Okay. That's a number that's getting used a fair amount these days.
That billion dollar figure. Can you provide to us, through the Chair, a listing of the debt obligations of PGW, the years of the borrowing and a schedule showing your debt service?
Yes, we can do that. The annual report contains most of the information you want and we'll provide a supplementary schedule showing coverages or indenture requirements.
Okay. Now, what is your debt-service coverage ratio right now? 60 /00 FINANCE
We are forecasting under what we're calling "a probable scenario for this year," which is to say that the program we have underway right now is, in fact, realized, we're showing a little over 1.5 on the 1998 indenture, which is the controlling document.
I'm sorry, the 1975 indenture, which is the controlling document.
But the fact that you are making this statement with that level of specificity, does that mean that the debt-service ratio on other borrowings is some other figure? Or is there an overall debt-service ratio for all of the debt?
Let me express it in a different way. There was a change in the way the long-term debt has been treated in 1998. They effectively separated out the new debt from the old debt and using this sort of double indenture technique. If it had -- if we had not known that, we would not make the 1.5 coverage for the 1975 indenture this year. In other words, it would be about 1.3. 61 /00 FINANCE
Okay. And you said you've already made the borrowing for FY 2000. And what do you anticipate the Capital Budget for 2001 to be?
We're estimating right now slightly under $50 million. Most of that is contained in two projects: the L and G plant, which is the continued refurbishment of the liquefaction equipment and prudent main replacement.
There was a gentleman up at the table earlier; I didn't catch his name.
Yes. Could you come back up, please. (Mr. Stinson returns to witness table.)
You had made a statement in response to a question by Councilman O'Neill and I just took down the essential words, and I wanted to try to get a better understanding 62 /00 FINANCE of what you meant. You used the phrase "fungible dollars." What did you mean by that? What does "fungible dollars" in the --
I'm not a finance person, but as far as I know, an influx of funds through this swap deal comes into the General Fund at PGW. And as Mr. Knudsen explained, because of the ongoing financial problems, those dollars, perhaps if they were routed to pay for other items or bills that came through or whatever was going on at the company at the time. But what we did in the capital budgeting process was presume that those dollars were, or dollars to replace them, would be made available; and, therefore, we budgeted to spend at a higher level for cast-iron replacement in 2001 and going forward.
That's a very interesting response. You lost me a little while ago. Are you saying that dollars that should have gone to the Operating Budget were spent on capital items? 63 /00 FINANCE
Let me respond. The intent on the swap money, the $8.4 million, was to be spent -- the intent was to use that money in the Capital Program, but it comes into the books of the company as a revenue, as it's called, as "project revenue" by legal definition. That money is treated in the books as --
Well, as opposed to customer rates or customer service revenues. It comes in -- it has another source than customers. The way the books work is that that money then works its way through the operating statement and, effectively, the intent at the time, I think, was that we would have an operating surplus and that money would be used for the Capital Program.
Why do you continue to use the term "intent"? What does that have to do with anything?
Because the intention was not realized. We did not use that money -- there was no money -- there is no profit in PGW this 64 /00 FINANCE year that that money was intended to generate, so that that money was used for the operations. It never got to the bottom line, it never got to be retained earnings that would then be devoted to the Capital Budget. It ended up inside the company paying for operating bills.
Is that like if we were to sell the building and we received certain dollars for it and we're supposed to receive that into a capital account, and you're saying that it worked its way through the system and it never ended up on the capital side and it ended up on the operating side? Is that what you're saying?
In your example, had you sold the building and it went into a capital account, it would have been reserved for capital charges and capital purposes.
The way this particular transaction is accounted for, it goes into the operating statements of the company. It didn't get segregated or put aside for a capital project only.
What was the 65 /00 FINANCE original purpose of this transaction?
I don't know. I mean, the statement of Mr. Hayllar was that it was going to be used for investment in prudent main replacement. If he had any other intent at that time, I don't have a clue.
So you're saying that that's what we were told at the time, that was the basis for the presentation and the decision that many of us would have made at that time based on what --
I was present the day that he made his statements on this issue.
And so the purpose for which we were asked to vote and support that particular transaction, which was for main replacement and hard things in the ground, you're saying that those dollars ended up on the operating side?
