Dominion Power 2004 Annual Report Download - page 73

Deferred income taxes reflect the net tax effects of temporary differ-
ences 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, 2004 2003
(millions)
Deferred income tax assets:
Other comprehensive income $ 594 $ 397
Deferred investment tax credits 31 31
Loss and credit carryforwards 798 424
Valuation allowance (328) (338)
Total deferred income tax assets 1,095 514
Deferred income tax liabilities:
Depreciation method and plant basis differences 2,735 2,310
Income taxes recoverable through future rates 60 16
Partnership basis differences 567 485
Postretirement and pension benefits 537 571
Intangible drilling costs 965 833
Geological, geophysical and other exploration differences 249 220
Deferred state income taxes 494 432
Other 318 21
Total deferred income tax liabilities 5,925 4,888
Total net deferred income tax liabilities $4,830 $4,374
At December 31, 2004, Dominion had the following loss and credit
carryforwards:
•Federal loss carryforwards of $1.4 billion that expire if unutilized during
the period 2005 through 2024. A valuation allowance on $806 million in
carryforwards has been established due to the uncertainty of realizing
these future deductions;
•State net operating loss carryforwards of $2.4 billion that expire if
unutilized during the period 2005 through 2024. A valuation allowance
on $988 million has been established for these carryforwards; and
•Federal and state minimum tax credits of $131 million that do not expire
and other federal and state income tax credits of $66 million that will
expire if unutilized during the period 2006 through 2024.
Other
Dominion has not provided for U.S. deferred income taxes or foreign
withholding taxes on its remaining undistributed earnings of $135 million
from its non-U.S. subsidiaries since those earnings are intended to be
reinvested indefinitely.
As a matter of course, Dominion is regularly audited by federal and
state tax authorities. Dominion establishes liabilities for probable tax-
related contingencies and reviews them in light of changing facts and cir-
cumstances. Although the results of these audits are uncertain, Dominion
believes that the ultimate outcome will not have a material adverse effect
on Dominion’s financial position. Dominion had no significant tax-related
contingent liabilities at December 31, 2004.
American Jobs Creation Act of 2004
The Act was signed into law October 22, 2004, and has several provisions
for energy companies including a deduction related to taxable income
derived from qualified production activities. Under the Act, qualified pro-
duction activities include Dominion’s electric generation and oil and gas
extraction activities. The Act limits the deduction to the lesser of taxable
income derived from qualified production activities or the consolidated fed-
eral taxable income of Dominion and its subsidiaries. At this time,
Dominion does not believe the qualified production activities deduction
will have a material impact on Dominion’s results of operations or financial
position in 2005.
The Act also allows United States companies to repatriate foreign
earnings at a substantially reduced tax rate until December 2005. At the
current time, Dominion does not have plans to repatriate funds to the
United States but is continuing its evaluation and will finalize its plans dur-
ing 2005. Dominion estimates the range of foreign earnings that may be
repatriated to be $135 million to $225 million, which would result in income
tax expense in the range of $20 million to $35 million.
8. Hedge Accounting Activities
Dominion is exposed to the impact of market fluctuations in the price of
natural gas, electricity and other energy-related commodities marketed and
purchased as well as the currency exchange and interest rate 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:
2004 2003 2002
(millions)
Portion of gains (losses) on hedging instruments
determined to be ineffective and included in net income:
Fair value hedges $(2) $(3) $ 2
Cash flow hedges 10 7(31)
Net ineffectiveness $8 $ 4 $(29)
Portion of gains (losses) on hedging instruments excluded from
measurement of effectiveness and included in net income:
Fair value hedges (1) $3 $ 1 $ (1)
Cash flow hedges (2) 101 7 (1)
Total $104 $ 8 $ (2)
(1) Amounts relate to changes in the difference between spot prices and forward prices for 2004
and to changes in options’ time value for 2003 and 2002.
(2) Amounts relate to changes in options’ time value.
The following table presents selected information related to cash flow
hedges included in AOCI in the Consolidated Balance Sheet at December
31, 2004:
Por tion
Expected to
Accumulated be Reclassified
Other to Earnings
Comprehensive during the Next
Income (Loss) 12 Months Maximum
After Tax After Tax Term
(millions)
Commodities:
Gas $ (673) $(354) 38 months
Oil (308) (135) 36 months
Electricity (209) (133) 36 months
Interest Rate (31) (3) 258 months
Foreign Currency 40 11 35 months
Total $(1,181) $(614)
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