Deal announced to sell PGW for $1.86 billion

GMCS Editorial: In many cases, a straight forward asset sale of an organization enables the new owners to purchase only the assets of an organization and not the collective bargaining relationship between the employer/employees that once existed. However, this sale has employment clauses specific to the existing employees.  As is the case many times, if the employees being hired by the new ownership were once employees represented by a union and they were content with that representation, a mere showing of cards may be all that is required for the new employer to have to recognize a union.   Additionally, while the current unions may not have any ability to collectively bargain the actual sale of the organization, they may have the rights to bargain the effects of the sale on their members which is often commonplace in asset sales.  Only time will tell what this relationship looks like after the sale.  Nothing is certain.

 

Deal announced to sell PGW for $1.86 billion

Mayor Nutter announced Monday that Connecticut energy company UIL Holdings Corp., has agreed to buy Philadelphia Gas Works for $1.86 billion.

The sale price is at the upper end of the range that the city's financial advisers last year estimated the utility would fetch. After paying off PGW's debts, Nutter said the sale would inject at least $424 million into the city's ailing pension fund.

"When I announced nearly two years ago that the City would begin exploring the sale of PGW, I pledged that I would sign an agreement only if the terms benefited Philadelphia taxpayers and PGW customers," Nutter said in a statement. "This agreement accomplishes those goals and much more."

He said UIL submitted the highest bid and agreed to contract terms that were important to the city: Keeping rates frozen for three years, maintaining PGW's discount programs for low-income families and seniors and preserving PGW employee and retiree pensions.

UIL, whose name surfaced publicly last week as the front-runner in the city's sale process, owns three natural gas utilities in New England and an electric company in New Haven. It would add PGW's 503,000 customers to a portfolio of 712,000 gas and electric customers.

"Energy is our core business and UIL is well suited to operate the natural gas utility business in Philadelphia and make substantive investments in its infrastructure," James P. Torgerson, UIL's chief executive, said in a statement.

UIL said it plans to operate dual corporate headquarters in Philadelphia and New Haven. PGW will become UIL's largest operating company.

The sale, if approved by City Council and the Pennsylvania Public Utility Commission, would end the city's 178-year ownership of PGW, the nation's largest municipally owned gas utility.

Council approval is far from certain. Nutter's relations with Council are frayed, and Council members have questioned why the city should sell one of its most valuable assets, which has been restored to stability in the last decade after a close call with financial ruin.

Council is hiring consultants to help analyze the bid and examine alternatives to a sale.

Nutter has pledged that injection of money into the city's underfunded pension system and will more than make up for the loss of the $18 million annual payment PGW now makes to the city.

But critics say it is only a matter of time before a profit-generating business will need to extract savings from PGW's operations - or raise rates - to satisfy its shareholders.

The Utility Workers Union of America Local 686, which represents 1,150 PGW employees whose contract expires in 2015, is opposed to a sale on principle. Union activists have recently been circling City Hall in a sound truck, urging Nutter to reject a sale.

Opponents of privatization argue the utility has been so well-run in recent years the city would be better off trying to grow PGW rather than selling it.

But Nutter and sale advocates say this is an opportune moment, with interest rates low and PGW on steady ground, for the city to unload an asset whose growth potential under municipal ownership is limited.

They say private owners will have more financial and legal capacity to transform PGW into a larger player in a regional energy network increasingly interconnected to production from the booming Marcellus Shale natural gas formation.

"Selling PGW and unleashing the potential of this asset will increase the development of energy enterprises, reduce overall costs for customers and create a competitive advantage for our city," Nutter said in a recent address to the Greater Philadelphia Chamber of Commerce.

PGW's riverfront access and its underused Port Richmond plant that produces liquefied natural gas (LNG) for winter storage was pitched to potential buyers as one of PGW's most attractive assets.

Monday's announcement, which came before stock markets opened in New York, caps a seven-month search for a buyer by the city's brokers, JP Morgan and Loop Capital Partners. The mayor said 33 entities expressed interest in buying PGW.

A financial adviser calculated that PGW could command a price of $1.4 billion to $1.9 billion, with net proceeds to the city of $422 million to $872 million.

UIL, with a market value of about $2.2 billion, is a pure-play utility - almost all of its $115.3 million of profits last year were earned in the highly regulated business of distributing energy.

UIL's principal business for much of its history was operating United Illuminating Co., an electric utility in New Haven with 317,000 customers.

In 2010, it paid $1.3 billion to the Spanish energy giant Iberdrola S.A. to acquire three New England gas utilities: Southern Connecticut Gas Co., Connecticut Natural Gas Corp., and Berkshire Gas Co. in western Massachusetts. The acquisition doubled UIL's size.

UIL's gas utilities serve a different demographic than PGW, whose service territory is contiguous with Philadelphia and includes a large number of low-income customers. PGW's rates are the highest in Pennsylvania state-approved social programs

Though UIL's gas utilities serve older cities like Hartford, New Haven and Bridgeport, their territories include extensive suburban populations where customers have traditionally used fuel oil for heating.

Bolstered by a state government policy to encourage customers to switch from heating oil to natural gas, UIL's gas utilities have added 21,000 customers in the last three years. They now serve about 395,000 customers.

UIL has secured $1.9 billion in short-term financing from Morgan Stanley Senior Funding, Inc. The company said it intends to issue long-term debt and equity to finance the transaction.

Source: Philly.com