in the Company’s project in the Neal Hot Springs project located in Malheur County, Oregon. Enbridge has contributed a total of $18,924,000, including the debt conversion, to Oregon Holdings in exchange for a 20% direct ownership interest. At the Company’s election, the agreement allows for additional contributions of up to $5 million that would increase Enbridge’s ownership by 1.5 percentage points for each $1 million contributed. Added to their base 20% ownership, additional payments could increase Enbridge’s ownership to a maximum of 27.5% under the existing agreement. The Company has contributed $13,492,000 to Oregon Holdings and has an 80% ownership interest. Oregon Holdings has a 100% ownership interest in USG Oregon LLC. After the initial contributions noted above, the Company and Enbridge have made additional capital contributions of $462,616 and $13,877,000; respectively. The impact of the additional contributions to the profit and loss allocation percentages could increase Enbridge’s ownership to 44%. The actual non-controlling ownership interest has not been determined, but has been estimated between 30% and 40%. For the three months ended June 30, 2013, the profit and loss allocation rate of 35% was utilized that was based upon an estimate of the expected ownership percentage after the contribution levels and other terms of the new ownership agreement are finalized. Prior to January 1, 2013, the allocation rate of 20% was used that was based upon the terms of the initial agreement.

The consolidated financial statements reflect 100% of the assets and liabilities of Oregon Holdings and USG Oregon LLC, and report the current non-controlling interest of Enbridge. The full results of Oregon Holdings and USG Oregon LLC’s operations are reflected in the statement of operations with the elimination of the non-controlling interest identified.

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Raft River Energy I LLC (“RREI”)
Raft River Energy I is a joint venture between the Company and Raft River I Holdings, LLC a subsidiary of the Goldman Sachs Group, Inc. An Operating Agreement governs the rights and responsibilities of both parties. At fiscal year end, the Company had contributed approximately $17.9 million in cash and property, and RREI has contributed approximately $34.1 million in cash. Profits and losses are allocated to the members based upon contractual terms. For income tax purposes, Raft River I Holdings, LLC receives a greater proportion of the share of losses and other income tax benefits. This includes the allocation of production tax credits, which will be distributed 99% to Raft River I Holdings, LLC and 1% to the Company during the first 10 years of production. During the initial years of operations, Raft River I Holdings, LLC will receive a larger allocation of cash distributions.

The consolidated financial statements reflect 100% of the assets and liabilities of RREI, and report the current non-controlling interest of Raft River I Holdings LLC. The full results of Raft River Energy I LLC’s operations are reflected in the statement of operations with the elimination of the non-controlling interest identified.

Effective May 17, 2011, a repair services agreement (“RSA”) was executed between the RREI and U.S. Geothermal Services, LLC for the purpose of funding repairs of two underperforming wells. The agreement defined terms of the RSA repair costs and RSA repair management fees that would be funded by the loan. The outstanding loan balance will accrue interest at 12.0% per annum. The RSA payments will be made preferentially from project cash flow at a rate of 90% of increased cash created by the repairs and cash availability on a quarterly basis. The repairs were completed in January 2012. Based upon the financial conditions applicable to the loan, RREI did not make any payments during the year ended December 31, 2012. As of December 31, 2012, the loan balance amounted to $2,136,150. During the quarter ended June 30, 2013, RREI made payments on the loan of $258,410. The balance of the loan at June 30, 2013 was $1,934,490. The loan balance and related interest effects are fully eliminated during the consolidation process.

NOTE 18 - SUBSEQUENT EVENTS

The Company has evaluated events and transactions that have occurred after the balance sheet date through August 14, 2013, which is considered to be the issuance date. The following events were identified for disclosure:

Final Completion of Neal Hot Springs Project
On August 1, 2013, the Company announced that Final Completion of the 22 megawatt Neal Hot Springs Project has been achieved. The Project also received the final advance under the DOE loan guarantee.

Distribution of Cash Grant Received for the Neal Hot Springs Project and Finalizes the DOE Loan
As previously announced on April 13, 2013, the Company’s subsidiary (USG Oregon LLC) received a cash grant payment of $32,749,541 from the U.S. Department of Treasury for Specified Energy Property under Section 1603, Division B of the American Recovery and Reinvestment Act of 2009.

The cash grant funds have been held in a controlled account established by the U.S. Department of Energy as guarantor of the low interest rate loan provided by the U.S. Treasury's Federal Financing Bank under the DOE's Title XVII loan guarantee program, which was created by the Energy Policy Act of 2005. On August 12, 2013, proceeds of the cash grant were distributed in accordance with the loan agreement, with $11,870,137 of the proceeds being used to prepay the project loan, $11,167,473 of proceeds being used to fund a series of project reserves, and balance of $9,711,930 being distributed as equity to the project owners. After the loan prepayment, the remaining final loan balance is $70.4 million. This loan has 21.5 years remaining with an aggregate fixed interest rate of 2.598% .

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Item 2 - Management’s Discussion and Analysis of Financial Condition and Results ofOperations

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. Examples of these forward-looking statements include, but are not limited to:

• our business and growth strategies;

• our future results of operations;

• anticipated trends in our business;

• the capacity and utilization of our geothermal resources;

• our ability to successfully and economically explore for and develop geothermal resources;

• our exploration and development prospects, projects and programs, including timing and cost of construction of new projects and expansion of existing projects;

• availability and costs of drilling rigs and field services;

• our liquidity and ability to finance our exploration and development activities;

• our working capital requirements and availability;

• our illustrative plant economics;

• market conditions in the geothermal energy industry; and

• the impact of environmental and other governmental regulation.

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. The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements:

• the failure to obtain sufficient capital resources to fund our operations;

• unsuccessful construction and expansion activities, including delays or cancellations;

• incorrect estimates of required capital expenditures;

• increases in the cost of drilling and completion, or other costs of production and operations;

• the enforceability of the power purchase agreements for our projects;

• impact of environmental and other governmental regulation, including delays in obtaining permits or ongoing impacts of the sequester;

• hazardous and risky operations relating to the development of geothermal energy;

• our ability to successfully identify and integrate acquisitions;

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• the failure of the geothermal resource to support the anticipated power capacity;

• our dependence on key personnel;

• the potential for claims arising from geothermal plant operations;

• general competitive conditions within the geothermal energy industry; and

• financial market conditions.

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.

The U.S. dollar is the Company’s functional currency; however some transactions have involved the Canadian dollar. All references to “dollars” or “$” are to United States dollars and all references to $ CDN are to Canadian dollars.

General Background and Discussion

The following discussion should be read in conjunction with our unaudited consolidated financial statements for the periods ended June 30, 2013 and notes thereto included in this report.

U.S. Geothermal Inc. (“the Company”) is a Delaware corporation. The Company’s common stock trades on the NYSE MKT LLC under the trade symbol “HTM” and on the Toronto Stock Exchange under the symbol “GTH”.

For the quarter ended June 30, 2013, the Company was focused on:

1)	Commissioning and operating the Neal Hot Springs power plant in Oregon;
2)	Operating the Phase I San Emidio power plant in Nevada;
3)	Operating the Raft River Unit I power plant in Idaho;
4)	Negotiating long term financing for the San Emidio Phase I power plant and for a potential future Phase II;
5)	Preparing for on-site development and drilling of well OW-12 for San Emidio Phase II;
6)	Conducting discussions with potential equity partners for the El Ceibillo project in Guatemala;
7)	Starting on-site development and drilling well EC-1 at El Ceibillo; and
8)	The evaluation of potential new geothermal projects and acquisition opportunities.

Project Overview

The following is a list of projects that are in operation, under development or under exploration. Projects in operation have producing geothermal power plants. Projects under development have 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, previous estimates of property development costs may be low.

