Even with solid earnings reported for the third quarter, albeit decreased from a year earlier, PG&E Corp. senior executives Wednesday delivered sobering news about both of its major business units — the utility and merchant energy operations. The Chapter 11 bankruptcy proceeding for PG&E’s utility now is expected to run into the first half of next year, and the National Energy Group (NEG) is going to default on short-term loan obligations as they become due in coming weeks.

Pacific Gas and Electric Co., the cash cow that is still providing solid earnings, is not expected to emerge from bankruptcy until “on or about May 30, 2003,” according to Robert Glynn, PG&E Corp. CEO, addressing a financial community conference call Wednesday, and that does not factor in time for legal appeals, if they materialize. It was also reported that the California Public Utilities Commission last week filed an amended alternative reorganization plan for the utility in federal bankruptcy court, but it is still “fatally flawed,” Glynn said.

For NEG’s merchant power plant and energy trading operations, PG&E senior executives said the unit cannot meet its $500 million of debt payment obligations due Thursday and Friday this week, and will not be paying anything on more than $1 billion of obligations due in the first quarter next year. Instead, NEG is working on a “global” agreement with its many debtholders that the company acknowledges will mean the sale or transfer of assets, further reduction of its energy trading and a big one-time hit charge against its earnings.

“The NEG’s efforts to raise cash or reduce debt have not produced sufficient results to meet the unit’s upcoming obligations,” said Peter Darbee, PG&E CFO. “The NEG’s focus is now on a global restructuring of its debt facilities and obligations, following several guiding principles: (a) seeking a consensual solution with the lenders and bondholders, (b) viewing the NEG as independent of the rest of PG&E and the utility; (c) making tax benefits an important element of the restructuring, and (d) recognizing the unique needs of each of the parties that are part of the discussions.

“A restructuring along these lines would require it to abandon, sell or transfer certain assets and continue to reduce energy trading operations. And any restructuring will result in substantial charges to earnings in the fourth quarter of 2002 or in 2003.”

Moody’s Investors Service later in the day lowered NEG’s ratings even lower to Ca from B3, noting that it reflects NEG’s “disclosure that it will not make certain interest and principal payments, including the repayment of principal due on a $431 million revolving credit facility and the payment of interest due on senior unsecured bonds. NEG’s financial results continue to be beset by weak operating cash flows relative to debt levels, along with strained liquidity.”

Regarding specific questions about the prospects of bankruptcy if the agreement is not made with the debtholders, a corporate spokesperson said that the company’s filing with the Securities and Exchange Commission late on Wednesday will show bankruptcy as one option if the financial restructuring is not completed, but it is not offered as an “either-or” proposition. The spokesperson also said there is no specified timetable by which a restructuring has to be reached, although company obviously would like to do it “as soon as possible.”

In response to a question about the option of just shutting down the NEG operations during the conference call, Glynn said there would not be corresponding capital gains to offset the loss, so it is not really an option. Current book value for the merchant energy group as a whole is slightly over $2 billion, he said, noting that more than $1 billion of that is in the unit’s Pacific Northwest-based interstate natural gas pipeline, which is fully up-to-date with all of its debt payments. There are no cross-defaults between PG&E Corp. and NEG as a whole, nor are there any between the gas pipeline unit and NEG, the PG&E executives said in response to specific questions from analysts.

There is no “exposure” of the pipeline should NEG be forced to file for Chapter 11 bankruptcy, said Thomas King, the newly named president of the NEG business unit.

“The (NEG debt) restructuring is a complex and challenging undertaking, but we very much believe there is a path to resolution that can work for all parties involved,” said Darbee, reiterating what Glynn said in his opening remarks to the conference call.

In regard to the utility bankruptcy, Glynn and others noted that the confirmation, or final “trial” phase, of the Chapter 11 process begins next Monday (Nov.18) with the CPUC putting on its case for why its alternative reorganization keeping the PG&E utility intact is the best course of action for creditors. That should last about a month, and then in mid-December, the utility puts on its case for why the utility should split off its wholesale generation, transmission and gas pipeline/storage operations into nonutility businesses and leave only the distribution operations in the utility. A judge’s decision is now expected in January, Glynn said.

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