A small Alaska electric cooperative’s bold but troubled attempt to establish a geothermal energy source is heading toward a costly close.
In a new bankruptcy reorganization plan filed June 28, Naknek Electric Association says it intends to plug and abandon the one geothermal well it drilled, and sell off its drilling rig.
Unsecured creditors would receive 8 cents on the dollar under the plan.
The plan amends an initial reorganization plan Naknek Electric filed in September 2011. That plan held out some hope that work on the co-op’s geothermal program could continue. But no such intent can be found in the amended plan, which says the co-op couldn’t put together the necessary financing.
The reorganization plan is subject to creditor and court approval.
Difficult wellNaknek Electric, serving 700 members and 1,100 meters in the King Salmon and Naknek communities, embarked several years ago on a quest to find a geothermal power source as an alternative to the skyrocketing costs for diesel to run its generators.
Geothermal prospects looked good, considering that the volcanic Katmai National Park and Preserve is fairly close to the co-op’s service area.
In January 2008, Naknek Electric bought a 120-acre site a few miles outside of King Salmon for $120,000, and later spent $11.5 million to buy and improve a drilling rig.
On Aug. 16, 2009, the co-op spudded the G-1 exploratory well, with an eye toward drilling multiple wells and building a geothermal power plant.
But serious problems soon beset the drilling effort.
The chief issue was the use of barite, a dense mineral commonly employed in heavy drilling muds.
While the well showed some promise as a geothermal source, the barite clogged the hole, preventing it from flowing freely, Naknek Electric said.
The co-op cited the unexpected withholding of government grants, and state regulators requiring extra drilling safety measures, as factors leading it to petition for Chapter 11 bankruptcy protection from creditors.
By the Sept. 29, 2010, filing date, Naknek Electric said it had run up some $40 million in debt that was “in one way or another associated with the geothermal project.”
What’s rig really worth?The reorganization plan lays out steps to sell certain assets. It’s clear, however, that proceeds won’t come close to repaying creditors in full.
Chief among these assets is the National 1320 rig, still located at the drilling site. An inventory of casing and other material, purchased for $2.5 million, also remains on site.
While the co-op’s financial statement values the rig at about $12 million, oilfield services company Baker Hughes has obtained an appraisal of less than $4 million, says a disclosure statement filed in court with the reorganization plan.
“Sale of the rig has proven difficult,” the court papers say. “But there is significant interest in lease of the rig.”
Naknek Electric wants to use the rig to plug and abandon the geothermal well, but doesn’t currently have the estimated $804,000 to do the job, the papers say.
If the rig is shipped out before the money to plug and abandon the well can be raised, the co-op “will lease a wireline vehicle” or similar equipment to do the work.
Baker Hughes is among the co-op’s secured creditors with a claim of more than $3.5 million.
The National Rural Utilities Cooperative Finance Corp., a private, nonprofit lender based in Herndon, Va., has a claim of nearly $26.8 million. CFC made loans to Naknek Electric for the geothermal program, including the rig purchase.
Unsecured claims total $37.1 million. The reorganization plan calls for these creditors to be paid $3 million over six years beginning in August 2014.
That equates to about 8 cents on each dollar of claim, the disclosure statement says.
Rate squeezeIf the plan is confirmed, Naknek Electric will continue generating diesel-fired electricity and serving its members as it works to repay creditors, court papers say.
While the plan doesn’t raise rates, the co-op “does project that some rate increases will be necessary” to fund the plan, the disclosure statement says.
The utility is in a tough spot, saying it “cannot indiscriminately increase rates to pay its creditors.”
The co-op believes the rates it currently charges members are close to a “tipping point” that could drive large customers to find other ways to meet their power needs.
The main concern is Naknek’s cannery row, where much of Bristol Bay’s huge commercial salmon harvest is packed each summer.
The packing companies could start generating more, or all, of their power with on-site generators. Or they could haul fish to other processing locations in or near Bristol Bay.
If a big processor switched to its own power, the co-op would have to increase rates on its remaining customers to meet expenses.
“A loss of any load could easily trigger a cascade effect where increased rates lead other commercial customers to switch to their own electric generation or shift operations to other communities,” the disclosure statement says.