Part of Wall Street spoke quickly and cautiously late Tuesday despite the separation of the Canada-to-California interstate PG&E Gas Transmission-Northwest pipeline from the Chapter 11 bankruptcy filing made by its parent, the PG&E Corp.’s merchant energy group, earlier in the day. The pipeline still could be sold off in the bankruptcy proceeding, a spokesperson said.

Standard & Poor’s Ratings Services (S&P) downgraded the pipeline to “CC” from “CCC” and removed its ratings from its “CreditWatch,” while dropping the principal trading and financial units of the PG&E National Energy Group (NEG) to “D” from “C” ratings. S&P set the outlook for the gas pipeline as “negative,” reflecting what it said is a “differential between a rating on a ring-fenced entity (PG&E GT-Northwest) and its ultimate parent, which in this case is NEG.”

At the same time company officials Tuesday continued to emphasize that the NEG bankruptcy filing will have no “material adverse effect” on the corporate holding company or the Pacific Gas & Electric regulated utility. The holding company stock closed Tuesday unchanged at $21.90/share, near a 52-week high of $22/share.

The 1,350-mile, 3 Bcf/d pipeline and a set of nearly a dozen independent power cogeneration units in the Northeast are not included in the bankruptcy petition although they are part of NEG, and as such, will be part of the new company that is owned by the unsecured creditors. They also could be sold off as part of the Chapter 11 process together or separately.

Separately in response to the Chapter 11 filings, New York Mercantile Exchange President J. Robert Collins said his exchange has been “closely monitoring” the PG&E situation, and it “does not anticipate any disruption to trading activity” in the Nymex natural gas basis contracts that reference PG&E pricing points. “The exchange is confident that its safeguards protect against any financial ramifications for the exchange and its clearinghouse.”

PG&E Corp. acknowledged Tuesday in a conference call with financial analysts that it expects tax benefits that could total in the hundreds of millions of dollars and possibly some litigation aimed at the holding company in the wake of its separation from the NEG filing earlier in the day.

PG&E intends to go back to being a utility holding company that is focused on improving the regulatory environment in California and working to gain final approval of a pending Chapter 11 bankruptcy reorganization settlement between Pacific Gas and Electric Co. and the California Public Utilities Commission. The Chapter 11 filing by NEG has been in the works since last fall as the merchant unit has been locked in discussions with a host of major creditors to eliminate the “challenges and uncertainties” that have swirled around NEG for more than a year.

In emphasizing its separation from NEG — legally and financially — the holding company faces various financial benefits from the tax consequences of accounting features, such as “worthless stock deductions,” along with the “possibility” for the NEG management and its creditors to file lawsuits alleging “tax-sharing agreements” between the parent and subsidiary were not honored.

Among the litany of steps NEG has taken to resolve its financial difficulties over the last 12 months are: (a) selling all or parts of interests in new wind and natural gas-fired power plants in California, Oregon, Texas and Ohio; (b) selling its Canadian energy trading operation, ET Canada; (c) reducing by 70% its U.S. energy trading portfolio, and (d) making two separate agreements to transfer three-each groups of merchant power generation plants to their respective lenders

“These Chapter 11 proceedings at NEG are not expected to have a material adverse effect on PG&E Corp. or on Pacific Gas and Electric Co.,” said Robert Glynn, PG&E’s CEO, during a financial conference call. “The corporation has no material obligations to NEG, and there are no equity infusion agreements, no material contingent liabilities and no tax-sharing agreements.

“At some point in NEG’s Chapter 11 process, a court order is expected to relieve PG&E (Corp.) of its equity interest in PG&E NEG. At that point, the corporation will no longer hold any interest in NEG or any of its subsidiaries (including PG&E Gas Transmission-Northwest).”

As part of a formal separation process between PG&E Corp. and NEG, any corporation officers on NEG’s board left as of Monday, and a formal “de-consolidation accounting” process has begun, according to PG&E’s CFO Peter Darbee. NEG results, beginning with the third quarter, no longer will be consolidated with the PG&E Corp. results, he said.

Glynn stressed that the parent company will now turn its full attention to the proposed settlement agreement between the utility and the CPUC staff, along with “maximizing the value inherent in the utility operations.” As part of that, Glynn indicated that the holding company will be “working with the CPUC to establish a more stable regulatory environment for the future.”

Ironically, as part of the utility Chapter 11 bankruptcy, PG&E had proposed splitting up the utility’s wholesale natural gas and electricity operations into three separate federally regulated entities. That plan has now been dropped by the utility in favor of the pending proposed settlement that keeps the utility intact under principally CPUC regulatory oversight.

The principal NEG power plants, most of which are in the final stages of construction or already in commercial operation, include: Athens (NY), Covert (MI) and Harquahala (AZ) power plants as a group going to their lenders; and the La Paloma (CA), Millennium Power (MA) and Lake Road (CT) plants that are similarly being transferred to their lenders.

In response to a financial analyst’s question regarding potential litigation from NEG revolving around agreements between the parent and the merchant energy unit, a PG&E attorney said there have been no “tax-sharing agreements,” only ad hoc tax-sharing arrangements from time to time. In terms of the possibility of lawsuits, attorney Bruce Worthington said “that is always possible.”

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