UIL Holdings Corporation to buy Philadelphia Gas Works for $1.9bn
April 2014 | DEALFRONT | PRIVATE EQUITY & VENTURE CAPITAL
Financier Worldwide Magazine
Energy company UIL Holdings Corporation announced in March that the company had agreed to acquire the assets and certain liabilities of the largest municipally owned natural gas utility in the US, the Philadelphia Gas Works (PGW).
The deal for PGW is worth $1.9bn, and UIL have indicated that the transaction will be completed on a cash and debt free basis via a fully committed facility from Morgan Stanley Senior Funding Inc. In a statement announcing the deal, UIL noted its intention to issue long term debt and equity in amounts consistent with maintaining investment grade credit ratings to permanently fund the transaction. UIL also intends to capitalise a new operating subsidiary at the closure of the transaction.
According to UIL’s statement, the transaction has been unanimously approved by UIL’s Board of Directors. “PGW Operations is an excellent operational and strategic fit for our company and a natural addition to our portfolio of fully regulated utilities,” said James Torgerson, president and chief executive of UIL Holdings. “We are committed to investing in PGW Operations to enhance its ability to deliver cost efficient, safe and reliable natural gas and high quality service to customers. Over time, and working with PGW Operations’ strong workforce, we will upgrade PGW Operations’ infrastructure, expand services and increase capital investments to drive growth.”
At the time of writing, the deal is still subject to the approval of the Philadelphia City Council and the state utility commission. Once the approval of the various authorities has been received, UIL anticipates that the deal will close by the first quarter of 2015. The acquisition of PGW will represent the largest deal in UIL’s history. However, it is expected that the sale of PGW will meet strong opposition from a number of parties. A number of environmental groups, unions and consumer groups have already expressed their dissatisfaction with the deal, noting that the sale of PGW would likely lead to marked increases in gas bills, while also handing significant public policy decisions around subjects such as hydraulic fracturing to a profit driven entity.
Should the deal win the appropriate approval, after paying off PGW’s bond obligations and setting aside funds for a number of other liabilities, including reserve funds and PGW’s own pension plan, Philadelphia will have between $424m and $631m to pour into the city’s retirement system. The injection of capital into the scheme would be particularly welcome, though it would likely be just a drop in the wider pension funding ocean. Indeed, as of 1 July 2012, Philadelphia’s pension fund for emergency services, as well as other public employees, had around $5bn of unfunded liabilities, and was poorly funded, at just 48 percent.
“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,” said Philadelphia mayor Michael A. Nutter in a statement. “This agreement accomplishes those goals and much more. UIL submitted the highest bid for PGW and agreed to contract terms that were important to the city. Our agreement keeps rates frozen for three years, maintains PGW’s discount programs for low-income families and seniors, safeguards PGW employee and retiree pensions and positions PGW to take full advantage of the abundant supply of natural gas in Pennsylvania to make our city and region a prime energy hub.” UIL will maintain PGW Operations’ headquarters in Philadelphia and its six customer service centres located around the city. The 178-year-old utility PGW manages approximately 6000 miles of gas mains and provides gas for around 500,000 customers throughout Philadelphia.
Upon completion of the deal, UIL will bolster its existing businesses and expand its customer base to more than 1.2 million gas and electricity customers across three states. The company already operates in Connecticut and Massachusetts through a number of subsidiaries including the United Illuminating Company and Berkshire Gas. According to UIL, PGW’s base rate will remain throughout 2017, with any future changes in rates to be determined by the Pennsylvania Public Utility Commission pursuant to its rate case procedures. UIL has also noted that the company will honour existing collective bargaining agreements.
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