Dominion Power 2005 Annual Report Download - page 70

Notes to Consolidated Financial Statements, Continued
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Our net deferred income taxes consist of the following:
At December 31, 2005 2004
(millions)
Deferred income tax assets:
Other comprehensive income $1,505 $ 594
Other 644 520
Loss and credit carryforwards 893 798
Valuation allowance (339) (328)
Total deferred income tax assets 2,703 1,584
Deferred income tax liabilities:
Depreciation method and plant basis differences 2,798 2,959
Partnership basis differences 181 167
Pension benefits 677 754
Gas and oil exploration and production related differences 1,956 1,607
Deferred state income taxes 465 471
Other 624 456
Total deferred income tax liabilities 6,701 6,414
Total net deferred income tax liabilities $3,998 $4,830
At December 31, 2005, we had the following loss and credit
carryforwards:
•Federal loss carryforwards of $1.3 billion that expire if unutilized
during the period 2007 through 2024. A valuation allowance on
$783 million in carryforwards has been established due to the
uncertainty of realizing these future deductions;
•State loss carryforwards of $1.9 billion that expire if unutilized
during the period 2006 through 2025. A valuation allowance on
$844 million has been established for these carryforwards; and
•Federal and state minimum tax credits of $316 million that do
not expire and other federal and state income tax credits of
$74 million that will expire if unutilized during the period 2006
through 2011.
Other
We have not provided for U.S. deferred income taxes or foreign
withholding taxes on remaining undistributed earnings of $146 mil-
lion from our non-U.S. subsidiaries since we do not intend to repa-
triate those earnings.
We are routinely audited by federal and state tax authorities.
The interpretation of tax laws involves uncertainty, since tax authori-
ties may interpret them differently. We establish liabilities for tax-
related contingencies in accordance with SFAS No. 5, Accounting
for Contingencies, and review them in light of changing facts and
circumstances. Ultimate resolution of income tax matters may
result in favorable or unfavorable adjustments that could be mate-
rial. Our estimated income tax payments for 2005 were reduced by
deducting a calendar year 2003 net operating loss, a substantial
portion of which resulted from a write-off related to our discontin-
ued telecommunications business, Dominion Fiber Ventures, LLC
(DFV). The DFV deduction reduced our 2005 income tax payments
by approximately $116 million. We have not yet recognized in net
income any tax benefits related to the deduction. If our tax deduc-
tion is challenged and ultimately not sustained, we will have to pay
$116 million plus accrued interest. At December 31, 2005 and
December 31, 2004, our Consolidated Balance Sheets reflect
$144 million and $52 million, respectively, of income tax-related
contingent liabilities.
American Jobs Creation Act of 2004 (the Jobs Act)
The Jobs Act has several provisions for energy companies, including
a deduction related to taxable income derived from qualified pro-
duction activities. Our electric generation and oil and gas extraction
activities qualify as production activities under the Jobs Act. The
Jobs Act limits the deduction to the lesser of taxable income
derived from qualified production activities or our consolidated
federal taxable income. Our qualified production activities deduc-
tion for 2005 is limited to a minimal amount.
Also, under the Jobs Act, United States companies could have
repatriated foreign earnings at a substantially reduced tax rate
until December 2005. We did not repatriate any funds under
this provision.
Note 8. Hedge Accounting Activities
We are exposed to the impact of market fluctuations in the price
of natural gas, electricity and other energy-related products mar-
keted and purchased as well as currency exchange and interest
rate risks of our business operations. We use derivative instruments
to manage our exposure to these risks and designate certain deriv-
ative instruments as fair value or cash flow hedges for accounting
purposes as allowed by SFAS No. 133. Selected information about
our hedge accounting activities follows:
Year Ended December 31, 2005 2004 2003
(millions)
Portion of gains (losses) on hedging instruments
determined to be ineffective and included in net income:
Fair value hedges $18 $ (2) $(3)
Cash flow hedges(1) (79) 10 7
Net ineffectiveness $(61) $8 $4
Portion of gains (losses) on hedging instruments excluded from
measurement of effectiveness and included in net income:
Fair value hedges(2) $4 $3 $1
Cash flow hedges(3) (2) 101 7
Total $2 $104 $ 8
(1) Represents an increase in hedge ineffectiveness expense primarily due to an increase in the
fair value differential between the delivery location and commodity specifications of
derivative contracts held by our exploration and production operations and the delivery
location and commodity specifications of our forecasted gas and oil sales.
(2) Amounts relate to changes in the difference between spot prices and forward prices for 2005
and 2004 and to changes in options’ time value for 2003.
(3) Amounts relate to changes in options’ time value.
68 Dominion 2005