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Income Taxes
 12 Months Ended
Dec. 31, 2013
Income Tax Disclosure [Abstract]  
Income Taxes
INCOME TAXES
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. Dominion and Virginia Power 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 adjustments to tax-related assets and liabilities could be material.
On January 2, 2013, U.S. federal legislation was enacted that provides an extension of the 50% bonus depreciation allowance for qualifying capital expenditures incurred through 2013.
In September 2013, the IRS issued final regulations that provide guidance to taxpayers on the treatment of amounts paid to acquire, produce or improve tangible property, including whether expenditures should be deducted as repairs or capitalized and depreciated on tax returns. The final regulations include a number of safe harbor tax accounting methods which a taxpayer may choose to elect and, if adopted, will not be challenged by the IRS. In addition, the IRS reissued certain temporary regulations that were also issued concurrently as proposed regulations regarding property dispositions. The final regulations are effective for tax years beginning on or after January 1, 2014.  Although changes in tax accounting methods would be effective prospectively, implementation of certain changes will require a calculation of the cumulative effect of the change on prior years. Under IRS procedural guidance issued in January 2014, if such cumulative effect increases taxable income, it is includible in taxable income over a four-year period, beginning with the year of the change. However, if such cumulative effect decreases taxable income, the entire amount is includible in taxable income in the year of the change.
Dominion and Virginia Power have evaluated tax accounting method changes that may be elected or required by the final regulations. At December 31, 2013, $17 million of deferred tax liabilities have been classified as current in the Companies’ Consolidated Balance Sheets, representing cumulative adjustment amounts expected to be reflected in income for tax purposes during the twelve months ending December 31, 2014. Tax accounting method changes in 2014 are not expected to materially affect the Companies’ cash flows, results of operations or financial condition.

Continuing Operations
Details of income tax expense for continuing operations including noncontrolling interests were as follows:
 
 
Dominion(1)
Virginia Power(2)
Year Ended December 31,
2013

2012

2011

2013

2012

2011

(millions)
 

 

 

 

 

 

Current:
 

 

 

 

 

 

Federal
$
317

$
43

$
31

$
357

$
70

$
(35
)
State
110

84

16

62

81

79

Total current expense
427

127

47

419

151

44

Deferred:
 

 

 

 

 

 

Federal
497

645

685

224

482

484

State
(31
)
40

48

17

21

13

Total deferred expense
466

685

733

241

503

497

Amortization of deferred investment tax credits
(1
)
(1
)
(2
)
(1
)
(1
)
(1
)
Total income tax expense
$
892

$
811

$
778

$
659

$
653

$
540


(1)
In 2012, Dominion’s current federal income tax expense for continuing and discontinued operations includes a $195 million benefit related to a carryback of its 2012 net operating loss. In 2011, Dominion’s deferred federal income tax expense includes the recognition of a $346 million benefit, including $51 million related to discontinued operations, for its 2011 net operating loss expected to be used to reduce taxable income in future years.
(2)
In 2011, Virginia Power’s deferred federal income tax expense includes a $54 million benefit related to a portion of its 2011 net operating loss that is expected to be used in future years. Also, Virginia Power’s current federal income tax expense reflects the amounts of its 2011 net operating losses realized through its participation in a tax sharing agreement with Dominion and its subsidiaries.

For continuing operations including noncontrolling interests, the statutory U.S. federal income tax rate reconciles to Dominion's and Virginia Power's effective income tax rate as follows:
 
 
Dominion
Virginia Power
Year Ended December 31,
2013

2012

2011

2013

2012

2011

U.S. statutory rate
35.0
 %
35.0
 %
35.0
 %
35.0
 %
35.0
 %
35.0
 %
Increases (reductions) resulting from:
 

 

 

 

 

 

State taxes, net of federal benefit
2.1

4.2

1.9

3.1

3.9

4.4

Valuation allowances
(0.1
)
(0.7
)
—

—

—

—

Investment and production tax credits
(2.4
)
(0.5
)
(0.6
)
(0.2
)
—

—

AFUDC - equity
(0.6
)
(0.9
)
(0.6
)
(0.8
)
(0.9
)
(0.8
)
Employee stock ownership plan deduction
(0.6
)
(0.7
)
(0.6
)
—

