COUNCIL OF THE CITY OF PHILADELPHIA PUBLIC HEARING AND PUBLIC MEETING BEFORE THE COUNCIL COMMITTEE ON FINANCE - - - Room 400, City Hall Philadelphia, Pennsylvania Tuesday, 4/21/98, 9:40 a.m. - - - BILL 980232 - Authorizing generally the issuance of Gas Works Revenue Bonds of the City of Phila., which shall be subordinate to bonds issued under General Gas Works Revenue Bond Ordinance of 1975, which ordinance is hereby amended to limit issuances of bonds thereunder, prescribing form of bonds issued hereunder, and providing for their execution, transfer, exchange, payment, and redemption, prescribing conditions precedent to issuance of specific series of bonds, including supplemental authorizing ordinances pledging certain revenues of THE Gas Works as security, adopting a rate covenant, and directing Gas Commission to impose rates sufficient to comply therewith, designating fiscal agent and sinking fund depositary, establishing Sinking Fund, including Sinking Fund Reserve, and providing for its management, providing remedies upon default, and providing for amendments and modifications. BILL 980233 - Constituting First Supplemental Ordinance to General Gas Works Revenue Bond Ordinance of 1988 authorizing Mayor, City Controller, and City Solicitor, or majority of them, to sell either at public or private sale Gas Works Revenue Bonds, First Series, of City of Philadelphia, in one or more subseries, in maximum aggregate principal amount of $300 million. 2 BILL 980234 - Authorizing, generally, the continued issuance and sale by the City of Philadelphia of Gas Works revenue notes of the City, prescribing the forms of notes and providing for their execution and payment pledging certain revenues of the Gas Works as security, adopting a rate covenant, and directing the Gas Commission and the manager of the Gas Works to impose and collect rates sufficient to comply therewith, prescribing the conditions precedent to the issue of specific series of notes, including a resolution passed by the Bond Committee, providing for establishment of credit support for notes, providing for designation of a fiscal agent and sinking fund depositary, providing for establishment of a sinking fund and its management, providing remedies upon default, and providing for amendments and modifications. PRESENT: COUNCILWOMAN ANNA C. VERNA, Chair COUNCILWOMAN JANNIE BLACKWELL COUNCILMAN JAMES F. KENNEY COUNCILMAN MICHAEL A. NUTTER COUNCILWOMAN HAPPY FERNANDEZ COUNCILWOMAN MARIAN B. TASCO COUNCILMAN W. THACHER LONGSTRETH - - - VINCENT VARALLO ASSOCIATES, INC. Registered Professional Reporters Eleven Penn Center, Suite 600 Philadelphia, PA 19103 (215) 561-2220 3 I N D E X Bill No. 980232 and 980233 Jim Hawes, President and CEO. . . . . . . . 4 Philadelphia Gas Works Thomas Queenan, City Treasurer. . . . . . . 7 Raymond Sharbutt. . . . . . . . . . . . . . 10 Chief Financial Officer of PGW Laureto Farinas . . . . . . . . . . . . . . 48 Public Policy Department, PGW Bill No. 980234 Thomas Queenan, City Treasurer. . . . . . . 79 Raymond Sharbutt. . . . . . . . . . . . . . 81 Chief Financial Officer of PGW 4 COMMITTEE OF FINANCE - BILL NO.'S 980232 P R O C E E D I N G S
Good morning everyone. This is a public hearing on the Committee on Finance. I would ask the clerk to please read Bill No.'s 980232 and 980233, which are companion bills.
Bill No. 980232, an ordinance authorizing generally the issuance of Gas Works Revenue Bonds of the City of Philadelphia, which shall be subordinate to bonds issued under the General Gas Works Revenue Bond Ordinance of 1975, which ordinance is hereby amended to limit issuances of bonds thereunder, prescribing the form of bonds issued hereunder, and providing for their execution, transfer, exchange, payment, and redemption, prescribing the conditions precedent to the issuance of specific series of bonds, including supplemental authorizing ordinances pledging certain revenues of the Gas Works as security, adopting a rate covenant, and directing the Gas Commission to impose rates sufficient to comply therewith, designating a fiscal agent and sinking fund depositary, establishing a Sinking Fund, including 5 COMMITTEE OF FINANCE - BILL NO.'S 980232 a Sinking Fund Reserve, and providing for its management, providing remedies upon default, and providing for amendments and modifications. Bill No. 980233, an ordinance 6 constituting the First Supplemental Ordinance to the General Gas Works Revenue Bond Ordinance of 1988 (the "1988 General Ordinance") authorizing the Mayor, the City Controller, and the City Solicitor, or a majority of them, to sell either at public or private sale Gas Works Revenue Bonds, First Series, of the City of Philadelphia, in one or more subseries, in the maximum aggregate principal amount of $300 million (the "First Series Bonds).
Good morning. Please identify yourself for the reported and proceed with your testimony.
Good morning, Chairwoman Verna and members of the Committee on Finance. I am Jim Hawes, President and CEO of the Philadelphia Gas Works. I have with me Ray Sharbutt, the Chief Financial of the Philadelphia Gas Works, and Thomas Queenan, the City Treasurer. And we are here this morning to 6 COMMITTEE OF FINANCE - BILL NO.'S 980232 testify in support of Bills No. 980232, 980233, and 980234. Mr. Sharbutt and Mr. Queenan and many others have been working on the details and the mechanics of these bills for over eight months, and both will have comments to follow. These proposals provide PGW with several unique opportunities as we continue to position PGW for the challenges ahead. With THE present extremely low interest rates, we can reduce our costs by refunding certain portions of prior bonds and the purchase of the lease on PGW's headquarters building, which will again allow us to take advantage of the lower interest rates and the debt service payments. Further, I would say that given such low-interest rates, it is also an opportune time to obtain the capital necessary to support current and planned capital projects necessary to continue the position of PGW for the future by allowing us to provide a safe, reliable, and efficient distribution system and a customer service system. Finally, this opportunities is 7 COMMITTEE OF FINANCE - BILL NO.'S 980232 consistent with our goal of improving the financial structure and readjusting the nature and the level of overall long-term indebtedness. A strong financial structure provides, as you know, much better positioning to take advantage of future options. I would add, finally, that Bill 980232 supports PGW's commercial paper program, and the ordinance will provide a continuation of the existing program which expires June 1, 1998. We have a host of subject matter experts with us today who are prepared to answer any questions that the Committee might have. I will turn it over to Thomas -- to Mr. Queenan to make further comments.
Good morning. Good morning, Finance Committee. My name is Thomas Queenan, I'm City Treasurer. And I'm here to testify in support of Bills No. 980232 and 980233. At the end of the business day this past Friday, I submitted to this committee a comprehensive package, which included my written testimony, testimony by Mr. Ray Sharbutt, CFO at 8 COMMITTEE OF FINANCE - BILL NO.'S 980232 PGW, as well as a description of the transaction and other supporting information. Therefore, I won't necessarily read my transcript again for the record. However, we do have a series of amendments to the two ordinances which I just referred to. I have provided them to your Chief of Staff for distribution. They basically refer to a series of nits and a clarification of the some of the language. So you should have in your packet a photocopy with the change nits and changes of words that have been amended for these two ordinances, all right? I'd also like to make a request for a suspension of rules as it relates to these two particular ordinances. As you know, this is for a refinancing of up to $300 million for PGW. Approximately $100 million will be new money for capital projects going forward. There will also be about $25 million of that $300 million which represents a refinancing of the 1989 Philadelphia Municipal Authority Lease Revenue Bonds that were issued in 1989 to fund the construction and acquisition of PGW's current headquarters. 9 COMMITTEE OF FINANCE - BILL NO.'S 980232 So part of this financing is a refinancing of that PMA debt which will accelerate the purchase of that building that they started to do acquire in 1989 and refinancing that debt to subordinate debt to PGW. Again, it's explained in my testimony. And then the balance, which is between 160 to 175 million of the $300 million represents a refinancing of existing outstanding PGW bonds. As noted by Mr. Hawes, because interest rates are very low at this time, we are able to refinance the outstanding debt so that PGW will realize an economic savings on its debt service going forward for the next 28 years. I believe that concludes my sort of oral presentation. I'm going to turn it over to Mr. Sharbutt who can discuss how the proceeds of the new money bonds will be used by PGW. At the conclusion of his testimony, we're all available to answer any questions that you may have.
