FERC last Thursday ruled that the high level of collateral sought by Kern River Gas Transmission from Reliant Energy Services Inc. (RES) to transport natural gas on its 2003 expansion was justified, and for the most part cannot be undone.

The order responds to a Section 5 complaint filed by RES and CenterPoint Energy Resources Corp. (CERC) in July 2006 [RP06-408]. The two Houston-based energy companies requested that Kern River be ordered to accept a “reasonable level of credit support” for four transportation service agreements as a substitute for a significantly more costly guarantee that was negotiated by RES’s then-affiliate CERC, which has since split from Reliant and become a subsidiary of CenterPoint Energy Inc (see NGI, July 10, 2006). CenterPoint executed the guarantee on behalf of Reliant, which was not creditworthy at the time, and now wants Kern River to release it from that guarantee.

The Federal Energy Regulatory Commission (FERC) “finds that for the three service agreements involving the Kern River expansion, the complainants have not met their burden,” the order said [RP06-408]. However, for a fourth service agreement that involved a capacity release, “Kern River must permit Reliant to substitute [a less restrictive] standard collateral for capacity-release agreements,” it noted.

Because RES was not rated investment grade in March 2001, CenterPoint executed a guarantee with Kern River covering all of affiliate RES’s payment obligations under the agreement. Since then, Reliant has been restructured into two companies, with the regulated side of its business spun off and renamed CenterPoint Energy, while it maintained ownership of the unregulated operations.

Kern River has demanded that either the CenterPoint guarantee remain in place for 10 more years, or that RES provide substitute credit support in the form of a letter of credit equal to all of the reservation charges for all of RES’s transportation agreements with Kern River through 2016, which would exceed $600 million, the two complainants said.

RES said it offered to post a letter of credit equal to one year’s worth of reservation charges ($53.67 million) and that its parent, Reliant Energy Inc., was willing to provide a parent guarantee to erase CenterPoint’s financial responsibility.

“We cannot find that Reliant and CenterPoint’s proposal to substitute a collateral amounting to 12 months of firm service reasonably meets the needs of Kern River, and particularly its lenders” for the 2003 expansion project, FERC said. “We further find it inappropriate to reconsider the amount of collateral after Kern River has obtained financing, pledged the collateral to its lenders and completed the project.”

Despite claims to the contrary by complainants, the order said that requiring CenterPoint to honor its guarantee was neither unjust nor unreasonable. “At the time the parties entered into these contracts, CenterPoint freely executed the CenterPoint Guaranty in lieu of Reliant putting up cash or other collateral. Indeed, CenterPoint entered into the guarantee even though at the time, it and Reliant intended to disaffiliate,” it noted.

The Commission also dismissed complainants’ arguments that Kern River’s request for a high level of collateral was inconsistent with the agency’s policy statement on creditworthiness issues. “The policy statement makes clear that project-financed projects [such as Kern’s 2003 expansion] may seek greater amounts of collateral from potential shippers on new construction projects than three months of reservation charges,” the order said.

However, Kern River provided no evidence to show that a fourth transportation agreement, which involved the release of capacity by Southwest Gas Crop. to Reliant on the Kern system, was related to the expansion construction or had been pledged to the pipeline’s lenders, the FERC order said. “The record evidence supports this conclusion as [the] Southwest Gas contract, and not [the] Reliant contract, is pledged as collateral to Kern River’s lenders,” it noted.

“Kern River must either permit Reliant to substitute the standard three months collateral applicable to capacity-release shippers under Commission policy, or file within 30 days to show why substitution of collateral is not appropriate.”

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