—

—

Other, net
(0.4
)
(0.6
)
(0.7
)
(0.4
)
0.3

1.1

Effective tax rate
33.0
 %
35.8
 %
34.4
 %
36.7
 %
38.3
 %
39.7
 %


Dominion's effective tax rate in 2012 reflects a $20 million reduction of a valuation allowance related to state operating loss carryforwards attributable to Fairless. After considering the results of Fairless’ operations in recent years and a forecast of future operating results reflecting Dominion’s planned purchase of the facility, Dominion concluded that it was more likely than not that the tax benefit of the operating losses would be realized. Dominion acquired Fairless in 2013 and will continue to evaluate the likelihood of realizing these tax benefits on a quarterly basis.
The Companies' deferred income taxes consist of the following:
 
 
Dominion
Virginia Power
At December 31,
2013

2012

2013

2012

(millions)
 
 
 
 
Deferred income taxes:
 
 
 
 
Total deferred income tax assets
$
2,142

$
2,505

$
462

$
466

Total deferred income tax liabilities
8,463

7,716

4,498

4,238

Total net deferred income tax liabilities
$
6,321

$
5,211

$
4,036

$
3,772

Total deferred income taxes:
 

 

 

 

Plant and equipment, primarily depreciation method and basis differences
$
5,383

$
4,601

$
3,628

$
3,394

Nuclear decommissioning
1,136

994

441

407

Deferred state income taxes
606

474

285

265

Federal benefit of deferred state income taxes
(212
)
(166
)
(100
)
(93
)
Deferred fuel, purchased energy and gas costs
(33
)
3

(50
)
(16
)
Pension benefits
435

231

(52
)
(17
)
Other postretirement benefits
(78
)
(171
)
(3
)
(7
)
Loss and credit carryforwards
(797
)
(656
)
(106
)
(77
)
Valuation allowances
69

93

—

—

Partnership basis differences
125

174

—

—

Other
(313
)
(366
)
(7
)
(84
)
Total net deferred income tax liabilities
$
6,321

$
5,211

$
4,036

$
3,772



At December 31, 2013, Dominion had the following deductible loss and credit carryforwards:
•
Federal loss carryforwards of $1.2 billion that expire if unutilized during the period 2021 through 2033;
•
Federal investment tax credits of $58 million that expire if unutilized through 2033;
•
Federal production and other tax credits of $45 million that expire if unutilized during the period 2031 through 2033;
•
State loss carryforwards of $1.5 billion that expire if unutilized during the period 2014 through 2033. A valuation allowance on $763 million of these carryforwards has been established;
•
State minimum tax credits of $133 million that do not expire; and
•
State investment tax credits of $7 million that expire if unutilized through 2017.

At December 31, 2013, Virginia Power had the following deductible loss and credit carryforwards:
•
Federal loss carryforwards of $282 million that expire if unutilized during the period 2031 through 2033;
•
Federal production and other tax credits of $5 million that expire if unutilized during the period 2031 through 2033; and
•
State loss carryforwards of $2 million that expire if unutilized during the period 2031 through 2033.

A reconciliation of changes in the Companies' unrecognized tax benefits follows:
 
 
Dominion
Virginia Power
 
2013

2012

2011

2013

2012

2011

(millions)
 
 
 
 
 
 
Balance at January 1
$
293

$
347

$
307

$
57

$
114

$
117

Increases-prior period positions
17

28

127

12

4

22

Decreases-prior period positions
(99
)
(106
)
(119
)
(42
)
(80
)
(51
)
Increases-current period positions
30

