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PGW Privatization:
Exelon's PECO Energy to Buy Philadelphia Gas Works (PGW)?

Today in Finance for January 24, 2001

Philadelphia is considering selling its troubled, city-owned natural gas utility, Philadelphia Gas Works, but isn't pursuing any deals now, according to published reports. The Philadelphia Inquirer earlier this month reported that Exelon Corp.'s Peco Energy and other unnamed suitors had expressed some interest in buying PGW. The newspaper quoted city officials as saying Peco had shown interest in operating or purchasing the gas company.

Philadelphia Daily News
Tue, Sep. 06, 2005

Opportunity may be knocking for debt-ridden Peco Energy


Imagine a natural-gas company serving almost a million customers, stretching from Philadelphia to a slice of Lancaster County and taking in Bucks, Chester, Delaware and Montgomery counties.

The company would supply the poor neighborhoods of the city and the fast-growing residential and commercial areas in the suburbs. It would be a combination of the present PGW and the natural-gas customers of Peco Energy.

PGW President Thomas Knudsen says such a company "represents a kind of end-game that PGW can only dream about."

Knudsen's "pipe dream" is beginning to look more like a real possibility owing to the confluence of market, regulatory and political forces.

A lot would have to happen for PGW to be removed from city control, including a plan to pay off the utility's burgeoning billion-dollars-plus debt, but an opportunity appears to be beckoning.

First, Exelon, which owns Peco Energy, is in the early stages of a merger gambit with New Jersey's Public Service Enterprise Group. The new company, Exelon Electric & Gas, would combine two large, investor-owned utilities, including 1.6-million New Jersey gas customers, with Peco Energy's Pennsylvania gas customers.

But city and PGW officials are warning that such a combination could spell near-monopoly power for the new company and a dire risk for the city's fiscally challenged natural-gas utility.

They are pushing for the state Public Utility Commission to deny the merger unless a remedy such as divestiture of Peco Energy's natural-gas customers is part of the deal.

Meanwhile, House Speaker John Perzel is quietly working on a two-stage plan that would move PGW from city control to a regional authority, which would prepare the company for sale.

But unlike Perzel's past dealings with Mayor Street's administration, including the hostile takeover of the city's Parking Authority, Street and Perzel are cautiously and quietly trying to collaborate on a process that would separate PGW and its huge debt from city government.

"The mayor's position has not changed from several years ago," said Joyce Wilkerson, Mayor Street's chief of staff and a member of the PGW board. "We are interested in selling the company."

What has changed is the company's relative stability: This year it will collect about 94 percent of its bills, up from 87 percent a few years ago; the company has forged a new relationship with its union and is better at controlling costs; and it's considering what could be a lucrative use of its liquefied-natural-gas operation, she said.

"When we first looked at trying to sell the company [several years ago], we faced a huge crevasse," Wilkerson said. "But through management and operational changes we are starting to close the gap. The company is now operating much more effectively and the changes are really like night and day."

Then came Exelon's proposed merger with PSEG last December.

"We have raised questions about the merger and the potential distortion of the market," Wilkerson said.

The Exelon-PSEG merger faces a myriad of regulatory hurdles, including Pennsylvania and New Jersey utility regulators, as well as four federal agency reviews.

PGW contends that the new company would have the "ability and incentive" to manipulate natural-gas and electricity prices. Not only could the merged company affect natural-gas prices in the region, but it also could raise electricity prices in certain peak load situations, where natural-gas- fired electricity-generating plants come on line.

Higher gas and electricity costs could imperil PGW's survival, Wilkerson said. About 130,000 of the company's 500,000 customers are at or below poverty level.

Knudsen warned that PGW and its customers face a situation reminiscent of the California energy crisis.

Exelon argues that the merged company would not own or control any of the interstate gas pipelines and would not be able to control gas supplies or price.

Exelon has no interest in seeing its gas customers, whether in Pennsylvania or New Jersey, spun off into new companies. Denis P. O'Brien, president of Exelon's Peco Energy, said in a recent filing that his company would "vigorously contest" any effort at divesting the new, merged company of its gas customers.

And while the new Exelon Electricity & Gas might be interested in exploring the purchase of PGW in the future, O'Brien said consideration of such a purchase would have to wait until the merger is completed. And even then, company experts foresee a host of problems.

But the Pennsylvania PUC thought enough about the divestiture issue to ask all the parties to answer a question about the viability and profitability of a shareholder-owned company made up of PGW, Peco Energy's gas division and the gas division of the New Jersey company.

In that context, Craig E. White, PGW's acting chief operating officer, submitted testimony to the PUC arguing that a combination of PGW and Peco Energy's gas division made the most financial sense given their proximity to each other.

But he also argued that a not-for-profit company operating under a public authority structure could be a viable alternative to an investor-owned company.

"It could utilize tax-exempt debt to refinance existing debt or to provide for on-going capital expenditures," he said.

And that's where the Perzel plan could come into play.

According to a legislative source familiar with Perzel's proposal, the speaker is contemplating a regional authority that would take possession of PGW and put itself out of business after no more than eight years.

The company's enormous debt would be refinanced with the commonwealth, rather than the city, guaranteeing the debt. With a better bond rating, the state presumably would save money for the company in the refinancing. Part of PGW revenues would be dedicated to retiring the debt.

"This is a chance to get something done with a company that is now well-run but has enormous debt," said the source. "Or we can just let it go on until it fails and then pick up the pieces."

Wilkerson said the city was expecting to see a "very thoughtful" legislative proposal.

"It's a challenge operating PGW if it's a company that just serves the city," she said. "The mayor will have to see the details, but we are certainly open to look at this. I think it's a new day. There are new opportunities for the company that weren't present several years ago. We are taking it all very seriously."

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Last modified: 22 October 2005

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