Income Taxes

Continuing Operations

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
Six Months Ended June 30,	2012		2011		2012		2011
U.S. statutory rate	35.0	%	35.0	%	35.0	%	35.0	%
Increases (reductions) resulting from:
State taxes, net of federal benefit	3.7		3.7		3.9		3.9
Valuation allowances	(1.8	)	0.1		—		—
AFUDC - equity	(0.7	)	(0.5	)	(1.1	)	(0.6	)
Other, net	(1.7	)	(0.1	)	0.1		0.3
Effective tax rate	34.5	%	38.2	%	37.9	%	38.6	%

Dominion's effective tax rate in 2012 reflects a $22 million reduction of a valuation allowance related to certain state operating loss carryforwards. As disclosed in Note 16 to the Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 2011, Dominion expects to purchase Fairless in 2013. Dominion currently operates the facility under a lease and, as a result of a 2012 contract modification, the exercise price of Dominion's option to purchase Fairless is fixed at approximately $923 million. After considering the results of Fairless' operations in recent years and a forecast of future operating results reflecting the planned purchase of the facility, Dominion has concluded that it is more likely than not that the tax benefit of the operating losses will be realized. Significant assumptions include future commodity prices, in particular, those for electric energy produced by Fairless and those for natural gas, as compared to other fuels used for the generation of electricity, which will significantly influence the extent to which Fairless is dispatched by PJM. Realization of these tax benefits ultimately depends on whether or not the expected future operating results are achieved. Dominion will continue to evaluate the likelihood of realizing these tax benefits on a quarterly basis.

As of June 30, 2012, there have been no material changes in Dominion's and Virginia Power's unrecognized tax benefits or possible changes that could reasonably be expected to occur during the next twelve months. See Note 6 to the Consolidated Financial Statements in Dominion's and Virginia Power's Annual Report on Form 10-K for the year ended December 31, 2011 for a discussion of these unrecognized tax benefits.

Discontinued Operations

Dominion's effective tax rate for the six months ended June 30, 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.