43

64

14

24

47

Decreases-current period positions
(5
)
—

(21
)
—

—

(21
)
Settlements with tax authorities
(2
)
(4
)
—

(2
)
(4
)
—

Expiration of statutes of limitations
(12
)
(15
)
(11
)
—

(1
)
—

Balance at December 31
$
222

$
293

$
347

$
39

$
57

$
114


Certain unrecognized tax benefits, or portions thereof, if recognized, would affect the effective tax rate. Changes in these unrecognized tax benefits may result from remeasurement of amounts expected to be realized, settlements with tax authorities and expiration of statutes of limitations. For Dominion and its subsidiaries, these unrecognized tax benefits were $126 million, $167 million and $184 million at December 31, 2013, 2012 and 2011, respectively. For Dominion, the change in these unrecognized tax benefits decreased income tax expense by $29 million in 2013 and increased income tax expense by $1 million and $51 million in 2012 and 2011, respectively. For Virginia Power, these unrecognized tax benefits were $8 million, $13 million and $20 million at December 31, 2013, 2012 and 2011, respectively. For Virginia Power, the change in these unrecognized tax benefits increased income tax expense by $4 million, $1 million and $6 million in 2013, 2012 and 2011, respectively.
In January 2012, the Appellate Division of the IRS informed Dominion that the Joint Committee had completed its review of the settlement of tax years 2004 and 2005 for Dominion and its consolidated subsidiaries. Since the measurement of unrecognized tax benefits in 2011 considered the results of completed settlement negotiations, Dominion’s results of operations in 2012 were not affected.
In April 2012, the IRS issued its Revenue Agent Report for Dominion’s consolidated tax returns for tax years 2006 and 2007, reflecting the resolution of all issues except one that was subsequently settled in 2012.
The IRS examination of tax years 2008, 2009 and 2010 began in the first quarter of 2012 and was later expanded to include the examination of the 2011 tax year. The audit concluded in late 2013, resulting in a payment of $46 million. However, the amount of a refund previously received by Dominion for its carryback of 2008 losses to 2007 was adjusted. The loss carryback, as adjusted, has been submitted to the Joint Committee for review. Dominion anticipates resolution of this matter early in 2014 with no further adjustments. Accordingly, except for 2007 and 2008, the earliest tax year remaining open for examination of Dominion’s federal tax returns is 2012.
Effective for its 2014 tax year, Dominion has been accepted into the CAP. The CAP is a method of identifying and resolving tax issues through open, cooperative, and transparent interaction between the IRS and taxpayers prior to the filing of a return. Through the CAP, Dominion will have the opportunity to resolve complex tax matters with the IRS before filing its federal income tax returns, thus achieving certainty for such tax return filing positions accepted by the IRS. Under a Pre-CAP plan, the IRS audit of tax years 2012 and 2013 will begin in early 2014.
With the audit protection afforded tax accounting method changes implemented under the September 2013 IRS regulations, settlement negotiations and expiration of statutes of limitations, it is reasonably possible that unrecognized tax benefits could decrease in 2014 by up to $115 million for Dominion and up to $25 million for Virginia Power. If such changes were to occur, other than revisions of the accrual for interest on tax underpayments and overpayments, earnings could increase by up to $65 million for Dominion and $7 million for Virginia Power.
Otherwise, with regard to 2013 and prior years, Dominion and Virginia Power cannot estimate the range of reasonably possible changes to unrecognized tax benefits that may occur in 2014.
For each of the major states in which Dominion operates, the earliest tax year remaining open for examination is as follows:
 
State
Earliest
Open Tax
Year
Pennsylvania
2010
Connecticut
2010
Massachusetts
2008
Virginia(1)
2010
West Virginia
2010
(1)
Virginia is the only state considered major for Virginia Power's operations.
 
 
 
Dominion and Virginia Power are also obligated to report adjustments resulting from IRS settlements to state tax authorities. In addition, if Dominion utilizes operating losses or tax credits generated in years for which the statute of limitations has expired, such amounts are subject to examination.
Discontinued Operations
Details of income tax expense for discontinued operations were as follows:
 
Dominion
Year Ended December 31,
2013
2012
2011
(millions)
 
 
 
Current:
 
 
 
   Federal
(274
)
(248
)
(41
)
   State
(41
)
(6
)
(17
)
      Total current benefit
(315
)
(254
)
(58
)
Deferred:
 
 
 
   Federal
232

(368
)
10

   State
40

(70
)
15

      Total deferred expense (benefit)
272

(438
)
25

      Total income tax benefit
(43
)
(692
)
(33
)


Dominion's effective tax rate for 2013 reflects the impact of goodwill written off in the sale of Kincaid and Brayton Point that is not deductible for tax purposes.
Dominion's effective tax rate for 2011 reflects an expectation that State Line's deferred tax assets, including 2011 operating losses, will not be realized in State Line's separately filed state tax returns.