Indicative of just how far the parent has gone in dispossessing a wayward child, the San Francisco-based energy utility holding company PG&E Corp. said in a financial filing last Wednesday that it will go to trial next year over a $361 million tax refund its bankrupt former merchant energy unit, PG&E National Energy Group (NEG), is claiming as its own.

Separately last Thursday, NEG announced that it is changing its name to “National Energy & Gas Transmission Inc.,” pending bankruptcy court authorization that is expected to come next month.

In the same filing to the Securities and Exchange Commission, PG&E said it reached an agreement Sept. 5 with NEG to remove a temporary restraining order on the use of the tax refund, which the parent company reaped in the wake of substantial financial losses over the past 12 months at the merchant energy unit. The two are contesting whether a so-called “tax-sharing agreement” was in place between the parent company and the subsidiary unit, with the parent adamantly maintaining no such formal agreement existed.

NEG, which is in default on several billion dollars of debt, filed for Chapter 11 bankruptcy protection July 8, and subsequently, received a restraining order from the federal bankruptcy court prohibiting PG&E Corp. from using the cash from the tax refund. Under the new agreement, the corporation has agreed to give NEG 10 days advance notice before allowing the cash balance on institutional money market accounts to drop below the $361 million level.

As the parent company has discussed in numerous financial conference calls in recent months, NEG alleges that an “implied tax-sharing agreement” existed between the merchant energy unit and the parent. PG&E denies this strenuously. The NEG bankruptcy court set July 2004 for a trial on the merchant unit’s tax complaint, according to the PG&E SEC filing.

“PG&E denies that any tax-sharing agreement, whether implied or express, ever existed and denies that it has any obligation to compensate NEG for the incorporation of its or its subsidiaries’ losses and deductions into PG&E Corp.’s consolidated federal tax returns, as required under the Internal Revenue Code,” the parent company told the SEC.

As the filer of a consolidated tax return, including the utility and merchant operating units, PG&E Corp. received a return of $533 million from the federal government for an overpayment of 2002 estimated federal income taxes resulting from losses and deductions incurred at PG&E Corp, the Pacific Gas and Electric Co. utility, and NEG. Of that total, PG&E said $361.5 million is attributed to NEG or its subsidiaries. NEG claims it is entitled to any tax savings achieved by the parent that resulted from NEG’s losses.

NEG’s argument is that the consolidated tax return “implies” a tax-sharing agreement. The parent contends it does not.

As part of the name change, NEG officials said it was designed to reflect what it called the “pending separation” from PG&E Corp. The new name is supposed to become effective immediately after the bankruptcy court approves the change, which the company said should come in early October. However, the company will not become legally separated from PG&E until the merchant energy operator’s Chapter 11 reorganization plan becomes effective.

Current NEG subsidiaries will also change their names, such as the PG&E Gas Transmission, Northwest Corp. It will become “Gas Transmission Northwest Corp.” However, USGen New England, Inc., will not change its name. USGenNE filed for Chapter 11 protection separately in July and its case is being handled apart from the rest of NEG.

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