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Projects in Operation
			Generating
			Capacity		Contract
Project	Location	Ownership	(megawatts)(1)	Power Purchaser	Expiration
Raft River (Unit I)	Idaho	JV(2)	13.0	Idaho Power	2032
San Emidio (Unit I)	Nevada	100%	9.0	Sierra Pacific	2038
Neal Hot Springs	Oregon	JV(3)	22.0	Idaho Power	2036

(1)	Based on the designed annual average net output. The actual output of the Raft River Unit I plant currently varies between 7.1 and 10.0 megawatts.
(2)	As part of the financing package for Unit I of the Raft River project, we have contributed $16.5 million in cash and approximately $1.4 million in property to Raft River Energy I LLC, the Unit I project joint venture company. Raft River I Holdings, LLC, a subsidiary of The Goldman Sachs Group, contributed $34 million to finance the construction of the project.
(3)	In September 2010, the Company’s wholly owned subsidiary (Oregon USG Holdings LLC) entered into agreements that formulated a strategic partnership with Enbridge (U.S.) Inc. (“Enbridge”). As of September 30, 2012, Enbridge has contributed approximately $32.8 million to the Neal Hot Springs geothermal project. The Company and Enbridge have not yet determined Enbridge’s current equity interest in the project, but current estimates show that Enbridge could own between 30% and 40% of the project depending on cash grant sharing and the return of unused contingency funds.

Projects Under Development
					Estimated
			Target	Projected	Capital
			Development	Commercial	Required
Project	Location	Ownership	(Megawatts)	Operation Date	($million)	Power Purchaser
El Ceibillo Phase I	Guatemala	100%	25	4thQuarter 2015	$135	MOU
El Ceibillo Phase II	Guatemala	100%	25	TBD	TBD	MOU
San Emidio Phase II	Nevada	100%	11	2ndQuarter 2015	$55	NV Energy
San Emidio Phase III	Nevada	100%	17.2	TBD	$100	TBD
Neal Hot Springs II	Oregon	100%	28	TBD	TBD	TBD
Raft River (Unit II)	Idaho	100%	26	TBD	$134	TBD
Raft River (Unit III)	Idaho	100%	32	TBD	$166	TBD

Additional Properties
Project	Location	Ownership	Target Development (Megawatts)
Gerlach	Nevada	60%	TBD
Granite Creek	Nevada	100%	TBD

Resource Details
			Resource
	Property Size	Temperature	Potential
Property	(square miles)	(ºF)	(Megawatts)	Depth (Ft)	Technology
Raft River	10.8	275-302	127.0	4,500-6,000	Binary
San Emidio	35.8	289-305	64.0	1,500-3,000	Binary
Neal Hot Springs	9.6	311-347	50.0	2,500-3,000	Binary
Gerlach	5.6	338-352	18.0	2,000-3,000	Binary
Granite Creek	3.8	TBD	TBD	TBD	Binary
El Ceibillo	38.6	410-491	50.0	1,800-TBD	Steam

Neal Hot Springs, Oregon
Neal Hot Springs is located in Eastern Oregon near the town of Vale, the county seat of Malheur County. An annual average 22 net megawatt power plant, consisting of three separate, 7.33 net megawatt modules, has been constructed and is undergoing commissioning. The facility achieved commercial operation under the terms of the power purchase agreement on November 16, 2012. Turbine upgrades made during April and May reduced plant and unit availability during the quarter with 38 days lost by individual modules attributable to this work. Overall plant availability was 72.2% .

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Additionally, two months of the quarter (April and May) have reduced power price under the terms of the PPA, and unusually high temperatures adversely impacted power generation. Generation from the facility during the second quarter of 2013 totaled 30,015 megawatt-hours. On June 27, 2013, the Company accepted substantial completion by the EPC contractor of all three of the Neal Hot Springs units.

On May 27, 2012, the Company was notified by the EPC contractor that mechanical completion was achieved on the first of the three units. On June 28, 2012, the construction contractor provided notice of mechanical completion for the second of the three modules and on July 31, 2012 notice of mechanical completion was received for the third power plant module. All three units continued to undergo commissioning and tuning operations during the current quarter. During the quarter, two modules were upgraded by TAS Energy with the installation of a third bearing on the turbine drive train. Installation was completed in mid-May and testing of the modules has confirmed that vibration has been reduced to meet industry standards.

On February 26, 2009, the Company submitted a loan application for the Neal Hot Springs project to the DOE’s Energy Efficiency, Renewable Energy and Advanced Transmission and Distribution Solicitation loan guarantee program under Title XVII of the Energy Policy Act of 2005. The financial closing for the DOE loan guarantee took place on February 23, 2011 which secured a $96.8 million loan guarantee from the Department of Energy and a direct loan from the U.S. Treasury’s Federal Financing Bank. The DOE loan is a combined construction and 22 year term loan. The annual interest rate on the loan is set at 37.5 basis points over the current average yield on outstanding marketable obligations of the United States of comparable maturity as determined on each date that a draw is made on the loan and is estimated to be 2.655% as an aggregate rate of the individual draws that occurred through June 30, 2013. Subsequent to the end of the quarter, the DOE loan was closed at final completion, and the construction cost of the project has been set at $128.1 million. Total project cost, including $11.2 million in reserves, was $139.3 million which is $4.3 million less than previously reported, which includes contingency funds unused.

Over the course of the ongoing construction, the budget was increased by $14.6 million in equity contributions by the partners. The first increase of $7.0 million was to cover additional drilling costs and modifications in plant controls and the cooling mechanism. Enbridge Inc., our partner at Neal Hot Springs, provided the additional investment in exchange for increased ownership interest in the project from 20% to a percentage to be calculated based on an agreed upon financial model. A second budget increase of $6 million, also provided by Enbridge Inc., was to establish a contingency fund for potential additional drilling program to complete the well field. Each of the additional investments made by Enbridge Inc. will be subject to calculations that will result in increased ownership interest in the project. Current estimates show that Enbridge could own between 30% and 40% of the project depending on ITC and BETC cash grant sharing. A $3.5 million contingency fund remains unused and is planned to be returned to Enbridge thereby adjusting the final Enbridge ownership. Enbridge and the Company expect to finalize the ownership percentages during the third quarter 2013.

As of June 30, 2013, eleven draws totaling $76.8 million have been made upon the DOE loan, which has annual interest rates between 2.36% and 2.997% . The project received a $32.75 million cash grant under Section 1603 Specified Energy Property in Lieu of Tax Credits from the Treasury Department. The cash grant, originally approved at $35.4 million, was subject to an 8.7% reduction due to Federal sequestration ordered by Congress under the Budget Control Act. The planned use of the grant proceeds is to: 1) fund cash reserves required by the DOE loan terms at the project level, 2) pay down approximately $11.9 million on the DOE loan and 3) use the balance to reimburse equity investors.

In July 2010, the Company applied to the Oregon Department of Energy (“ODOE”) for the Business Energy Tax Credit (“BETC”), which allows an income tax credit for up to $20 million in qualifying capital expenditures for a renewable energy project. On December 31, 2012, ODOE issued a Final Certificate Conditional for the Neal Hot Springs project BETC which can be sold to a pass-through tax partner and monetized at a cash value of $7.36 million. The final certificate was issued on March 1, 2013. It is anticipated that the BETC cash may be available during the second half of 2013.

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The PPA for the project was signed on December 11, 2009 with the Idaho Power Company. The PPA has a 25 year term with a starting average price for the year 2012 of $96.00 per megawatt-hour and escalates at a variable percentage annually. On May 20, 2010, the Idaho Public Utilities Commission approved the PPA with no changes to the terms and conditions. Power generated during 2013 will be paid at an average price of $99.00 per megawatt-hour.

San Emidio, Nevada
The new Phase I power plant at San Emidio achieved commercial operation on May 25, 2012. During the quarter ended June 30, 2013, the plant achieved 91.5% availability and generated an average of 9.0 net megawatts per hour. A planned, spring outage was taken in April for 6.3 days. Power production totaled 18,039 megawatt-hours for the quarter.