Good morning, Chairwoman Verna and other members of the committee. 10 COMMITTEE OF FINANCE - BILL NO.'S 980232
I'm Raymond Sharbutt. I'm the Chief Financial Officer of PGW, and I'm appearing before you on Bills 980232 and 980233. The first bill, Bill No. 980232, is a significant bill for the future for PGW. It's a 1998 ordinance, which restructures the existing 1975 ordinance, which authorizes the issuance of revenue bonds by the City of Philadelphia secured by a pledge of revenues of PGW. And we'll govern all new debt issue in the future. Remaining outstanding debt of the 1975 ordinance will still be carried under the provisions of that ordinance. The second bill, No. 980233, as Thomas said, consists of the $100 million of new money, 175 million of refunding, and the 125 million of refunding of the PMA lease on the City-owned headquarters building of PGW. The 100 million of new money is a key component of the improvement in the infrastructure at PGW, which will include the funding of our initiatives, information technology initiatives. Those are necessary to grow revenues and to implement the plans to enhance the financial 11 COMMITTEE OF FINANCE - BILL NO.'S 980232 stability of PGW, as Mr. Hawes has said, which is one of our primary objectives. As both Mr. Hawes and Mr. Queenan have said at this time, the present low-interest rates make it economically advantageous for PGW to conduct this refunding and the issuance of new money, and also to save significant amounts on the refinancing of the PMA lease of the company's headquarter building. Both the '98 general ordinance and the supplemental ordinance for the 300 million continue to meet our strategic goal of modernizing PGW's financial structure, and they will allow us to readjust the nature and level of our overall long-term debt and give us more financial and operating flexibility necessary in the future to keep the company strong and viable. I have also submitted testimony, along with Mr. Queenan and Mr. Hawes, which outline these issues in more detail, and we have appropriate PGW and other personnel here to answer any technical or other questions you may have.
Excuse me. If I may add 12 COMMITTEE OF FINANCE - BILL NO.'S 980232 just one other item -- I'm Thomas Queenan again, the City Treasurer -- that I sort of neglected to mention, and I think this is actually very good information. As part of the restructuring of -- one of the ordinances here for the 1998 General Revenue Bond Ordinance for PGW will actually create a junior-senior indenture structure, which we described in detail in our written testimony. I've also submitted in our package two tables, and I hope everyone has received a copy of those tables. And there's Table and 14 Supplemental Table 15. I think the thing that's 15 quite interesting is that this restructuring will improve the ability of PGW to meet its rate calculation, which it is required to do every year. What this means, for the most part, is that PGW has a 1.5 rate -- debt service rate coverage requirement. So for every $100 of debt that it has outstanding, it has to earn $150 of revenue. That's part of the covenant of the bonds that are outstanding. But with the junior-senior structure, 13 COMMITTEE OF FINANCE - BILL NO.'S 980232 this structure will make it a lot easier for PGW to meet its coverage. So if you look at Table 4 -- I'm sorry -- Supplemental 15 going forward, it 5 represents debt service coverage. You see 1.53 6 current estimate going forward. You can see where 7 PGW will be, based on current estimates, under the 8 existing 1975 ordinance. 9 Under the proposed structure in the 10 1998 ordinance on Table 15, on the same line item, 11 you can see that PGW more easily meets its rate 12 coverage, which is actually a benefit to the 13 system going forward. 14 So, as noted by Mr. Sharbutt, this 15 particular ordinance provides some flexibility, and it allows a modernization of how PGW currently operates. Thank you.
Thank you. I have a couple questions that I would like to ask, as I'm sure that there are other committee members that would like to do the same. Can you tell us why you are proposing to create a 1998 general ordinance for the Gas Works and not issue the proposed bonds under the 14 COMMITTEE OF FINANCE - BILL NO.'S 980232 existing 1975 general ordinance?
Well, again, as I mentioned, one of the things we were trying to do is that when the 1975 ordinance was first put together in 1975, the way that utilities operate today, the way that the bond market operates today and how we do financings, there was a need to go in and to essentially modernize that particular ordinance. We've done the same for the Water Department, and we've done the same also for the Division of Aviation, modernizing these sort of ordinances that control how bonds are financed. The other feature that I just described as a "junior-senior indenture," which allows PGW to better meet its debt service rate coverage by creating a second tier of bonds, which we call -- we have the senior debt, the existing 1975 bonds that are outstanding, but were able to create another layer of debt just below that called the 1998 bonds, which also have a 1.5 coverage. But the way you do the calculation, it's an easier coverage to meet than the current structure allows. For example, if there were a 15 COMMITTEE OF FINANCE - BILL NO.'S 980232 very -- well, if there was a very warm winter, which we've actually been experiencing, if revenues at PGW were to drop, their ability to meet their coverage may be in jeopardy. This new structure allows there to be some millions of dollars of reduction in revenue based on, let's say, a very warm winter, and they would still be able to meet their coverage. As you know, in 1995, there was -- there was a need to -- we met our coverage in 1995, but it was actually very close, so we thought that we would try to structure the ordinance, which allows PGW an easier ability to meet its coverage requirement of 1.5.
What impact, if any, will these proposed changes have upon PGW's rate-payers?
What's being proposed in each of these ordinances -- and I'll turn it over to Mr. Sharbutt in a moment -- is rate-neutral to any of the current rate-payers to PGW; other than the fact that we will be reducing debt service on outstanding bonds going forward for 28 years.
Councilwoman Verna, 16 COMMITTEE OF FINANCE - BILL NO.'S 980232 there will be no current rate-payer impact as a result of any of these transactions. We do hope to see positive impacts in future financings as we issue under the new indenture, and those will be reflected in, hopefully, savings to the rate-payer.
Can you explain the mechanics of the debt service coverage calculation as required by the proposed 1998 ordinance?
Yes, I can do that. It's actually very -- to some extent, it's quite complicated. In your packets, I provided two charts, which, you know, if you read through the testimony, I think it's very helpful to read through the --
I understand. What we're doing essentially, as I mentioned earlier, there's a 1.5 coverage requirement for outstanding PGW debt. For every dollar or every $100 of outstanding debt, there needs to be $150 of revenues. 17 COMMITTEE OF FINANCE - BILL NO.'S 980232 By creating this new structure, we are actually refinancing bonds that are outstanding to the 1975 ordinance to a subordinate level called "junior debt," which also has a one-and-a-half- times coverage. And we've also agreed that we will not issue any more new money under the 1975 ordinance, but will issue future new money for PGW going forward under the 1998 ordinance; which, again, is a junior indentured debt. So that what you have, you create a second tier of one and a half times coverage debt. So when revenues come into PGW, you net out operating expenses. You use the net revenues to do your calculation on debt service on an annual basis under the 1975 ordinance. Because you've reduced that amount of debt outstanding under the '75 ordinance, the required revenue can be less. After you do the test, then you do the test again based on revenues again on the bonds that are issued at the second-tier level for the 1998. So, in effect, what you're doing is kind of like a waterfall effect that you can use 18 COMMITTEE OF FINANCE - BILL NO.'S 980232 the monies that you use to do the coverage for the 1998 bonds outstanding, you can use that same revenue partially to do the same test analysis for coverage on the 1975 bonds. So you're able to leverage the revenues that you're using to do the debt service test on the '98s to do the debt service tests on the '75s. It's a little complicated, I know.
I'm just trying to keep it in a simple description, but you're able to leverage the revenues you're using to test the '98s to also do the tests on the ''75s. So, in effect, the total revenue requirements for PGW can be reduced slightly and you still meet your current coverage requirements.
How do you think the rating agencies look upon this proposal, and will they have an adverse effect on PGW's ratings?
No. Actually, the rating agencies will look upon this structure positively because it allows operating flexibility for PGW as it relates to its revenues. 19 COMMITTEE OF FINANCE - BILL NO.'S 980232 So if their costs go up or if their revenues go down, our analysis tells us, for example, that there could be a drop in approximately $10 million, for example, of revenues at PGW, and it will not have a problem meeting its rate coverage, all things remaining the same as they are today. But under the current 1975 ordinance, if revenues were to drop $10 million, then PGW would have great difficulty meeting its coverage under the existing '75 ordinance. Therefore, the rating agencies will view this positively because it represents our initiative to create a financing structure that allows PGW to operate -- well, it allows a financing structure that allows PGW to better meet its rate coverage.
