Chugach Electric Association recently closed on its acquisition of Municipal Light & Power (ML&P) from the Municipality of Anchorage, Alaska, which was one of the largest acquisitions of a municipal utility by a cooperative. CFC was pleased to support Chugach in various aspects of the transaction, which has been in the works for the past two and a half years following the overwhelming support by Anchorage voters approving the sale of ML&P to Chugach in April 2018.
“The public discussion of whether a city the size of Anchorage needed three electric utilities has been occurring for more than 30 years,” Chugach CEO Lee Thibert said. “With just over 298,000 people living in the Municipality of Anchorage, most agreed three were too many, duplication costs money, and there is a more efficient and cost-effective way to provide service to the relatively small population.” In addition to Chugach and ML&P, a portion of the city is served by Matanuska Electric Association.
The union of Chugach, a combined distribution and generation and transmission cooperative, with ML&P is expected to lead to cost savings and operational efficiencies for the enlarged utility, coupled with lower rates and improved reliability for its members.
Chugach’s Acquisition Will Bring Operational Benefits and Reduced Rates
“The combination creates a special opportunity to achieve synergies and reduce rates,” Thibert said. “The net savings from the combined utility is estimated to be more than $200 million in net present value benefits over the next 40 years. The savings come from achieving greater efficiencies through economies of scale, which helps to hold down costs for the benefit of our members and makes Anchorage a more attractive community in which to live and conduct business.”
The combined entity is also expected to be more financially and operationally efficient, with ML&P’s commercial and industrial customers in Anchorage complementing Chugach’s largely residential service territory. Approximately 23,000 former ML&P customers are joining Chugach as a result of the acquisition, boosting Chugach’s membership to about 92,000 members.
“As a larger utility, Chugach will be better positioned to confront the challenges facing electric utilities across the country, such as declining sales, increasing distributed generation and the need to green the power supply portfolio,” said Kurt Strunk, director of NERA Economic Consulting.
CFC Supported Chugach Financing with a Sizeable Funding Commitment
Chugach financed the bulk of the $986 million transaction cost by raising $800 million in the private placement market. Chugach launched the private placement financing in September 2020. The transaction was very successful, garnering significant interest from fixed-income investors, and was more than four times oversubscribed. CFC supported the deal by making a sizeable funding commitment to the transaction and was awarded one of the largest investor allocations of $70 million.
CFC supported the acquisition of ML&P in several additional ways. CFC provided a “comfort letter” to Chugach’s regulator expressing an interest in participating in the private placement, which helped demonstrate that it had the financial resources to complete the transaction. In addition, CFC’s ultimate participation in the transaction strongly demonstrated to other investors that a key player in the industry was willing to stand behind the transaction.
“CFC’s relationship with Chugach over the years led us to play a meaningful role in a very successful transaction for the system and its members,” CFC Senior Vice President and CFO Andrew Don said. “We have been following Chugach’s progress regarding this acquisition with the city of Anchorage and with the state regulators for some time and were pleased to provide financial advisory and credit support through the process.”
Chugach Communicates the Benefits of Becoming a Cooperative Member
The acquisition closing and integration has generated considerable interest from Chugach members and from former ML&P customers, who are now members of the cooperative.
“There has been a great deal of interest from both legacy and new Chugach members,” Thibert said. “Everybody is wondering how the consolidation will impact them. In the long run, we know that rates will be lower overall than they otherwise would be with two utilities. We are looking forward to watching those savings materialize in the years to come.”
Chugach is actively reaching out to former ML&P customers to communicate to them about the integration and explain what it means to be a member of a cooperative.
“We sent out letters and a welcome package to each new member. We are also continually updating our website and monthly newsletter with fresh information, and we have a robust member services department that takes dozens, sometimes hundreds, of calls each day,” Thibert said. “Due to the ongoing COVID-19 pandemic, we are unable to interact in person in any large way at this time, but we are looking forward to our new members being able to vote in our 2021 board election and welcoming them at our 2021 annual meeting.”
Pandemic Disruptions Affected Chugach’s Acquisition Planning
While the pandemic did not impact Chugach’s completion of the financing of the acquisition, the crisis affected various aspects of planning for the combination of Chugach and ML&P. The integration team meetings that were often hands-on and face-to-face before the pandemic changed to virtual whenever possible. Some limited in-person training in places such as generation and dispatch did occur in order to be ready for a combined utility. The integration team kept the groups small and utilized the health and safety protocols required to reduce the spread of the virus.
Thibert added, “Not surprisingly, the employees of both utilities handled the additional challenges with professionalism, and the efforts kept moving forward as you’d expect from highly trained and motivated teams.”
CFC Continues to Support Chugach’s Financal Needs
CFC has had a long relationship with Chugach, providing financing and credit arrangements to the cooperative over the years. A longstanding bilateral line of credit from CFC provided Chugach support, both in March 2020 due to volatility in the commercial paper market caused by the pandemic and in 2008 when the auction rate securities market failed. CFC has been lead arranger and administrative agent for Chugach’s syndicated credit facility, which was upsized in 2019 in anticipation of the ML&P transaction. In 2017, CFC financed the Battle Creek Diversion Project—designed to increase energy output at the Bradley Lake Hydroelectric Project.
“CFC’s support of Chugach through the regulatory approval process and ultimately in the financing of its acquisition of ML&P was a rewarding experience,” CFC Regional Vice President Ann Shankroff said. “CFC marshalled internal resources across the organization to deliver a sizeable commitment to the Chugach bond transaction at a very competitive rate. We look forward to a longstanding relationship with Chugach and continuing to support the combined entity’s financing needs in the years ahead.”
CFC’s G&T group provides many types of financing—private placement and structured term loans, syndicated credit facilities and bilateral lines of credit, as well as guarantees and LOCs—and financial advisory services to G&T member systems.
Contact your CFC regional vice president to discuss what financing and services can help your cooperative.