[BETA] Fortnightly

Wholesale customer turns tables, threatens leveraged buyout against its own supplier.

Matanuska Electric Association, the largest customer of Alaska's Chugach Electric Association, has offered to acquire Chugach, the state's largest power company. But in launching the hostile takeover, Matanuska said it would pay not a cent to Chugach. Adding a new twist to the term "cooperative finance," the Matanuska co-op proposed a leveraged buy-out - a takeover strategy popular during the 1980s. In this case, Matanuska would buy Chugach by refinancing most of its $347 million debt and then realize further savings through economies of scale achieved by the merged company.

Should Matanuska succeed in its efforts, it plans to create a separate generation and transmission company, while adding Chugach's retail customers to its own distribution system. The result would be that Matanuska's new, wholly owned subsidiary, Chugach Electric Power, would provide wholesale power to Matanuska. Matanuska, in turn, would become a larger cooperative, distributing power to about 85,000 members.

Matanuska claims that the acquisition would produce savings of at least $200 million during the next 25 years. It wants to refinance a large portion of Chugach's debt from the present 9 percent interest rate to a rate of about 7 percent. The refinancing alone, Matanuska says, would save about $10,000 per day, or $100 million during the next 25 years.

A Long and Rocky Road

The Chugach Electric board of directors remains skeptical of the offer. In a Nov. 3 letter to Wayne D. Carmony, Matanuska Electric general manager, Chugach's general manager, Eugene N. Bjornstad, questioned Matanuska's veracity. Bjornstad wrote, "All the evidence so far points to your determination to filter our words and actions through a lens that is designed to portray reality as fantasy." Bjornstad accused Matanuska of springing the proposed takeover on an "unsuspecting" Chugach board, and then withholding information necessary to evaluate the proposal.

Bjornstad pointed out that Chugach was well aware of alternative financing methods and lower interest rates. He said that Chugach has continually reviewed refinancing alternatives, and that in light of the hostile takeover attempt, it is reevaluating them. Bjornstad blasted Matanuska for "engaging in a publicity barrage," stating that such matters are best discussed in private under agreed-upon ground rules.

Further raising the tension between the two companies, Matanuska filed a formal complaint with the Alaska Public Utilities Commission on Dec. 2, seeking investigation of Chugach's failure to refinance its long-term debt. The complaint also asks the PUC to hold a public hearing on whether Chugach's inaction constitutes mismanagement.

Disclosure Denied

Meanwhile, Matanuska has refused to release the detailed analysis of its proposal to Chugach, instead asking that Chugach's consultants from firms such as Goldman, Sachs & Co. meet in Marietta, Ga., the home of Matanuska's consultant firm, GDS Associates Inc., and go over the proposal.

Matanuska says its position is justified. "While much of the strategic business and financial data you have requested could be jointly developed if our boards were going forward to implement a merger, it would be imprudent for Matanuska to provide that information in an acquisition offer that