PGW CEO talks jobs and the future after takeover bid

Philadelphia Gas Works head Craig White sat down with me to chat about the potential $1.86 billion sale of the natural gas company — a company he’s been with for more than 30 years. White, CEO since 2011, discussed his support for the sale of the nation’s largest municipally owned utility to Connecticut-based investor-owned UIL Holdings, even though his role could dramatically change in the future.

Tell me about your role throughout the seven-month search for a buyer of PGW?

My personal role as the CEO is two-fold. No. 1, the mayor said to me very early on, continue to run the business as a business. In other words, keep PGW on track. We’ve made a lot of success over the last few years and keep that momentum moving forward, regardless of what happens. I’ve also been part of the sale committee process … our major role as PGW employees was to work on such things as the Confidential Information Memorandum. And then as the bidders were whittled down to the finalists, we had management presentations. In addition, we were receiving about 1,800 data requests. We received a lot of questions from the entities that were looking to bid on PGW.

How are you involved now?

Now that a winning bidder has been chosen … four members of UIL and [three] members of the Nutter Administration, plus myself, are on a transition team, which is basically just addressing issues that are consistent with what the asset purchase agreement calls for. There are certain things that we are doing in our ongoing business that will have an impact down the road, that … UIL is informed and participating in. For instance, if we do union negotiations, labor negotiations, UIL has the ability to participate. But we are not in an environment right now where UIL is directing management decisions. We’re doing this very cooperatively and very collegiately. It’s in accordance with 6.1 of the APA.

And UIL obviously has invested interest in what’s going on with PGW day-to-day, as it can still pull out of the agreement until July 15, right?

July 15 is a milestone where I believe that they could, if the deal isn’t approved, they could walk away from the deal. That doesn’t mean that they have to walk away from the deal.

What is UIL doing differently from you, while waiting on city council’s due diligence?

I think that UIL is doing a lot of things that are separate from what I do in running the business. They are speaking to thought leaders and decision makers in the city of Philadelphia and I’m not participating in that aspect of the sale process.

Are you talking with council members?

No. I don’t know if you remember years ago there used to be a show called “Dragnet.” And they had an actor, Jack Webb, and in the show he’d always say “just the facts, ma’am.” You know this was his tagline. And the point is, we’re here to run the utility and if we’re asked a question, we respond to that question, not necessarily on the opinion side of the equation.

What will come of your role if council approves the sale?

I guess at that point it would be determined by UIL.

How does that typically work in situations like this?

I could only theorize. I would think that, the signals that have been given to me are that they would run this much the same as it’s run today with the ability to take the best of what we do, and the best of what they do, and incorporate it here. So I would expect that we will have a lot of the structure we have today, but maybe some improved capabilities. For instance, we use Oracle Financials, they use SAP, they’ve already bought the licenses and so forth. There may be a conversion in the future. Those are the types of synergies that save you a lot of money … And I would think that the majority of the savings may come from [information system] type issues. Not people.

UIL has laid out some of its intentions if it’s a successful bid, right?

They’ve basically stated that PGW employees' jobs are guaranteed for a minimum of three years. They’ve committed to keep all the district offices that we provide. They’ve also said that they have no intention of breaking the utility into pieces and selling off various components. The liquefied natural gas is one component, and so forth ... One of the interesting things and observations that I have had is that UIL and the way they run their gas utilities, is much the same as the way PGW runs and thinks about the business. So I think there will be some great opportunities for synergies, because our business models are not that far apart. We’re looking at the same opportunities in our service territories: combined heat and power, natural gas vehicles, the use of LNG. These are things that fit very nicely into the UIL business model. We’ve got a fairly consistent approach. If we were purchased by a utility that operates the business materially different, I think you would see immediate sell-offs of major components of the organization. You’d probably see significant outsourcing. I don’t believe you’re going to see that with a company like UIL. Again that’s my opinion.

Back to jobs, what did UIL promise?

