Dominion Power 2003 Annual Report Download - page 70

68.Dominion 2003
Notes to Consolidated Financial Statements, Continued
The statutory U.S. federal income tax rate reconciles to the
effective income tax rates as follows:
Year Ended December 31, 2003(1) 2002(2) 2001
U.S. statutory rate 35.0% 35.0% 35.0%
Increases (reductions) resulting from:
Valuation allowance 4.0 ——
State taxes, net of federal benefit 2.2 2.5 5.9
Utility plant differences (0.4) (0.1) 0.5
Preferred dividends 0.4 0.3 0.9
Amortization of investment tax credits (0.9) (0.7) (1.7)
Nonconventional fuel credit — (1.8) (4.6)
Other benefits and taxes related to
foreign operations (0.5) 0.2 3.0
Goodwill amortization —— 3.3
Employee pension and other benefits (0.7) (0.6) (1.4)
Employee stock ownership plan deduction (0.7) (0.8) —
Other, net 0.2 (0.7) (0.5)
Effective tax rate 38.6% 33.3% 40.4%
(1) Dominion’s effective tax rate increased in 2003, reflecting the effects of the
expiration of nonconventional fuel tax credits, an increase in valuation
allowances related to federal loss carryforwards at CNG International and
DCI that are not expected to be utilized and an impairment of goodwill
associated with the telecommunications investment, partially offset by a
reduction in Canadian tax rates applied to deferred tax balances.
(2)Dominion’s effective income tax rate decreased in 2002, reflecting the effect of
including certain subsidiaries in Dominion’s consolidated state income tax
returns. In addition, the effective tax rate decreased for foreign earnings, the
impact of discontinuing goodwill amortization for book purposes and other
factors.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities
for financial reporting purposes and the amounts used for income
tax purposes. Dominion’s net deferred income taxes consist of
the following:
At December 31, 2003 2002
(millions)
Deferred income tax assets:
Other comprehensive income $ 397 $ 246
Deferred investment tax credits 31 37
Loss and credit carryforwards 424 204
Valuation allowance (338) (8)
Other — 18
Total deferred income tax assets 514 497
Deferred income tax liabilities:
Depreciation method and plant basis differences 2,085 1,833
Income taxes recoverable through future rates 16 15
Partnership basis differences 485 352
Investee earnings reported in different tax periods 208 149
Postretirement and pension benefits 604 517
Intangible drilling costs 833 777
Geological, geophysical and other
exploration differences 220 196
Deferred state income taxes 432 347
Other 5321
Total deferred income tax liabilities 4,888 4,507
Total net deferred income tax liabilities(1) $4,374 $4,010
(1) At 2003 and 2002, total net deferred income tax liabilities include $97 million
and $89 million, respectively, of current deferred tax assets included in other
current assets on the Consolidated Balance Sheets.
At December 31, 2003, Dominion had the following loss and
credit carryforwards:
• Federal loss carryforwards of $499 million that expire if unuti-
lized during 2004 through 2007. A valuation allowance on
$251 million has been established due to the uncertainty of
realizing the future deductions;
• State net operating loss carryforwards of $1.3 billion that
expire if unutilized during 2008 through 2022. A valuation
allowance on $446 million has been established for these
carryforwards; and
• Federal minimum tax credits of $113 million that do not expire
and other federal and state income tax credits of $54 million that
will expire if unutilized during 2006 through 2009.
8. Hedge Accounting Activities
Dominion is exposed to the impact of market fluctuations in the
price of natural gas, electricity and other energy-related products
marketed and purchased as well as currency exchange and
financial market risks of its business operations. Dominion uses
derivative instruments to mitigate its exposure to these risks and
designates derivative instruments as fair value or cash flow
hedges for accounting purposes. Selected information about
Dominion’s hedge accounting activities follows:
2003 2002 2001
(millions)
Portion of pre-tax gains (losses) on hedging
instruments determined to be ineffective
and included in net income:
Fair value hedges $(3) $ 2 $ (1)
Cash flow hedges 7(31) 3
Net ineffectiveness $4 $(29) $ 2
For options used as hedging instruments,
change in options’ time value excluded
from measurement of effectiveness and
included in net income:
Fair value hedges $1 $ (1) —
Cash flow hedges 7(1) (47)
Total change in options’ time value $8 $ (2) $(47)