As it approaches a clean legal and financial divorce from its second and most recent Chapter 11 bankrupt business unit, PG&E Corp., San Francisco, indicated Tuesday it could become embroiled in a federal court dispute over alleged “shared tax benefits” due the now-bankruptcy-mired PG&E National Energy Group (NEG). Several hundred million dollars could be at stake, according to PG&E holding company officials.

In a conference call with the investment community Tuesday, PG&E Corp. CEO Robert Glynn referred to a “strategic separation” of the parent company from NEG.as one of three recent developments that are key to company restoring its finances next year. “As a result there is now a clearer path for further stability in our outlook,” Glynn said.

Potentially at issue is what the net tax-cash benefits have been to the holding company historically from NEG’s troubled finances in the past two years. When asked, PG&E officials could not come up with that estimated dollar amount, although the so-called “benefits” were thought to have netted out to around zero prior to the latest tax refund that PG&E received due to NEG, according to the company’s CFO responding to a financial analyst’s question.

The NEG and outside auditors have completed a review of the unit’s second quarter figures, resulting in “offsetting changes to NEG revenues and expenses mostly related to hedging activities,” and the merchant unit “continues to review the presentation of its trading revenues and expenses for prior periods which primarily relates to changes made in past reporting periods to the netting of trading activities and re-classification of discontinued operations,” said PG&E CFO Peter Darbee. He added that he didn’t expect the ongoing review to have any “material impact” on the previously reported consolidated operating results.

The possibility of Internal Revenue Services disallowances or credits for previous tax payments would be the only likely way that the holding company would become immersed in the NEG’s Chapter 11 proceedings and reorganization plan, Darbee said. “We do not believe that any NEG Chapter 11 filings will have any adverse material impact on the corporation.”

In response to a question on the conference call, Darbee said PG&E Corp. has current cash of about $800 million, including a $533 million tax refund, of which $361 million relates to the NEG. Cash at the utility, Pacific Gas and Electric Co., is about $3.7 billion, of which about $33 million came from its portion of the big tax refund. That large refund is likely to become the source of NEG’s claim in Chapter 11 that it had a “tax-sharing agreement” with the parent company, something that PG&E adamantly argues never existed.

“The forum to deal with (NEG tax) claims will be in the bankruptcy case,” said Bruce Worthington, PG&E’s general counsel. “We believe there is no basis for them to make a claim. They have raised a question about whether we had a tax-sharing agreement, and as we have previously state, we do not have any such agreement, so we think we will prevail if this issue is litigated.” The likelihood is that NEG attorneys will attempt to convince the court that there was an “implied” tax-sharing agreement based on past performance, but PG&E’s attorneys contend their legal arguement will fail.

Darbee noted that if NEG raises a claim to some or all of alleged “shared-tax benefits,” the amount would most likely be close to the recent $361 million refund.

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