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.
"This could be a triple win all around," Nutter said in an interview Monday after the deal was formally announced. "It's a significant moment for the city."
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.
"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."
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.
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.
At a City Hall news conference Monday, James P. Torgerson, UIL's chief executive, encouraged skeptics to look closely at the deal.
"I know people initally said they were against it, but they haven't seen the terms of the deal," he said.
UIL's Torgerson said the company expects the sale to close in the first quarter of 2015. It can exit the deal if City Council takes no action by July 15.
UIL is paying a premium for PGW compared to the $1.3 billion it paid in 2010 for three New England gas utilities, which may explain the company's poor performance on the New York Stock Exchange Monday, where it closed at $36.97, down $1.75 or 4.5 percent.
Nutter has pledged that the injection of money into the city's underfunded pension system will more than cover 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.
Nutter said the contract signed by UIL requires that all PGW employees be offered employment at UIL. If an employee decides to retire or accept a job elsewhere, that position may go unfilled, but total employment may not dip below 1,350 employees for at least three years. PGW currently employs about 1,650.
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.
Nutter on Monday said the city expects to net between $424 million and $631 million after the sale.
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.
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.
UIL's news release: http://bit.ly/NmQ6Xi