Beluga River Unit

9 Months Ended

Sep. 30, 2016

Beluga River Unit [Abstract]

Beluga River Unit

9. BELUGA RIVER UNIT

On February 4, 2016, Chugach entered into an agreement entitled, “Purchase and Sale Agreement between ConocoPhillips Alaska, Inc. and Municipality of Anchorage d/b/a Municipal Light & Power and Chugach Electric Association, Inc.” The Purchase and Sale Agreement transfers COP’s working interest in the BRU to Chugach and ML&P. The total purchase price was$148.0 million, with Chugach’s portion totaling $44.4 million. Chugach’s interest in the BRU is to reduce the cost of electric service to its retail and wholesale members by securing an additional long-term supply of natural gas to meet on-going generation requirements. The acquisition complements existing gas supplies and is expected to provide greater fuel diversity at an effective annual cost that is $2 million to $3 million less than alternative sources of gas in the Cook Inlet region.

Under the joint bid arrangement, Chugach’s ownership of COP’s working interest is 30% and ML&P’s ownership is 70%. The ownership shares include the attendant rights and privileges of all gas and oil resources, including 15,500 lease acres (8,200 in Unit / Participating Area and 7,300 held by Unit), Sterling and Beluga producing zones, and COP’s 67% working interest in deep oil resources. On April 21, 2016, the acquisition was approved by the RCA (see “Note 4 – Regulatory Matters – Beluga River Unit”) and the transaction closed on April 22, 2016.

Chugach had a firm gas supply contract with COP, as previously discussed under “Note 10 – Commitments and Contingencies – Commitments - Fuel Supply Contracts”. In addition to Chugach, COP had contractual gas sales obligations to ENSTAR through 2017. These contracts were assumed by ML&P and Chugach on the basis of ownership share.

The BRU is located on the western side of Cook Inlet, approximately 35 miles from Anchorage, and is an established natural gas field that was originally discovered in 1962. The BRU was jointly owned (one-third) by COP, Hilcorp, and ML&P. Following the acquisition, ML&P’s ownership of the BRU increased to approximately 56.7%, Hilcorp’s ownership remained unchanged at 33.3%, and Chugach’s ownership is 10.0%.

Chugach’s interest in the BRU is insignificant to the BRU as a whole and compared to Chugach’s operations prior to the acquisition. As such, Chugach has not provided supplemental pro forma financial information. Since the BRU activities are limited to the extraction of natural gas, Chugach is following the guidance provided in ASC 932-810-45-1 (Extractive Activities-Oil and Gas – Consolidation – Other Presentation Matters) and will record its pro rata share of the assets, liabilities, revenues and expenses of the BRU.

Chugach recorded the acquisition at fair value. The allocation of the purchase price is considered preliminary, pending receipt of the final valuation report which is expected by the end of 2016. The table below outlines the acquisition allocation recorded at September 30, 2016.

	Amount
Utility Plant:
Proved Developed Reserves	$	33,693,922
Proved Undeveloped Reserves		10,710,000
Asset Retirement Obligation		3,523,409
Utility plant		47,927,331
Cost of removal obligation		(3,523,409)
Cash Consideration	$	44,403,922

Acquisition costs are recorded as deferred charges on Chugach’s balance sheet because Chugach believes it is probable the RCA will allow them to be collected through rates, and totaled $1.4 million at September 30, 2016. These charges are being amortized over the estimated life of the BRU and recognized as depreciation and amortization on Chugach’s statement of operations.

Each of the BRU participants has a right to take their interest of the gas produced. Parties that take less than their interest of the field’s output may either accept a cash settlement for their underlift or take their underlifted gas in future years. As part of the BRU acquisition, Chugach acquired 30% of COP’s underlift, which was 69,099 Mcf at acquisition and68,354  Mcf at September 30, 2016. Chugach has opted to take the cumulative underlift in gas in the future and will record the gas as fuel expense on the statement of operations when received.

The revenue generated by Chugach’s interest in the BRU operations is primarily associated with the gas sold to ENSTAR, pursuant to the aforementioned contract due to expire December 31, 2017.  Chugach recognized revenue from the BRU in the amount of $1.8 million through September 30, 2016.

Chugach records depreciation, depletion and amortization on BRU assets based on units of production. As of September 30, 2016, Chugach lifted 1.3 Bcf resulting in approximately 25.7 Bcf remaining in Chugach’s proven developed reserves.Prior to the acquisition, COP was the contracted operator of the BRU. Following the acquisition, Hilcorp temporarily assumed operations under an agreement similar to that previously held by COP. A final operator agreement is expected during the fourth quarter of 2016. In addition to the operator fees to Hilcorp, other BRU expenses include royalty expense, interest on long-term debt, and estimated property tax. All expenses other than depreciation, depletion and amortization and interest on long-term debt are included as fuel expense on Chugach’s statement of operations. Chugach has applied and qualified for a small producer tax credit, provided by the State of Alaska, resulting in an estimate of no liability for production taxes. The revenue in excess of expenses less the allowed TIER from BRU operations is adjusted through Chugach’s fuel and purchased power adjustment process.