There were some things that the Nutter Administration required. In other words, over a three-year period, the workforce could not drop below 1,300. UIL committed to 1,350. Quite frankly, Jim Torgerson [UIL president] and I have had many conversations about this. In any organization, you can’t just say, “Oh, I’m going to lop off 300 people.” If you’re going to change the way you do the business, you’ve got to re-engineer it.

What do you say to your employees, nervous about the possible change?

We do have 1,640 employees and certainly change is difficult, I’m no different than any of those other employees. Change is something that we all struggle with. And I think that there are a lot of unknowns now for employees. Obviously at this point, I get asked a lot of questions and I don’t necessarily have the answers. The only answers I do have is that in my experience with dealing with the folks from UIL, I’m very impressed. I’ve known Jim Torgerson through American Gas Association and the people I know that know Jim better than I, have nothing but the highest regard for his integrity. And I’m just like anybody else, if people you trust tell you that someone that they know is of the highest integrity, that goes a long way with me. The other thing that I tell employees, if you believe that history is a good prognosticator of what’s going to happen in the future, the way that UIL has treated employees up there as they bought these utilities has been, as it’s been relayed to me, has been of a very high regard for the employees. So beyond that, I can’t give employees any assurances that aren’t written in stone.

Or yourself really, right?

Yes. I mean, it’s too early for me to have a discussion about what’s going to happen … with Jim. When they get city council approval, then I’ll have that discussion. Up to now, Jim and I are peers. We work together at AGA, I run PGW, he runs UIL. We may be peers again, or I may work for Jim Torgerson. So I’m in the same boat as our employees, that’s for sure.

So after those three years, what do you think will happen?

Well, I think we’ve got more work than we have people. And I’ve said that for years. I fully expect that you’re going to see a significant expansion of infrastructure replacement under UIL. We have a very good program here at PGW, but quite frankly that program is expensive and the only people that can pay for that program are customers.

That’s the cast-iron replacement program. Tell me about it.

We have had for decades and 18-mile program, where we remove 18 miles per year. We have recently expanded that to 25. I anticipate that UIL will be very interested in doubling that number. If we can remove cast-iron, that’s to everyone’s advantage because cast-iron is now considered no longer state of the art, and it’s something that has a certain level of risk and removing that risk is in everyone’s best interest.

What are the risks?

Cast-iron is inherently brittle, so left undisturbed, it can be in the ground for another 100 years, but the problem is, if it gets undermined, for instance if there’s a water main leak, and the pipe gets undermined, you’re subject to main breaks. You can also have main breaks where the pipe has never broken before and for no apparent reason, you can have a main break. What we’re replacing it with doesn’t historically break. In most cases it’s either welted steel or plastic.

Let’s talk safety concerns if UIL was to become PGW’s parent company.

UIL deals with the same exact issues as PGW. It’s not as if UIL is a company that this issue is foreign to them. They are a Northeast operation with cast-iron. So they know exactly what we’re dealing with down here … There is not a utility in the business that safety is not the No. 1 item. It is the No. 1 item. You cannot have an unsafe system. That is just a given.

UIL has agreed to buy PGW for $1.86 billion, and about $420 million will go to the city’s ailing pension fund. Is it worth it in the long run?

Well, I can’t [determine] whether council believes that’s worthwhile or not. The only thing I can tell you is, we pay the city $18 million a year. I know you’ll identify that for about eight years we did not make that $18 million payment. The city allowed us to forgo it. We have been making the payment now for a number of years. And previous to those eight years where we didn’t make the payment, we made the payment for a number of years. Obviously, that $18 million has to be considered verses the $1.86 billion purchase price.

What are the benefits of a private PGW on the Philly economy?

I’d have to have a crystal ball for that. But what I will say is that an investor-owned could be much more nimble to business opportunities. The way I’m looking at this, Philadelphia really needs to attract industry to really regain its prominence. And with industry, comes jobs, tax revenue, which potentially could impact our school district and other city services. What I think can happen here is that an investor-owned entity may be more successful in attracting business opportunities to the city of Philadelphia. That being said, I would tell you that we look at those opportunities every day and it’s very important to us as well. The fact of the matter is, we’re not quite as nimble. I keep coming back to that same concept.

