UIL ends its bid to buy PGW

UIL Holdings Corp. has terminated its $1.86 billion offer to buy the Philadelphia Gas Works, ending Mayor Nutter's ambitious two-year effort to privatize the nation's largest municipal gas utility.

The Connecticut utility announced Thursday that it was pulling the plug on the deal, moribund since City Council President Darrell L. Clarke's surprise announcement Oct. 27 that the legislative body would not hold hearings or a vote on the proposal.

"We are extremely disappointed that no ordinance was introduced to approve the acquisition, and we're equally disappointed that we were not afforded a hearing to present the facts regarding our bid proposal," said James P. Torgerson, UIL's president and chief executive.

Despite intense lobbying by business and labor leaders to approve a sale, and UIL's offers to modify the terms to satisfy Clarke's stated concerns, no Council members stepped forward to introduce the legislation to sell PGW.

Nutter, in a statement, said Council's decision not to hold hearings was "a big mistake and represents a massive failure" in leadership.

"The citizens of our city, the customers of PGW, and our own city workers will feel the negative effects of this terrible indecision for years to come, and ultimately will regret that City Council chose to end a legitimate debate on this issue even before it started," the mayor said.

Clarke, in a statement, blamed the deal's failure squarely on Nutter, saying he did not include Council sufficiently during the bidding process.

"Such a shortsighted deal that did not address the concerns of the approving authority, in this case City Council, never had a chance of winning our endorsement," Clarke said.

Under the agreement, the sale would have expired at year's end. After legislation was not introduced at Thursday's Council meeting, it became clear that Council would not take up the matter by the deadline.

Nutter said the sale to UIL, a New Haven utility operator, provided the city an opportunity to liberate itself from a highly indebted noncore business and attract private investors to dramatically speed up replacement of brittle gas mains.

The deal also would have injected a half-billion dollars of profit into the city's underfunded pension plan, which Nutter said would provide budget relief for years to come.

The sale took on urgency in recent months as part of a growing movement among regional political, business, and labor leaders to promote Philadelphia as an "energy hub." Business leaders say a private PGW could play a bigger role in partnering with industries connected to the booming Marcellus Shale natural gas field.

UIL's decision to pull out came on the eve of a meeting that the Greater Philadelphia Chamber of Commerce is holding Friday at Drexel University to promote Philadelphia as a regional energy hub.

The one-day summit is aimed at building support among potential investors to create or expand energy-related businesses in the region. The failure of the PGW deal is unlikely to go unnoticed.

"The eyes of the city, state, and our country, if not the world, are on Philadelphia and looking at how we conduct business, how we treat good companies like UIL, and how we handle big decisions," Nutter said.

Clarke said there was "no appetite" on Council for the deal. In an interview with the Inquirer Editorial Board earlier Thursday, he said he had always been opposed to privatizing PGW's 1,630 public-sector jobs.

Council leaders objected that Nutter had discounted options for operating PGW under city ownership. Clarke and other Council members say they are more interested in pursuing a public-private partnership to run or sell part of PGW while retaining city ownership. But Clarke would not disclose plans for alternative deals Thursday.

Most of the partnership conversations have focused on expanding the utility's production of liquefied natural gas (LNG), which PGW uses to store energy for winter use. There is a growing market for LNG as a fuel.

Shelley R. Smith, the city solicitor, has discounted partnerships as posing insurmountable legal issues that would jeopardize the tax-exempt revenue bonds the city used to finance the LNG operation.

Nutter has said a partnership would do nothing for the pension plan or to relieve the city of PGW's liabilities.

City leaders and consultants in recent decades have recommended that the city get out of the gas business - Philadelphia is one of the few major cities that still owns and operates a gas utility.

But PGW's financial condition did not make it attractive to private buyers.

Council had to lend PGW $45 million in 2000 to keep it afloat. The utility's annual $18 million payment to the city was suspended for seven years until 2011, at a cost of $126 million to the city treasury.

Six years ago, PGW had to go to the Pennsylvania Public Utility Commission for an emergency $60 million rate increase to help it pay bills.

In 2008, the Pennsylvania Economy League said the city would be fortunate to find a buyer to take the financially troubled PGW off its hands.

With new management in place, and under the regulatory authority of the PUC, the utility has improved to the point that its financial condition is significantly stabilized.

The PUC, alarmed by PGW's financial condition and the slow pace at which it was replacing gas mains, mounted pressure on the city to explore a sale.

Nutter in 2010 hired banker Lazard Freres & Co. to study alternatives for the utility. It reported back in 2012 that a sale was the best option, and estimated that PGW might fetch as much as $1.85 billion.

On the basis of that report, Nutter started the sale process. It turned out to be an opportune moment, when utilities were valued at a premium and interest rates were low. Thirty-three entities submitted bids, and UIL's came in the highest.