How has the warm winter affected PGW, and what steps has the company taken to ensure that PGW meets its debt-coverage requirement?
I'm Jim Hawes, CEO, Philadelphia Gas Works. The effects of this winter have been, 20 COMMITTEE OF FINANCE - BILL NO.'S 980232 to say the least, significant. It is has been much like an emotional roller coaster because every month, as we enjoyed the warm days and the birds singing early, we also knew that that was less revenue dollars coming in. So the net effect, as we see it today -- and I am more comfortable today than I've been at any point over the last two or three months -- we have -- essentially, the effect of the warm weather has been roughly in revenues about $52 million. Back in November, we put in place, as most businesses do, after we finished our budget and projections and started into the year, through December, we were doing very well. All the indicators were positive. I think that's the time where people like me start to worry 'cause you start to say to yourself, What if the cycles change? which often happens in this business. And, of course, we had been warned that El Nino would kick in at some point and things would go south. Well, in fact, that did happen in the month of December. We had put in place contingency plans 21 COMMITTEE OF FINANCE - BILL NO.'S 980232 in November for two reasons. One was to make sure that if things did go the wrong way, we had a plan already in place to address that issue; and, second, to ensure that we had sufficient cash to move forward. As it turned out -- and much as we didn't expect in November when we put that in -- we actually did experience a much, much warmer January, February, March, and now April. And that is when the $52 million deficit started to appear. Now, to your question of what have we done up to this point? we are comfortable that we have measures in place to ensure that we meet debt coverage. As an example, we put in place very strict requirements operationally. We are projecting somewhere between $89 million from operations and are close to 18 to $19 million from a combination of operations and financial changes that we're making internally. A couple examples of that. And it is very difficult in a company such as ours that is steeped in tradition, both positive and negative tradition, to make change. But as an example of one of the areas where we have worked very hard 22 COMMITTEE OF FINANCE - BILL NO.'S 980232 during this year, if you look at just in the nineties how overtime is institutionalized -- and I'm not suggesting that it wasn't needed because it, in all probability, was. The fact of the matter is the average overtime in the nineties was a little over $10 million. And that's the average of the seven years prior to this year. We have put in very strict measures this year; and we had them in place, of course, before we needed them. But our overtime this year will be between 5 and $6 million, and we are projecting $5.5 million in overtime. That is a very significant cultural change, and one that is needed when your demand is off. That is not something that we're used to. Demand was down. I think we stepped up with implementing various changes that actually changed the way we do business. Our expense pool is roughly $575,000. The majority of that is gas costs. The pool from which we have to cut expenses is very small. Fifteen hundred of our employees are contract- covered, and so the pool from which we actually 23 COMMITTEE OF FINANCE - BILL NO.'S 980232 cut expenses is very small. That pool is -- out of the 575,000, the pool from which we have to work with is probably less than $50 million. And we have cut out roughly percent of that between 6 the operation and financial changes. 7 So I think I'm very comfortable for the 8 first time this year seeing that we can see the 9 end, and we believe confidently that we have 10 things in place to meet our debt-coverage 11 obligations. 12
In essence, are 13 you saying that we will not need any of the 14 savings from the proposed refinancing in FY '98 in 15 order to make the debt-service coverage 16 requirements? 17
I think we are looking at in the $6-million-range, in the 6- to $7-million-range. 24 COMMITTEE OF FINANCE - BILL NO.'S 980232
That's correct. We estimate that it will be between and $7.5 6 million of interest rate savings for fiscal year 7 1998. It's an estimate only because once we get to the market, we don't know exactly what interest rates will be, but that's the estimated target.
All right. I really don't want to monopolize the questioning. I'm certain other Councilpeople do have questions. The Chair recognizes Councilwoman Fernandez.
Thank you, Madame Chair. You answered my one question which Mr. Sharbutt had not indicated in his testimony what the significant interest savings are. So you're saying they're about 7 million?
Right. We expect the restructuring will give us a savings on our bonds in fiscal year 1998 of approximately $7 million. 25 COMMITTEE OF FINANCE - BILL NO.'S 980232
But the significant interest savings from the refinancing was less than that?
Out of the $7 million, we are going to have approximately 3.6, $3.5 million of interest-rate savings in fiscal year 1998. And the balance of that is the restructuring of debt, which will give us the total amount of $7 million of savings in debt-service cost in 1998 fiscal year.
I would find it helpful when you come any other times here, when you have, you know, complex deals like this, to give us a little bit more information. I found it sort of skimpy. And to get these charts just today instead of having those, you know, as we're reading the testimony so we can try to understand, you know, in more detail what you're talking about. I would find that helpful.
Because I couldn't figure out why you didn't at least make an estimate of what significant interest savings would be if you want us to understand, you know, COMMITTEE OF FINANCE - BILL NO.'S 980232 what's going on.
Well, out of the $7 million in debt-service costs for fiscal year '98, about $3.6 million is interest savings.
Okay. And after that, I think those kind of numbers need to be in writing in testimony, even if they're your best estimate.
Okay. And the other thing, your complicated -- your attempt to help us understand how this restructuring is working with your simplified example today, I still found not very understandable. I like to match things with some numbers. So I would find it helpful if you could give us -- we can move ahead today, but I'd like to see that spelled out with some exampled numbers of how it affects, you know, the senior note, the junior note. I must admit I had difficulty following it, particularly when there aren't examples and something, you know, like a diagram or something in writing. 27 COMMITTEE OF FINANCE - BILL NO.'S 980232
I will have that information sent to you after today's hearing.
And then the other question would be to Mr. Hawes. In terms of the warm weather and the fact that you had less income, how did the warm weather affect your low-income customers who often have trouble meeting their bills? Have you had also lower amounts then of uncollectible -- uncollectibles that you need to make up from the rest of your budget?
Well, we would have lower collectibles with lower billings, but I think the percentage is pretty much of the same. We are in the midst of just starting our collections campaign, so we'll have better information in a few weeks. But I think, in general, with lower revenues, you would have lower receivables, and that's one of the reasons we were able to reduce our expense for bad debt. That's in that $19 million. It was because of that.
If I'm correct, the -- if a low-income customer is only 28 COMMITTEE OF FINANCE - BILL NO.'S 980232 paying, let's say, a third of their bill of the actual cost of the gas, and the company's picking up the rest or it's matched by some funds or something, if the cost of gas was lower, then that margin of loss should be lower; is that correct?
Well, I don't know that the gas was that much lower in terms of price. The gas was lower, but it was --
Right. The usage is down. And as a result of the usage being down, the revenues are down, if I'm understanding you. But I think the percentage of customer bills and their billings are essentially lower based on the lower volume, not on the fact that we were able to collect any more, if I'm understanding you correctly.
What I'm saying is if a low-income customer is only paying in their payment plan, let's say, a third of the actual cost of gas, so you have two thirds that 29 COMMITTEE OF FINANCE - BILL NO.'S 980232 gets made up from either grants or lost dollars to PGW. If the actual cost of gas to service that customer was lower because the winter was warmer, wouldn't your margin be smaller? And wouldn't you be, at least with your low-income customers, you're in a better situation?
Well, our bad-debt expense did go down approximately $3 million, which is part of this savings that we had mentioned earlier. And a component of that reduction is related to the low-income customers. But I can't say that it's any more or less than that of any other customer. They all went down because of the reduction in revenues. But the margin that you're talking about, the 30 dollars and paying more than that, it went down proportionately and is a part of our savings, yes.
A little over $3 30 COMMITTEE OF FINANCE - BILL NO.'S 980232 million, yes.
You're welcome. The Chair recognizes Councilwoman Tasco.
Good morning. What other cost-saving measures have you looked at or implemented in terms of trying to meet debt coverage? Have you looked at cutting expenses -- cutting costs, lowering expenses rather than rely on totally the savings from the interest?
