Dominion Power 2007 Annual Report Download - page 84

Notes to Consolidated Financial Statements, Continued
In 2007, our effective tax rate reflected the effects of the sale
of our U.S. non-Appalachian E&P operations, including the
impact of goodwill, not deductible for tax purposes, that reduced
the book gain on sale. In addition, we recognized a tax benefit
from eliminating $126 million of valuation allowances on
deferred tax assets that relate to federal and state loss carryfor-
wards, which will now be utilized to partially offset taxes other-
wise payable on the gain from the sale.
In 2006, our effective tax rate reflected the tax benefit from a
net $163 million decrease in valuation allowances on deferred tax
assets resulting from the elimination of valuation allowances
related to federal and state tax loss carryforwards then expected to
be utilized to offset capital gain income anticipated from the sale
of Peoples and Hope, partially offset by valuation allowance
increases primarily associated with deferred tax assets recognized
as a result of impairments of certain DCI investments discussed in
Note 28. This net benefit was partially offset by the establishment
of $145 million of deferred tax liabilities associated with the
excess of our financial reporting basis over our tax basis in the
stock of Peoples and Hope, in accordance with EITF Issue No.
93-17, Recognition of Deferred Tax Assets for a Parent Company’s
Excess Tax Basis in the Stock of a Subsidiary that is Accounted for as
a Discontinued Operation (EITF 93-17). Although these sub-
sidiaries are not classified as discontinued operations, EITF 93-17
requires that the deferred tax impact of the excess of the financial
reporting basis over the tax basis of a parent’s investment in a
subsidiary be recognized when it is apparent that this difference
will reverse in the foreseeable future. We recorded these deferred
tax liabilities, since the financial reporting basis of our investment
in Peoples and Hope exceeded our tax basis. This difference and
the related deferred taxes were expected to reverse and partially
offset current tax expense recognized upon closing of the sale.
In January 2008, Dominion and Equitable agreed to termi-
nate the agreement for the sale of Peoples and Hope. We antici-
pate that the ultimate disposal of these subsidiaries will be
structured as a sale of the subsidiaries’ stock; however, we now
expect that the taxable gain will be determined based on the sale
of the subsidiaries’ underlying assets. Accordingly, in January
2008, we reversed $136 million of deferred tax liabilities, repre-
senting the adjusted balance of the amounts established under
EITF 93-17.
Deferred income taxes reflect the net tax effects of temporary dif-
ferences between the carrying amount 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:
As of December 31, 2007 2006
(millions)
Deferred income taxes:
Total deferred income tax assets $1,871 $1,406
Total deferred income tax liabilities 6,173 6,918
Total net deferred income tax liabilities $4,302 $5,512
Total deferred income taxes:
Depreciation method and plant basis differences $2,724 $2,878
Gas and oil E&P related differences 520 2,186
Deferred state income taxes 506 514
Pension benefits 582 431
Recognition of deferred taxes—stock of
subsidiaries held for sale 136 145
Loss and credit carryforwards (157) (762)
Valuation allowances 23 144
Other (32) (24)
Total net deferred income tax liabilities $4,302 $5,512
At December 31, 2007, we had the following loss and credit carry-
forwards:
‰Federal loss carryforwards of $49 million that expire if unutil-
ized during the period 2009 through 2021. A valuation
allowance on $1 million of carryforwards has been established
due to the uncertainty of realizing these future deductions;
‰State loss carryforwards of $1,245 million that expire if unutil-
ized during the period 2008 through 2027. A valuation
allowance on $696 million of these carryforwards has been
established; and
‰State minimum tax credits of $81 million that do not expire
and other state income tax credits of $21 million that will
expire if unutilized during the period 2011 through 2017.
Judgment and the use of estimates are required in developing
the provision for income taxes and reporting of tax-related assets
and liabilities. The interpretation of tax laws involves uncertainty,
since tax authorities may interpret the laws differently. We are
routinely audited by federal and state tax authorities. Ultimate
resolution of income tax matters may result in favorable or
unfavorable impacts to net income and cash flows and adjust-
ments to tax-related assets and liabilities could be material.
Prior to 2007, we established liabilities for income tax-related
contingencies when we believed that it was probable that a
liability had been incurred and the amount could be reasonably
estimated and subsequently reviewed them in light of changing
facts and circumstances. At December 31, 2006, our Con-
solidated Balance Sheet included $187 million of income tax-
related contingent liabilities, including $135 million related to
our deduction of a calendar year 2003 net operating loss, a sub-
stantial portion of which resulted from a write-off related to our
discontinued telecommunications business and $27 million
related to our use of certain tax credits to reduce tax payments.
With the adoption of FIN 48, effective January 1, 2007, we
recognize in the financial statements only those positions taken,
or expected to be taken, in income tax returns that are more-
likely-than-not to be realized, assuming that the position will be
examined by tax authorities with full knowledge of all relevant
information. As a result, we reversed the tax-related contingent
liabilities, described above, and included such reversals with the
82 Dominion 2007 Annual Report