Council's own consultants found no fault with the fairness of the sale price or the process.

In a PUC hearing last month, Commissioner James H. Cawley said he was worried that PGW's financial condition was unsustainable as a municipal utility and urged the city to sell.

"I have never seen a more generous and fair and beneficial terms to a seller in my entire career," said Cawley, who has spent 15 years as a regulator.

"I can't imagine looking a gift horse like this in the mouth, particularly when the company is now in a financial condition which, I'll speak for myself here, may not be sustained if this company is not sold."

UIL spent more than $21 million in its yearlong effort to buy PGW. Most of the acquisition costs were to maintain a letter of credit that would have covered the purchase price.

PGW spent $2.1 million of its funds to hire a team of financial, legal, and communications advisers to market the sale. Council spent $522,000 on a consultant to examine the deal.

The brokers who managed the sale, JPMorgan and Loop Capital Markets, who stood to earn more than $12 million in fees if the deal went through, will also earn no commissions.

UIL, in its sales agreement, pledged to freeze rates for three years, and maintain PGW's discount programs for low-income families and seniors.

Under the deal, PGW employee and retiree pensions would have been fully paid up. UIL promised to operate dual corporate headquarters in Philadelphia and New Haven. It pledged to keep PGW's six neighborhood offices open. It would have assumed all of PGW's environmental liabilities.

UIL pledged to maintain total payroll above 1,350 workers.

But Clarke regarded that as a pledge to reduce PGW's workforce. His statement after the deal fell through maintained that UIL would have been allowed "to lay off employees and to shift jobs away from experienced PGW workers."

He was also concerned that PGW workers, who must be city residents, would no longer have a residency requirement as employees of a private company.

Mayor Nutter's Statement

Mayor Nutter released the following statement on the collapse of the deal to sell PGW:

"This decision by the Philadelphia City Council is a big mistake and represents a massive failure in leadership for our city and our citizens. It is unfortunate for Philadelphia that City Council could not make a public decision in this important matter following public hearings and an up-or-down vote. . . .

"The citizens of our city, the customers of PGW, and our own city workers will feel the negative effects of this terrible indecision for years to come, and ultimately will regret that City Council chose to end a legitimate debate on this issue even before it started.

"The eyes of the city, state, and our country, if not the world, are on Philadelphia and looking at how we conduct business, how we treat good companies like UIL and how we handle big decisions.

"The roles and responsibilities of each branch of our government, in a transaction such as this, are clearly set forth in the Home Rule Charter, and unfortunately, in this instance, City Council failed to represent our own vested employees, all of its constituents, and the larger city interests.

"Rather, it allowed small-minded, parochial, and often petty issues and interests to get in the way of larger, broader, and more innovative opportunities to move forward on behalf of all of our citizens, who deserved the chance to see, hear, and learn more about an incredible proposal to transform PGW into a true national, if not international, leader in providing energy services. . . .

"PGW still needs support and investment, and now that City Council has made its decision to do nothing, it is imperative and vitally urgent that Council President Clarke release his public-private partnership plan in full detail so that the citizen taxpayers and ratepayers can understand his plan for PGW and its future. I look forward to reading that plan soon."

Council President's Statement

City Council President Darrell L. Clarke had this to say:

"This year, the City Council of Philadelphia has learned a great deal about opportunities to enhance PGW's operations and to establish our city as the center of a regional energy hub. It is unfortunate that Mayor Nutter chose to pursue an extremely narrow deal to privatize PGW that ignores opportunities to increase Philadelphia's economic output. This deal would have resulted in significant job loss among Philadelphians by allowing UIL to lay off employees and to shift jobs away from experienced PGW workers, who are bound by residency requirements to live in our city, to less experienced workers from anywhere outside of Philly.

"Make no mistake, the failure of this deal is not the fault of UIL Holdings. The lack of sufficient jobs, consumer, and safety protections in this deal are a direct result of the Nutter administration's Request for Proposals, which was limited in scope and issued with no input from City Council. Such a shortsighted deal that did not address the concerns of the approving authority, in this case City Council, never had a chance of winning our endorsement. It is a shame that the administration did not make this clear to UIL earlier in the process. . . .

"The debate over PGW is one we should have as a city with all stakeholders at the table. The termination of this one particular sale agreement is not the end of this debate, which thanks to the legislative branch is now fully public, as it should have been all along. Once again, the Nutter administration has learned that the birthplace of American democracy has little tolerance for sweeping policy decisions made unilaterally with no input from the public. It is my sincere hope that our city will move forward on maximizing energy industry opportunities in a much more collaborative, inclusive, and thoughtful way."

Source: Philly.com