In the wake of “recent upheavals in the gas industry” that have prompted severe credit downgrades of energy traders and others, Tennessee Gas Pipeline has proposed broad changes to its transportation tariff to protect it and its paying pipeline customers from the financial risks posed by insolvent or non-creditworthy shippers.

In a recent filing at FERC, the El Paso pipeline proposed that its customers be required to submit information about their credit status “upon Tennessee’s request,” rather than “once every three months.” In addition, customers would need to submit copies of their audited and certified financial statements for the previous two fiscal years, as well as copies of their financial statements for the most recent period. If the statements for the latest period are unaudited, they must be signed and attested to by the customer’s president and chief financial officer as ” fairly representing the financial position of the company,” according to Tennessee’s proposed changes. Tennessee wants the new tariff provisions to take effect Sept. 16.

To further assess a customer’s credit status, the pipeline said it should be allowed access “at its request” to: “A) a bank reference and at least two trade references that show that the customer’s obligations are being paid on a reasonably prompt basis; B) confirmation in writing that the customer is not operating under any chapter of the bankruptcy laws and is not subject to liquidation or debt-reduction procedures under state laws; C) confirmation in writing that the customer is not aware of any change in business conditions which could cause a substantial deterioration in its financial condition, a condition of insolvency, or the inability to exist as an ongoing business entity; D) confirmation in writing that no significant collection lawsuits or judgements are outstanding which would seriously affect the business entity’s ability to remain solvent; and E) a list of the customer’s owners and/or shareholders, if the customer is a privately held entity.”

If a customer becomes insolvent or loses its creditworthiness, Tennessee said it will alert the shipper by e-mail if its plans to discontinue service. Even in such cases, “the customer shall continue to be liable for all charges due under its service agreement and associated rate schedule,” the pipeline said in the tariff proposal. For a credit-risky customer to continue shipping on Tennessee, it would have to pay “any outstanding balances due Tennessee for services rendered and provide adequate [financial] assurances,” such as an irrevocable letter of credit or pledge assets as security.

In the event of a customer default, “Tennessee may take title, at no cost to Tennessee and free and clear of any adverse claims, to gas that the customer may have in [the pipeline’s] system under effective service agreements,” including gas in Tennessee’s storage facilities, transportation line and parked gas under its Rate Schedule PAL, the pipeline proposes. “Tennessee will only take title to an amount of a customer’s gas necessary to offset the dollar amount the customer owes Tennessee for the services.”

As for customers who have multiple contracts, “Tennessee proposes to deem a default on…one contract as a loss of creditworthiness on any other contracts the customer has with Tennessee,” it said. The pipeline “reserves the right to suspend service on all other contracts with the customer until the customer [pays] the delinquent amount on the defaulted contract.”

The El Paso pipeline addressed the credit risks associated with capacity releases as well. It proposes that releasing shippers be held liable for payment in the event replacement shippers default. Natural Gas Pipeline Co. of America also has proposed tariff changes — although more limited in scope than Tennessee’s — that seek to prevent its transportation capacity from being released by non-creditworthy shippers at cut-rate prices (see Daily GPI, Aug. 23).

If Tennessee builds new facilities to accommodate a shipper, the pipeline said in the future it will require an “irrevocable letter of credit from [the] customer in an amount up to the cost of the facilities.”

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