PhillyDeals: How good a deal for city if PGW sold?

PGW's Port Richmond plant. A $1.5 billion price has been cited, but what would city reap?
PGW's Port Richmond plant. A $1.5 billion price has been cited, but what would city reap? (CLEM MURRAY / Staff Photographer)
Posted: October 28, 2013

The bankers Philadelphia hired to try to sell the Philadelphia Gas Works have put out an analysis that makes the deal look good. Can we believe them?

They say the works could sell for at least $1.5 billion, based on the bills a new owner can expect to wring from Philadelphians, and the prices other utilities have fetched.

But the city doesn't get to keep all that. About three-fifths of the total would be spent paying back PGW's past borrowings and interest-rate swaps.

An additional $128 million is supposed to bail out PGW workers' underfunded retirement plan. (That's less than the $150 million plan deficit PGW reported last year.)

And $20 million could go to JPMorgan, Loop Capital, Lazard Freres, and other banks managing the sale.

On the other side of the books, the city would stop collecting an annual PGW fee - usually $18 million - that is the chief remaining tangible benefit the city enjoys from running the Gas Works, which Mayor Frank Rizzo took over from UGI Corp. in 1970.

(The other benefits were lots of patronage jobs and free gas for many voters, which nearly drove PGW out of business, before Philadelphia's turnaround expert, Thomas Knudsen, was sent in to make the place more businesslike.)

That still leaves at least $452 million for the city - maybe twice that, Lazard says, if it can get a nice bidding war going between the would-be owners it has so far declined to name.

The Nutter administration wants that money to go to the perennially underfunded city Board of Pensions, which would invest it, in hopes of reducing the yawning gap between what the pension system owns, and what it owes workers, before that shortfall consumes future city budgets.

Lazard figures the invested funds would yield at least $27 million a year to the pension system starting in 2016, and more each year after that as returns are compounded - more than enough to offset the loss of the $18 million PGW fee.

Is that assuming too much? Consider what happened when the Board of City Trusts, which manages old Stephen Girard's inheritance to fund the Girard College boarding school, tried a roughly similar move in 2007.

The Girard trustees long-term leased the dowdy Center City block of offices and shops where their office sits to a developer, who paid them $90 million.

The year before the deal, Girard collected $5.27 million in rents from that block - about one-quarter of the cost of operating the school for a year.

With rents dropping, the trustees hoped they could revive returns by investing the $90 million - just as the city hopes to boost income by selling PGW and investing the proceeds.

But that's not what happened. In 2008 the real estate and investments markets collapsed.

Instead of investing, Girard felt obliged to spend $6 million from the $90 million on operations to keep Girard College's doors open in each of the next two years.

Last year Girard collected just $3.7 million from that portfolio - less than its rents prior to the long-term lease. Only this year is Girard collecting more than it did before cutting the deal. Even with the real estate rebound, Girard still feels so strapped, it's planning to shut its boarding program, pending court permission, next year.

What if Lazard's PGW projections prove equally rosy? Let's see where the preliminary bids come in Nov. 1, says city budget director Rebecca Rhynhart. "We're not going to do it at a loss," she promised.

The tougher question may be what happens to Nutter's plan if PGW does fetch attractive offers when Lazard collects preliminary bids Friday, and the city actually goes ahead with a sale.

What's the likelihood any proceeds would make it past a hungry City Council and into the pension plan?



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