San Francisco-based PG&E Corp. reiterated it expected lenders to its merchant energy unit will continue to forbear the continuing defaults by its multi-billion-dollar nonutility businesses, but if push comes to shove, a bankruptcy filing or charges against last quarter or 2003 earnings eventually could be needed, the energy holding company said in a filing last week with the Securities and Exchange Commission.

While also reiterating that rating agencies have indicated that its interstate natural gas pipeline operations based in the Pacific Northwest are much stronger than the rest of PG&E’s National Energy Group (NEG), even that sub-unit’s rating was further lowered two weeks ago, although not to the bottom of junk ratings as happened to NEG overall from both Moody’s Investors Service and Standard & Poor’s.

The SEC filing also acknowledged potential longer term problems from NEG’s guarantee of its energy trading unit’s obligations under certain contracts, noting that a default by NEG would cause “cross-defaults” to occur under certain master trading agreements entered into between various trading subsidiaries and respective counter-parties.

PG&E said in the 8-K filing that NEG’s lenders continue to “negotiate a global restructuring of these commitments” that the merchant power plant developer/operator, energy trader, and interstate pipeline builder/operator has defaulted on and has said it will have to default on further when payments become due in the first quarter next year. A global settlement, NEG said in the filing, will cause the merchant unit to “abandon, sell, or transfer certain assets, and reduce energy trading operations.”

If the lenders and NEG agree to this, the change of assets would cause “substantial charges to earnings in either the fourth quarter of 2002 or in 2003,” the company said. On the other hand, if the lenders exercise what PG&E called their “default remedies, or if the restructuring fails,” NEG and some of its sub-units “may be compelled to seek protection under or be forced into Chapter 11 of the U.S. Bankruptcy Code.”

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