On November 9, 2011, the Company’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 San Emidio. The loan agreement provided for borrowing of up to 90% of the total expected cash grant and consisted only of a single funding of $7.5 million. The funds were drawn from a loan facility that included commercial terms for the payment of interest and associated fees. An application for an $11.65 million ITC cash grant was submitted to the United States Department of the Treasury on July 17, 2012, and on November 14, 2012 the Treasury issued $10.65 million of the requested ITC cash grant amount. $7.78 million was paid to Ares Capital to satisfy the bridge loan facility, with the remaining $2.87 million paid to USG Nevada LLC. In March 2013, the remaining cash grant balance of $1.05 million, for items included in the original submission, was received from the Treasury.

The Phase I repower began construction in the third calendar quarter of 2010 and was delayed in the startup due to EPC contractor’s delay in completing Unit I and certain technical issues related to the new plant. The Phase II expansion is delayed due to the extended time it has taken to get Phase I online, and we are not able to accurately determine when Phase II will be completed at this time. Due to the EPC contractor’s delay in completing the Unit I repower plant and the impact the delay has on future Phases, the Company expects to utilize the ITC cash grant in lieu of the Production Tax Credit only in connection with the Phase I repower. The Phase II expansion is still dependent on successful development of additional production well capacity.

The total capital cost of the Phase I repower was $29.5 million, with Phase II estimated at approximately $55 million and Phase III approximately $100 million. We expect that approximately 75% of the Phase II and Phase III development may be funded by project loans, with the remainder funded through equity financing.

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, constructed the 9.0 net megawatt power plant. TAS Energy of Houston, Texas supplied a modular power plant to the project. Phase I achieved mechanical completion in December 2011, and following performance testing of the power plant, which began in early May 2012, achieved commercial operation on May 25, 2012. Commissioning was extended due to a series of mechanical issues related to the use of an innovative configuration of proven technology that include defective capacitors, the mechanical failure of the 2,500 horsepower process pump, excessive vibration in the turbine gear box, and failure of the silencer. The SAIC provided its services under a fixed price contract that included financial guarantees for the original completion date and power output of the plant. Discussions with the SAIC are complete and Substantial Completion under the SAIC contract was achieved February 21, 2013.

A final settlement agreement was executed as part of Substantial Completion and included a fixed total construction loan payable to the EPC Contractor of $29.5 million. Prior to Substantial Completion, the Company had paid down the loan balance by $1.0 million in three monthly payments. Upon Substantial Completion, a payment of $1.35 million was made to SAIC, and the construction loan was extended until November 15, 2013 with a balance of $25.0 million carrying an interest rate of 10%. Monthly payments of $300,000 are made under this loan until it is repaid.

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Additionally, a $2.0 million, 5 year term, unsecured loan was put in place for the balance of the construction loan. This loan bears interest at 7% and has a payment obligation of $119,382 per quarter. A long term, permanent loan is currently under negotiation with a lender, and is expected to close in the third quarter of 2013. The Company expects to use the long term loan to repay the SAIC construction loan.

The Phase I plant completed its capacity testing during the first quarter, and as a result of the capacity test exceeding the design output, the plant was up rated to 9.0 net annual average megawatts per hour from the design point basis of 8.6 megawatts. Final Completion of the Phase I under the terms of the EPC plant was executed on June 24, 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. A Small Generator Interconnection Agreement for 16 megawatts of transmission capacity was executed with Sierra Pacific Power Company on December 28, 2010.

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, a South Zone and a North Zone. The first phase was completed in 2011.

The second stage of the DOE program is a 50-50 cost shared drilling plan that followed up on the South Zone 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 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 Zone under the 50-50 cost share grant.

The North Resource Area, planned for our Phase II expansion, has an additional five observation/temperature gradient wells and one production well planned as part of the cost share drilling program. Drilling in the North Resource Area is scheduled to start during the 3^rd quarter of 2013.

Raft River, Idaho
During the quarter ended June 30, 2013, Raft River Unit I operated at 89.3% availability and generated an average of 9.32 net megawatts per hour. A planned, spring outage was taken in June for 10 days. The outage was longer than normal to allow the repair and modification of the cooling tower circulating pumps. Power production totaled 17,247 megawatt-hours during the quarter.

The DOE $11.4 million cost-shared, thermal fracturing program began the first stage of injection in June and is planned to continue until September when the second stage is scheduled to begin. Four, 300 foot deep seismic monitoring wells were completed in the area around well RRG-9 and seismic geophones were installed. Background seismic monitoring will be conducted for approximately two weeks prior to starting the first phase of injection using cooled brine from the power plant and will continue through the full program.

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If the fracturing program is successful, and permeability is improved to a commercial level, well RRG-9 may be utilized as a production or injection well for the existing Raft River power plant. The Company’s contributions for the thermal fracturing program are made in-kind by the use of the RRG-9 well, well field data, and monitoring support totaling $816,877.

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 contains 24,710 acres (100 square kilometers) in the center of the Aqua and Pacaya twin volcano complex. An office and staff are located in Guatemala City and a 17.2 acre plant site has been leased on land adjacent to the existing wells. Discussions are taking place with several interested parties for the potential sale of an equity interest in the El Ceibillo project. El Ceibillo, the first development target on the concession, is located near the town of Amatitlan, in a developed industrial zone immediately adjacent to the highway that connects Guatemala City to the Port of San Jose on the Pacific coast.

During the current quarter, site work started with the construction of a temporary office, fencing on the plant site, construction of a drill pad and drilling well EC-1. Well EC-1 was drilled to a total depth of 4,829 feet (1,472 meters) and encountered a bottom hole temperature of 491°F (255°C), with the temperature gradient at the bottom of the hole rising at a rate of 7.1°F/100 Feet (129.1°C/km) . High temperatures in excess of 392°F (>200°C) were encountered in the well beginning at a depth of 2,625 feet (800 meters), which represents a potential high temperature reservoir interval in excess of 2,204 feet (672 meters). Permeability was encountered and a slotted liner capable of supporting production was placed in the well. A preliminary cleanout flow from the well looked favorable and warrants formal testing. Subsequent to the end of the quarter, the flow test equipment has been fabricated and is set up on site. Additional clean out of the well has commenced and a formal flow test will be completed during the 3^rd quarter.

An initial development of a 25 megawatt (Phase I), flash steam power plant is planned in the El Ceibillo area of the concession, but the final size of the facility will be determined after drilling and resource delineation has advanced. Initial transmission studies have been completed, and identified the grid interconnection point approximately 1.2 miles (2 kilometers) from the site.

A binding Memorandum of Understanding (“MOU”) was signed on October 18, 2012 with one of the largest power brokers in Central America. The MOU establishes the framework for a PPA that includes a 15-year term for an initially estimated 25 megawatts of power generation up to a maximum of 50 megawatts of power generation. The MOU includes a project power price that the Company believes is competitive with the prevailing energy prices in the region. Several conditions precedent must be met before the PPA is negotiated and becomes effective, including confirming the geothermal reservoir by an independent reservoir engineer, obtaining all required permits and authorizations, and securing a project finance commitment.

The MOU may be terminated (i) as a result of the bankruptcy of any of the parties, (ii) on January 1, 2015, unless such date is extended by mutual agreement, because the construction of the project has not been initiated and/or the commercial operation date has been moved beyond the date set out in the PPA framework, or (iii) if the geothermal resource found lacks the conditions to sustain a long-term commercial production that allows electric power to be produced under the necessary conditions of profitability.

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On December 28, 2012 an environmental report titled “Construction and Operation of the Geothermal Electric Plant, El Ceibillo” was submitted to the Ministry of Environment and Natural Resources. This report is an EIS level review of the potential impacts from development of a 25 megawatt power plant and satisfied a requirement of the contract that granted the concession. A public review period concluded on January 29, 2013 without any comments received and it is now under formal review by the Ministry.

