As an outgrowth of merchant power generation’s shrinking margins and spark spreads, Moody’s Investors Service last Wednesday changed the rating outlook from stable to negative on debt securities of PG&E Corp.’s National Energy Group (NEG). The move reflects “the growing reliance on less predictable cash flows coupled with the weak marketplace for merchant generation,” Moody’s said in announcing the change.

An official with the National Energy Group said the change was not “unexpected,” and basically was a “commentary on the marketplace” rather than NEG operations. He called it a “trend for the sector” right now. The Moody’s rating outlook is defined as meaning there is a “25% probability” that the rating could drop over the next 18 months. “It is not a very large plan-changer for us at all,” the NEG official said. NEG is PG&E’s nonutility operations in trading, power plant development and natural gas interstate transmission pipelines.

While the “stable” rating was based on the PG&E Gas Transmission-Northwest’s “predictable cash flows,” Moody’s said, future cash flows will be dependent “upon margins derived from the merchant electric power market.” The immediate prospects for those markets are for narrower margins and spark spreads, so Moody’s thinks the “prospect for a healthy electric merchant market has weakened.”

NEG’s cash and credit situations seem adequate, Moody’s noted, and the company has committed to completing construction of projects already under way, but it has slowed down its plans for new projects.

“Additional rating pressure could occur should NEG need to raise additional capital given the parent company’s (PG&E Corp.’s) challenge of raising equity due to the April 2001 bankruptcy filing by its utility affiliate, Pacific Gas and Electric Co.” NEG officials indicated they have no plans now for needing additional financing.

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