Eklutna hydro power a piece of puzzle as Chugach, ML&P refine sale

  • Power from the Eklutna hydroelectric plant on the Knik River is part of the pending deal between Chugach Electric Association and Anchorage Municipal Light & Power for Chugach to acquire the utility. The two own a combined 83.3 percent of the plant with Matanuska Electric Association holding the remaining 16.7 percent. (Photo/Courtesy/Chugach Electric Association)

Officials are on the clock to hash out the all-important details of the $1 billion sale of Anchorage Municipal Light and Power to Chugach Electric Association in time for the necessary approvals.

Nearly two-thirds of Anchorage voters consented in April to a proposal from Mayor Ethan Berkowitz’s administration to sell the municipality-owned electric utility to the neighboring Chugach cooperative, but that vote was just the start of the real work in a deal Municipal Attorney Becky Windt Pearson called “immensely complicated.”

The resolution voters approved requires the Anchorage Assembly and Chugach board of directors to subsequently approve the final terms of the sale by Dec. 31.

That ostensibly sets a much sooner deadline for final negotiations, as both bodies will need time to review and debate the purchase and sale.

Windt Pearson said the negotiating teams have committed to getting an asset purchase agreement done by Oct. 24 in advance of Assembly public meetings and work sessions expected in November, adding that about half of the transaction documents have been negotiated.

“We started with a very rudimentary set of terms and we’ve been working towards something that is more nuanced and we’re really pleased with how far we’ve come,” she said.

The Assembly is tentatively scheduled to vote on the sale Dec. 4.

The utility consolidation is also subject to approval by the Regulatory Commission of Alaska, which could require changes to the structure of the deal.

As it stands now, the all-in price for ML&P has gone down slightly from $1.024 billion to $1.009 billion, mostly because of lower-than-expected costs to execute the deal.

Chugach has also committed to municipal requests to not lay off any ML&P employees or raise customer rates because of the sale, Anchorage officials said.

CEO Lee Thibert said Chugach would find similar senior-level positions for those currently in leadership positions at ML&P.

Ekluta hydro shift

The biggest change to the original proposal is a shift away from Chugach making 30 years of unsecured payments totaling $170 million. Instead, the utility has agreed to a 35-year power purchase contract from the 39-megawatt Eklutna hydroelectric plant, which Anchorage will remain a partial owner of.

How much power Chugach buys from the Eklutna facility will depend on whether or not Matanuska Electric Association agrees to increase its stake in the hydro plant through a separate but related deal with Anchorage, according to Windt Pearson.

Currently, the municipality holds a 53.3 percent stake in Eklutna hydro, Chugach is a 30 percent owner and MEA owns the remaining 16.7 percent.

Anchorage officials have put forth an offer for MEA to own up to 35.7 percent of the plant or remain a 16.7 percent owner and buy more power from it, according to the power purchase term sheet.

If that happens, Chugach would have rights to the remaining 64.3 percent of Eklutna power. If MEA declines, Chugach would simply buy more power from Anchorage, which would remain the majority Eklutna owner.

In the event MEA accepts, Chugach’s power purchase payments would start at about $2.5 million per year and gradually increase to more than $3.5 million in year 35, the term sheet states.

Without greater participation from MEA, Chugach would start by paying $3.9 million for more power in year one and end with a $5.4 million payment by the end of the power purchase agreement.

Windt Pearson said the municipality will keep title to Eklutna either way and the power purchase arrangement puts Anchorage in a better position than the originally contemplated payments that amounted to a 30-year unsecured loan.

“(Eklutna) is our asset. If there’s a default under the agreement we keep it and can do something else with it,” she said.

MEA spokeswoman Julie Estey said the utility officials are in preliminary conversations with their municipal counterparts to discuss a possible Eklutna deal.

Municipal Manager Bill Falsey described the Eklutna proposal as the “correctly shaped puzzle piece to fit the hole” of the less desirable direct payment option.

“It’s clean, so rather than retaining a single generation unit at (ML&P’s plant) 2A, with this we could retain the entirety of the MOA share of the Eklutna plant,” Falsey said.

Chugach will also be responsible for operating and maintaining the Eklutna hydro infrastructure, which could be a significant point given major changes are likely coming to the Eklutna River watershed over the next decade.

A 1991 agreement in which the U.S. Department of Energy sold the Eklutna hydro plant to the utilities included a mandate for the plant’s owners to start studying options to restore fish and wildlife habitat in the Eklutna River in the coming years.

Eklutna Lake, with its large earthen dam, also provides the vast majority of Anchorage’s water supply in addition to fueling the hydro plant with water diverted away from the Eklutna River.

Environmental studies on how to mitigate the impacts of the dam and power plant must start by 2022; the work must be done by 2032, but the Assembly has urged the utilities to start the process sooner.

“Some form of restoration is going to happen,” Anchorage Assembly member Forrest Dunbar said at the work session.

If the only option is to shut down the hydro plant, Chugach will continue to make the power purchase payments, according to the agreement term sheet.

Clearing debt, PILT

Windt Pearson said defeasance costs on the $542 million of ML&P debt Chugach agreed to pay off at closing will be $13.3 million less than originally calculated and the annual payment-in-lieu-of-taxes, or PILT, that Chugach will pay the city for the assets it acquires also won’t be quite as much as once thought based on ML&P’s latest electric rate case determination by the RCA.

The debt retirement will account for the vast majority of $767.8 million in cash Chugach will pay the municipality at closing.

The PILT, which will replace ML&P’s municipal utility service area, or MUSA, payments, will also be paid over 50 years versus the 30-year term originally contemplated. MUSA payments are a substitute for property taxes on publicly owned utilities and are accounted for in ML&P’s customer rates.

Recent MUSA payments have been in the $6 million per year range for ML&P.

“There will still be the question at the end of that (50 years) as to how that revenue source is replaced but we have a longer time to consider how to do that, what kind of structure to put in place,” Windt Pearson said.

The PILT has also been structured to prevent legacy ML&P customers from bearing the brunt of paying for the transaction, she added. Because it is a calculation based on the assets located in the ML&P service territory, primarily Midtown and Downtown Anchorage, there were concerns that if it continued to be calculated based on actual asset investment it could create a disincentive for Chugach to make future investments in the area.

As a result, the same payments will be due regardless of what Chugach does there, Windt Pearson said.

That structure will remain until 2033 — while former ML&P customers are getting the benefit of the utility’s ownership stake in the Beluga River natural gas field — at which point the PILT will shift to all Chugach customers, she said further.

The Beluga River field is expected to produce feedstock natural gas through 2033.

Financing

With the major points worked out, Chugach’s Thibert said the utility has retained three financial advisors to help it secure the necessary cash to close the deal. Thibert said that while near-term interest rates are gradually rising, rates on 10-year terms have been flat.

“I think the market looks very good right now for co-op financing. The yield curve has been very flat, so that’s encouraging,” he said.

“We’ve been talking to financiers out there; there is interest in the market. We feel that this will get plenty of subscriptions once we put this thing out for bid.”

Chugach is ready to finish the deal, he added.

“We put a lot of time and energy into it and we still have some more work to do but we feel very good about where we’re at. We think it’s been a good process and we look forward to a successful transaction,” Thibert said.

 

(Editor's note: This story has been updated to correctly note the owners of the Eklutna hyroelectric facility are required to study ways to mitigate its evironmental impacts, but are not immediately required implement mitigation based on the 1991 agreement.)

Elwood Brehmer can be reached at [email protected].

Updated: 
10/04/2018 - 1:13pm

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