When 33 potential bidders expressed interest in August in vying for Philadelphia Gas Works as part of the city’s anticipated sale of the largest municipally-owned gas utility in the country, Ballard Spahr‘s Gregory L. Seltzer knew his client was in good shape.
But for Seltzer, who began working with the city of Philadelphia 13 months ago after his firm won an RFP to help shepherd the deal, the trickiest work was about to begin.
“From a legal perspective, this deal looks like and will read a lot like any big deal any law firm has done,” Seltzer said.
“But the complications of it are the political aspects of the deal.”
While most M&A deals are driven by price and risk exposure, Seltzer said, Philadelphia Mayor Michael Nutter had other things to consider—such as the ability to get City Council’s approval of the deal. And with the announcement Monday that the city reached an agreement to sell PGW to Connecticut-based UIL Holdings Corp. for $1.86 billion, the approval of City Council and the Public Utility Commission are the next and final hurdles to cross in closing the deal.
Seltzer is confident his team’s work in structuring the deal will satisfy the financial and political concerns of the PUC and City Council. The latter is slated to take up the issue in the coming two weeks and the deal could close anywhere between October 2014 through February 2015, Seltzer estimated. Under the terms of the purchase agreement, UIL can back out of the deal free and clear if City Council fails to approve it by July 15, 2014, Seltzer said.
This deal took the typical private auction process seen in many transactions and applied it to the sale of a public entity. In November, the city’s financial advisers at JPMorgan and Loop Capital whittled down the initial 33 bidders to around 15 who they felt had not only the financial wherewithal to do the deal, but the operational background to run a utility, Seltzer said. Those bidders were provided with additional information on PGW and given until Jan. 31 to submit their final bids, with about five doing so.
Seltzer said he made the strategic decision to require the bidders to not only submit their final price, but also a comprehensive markup of a purchase agreement.
“I didn’t want to be negotiating key contract terms after we got a price and a buyer got a sense they were out in front in terms of price,” Seltzer said. “Then we took the last three or four weeks to use the competitive tension and the desire for this asset against the bidders. We pit them against themselves and negotiated.”
While UIL was the top bidder on price, Seltzer said this deal required the winning party to agree to a number of other terms related to gas rates, employee numbers, environmental issues and pension obligations. He said his team executed every deal point the mayor wanted and if a party wasn’t agreeing to one deal point, Seltzer and his team would go to another bidder and push them on that point.
In the end, Seltzer and a team of 15 other lawyers at Ballard Spahr were successful in finding a buyer who would agree to keep rates frozen for three years; offer jobs to all existing PGW employees with the promise that the 1,600-employee count will not dip below 1,350 employees in three years; assume all of PGW’s environmental liabilities; assume all employee benefit liabilities post-closing; and create a “mirror-pension plan” in which UIL will honor all current pension obligations as they currently exist until May 2015 when the union contract expires.
Aside from the corporate aspect of the deal, Seltzer said he worked closely with labor and employment partner Shannon Farmer, who has long represented the city on labor matters; real estate partner Joanne Phillips; and employee benefits partner Brian M. Pinheiro. Seltzer said the real estate component of the deal was also complex. Not only did it involve $40 million in real estate assets, but there were a number of easement issues related to the underground infrastructure, Seltzer said.
As the deal was heating up, the weather was not. The core negotiating period took place over four weeks of one of the snowiest winters the Philadelphia region has ever seen. That meant Seltzer spent several nights in a city hotel to ensure he was available for face-to-face negotiations.
Marcellus Draws the Bids
Seltzer tied the strong interest in PGW to three main factors.
First of all, PGW is the largest municipally-owned gas utility in the country with a large, set customer base, Seltzer said. While the profit margins aren’t very high, there is a solid stream of business, he said. But Seltzer acknowledged the interest in PGW wouldn’t have been as strong if there weren’t other factors.
PGW has a liquefied natural gas business with an infrastructure already in place along the river, Seltzer said. It allows for easier storage, transportation and alternative uses of natural gas when it is turned into a liquid, he said. As a city-owned entity, PGW could only do so much to expand that business. Seltzer said UIL could invest more in research and development to build out that platform.
The third and perhaps most appealing piece of the PGW pie is the proximity to the region’s Marcellus Shale.
“This is a huge asset for a gas company having the nexus to the Marcellus Shale,” Seltzer said.
UIL was represented by a team of attorneys at Sullivan & Cromwell led by partner Joseph B. Frumkin in New York. Frumkin previously assisted UIL in a $1.3 billion acquisition of three gas utilities from Iberdrola USA.
As part of the PGW deal, UIL plans to operate dual corporate headquarters in Philadelphia and New Haven, Conn. UIL currently serves about 706,000 electric and natural gas customers in Connecticut and Massachusetts and has combined assets of more than $4 billion.
Of the sale proceeds, about $130 million will be put into the PGW pension, Seltzer said.
After paying off all of PGW’s bond obligations and putting aside funds for other liabilities, including fully funding the PGW pension plan and reserving for residual risks, Nutter said in a statement that the city expects to have between $424 million and $631 million remaining, based on current stock and bond markets. That sum will be deposited in the city’s general employee pension fund.
“With the pension fund now less than 50 percent funded, this contribution is one part of a strategy to provide additional resources to the fund, while lowering its costs in order to improve that funding percentage,” Nutter said.
Seltzer said the city’s financial advisers determined the one-time payment to the fund was more beneficial than the $18 million payment PGW gives the city each year.
Other Ballard Spahr attorneys who worked on the deal were Amit Kakkar, Laura A. Kowal, Sandra Maki Hashima, T. Conrad Bower, Joy C. O’Brien, Robert C. Gerlach, Robert S. Kaplan, Kurt R. Anderson, Jonathan M. Calpas, Valarie J. Allen, Ronald M. Varnumand Alisa M. Huth.