There was a time when I thought the city selling the Philadelphia Gas Works was about as likely as us getting the Olympics.
I doubt we’ll ever see the games in South Philly, but listening to Mayor Michael Nutter today, I got the feeling that the city might actually unload the nation’s largest municipally owned gas utility to a private buyer.
Nutter announced the selection of the “brokers” who will solicit and evaluate bids for the city. They’re investment banks – JP Morgan and a minority-owned partner, Loop Capital Markets.
The reason a sale seems possible now is that (a) PGW isn’t the train wreck it was 20 years ago, badly-managed and loaded with debt, and (b) if we believe what the hired guns are telling us, it’s a great time to sell a utility.
“The market for utilities is very strong,” said Paul Dabbar, a managing partner at JP Morgan who specializes in mergers and acquisitions. “So this is an excellent, I could argue possibly an all-time high in terms of interest for businesses like this is general.”
And he must have some idea that the city call pull this off, given the way the brokers’ contract is written. Mayor Nutter says, like your real estate agent, they’re working on a contingency basis..
“They will be paid only, only if the sale of PGW is completed and approved by City Council and the Pennsylvania Public Utility Commission,” Nutter said.
The terms are set to encourage the brokers to fetch a high price. They get a little less than a half a percent of the sale price up to $1.6 billion. The brokers earn two percent of anything the city gets above that.
So at a sale price of say $1.8 billion, the brokers would earn more than $11 million in fees. The city will have a separate financial advisor, Lazard, not working on a contingency basis, to scrutinize the proposals. A company official said it would provide an “outcome agnostic” analysis for the city.
It could take a year to get a deal with a buyer, and then it has to go to City Council, where President Darrell Clarke said there will be extensive review and public hearings.
“This is a very significant step that the mayor decided he wanted to do without consultation with members of Council prior to him making the announcement,” Clarke said. “So we have to review whatever proposal comes forth.”
It’s possible the city could net a couple hundred million dollars from a sale. Nutter said that might go to shore up the city pension fund, and he didn’t rule out helping the school district.
Nutter said the city would proceed with a sale only if it was a good deal for the city and PGW customers, and it he said the buyer would have to preserve existing PGW social programs and abide by “current” union contracts.
But, listening to Nutter, it was hard not to conclude he sees the sale as in important piece of his mayoral legacy.
“The city has owned PGW for 176 years,” he said. “There was a time when that made sense. I believe that time has long since passed.”
Somehow I think his analysis of the sale won’t be so “outcome agnostic.”