The bankers
Philadelphia hired to try to sell the Philadelphia
Gas Works have put out an analysis that makes the deal look good. Can we
believe them?
They say the
works could sell for at least $1.5 billion, based on the bills a new owner can
expect to wring from Philadelphians, and the prices other utilities have
fetched.
But the city
doesn't get to keep all that. About three-fifths of the total would be spent
paying back PGW's past borrowings and interest-rate swaps.
An additional
$128 million is supposed to bail out PGW workers' underfunded retirement plan.
(That's less than the $150 million plan deficit PGW reported last year.)
And $20 million
could go to JPMorgan, Loop Capital,
Lazard Freres, and other banks managing the sale.
On the other side
of the books, the city would stop collecting an annual PGW fee - usually $18
million - that is the chief remaining tangible benefit the city enjoys from
running the Gas Works, which Mayor Frank
Rizzo took over from UGI Corp. in 1970.
(The other
benefits were lots of patronage jobs and free gas for many voters, which nearly
drove PGW out of business, before Philadelphia's turnaround expert, Thomas Knudsen, was sent in to make the
place more businesslike.)
That still leaves
at least $452 million for the city - maybe twice that, Lazard says, if it can
get a nice bidding war going between the would-be owners it has so far declined
to name.
The Nutter
administration wants that money to go to the perennially underfunded city Board
of Pensions, which would invest it, in hopes of reducing the yawning gap
between what the pension system owns, and what it owes workers, before that
shortfall consumes future city budgets.
Lazard figures
the invested funds would yield at least $27 million a year to the pension
system starting in 2016, and more each year after that as returns are
compounded - more than enough to offset the loss of the $18 million PGW fee.
Is that assuming
too much? Consider what happened when the Board of City Trusts, which manages old Stephen Girard's inheritance to
fund the Girard College boarding school, tried a roughly similar move in 2007.
The Girard
trustees long-term leased the dowdy Center City block of offices and shops
where their office sits to a developer, who paid them $90 million.
The year before
the deal, Girard collected $5.27 million in rents from that block - about one-quarter
of the cost of operating the school for a year.
With rents
dropping, the trustees hoped they could revive returns by investing the $90
million - just as the city hopes to boost income by selling PGW and investing
the proceeds.
But that's not
what happened. In 2008 the real estate and investments markets collapsed.
Instead of
investing, Girard felt obliged to spend $6 million from the $90 million on
operations to keep Girard
College's doors open in each of the next two years.
Last year Girard
collected just $3.7 million from that portfolio - less than its rents prior to
the long-term lease. Only this year is Girard collecting more than it did
before cutting the deal. Even with the real estate rebound, Girard still feels
so strapped, it's planning to shut its boarding program, pending court
permission, next year.
What if Lazard's
PGW projections prove equally rosy? Let's see where the preliminary bids come
in Nov. 1, says city budget director Rebecca
Rhynhart. "We're not going to do it at a loss," she promised.
The tougher
question may be what happens to Nutter's plan if PGW does fetch attractive
offers when Lazard collects preliminary bids Friday, and the city actually goes
ahead with a sale.
What's the
likelihood any proceeds would make it past a hungry City Council and into the
pension plan?
Source: Philly.com
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