Gas Transmission Northwest (GTN), the former regional interstate natural gas pipeline company for PG&E Corp., jumped up five notches from a “CC” to “A-” credit rating under Standard & Poor’s Ratings Services’ system, reflecting its new standing as a wholly owned part of TransCanada Pipelines Ltd. However, S&P designated the pipeline’s outlook as “negative,” reflecting TransCanada’s own similar outlook and what the rating agency called “an above-average business profile and a somewhat weak financial profile.”

S&P said the negative outlook is tied to TransCanada, and to the extent that the Canadian pipeline’s outlook changes, GTN’s ratings may be affected. “The rating on TransCanada will cap the rating on GTN,” S&P said.

TransCanada’s $1.7 billion purchase of GTN was completed on Monday when National Energy & Gas Transmission Inc., the former PG&E National Energy Group, emerged from Chapter 11 bankruptcy proceedings (see Power Market Today, May 4).

“The credit rating on GTN is capped by the consolidated credit strength of TransCanada (A-, Negative),” S&P said in its analysis released Tuesday. “The rating on GTN will be capped by the rating on TransCanada because S&P generally takes the view that a weaker parent can siphon assets from a subsidiary during periods of financial distress or burden the subsidiary with liabilities.”

S&P cited an ongoing arbitration GTN has over a tolling arrangement that went sour in which there is an $83 million difference between the pipeline’s proposed settlement and what the other party wants, noting that TransCanada is supposed to put a portion of its purchase price into an escrow account equal to the “full face amount of the outstanding guarantees” as a way of protecting GTN bondholders from the outstanding claim. Otherwise, S&P’s only other concern cited dealt with GTN’s deals that involved noninvestment-grade entities, such as Sierra Pacific Resources and Avista Corp.

On the plus side, S&P noted that GTN has a “solid competitive position” in its western markets, supplying about 30% of California’s natural gas supplies as the only transporter of Canadian supplies into the state. “GTN operates at almost 100% reliability and consistently maintains a greater than 99% load factor,” S&P said. “Internal cash generation comfortably covers the capital budget and working capital needs.”

In the past several months, NEGT announced the separate sales of each of its major operating business units and expects to cease operations during 2005. In May, the bankruptcy court approved the sale of NEGT’s subsidiary GTN to TransCanada Corp. for $1.7 billion, which includes $500 million of assumed debt (see Daily GPI, April 30).

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