MOA approves ML&P sale
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The next step will be to file the purchase agreement with RCA for its approval
Alan Bailey Petroleum News
During its meeting on Dec. 4 the Anchorage Assembly, in a unanimous vote, authorized the sale of electric utility Municipal Light & Power to Chugach Electric Association. The authorization was based on sale terms which have been negotiated between the Municipality of Anchorage and Chugach Electric since the Anchorage electorate voted in April to allow the municipality to proceed with the proposed sale of ML&P.
The next step will be for the municipality and Chugach Electric to sign the purchase agreement and related documents - the Chugach Electric board has already authorized Lee Thibert, the utility’s CEO, to sign off on the deal. The terms of the deal will be filed with the Regulatory Commission of Alaska in the first quarter of 2019. Regulatory approval by the RCA could take six to nine months to complete, with the deal expected to close in the fourth quarter of 2019 or early in 2020, Chugach Electric says.
“We appreciate the hard work and diligence of assembly members and the Chugach board of directors,” Thibert said in response to the assembly vote. “We have had great discussion and dialogue, and we are looking forward to continuing to move toward a combined utility which will ultimately benefit the electric ratepayers of both organizations, the employees, and the community at large.”
“The municipality just took an important step in the sale of ML&P to Chugach. The result will deliver a unified utility to the ratepayers and strengthens the municipality’s financial well-being,” said Anchorage Mayor Ethan Berkowitz. “A lot of people worked very hard to make this happen. I thank them and the people of Anchorage for the willingness to take this next step.”
Critical issues During a Dec. 3 meeting of the Anchorage Chamber of Commerce Rebecca Pearson, attorney for the Municipality of Anchorage, reviewed the outcome of the negotiations that had led to the deal that has now been approved. She said that there were a few critical criteria that the deal had to meet. There was a need to ensure that Chugach Electric pays a competitive price for the municipal utility. There was a need to understand how the municipality would use the funds that it receives from the deal. There was to be no increase to the base rate for electricity for customers as a consequence of the deal. The deal was not to trigger an increase in taxes for Anchorage residents and businesses. And no ML&P or Chugach Electric employees were to lose their jobs.
In January, when the proposal for the ML&P purchase was first put to the Anchorage Assembly, the concept involved Chugach Electric ultimately making payments with an estimated net present value of a little over $1 billion. That consisted of a $170 million cash payment at close of the deal, plus another $542 million for the repayment of all of ML&P’s outstanding debt. Chugach Electric was to make annual payments to the municipality amounting to a net present value of $170 million. And, Chugach Electric would make payments in lieu of taxes for the ML&P properties to the municipality for 30 years. These PILT payments, with a net present value of $142 million, would replace the dividend payments that the municipality currently receives from ML&P, thereby ensuring that the sale of ML&P would not trigger any tax increases in the municipality.
Any excess cash that the municipality receives as a consequence of the transaction, once ML&P’s debts have been paid off, would be paid into the municipality’s trust fund, a fund that creates annual dividends for the municipality - increasing the balance in the fund would increase the size of the dividends, Pearson commented. However, the PILT payments would be cash neutral, since they would simply replace the ML&P dividend.
Refining the terms After the April vote to allow the proposed ML&P sale to proceed, the municipality and Chugach Electric entered negotiations to refine and finalize the terms of the deal. The biggest single hurdle that the negotiators had to cross was the proposed schedule of annual payments by Chugach Electric - in effect, this was a form of unsecured financing, Pearson said. Ultimately, the negotiators came up with an alternative arrangement, under which Chugach Electric would not purchase the municipality’s share of the Eklutna hydroelectric power plant, but instead would have an agreement to buy power from the facility for 35 years. In effect, this agreement would extract for the municipality value that might otherwise have been obtained from the sale of the asset, eliminating the need for unsecured payments while maintaining the overall value of the transaction. Revenues from the power purchase would be put into the municipal trust fund, Pearson said.
Thibert explained that the Eklutna arrangement is purely financial: Chugach Electric would maintain and operate the Eklutna facility on behalf of the municipality.
Pearson also pointed out that there is also an agreement with Matanuska Electric Association that allows MEA to purchase an increased share of the Eklutna plant from the municipality. That would reduce the municipality’s revenues from the plant but would respond to a directive from the Anchorage Assembly to find benefit for MEA ratepayers from the sale of ML&P - some MEA ratepayers live in the northern part of Anchorage. If MEA does increase its interests in the Eklutna plant, those ratepayers would benefit from MEA’s increased access to cheap hydropower, Pearson said.
PILT methodology Also as part of the negotiations over the deal, the municipality and Chugach Electric designed a PILT methodology that would eliminate any disincentive for Chugach Electric to build new plant inside ML&P’s service area, or perhaps to avoid some PILT liabilities by moving plant out of that area. Essentially, the annual PILT dues will be calculated by using the total value of the ML&P plant at the close of the sale to Chugach Electric, upping this value annually by the percentage annual increase in the value of Chugach Electric’s properties, and then multiplying the result by the property tax mil rate for the year.
The negotiated agreement has also extended the period during which Chugach Electric will make PILT payments from 30 to 50 years, thus securing that source of income for the municipality for a longer period of time, Pearson said. And, to ensure that the transaction does not impact electricity base rates, consumers within the ML&P service area will initially bear the full cost of the PILT while also retaining the benefit of the relatively low cost of ML&P’s share of natural gas fuel obtained from the Beluga River gas field. However, after 2033 all of Chugach Electric’s customers will contribute to PILT payments while also obtaining full benefit from the use of Beluga gas.
A stronger deal Both sides of the negotiations over the terms of the deal feel that the deal is now stronger than it was originally, Pearson said.
And the total net value of the purchase transaction has dropped, although it remains around $1 billion. The drop primarily results from the cost of paying off the ML&P debt being lower than originally thought, although the net present value of the PILT payments has also fallen slightly, Pearson explained. The deal, as now agreed, involves a cash payment at close of $767.8 million and PILT payments with an estimated net present value of $166.8 million, she said. The net present value of the Eklutna power purchases would be in the range $48.8 million to $75 million.
Thibert said that the utilities have also been developing plans for integrating 11 different functional areas following the close of the ML&P purchase.
“It sounds simple until you get into the details,” he said.
He confirmed that no employees will be laid off as a result of the deal, but that employment levels will drop through attrition over time. Probably over the next four to five years around 70 to 80 job positions will go, he said.
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