New Cost-Benefit Study Shows Increased Value for Sale of PGW

Philadelphia, October 18, 2013 – The City of Philadelphia released a cost-benefit study, authored by its financial advisor, that estimates a sale of the Philadelphia Gas Works (“PGW”) could generate net sales proceeds in the range of $422 million to $872 million for the City of Philadelphia. These funds would be used to bolster the City’s severely underfunded pension fund.

The City’s financial advisor, Lazard Frères & Co. LLC (“Lazard”), predicted a potential sales price range of $1.45 billion to $1.9 billion, which is $50 million higher than the range in its February 2012 analysis for the City. A portion of the sale proceeds would be used immediately to defease PGW’s debt, fully fund PGW’s unfunded pension liabilities and cover other costs, resulting in the projected net sale proceeds amount.

Lazard’s analysis also estimates the net present value of both the future tax revenues that the City would be expected to receive from a private owner and the foregone $18 million annual franchise fee that PGW currently pays to the City.  When those factors are taken into account, the net present value benefit to the City of a PGW sale in the updated valuation range is projected to be between $278 million and $764 million.

“I am extremely encouraged by this latest analysis. If the City receives a price in the range estimated by Lazard, a sale will be beneficial for the City’s taxpayers and PGW customers,” said Mayor Michael A. Nutter. “A sale of PGW would eliminate risk to the general fund.  Equally important, proceeds would be used to shore up municipal pension funds.  Making this up-front investment with sales proceeds would enable the City general fund to be held harmless from the foregone $18 million annual PGW franchise payment while simultaneously allowing us to put more than the amount required under state law each year into our pension fund.”

In addition to the monetary costs and benefits to the City that would likely result from a sale, Lazard also provided a qualitative assessment of the benefits and considerations of a non-City-owned PGW.

Included among the benefits:

  • City taxpayers would no longer be responsible for PGW financial and operating risks;
  • Rate increases are likely to be less probable because a non-City-owned PGW could pursue new business opportunities and operate more efficiently;
  • PGW’s pension would be fully funded, securing benefits for PGW’s current retirees and employees;
  • City personnel and resources now being used to administer PGW would be reallocated toward other City operating priorities;
  • Community programs and charitable giving would likely begin, as is typical of investor-owned utilities; and
  • Enhanced ability of a private owner to invest in accelerated pipeline replacement and safety programs.

“Selling PGW would protect the general fund from ever again being at risk of needing to make emergency loans to PGW, Mayor Nutter said. “None of Philadelphia’s peer group cities have that kind of exposure because they are not in the gas business.”

Among the qualitative costs and considerations of a sale, according to the report, are:

  • the loss of direct control of PGW, though rates and other business practices would still be regulated by the Pennsylvania Public Utilities Commission
  • potential for residual exposure to certain retained liabilities, such as future unfunded pension/OPEB liabilities or contingent environmental liabilities, if the City cannot transfer them to a buyer as part of the sale process.

“Assuming a sale in the valuation range resulting from our analysis, our estimated quantitative and qualitative analyses indicate that the benefits of selling PGW would likely significantly exceed the associated costs and considerations for the City, its residents and PGW customers,” said George Bilicic, Global Head of Power, Energy and Infrastructure at Lazard.

Potential buyers of PGW are aware that the City has established certain customer protection requirements.  For example, the sale agreement will require that the senior citizen program continue under its current terms and the Pennsylvania Public Utility Commission (PUC) will continue to oversee the program that assists low-income households. These protections are factored into Lazard’s sale price range estimate as is a rate freeze through 2017, the year in which PGW currently anticipates needing a rate increase.

The sale process has now advanced to the stage where qualified bidders have been identified and are receiving additional information about PGW’s operations. The City anticipates reaching agreement with a buyer in early 2014.  The final sales agreement would require approval from Philadelphia’s City Council and the Pennsylvania PUC.

PGW is the nation’s largest municipally-owned gas utility, with annual revenues of more than $600 million, more than 500,000 residential, commercial and industrial customers, and more than 1,600 employees. Read more about the sale process and submit questions or comments at www.exploringasale.com.

Philadelphia Gas Works Cost/Benefit Analysis

Posted in Mayor's Press Releases, Neighborhoods, Press Release, Topics, Transportation & Utilties
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