With its merchant energy unit, National Energy Group, headed toward Chapter 11 proceedings, where its utility operations currently are stalled, PG&E Corp. Tuesday reported a first quarter net loss of $354 million, or 93 cents/share, compared to net income of $631 million, or $1.71/share, for the first quarter last year.

Under a new procedure of also consolidating the holding company and utility operations, PG&E and Pacific Gas and Electric Co. had profits of $172 million, or 45 cents/share, in the first quarter, compared with $183 million, or 50 cents/share, for the same period in 2002.

PG&E’s CEO Robert Glynn said Chapter 11 bankruptcy proceedings are now inevitable for the merchant energy unit, the National Energy Group (NEG), because it is in default on loans totaling about $2.9 billion, it has no assets that can be used to get additional financing, and ongoing sale of assets “aren’t expected to restore [the] company’s or subsidiaries’ financial standing.” Further, he said the court is “well-suited” to handle a case of this complexity in which more than 40 banks and public bondholders make up the creditors. No date has been set, but Glynn said the bankruptcy filing could “come as early as the current quarter.”

Glynn said neither the current bankruptcy-immersed utility, nor the holding company, are threatened with any “material adverse impact” from NEG’s prospective bankruptcy. At the same time, PG&E officials said they are assuming the utility will not come out of its now more than two-year-old Chapter 11 bankruptcy until the end of this year, which would be almost 12 months later than originally anticipated.

NEG reported a net loss of $261 million, or 69 cents/share, for the first quarter, compared with net income of $37 million, or 10 cents/share for the first quarter last year.

“Since last November, NEG has been operating while in default of its major lending facilities, and we have been working with lenders to reach an agreement on restructuring,” Glynn said on a conference call with financial analysts. “The very fact that the restructuring discussions have continued for this length of time is a reflection of both the parties’ desire to reach an agreement as well as the difficulties in doing so. It is a complex project.

“While they are continuing, no agreement has been reached, and we can’t assure that one will be. We currently believe that any restructuring of the PG&E National Energy Group will be implemented through a Chapter 11 (bankruptcy) proceeding, whether or not it is implemented in cooperation with the NEG lenders, and whether or not PG&E Corp. would retain ownership of NEG after such a proceeding.”

In addition to an added drain for about $200 million in charges related to NEG, the PG&E utility headroom (difference between wholesale energy costs and retail rates) was lower than the previous first quarter because of warmer-than-normal weather and the extended outage at the Diablo Canyon Nuclear Generating Plant.

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