The El Ceibillo geothermal project area has nine existing geothermal wells that were drilled in the 1990s and have depths ranging from 560 to 2,000 feet (170 to 610 meters). Six of the wells have measured reservoir temperatures in the range of 365°F to 400°F and have high conductive gradients that indicate rapidly increasing temperature with depth. Fluid samples and mineralization from the wells indicate the existence of a high permeability reservoir below the existing well field.

Gerlach Joint Venture
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 and the hole was opened from a 6.5 inch diameter well to a 12.5 inch diameter well. Lost circulation was confirmed with 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, 2011. The upper section of the well was drilled to 826 feet deep and an 8 inch liner was cemented in place. The well was secured and the drill rig was moved back to San Emidio. Temperature measurements in the well have provided the highest measured temperature in the field to date at 268°F within 160’ 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 at 1,600’ and 2,800’ deep that will be targeted when drilling is resumed.

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. Subsequent temperature surveys indicate an isothermal temperature profile at 241°F which may indicate that higher temperature fluid does not occur below the 18-10a well site.

A plan and budget for 2013 has been developed to deepen well 18-10a to intersect the lost circulation zone at 2,800 feet deep to provide temperature information on the deep structure. Further work is dependent upon additional funding from the partners.

Granite Creek, Nevada
The Granite Creek assets are located about 6 miles north of Gerlach, Nevada along a geologic structure known to host geothermal features including the Great Boiling Spring and the Fly Ranch Geyser. A first stage gravity geophysical program was completed in the third quarter of 2008 and will be used to evaluate the resource potential, and help determine where to drill temperature-gradient exploration wells.

After a detailed review of the geologic setting, the lease position at Granite Creek was reduced to 2,443.7 acres (3.8 square miles). One full lease and portions of the two remaining leases were relinquished to the Bureau of Land Management.

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Operating Results
For the six months ended June 30, 2013, the Company reported net income attributable to the Company of $12,165 ($0.00 income per share) which represented a $2.6 million favorable increase from the net loss of $2.6 million reported in the same period in 2012 ($0.03 loss per share). For the three months ended June 30, 2013, the Company reported net loss attributable to the Company of $1.4 million ($0.01 loss per share) which represented a $445,489 million unfavorable decrease from the net loss of $0.9 million reported in the same period in 2012 ($0.01 loss per share). Generally favorable variances were reported related to the operations of the Company’s three power plants. Notable favorable variances were reported in stock based compensation and other income/expenses. Notable unfavorable variances were reported in professional and management fees, salaries and related compensation, interest expense, and leases and well testing.

Plant Operations
During the six months ended June 30, 2013, the Company’s energy production revenues and related operating costs originated from its fully operational three power plants. The San Emidio plant (USG Nevada LLC) is located in the San Emidio Desert in the northwestern part of the State of Nevada. The original San Emidio plant and related water rights were purchased in 2008. The old plant ceased operations in December 2011 and was replaced with a new plant that began commercial operations in May 2012. The Raft River plant (Raft River Energy I LLC) is located in South Eastern Idaho. The Raft River plant began operations in January of 2008. The new plant at Neal Hot Springs, Oregon (USG Oregon LLC) began commercial operations on November 16, 2012.

A summary of energy sales by plant location for the two reporting periods are as follows:

	For the Six Months Ended June 30,
	2013		2012
	$	%*	$	%*
Energy sales by plant:
Neal Hot Spring, Oregon	6,632,554	55.9	-	-
San Emidio, Nevada	3,355,309	28.2	427,931	19.0
Raft River, Idaho	1,887,635	15.9	1,822,346	81.0
	11,875,498	100.0	2,250,277	100.0

%*- represents the percentage of total Company energy sales.

	For the Three Months Ended June 30,
	2013		2012
	$	%*	$	%*
Energy sales by plant:
Neal Hot Spring, Oregon	2,435,303	49.8	-	-
San Emidio, Nevada	1,628,382	33.3	427,931	35.9
Raft River, Idaho	823,154	16.9	765,255	64.1
	4,886,839	100.0	1,193,186	100.0

%*- represents the percentage of total Company energy sales.

Neal Hot Springs, Oregon (USG Oregon LLC) Plant Operations
The Neal Hot Springs plant began producing power in the quarter ended December 31, 2012 and was considered to be commercially operational on November 16, 2012. The quarter ended March 31, 2013, was the plant’s first full quarter of operations. Energy production was down in the current quarter ended June 30, 2013 due to planned maintenance and contractual lower seasonal rates. Turbine upgrades made during April and May of 2013 reduced plant production by approximately 38 days. Overall, plant production was down 34.9% from the prior quarter ended March 31, 2013. Primarily due to the contracted seasonal price reduction, the average rate per kilowatt hour decreased 11.5% from the prior quarter ended March 31, 2013.

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Key quarterly production data for the Neal Hot Springs, Oregon plant is summarized as follows:

			Ave.	Net	Depreciation
	Kilowatt	Energy	Rate per	Operating	&
	Hours x	Sales	Kilowatt-	Income	Amortization
Quarter Ended:	1,000	($)	Hour ($)	($)	($)
December 31, 2012	23,256	2,320,867	0.0887	1,590,005	256,670
March 31, 2013	46,137	4,197,252	0.0906	2,899,708	779,298
June 30, 2013	30,016	2,437,303	0.0802	1,011,514	814,434

San Emidio, Nevada Plant Energy Sales and Plant Operating Expenses (USG Nevada LLC)
For the six months ended June 30, 2013, the San Emidio plant reported net profit of $622,323 which was a favorable increase of $1,106,976 from the loss of $484,653 reported in the same period in 2012. For the three months ended June 30, 2013, the San Emidio plant reported net loss of $212,058 which was an unfavorable increase of $203,366 from the operating loss of $8,692 reported in the same period in 2012. The new plant became commercially operational on May 25, 2012; therefore, only small amounts of revenues were earned during testing and the 36 days of operations at the regular rates during the six months ended June 30, 2012. During the quarter ended March 31, 2013, the plant produced the highest amount of energy revenues and kilowatt hours ($1,726,927 energy sales; 19,228,121 kilowatt hours) than any other quarter in operating history of USG Nevada LLC. Production levels in the current quarter decreased slightly (6.2%) from the prior quarter. Overall energy sales for the six months ended June 30, 2013 increased $1,200,451 (280.5% increase) from the same period in 2012.

Since the facility was fully operational for the entire six months of the current reporting period, the associated operating costs increased accordingly. The two major costs areas (excluding depreciation) of employee compensation and plant/well field maintenance increased for the six months ended June 30, 2013 from the same period ended 2012 by the following amounts: $381,005 (352.0% increase) and $371,230 (275.8% increase); respectively. Since the majority of the employees’ time was dedicated to plant construction in the prior reporting period, operation salary costs were significantly lower. In addition to higher routine costs related to maintenance of the plant and well field, the plant was assessed a PEC revenue shortfall charge of $283,000 based upon the low production levels of 2012. Some of these costs could be recovered if the credits can be purchased from another source.

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Summarized statements of operations for the San Emidio, Nevada plant are as follows:

	Six Months Ended June 30,
	2013				2012				Variance
	$		%*		$		%		$		%**
Plant revenues:
Energy sales	3,355,309		100.0		427,931		101.5		2,927,378		684.1
Energy credit sales	-		-		(6,124	)	(1.4	)	6,124		100.0
	3,355,309		100.0		421,807		100.0		2,933,502		695.5
Plant expenses:
Operations	1,338,912		39.9		536,767		127.3		(802,145	)	(149.4	)
Depreciation and amortization	772,374		23.0		370,459		86.6		(401,915	)	(108.5	)
	2,111,286		62.9		907,226		215.1		(1,204,060	)	(132.7	)
Operating income (loss)	1,244,023		37.1		(485,419	)	(115.1	)	1,729,442		356.3
Other income (expense):
Interest expense	(621,712	)	(18.5	)	-		-		(621,712	)	#
Interest income	12		0.0		766		0.2		(754	)	(98.4	)
	(621,700	)	(18.5	)	766		0.2		(622,466	)	#
Net income (loss)	622,323		18.5		(484,653	)	(114.9	)	1,106,976		228.4

%*-	represents the percentage of total plant operating revenues.
%**-	represents the percentage of change from 2012 to 2013.Increases in revenues anddecreases in expenses from the prior period to the current period are considered to befavorable and are presented as positive figures.
#-	variance percentage that is extremely high or undefined.

