Administration officials are making their rounds to discuss the possible sale of the Philadelphia Gas Works as the city prepares to test the market with an eye to a possible sale.

“We have to not only educate [the public] but get them to a comfort level that this is what we need to do,” said Rina Cutler, deputy mayor for streets and utilities.

A sale, which would have to be approved by City Council, would have to generate between $1.5 and $1.85 billion to provide any financial benefit for the city. The vast majority of proceeds would be used to cover PGW’s liabilities — approximately $1 billion in debt, and about $500 million in other liabilities.

Cutler, Rebecca Rhynhart, city budget director and George Bilicic, vice chairman of investment banking from Lazard Freres, a New York investment bank, are meeting with members of the media and other groups to explain the benefits and drawbacks of a potential deal.

“There are a variety of reasons that have brought us to this point,” Cutler said. “One, interest rates are low, so it’s a really good time to buy. The company has done a great job in securing itself … management has really stabilized the firm. The gas industry itself has a very ample supply, so rates and the cost of purchasing product is low. I think all of those pieces coming together have required us to take the next step.”

For customers, the main benefit is the possibility of fewer rate increases.

“Our analysis shows that, because of the benefits of combining PGW with another utility operation, you would be able to reduce the overall operating costs,” Bilicic said. “That eases pressures on rates.”

In addition, he added, even under new ownership the company would continue to be regulated by the Pennsylvania Utilities Commission, offering the same level of consumer protections now in place.

“The consumer, in this case, is relatively protected,” he said.

Among the conditions the city would impose on a sale: a rate freeze until 2016, any purchaser would be required to honor all existing employee contracts — which run until May 2015; that any buyer would guarantee that the company would maintain a headquarters in Philadelphia for at least three years and retain a certain number of employees at that location.

The mayor, earlier this week, declined to say what the minimum numbers set by the city might be.

“We’re not going to negotiate in public,” he said.

PGW employs 1,654 people — 1,138 of those positions are union jobs.

Any deal would include a no layoff provision for any employee hired before May 15, 1998 and another 150 hired after that date. That represents about two-thirds of the company’s union employees.

Cutler said the administration expected resistance from the union, Utility Workers Union of America, Local 686.

Union officials did not return repeated phone calls from the Tribune seeking comment.

City Councilman Kenyatta Johnson, chair of the transportation and public utilities committee, has already called for hearings.

“I think it’s important that we look at all of the angles as we look to generate revenue for the city. We must review all of the options. But my first priority is to protect the consumer and public employees who work for PGW,” Johnson told the Tribune on Wednesday, adding: “A large portion of PGW’s customers are low-income.”

“It’s imperative that we protect them if we are to look at selling such a vital institution.”

On Thursday he called for hearings on the matter.

The sale could produce several benefits for the city, Rhynhart said.

It would remove what has often been a liability for the city’s general fund. In 2000, the city had to loan PGW $45 million, which it only recently repaid. In addition, the city has received only one scheduled annual payment of $18 million that it was supposed to be getting since 2004. That payment came last year, and is expected again this year due to an improvement in PGW’s finances.

In addition to removing financial obligations, the sale would generate revenue through the Pennsylvania Utility Realty Tax. Since the gas company is city owned, its properties are tax-exempt. That would change after a sale.

Rhynhart said that trade-off could prove a benefit to the city.

“There are several taxes we would get, the BPT tax [business privilege tax], the use and occupancy tax, which would go to the school district,” she said, adding that the city had not yet been able to determine how much those taxes would generate. Largely because PGW has never paid real estate tax, so it’s difficult to estimate how much the PURTA might generate. “In order to a full picture of the taxes, we would get we need to have a full evaluation done.”

In addition, after the city covered PGW’s liabilities, it could have several hundred million left over for the general fund. That could be used for any number of things. Cutler rattled off several options.

“Are we going to hundred percent fund the pension fund? Are we going to pay down debt? Are we going to say 2 percent of this is going to social services?” she asked. “We will need to craft that.”

A sale could take as long as two years to complete: a year to wrap up the deal and another year to secure approval from the Public Utilities Commission.

Founded in 1836, PGW is the largest and one of only four municipally-owned gas companies among the 30 largest cities in the United States. It serves more than 514,000 customers.

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