The PGW Money shuffle

[eldondre]

During last winter's credit-market meltdown, when the Philadelphia Gas Works was forced to beg regulators for an emergency rate increase, the city-owned utility quietly instituted a number of belt-tightening measures, including one that bordered on sacrilege.

PGW cut its capital budget by about 24 percent, to $55 million from $72 million. Rather than digging up the customary 18 miles of aging cast-iron gas mains it replaces each year, the utility upgraded only six miles of pipe.

For PGW oldtimers, the reduction in gas-main replacements was unsettling. Despite years of upheaval at the utility, its professionals have taken pride in maintaining the system's safety and integrity without compromise...Two credit-rating agencies, Standard & Poor's and Fitch Ratings, recently called PGW's outlook "stable" while reaffirming the utility's borderline investment-grade rating. The bond-rating agencies universally praise the utility's management team under chief executive officer Thomas Knudsen for, as Moody's Investor Services said, "demonstrating a strong record of operational improvements and strategic planning."

But the bond-rating agencies say they won't upgrade PGW from near-junk bond status until the utility sorts out several fundamental financial issues. Chief among them is its $1.2 billion debt, which has grown for more than a decade as the utility has borrowed to pay for operations and capital projects in what Bogdonavage called "a vicious cycle."..PGW last paid for improvements with internally generated funds in 1993...The utility also is trying to generate legislative support for a new funding mechanism it says will allow it to reduce borrowing costs for infrastructure improvements, such as the gas-main replacements deferred this year.

The funding scheme, contained in House Bill 744, is called a distribution services infrastructure charge (DSIC).

For PGW, the legislation would allow a third party with better credit, such as the Philadephia Authority for Industrial Development, to sell bonds to finance its improvements. The PUC would issue an irrevocable order allowing PGW to recover interest and principal payments through a surcharge on bills...It also is considering outsourcing some customer service and repairs now done by union workers, though such changes would require easing work rules in contract negotiations that will take place this year.

PGW works to get its capital in order | Philadelphia Inquirer | 07/08/2009

[desolate]

Mayors of Philly have been doing this to PWD for years to "lower the budget"

Hence all the sewer failures and old lines dumping into rivers and creeks.

With water you have just sinkholes and pollution.

Not really looking forward to PGW "issues"

[billy ross]

There is good news buried in that article. PGW will retire one third of its debt over the next five years by simply cashflowing it (i.e. making the contractual payments). In order to do this it will continue to run a deficit, but a continually shrinking deficit, and one which is much smaller than the debt it is retiring. In short, I think that time will take care of PGW, finally.

Actually, the news is better than that:

' Knudsen believes it will turn the corner next year and eke out enough cash in the next four years to reduce long-term debt by $400 million.'

That means that they will supposedly be sufficiently cash-positive starting next year to wipe out $400 million NET in debt over four years.

[eldondre]

There is good news buried in that article. PGW will retire one third of its debt over the next five years by simply cashflowing it (i.e. making the contractual payments). In order to do this it will continue to run a deficit, but a continually shrinking deficit, and one which is much smaller than the debt it is retiring. In short, I think that time will take care of PGW, finally.

Actually, the news is better than that:

' Knudsen believes it will turn the corner next year and eke out enough cash in the next four years to reduce long-term debt by $400 million.'

That means that they will supposedly be sufficiently cash-positive starting next year to wipe out $400 million NET in debt over four years.

Of course, that good news has an asterisk

But he is counting on the PUC's making permanent the $60 million rate increase. Under terms of the emergency relief, PGW is required to file a new rate case with regulators by the end of the year.

[raider.adam]

Of course, that good news has an asterisk

Don't confuse him with facts.

[billy ross]

Don't confuse him with facts.

Huh? The widely praised head of PGW plans to cash flow $100 million per year in debt amortization starting next year, which, assuming straight line amortization (a little dangerous), will completely retire PGW's $1.2 billion millstone debt in 12 years, and somehow you find fault with his plan? What on earth do you want?

[billy ross]

Of course, that good news has an asterisk

We all know how temporary things more often than not become permanent. It is either a sign of irrational fear or disingenuous to assume that temporary tax increases will become permanent in the case of sales taxes but to assume the opposite in the case of gas rates.

PGW already has its 'temporary' rate increase in hand. The city is still waiting for its second 'temporary' sales tax increase to be approved. Do I really believe that in 12 years PGW will be debt free? No. Probably some of the enhanced cash flow will be spent on renewing their systems. Probably some of the rate increases will be given back once the cash call-induced 'crisis' is over. Do I believe that PGW has gotten over the hump? Yes. With an $800 million debt in four years and much better collection policies it should be well on the road to health, and maybe even able to contribute dividends to its owner.