The intercompany elimination adjustments for management fees are not incorporated into the presentation of the subsidiary’s net operating income/loss.

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	Three Months Ended June 30,
	2013				2012				Variance
	$		%*		$		%		$		%**
Plant revenues:
Energy sales	1,628,382		100.0		427,931		100.0		1,200,451		280.5
Plant expenses:
General operations	853,422		52.4		255,345		59.7		(598,077	)	(234.2	)
Depreciation and amortization	365,314		22.4		181,333		42.3		(183,981	)	(101.5	)
	1,218,736		74.8		436,678		102.0		(782,058	)	(179.1	)
Operating income (loss)	409,646		25.2		(8,747	)	(2.0	)	418,393		#
Other income:
Interest expense	(621,712	)	(38.2	)	-		-		(621,712	)	#
Interest income	8		0.0		55		0.0		(47	)	(85.5	)
	(621,704	)	(38.2	)	55		0.0		(621,759	)	#
Net income (loss)	(212,058	)	13.0		(8,692	)	(2.0	)	(203,366	)	#

%*-	represents the percentage of total plant operating revenues.
%**-	represents the percentage of change from 2012 to 2013.Increases in revenues anddecreases in expenses from the prior period to the current period are considered to befavorable and are presented as positive figures.
#-	variance percentage that is extremely high or undefined.

The intercompany elimination adjustments for management fees are not incorporated into the presentation of the subsidiary’s net operating income/loss.

Key quarterly production data for the San Emidio, Nevada plant is summarized as follows:

				Net
			Ave.	Operating		Depreciation
	Kilowatt	Energy	Rate per	Income		&
	Hours x	Sales	Kilowatt-	(Loss)*		Amortization
Quarter Ended:	1,000	($)	Hour ($)	($)		($)
June 30, 2011	5,556	623,731	0.1123	(16,818	)	246,038
September 30, 2011	4,943	629,582	0.1274	45,876		210,366
December 31, 2011(1)	3,291	361,876	0.1100	(433,861	)	206,522
March 31, 2012(1)	-	-	-	(475,961	)	189,126
June 30, 2012(2)	5,465	427,931	0.0776	(8,748	)	181,333
September 30, 2012	8,280	745,494	0.0897	101,103		253,429
December 31, 2012	16,231	1,459,078	0.0900	(223,412	)	416,091
March 31, 2013	19,228	1,726,927	0.0903	834,254		407,060
June 30, 2013	18,039	1,628,382	0.0903	(212,058	)	365,314

(1)-	The old power plant ceased operations on December 12, 2011, to facilitate the transfer of operations to the new power plant.
(2)-	The new power plant became commercially operational on May 25, 2012. The plant produced power at a lower “test rate” in May and at the full contract rate of .08975 per kilowatt hour in June.

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*- The intercompany elimination adjustments for management fees are not incorporated into thepresentation of the subsidiary’s net operating income/loss. The plant’s interest costs areincluded.

Raft River, Idaho Unit I (Raft River Energy I LLC) Plant Operations
Net loss from Raft River Energy I LLC (“RREI”) operations of $647,984 for the six months ended June 30, 2013, favorably decreased by $853,991 from the loss of $1,501,975 the reported in the same period in 2012. Net loss from RREI operations of $715,605 for the three months ended June 30, 2013, favorably decreased by $89,681 from the loss of $805,286 reported in the same period in 2012. Both the energy production levels and rates earned in the current six months ended June 30, 2013 were consistent with the same period ended 2012. The main reason for the difference was the repair costs incurred primarily in the first quarter ended March 31, 2012. The repairs of wells RRG-2 and RRG-7 were completed in January 2012. For the six months ended June 30, 2012, repair costs totaled $862,911 which was $740,767 higher than the repair costs incurred for the current six months ended June 30, 2013. An additional factor to the lower repair costs incurred in the six months ended March 31, 2013, was that RREI collected two grant awards related to the well repairs that totaled $217,594, which offset repair costs.

The summarized statements of operations for RREI are as follows:

	Six Months Ended June 30,
	2013				2012				Variance
	$		%*		$		%*		$		%**
Plant revenues:
Energy sales	1,887,635		91.5		1,822,346		90.7		65,289		3.6
Energy credit sales	184,566		8.5		195,883		9.3		(11,317	)	(5.8	)
	2,072,201		100.0		2,018,229		100.0		53,972		2.7
Plant expenses:
General operations	1,683,475		81.2		2,396,639		118.7		713,164		29.8
Depreciation and amortization	944,134		45.6		1,016,810		50.4		72,676		7.1
	2,627,609		126.8		3,413,449		169.1		785,840		23.0
Operating income (loss)	(555,408	)	(26.8	)	(1,395,220	)	(69.1	)	839,812		60.2
Other income (expense):
Interest expense	(106,196	)	(5.1	)	(107,031	)	(5.3	)	835		0.8
Other and interest income	13,620		0.7		276		0.0		13,344		#
	(92,576	)	(4.5	)	(106,755	)	(5.3	)	14,179		13.3
Net income (loss)	(647,984	)	(31.3	)	(1,501,975	)	(74.4	)	853,991		56.9

%*-	represents the percentage of total plant operating revenues.
%**-	represents the percentage of change from 2012 to 2013.Increases in revenues anddecreases in expenses from the prior period to the current period are considered to befavorable and are presented as positive figures.
#-	variance percentage that is extremely high or undefined.

The intercompany elimination adjustments for interest expense, management fees and lease costs are not incorporated into the presentation of the subsidiary’s operations.

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	Three Months Ended June 30,
	2013				2012				Variance
	$		%*		$		%*		$		%**
Plant revenues:
Energy sales	823,153		90.5		765,255		89.7		57,898		7.6
Energy credit sales	86,237		9.5		87,763		10.3		(1,526	)	(1.7	)
	909,390		100.0		853,018		100.0		(56,372	)	6.6
Plant expenses:
General operations	1,103,741		121.4		1,093,817		128.2		(9,924	)	(0.9	)
Depreciation and amortization	472,094		51.9		507,783		59.5		35,689		7.0
	1,575,835		173.3		1,601,600		187.8		25,765		1.6
Operating income (loss)	(666,445	)	(73.3	)	(748,582	)	(87.8	)	82,137		11.0
Other income (expense):
Interest expense	(49,370	)	(5.4	)	(56,780	)	(6.7	)	7,410		13.1
Other and interest income	210		0.0		76		0.1		134		176.1
	(49,160	)	(5.4	)	(56,704	)	(6.6	)	7,544		13.4
Net income (loss)	(715,605	)	(78.7	)	(805,286	)	(94.4	)	89,681		11.1

%*-	represents the percentage of total plant operating revenues.
%**-	represents the percentage of change from 2012 to 2013.Increases in revenues anddecreases in expenses from the prior period to the current period are considered to befavorable and are presented as positive figures.
#-	variance percentage that is extremely high or undefined.

The intercompany elimination adjustments for interest expense, management fees and lease costs are not incorporated into the presentation of the subsidiary’s operations.

