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Moody's Lowers Credit Rating of PG&E Unit

Utilities: The downgrade of National Energy Group is the second in two months.


Moody's Investors Service on Tuesday downgraded the credit rating for PG&E Corp.'s energy-trading subsidiary, PG&E National Energy Group, for the second time in two months.

Moody's also warned that further downgrades are possible, citing concerns about the company's ability to extend a $400-million credit line past its Oct. 21 expiration date.

The action drops the rating on the company's senior unsecured debt and credit line from Ba2 to B1--four levels below investment grade.

"The rating action and review for possible downgrade reflects NEG's weak operating performance, low operating cash flow relative to its debt and tight liquidity," according to a Moody's statement. A Moody's spokesman was not available for additional comment.

Shares of San Francisco-based PG&E fell 51 cents, or 5%, to close at $9.36 on the New York Stock Exchange, less than half of the $23.75 level it hit in May. The company's Pacific Gas & Electric Co. utility is operating under Bankruptcy Court protection.

In early August, both Moody's and Standard & Poor's credit-rating service cut the energy-trading unit's credit rating to "junk" status, forcing the company to begin renegotiating more than $1 billion in credit agreements with lenders.

The most recent downgrade "does not trigger any incremental financial obligations at the corporation or at PG&E [National Energy Group], beyond those associated with previous rating agency downgrades," the company said in a statement.

But analysts said the continuing credit-rating decline highlights the company 's weakened position as it faces two deadlines this month--both of which are already the result of extensions.

One provision of a $1-billion loan made to the parent company is that PG&E NEG maintain an investment-grade credit rating. Lenders, which are still owed $420 million, granted the company a waiver of that requirement until Oct. 18.

In addition, NEG's line of credit with 16 lenders owed $431 million, is set to expire Oct. 21, and Moody's expressed "concerns about the ability of NEG to extend" the credit line.

"The downgrades are beginning to recognize the severity of the problem, but that may be a bit late," said Paul Fremont, an electric utilities analyst with Jefferies & Co.

"The company is negotiating for its life, for its continued existence, and that was the case in August," Fremont said.

The energy group develops, builds and operates electric generating facilities and natural gas pipelines and provides energy trading.

It's part of a market sector facing a host of woes, including the fallout from Enron's collapse, sagging wholesale prices and flagging investor confidence, said Arleen Spangler, a director in the utilities, energy and project finance group at Standard & Poor's.

In addition, she said, the PG&E energy group used short-term financing to fund the construction of power plants nationwide.

She said S&P has "not come to a conclusion" on whether to further downgrade NEG's credit rating.

"We would hope that the company would have some restructuring plan in place" before Oct. 18, she said.

The parent company declined to elaborate on previously announced plans to explore options for the energy group.

Those options include "sales of assets and businesses, debt restructuring and reorganization of existing operations."

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