I'm saying -- yes, that's correct. 66 /00 FINANCE Now, that isn't to say, as Mr. Stinson was saying, that we aren't going ahead and using and meeting that level of investment. We're simply borrowing more long-term to do that.
Well, did anyone at the company think maybe to come back and tell City Council that you -- that the company had been deceptive in its testimony about that particular item?
Point of order. I believe that -- and I'm not sure, but we can check the notes of testimony -- when the former CEO, Mr. Hayllar, testified, I believed we asked the question, Did the funds have to be spent on capital projects? And he said no. He said no, that could be used for operating budget.
Because that was a concern that was raised by the Commission.
Okay. I know you answered some -- thank you, Mr. Stinson. I know you gentlemen had answered some questions earlier about the IT system, and 67 /00 FINANCE hopefully this is not redundant, but is there a projected timetable for getting that particular matter cleaned up and fixed? COMMISSIONER KISHINCHAND: There is a projected timetable, but not for a complete cleanup of that. As I said, by the end of June, we should be able to bill everybody by the end of August. The number of, you know, modules might start working.
The number of what? I'm sorry. COMMISSIONER KISHINCHAND: The number of modules. I'll have Tom Knudsen, who's taking over the ownership, I guess, of BCCS to answer that. He's obviously (inaudible).
The program right now is to get to August 31st and have auditable statements of PGW. To do so, we must bill our customers. Our timeline right now is to have the system billing by the end of June. We'll use July to clean up whatever issues or process are still involved, and then we want to have the month of August to essentially clean up for the entire year. 68 /00 FINANCE So to answer your question in the specific, we will improve part of the program through August. The remainder of the improvements to BCCS, we are looking at that right now to determine whether we can afford to do that or what the options are. We have Arthur Anderson, which is now Anderson Consulting, looking at this whole question.
What do you mean "the remainder"? What does that mean?
Well, beyond simply the billing function of the customer information system, there are a number of other things that it should do well. And the question is --
Sure they are, but they are not necessarily important to its survival, and that's what we are talking about right now; we're talking about it's financial survival. And we need two things: we need billings and we need financial statements.
What happens if things go well and August comes and it's a better 69 /00 FINANCE operation, what happens to the 30,000 or so people if you catch up with them?
I mean, do they get some enormous bill, do they just, you know, kind of start with a blank slate and say, Well, you know, glad you finally caught me, and I'm, you know, pleased to see you? Or do they get some huge bill and then now they're in a fight with you about it? I mean, what happens?
Well, I think that's a fair question, a fair representation. We may, in fact, end up with some fights, but the tariff allows that for as long as it took us to bill a customer, they have to pay without any penalties, without any interest. So that -- and, yes, in fact there will be large bills, but the tariff has anticipated just this kind of a problem.
Okay. COMMISSIONER KISHINCHAND: They can take as long to pay off that back-charge as it took us to bill them. So in the eight months -- they have another eight months to pay it off.
Well, I understand 70 /00 FINANCE that, but I think I may have mentioned this at one of the other meetings. I mean, how successful do you think you're going to be at proving that the person owes it under the present circumstances?
Right. Well, we have -- we have some real faith that the bulk of the bills that are going out are correct. I mean, we can run some analyses to demonstrate that. We have problems with the system such that -- as Kumar indicated, he didn't get properly billed simply because the AMR did not read properly at his house. I mean, those are ongoing problems, but there are these --
Was that an AMR problem or was that a software problem of the system reading what the AMR received? COMMISSIONER KISHINCHAND: We don't really know at this point. In fact, Councilman Kenney asked that question, and I don't think we're prepared at this point to say whether it's 71 /00 FINANCE the system that's not working or whether it's the AMR that's not working. We need to do some investigation of that.
Okay. Last question. In the exchange between Councilman O'Neill and Miss Pozefsky, again, I took down part of the response, and the response was, Well, that's a Law Department question. And I thought I had read or heard somewhere that PGW, one, has a somewhat recently fairly beefed-up legal counsel office or kind of a law operation as well as, I guess, access to outside attorneys. So I didn't really understand what that response meant.
