Controller doubts arithmetic in PGW sale

City Controller Alan L. Butkovitz says Mayor Nutter's proposed $1.86 billion sale of Philadelphia Gas Works could yield less income than expected, a contention strongly disputed by the administration's financial mavens.

Butkovitz said in an interview last week that he couldn't pin down the cost of paying off PGW's unfunded pension liabilities, which the Nutter administration estimates will range from $224 million to $272 million.

"We think it's over $300 million, and we've raised that question, and they haven't been able to say what it is," said Butkovitz, the city's fiscal watchdog.

The controller's doubts about the arithmetic of the sale is the latest challenge the Nutter administration faces as it tries to convince skeptics of the value of selling the 176-year-old utility.

"Suppose it comes back that the gas workers' pension fund would eat up all of the profit and more, so that we actually sell it at a loss," Butkovitz said. "That would be an important development."

Rob Dubow, the city's finance director, said Tuesday that Butkovitz's projections were misinformed. "We need to sit down and talk with him," Dubow said.

The administration estimates the proposed PGW sale to UIL Holdings Corp. will net the city $420 million to $631 million after all obligations are paid off. UIL's offer came in at the top of the range that financial advisers estimated the utility would fetch.

Nutter has proposed investing the sale profit into the city's underfunded pension plan, which would speed up the rate at which the city pays down the overhang.

The complex transaction requires approval of City Council and the Pennsylvania Public Utility Commission. Council has hired Concentric Energy Advisors Inc. to analyze the sale terms, and also to explore whether the city has better alternatives than divesting the utility.

Council has resisted calls from the administration and the Committee of Seventy to schedule hearings on the sale. A spokeswoman for Council President Darrell L. Clarke said hearings were premature before the consultant has finished its work.

"What exactly would be discussed during hearings conducted before Council has any facts about the bid process and PGW's actual value?" Jane Roh, Clarke's spokeswoman, said in an e-mail last week.

UIL, which is based in New Haven, Conn., and owns four New England utilities, has the option of pulling out if Council has not approved the sale by July 15. Council is expected to take its summer recess in mid-June.

The forthcoming consultant's reports, which Council commissioned for $425,000, have assumed pivotal importance.

"If the consultant comes back and says this is a once-in-a-lifetime opportunity, this is a great deal, we should act quickly, I don't see how Council would be able to reject the proposal," said Butkovitz.

Butkovitz's doubts echo a whisper campaign questioning where the money will go from the sale, and why there is a range of more than $200 million in expected proceeds.

City Treasurer Nancy Winkler, who sat down with Dubow on Tuesday to explain the numbers, said it was "appropriate" to have a range because the sale was expected to close early next year and some amounts were variable - the amount of cash in PGW's treasury at closing, the market value of PGW's pension fund, the amount of receivables on PGW's books, and the value of the gas stored at its Port Richmond facility. All those factors will adjust the final tally.

Here's where the city says the money will go:

The city must pay off PGW's debt, which amounts to about $1.1 billion. The liability is reduced by $106 million that PGW holds in reserve under terms of its bonds. It's further reduced by cash PGW has when the sale closes, projected to be $80 million to $120 million. That would leave $888 million to $931 million to pay off.

PGW must fully fund its employee pension plan. The utility's actuaries, AON Hewitt, estimate PGW's unfunded pension liabilities at $224 million if retirements continue at a historic pace. But if more PGW employees decide to retire because of the impending sale - they will have to make a decision by the end of the year - the pension obligation could go as high as $272 million.

PGW will pay closing costs of $14.1 million to $16.2 million to legal, financial, and communications advisers. The biggest share would go to JPMorgan and Loop Capital Partners, the brokers who marketed the utility and negotiated the deal.

The city estimates it will retain $100 million to $175 million in reserve, to make up for any unforeseen costs, including future PGW pension shortfalls.

"Whenever you do a large transaction like this, it's appropriate to have a little bit of a holdback," said Winkler. After several years, and the risk of hidden costs subsides, the city would transfer the remaining reserve fund to the city's pension.

The city's general fund will take $27 million to $36 million to compensate for the loss of the $18 million annual payment that PGW makes to the city. After 2017, the city budget will make up for the loss of the PGW payment from savings the city will realize in its annual minimum payment to the city's pension fund, which will be reduced by $40 million or more from the investment of the profit from the PGW sale.