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Philadelphia Council Balks at Gas Utility Sale

(Corrects price in headline to billion from million in story published on June 19.)

The Philadelphia City Council failed to schedule hearings on the proposed $1.86 billion sale of its natural gas utility to UIL Holdings Corp. (UIL), threatening a deal that promises to prop up the city’s pension fund.

Council President Darrell Clarke said nothing today during the council’s last meeting before its summer recess regarding the sale of Philadelphia Gas Works, the nation’s largest municipally-owned gas utility. Councilwoman Marian Tasco said the council needs more time to review the sale.

UIL Holdings, which announced the acquisition in March, can walk away from the deal if the council has not approved the sale by July 15. The council is not scheduled to meet again before September 11.

“There are many questions that need to be answered,” Tasco said during the meeting. “Given the complexity and importance of the proposed transaction, City Council would be irresponsible if we did not do our due diligence.”

Mayor Michael Nutter backs the sale, which would inject at least $424 million into the city’s retirement system. The deal would also improve safety as New Haven, Connecticut-based UIL Holdings has promised to speed replacement of aging cast-iron pipe linked to leaks, explosions and deaths.

The council has hired its own consulting firm which is seeking more information from the administration, Tasco said.

“We continue to believe that our bid and proposal represents great value for the City of Philadelphia and also for its citizens,” Michael West, a spokesman for UIL Holdings, said in a phone interview. “We still remain committed to working with city council and its leadership.”

Just Say No

Before the session, members of Gas Workers Union Local 686 rallied outside City Hall against the sale with flyers, signs and t-shirts that read “Don’t Sell PGW.” Former Philadelphia Mayor John Street led the crowd with several loud chants of, “Just Say No!”

Nutter said after the council meeting that he hopes members will be prepared to hold hearings on the sale when they return in September.

“Notwithstanding what their legal rights are, at the moment at least I’m left with the strong impression that they’d like to see the transaction through to completion,” the mayor said of UIL.

Pipeline Replacement

Philadelphia Gas Works has replaced about 10 percent of its cast-iron gas pipeline mains since 2004, the second-slowest rate among the top 10 owners of iron pipelines, according to an analysis of data provided by the U.S. Pipeline and Hazardous Materials Safety Administration.

“They are currently on about an 88-year replacement program,” UIL Holdings Chief Executive Officer James Torgerson said in a May 19 address at an industry conference. “I’d like to say we’d cut it in half.”

While only 2.5 percent of distribution mains in the U.S. are cast iron, the older pipe accounts for 10.5 percent of leaks that caused an injury, death, property damage or large leaks between 2005 and 2013, according to PHMSA.

UIL Holdings expects to increase profit after 2017 by accelerating replacement of 1,500 miles (2,400 kilometers) of aging cast-iron pipe, according to Torgerson.

Under the deal announced in March, UIL Holdings agreed to keep rates frozen for three years, establish a second corporate headquarters in the city and maintain at least 1,350 jobs at the utility. State regulators must also approve the transaction.

Pension Liabilities

UIL was one of 33 bidders for Philadelphia Gas Works, which was founded in 1836 and supplies about 500,000 customers in the fifth-largest U.S. city. The company said the purchase will give it access to markets near the booming Marcellus and Utica gas-shale formations.

Philadelphia’s pension fund has enough money to meet only 47 percent of its obligations and faces an unfunded liability of $5.3 billion as of July 2013, up from $5.1 billion the previous year, according to an actuarial report released in April. Other governments across the country that also face funding gaps are paring benefits or paying more into their retirement systems.

The average state and local plan had about 72 percent of the money needed to meet retirement obligations last year, the Center for Retirement Research at Boston College said. Governments paid more into the funds, 83 percent of their required annual contributions, up from 81 percent a year before.

To contact the reporters on this story: Romy Varghese in Philadelphia at rvarghese8@bloomberg.net; Mark Chediak in San Francisco at mchediak@bloomberg.net

To contact the editors responsible for this story: Susan Warren at susanwarren@bloomberg.net Will Wade, Robin Saponar

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