Philadelphia's mayor plans to sell the city's public gas works, defeasing the works' bond debt in the process and raising money for the city's pension fund.
Mayor Michael Nutter announced the agreement to sell the Philadelphia Gas Works for $1.86 billion to UIL Holdings Corp. on Monday.
As a condition of the agreement, the city will pay off the gas works' $1.06 billion bond, commercial paper, and pension debt. Its swaps will be terminated.
The city will get the money to do this from UIL's purchase money as well as from $200 million in business and funded reserves at the works, Philadelphia treasurer Nancy Winkler said.
A large portion of the works' bonds is immediately callable and will be called at par value, Winkler said. Additional money will be set aside in an escrow account that Winkler will manage. This account will be used to pay off the rest of the bonds at par value as they become callable, she said.
The city will also pay off the work's unfunded pension liability to its workers.
After the city sets aside money for the payments and the escrow account, it expects to have $420 to $630 million left over to be deposited in the city's pension fund, Winkler said.
Since the ratings agencies have cited the city's large unfunded liability for its pension fund as a weakness, the deposit should be a credit positive for the city, staff from Nutter's office said.
If it were to follow an existing formula, when the city would make a big deposit into its pension fund, the city would lower the amount it would pay into the pensions in the following years. In this case, the city will make an adjustment to the formula to keep the pension payments at a high level, Winkler said.
The city has currently funded the city pensions at 48%. A $420 million deposit to the fund, taken with planned contributions and expected investment growth, would lead to a 77% funding level in fiscal year 2030, Winkler said. A $750 million deposit, using the same assumptions, would lead to an 86% funding level in fiscal 2030.
The city's city council and the Pennsylvania Public Utility Commission will have to approve the deal. Winkler said she was hopeful the agreement could be adopted by the first quarter of 2015.
The sale price was at the top end of what the city hoped it would get, Winkler said.
"The sale is positive for the city's credit in terms of the proceeds, which will go towards reducing the city's underfunded liabilities," said Janney Capital Markets managing director Alan Schankel. "Another positive aspect is reduction of enterprise risk and the elimination of a city management distraction from this large non-core municipal enterprise. For example, in the past, the city has had to loan PGW money to help with liquidity.
"As far as approval, I see no major hurdles," Schankel continued. "Based on the mayor's press release it appears that many conditions are included that would encourage council and regulatory approval including no rate increases for three years and minimal PGW employee disruption."
JPMorgan and Loop Capital Markets served as sales brokers for the deal. Ballard Spahr was Philadelphia's counsel on the deal. Lazard was Philadelphia's financial advisor.
"This historic transaction included very complex transactional, political, and regulatory issues," said Mark Stewart, Ballard's chair. "That our team got it done — and on such favorable terms to the city — exemplifies both the skill of our mergers and acquisitions team and our experience with public-private partnerships. Terms were as important as price to the city. This transaction yielded a terrific result on both fronts."
Lazard provided an initial assessment of PGW, recommended the sale, helped to choose a bank, and advised all along the way to Monday's announcement of the sale, said Judi Mackey, Lazard director of global communications.