[eldondre]

just so were clear, the debt free plan is afarce, simply shuffling money around. Second, the only way to pay down debt is to increase rates while the suburbs decrease them. That's a positive with an asterisk. The asterisk is we have to pay extra. It should pay no dividends to the city until rates are in line to peco. The city is the reason we have this problem to begin with. Pgw has improved but it still has an extremely high cost structure. That needs to be addressed. Knudsen is to be applauded and it's not hisfault it's such a disaster but something should be done to ensure we keep getting competent management.

[raider.adam]

Huh? The widely praised head of PGW plans to cash flow $100 million per year in debt amortization starting next year, which, assuming straight line amortization (a little dangerous), will completely retire PGW's $1.2 billion millstone debt in 12 years, and somehow you find fault with his plan? What on earth do you want?

Because, as eldondre points out, it is easy to have a debt pay down plan look bigger than it is when it is based off raising rates on a, predominantly, captive audience.

But I am sure you are happy with higher natural gas prices because it takes money away from terrorists.

[billy ross]

just so were clear, the debt free plan is afarce, simply shuffling money around. Second, the only way to pay down debt is to increase rates while the suburbs decrease them. That's a positive with an asterisk. The asterisk is we have to pay extra. It should pay no dividends to the city until rates are in line to peco. The city is the reason we have this problem to begin with. Pgw has improved but it still has an extremely high cost structure. That needs to be addressed. Knudsen is to be applauded and it's not hisfault it's such a disaster but something should be done to ensure we keep getting competent management.

Starting with a $1.2 billion debt and in five years having an $800 million debt is not shuffling money around. What on earth are you talking about.

I pay more in gas bills than any person I know, and it really bothers me (I just paid an electric bill yesterday on a building where I pay for both heat and air and I can assure you that I'd rather pay for air). The gas company should be buying me drinks all winter long, just to help me forget the checks I write to them. However, it bothers me more to have a gas company with a $1.2 billion debt and which is essentially insolvent. The thought that the gas company will cash flow away one third of its debt over the course of four years (the first year seems to be a tread water year) is immensely comforting to me. It means that the pain will recede as the gas company gains back its financial health. When I was a kid Philly had insanely high electric rates, due to PE's need to pay for its nuclear plants (keep in mind that I have been in this business since my childhood). Pennsylvania ingeniously allowed PE to recover its sunk costs in the power plants while allowing competition (and price-fixing) to cause PA's electric rates to drift lower and lower (I think mostly via inflation). 30 years ago Philly had the highest electric rates of any city in the USA. Now we have among the lowest (but not for much longer - our rates are scheduled to float soon). I see the model repeating itself with PGW, and I can't be happier.

The insane gas bills I paid last winter shouldn't go up by much over the next five years, as last winter was one of the fiercest on record. I am also hoping that I am already paying the emergency increase, as opposed to waiting for it to kick in (I am pretty sure I have already been paying it).

[billy ross]

Because, as eldondre points out, it is easy to have a debt pay down plan look bigger than it is when it is based off raising rates on a, predominantly, captive audience.

But I am sure you are happy with higher natural gas prices because it takes money away from terrorists.

Actually, when we were in British Columbia a few years ago I was amused to note that the taxis there run on propane. I would love to see natural gas become cheap enough that Americans (Philadelphians especially) switch to natural gas for uses other than heating and cooking. I understand that this is already the case in Utah, due to its proximity to gas fields and distance from oil fields. In short, I would love to see natural gas prices continue to drift lower relative to oil prices. It isn't perfect - it's still a fossil fuel - but it burns so much cleaner than oil, it needs alot less refinement, and as long as the new supply continues to be domestic, there aren't the national security issues, nor the issues of supporting despicable people and regimes. The present wholesale price of natural gas is so low that all of the LNG import terminals built a few years agos for billions are sitting idle (last I checked, six months ago), because the world price of LNG is / was much higher than the domestic US price of natural gas.

[eldondre]

Starting with a $1.2 billion debt and in five years having an $800 million debt is not shuffling money around. What on earth are you talking about.

don't be deliberately dense. Getting all the debt off its books is shuffling money around, specifically from its books to to some third party, is the PIDC.

