Philadelphia plans first deal for Gas Works since 2017

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Philadelphia is gearing up for a $266 million revenue bond deal for its public gas utility next month that could offer $10 million in net present value savings.

Ahead of the sale, Fitch Ratings revised its outlook on Philadelphia Gas Works' revenue bonds to positive from stable, and affirmed its BBB-plus ratings, citing better debt service coverage. Philadelphia is slated to hit the market in early June with around $215 million in new money bonds and roughly $51 million of refunding bonds in its first transaction on behalf of PGW since 2017.

"To receive a positive outlook during a period of wholesale credit rating downgrades is a testament to the PGW management team," said Philadelphia Treasurer Christian Dunbar.

“To receive a positive outlook during a period of wholesale credit rating downgrades is a testament to the PGW management team,” said Philadelphia City Treasurer Christian Dunbar, noting many localities remain under credit pressure during the COVID-19 pandemic. “We were hoping for an upgrade before COVID-19 but we are happy to get an improved outlook and affirmation."

Moody’s Investors Service and S&P Global Ratings both retained their stable outlooks on the PGW bonds while affirming ratings of A3 and A, respectively.

The PGW bonds will be sold in a negotiated offering with Siebert Williams Shank & Co, LLC, as lead underwriter and PNC Capital Markets as co-senior manager. Phoenix Capital Partners and Public Financial Management are financial advisors on the deal.

Proceeds will finance portions of PGW's capital improvement plan and refund some bonds issued in 1998. Dunbar said he hopes the refinancing will generate around $10 million in net present value savings. If market conditions cooperate, PGW will also refund $30 million in unhedged variable rate debt and $122.8 million of hedged variable rate debt with interest rate swaps.

"We had planned to take out the swaps because they are all Libor-based, however the economics are not as attractive since COVID, so we will continue to monitor up to the transaction date," he said.

Fitch analyst Andrew DeStefano noted PGW has improved debt service coverage in recent years, with the help of rate hikes approved by the Pennsylvania Public Utility Commission. PGW, which is the nation’s largest municipally owned gas utility, is seeking a 10% rate hike from the PUC, with a decision expected later this year.

“PGW's historically stable financial profile has improved over the past few years as previous rate increases have led to greater cost recovery,” DeStefano wrote in an April 21 report. “While rate changes are ultimately approved by the PUC, a generally supportive regulatory regime has provided PGW sufficient support to maintain a stable financial profile.”

PGW was founded in 1836 and came under city ownership in 1841. The Philadelphia City Council rejected a 2014 proposal to privatize PGW through a sale to UIL Holdings Corp. for $1.86 billion.

PGW's customer base increased to 510,000 from 501,000 in 2015. PGW estimates it serves roughly 85% of Philadelphia’s home heating market with the remaining customers using alternative energy sources.

Philadelphia sold two bond deals for PGW in 2016 and 2017 that achieved net present value savings of $39 million, according to Dunbar.

Philadelphia’s general obligation bonds are rated A-minus by Fitch, A by S&P and A2 by Moody’s.

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Bond ratings Negotiated Bond Sales Pennsylvania City of Philadelphia, PA Philadelphia Gas Works