I think that the percentage of the total that is related to operational and financial -- in other words, those things that are internally controlled -- would be far in excess of those that came from other sources. I think the numbers, as they stand today, are roughly between 18 and a half, $20 million operation and financial and the 7 million that was mentioned from the interest and bond restructuring. So I think that we have cut significantly into the operations of the 31 COMMITTEE OF FINANCE - BILL NO.'S 980232 business. I mean, that's just the way it works. We didn't want to do it but we certainly didn't want to be in a position where we'd have to go into some sort of emergency rate relief or something like that. When demand is down in the real world you have to cut expenses. That's what we did. And in our business, because the season's so shortly, if you don't start early, you don't have a chance to impact the financials anywhere near the way it would in a lot of other companies. So that's why we instituted the measures early. And just on the balance sheet alone -- and, of course, these expenses will vary in the remaining months -- not the balance sheet, just the income statement alone. If you looked at expense reductions, through the month of May, you will see an actual number of $19 million. And we'll have to use some of that because we actually put a freeze on hiring, which will affect some of the programs that we had in place. But we actually put a -- we had, I think, 35 or 40 positions that we just said we'll 32 COMMITTEE OF FINANCE - BILL NO.'S 980232 just have to not move on. But some of those, we'll have to move on so that will vary over 4 the next few months. 5 But to answer your question around 6 whether or not a substantial savings has come from 7 operations, the answer is very clearly, the 18 to 8 $19 million is significant in a company the size 9 of PGW. 10
Would you say, 11 though, that the positions that you didn't feel, 12 were those positions essential to providing 13 services to the rate-payer, or were they positions 14 that you had designated for your marketing 15 program? 16
All of the positions were 17 critical because, as you'll recall, we've cut out 18 and reduced a lot of positions other than 19 marketing in the budget, as it was submitted last year. What we tried to protect during the first phase was, we tried to protect the service initiatives -- not tried, we did protect the service initiatives and the information technology initiatives because those are the ones that are 33 COMMITTEE OF FINANCE - BILL NO.'S 980232 harder to restart once you stop them. So I don't believe that our service initiatives, which are tied to our IT initiatives have been hurt as much as they may have been. Where we have cut most of the -- a lot of labor costs have been in overtime and in the marketing positions that we didn't fill, which will have an impact on revenues.
How's PGW bonds rated? How are you rated? Does the market look at the financial stability of the company in determining whether or not they will buy into this?
Yes, the financial stability, the long-term goals and plans of the company are considered, the regulatory environment, the past financial performance. We have interviews scheduled with all three of the rating agencies coming up, I believe, in early May on this issue. And we just underwent two reviews last year. So they look upon all factors; which, in this case, will be augmented -- the support PGW presents will be augmented by the Engineer's 34 COMMITTEE OF FINANCE - BILL NO.'S 980232 Report, which essentially looks at the same factors that the rating agencies look at. We now have a -- I believe it's a B/double-A rating at Moody's, and an A rating at Fitch.
I'm sorry, sir, you're going to have to speak closer into the mike. The stenographer cannot hear you.
We will be meeting with those agencies in early May for a reevaluation, all three of the major rating agencies.
That's right. Thomas Queenan, City Treasurer again. We have a B/double-A rating with Moody's, and an A-minus rating with Fitch. You're exactly right. The rating agencies do take into account the operations of PGW. So they will rate an underlying rating of the utility company, PGW, as well as rating the bonds. We anticipate that these bonds will be 35 COMMITTEE OF FINANCE - BILL NO.'S 980232 ensured so we hope to have a triple-A on the bonds that we're proposing to finance with this ordinance. We will be meeting with them during the week of May the 4th to have extensive analysis and reviews of PGW and the structures that we're proposing with these ordinances.
Thank you. Before I recognize Councilman Kenney, I would just like to piggyback on a question that Councilwoman Tasco asked. You talked about many of the reductions that you anticipate. However, in the Exhibit 3 of the Engineering Report, there is an increase in administrative spending by $800,000 over the original 1998 budget. And it would appear from that same report that there is an increase of approximately $11 million from 1997. As far as marketing is concerned, there's quite an increase. It was from 3,000 to 16,000.
Councilwoman Verna, is that Exhibit 3? 36 COMMITTEE OF FINANCE - BILL NO.'S 980232
So I don't know how we talk about reductions when we see increases from these reports.
Well, the reductions that we've been discussing are through March of 1998 compared to our budgeted numbers. And at that point, the actual financial data reflects an $18-million-reduction in expenses. It does not compare the expenses to the levels that we experienced in 1997. We are over in two primary areas; one being marketing, and the other being administrative, which is primarily the information and technology area. So. . .
That's my question. Can you explain? We keep hearing about reductions. Let's just talk about the Engineer's Report on Exhibit 3. 37 COMMITTEE OF FINANCE - BILL NO.'S 980232
But I'm talking about why are they so much more, A? And B, it's certainly an increase from the original budget for 1998 where the current estimate is.
We had two areas that we chose not to make cuts in because of the restart-up costs, and one of those was a very costly item in the information and technology. This is computer upgrades and that type of activity. The other that we chose not to reduce as a part of the cost-cutting, other than freezing THE hiring level, was the marketing. So those two have been excluded from cost-cutting. And the two categories you mentioned include costs for those two items.
Part of the -- Chairwoman 38 COMMITTEE OF FINANCE - BILL NO.'S 980232 Verna, part -- in my testimony, in answer to one of the questions, what I said was that the areas that were critical that we had chosen to prioritize around were the IT initiatives, which are fundamental to all of our long-term strategies -- that's the information and technology area -- and the marketing area. Now, the reason that you see an increase in marketing over the prior year is because we didn't have any marketing. And, as you will recall, a lot of revenue projections, the fuel to grow the business for the most part is provided by marketing. So if you -- last year, as we were starting to hire people, they were not a part of the 1997. In 1998, although we have cut back on the rate at which we had planned to add to marketing, the fact of the matter is we have grown that area because that's the area that's got to go out and bring in the revenues; particularly in the business, the industrial, and commercial areas. So the marketing piece, clearly, we have reduced the level at which we intended to increase marketing because that is critical to our 39 COMMITTEE OF FINANCE - BILL NO.'S 980232 long-term plans, but we have significantly reduced the rate at which we intended to increase. And the bottom line is, as of -- on our income statement, as of the end of March, we are $19 million below budget. I mean, that is the reality when you look at it compared to what we had planned to spend.
Madame Chairwoman, I think there may be some confusion in the actual numbers that you're seeing for marketing also because, if you look at the Exhibit 3, you have $3.8 million of marketing for 1997.
In 1998, we have included in marketing expenses the cost of products that are being sold. It's not all an increase in people and that type of expenditure. In 1998, we expected to sell about $8 million worth of new products such as CO2 Detectors, gas hearths appliance service arrangements. The cost of those products is included in marketing expense. So it's not all people and personnel hiring. About $7 million of that is for the cost 40 COMMITTEE OF FINANCE - BILL NO.'S 980232 of those products.
Thank you for your explanation. The Chair recognizes Councilman Kenney.
Thank you very much, Madame Chair. What's the current state of our uncollectible receivables when it comes to both residential and commercial gas service? How much money is owed, in your estimation, to the PGW?
I think at the end of the heating season, the total will be in the $200 million dollars range.
It's cumulative over time. It's just what's owed on the last day of a particular period -- March in this example.
And what effect does that $200 million number have on the bond rating and the stability of the company in the view of the regulators? Not the regulators, in the view of the houses in New York that rate these? 41 COMMITTEE OF FINANCE - BILL NO.'S 980232
The primary interest of those agencies would not be the level but how much of it we're expecting to collect.
We're going to try and collect every dollar of it. We have stepped up collection efforts. We were very successful last year. We have new programs for collection -- liens and judgments. We have stepped up allocating personnel to the collection efforts. We have a telephone collection process. We have even gone to the point of when a piece of property changes hands in a sale, we are there with all of the others to get any past-due gas bills. So anything we can do to increase collections, we are doing.
Where are you now compared to your goal for, say, 1997? How did you -- where did you hit? Were you anywhere near your goal for collection of outstanding receivables?
Our plan is to exceed it. 42 COMMITTEE OF FINANCE - BILL NO.'S 980232 But the collection -- our aggressive collection program couldn't start until April 1, so we're out everywhere right now. Our plan is to exceed the goal. You may have noticed in The Business Journal yesterday -- I didn't like the term they used, but The Business Journal had our collections manager on the front page talking about our collections effort and how aggressive we intend to be in terms of getting our money. So we intend to exceed the goal, but the collections campaign will end -- I'm not sure of the exact date, but I think it's like in another month and a half.
