Hill-Lake Gas Storage LP, a West Texas storage facility owned by Falcon Gas Storage, has notified Tractebel Energy Marketing Inc. (TEMI) that it plans to shut off natural gas storage service to the marketer effective Thursday and has put a lien on TEMI’s gas in storage for allegedly failing to comply with the creditworthiness requirements of its contract, a top Falcon Gas official said.

Meanwhile, Houston-based TEMI has appealed to FERC, the Texas Railroad Commission and a state district court in Harris County, TX, to protect its storage rights and prevent the confiscation of its $3.2 million of gas by Hill-Lake. The Texas court earlier this month rejected the marketer’s request for a temporary restraining order because it was unable to show that Hill-Lake’s action would cause “irreparable injury,” a Washington, DC attorney for Falcon Gas said. TEMI now is seeking a temporary injunction to stop the termination of its contract and the lien on its gas. A hearing is scheduled Friday in the state district court to hear arguments, the attorney said.

Hill-Lake intends to cut off storage service because TEMI has not complied with the terms of its $3 million contract, which requires the customer to be either investment-grade or backed by credit assurances from a creditworthy affiliate, said Falcon Gas CEO John Hopper. TEMI did provide a $3 million guaranty from its parent Tractebel Inc. and an irrevocable one-month letter of credit for the entire sum of the monthly demand charges remaining under its contract ($2.54 million), but Hopper said these were insufficient since Tractebel’s liabilities exceed its current assets by $1.2 billion.

He noted that TEMI could have provided a credit letter with “some teeth to it” from Tractebel’s parent, France-based Suez (which is investment grade), but they refused to do so. Moreover, Hopper said Hill-Lake had given TEMI months to resolve the problem. “Now they’re squealing about it to anybody who will listen.”

He contends that Hill-Lake has the right to sell TEMI’s gas in storage under Texas law and the terms of the contract.

In its complaint filed at FERC on May 16, TEMI claimed that Hill-Lake’s demand for the added credit assurances had nothing do with the marketer’s credit status, but rather was in retaliation for its allegations that the storage company was under-delivering its contract [PR03-14]. It further signaled that the credit rating of Tractebel was strong, and “has not become impaired since the [storage] contract was executed.”

Hill-Lake did not demand any credit assurances from TEMI when the storage contract was initially entered into in August 2002, or when it was re-executed on Jan. 1 of this year, according to the complaint. “Nor has Tractebel’s credit quality diminished since that time,” the gas marketer said. “Rather, Hill-Lake’s demand for credit assurances is a punitive response to Tractebel’s assertions that Hill-Lake has failed to deliver Tractebel’s full contract quantities.”

From a legal standpoint, the marketer contends that the storage company’s credit demands flout the Commission’s recent decisions in Northern Natural Gas and Tennessee Gas Pipeline cases, which held that three months of demand charges were sufficient security in the event of a credit downgrade or default. Furthermore, it said FERC in those rulings barred the pipelines from confiscating a shipper’s gas.

“Tractebel is, and always has been, current on its payments to Hill-Lake. Yet, Hill-Lake is demanding $5,745,000 in collateral and gas from Tractebel for a storage contract on which Hill-Lake has seriously under-delivered.”

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