Councilman Nutter, Councilman O'Neill, and Chairwoman, I've had the opportunity to caucus with PGW and with the Gas Commission to come to an agreement on the interpretation of the agreement and what it provides for with respect to budgets in the past 15 minutes.
I understand that, and I'm sure Councilman O'Neill will want to come back and get the answer to that. My question had more to do with your response to his inquiry, 72 /00 FINANCE which was, That's the Law Department question. I mean, you are the general counsel for PGW?
Six and a half. Six lawyers and a part-time person, a part-time lawyer.
The lawyer is a full person who works part-time, I'm sorry.
Very good. What did you mean by that in your response to Councilman O'Neill?
What I meant that, Councilman, is there have been historic differences of opinion as to how this particular provision is interpreted, with PGW, at times past, having had a different opinion than the Gas Commission. And ordinarily, when there's a difference of opinion between PGW and the Gas Commission, it would be the Law Department that 73 /00 FINANCE would come in and make a formal decision as to what would be the binding interpretation. In this particular instance, however, that probably would not be necessary, because we've had an opportunity to caucus since the last discussion.
Okay. With respect to the interpretation as to how the budgets -- whether the budget are, in fact, line items and whether approval is needed if changes are made, PGW, at this point in time, having discussed this with the Gas Commission and understanding that the Gas Commission is, in fact, able, subject to its own rules and regulations, to determine whether or not a line-item budget is necessary, the Gas Commission at this point in time has no formal rules and regulations but has, in fact, in orders -- the Gas Commission has, in fact, stated that they would like to see PGW return to the Gas Commission for approval of transfers between line items. It's not a formal rule and regulation, and that was, in fact, what the agreement appeared 74 /00 FINANCE to require. The Gas Commission certainly could promulgate a rule or regulation instead of doing it in the form of an order. PGW will come back to the Gas Commission for line item approvals if the line items are changed during the course of the budget.
How long has this been -- first, actually, I understood very little of what you said but, you know, I'll reread the notes of testimony. But, second, how long has this been an outstanding question or a difference of opinion between the Gas Commission and PGW?
Councilman, I don't know. I was made aware of the issue in November when the last Council hearing on this subject came up. In terms of how long it's been an issue and in terms of what of interpretation has been, my understanding has been that PGW's practice over the years has not been to come back to the Gas Commission when there are line items changes in the budget.
And they chose not to come back based on what? 75 /00 FINANCE
I believe, based on their understanding, that as long as there was no 4 overspending in the aggregate, there could be some flexibility of spending and changes within categories, among categories.
And here today, as a result of a question asked by Councilman O'Neill, and after what did you say, a 13-minute, a 15-minute caucus, you've now resolved the issue?
Okay, so if that's the agreement or the understanding -- and as I said, you lost me a little while ago about some of the orders and who tells who what to do -- what does that now mean?
Let me tell you what the management agreement says what the issues were and what I think it now means. The management agreement says that all expenditures and commitments for the Gas Works shall be made pursuant to, quote, such approved budgets and subject to rules and regulations, if any, promulgated by the Gas Commission in 76 /00 FINANCE connection therewith. My understanding is that the Gas Commission has never formally promulgated a rule or regulation that requires the budgets to be line-item budgets that are approved, and that all the spending needs to adhere to the line item category, but that the Gas Commission -- and Carlton Williams, who was the budget examiner for this purpose says, that the Gas Commission has in fact, in orders, stated that line items should be adhered to. Based on the fact that the Gas Commission certainly could promulgate in a rule or regulation the content of the orders that Carlton Williams has said he has issued --
Hold on for a second, 'cause, I mean, as you know, this is nowhere near any level of serious expertise. Am I understanding you to say that the Gas Commission could issue an order to PGW about whatever that order is about? And my am I understanding your language to mean that PGW can then operate within that order? And are you using the term "promulgate" some regulations or processes or procedures or rules about how they're going to 77 /00 FINANCE adhere to that particular order? Is that what you're saying? I mean, these aren't trick questions. I mean, I just don't know.
This is not a process with which I am particularly familiar, which, I think, is fairly evident from the level of some of this discussion. The first time that I had looked at this carefully, spoken with the Gas Commission and spoken with our folks about the budget has been today, because our assumption was that filing with the Gas Commission, the reconciliations for the last few years, which was done in February of this year, would address this issue. So, Councilman, I'm attempting to give you a quick answer to a question that was posed here today. We can get back to you with a better analysis of what the agreement says and what the Gas Commission and PGW agreed to do within fairly short order, and I think that -- you know, I make that proffer now.