Do you feel that you have everything you need to effectively collect, or all of the ability and power that you need to effectively collect these receivables? Or are their things that you may need from this Council or from the PUC or from whatever, the Gas Commission, to be more effective in your collection? And I want to ask you a question relative to that. Is it a safe assumption that 43 COMMITTEE OF FINANCE - BILL NO.'S 980232 those people who are unable to pay their bills through legitimate reasons, those who refuse to pay their bills because of subterfuge, are being paid by those of both residential and commercial users who are up to date in paying our bills? I mean, is our rate that we're paying annually for gas -- is part of that a function of what has not been collected in that current year?
And, hypothetically, in a given year, not the $200 million dollar problem over decades, but in a given year, how much money, in your estimation, is paid for by the people who are paying their commercial and residential bills for those who don't, either because of low income, which no one would want not to have someone have heat if they're legitimately poor and cannot afford, but there are also others who know the system and play the system quite well. How much is that number a year; for example, 1997? And do you believe that the inability 44 COMMITTEE OF FINANCE - BILL NO.'S 980232 to shut them off in the winter is a major factor in that?
And do you think if that hammer was there, on those individuals who could pay but choose not to pay maybe not until April 1 or thereafter, if those people had the hammer on their head of being shut off, what would be the effect of your collections?
Those are the ones we go after first in our collection efforts.
My question is: In the dead of February, when Joe Smith, who knows that before April 1st, he's not going to be shut off, and after April 1st, he couldn't care 'cause it's warmer now -- not Mrs. Jones who may be a senior citizen who's on a fixed income or has a disability or is in a wheelchair, not that individual. I'm talking about Mr. Smith who says, I 45 COMMITTEE OF FINANCE - BILL NO.'S 980232 know the system well enough that no one's going to shut me off before April 1st, if you had the ability to shut him off, what would be the effect of that on your collection efforts? Would it be substantially improved?
It would obviously substantially improve it. It would be somewhat difficult to administer such a program where you had different policies for all types of customers as far as shut-off.
We do have the ability today to shut some customers off. But I believe -- I think that the crux of your answer, in terms of what we're trying to do is, we have taken a very aggressive posture with all of our customers, the ones who -- and we know -- we have ways of determining who we think is most likely to be able to pay. And we are very aggressive with them and we are very aggressive early with them.
But compared to other utilities, you're basically a toothless 46 COMMITTEE OF FINANCE - BILL NO.'S 980232 tiger however aggressive you may be.
Well, we could be missing a few, but I think that's the nature of this industry because moratoriums exist not just in PGW. We just got to be aggressive as soon as it's over.
Excuse me. I'm not sure if they are aware -- they should be aware, but the Gas Commission did give the PGW the ability to turn -- even during the moratorium, to shut off the gas of someone who's not paying and who can pay.
How many? How many from last year? 47 COMMITTEE OF FINANCE - BILL NO.'S 980232
I don't have the exact number, but it's in the 10,000 -- I think it was 13,000-range. It was a significant increase over the prior year for that type of a shut-off.
I'd be interested in knowing during the moratorium how many were shut off based on the Gas Commission's --
Is there somebody here from Operations that could answer that 48 COMMITTEE OF FINANCE - BILL NO.'S 980232 question? (Unidentified person later identified as Laureto Farinas comes forward.)
My name is Laureto Farinas, Public Policy Department, PGW. The rules governing shut-off's during the winter moratorium are such that PGW must petition the Gas Commission on a case-by-case basis for leave to shut each customer off. There is a very long and complex burden of proof that the company has in order to show that this customer is deserving to be shut off. As a result of that process, we have not tried as of yet, in the past two winters, to try to shut anyone off at this time. 49 COMMITTEE OF FINANCE - BILL NO.'S 980232
Well, could you make an effort next winter to try to find somebody? Not the old lady in the wheelchair, but somebody who may be deserving of having their gas shut off as a sign that we can no longer afford -- the middle class in this city and the businesses in this city can no longer afford to carry the bulk of people who can pay but refuse to pay. I mean, it's just -- it's also a matter of fairness. It's a matter of fairness to expect a family of four or five who work two jobs, who pay their bills, who do the right thing to carry a guy or a woman just don't want to pay because they know that before April 1st, they're not going off. I mean, is that a naive statement? I mean, I --
No, it's not. In fact, that is fundamentally how we have structured who we go to and in what time frame we go to them in terms of the age of the account.
Mr. Hawes, in all due respect, if I am individual who refuses to pay my gas bill, and you shut me off on May 15th, so what? 'Cause I'll come back come in in September, 50 COMMITTEE OF FINANCE - BILL NO.'S 980232 and I'll make a deal with you 'cause you're required to make that deal with me.
And then I'll break that deal again, and you'll shut me off again in June.
Yeah. All I was suggesting is that -- not the shut-off process, but there are a lot of things we do before you get to that point.
Well, how many deals can you make with PGW before you refuse to make another deal?
Do you know? I mean, Councilman Tasco said "two." I mean, none of you guys responded. How many, two deals?
Two. Okay, fine. I guess -- and there's no way to get that gas back 51 COMMITTEE OF FINANCE - BILL NO.'S 980232 on again after two?
There are ways that people can circumvent the system by having relatives do it, different addresses. We have an intelligent customer base.
Well, there's one address -- I mean, I don't want to belabor this, but it's just one of these issues that has gone on and on and on. And it affects the ability of the million class and business to remain in this city, living, paying taxes, and employing people. It is one of those costs that drive people crazy. It's like auto insurance. We're all paying bulk of the auto insurance for people who don't pay, who choose not to pay, who choose not to take the bus. So it's a similar situation from my perspective. And from the people that I hear from in every part of the City, the gas rates are too high, and they're being paid for by people who are working and paying the bills. And this is my second question? Is there a strategy -- and this is, I understand, a refinancing of capital bonds that cannot be used 52 COMMITTEE OF FINANCE - BILL NO.'S 980232 for operation but primarily for capital purposes, and I understand that. We've done other types of refinances before, both in water and in gas. Is there a strategy, or is there any contemplation of using any of these dollars when they're eligible for a reduction of rates? I mean, do we have a strategy to reduce the costs so that residential and commercial consumers -- not just keeping it even or not have too much of an increase, but actually taking some of those dollars and reinvesting it back in to reduce the rates of the average rate-payer?
Our strategy today, Councilman, is we are building the infrastructure in order to reduce expenses. That's the strategy behind the IT initiatives, that's the strategy behind all of the very formal process improvement work that we've been doing. We believe that -- our current rates are in the 850-range. We believe that in two years, we have to be down to the 725-range because that's when customers will have a choice. So we are moving as far as we possibly 53 COMMITTEE OF FINANCE - BILL NO.'S 980232 can to look at every way we can to get those rates down in that time frame because there will be no 4 more choice.
And you haven't been here during this whole -- I mean, you're relatively newcomers on this scene.
But, I mean, without choice, we wouldn't be talking about this.
I have one other -- if you'll just bear with me Madame Chair, I have a question. Again, in the six years that I've sat here, I still don't understand the financing team issues. And I do want to commend the City for their efforts in continuing to reduce the cost of issuance and those issues that affect what fees are paid to companies and firms throughout the City and elsewhere that deal with these issues. And I recognize that these issues are 54 COMMITTEE OF FINANCE - BILL NO.'S 980232 very technical, and there's a small group of professional firms that have the ability to deal with these things. What I would ask the Treasurer if you could do for me, is to give me in writing a short paragraph on what each of these particular functions are. What does the co-bond counsel do? What does the co-underwriter counsel do, the special counsel, the disclosure counsel, the senior investment banks, co-managers, and financial advisers? I just need to know for my own edification -- in general terms, not on this specific issue -- what it is, what services these particular firms perform, and what is the critical nature of their involvement in the issues? And in regard to that, why are there two co-bond counsels and two co-underwriter counsels on every issue that we do? Is there a reason for that?
Well, what I can do is, I can provide you with a memorandum explaining each of the positions and what role each plays, and I can get that to you, Councilman. 55 COMMITTEE OF FINANCE - BILL NO.'S 980232
Can you give me in general why there's two bond councils and two underwriter counsels. Is there -- I mean --
Well, generally, for example, we'll use the PGW financing. We've been working on this financing since last August. It's a very complex and long transaction in that there's always a help to have two counsels work on a particular transaction. They check each other, they bring different things to the table. PGW has not done a revenue bond financing for close to four years now. So we've done a lot of work to produce this new ordinance 15 to verify to the 1975 ordinance that's been the operating ordinance for PGW. So in this particular transaction, there's been a need to have a team established like this because there's been a lot of work involved with it.
