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Vol. 15, No. 45 Week of November 07, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

Troubled co-op seeks loan

Alaska electric utility aims to continue geothermal drilling despite bankruptcy

Wesley Loy

For Petroleum News

A small Southwest Alaska electric cooperative forced into bankruptcy because of an overbudget geothermal drilling project now wants to go deeper in debt to finish what it started.

A lawyer for Naknek Electric Association filed papers Oct. 29 in U.S. Bankruptcy Court in Anchorage seeking permission to borrow $1.5 million from the National Rural Utilities Cooperative Finance Corp.

CFC, as it’s known, is a private, nonprofit lender based in Herndon, Va.

Naknek Electric needs the money for equipment necessary to clean out drilling mud that’s clogging its geothermal well. The co-op drilled the 10,433-foot well beginning in August 2009 in hopes of finding a hot water source it can harness to generate electricity.

Unless the cleaning work is done, the co-op’s lawyer has said, the only alternative might be to plug and abandon the well, ending a quest to get away from burning expensive diesel to make electricity for the villages of Naknek, South Naknek and King Salmon.

What led to bankruptcy

Naknek Electric filed for Chapter 11 bankruptcy reorganization and protection from creditors on Sept. 29, citing assets of $10 million to $50 million and liabilities in the same range. Among the co-op’s creditors are oil and gas contractors such as Baker Hughes and BJ Services that had a hand in the geothermal project.

The co-op’s biggest creditors, however, are lenders such as CFC that specialize in financing rural utilities. CFC loaned the co-op $8.5 million to buy the drilling rig that remains atop the geothermal well seven miles northeast of King Salmon.

In October, the co-op mailed a newsletter to its members explaining the situation, and citing Continental Airlines, Macy’s and Texaco as examples of companies that “reorganized and flourished” after a bankruptcy filing.

The newsletter attributes the co-op’s financial distress to three main items:

*The U.S. Department of Energy unexpectedly barred the use of $8.5 million in grants for the co-op’s first geothermal well “due to the lack of an environmental assessment.” The funds were to be used only for subsequent wells.

*The Alaska Oil and Gas Conservation Commission caused more than $4 million in added expense by requiring the co-op to treat its geothermal well as an oil and gas well — that is, a well that could encounter dangerous hydrocarbons. The AOGCC notified the co-op three days prior to spudding that it would have to comply with certain regulations, the newsletter said.

*The co-op experienced shortfalls in an anticipated $15 million line of credit and other financing.

Alternative energy dream persists

The newsletter suggests the co-op had little alternative but to embark on the risky geothermal drilling campaign.

In 2008, diesel to run the utility’s generators soared above $4 a gallon. Meantime, higher heating, transportation and food costs “drove residents and small businesses to leave town and close up shop.” Co-op membership and residential electricity sales declined.

Faced with the possibility of losing large power customers such as Bristol Bay salmon processors, and unwilling to let the co-op “die with the community,” the board of directors and managers chose to try to tap the region’s known geothermal potential.

“The Directors and management knew there were risks involved, but the analysis indicated the risks were ones that NEA could cope with,” the newsletter said. “Doing nothing was not an option, and NEA’s Board stands by its initial decision to begin the drilling of its first exploratory geothermal well.”

The well contains sufficient temperature and water to provide a minimum of 2 to 3 megawatts of power, even though the drilling fluids haven’t been completely cleaned out, the newsletter said.

Court papers say the $1.5 million loan will allow the co-op to clean and test the well and file an application with the U.S. Department of Agriculture’s Rural Utilities Service for a $41 million loan guarantee.

“With a $41,000,000 loan, supplemented with grants available to NEA for the geothermal project, NEA will pay off the creditors in this case, drill additional wells and purchase a geothermal power generation plant and distribution system,” said a motion the co-op’s attorney, Erik LeRoy, filed Oct. 29. “NEA’s preliminary test results and utility projections indicate that while a geothermal project will cause a spike in the cost of electricity for its members, in the long run, its members will benefit. NEA estimates that a geothermal plant will supplant 60% to 70% of its diesel generated electricity.”

What’s next

On Dec. 4, the co-op plans to hold a special membership meeting to vote on raising its $25 million debt ceiling. Already, it has almost $50 million in debt and vendor liabilities, court papers said.

Still, the co-op membership “appears to remain supportive of the geothermal project.”

To secure the $1.5 million loan, CFC would receive a lien against the co-op’s diesel-fired power plant in Naknek.

A hearing on the co-op’s motion to approve the loan is scheduled for 9 a.m. Nov. 24 in the bankruptcy court in Anchorage.

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