For PGW, the legislation would allow a third party with better credit, such as the Philadephia Authority for Industrial Development, to sell bonds to finance its improvements. The PUC would issue an irrevocable order allowing PGW to recover interest and principal payments through a surcharge on bills.

The lower issuance cost and interest rates would save the utility $63 million over 30 years for each $100 million borrowed, PGW says. The arrangement would also get the debt off PGW's bloated balance sheet.

that's not to mention from y pocket to theirs.

However, it bothers me more to have a gas company with a $1.2 billion debt and which is essentially insolvent.

It bothers me too and at least he's finally trying to address it since the politicians don't seem inclined to.

It means that the pain will recede as the gas company gains back its financial health.

it means there's hope, nothing is inevitable.

Pennsylvania ingeniously allowed PE to recover its sunk costs in the power plants while allowing competition (and price-fixing) to cause PA's electric rates to drift lower and lower (I think mostly via inflation). 30 years ago Philly had the highest electric rates of any city in the USA. Now we have among the lowest (but not for much longer - our rates are scheduled to float soon). I see the model repeating itself with PGW, and I can't be happier.

there's really nothing similar about those two situations at all. Also, I've heard PECO increases will be lower than much of the rest of the state because PECO rates are generally higher than, say, PPL. AFAIK, our rates are half that of New England, less than NY, and more expensive than sunbelt states. PECO is now benefitting from low cost power from paid off nuclear plants, PGW will still have outdated equipment, buy spot market power, and ceteris paribus, have an expensive cost structure.

The insane gas bills I paid last winter shouldn't go up by much over the next five years, as last winter was one of the fiercest on record. I am also hoping that I am already paying the emergency increase, as opposed to waiting for it to kick in (I am pretty sure I have already been paying it).

A lot of that will depend on gasprices and what their capital needs are I would imagine.

as for natural gas, we need the price to increase a bit. Penn sits on one of the largest natural gas reserves in the world AFAIK but it's expensive to extract...so we need prices to remain elevated. If other pices increase, the relative price is more competitive.

[billy ross]

don't be deliberately dense. Getting all the debt off its books is shuffling money around, specifically from its books to to some third party, is the PIDC.

that's not to mention from y pocket to theirs.


It bothers me too and at least he's finally trying to address it since the politicians don't seem inclined to.


it means there's hope, nothing is inevitable.

there's really nothing similar about those two situations at all. Also, I've heard PECO increases will be lower than much of the rest of the state because PECO rates are generally higher than, say, PPL. AFAIK, our rates are half that of New England, less than NY, and more expensive than sunbelt states. PECO is now benefitting from low cost power from paid off nuclear plants, PGW will still have outdated equipment, buy spot market power, and ceteris paribus, have an expensive cost structure.

A lot of that will depend on gasprices and what their capital needs are I would imagine.

as for natural gas, we need the price to increase a bit. Penn sits on one of the largest natural gas reserves in the world AFAIK but it's expensive to extract...so we need prices to remain elevated. If other pices increase, the relative price is more competitive.

That third party stuff is speculative, and it refers to the remaining $800 million. It may or may not happen. I don't believe it refers to the $400 million which has come due - it is my understanding that PGW plans to cash flow its way out of that, and that it has already gotten the emergency rate increase to pay part of those increased principal payments. It seems to have found the remainder in its present budget, partially through skimping on capital expenditures. It's a balancing act, and I am finally glad to say that we seem to have competent people in there. It was such a mess for so long that we're not going to come out of it overnight.

[eldondre]

That third party stuff is speculative, and it refers to the remaining $800 million. It may or may not happen. I don't believe it refers to the $400 million which has come due - it is my understanding that PGW plans to cash flow its way out of that, and that it has already gotten the emergency rate increase to pay part of those increased principal payments. It seems to have found the remainder in its present budget, partially through skimping on capital expenditures. It's a balancing act, and I am finally glad to say that we seem to have competent people in there. It was such a mess for so long that we're not going to come out of it overnight.

speculative or not, it's money shuffling and it's being proposed. they need savings to come from reductions in operating costs, not maintenance. That's not to say things aren't better at PGW, of coruse, if they had gotten worse, it would have been in bankrupcty.

[billy ross]

The irony is that it is expensive to be poor, and PGW is a great example of that. When you have a poor credit rating it is expensive to borrow. PGW needs to fix its credit rating, but while it is doing so it seems to want another entity to borrow the money so that interest rates can be lowered. It is essentially asking for a co-signer. When you are running a business you need to look at all kinds of ways to cut costs. Interest expense is one of them. I have no problem with PGW enlisting a third party so that it can have lower interest expenses. Of course it would be better for PGW to get its house in order so that it can be a rock-solid borrower, but again that doesn't happen overnight. I'll repeat - if in 5 years PGW can have paid off one third of its debt then great things are afoot.