Key quarterly production data for RREI is summarized as follows:

	Kilo-		Ave. Rate			Depreciation
	watt	Energy	per	Net Income		&
	Hours x	Sales	Kilowatt-	(Loss)*		Amortization
Quarter Ended:	1,000	($)	Hour ($)	($)		($)
June 30, 2011	14,144	651,059	0.0487	(1,986,673	)	510,367
September 30, 2011	14,562	942,111	0.0673	(489,767	)	508,968
December 31, 2011	17,888	1,159,245	0.0670	(965,553	)	508,405
March 31, 2012	19,639	1,057,091	0.0557	(696,689	)	509,027
June 30, 2012	15,999	765,255	0.0503	(805,286	)	507,783
September 30, 2012	17,836	1,176,107	0.0681	2,348		505,560
December 31, 2012	21,170	1,398,218	0.0679	154,752		505,559
March 31, 2013	19,675	1,064,481	0.0561	67,620		472,040
June 30, 2013	17,248	823,153	0.0499	(715,605	)	472,094

* - Net income (loss) does not include intercompany elimination adjustments for interest expense,management fees and lease costs.

-48-

Professional and Management Fees
For the six months ended June 30, 2013, the Company incurred professional and management fees of $726,350, which was an increase of $350,649 (93.3% increase) from the same period in 2012. For the three months ended June 30, 2013, the Company incurred professional and management fees of $432,190 which was an increase of $168,652 (64.0% increase) from the same period in 2012. In the first quarter ended March 31, 2013, the increase was primarily related to the change in the corporate reporting year end. Many of the legal and audit related costs that had been incurred in quarters ended June 30^th in prior years were incurred in the first quarter ended March 31, 2013. During the current quarter ended June 30, 2013, the increase related primarily to the consulting fees paid to the former CEO’s consulting firm of $155,393. During the six months ended June 30, 2013, the Company incurred audit/audit related, legal and SOX consulting costs that amounted to approximately $254,000, $114,000 and $65,000; respectively.

Salaries and Wages
For the six months ended June 30, 2013, the Company reported $1,118,143 in salaries and related costs, which was an increase of $599,376 (115.5% increase) from the same period in 2012. For the three months ended June 30, 2013, the Company reported $553,655 in salaries and related costs, which was an increase of $240,638 (76.9% increase) from the same period in 2012. The increase was primarily due to bonuses awarded and due to lower amounts of compensation that were capitalized on the Company’s major projects. During the first quarter of 2013, the Company paid employee bonuses of $171,000. A CEO signing bonus of $150,000 was paid in the second quarter of 2013. During the six months ended June 30, 2013, general employee cost of living pay increases and the net increase in the change in CEO compensation packages resulted in an increase of over $105,000 ($65,000 increase for the three months ended June 30, 2013) from the same period in 2012.

During the six months ended June 30, 2012, significant portions of the management and development compensation costs were allocated to the Company’s capital projects (Neal Hot Springs, Oregon and San Emidio, Nevada – Phases I and II). Since both the Neal Hot Springs and the San Emidio Phase I projects were substantially completed prior to and operational during the current period, salary cost allocations for both projects decreased.

-49-

Management and development employee salaries and related costs allocated to major U.S. Geothermal projects are summarized as follows:

	For the Six Months Ended June 30,
	2013		2012		Variance
Financial Element	$		$		$		%
Total Company salary and related costs, excluding plant operations	1,580,641		1,171,880		408,761		34.9
Salary and related costs allocated to the following projects:
USG Oregon LLC (Neal Hot Springs Project)	(336,859	)	(424,108	)	87,249		20.6
USG Nevada LLC (San Emidio Phase I Project)	(43,777	)	(117,828	)	74,051		62.8
USG Nevada LLC (San Emidio Phase II Project)	(43,548	)	(86,364	)	42,816		49.6
Development activities in Guatemala	(37,630	)	(8,449	)	(29,181	)	(345.4	)
Small projects and plant operations	(684	)	(16,364	)	15,680		95.8
	1,118,143		518,767		599,376		115.5

%- represents the percentage of change from 2012 to 2013.

	For the Three Months Ended June 30,
	2013		2012		Variance
Financial Element	$		$		$		%
Total Company salary and related costs, excluding plant operations	764,953		605,371		159,582		26.4
Salary and related costs allocated to the following projects:
USG Oregon LLC (Neal Hot Springs Project)	(144,503	)	(203,048	)	58,545		28.8
USG Nevada LLC (San Emidio Phase I Project)	(19,933	)	(32,590	)	12,657		38.8
USG Nevada LLC (San Emidio Phase II Project)	(21,165	)	(39,670	)	18,505		46.6
Development activities in Guatemala	(25,506	)	(8,448	)	(17,058	)	(201.9	)
Small projects and plant operations	(191	)	(8,598	)	8,407		97.8
	553,655		313,017		240,638		76.9

%- represents the percentage of change from 2012 to 2013.

Stock Based Compensation
For the six months ended June 30, 2013, the Company reported $263,753 in stock based compensation, which was a decrease of $203,353 (43.5% decrease) from the same period in 2012. For the three months ended June 30, 2013, the Company reported $204,391 in stock based compensation, which was an increase of $41,416 (25.4% increase) from the same period in 2012. Stock based compensation includes the calculated values for both Company stock and stock options. The final vesting period of the last employee stock compensation award occurred in March 2012. In the current quarter ended June 30, 2013, stock was provided to the new CEO as a component of his compensation package.

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The compensation related to the value of the stock options issued to employees was significantly lower in the first quarter ended March 31, 2013 from the same period in 2012 due to the lower market price of the Company’s outstanding stock during those periods. During the current quarter ended June 30, 2013, the Company’s stock price has increased and the value of the stock options was consistent with the same period ended in 2012. The stock based compensation components are summarized as follows:

	For the Six Months Ended
	June 30,
	2013	2012	Variances
	$	$			%
Total Stock Based Compensation:
Stock option compensation	242,460	388,251	(145,791	)	(37.6	)
Stock compensation	21,293	78,855	(57,562	)	(73.0	)
	263,753	467,106	(203,353	)	(43.5	)

%- represents the percentage of change from 2012 to 2013.

	For the Three Months Ended
	June 30,
	2013	2012	Variances
	$	$	$	%
Total Stock Based Compensation:
Stock option compensation	183,098	162,975	20,123	12.3
Stock compensation	21,293	-	21,293	*
	204,391	162,975	41,416	25.4

%- represents the percentage of change from 2012 to 2013.
*- variance percentage was undefined.

Leases and Well Testing

For the six months ended June 30, 2013, the Company reported $576,386 in other leases and well testing expenses, which was an increase of $458,241 (387.9% increase) from the same period in 2012. For the three months ended June 30, 2013, the Company reported $414,377 in other leases and well testing expenses, which was an increase of $321,252 (345.5% increase) from the same period in 2012. During the six months ended June 30, 2013, the Company incurred costs for a temporary office building, a drill pad and a test well EC-1 that amounted to $565,884 ($396,475 incurred in the three months ended June 30, 2013) at Guatemala (U.S. Geothermal Guatemala S.A.). The well was completed in June 2013 and costs are being incurred to prepare for flow testing in July and August of 2013. Testing and development activities are expected to continue until the viability of the project can be determined.

Interest Expense

During the six months ended June 30, 2013, the Company reported $1,604,185 in interest expense from plant construction loans ($1,123,883 interest expense for the three months ended June 30, 2013). All of the construction loan interest incurred during the six months ended June 30, 2012 was capitalized as a component of the total construction costs.

Other Income/Expenses

For the six months ended June 30, 2013, the Company reported $60,492 in income in other income/expenses which was a favorable increase of $556,426 (112.9% increase) from the loss from the same period in 2012. In February 2012, water rights on 2,917 acres leased property in the Granite Creek area located in the State of Nevada were relinquished and removed from intangible assets at their carrying amounts that totaled $548,701. The relinquishment was considered to be a loss that was recognized in the six months ended June 30, 2012. A significant variance was not reported for the three months ended June 30, 2013, from the same period in 2012.