And what do you mean by nimble?

We have no shareholders, so if a bad decision is made, the only people that are there to pay for that bad decision are rate payers and if you’re an investor-owned and you want to take a little bit more risk than a municipal is willing to do, then if things go rye, the shareholders may be on the hook for that. That’s the big difference. There are realities of what we have to deal with as a municipal that are no one’s fault other than the fact that it’s a municipal environment. And if you’re in an investor-owned environment, there are different roles of engagement. You don’t have a state constitution that eliminates the ability to partner. We have a limitation. We cannot sign contracts for more than four years. If we want to enter into a contract that’s more than four years, we have to do it through the Philadelphia Authority for Industrial Development.

Are partnerships typical for entities?

Yes. You might have a number of entities partner to build an interstate pipeline. Philadelphia Gas Works can’t do that by virtue of state constitution. There are things that we are very proud of here at PGW that we’ve done, and they would probably be looked at by anyone as good moves, great opportunities, way to go. My point is though, the investor-owned may be able to expand on that, take on a little more risk and be willing to move a little more quickly.

Yes, and to critics’ points, they think PGW is doing so well, it makes more sense to grow it rather than sell it.

My thoughts on that are, I’m looking for all the support of those folks, if the company isn’t sold, to support the necessary enhancements that we will need to grow the business. If we need changes to the procurement policies of the city as they pertain to PGW in order for us to be a little more nimble, those are the kinds of major, groundbreaking modifications that have to occur. If we’re not sold, and you can’t just talk about it, talk is cheap, if you really want this organization to take advantage of some of the opportunities that are in the energy industry, you have to look at the business differently. And you know, it’s not my decision as to whether it gets sold or it’s not sold. If it’s not sold and these things are to happen, there’s got to be some fundamental changes.

Or else?

Or else we’ll have to operate with the limitations that we have today. So you may want to change the procurement rules of the city as they pertain to PGW, you may want to lobby for changes to the state constitution as it pertains to PGW, there’s probably a myriad of things that from time to time we’ve run into as road blocks. Or things that when dealing with commercial businesses, they’re not comfortable with dealing with PGW. For instance, many times I’ve been in a situations where we’ve gotten to a negotiating point in a contract and we’ve said, “that’s a city rule, that’s nonnegotiable.” Those are the types of things that make it a little more difficult to do business. I keep coming back to the fact that they’re not inappropriate in a municipal environment. But if you want to really get the advantages of the energy business, you have to take on more risk.

PGW has been making strides throughout the past few years with all these limitations, why can’t it just continue doing so?

We would continue to make incremental advances. It may be smaller, it may be less risky … Whereas UIL might say, you know what, we’re willing to take on the risk that if we spend that money and this deal doesn’t work, we’re going to the next deal. But in our environment, we may not be able to even take that next step. If you’re looking at this deal, the two fundamental points are, you’re getting a lot of money up front and you’re getting a lot of replacement of aging infrastructure and beyond that you’re getting a company that probably can react to business opportunities in a more nimble, efficient manner than we can. Other than that, we’re a pretty good operation. But those are differences. I can’t necessarily control those differences.

The sale would add PGW’s 500,000 customers to UIL’s entire pool of 700,000. What do you think about that?

UIL has 380,000 gas customers and 300,000 electric customers. They’re growing at a rate of 15,000 new gas customers a year. That’s huge. They’re expanding up there. To put that into perspective, when I started here, we had 518,000 customers, today we have 503,000 customers. So we’re pretty much flat. They’re growing at a rate of 15,000 customers a year, that’s a healthy organization up there.

PGW would still be UIL’s largest operating company, so do you think that this could potentially be a problem?

I would say that due to the fact that they have three gas utilities in three different jurisdictions, their complexity is every bit as much as ours.

What do you think city council will say?

I think city council hired a top-notch consulting firm in Concentric. So I fully expect that they’re going to get the information that they need to make a reasoned decision.

Source: Philadelphia Business Journal