Before Perzel's fall from grace he was talking about the state issuing an enormous bond to take over PGW's debt, then selling PGW minus its debt. I figured that that would be a hard sell in the legislature, but Perzel was not without his tricks. I like Knudson's solution much more. Something had to be done, and something is being done.

[eldondre]

The irony is that it is expensive to be poor, and PGW is a great example of that. When you have a poor credit rating it is expensive to borrow. PGW needs to fix its credit rating, but while it is doing so it seems to want another entity to borrow the money so that interest rates can be lowered. It is essentially asking for a co-signer. When you are running a business you need to look at all kinds of ways to cut costs. Interest expense is one of them. I have no problem with PGW enlisting a third party so that it can have lower interest expenses. Of course it would be better for PGW to get its house in order so that it can be a rock-solid borrower, but again that doesn't happen overnight. I'll repeat - if in 5 years PGW can have paid off one third of its debt then great things are afoot.

I see it more like what enron did, taking out debt for revenue generating opportunities but leaving it off the books in subsidiary companies. co-signing would be an expllicity guarantee form the city of Philadelphia, not shifting it off the books. I do have a problem with PGW moving its debt onto the taxpayers books, it merely obfuscates the picture. It should act like any other company and reduces expenses it controls, pay down debt. Like I said, according to the Inquirer, PGW has the highest employee to customer ratio in the industry. that's what they need to address, not sticking taxpayers with the debt.

[billy ross]

I see it more like what enron did, taking out debt for revenue generating opportunities but leaving it off the books in subsidiary companies. co-signing would be an expllicity guarantee form the city of Philadelphia, not shifting it off the books. I do have a problem with PGW moving its debt onto the taxpayers books, it merely obfuscates the picture. It should act like any other company and reduces expenses it controls, pay down debt. Like I said, according to the Inquirer, PGW has the highest employee to customer ratio in the industry. that's what they need to address, not sticking taxpayers with the debt.

I just mailed a (mercifully low) gas bill off to Newark, NJ. This is a fairly recent change. Do you think that PGW outsourced its billing, or do you think they have a satellite office in Newark?

[raider.adam]

Actually, when we were in British Columbia a few years ago I was amused to note that the taxis there run on propane. I would love to see natural gas become cheap enough that Americans (Philadelphians especially) switch to natural gas for uses other than heating and cooking. I understand that this is already the case in Utah, due to its proximity to gas fields and distance from oil fields. In short, I would love to see natural gas prices continue to drift lower relative to oil prices. It isn't perfect - it's still a fossil fuel - but it burns so much cleaner than oil, it needs alot less refinement, and as long as the new supply continues to be domestic, there aren't the national security issues, nor the issues of supporting despicable people and regimes. The present wholesale price of natural gas is so low that all of the LNG import terminals built a few years agos for billions are sitting idle (last I checked, six months ago), because the world price of LNG is / was much higher than the domestic US price of natural gas.

But bad people sell natural gas. You want to give money to bad people?

[eldondre]

I just mailed a (mercifully low) gas bill off to Newark, NJ. This is a fairly recent change. Do you think that PGW outsourced its billing, or do you think they have a satellite office in Newark?

then that's really disturbing they have so many employees. who are they and what do they do?
BTW-PGW has improved over the years, I'm not arguing that point. Every move I've done has been easier, though it's worth noting that PECO has been easy to transfer accounts for years. go online, fill out form, submit, receive confirmation email. nonetheless, PGW level of service is something the PWD should strive for.
when do we know hell has frozen over? when billyross admits something negative occurred in Philadelphia.

[raider.adam]

I just mailed a (mercifully low) gas bill off to Newark, NJ. This is a fairly recent change. Do you think that PGW outsourced its billing, or do you think they have a satellite office in Newark?

It's probably just a lockbox account. My insurance company does it to (as well as credit card companies, mortgage companies, etc.)

Basically, it is a service your bank provides (for a fee). You have all your customer bill payments mailed there. They process the checks, load the money to your account and send you an electronic file of account numbers and payments so you can load it into your accounts payable system.

Part of the efficiency is that the machines read the numbers off the bill stub and the check so there are no keying errors and it is much faster.

You save a bundle from having your own internal employees handling check processing and it is deposited same day.