Dominion Power 2000 Annual Report Download - page 52

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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, 2000 1999 1998
U.S. statutory rate 35.0% 35.0% 35.0%
Utility plant differences 0.8 0.3 3.0
Preferred dividends 2.1 1.6 1.4
Amortization of investment
tax credits (2.3) (1.8) (1.9)
Nonconventional fuel credit (7.1) (4.4) (2.8)
Other — benefits and taxes related
to foreign operations (2.7) (0.2) (0.1)
State taxes, net of federal benefit 4.3 1.5 1.5
Goodwill amortization 4.4
Employee pension and other benefits (1.4)
Other, net (2.6) (0.8) (0.9)
Effective tax rate 30.5% 31.2% 35.2%
The tax benefit associated with dispositions of employee stock
plans reduced taxes currently payable for 2000.
In 1998, the United Kingdom reduced its corporate income
tax rate, effective April 1, 1999, by one percent to 30 percent.
Accordingly, deferred tax liabilities and 1998 income tax expense
were reduced by $8.3 million.
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 tax liability is attributable to:
(millions) At December 31, 2000 1999
Assets:
Deferred investment tax credits $55 $52
Other 4
Total deferred income tax asset 59 52
Liabilities:
Depreciation method and plant
basis differences 1,994 1,493
Income taxes recoverable
through future rates 20 20
Partnership basis differences 141 159
Postretirement and pension benefits 481 (6)
Intangible drilling costs 269 44
Other (26) 52
Total deferred income tax liability 2,879 1,762
Net deferred income tax liability $2,820 $1,710
Note 9 Transfers and Servicing of Financial Assets
During 2000 Dominion sold commercial loans in a securitization
transaction. In that securitization, Dominion retained servicing
responsibilities and subordinated interests. Dominion receives
annual servicing fees approximating 38 basis points of the out-
standing balance and rights to future cash flows arising after the
investors in the securitization trust have received the return for
which they contracted. The investors and the securitization trusts
have no recourse to Dominion’s other assets for failure of debtors to
pay when due. Dominion’s retained interests are subordinate to
investors’ interests. Their value is subject to credit and general eco-
nomic risks on the transferred financial assets. All of the loans in
the securitization are variable rate loans, consequentially changes
in interest rates will not cause a material change in the perfor-
mance of the portfolio of loans.
Dominion also securitizes receivables of residential
mortgage loans.
When Dominion sells receivables in securitizations of residen-
tial mortgage loans, it retains interest-only strips, one or more
subordinated tranches, servicing rights and future rights to
prepayment penalties, all of which are retained interests in the
securitized receivables. Gain on sale of the receivables depends
in part on the previous carrying amount of the financial assets
involved in the transfer. Dominion generally estimates fair value
based on the present value of future expected cash flows using
management’s best estimates of the key assumptions — credit
losses, prepayment speeds, forward yield curves and discount rates
commensurate with the risks involved.
During 2000 and 1999, Dominion sold residential mortgage
loans through securitization transactions. In each of those
securitizations, Dominion retained servicing responsibilities and
subordinated interests. Dominion receives annual servicing
fees approximating 50 basis points of the outstanding balance
and rights to future cash flows arising after the investors in the
securitization trust have received the return for which they con-
tracted. In addition, Dominion receives future cash flows from
prepayment penalties on mortgage loans that prepay during the
contractual penalty period. The investors and the securitization
trusts have no recourse to Dominion’s other assets for failure
of debtors to pay when due. Dominion’s retained interests are sub-
ordinate to the investors’ interests. The retained interests’ value
is subject to credit, prepayment and interest rate risks on the
transferred financial assets.
In 2000 and 1999, Dominion recognized pretax gains of
$85 million and $107 million, respectively, on the securitization of
residential mortgage loans.