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 does not contemplate a merger," said Matanuska's Carmony. "This is particularly true given Chugach's frequently stated position that Matanuska is Chugach's competitor."

That stance left Bjornstad fuming, calling it "tantamount to saying that there is no way we can work with one another in connection with your proposal." But Matanuska said it believes that Chugach, by asking for more information, merely is trying to delay a vote on the proposal by the board of directors.

Instead of waiting, Matanuska informed Chugach that pursuant to Chugach's bylaws, it will pursue the matter through a petition process. That process will put the takeover up for a vote by Chugach's electric service customer members. The petition drive began in early November.

Standard & Poor's rates Chugach's bond series 1991A as a single-'A'. S&P says that in order to initiate the acquisition on its own, Matanuska must collect signatures of 10 percent of Chugach's members in order to call a membership meeting. If a majority of the members at the meeting vote in favor of the acquisition, then Chugach's board will have to seriously consider the offer. Matanuska said it expects that the vote would be presented to Chugach's members at its next annual meeting, in April.

Again, Chugach said it feels pushed. "It really makes you curious about the merits of the proposal," said Chugach president Pat Jasper. "Is there some reason to be afraid of a reasoned analysis?" he queried.

In a letter to Chugach members, Bjornstad questioned Matanuska's proposed $500 payment to qualifying active members of both associations if the deal goes through. He explained that the total payment (a $42.5 million "acquisition premium") would force debt service costs up so high and so disrupt cash flow that the surviving association would not begin to see savings for at least 20 years.

"The additional cost ¼ cannot be financed out of savings identified by MEA from combining the two companies."

Not so, says Matanuska's Carmony. "Our analysis shows we can afford a payment of $500 to each active member of the newly expanded Matanuska, once the purchase is concluded," he said. Matanuska claims that Chugach is running a misleading advertisement, in which it portrays their members as fish hungrily eyeing a $500 bill. The result of all the bickering is that Chugach's board officially rejected the takeover in mid-November, claiming that the proposal "would cause either reduced margins or higher rates." But Matanuska is undaunted, and continues with its takeover petition.

Equal Representation?

Jasper also noted that he feared for Chugach's members if the cooperative is broken up, accusing Matanuska of not planning to give Chugach and its members any seats on the board of directors of the new organization, even though Matanuska proposes to add five seats to the present seven. He pointed out that Chugach's 55,000 retail customers would be combined with Matanuska's 35,000-member customer base, and while the new Matanuska would then have three times as many customers, most would be made up of former Chugach members.

"Chugach has been providing safe, reliable, affordable power for 50 years," Jasper observed. "That is not a legacy you throw away overnight based on unsubstantiated assertions."

Lori A. Burkhart is a contributing legal editor to Public Utilities Fortnightly.

Did Someone Say "Hostile"?

Matanuska plays cagey with its refinance plan.

"While much of the financial data you have requested could be jointly developed if our boards were going forward to implement a merger, it would be imprudent [for us] to provide that information in an acquisition offer that does not contemplate a merger."

- Wayne Carmony, Matanuska Electric Asso.

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