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Net Income/Loss Attributable to the Non-Controlling Interests
The net income/loss attributable to the non-controlling interest entities is the line item that removes the portion of the total consolidated operations that are owned by the Company’s subsidiaries. For the six months ended June 30, 2013, the Company reported $256,288 in net income attributable to non-controlling interests, which was an increase of $1,924,710 from the $1,668,422 net loss reported in the same period ended 2012. For the three months ended June 30, 2013, the Company reported $590,268 in net loss attributable to non-controlling interests, which was a favorable decrease of $306,019 from the $896,287 net loss reported in the same period ended 2012. The primary reason for the increase was due to the operations of the Neal Hot Springs plant which reported net income of $2,943,402 ($518,755 three months ended June 30, 2013) for the six months ended June 30, 2013. The impact of the Neal Hot Springs operations on the Company’s reported income attributable to non-controlling entities was an increase of $1,027,181 ($179,490 three months) from the six months ended June 30, 2012 as compared to the same period ended 2013.

Off Balance Sheet Arrangements

As of June 30, 2013, the Company does not have any off balance sheet arrangements.

Liquidity and Capital Resources

We believe our cash and liquid investments at June 30, 2013 are adequate to fund our general operating activities through December 31, 2013. Other project development, such as Guatemala, may require additional funding. In addition to government loans and grants discussed below, we anticipate that additional funding may be raised through financial and strategic partnerships, market loans, issuance of equity and/or through the sale of ownership interest in tax credits and benefits.

The recent financial credit crisis has not impacted the ability of our customers, Idaho Power Company and Sierra Pacific Power, to pay for their power. This power is sold under long-term contracts at fixed prices to large utilities. The status of the credit and equity markets could delay our project development activities while the Company seeks to obtain economic credit terms or a favorable equity market price to further the drilling and construction activities. The Company continues discussions with potential investors to evaluate alternatives for funding at the corporate and project levels.

Under the Loan Guarantee Agreement at Neal Hot Springs with the Department of Energy, all funds for USG Oregon LLC are deposited into PNC Bank subject to certain procedural restrictions on use of the funds. At June 30, 2013, $45.2 million in funds were deposited at PNC Bank and unavailable for immediate corporate needs.

For projects under construction before the end of 2010 and online before the end of 2013, a project can elect to take a 30% investment tax credit (“ITC”) in lieu of the production tax credit (“PTC”). The ITC may be converted into a cash grant within the first 90 days of operation of the plant. Phase I at San Emidio attained commercial operation on May 25, 2012. An application was submitted in July 2012 electing to take the ITC cash grant in lieu of the PTC. The United States Department of Treasury notified the Company that it would allow $10.65 million in cash grant. The cash grant proceeds were received on November 10, 2012 and used to repay the Ares Capital bridge loan facility, with the remaining balance payable to USG Nevada LLC. An additional $1.05 million of cash grant items were subsequently approved and paid in March 2013.

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For the Neal Hot Springs project, an application was submitted in the first quarter 2013 electing to take the ITC cash grant, in lieu of the PTC, for approximately $35.9 million from U.S. Treasury and the funds will be used to fund reserves required under the DOE Loan Guarantee Agreement and return funds to our partner in the project, Enbridge. Due to federal sequestration in early 2013, the ITC cash grant amount received in April 2013 was reduced by 8.7% to $32.7 million.

In July 2010, the Company applied to the Oregon Department of Energy for the Business Energy Tax Credit (“BETC”), which allows an income tax credit for up to $20 million in qualifying expenditures for a renewable energy project. The Neal Hot Springs project has completed final certification for the credit which can be sold to a pass-through partner and monetized at a cash value of $7.36 million (less a potential 5% broker fee). It is anticipated that the BETC cash will be available during 2013.

On May 21, 2012, the Company entered into a purchase agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“LPC”), pursuant to which the Company has the right to sell to LPC up to $10,750,000 in shares of the Company’s common stock, (“Common Stock”), subject to certain limitations and conditions set forth in the Purchase Agreement and imposed by the Company’s board of directors and pricing committee thereof. Pursuant to the Purchase Agreement LPC initially purchased $750,000 in shares of Common Stock at $0.38 per share. Following this initial purchase, on any business day and as often as every other business day over the 36-month term of the Purchase Agreement, and up to an aggregate amount of an additional $10,000,000 (subject to certain limitations) in shares of Common Stock, the Company has the right, from time to time, at its sole discretion and subject to certain conditions to direct LPC to purchase up to 250,000 shares of Common Stock, which amount may be increased in accordance with the Purchase Agreement if the closing sale price of Common Stock on the NYSE MKT exceeds certain specified levels. The purchase price of shares of Common Stock pursuant to the Purchase Agreement will be based on prevailing market prices of Common Stock at the time of sales without any fixed discount, and the Company will control the timing and amount of any sales of Common Stock to LPC. No sales of Common Stock under the Purchase Agreement will be made through the TSX. The Purchase Agreement contains customary representations, warranties and agreements of the Company and LPC, limitations and conditions to completing future sale transactions, indemnification rights and other obligations of the parties. There is no upper limit on the price per share that LPC could be obligated to pay for Common Stock under the Purchase Agreement. LPC shall not have the right or the obligation to purchase any shares of Common Stock if the purchase price of those shares, determined as set forth in the Purchase Agreement, would be below $0.25 per share. The Company has the right to terminate the Purchase Agreement at any time, at no cost or penalty. Actual sales of shares of Common Stock to LPC under the Purchase Agreement will depend on a variety of factors to be determined by the Company from time to time, including (among others) market conditions, the trading price of the Common Stock and determinations by the Company as to available and appropriate sources of funding for the Company and its operations. As consideration for entering into the Purchase Agreement, the Company has issued to LPC 651,819 shares of Common Stock. The Company will not receive any cash proceeds from the issuance of these 651,819 shares. As of September 30, 2012, the Company has sold LPC an aggregate of 4,625,506 shares of common stock pursuant to the Purchase Agreement for net proceeds of approximately $1,343,639. On December 21, 2012, the Company and LPC entered into an Amendment No. 1 to the Purchase Agreement (the “Amendment”) to reduce the total amount that can be purchased under the Purchase Agreement, including amounts already purchased, from $10,750,000 to $6,500,000.

The Company also entered into an agreement with Kuhns Brothers Securities Corporation (“KBSC”), pursuant to which KBSC agreed to act as the placement agent in connection with the sale of shares of Common Stock to LPC. The Company has agreed to pay KBSC the following compensation for its services in acting as placement agent in the sale of Common Stock to LPC: (A) the Company will pay a cash fee to KBSC in an amount equal to: (i) 6% of the aggregate gross proceeds received by the Company from the initial sale of $750,000 in shares of Common Stock to LPC pursuant to the Purchase Agreement, and (ii) 3% of the aggregate gross proceeds received by the Company from additional sales of Common Stock to LPC pursuant to the Purchase Agreement; and (B) the Company will issue to KBSC the number of warrants (the “Compensation Warrants”) equal to: (i) in the case of the initial sale of $750,000 in shares of Common Stock to LPC, 6% of the aggregate number of shares sold to LPC; and (ii) in the case of additional sales of Common Stock to LPC, 3% of the aggregate gross proceeds received by the Company from such sales divided by 115% of the closing sale price of one share of Common Stock on the day prior to the respective issuance of the Compensation Warrant.

-53-

The Compensation Warrants issued pursuant to clause (ii) in the preceding sentence will be based on incremental sales to LPC of $2 million in aggregate gross proceeds. Each Compensation Warrant will have an exercise price equal to 115% of the closing sale price of one share of Common Stock on the day prior to its issuance, a term of five years from the date of its issuance and will otherwise comply with the rules of the Financial Industry Regulatory Authority, Inc. On December 26, 2012, the Company completed a registered direct offering with a number of investors, pursuant to which they acquired, in total, 11,810,816 units (each a “Unit”) of the Company at a price of $0.37 per Unit. Each Unit consists of one share of common stock of the Company and one half of one common stock purchase warrant (each whole warrant a “Warrant”). Each Warrant will entitle the holder thereof to acquire one additional share of common stock of the Company for a period of 60 months following the closing of the offering for $0.50 per share of common stock. The gross proceeds of the Unit offering were approximately $4.37 million. Kuhns Brothers Securities Corporation acted as placement agent for this offering and was paid a placement fee of $262,000, plus expenses of approximately $20,000.