To this extent, it's a function of the complication. But one thing we've noted for the record in the past is that we always 56 COMMITTEE OF FINANCE - BILL NO.'S 980232 have budgeted sort of a budgeted amount of money that we pay in the category of "bond counsel" and "underwritings counsel." And whether there is a single counsel or a dual counsel, the budget amount will be the budgeted amount.
I have accepted that explanation for six years, but I will tell you in advance that it is difficult for me to believe that when there is two lawyers, it's the same price as one lawyer. And that may be a difficult concept for most people. It's a difficult concept for me, but I will accept that because you are telling me so, and I've trusted you, and you have been truthful with me in the past. The 18 firms that are involved in this particular transaction, how many of them would you consider to be minority firms, either female minority or racial minority firms involved in this transaction?
Just a second, let me check the list here. For the firms that are listed here, 57 COMMITTEE OF FINANCE - BILL NO.'S 980232 five of them are MBE and WBE companies.
I think it's very important that we make that effort to be inclusive, both racial minority and gender minority when it comes to involvement in these kinds of issues. What effort is the Treasury Office or PGW making to reach out to firms in this City, either African-American or Latino, Asian, or female, to involve them in this process to allow them to be mentored in the business of bond issues, bond deals, and other types of complicated financial matters which would give them an opportunity to at some point in time compete with majority firms in this City that are specialized in this area?
Over the last six years, the Administration has really been committed to trying to reach out to the broader community and be inclusive in all of our bond financings as it relates to the investment banking side of the transaction. We have a various, sort of open process when it comes to qualifying investment banks to 58 COMMITTEE OF FINANCE - BILL NO.'S 980232 provide services to the City of Philadelphia. It's almost -- almost -- you have to work very hard not to be qualified. If you contact my office, we will send an RFQ -- request for qualifications -- to any investment bank, and it's a series of questions and a series of standards that they must meet. Most people are able to respond to us and have been approved. So we have a very good record in terms of being as inclusive in terms of reaching out and including people on the bond side. On the legal side, in terms of attorneys, one feature of the co-counsel role is to allow those companies that are small MBE, WBE, or just simply new to the legal business of bond financing, this allows them to work in concert with a more experienced company, which is, in some cases the larger firms. But in some cases lately, we have even some of the smaller firms that are as experienced as some of the larger firms when it comes to providing bond financing to the City. On some of our other transactions where the deals may not be as large or as complicated, we have worked with starting companies that are 59 COMMITTEE OF FINANCE - BILL NO.'S 980232 MBE and WBE; or, again, just start-up firms that have worked in the co-counsel role.
In other financings that we do with the City, through my office -- some of the hospital authority financings, some of the more --
Well, I can -- not to interrupt you, but I can only tell you what's come through my view -- that is as a member of the Finance Committee and cochair of the Rules Committee on hospital Financing.
I would like you to give me a list of small start-up firms, either racial minority or gender minority firms, that have been included in this process in the course of the last two or three years.
And this is not stuff that you do unilaterally from this Council. I'm talking about the stuff -- the issues and items that we have voted on here, how many 60 COMMITTEE OF FINANCE - BILL NO.'S 980232 different minority firms have been involved in the opportunity to be mentored and to learn this business?
Thank you. And when you send that information to Councilman Kenney, I would think that every member of this committee would also like to have a copy.
The Chair now recognizes Councilwoman Tasco. She's going to --
I'm going to follow up on that question raised by Councilman Kenney. Thank you, Councilwoman Blackwell. Of the companies, other than the minority companies of female-owned companies, the other companies in your request for RFQ, you send out requests for qualifications, do you look at the number of minorities and women employed by these companies? 61 COMMITTEE OF FINANCE - BILL NO.'S 980232 And, also, do you look at where they are in terms of partnership and position -- level of position with the company?
When we review the responses to the RFQs, we do review what will be the composition of the team that is assigned to the Philadelphia account in regards to everyone on the transactional team -- minority, female, etc. But in regards to the entire composition of a company, for example, in one of the large national firms, our analysis does not extend that far because that's well beyond our capacity to do that analysis. And a lot of the firms just don't do municipal finance, but they also have other areas like corporate finance and global finance, project finance, that are well beyond our capability to do that type of analysis. So we are not able to do it to that extent, but we do provide that kind of analysis, and we do review the composition of the team that will be assigned for municipal finance for the City of Philadelphia.
I just have one 62 COMMITTEE OF FINANCE - BILL NO.'S 980232 follow-up on that same line. And, Councilwoman Blackwell, I'm sorry. So I understand that if there are minority -- either racial minority or gender minority law firms in this city who would like an opportunity to become co-bond counsel or co-underwriter's counsel in these types of issues, all they have to do is call your office? (Laughter.)
Well, I mean, the co-managers for the investment banker can call your office for an RFQ. Why have we not done a similar RFQ on the legal work?
I don't work in the Law Department. I just know we do it for the banking team. We do it for the financial professionals that work through my particular office. I think I have worked with a - and you'll find when I send you this memo that we work with a number of MBE and WBE legal firms -- small sole practitioners and large firms -- in the City of Philadelphia. And I think you'll find it to 63 COMMITTEE OF FINANCE - BILL NO.'S 980232 become quite -- quite --
See. As I said earlier, I believe very much in this program because I think it's important that these type of resources be shared throughout the community as best as possible and in as much of an equitable way as possible. But I also think that there are probably other firms out there, both African-American and Asian and Latino and female, that would really like to have an opportunity to learn from a Wolf, Bloch, Schorr how to do a bond deal.
I agree. And the Administration and I am committed to that as well.
Councilwoman Blackwell, you will get your turn, but Councilwoman Fernandez does have a question on this issue.
I have just one brief question on that whole thing. Mr. Queenan, when you went down through 64 COMMITTEE OF FINANCE - BILL NO.'S 980232 the people listed in your testimony for the PGW Revenue Bond Series '98 Financing Team.
For this record, I recognize some names, but could you indicate which of those are racial minority firms and which are -- I have difficulty with "female minority" since we're the majority, but also female-owned firms on both that one and on the commercial paper?
Okay, let me speak to the revenue bond financing as I go through the list. MBE firms are Ronald A. White, P.C., which is co-bond counsel; Singley & Associates, which is co-underwriter's counsel; Pryor McClendon Counts is an MBE; The Chapman Company, as a co-manager, is also an MBE; And M.R. Beal & Company -- I'm not sure -- is an MBE and possibly a WBE.
Well, I only say that 65 COMMITTEE OF FINANCE - BILL NO.'S 980232 because I believe that one of the partners is a woman. I don't know what the percentage is -- 51/49, I'm not really sure. I could check on that. But I believe they certainly are an MBE, and they may also be a WBE.
Just a second. On the commercial paper, Ronald A. White is co-bond commercial paper counsel. And is an MBE firm that is it. On this particular transaction, there are essentially three -- or really just two professionals who provide service on the transaction: Canadian Imperial Bank of Commerce is a letter-of-credit provider; Trustee Bank is -- First Trust of New York's Bank's placement agent is Goldman Sachs. They basically sell the bond for us; And then the City's financial advisor, Public Financial Management.
So the big parts of that are the legal counsel and the placement agency? 66 COMMITTEE OF FINANCE - BILL NO.'S 980232
The two big ones on that, then, are the commercial counsel, and Goldman Sachs is the placement agency? Is that the bulk of the --
Yeah. The other participant letter of credit, the fiscal agent and the placement agency are selected through a competitive bid process. In terms of those folks who were assigned, those professionals who were assigned to the transaction, it was limited to the two co-counsel that you see listed here, Wolf Bloch and Ronald A. White. And so of those two, one is an MBE.
Thank you. The Chair recognizes Councilwoman Blackwell.
