Wall Street backs PGW sale, warns of 'backlash'

If it gets past City Council and the Pennsylvania Public Utility Commission, Philadelphia Mayor Michael Nutter's plan to sell the Philadelphia Gas Works to Connecticut-based UIL Holdings Corp. for $1.86 billion, and use up to $630 million to trim the city pension plan's $8 billion long-term deficit, will be a "credit positive" that could improve city bond ratings and reduce borrowing costs, writes analyst Michael D'Arcy in a report to clients of Moody's Investors Service today.

That's if Nutter is able to execute his plan to keep the city paying millions each year into the pension fund, after the PGW cash infusion, D'Arcy added. "The city's decision to sell PGW now is driven by officials' belief that the utility's recent strong results have increased its value," and that today's cheap U.S. interest rates makes it easier for buyers to borrow money to finance the deal, driving up the sale price, he noted. Besides the pension bailout, the rest of the sale price will pay off PGW bonds and the gasworks' own pension plan.

But analyst D'Arcy also noted Philadelphia is risking a "popular backlash": Under UIL, after a three-year guaranteed rate freeeze, "rates could increase significantly over time." Also, the value of PGW could rise rapidly in private hands, leading to sellers' remorse, which is what happened after Chicago sold its Skyway and its parking meter systems at prices that city officials and voters now believe was "not competitive."

Moody's adds that Pennsylvania has lately been a center for selling off public assets to repay debts that politicians ran up without raising money to pay for. Allentown last year leased its water and sewer systems to the Lehigh County Authority in exchange for $220 million, which "largely eliminated the city's unfunded pension liability." Similarly, Harrisburg leased its state-worker parking garages "to raise $267 million to repay defaulted bonds" from a corrupt city incinerator construction project.