It looks as if Phila. is ready to sell off PGW - with conditions

The city is about to hang a "For Sale" sign on the Philadelphia Gas Works, with a hefty price tag, and see if there's a taker for the 175-year-old utility.

Mayor Nutter on Monday announced the results of a long-awaited strategic assessment, which said a sale of PGW could net millions in profit and remove significant liability and risk to the city's finances.

Nutter, however, was cautious in his remarks, noting that a sale would be consummated only if a buyer met a long list of conditions to protect workers, freeze rates, maintain low-income and senior citizen assistance, and honor union contracts.

He also stressed that the city would sell the debt-laden PGW only at a profit. The city, he said, was not dumping the utility just to get out of the gas business.

"This is a tremendously complicated and very involved process. We are completely and totally at the start," Nutter said. "No judgments or decisions have been made."

The city and its financial advisers, Lazard Frères & Co. L.L.C., estimated PGW's liabilities at about $1.5 billion, with about $1 billion in debt, mostly from bonds.

The utility could be sold - under the conditions imposed by the city - for between $1.5 billion and $1.85 billion, said city Budget Director Rebecca Rhynhart.

"It is a good time to sell because interest rates are low and the appetite for utility acquisitions is high," she said.

Keith Holmes, president of the Philadelphia Gas Workers Union that represents 1,125 PGW employees, said the union would oppose any sale. The utility has an additional 500 nonunion employees.

Holmes said any private buyer would look to cut costs by laying off employees. Nutter said one condition of a sale would be to honor the union's contract, which expires in May 2015.

"If you listened, they said it would be two to three years before the company could be sold. Our contract would expire then," Holmes said. "I don't see that as sufficient as far as saying we're going to be secure."

PGW chief executive officer Craig White declined to offer an opinion on a potential sale.

"The administration is making the call," he said. "Our job is to run the place as best we can, and we intend to do that during this period of time."

Selling PGW is not a new idea - it has been proposed and studied by previous administrations.

Of the 30 largest cities, only four own gas companies. PGW, with 514,000 customers, is the largest of the four and has the highest cost of service in the state, Nutter said.

The 48-page Lazard report, which cost the city $200,000, included conversations with six companies - potential suitors who remained anonymous.

Nutter and Rhynhart said interested parties most likely would be "strategic" buyers - companies in the energy business that would run the utility - rather than "financial" suitors only interested in making an investment.

One of the two companies that expressed the most interest in the Lazard report questioned whether the city had the "political will" to do the deal, and Lazard recommended the city build "broad support" for the plan.

A sale would have to be approved by City Council.

Council President Darrell L. Clarke said that the administration briefed members Monday, but that he wanted time to analyze the Lazard report for himself.

Generally, Clarke has advocated selling city assets to raise money, but he said he was concerned about losing jobs and maintaining the low-income assistance programs at PGW.

Nutter and Clarke want money raised from asset sales to be used to pay down the city's long-term obligations, such as the underfunded city pension.

The city's next step is to hire advisers to help conduct a sale, which Nutter said would last six to 12 months and "likely entail multiple rounds of bidding and negotiating."

The Pennsylvania Utility Commission, which would maintain oversight of PGW after a sale, also would have to give its approval. That process could take another year.

"A private owner is not going to be able to shortchange the ratepayers on safety or on service," the mayor said.

A buyer would have to agree to freeze rates until 2016, Nutter said, and maintain corporate headquarters and a specified number of employees in the city for a certain number of years.

The actual number of employees and years would be subject to negotiations. The new owners also would have to guarantee employee and retiree benefits.

The rationale for selling PGW - other than raising money for the city - seems to be the possibility that the utility could backslide into mismanagement.

The utility was so poorly run through the 1990s that the city had to lend it $45 million in 2000 - money recently repaid.

The city also just received its $18 million dividend again last year, after last getting the money in 2004. The city would lose the annual payment in a sale, but would gain tax revenue from a private owner.

It is unclear if the tax revenue would offset the loss of the dividend, assuming PGW was able to make the payment every year.

Rhynhart said the utility was much better run today, but financial risk to the city remained.

"We think that the general fund is at a point now where we don't have the flexibility to make a $45 million loan like we did then," she said.

Staff writer Bob Warner contributed to this article.