Thank you very much, Madame Chair. I only wanted to make a statement that would reflect that during these harsh times, I don't believe it's that the issue of a person 67 COMMITTEE OF FINANCE - BILL NO.'S 980232 paying for somebody who can't pay. I believe the way that companies and organizations are structured and the way there are profits at the top and the state of economy causes the problem. The moratorium period has been severely limited. I don't know how we got there. You know, we fight and fight, and we still manage to get a very limited -- you only have a few months' moratorium. I remember when it used to be like, gosh, like maybe April to December. You get a couple months; moratorium now. And then you have people who come to my office every day who can't get gas, who have severe problems, and who just don't have the money in this severe economy. And with the job problem we have, they have they can't pay the bill. So I would only ask that the record reflect I do -- and if you go over to the Gas Commission and you appeal a high bill, they have about five or seven people who sit there, and you, John or Jane Q. Public sit there and feel totally intimidated against a board, one of whom is a lawyer. There's not even a balanced experience organized for a person to appeal their bill. 68 COMMITTEE OF FINANCE - BILL NO.'S 980232 So I wanted the record that I do not agree that we always pay for the person who can't, I believe it's the nature of this free-enterprise system. We get excessive profits at the top, etc., and the way business is sometimes organized that does not allow a person to pay their bills. So I would ask that you keep that in mind, that I'm absolutely committed to a fair perspective that will always look at the cases individually and that would allow people to have a chance to certainly redress the issue of not having enough money coming in to pay the bill. Thank you, Madame Chair.
Just finally for the record, I happen to agree with Councilwoman Blackwell. And, for the record, I would pay for free all the gas needs for every legitimately poor person in the City, not for those who can pay and refuse to pay because they know how to work the system,, and we need to segregate those who are truly needy from those who are thieves, and shut 69 COMMITTEE OF FINANCE - BILL NO.'S 980232 them off. And I would be willing to pay the gas bills for every poor, indigent, shut-in, wheelchair-bound person in the City 'cause I think there's probably enough money to do it if we took the commercial and residential deadbeats and shut them off.
Are there any other questions from members of the committee? I just have one last question. Can you tell me why of PGW's Annual Report claims that you will implement the weather normalization adjustment, when, in fact, this has not been approved by the Gas Commission and the hearing commissioner recommends that it be rejected?
I think when the Annual Report was published -- I mean, when it was written, which would have been in the October, November time frame, that is what we had planned. Obviously the Commission -- the Commission staff recommended, you know, a different position. We are currently now appealing that decision, and we'll see where it goes. But I think when that was written, as I recall, that was 70 COMMITTEE OF FINANCE - BILL NO.'S 980232 what we had hoped would happen, but that was in the October-November time frame.
And if I were writing that today, I would write it differently.
As further support, we had actually filed on August 1st a request for that.
On August 1st, we had filed a request. So at that time, it was actually a proceeding before the Gas Commission.
Thank you. Are there any other questions from members of the committee? (No further questions at this time.)
Is there anyone else to testify on the two bills that we are hearing? (No response.)
If not, I would ask the Treasurer to please go over the amendments to the bills very quickly. 71 COMMITTEE OF FINANCE - BILL NO.'S 980232
Okay, okay. I'll read into the record the amendments. Starting with Bill No. 980232: From , under Section 2.01, second paragraph, the revised language would be: "Accreted Value means with respect to any capital appreciation bond as of any specified date, the Original Value of such bond plus interest accreted on such bonds to such date, all as may be provided in an applicable Supplemental Ordinance." The next is on , the definition of "Exchange Agreement." We're adding: "Means with respect to a series of bonds or any portion thereof" is the amended language. And at the end of that paragraph, the last word "counterpart" should be "counterparty," with a Y. The next page is on of the proposed ordinance. I'm sorry, there is no change on of the proposed ordinance. Those two I've listed are the only amendments for this ordinance.
Thank you. Can we now go to Bill No. 980233. 72 COMMITTEE OF FINANCE - BILL NO.'S 980232
The first appears on for that referenced ordinance. Under Section 1, about midway through the paragraph, where it says "the bond shall be sold," it should read "the first series bond shall be sold." The next change is on of the ordinance.
Yeah, of the actual ordinance and are a typewritten document. And when I refer to the page numbers, I'm referring to page number referring to the actual --
All right, the pink copy, . Under Section 7, where it says "so long as the book entry" should read "so long as, but only so long as the book entry only system." If you go further down on that --
I'm sorry. I'm looking at the amended version, and I think you're skipping a couple.
You're right, I apologize. You're absolutely right. Let me start over again.
Okay, from Section 2, second paragraph, midway through the paragraph, it says "City or Gas Works." It should read "City or the Gas Works." Further down, in that same paragraph, after "Director of Finance or escrow deposit agreement," it should read "Director of Finance or an escrow deposit agreement." The third paragraph to Section 2, the last sentence of the paragraph, instead of saying "As project revenues in accordance with Section 20 4.02," it should read "As Gas Works revenues in accordance with Section 4.02." The next change is on , Section 23 7, again, where it says "So long as the book entry" it should read "So long as but only so long as the book entry." 74 COMMITTEE OF FINANCE - BILL NO.'S 980232 In that same sentence, where it says "The provisions of this Section 7," it should read "The following provisions of this Section 7." The next paragraph in the same section, second sentence, instead of saying "A beneficial owner who is the owner of such an interest in a bond" --
I'm sorry, I don't mean to interrupt you. I believe there is something before that in the first -- it's in the first sentence.
Oh, you're absolutely right. In the first sentence, it says, "Pursuant to the book entry only system, ownership interest in the bonds." It should instead read, "Pursuant to the book entry only system, ownership interest in the first series bonds." In the second sentence of that paragraph, instead of "a beneficial owner who is the owner of such an interest in a bond," it should instead read, "A person who owns such an interest in a first series bond (a beneficial 75 COMMITTEE OF FINANCE - BILL NO.'S 980232 owner)." In the third paragraph of Section 7, the first sentence, where it says -- these words should be removed from the ordinance: "Of the first series bonds, (the beneficiary-owner)" should be deleted. Further in that same sentence, it says "or to the participants." "Participants" should be capitalized. And further in that same sentence, the parentheticals that hold "the Participants" should be deleted. On of the proposed ordinance, the second full paragraph, instead of the second sentence reading, "If the book entry only system is no longer utilized upon receipt of notice from the fiscal agent, the beneficial owner may elect to receive bond certificates." It should instead read, "If the book entry is no longer utilized, bond certificates will be issued in such names as the City and the fiscal agent are directed by the depository." On of the proposed ordinance, under Exhibit A, the date of March 26, 1998 should 76 COMMITTEE OF FINANCE - BILL NO.'S 980232 be replaced with the date of April 21, 1998. On , Exhibit B, the date of March 26, 1998 should be replaced with April 17, 1998. On , Under Exhibit B, it says, "The acquisition of the building being currently leased by the Gas Works. . . " It should read, "The acquisition of the headquarters building currently being leased by the Gas Works." And in paragraph triple i on the same page, 14, we should, after the word "amortizing," insert the words "no more than 30 years," and delete the word "over." In that same sentence, the blank between the words "exceeding percent" should be exceeding 7.5 percent. On , under Section Roman numeral IV, the "Gas Works revenue" should be "revenues," plural. And the next paragraph down, the bracketed language which begins with "furthermore" and ends with "parameters" should be completely deleted. The next paragraph down, the brackets 77 COMMITTEE OF FINANCE - BILL NO.'S 980232 on Roman Numeral V, the words should remain, but the brackets should be deleted. And that concludes all of the amendments to Bill No. 98023.
I've been handed even more amendments. Okay, there's been added two more amendments. Back to , Roman Numeral II, we should add --
, Roman numeral II, first full sentence, third line, it says, "In the manufacture." We should add the word "in the supply," comma, "manufacture," comma. In other words, the word "supply" should be added. And then the final amendment is that the correct spelling of the name of the Director of Finance is Ben Hayllar. And that's B-E-N, H-A-Y-L-L-A-R. 78 COUNCIL COMMITTEE ON FINANCE - BILL NO. 980234 That concludes the amendments to Bill 3 No. 980233. It appears it actually might have been corrected already. But in our hard copy, it was spelled incorrectly, his name.
Thank you. Are there any questions from the members of the committee? (No further questions.)
Also, again for the record, I would like to request a suspension of the rules for these two ordinances.
Thank you. The Clerk will now read Bill No. 17 980234.