I just -- again, the order mentioned that the Gas Commission has 78 /00 FINANCE ordered line items but they haven't formally filed the ruling, and I guess a fair inference is that rules have to be followed but their orders don't?
That seems like a logical follow-up to that because if they --
Let me respond to that. It is this management's intention to follow the orders of the Commission. The order as it stands right now is that we will follow a line-item approach to this budget and to the next. It is my understanding that if we were to want to change anything in terms of redirecting resources within the approved budget, that we can go to the Commissioner, and that they can give us that kind of approval. But right now, it is our intention to follow the letter of the budget line by line.
Okay. Now, I understand that from this day forward, where we have a line-item budget, even though no one agrees that it's written anywhere that that has to be, it's just everybody agreeing to do it if that's what the Gas Commission wants, okay. 79 /00 FINANCE And we just had a discussion about a swap of 8.4 million that was everybody's intention to use for gas mains, but it didn't work out. And, obviously, there was nowhere that forced that money -- nowhere was it written that that money had to be used for gas mains; it's just what was told to this legislative body. So I want to know what the law is. If the law isn't line-item budgets but you're agreeing because the Gas Commission wants it and could make it law, that's fine, I understand that part of it. But I want to know if it is currently the law. And I'd also like to know, since I'm now learning about orders versus rules, if the Gas Commission has ever ordered or filed an order for line items and how often and how recent they have filed. The management agreement go backs to the '70s?
'72, okay. So it's about a 28-year history where it should be pretty obvious whether we ever had line-item budgets and why, and also whether there's a City 80 /00 FINANCE Solicitor opinion anywhere on this. I mean, in some brief discussions with my colleague, who is a member of the Gas Commission for some time -- has been a member of the Gas Commission for some time now, Councilwoman Tasco indicates that this actually has been a request a long time. I didn't grill her on how long that is, but it's not like it just came up this morning. So I would like some historical -- and I really don't want to -- I don't have any problem with this budget, I mean, which was better news on the gas mains, but I can vote for this budget to start getting things done since it's taken so long. But we don't have a Council meeting for two more weeks, and I don't want to vote on budget unless I know whether it's a line-item budget by law, and I think that's only fair. So if you could get back to me in the next two weeks, I would appreciate it.
I will take the responsibility for getting a City Solicitor opinion on that and also for developing the record on -- 81 /00 FINANCE
-- what the historic practice has been and what orders have come from the Gas Commission with respect to line items.
I'm actually very upset that there's this much question about it. I mean, this is not an significant matter, when someone can get approval for $9 million for a computer system that costs 30 or 2 million for a warehouse that becomes office repairs. This is not how -- because these budgets just don't come to the Gas Commission; they come to City Council, and the reconciliation doesn't -- won't be just coming to the Gas Commission, I hope it will be coming to City Council, and I think it also should have, at least my understanding. So the historical part would be very important. Thank you.
Thank you. Are there any other questions from members of the committee? (No further questions.)
The Chair will be 82 /00 FINANCE with us shortly. (Chairwoman Blackwell returns to chambers.)
Thank you very much, everyone. Thank you. What the Chair would like to do at the request of some members of the committee is to continue this hearing until June 1st, at 9 a.m. so That means we will skip a week and we don't have a session next week. And then we'll reconvene the following Thursday, before we go into Council, at 9 a.m.. And if that's acceptable to everybody, then we will be recessed until then. COMMISSIONER KISHINCHAND: That will be fine. We will be here.
Thank you, thank you very much. Thanks, everyone, for coming.
Thanks. COMMISSIONER KISHINCHAND: Thank you. (Adjourned at 4:25 p.m.) - - - 83 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 Thursday, May 2000, were 8 reported fully and accurately by me, and that this 9 is a correct transcript of same. 10 11 12 13 RE: COUNCIL COMMITTEE ON FINANCE 14 BILL NO. 000280 15 16 17 18 __________________________________, JOSEPHINE CARDILLO, Registered Professional Reporter