A good deal? Who knows?

Watching the Town Hall last evening on the proposed $1 billion sale of Anchorage’s Municipal Light & Power utility to the Chugach Electric Association, it seemed we had heard most of the information previously.

While it largely was redundant, calling the meeting a dog-and-pony show would be unfair. There was a good amount of much-needed information given out.

What was missing: Will the deal reduce taxes? How? By how much? Why did the city abandon a bid process to settle on Chugach? Why were there no Requests for Proposals sent out? After all, at least five other entities sent letters of interest. And why end-run the city charter to reduce the vote percentage needed to approve the sale – from 60 percent to 50 percent? The city’s telephone utility sale, after all, was held to the higher standard.

Yes, yes, we get the idea of local control. And we get that a sale is being rushed because of rising interest rates. We get the idea of keeping local money local. The rest of it? Not so much. The sale, perhaps the largest single sale in state history, was negotiated, so far, largely in secret. The few details available were pried loose by the Anchorage Daily News.

There are other questions, too. While the city and Chugach vow increased efficiency, Chugach promises not to lay off any of either utility’s union workers, depending, instead, on attrition to reduce the labor force. The union, the International Brotherhood of Electrical Workers, has been remarkable silent during this process.

If a simple majority votes “yes,” in next month’s election, the sale will be approved, with more negotiations after the election, along with due diligence and another trip to the Assembly for final approval before the Regulatory Commission of Alaska can wade in. We suspect those negotiations also will be carried out in secret. A majority “yes” vote also – and at the same time – would amend the charter to allow that to happen.

Ten years ago, Navigant Consulting, at the behest of ML&P and Chugach performed an evaluation of “alternative approaches to the combination of their respective utilities….” Using several approaches, it considered seven possible combinations, from ML&P buying Chugach to a governmental entity buying both to joint contracted operations. It carried its evaluation out to 2020.

In a letter to then-Mayor Mark Begich and Elizabeth Vazquez, chairman of Chugach at the time, Navigant said:

“The more promising combination alternative include acquisition options where ML&P acquires Chugach and where a third-party governmental entity acquires both ML&P and Chugach to create a new utility.”

In its study, it concluded: “These two cases are estimated to create the highest potential for customer rate savings ‐ $168 million and $218 million, respectively.”

Would Navigant’s conclusions be the same today? You can read them here.

No matter how you couch it, the lack of a procurement process, the lack of a detailed answer on property taxes and the skirting of the city charter all are bothersome.

Is the sale a good deal? We wish we knew.


2 Responses to A good deal? Who knows?

  1. Pete Brown March 7, 2018 at 10:20 pm

    So, tell me how much sense does it make for Chugach to pay $712M up front, financed by bond sales, plus agree to make two additional streams of payments, one for acquisition (the net present value (npv) of which is represented as of $170M and another for Payments in Lieu of Taxes (PILT), npv $142M for ML&P?

    That’s a total cost to Chugach of $1,024M for ML&P whose book value is $254M and which generated income before transfers of $11.7M. (“Income before transfers” is the non profit accounting buzzword for profit before cash is shifted from ML&P to the Muni).

    Valuation is a bit out of my area of expertise but here is a back of the envelope estimate.

    Assuming a rough current market multiple of 25x earnings (a stretch) MLP is worth about $277M based on its earning yet Chugach is paying about 3 to 4 times that and I guarantee there are no gems of hidden assets in its portfolio or achievable economies large enough to justify that premium.

    Also, as an added bonus, Chugach gets to increase its its long term debt by only 160% (provided you only look at its long term bonded indebtedness increase and ignore the obligations for future payments required for the acquisition and PILT. Its real financial leverage is increasing even more.

    How can this possibly make sense?


    The Muni’s synopsis of the proposal

    Chugach Electric Association 2016 audited statement

    ML&P’s 2016 statement

  2. Pete Brown March 8, 2018 at 10:09 am

    I have made an error in my representation above that requires correction. My analysis of the mkt of value $277M is a value based on ML&P’s existing debt structure. There probably is some room for a new buyer to realize some modest interest expense savings. That $277M figure falls right within the range of the other deals which the Muni has just disclosed.

    See: https://s3.amazonaws.com/arc-wordpress-client-uploads/adn/wp-content/uploads/2018/03/07054724/MLP-Comparison-Chart.pdf

    However, my suggestion that CEA would be paying 3 to 4 times a reasonable mkt value is in error. Its an apples to oranges mistake with respect to ML&P’s debt. It was a late night brain fade by me. (Don’t blog when exhausted.)

    Nonetheless, it appears that CEA is still paying a big premium ($340M) comparing it to the other deals disclosed by the Muni. Some of that premium goes to the Muni but a big chunk goes to ML&P employees. Compare the employee retention terms to get an idea. As proposed by the Mayor and CEA, departments will be merged and there will only be personnel reductions through attrition and normal employee turnover and retirements.

    That’s precisely the problem. The redundant employees, be they at CEA or ML&P, will be sleeping at their desks collecting paychecks for years until they collect their generous retirement.

    During normal corporate mergers, layoffs usually occur relatively quickly and economies of scale are achieved in part because the new single entity no longer needs two accounting depts, two billing depts, two purchasing depts, two HR depts, two data processing depts, etc, etc, etc. Redundant employees are usually terminated quickly and given some modest termination package.
    But not here. The Mayor has guaranteed his labor supporters that these efficiencies can not be achieved in any reasonable period of time.

    So, what we have here is a deal that is favorable to the Muni. But the problem is that cost of the purchase, regardless of the buyer, is going to end up being paid by local electric consumers. It can’t be any other way. CEA is overpaying and the entire CEA service area will be burdened by cost of this deal. CEA directors are bailing out the Muni at the expense of the ratepayers and are again breaching their fiduciary obligation to their members.

    Its financial sleight of hand by the Mayor to give the Muni a temporary cash injection to defer the day of reckoning for our expensive municipal government.


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