Dominion Power 2006 Annual Report Download - page 76

Deferred income taxes reflect thenettax effects of temporary
differencesbetween thecarrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Ournet deferred income taxesconsist of thefollowing:
As of December 31, 2006 2005
(millions)
Deferred income taxes:
Total deferred income tax assets $1,406 $2,703
Total deferred income tax liabilities 6,918 6,701
Total net deferred income tax liabilities $5,512 $3,998
Total deferred income taxes:
Depreciation method andplant basis differences $2,878 $2,798
Gas and oil exploration andproduction related
differences 2,186 1,956
Deferred state income taxes 514 268
Pension benefits 431 672
Unrealized gains -available forsale securities 151 89
Recognition of deferred taxes -stock of
subsidiaries held for sale 145 —
Partnership basis differences 54 181
Loss andcredit carryforwards (762)(893)
Derivative losses (174) (1,495)
Valuation allowances 144 339
Other (55)83
Total net deferred income tax liabilities $5,512 $3,998
At December 31, 2006, we had the following loss and credit
carryforwards:
Federal loss carryforwards of $845 million that expire if unutil-
ized during the period 2007 through 2021. A valuation allow-
ance on $213 million of carryforwards has been established
due to the uncertainty of realizing these future deductions;
 State loss carryforwards of $2.2 billion that expire if unutilized
during the period 2007 through 2026. A valuation allowance on
$769 million of these carryforwards has been established;and
Federal and state minimum taxcredits of $368 million that do
not expire and other federal and state income taxcredits of
$68 million that will expire if unutilized duringthe period
2011 through 2025.
Other
We have not provided forU.S. deferred income taxesorforeign
withholding taxes on remaining undistributed earnings of $178
million from our non-U.S. subsidiaries since we do notintend to
repatriate thoseearnings.
We are routinely audited by federal and state taxauthorities.
The interpretation of taxlaws involves uncertainty, since tax
authorities may interpret them differently. We establish liabilities
fortax-related contingencies in accordance with SFAS No. 5,
Accounting forContingencies,andreview them in light of chang-
ing facts and circumstances. Ultimate resolution of income tax
matters mayresult in favorableor unfavorable adjustments that
could be material.Our estimated income taxpayments for2005
were reduced by deductingacalendar year 2003 net operating
loss, a substantial portionof which resulted from awrite-off
related to our discontinued telecommunications business.This
deduction reduced our 2005 income tax payments by approx-
imately $116 million. If our taxdeductionis challenged and
ultimately not sustained, we will have to pay$116 million plus
accrued interest. In addition,wehave recorded an estimated
liability of $27 million forreduced payments to astate taxing
authority related to certain taxcredits, forwhich the tax benefit
has not yet been recognized. At December 31, 2006 and
December 31, 2005, our Consolidated Balance Sheets reflect
$187 million and $144 million, respectively, of income tax-
related contingent liabilities.
American Jobs Creation Act of 2004 (the Act)
The Act has several provisions forenergy companies, including a
deduction related to taxable income derived from qualified pro-
ductionactivities. Our electric generation and oil and gas
extraction activities qualify as productionactivities under the Act.
The Act limits the deductionto the lesser of taxableincome
derived from qualified productionactivities or our consolidated
federal taxableincome. Our qualified production activities
deductionfor 2006 is minimal.
NOTE 8. HEDGE ACCOUNTING ACTIVITIES
We are exposed to the impact of market fluctuations in the price
of natural gas,oil, electricity and other energy-related products
marketed and purchased,as well as currency exchange and inter-
est raterisks of our business operations. We use derivative
instruments to manage our exposureto these risks and designate
certain derivative 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, 2006 2005 2004
(millions)
Portion of gains (losses) on hedging instruments
determined to be ineffective andincluded in
net income:
Fair value hedges $(22) $18$(2)
Cash flow hedges(1) 44 (79) 10
Net ineffectiveness $22$(61) $ 8
Portion of gains (losses) on hedging instruments
excluded from measurement of effectiveness
andincluded in net income:
Fair value hedges(2) $8 $4 $ 3
Cash flow hedges(3) (1) (2) 101
Total $7 $2 $104
(1) Represents hedge ineffectiveness, primarily due to changes in the fair value
differential between the delivery location and commodity specifications of
derivatives held by our E&P operations and the delivery location and commod-
ity specifications of our forecasted gas and oil sales.
(2) Amounts relate to changes in the difference between spot prices and forward
prices.
(3) Amounts relate to changes in options’ time value.
Due to interruptions in oil production in the Gulf of Mexico
caused by Hurricane Ivan, we discontinuedhedgeaccounting for
certain cash flow hedges in September 2004, since it became
probablethat the forecasted sales of oil would not occur. In con-
nection with thediscontinuance of hedge accounting for these
contracts, we reclassified $71 million ($45 million after-tax) of
losses from AOCI to earnings in September 2004.
As aresult of adelayinreaching anticipated productionlevels
in the Gulf of Mexico, we discontinued hedge accounting for
certain cash flow hedges in March 2005, since it became probable
that the forecasted sales of oil would not occur. The dis-
continuance of hedge accounting for these contracts resulted in
the reclassification of $30 million ($19 million after-tax) of losses
from AOCI to earnings in March 2005.
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