PGW sale could bring city a different kind of payoff

A privatized Philadelphia Gas Works would pay very little city tax compared with the $18 million fee the utility now generates annually for the treasury, but Nutter administration officials say its sale could yield far bigger long-term benefits for city taxpayers.

City Budget Director Rebecca Rhynhart acknowledged Thursday that the municipal utility, if sold to a private buyer, would generate a "minimal amount of tax revenue" for the city - less than $300,000 a year.

But Rhynhart said proceeds from the sale, if used to pay down the city's underfunded pension liability, could reduce the annual pension obligation by much more than the utility now generates in income. "That expenditure reduction far outweighs the loss of $18 million in annual revenue," she said.

In recent days, Nutter administration officials and their financial adviser, Lazard Freres & Co., have presented an updated cost-benefit analysis of a PGW sale to political and business leaders as part of an effort to build support for a sale.

Lazard now says the utility could fetch as much as $1.9 billion, up $50 million from its estimate in early 2012. In a low-interest-rate climate, utilities such as PGW are fetching premium prices, said Frank Setian, a Lazard senior banker.

"This is one of the best windows one could imagine to privatize an asset like PGW," he said.

After paying off liabilities, the city could achieve a net benefit ranging from $278 million to $765 million from a sale, Lazard said. In 2012, Lazard estimated that the city could net as much as $496 million.

The city's release of its new cost-benefit analysis comes as prospective buyers are preparing their initial bids for PGW, the largest municipal gas utility in the country. The first round of bids is due Nov. 1.

A second and final round of bidding, being managed by JPMorgan and Loop Capital Markets, is expected to be completed in January.

The transaction will require approval from City Council and the Pennsylvania Public Utility Commission, which could take up to a year.

The sale is opposed by PGW's union, and is regarded skeptically by some Council members and the city's public advocate, Community Legal Services.

Mayor Nutter and his deputies have stepped up efforts to sell the sale to civic leaders, to stave off criticism about the loss of the $18 million fee.

According to new estimates, a private PGW would pay only $278,000 a year to the city, mostly in property tax, which it now does not pay. But the sale could generate a deposit to the pension plan ranging from $272 million to $622 million after setting aside money for contingencies, according to the city's analysis.

That one-time infusion to the pension fund would yield an ongoing benefit by reducing the city's annual minimum payment obligation by $27 million in 2016, and as much as $72 million in 2016, under the most optimistic sale scenario.

Philadelphia officials suggest that the reduced pension obligation would allow the city to pay more into the pension fund, accelerating its return to financial health. The fund has more than 64,000 members, including 26,000 current city employees.

"It enables us to accelerate the help to the pension fund without increasing taxes or decreasing services," said Suzanne Biemiller, the mayor's first deputy chief of staff. "It's a way to get us into a better condition faster."

The city's pension fund is valued at about $4.7 billion, less than half the assets actuaries say it needs to meet its obligations.

Though the city would lose out on the annual fee, other taxing agencies would reap new revenue from a private utility.

The Philadelphia School District would collect $675,000 a year in property tax and use-and-occupancy tax, for example. A private PGW also would pay corporate income tax to Pennsylvania and the federal government that it does not pay now.

215-854-2947 @Maykuth