Cash Strapped Phili Seeks Buyer For City Gas Works

Philadelphia Mayor Michael Nutter said on Monday the city is seeking a buyer for its publicly owned gas utility, the largest of its kind in the US, after an independent report concluded that a sale could raise several hundred million dollars for the city’s general fund.The study by the investment bank Lazard concluded that the time is right to sell Philadelphia Gas Works because there’s good demand for strategic utility acquisitions, and because interest rates are low.

Lazard’s study, based on “market soundings” of six firms, estimated a sale could raise between $1.5 billion and $1.85 billion, said Rebecca Raynhart, the city’s budget director, at a news conference.

The higher figure would represent a net gain to the city of about $350 million after paying down the utility’s current liabilities of some $1.5 billion, including about $1 billion in debt.

“While there can be no guarantee of the ultimate outcome, Lazard’s valuation analysis indicates that the value expected to be achieved in a strategic sale may well exceed the City’s estimate of PGW’s liabilities,” City officials said in a statement.

If realized, that would reduce the City’s liabilities and help it meet other obligations, possibly including higher payments to its pension fund, Nutter said.

The 175-year-old utility, with 514,000 customers and about 1,650 employees, has had some periods of mismanagement but is now in better financial condition than it has been for decades, officials said.

Its assets include a liquid natural gas plant used to supplement regular supplies in cold weather and which is seen as too small to be used as an LNG export terminal but which may have the potential to supply cars and trucks if they are converted to run on natural gas.

Nutter said any sale would only come after a six-to-12 month marketing process, and be on the condition that a buyer agrees to continue current PGW programs for low-income residents and senior citizens, that a current rate freeze through August 2016 is maintained, and that current employee contracts would be honored.

“A private owner isn’t going to be able to short-change ratepayers on services or safety,” Nutter said.

Service levels would continue to be regulated by the Pennsylvania Public Service Commission, which would also issue approvals for any sale in a process that could take another 12 months beyond agreement of sale.

City officials will issue a request for proposals in about a month’s time, said Raynhart.

Launching the privatization process does not mean the city is committed to selling the utility, Nutter said, and it will only enter into a binding contract if a sale offer exceeds the value to the City under its current ownership structure.

Utilities like PGW may be attractive to private buyers who believe they can make operating efficiencies or financial improvements that may not be possible under private ownership, Philadelphia officials said. For that reason, utilities are typically acquired for a premium over the value of their assets.

The 48-page Lazard study was commissioned by the City at a cost of $200,000. The bank was also asked to consider the option of transferring PGW management to a private company on a long-term lease, but concluded that alternative would not lead to any significant liability reduction or risk transfer for the City.