Connecticut utility pulls out of PGW deal

The planned buyer of Philadelphia Gas Works pulled out of the deal late Thursday, ending a four-year process that could have modernized the utility and paid off a chunk of the city’s public-pension deficit, but ended up as a only a multimillion-dollar failure that raised questions about the city’s readiness to attract investors.

The action came one day before potential investors were due to attend a high-profile sales pitch for Philadelphia as a major "energy hub," where natural gas from Pennsylvania's Marcellus Shale would be pumped, processed, exported, and used for a new generation of manufacturers.

UIL Holdings, a Connecticut-based energy-delivery company, issued a statement saying it had terminated its agreement to buy PGW, the nation’s largest municipally-owned gas utility, for $1.86 billion because the City Council had failed to introduce an ordinance to approve the deal and had not even held a hearing to discuss it.

"Unfortunately, we had no choice but to terminate our efforts in the City of Philadelphia to acquire the PGW assets," said James P. Torgerson, UIL’s President and Chief Executive Officer. "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.

“Philadelphia and the City’s gas customers would have benefited from our accelerating the pace of pipe replacement and from our management of the PGW assets."

UIL’s contract allowed it to withdraw any time after July 16, but the company decided to pursue the deal in order to give the Council time to study the agreement and introduce an appropriate bill, Torgerson said.

“With no action by the Philadelphia City Council to introduce an ordinance so far and none in the foreseeable future, UIL has decided to terminate the agreement,” the  statement said.

City Council President Darrell Clarke stunned the Nutter administration on Oct. 27 by saying that the Council had “no appetite” for the sale, and that no hearings would be held to discuss it. After an “exhaustive review” of the proposal, Clarke said he had concluded that the financial and public-policy risks of the sale outweighed its stated benefits.

In a statement issued late Thursday, Clarke blamed Nutter for the failure of the deal.

“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,” Clarke said.

“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. This company and its shareholders could have been spared a significant amount of time, money and resources. 

“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,” he said.

Clarke said the Council would continue to explore “options to enhance PGW’s operations.”

The Nutter administration, which hired the investment bank Lazard to evaluate the proposed sale in 2010, argued that private ownership, with its access to the capital markets, would allow PGW to repair its vast and aging network of cast-iron pipes in about half the 80 years the work would take if PGW remained a municipal entity.

Sale proceeds would also allow the City to pay around $500 million into its severely under-funded public pension fund, Nutter asserted.

Clarke’s abrupt rejection of the deal followed a Council-ordered consultant’s study of the transaction, at a cost of some $500,000, and an earlier evaluation of options for the sale by bankers hired by the City.

Despite Clarke’s statement, Nutter insisted in the weeks following that the deal could still be saved.

But in a statement following UIL’s Nutter blasted the Council for allowing “small-minded, parochial and often petty issues” to get in the way of broader opportunities for the city.

“This decision by the Philadelphia City Council is a big mistake and represents a massive failure in leadership for our City and our citizens,” Nutter said. “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.

“Instead, City Council held no hearings and chose a behind-the-scenes decision-making process and no action, thus shutting out the public and denying Philadelphians the opportunity to voice their views.

“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,” Nutter said.

 “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.

Mark Alan Hughes, director of the University of Pennsylvania’s new Kleinman Center for Energy Policy, said UIL’s decision to pull out of the deal a few weeks before the Dec. 31 deadline, when it would have automatically expired, signals the company’s anger.

“I think this is the strongest possible statement of UIL’s disgust with the Council,” Hughes said in a statement. “It would have been simple and costless to allow the agreement to automatically expire in three weeks. But to take positive action seems to send a message that Philadelphia city government is not capable of reliably closing a process more complex than press conferences or ground breakings.”  

Now that the UIL deal is dead, the City should avoid courting other potential investors in PGW — and in new energy infrastructure that would make up Philadelphia’s proposed “energy hub” — until a new administration is elected in 2016, Hughes said.

“The only next step even vaguely consistent with good government best practices is now to expose this decision, as well as the larger energy-hub debate, to next year’s mayoral election. There should be no back-door, work-around process tainted by shady dealings,” he said.