As a result of contract protection received from the bankruptcy court, Mirant Corp. reported last week that many of its electricity and natural gas customers were continuing to make deliveries without interruption. But customers were feeling the effects of the bankruptcy in other ways. Potomac Energy Power Co. (Pepco), a key power customer in the Mid-Atlantic region, had its long-term corporate credit rating put on CreditWatch in the wake of Mirant’s bankruptcy filing.

The Atlanta-based power and natural gas company said a number of its contract customers had signed on to its Counterparty Assurance Program, which the court granted so that Mirant could honor its obligations under existing and future trading and marketing contracts while in bankruptcy. The court protection applies only to customers who do not terminate their trading and marketing contracts because of Mirant’s Chapter 11 bankruptcy filing.

Mirant spokesman James Peters declined last week to identify the customers who signed up for the program. Nor would he specify how many Mirant customers had committed to it. He said the companies were a mix of both electricity and natural gas customers.

BP in Houston continued last week to trade with bankrupt Mirant to “minimize disruption in the market,” spokesman Neil Chapman told NGI. The “bankruptcy court has put protection in place” to make this possible.

Washington Gas Energy Services, a marketer of gas and electricity to retail customers in the Washington, DC metropolitan area, said it also expected to continue business as usual in the wake of Mirant’s bankruptcy filing. Washington Gas Energy, a subsidiary of WGL Holdings Inc., has contracts with Mirant Americas Energy Marketing LP to supply wholesale electricity to 79,000 customers in the District of Columbia and Maryland.

“Regardless of the course of the bankruptcy case, [Washington Gas Energy’s] electric customers should not experience an interruption in their electric service due to this development,” said company President Harry Warren.

Washington Gas Energy has access to $30 million in collateral from an escrow account established by Mirant Americas as part of its supply contracts, according to the marketer. In the opinion of counsel, Washington Gas Energy has the right to draw on the escrow funds if the contracts with Mirant Americas terminate, and it is forced to buy replacement power at a higher cost or otherwise mitigate its damage, the company said.

Washington Gas Energy, along with parent WGL Holdings, said it planned to monitor the situation and would keep customers informed through its web site at https://www.wges.com.

Also in the national capital area, Pepco said last week that there was no interruption of power supply to its 700,000 customers as a result of the bankruptcy filing by Mirant. But Pepco, a subsidiary of Pepco Holdings Inc., did take a hit to its credit rating.

Standard & Poor’s Rating Services placed its ‘BBB+’ long-term corporate credit rating on Pepco Holdings Inc. and the ratings of the company’s subsidiaries on CreditWatch with negative implications, citing the “uncertain affect” of Mirant’s bankruptcy on power contracts held by Pepco Holdings’ Pepco subsidiary. The ‘A-2’ short-term corporate credit and commercial paper ratings for Pepco Holdings were unaffected, but S&P cautioned that this could change.

“It is not known yet how Mirant or the bankruptcy court will treat the full-requirements power purchase contracts (TPA) between Pepco Holdings’ subsidiary Potomac Electric Power [Pepco] and Mirant’s subsidiary, Mirant Americas Energy Marketing (MAEM). There are also several power purchase agreements (PPAs) related to Pepco’s nonutility generators that could be rejected by Mirant as well,” S&P said.

Mirant Americas Energy currently supplies Pepco with all of its default service load under two purchase contracts to serve the utility’s 700,000 power customers in Maryland and Washington, DC, according to S&P. The contracts terminate when energy rate caps that were imposed by Maryland and Washington regulators expire — June 2004 in Maryland and January 2005 in Washington.

S&P warned that Pepco could face problems as a result of the Mirant bankruptcy.

“Due to the below-market pricing contained in the [power purchase contracts with Pepco], Mirant could request the bankruptcy court to set aside or approve a rejection of these contracts. If this were to occur, Pepco will have to procure power at higher market prices, while continuing to operate under the energy rate cap, thus eroding the positive margin that Pepco is currently earning.”

Under such a scenario, S&P estimates the potential cost exposure to Pepco could be between $175 million and $200 million before taxes.

“There are several ways that Pepco could mitigate its exposure, including a renegotiation of the contracts, seeking extraordinary rate relief, or contesting any contract rejection through FERC intervention,” the credit-rating agency said. “However, all of these…will take some time to effect and the outcome of each is unknown at this time.”

An “unfavorable outcome for Pepco,” S&P believes, “would have a negative effect on Pepco’s credit as the company would likely need to raise additional capital at the same time that its earnings would decline.”

The issue of bankrupt energy companies attempting to back out of existing power contracts garnered national attention after Chapter 11-mired NRG Power Marketing recently made a bid to cancel a standard offer service contract with Connecticut Light & Power (CL&P). FERC has launched a proceeding to determine whether NRG Power Marketing should be allowed to back out of the CL&P agreement.

Pepco’s long-term corporate credit will remain on CreditWatch until the “outcome of any bankruptcy court decision is known and Pepco’s ability to mitigate any adverse decisions is also known,” said S&P.

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