With its subsidiary NRG on the financial ropes and near bankruptcy, Xcel Energy on Friday announced plans to sell the Viking Gas Transmission pipeline and a one-third interest in the Guardian Pipeline project to Northern Border Partners LP for $152 million including associated debt. Northern Border Partners is expected to purchase all of the common stock of Viking by the end of December, subject to regulatory approvals.

Xcel CFO Dick Kelly said the sale reflects the utility company’s continuing focus on core utility operations. “We’ve been pleased with Viking’s financial performance and the contributions of its employees to make it a successful company,” Kelly said. “However, we do not have enough scale in the gas transmission business to realize the full potential of Viking. This sale is consistent with our intent to focus on our core electric and gas distribution businesses.”

Northern Border Partners CEO Bill Cordes touted the stable cash flows of the Viking and Guardian pipeline systems. “In addition, these systems are strategically located to serve upper Midwestern markets and provide potential operating and commercial synergies with other Northern Border assets,” he noted.

With Viking and Guardian and Northern Border Pipeline Co., Northern Border Partners will serve a substantial portion of the upper Midwest marketplace. Northern Border already delivers 2.4 Bcf/d of gas to the region. Guardian, which will begin at the terminus of Northern Border at Joliet, IL, will provide a new reach into the Wisconsin market from the south with 750 MMcf/d of access. Guardian Pipeline is scheduled to start service next month. The 141-mile interstate natural gas pipeline system will transport gas from Joliet to a point west of Milwaukee. Subsidiaries of CMS Energy and Wisconsin Energy Corp. hold the remaining interests in the Guardian system.

The Viking system is a 671-mile interstate gas pipeline extending from Emerson, MB, to Marshfield, WS. It has a firm transportation capacity of 516 MMcf/d and connects to many other major pipeline systems including TransCanada, Northern Natural Gas, Great Lakes and ANR to provide service to markets in Minnesota, Wisconsin and North Dakota. Northern Border Partners also owns the 350-mile Midwestern Gas Transmission system, which stretches from Portland, TN, to Joliet.

Cordes said the company expects to receive about $22-23 in earnings (before interest, taxes, depreciation and amortization) for 2003 from the new facilities. “We believe that this acquisition will be immediately accretive to earnings and cash flow per unit,” he added. “It should provide at least $0.10 in additional cash flow per unit in 2003 and 2004, depending on the timing of permanent financing.”

Northern Border Partners intends to finance the acquisition initially under its revolving credit facility and expects to issue equity for a portion of the acquisition price next year.

Meanwhile, for Xcel the sale represents a small step toward restoring its financial strength. The major thorn in its side has been independent power generation and marketing subsidiary NRG Energy Inc. The Wall Street Journal reported on Friday that Xcel is prepared to surrender its ownership in NRG to creditors through a Chapter 11 bankruptcy filing or other restructuring plan. NRG and Xcel acknowledged the details of the restructuring plan as reported in the Journal but denied that a bankruptcy filing is imminent. Such a possibility, however, has been expected for months.

“We have begun the process of negotiating with our various bank and bondholder constituencies regarding specific points in the restructuring proposal,” Kelly, who also is NRG’s president, said in a statement. “We anticipate that those negotiations will take several weeks. Consistent with what we have said previously, a Chapter 11 filing may ultimately be the means to implement any restructuring proposal agreed to with our creditors.

“Our customers and vendors should be reassured that NRG has sufficient cash and liquidity to meet its current operating obligations,” he added. “Any Chapter 11 filing should have little, if any, impact on employees and plant operations as we would continue to run our businesses and plants in the same manner as before and without interruption.”

NRG owes banks and bondholders as much as $10 billion, including about $1.3 billion in overdue collateral payments that were triggered by credit ratings downgrades in August.

If the independent power generation unit filed under Chapter 11, it would be the first major energy company to file for bankruptcy since the fall of Enron. However, many observers expect more bankruptcy filings to follow. Standard & Poors’ said earlier last week that merchant energy companies will have to refinance about $90 billion in debt between 2003 and 2006, which will be one of the “worst times in recent history to refinance debt” (see related story).

Xcel on Friday also received a waiver from regulatory authorities that allowed it to pay down a $400 million credit line that expired Friday. Funds to pay down the line came from cash at the Xcel Energy holding company plus funds from a new financing.

“We would have preferred to renegotiate our existing bank line, but we’re in a difficult market for bank financing because a number of banks are facing losses on loans to the independent power sector,” said Kelly. “Consequently, several weeks ago we began to develop contingency plans.”

Kelly said one of the bank lenders has a relatively large exposure to subsidiary NRG Energy but was a small participant in Xcel Energy’s $400 million bank line.

“This bank tried to leverage its position in the Xcel Energy facility, demanding among other things that Xcel Energy make various financial commitments to NRG in exchange for approval of a renegotiated bank line,” he said. Kelly added that the other banks were willing to accept reasonable terms.

When Xcel Energy reached an impasse in negotiations it elected to switch to one of its contingency plans. “The new financing gives us a lot of flexibility at an attractive interest rate,” said Kelly. “We will describe specific terms of the new financing in an 8K we intend to file on Nov. 12.”

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