National Grid 2006 Annual Report Download - page 62

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company and other related subsidiaries participate with National Grid Holdings, Inc.
(NGHI), a wholly owned subsidiary of National Grid plc, in filing consolidated US federal income
tax returns. The Company's tax provisions and tax accounts are calculated on a separate compa-
ny basis. Federal income tax returns have been examined and all appeals and issues have been
agreed upon by the Internal Revenue Service (IRS) and the NGHI consolidated filing group through
March 22, 2000, the date of the group's acquisition by National Grid plc. The IRS is currently
reviewing the March 31, 2001 and March 31, 2002 tax returns of the NGHI consolidated filing
group. The IRS has issued a preliminary notice of deficiency disallowing certain tax deductions
taken in these consolidated US federal income tax returns. These adjustments are being
appealed. The Company has joint and several liability for any potential assessments against the
consolidated group. Management believes that the positions taken by the Company and its relat-
ed subsidiaries and parent company are appropriate and the resolution of the tax matters will not
have a material effect on the Company's financial position, results of operations or cash flows.
In December 1998, Niagara Mohawk received a ruling from the IRS which provided that the
amount of cash and the value of common stock that was paid by Niagara Mohawk to the subject
terminated IPP Parties was deductible in 1998 which resulted in Niagara Mohawk not paying any
regular federal income taxes for 1998, and further generated a substantial net operating loss for
federal income tax purposes. Niagara Mohawk carried back a portion of the unused net operating
loss (NOL) to the years 1996 and 1997, and also for the years 1988 through 1990, which resulted
in federal income tax refunds of $135 million that were received in January 1999. As a result of the
merger with the Company, Niagara Mohawk is now part of the consolidated tax return filing group
of NGHI. The consolidated tax filing group was able to utilize the remaining NOL carryforward prior
to its expiration in 2019. The amount of the NOL carryforward as of March 31, 2006 and 2005
was $0 and $301 million, respectively. The Company’s ability to utilize the NOL carryforward
generated as a result of the Merger Rate Agreement and the utilization of alternative minimum
tax credits is affected by the rules of Section 382 of the Internal Revenue Code. There were no
valuation allowances for deferred tax assets deemed necessary at March 31, 2006 or 2005.
62
National Grid USA / Annual Report