Bill No. 980234, an ordinance authorizing, generally, the continued issuance and sale by the City of Philadelphia of Gas Works revenue notes of the City, prescribing the forms of notes and providing for their execution and payment pledging certain revenues of the Gas Works as security, adopting a rate covenant, and directing the Gas Commission and the 79 COUNCIL COMMITTEE ON FINANCE - BILL NO. 980234 manager of the Gas Works to impose and collect rates sufficient to comply therewith, prescribing the conditions precedent to the issue of specific series of notes, including a resolution passed by the Bond Committee, providing for establishment of credit support for notes, providing for designation of a fiscal agent and sinking fund depositary, providing for establishment of a sinking fund and its management, providing remedies upon default, and providing for amendments and modifications.
What is the current out-- oh, I'm sorry you're here to testify on this bill. Would you give us some explanation of it, please.
My name is Thomas Queenan, City Treasurer for the City of Philadelphia. I'm here to testify in support of Bill No. 980234, which is a proposed ordinance 21 requesting authorization for PGW to continue its current commercial paper program, which is used to finance operating cash for the Gas Works. I submitted to Council my written testimony, which I actually would like to offer 80 COUNCIL COMMITTEE ON FINANCE - BILL NO. 980234 some amendments to that ordinance that was submitted, to revise some again, nits that are in the bodies of the document. Should I do that now or --
No. I think we will have questions from members of the committee before we go into that.
I would just say that this program is a program that was initially started in 1993. It was approved by this body, City Council. Authorization expires on June of this year. So this is an effort to just extend that authorization that was previously provided in 1993 because we have come to the end of the authorization provided by the original ordinance. This is a continuation. There have been some revisions to some of the language and some of the definitions, I suppose, in the original ordinance. But, for the most part, we have, as you've noted on the back page, the team, which is the original team that was the participant in the 1993 authorization for the commercial paper program, this team has 81 COUNCIL COMMITTEE ON FINANCE - BILL NO. 980234 committed to continue to provide this service to the City on an ongoing basis. Ray Sharbutt, CFO for PGW, is here to describe how the commercial paper program is utilized by PGW.
Raymond Sharbutt, Chief Financial Officer, PGW. As to the commercial paper bill, No. 11 980234, the commercial paper program authorized in 1993 is a crucial part of our management tools at PGW. Due to the highly seasonal nature of our business, the ability to issue such short-term debt is one of the most important aspects of our operations. The funds from this debt are used to provide our working capital retirement. And during the seasons when very little cash comes in, it's the only bridge that allows us to get through the season without severe adverse impacts financially on the company. The bill currently before you is merely a continuation of the existing bill, and we recommend the continuance of this, and it's a 82 COUNCIL COMMITTEE ON FINANCE - BILL NO. 980234 crucial part of our operating program on a day-to-day basis. I'm available to answer any questions you may have.
Thank you. Can you tell us what the current outstanding balance in the commercial paper issued by PGW is?
We currently have $80 million, and that is the peak that we've experienced for this year.
Is PGW authorized to issue the maximum amount authorized by City Council without approval from the Philadelphia Gas Commission?
No, ma'am, we're not. City Council has authorized the issue of up to a $100 million. The Gas Commission has not gone up to that level. They have retained an $85-million-level, which is the one. We did go before the Gas Commission earlier this year and sought their approval, and it was granted to go above the 85 million that they have authorized. That's a limited agreement, 83 COUNCIL COMMITTEE ON FINANCE - BILL NO. 980234 and at the end of this season, it will go back down to the '85. So we do have two limits here.
Thank you. Are there any other questions from the members of the committee? (No further questions.)
All right. Perhaps we can go over the amendments at this point.
Thank you. There are fewer amendments to this particular ordinance. The first one appears on Bill No. 980234, under Section --
On , in the paragraph that begins with the "Gas Commission," we should delete the words "and the manager are" should be deleted and replaced with "is hereby authorized. . ." The second line down, in the same 84 COUNCIL COMMITTEE ON FINANCE - BILL NO. 980234 paragraph, between the word -- the word "and" in "to impose and charge." The inserted language after "charge" should read: Comma, "and the Gas Commission and the manager are hereby authorized and directed without further authorization to collect or cause to be collected rents, rates, and charges." The next change is on , the paragraph G.
Okay. "The Gas Commission currently is the Gas Commission hereby authorized. . . " it should be revised to read, "The Gas Commission is hereby authorized. . ." The second line of the same paragraph, where it says "to impose and charge and to 85 COUNCIL COMMITTEE ON FINANCE - BILL NO. 980234 collect," it should be revised to read "to impose and charge, comma, and the Gas Commission and the manager are hereby authorized and directed without further authorization to collect or cause to be collected,," . The second change to this ordinance is on . Paragraph G. It states it has, comma, the following two words, "by ordinance," should be deleted and replaced with, "in Section 4.03 (B) hereof authorize the imposition. . ." The second line of the same paragraph after the word "charges," the words "by the Gas Commission and the manager" should be deleted. That concludes all the offered amendments to Bill No. 980234.
Are you asking for a suspension of the rules on this bill also.
Yes, we are requesting a suspension of the rules on Bill No. 980234.
Thank you. Is there anyone else to testify on the bills that we have heard, any one of the three bills? (No response.) 86 COUNCIL COMMITTEE ON FINANCE - BILL NO. 980234
We will now go into our public meeting. The Chair recognizes Councilwoman Tasco regarding Bill No. 980232.
It has been properly moved and seconded that the amendments be approved. All in favor, signify by saying aye. Those opposed? The ayes have it. The motion has been carried. - - -
Madame Chair, I move that Bill 980232 be reported out of committee with a favorable recommendation, as amended, and a request for a suspension of the rules so as the 87 COUNCIL COMMITTEE ON FINANCE - BILL NO. 980234 bill will have a first reading at the next session of Council.
It has been properly moved and seconded that Bill No. 980232 be reported out of committee with a favorable recommendation, as amended. Also a recommendation that the rules of Council be suspended so as to permit a first reading at our next session of Council. All those in favor, signify by saying aye. Those opposed? The ayes have it. The motion has been carried. - - -
The Chair recognizes Councilwoman Fernandez regarding Bill 20 No. 980233.
Madame Chair, I move that we accept the amendments proposed in the public hearing on Bill No. 980233.
It has been 88 COUNCIL COMMITTEE ON FINANCE - BILL NO. 980234 properly moved and seconded that the amendments be approved. All in favor will signify by saying aye. Those opposed. The ayes have it. The motion so carried - - -
Madame Chair, I move that Bill No. 980233, as amended, be reported out with a favorable recommendation by this committee. And I request a suspension of the rules to provide for first reading at our next regularly-scheduled meeting.
It has been properly moved and seconded that Bill No. 980233 be reported out of committee with a favorable recommendation, as amended. Also a recommendation that the rules of Council be suspended so as to permit first reading at our next session of Council. 89 COUNCIL COMMITTEE ON FINANCE - BILL NO. 980234 All in favor will signify by saying aye. Those opposed? The ayes have it. The motion is carried - - -
The Chair recognizes Councilman Kenney regarding Bill No. 10 980234.
Thank you, Madame Chair. I move that we accept the amendments of Bill No. 980234. (Duly seconded.)
It has been properly moved and seconded that the amendments be approved. All in favor will signify by saying aye. Those opposed? The ayes have it. The motion is carried - - -
The Chair recognizes Councilman Kenney. 90 COUNCIL COMMITTEE ON FINANCE - BILL NO. 980234
Madame Chair, I move that Bill No. 980234, as amended, be reported out of this committee favorably, and a request made for suspension of rules to allow for first reading at our next session of Council. (Duly seconded.)
It has been properly moved and seconded that Bill No. 980234 be reported out of committee with a favorable recommendation, as amended. Also a recommendation that the rules of Council be suspended so as to permit first reading at our next session of Council. All in favor will signify by saying aye. Those opposed? The ayes have it. The motion is carried. This concludes our public meeting. Thank you all very much. - - - (Adjourned at 11:12 a.m.) - - - 91 C E R T I F I C A T E I HEREBY CERTIFY that the foregoing proceedings of the Council of the City of Philadelphia of Tuesday, April 21, 1998 were reported and accurately by me, and that this is a correct transcript of same. RE: COUNCIL COMMITTEE ON FINANCE BILL NO.'S 980233 and 980234 __________________________________, JOSEPHINE CARDILLO, RPR