On September 30, 2011, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with McNicoll, Lewis & Vlak LLC (“MLV”), pursuant to which the Company, from time to time, was entitled to issue and sell through MLV, acting as the Company’s sales agent, shares of the Company’s Common Stock. The Company’s board of directors authorized the issuance and sale of shares of the Company’s Common Stock under the Sales Agreement for aggregate gross sales proceeds of up to $10,000,000, subject to certain limitations based on the sales price per share, for a period of one year from the date of execution of the Sales Agreement. Pursuant to the Sales Agreement, MLV was entitled to compensation at a fixed commission rate of the greater of (i) 3% of the gross sales price per share sold or (ii)(1) $0.03 per share sold if the sale price per share was $0.80 or greater or (2) $0.0225 per share sold if the sale price per share was less than $0.80 (but in no event would compensation exceed 8% of gross proceeds). The Company has, also, agreed to reimburse a portion of MLV’s expenses in connection with the offering of the Company’s Common Stock under the Sales Agreement. The Company terminated the Sales Agreement effective May 19, 2012. Prior to such termination, the Company sold 241,989 shares of common stock pursuant to the Sales Agreement for net proceeds of approximately $126,133.

On February 24, 2011, the Company completed the financial closing with the U.S. Department of Energy (“DOE”) of a $96.8 million loan guarantee to construct the Company’s planned 22-megawatt-net power plant at Neal Hot Springs in Eastern Oregon. Neal Hot Springs was the first geothermal project to complete a loan guarantee under the DOE’s Title XVII loan guarantee program, which was created by the Energy Policy Act of 2005 to support the deployment of innovative clean energy technologies. The DOE loan guarantee will guarantee a loan from the U.S. Treasury’s Federal Financing Bank. The $96.8 million Federal Financing Bank loan represents 67% of total project cost. When combined with the previously announced equity investments by the project’s partner, Enbridge Inc., the loan provides 100% of the anticipated capital remaining to fully construct the project.

In September 2010, Oregon USG Holdings, LLC (a wholly owned subsidiary) entered into agreements with Enbridge (U.S.) Inc. that formed a strategic and financial partnership to finance the Neal Hot Springs project located in eastern Oregon. A component of these agreements included a $5 million convertible promissory note, which converted. DOE guaranteed project loan and was treated as an equity contribution by Enbridge to the project. The agreements also provided for additional equity contributions of $13.8 million from Enbridge that when combined with the $5 million convertible promissory note earned Enbridge a 20% direct ownership in the project. As a result of cost overruns for the project, and at the election of the Company, an additional payment obligation of up to $8 million was contributed by Enbridge that increased their direct ownership in the project by 1.5 percentage points for each $1 million contributed. Added to their base 20% ownership, additional payments increased Enbridge’s ownership to 27.5% . An additional $6 million cost overrun facility was established by Enbridge to cover costs that resulted from unexpected poor results from injection well drilling.

-54-

The additional investment by Enbridge will increase their ownership in USG Oregon LLC based on running a project financial model and determining what percentage of the forecasted project income will be allocated to Enbridge to arrive at a predetermined rate of return for the additional investment. Current estimates of the ownership assuming that all of the investment is used for drilling shows that Enbridge could own up to 40% of the subsidiary. The model will be rerun after all of the variables have been fixed which is anticipated to be in the third quarter of 2013 to set the final ownership ratios between the two parties.

Potential Acquisitions
The Company intends to continue its growth through the acquisition of ownership or leasehold interests in properties and/or property rights that it believes will add to the value of the Company’s geothermal resources, and through possible mergers with or acquisitions of operating power plants and geothermal or other renewable energy properties.

Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been made. We evaluate our estimates and assumptions on a regular basis. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for the financial statements.

See Management’s Discussion and Analysis and the financial statements and related footnotes included in our Transition Report on Form 10-K for the nine months ended December 31, 2012, for a description of our critical accounting policies.

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

Interest Risk on Investments
At June 30, 2013, the Company held investments of $49,755,466 in money market accounts. These are highly liquid investments that are subject to risks associated with changes in interest rates. The money market funds are invested in governmental obligations with minimal fluctuations in interest rates and fixed terms.

Foreign Currency Risk
The Company is subject to a limited amount of foreign currency risks associated with cash deposits maintained in Canadian currency. The Company has utilized and it is continuing to utilize the Canadian markets for raising capital. By proper timing of the transactions and then maintenance of adequate operating funds in other financial resources, the Company has been able to mitigate some of the risks surrounding foreign currency exchanges. At the quarter ended June 30, 2013, the Company held deposits that amounted to less than $10,000 in U.S. dollar equivalents. As a matter of standard operating practice, the Company does not maintain large balances of Canadian currency, and substantially all operating transactions are conducted in U.S. dollars.

-55-

Prior to April 1, 2007, the strike price for the Company’s stock option plan had been stated in Canadian dollars as the plan had been administered through our Vancouver office and Pacific Corporate Trust Company. This subjected the Company to foreign currency risk in addition to the normal market risks associated with the stock price fluctuations. A long-term liability had been established to reflect the fair value of the stock options payable. The strike price on subsequent option grants is stated in U.S. dollars.

Commodity Price Risk
The Company is exposed to risks surrounding the volatility of energy prices. These risks are impacted by various circumstances surrounding the energy production from natural gas, nuclear, hydro, solar, coal and oil. The Company has been able to mitigate, to a certain extent, this risk by signing power purchase contracts that exceed 20 year periods for the power plant currently in production and scheduled to go into production. This type of arrangement will be the model for power purchase contracts planned for future power plants.

Item 4 - Controls and Procedures

An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective at the end of this period covered by this report to ensure that information we are required to disclose in the reports that we file or submit under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms relating to us, including our consolidated subsidiaries, and was accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

There has been no change to our internal control over financial reporting during the six months ended June 30, 2013 that has materially affected, or is likely to materially affect, our internal control over financial reporting.

-56-

PART II- OTHER INFORMATION

Item 1 - Legal Proceedings

None.

Item 1A - Risk Factors

See “Risk Factors” in our transition report on Form 10-K for the nine months ended December 31, 2012. There have been no material changes in the risk factors during the six months ended June 30, 2013.

Item 2 - Unregistered Sales Of Equity Securities And Use Of Proceeds

None.

Item 3 – Defaults Upon Senior Securities

None.

Item 4 – Mine Safety Disclosures

Not applicable.

Item 5 - Other Information

None.

Item 6 - Exhibits

See the exhibit index to this quarterly report on Form 10-Q.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	U.S. GEOTHERMAL INC.
	(Registrant)
Date: August 14, 2013	By:/s/ Dennis J. Gilles
	Dennis J. Gilles
	Chief Executive Officer
Date: August 14, 2013
	By:/s/ Kerry D. Hawkley
	Kerry D. Hawkley
	Chief Financial Officer and Corporate Secretary

-58-

EXHIBIT INDEX

Exhibit Number	Description
10.1	Employment Agreement dated April 19, 2013 between U.S. Geothermal Inc. and Dennis J. Gilles (incorporated by reference to Exhibit 10.1 to the registrant’s Form 8-K filed on April 25, 2013)
10.2	Engagement Agreement for Executive Management Advisory Services dated April 19, 2013 between U.S. Geothermal Inc. and Daniel Kunz & Associates LLC (incorporated by reference to Exhibit 10.2 to the registrant’s Form 8-K filed on April 25, 2013)
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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