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
Nine Months Ended September 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	5.0		3.6		3.9		3.9
AFUDC - equity	(1.1	)	(0.5	)	(0.8	)	(0.6	)
Employee stock ownership plan deduction	(0.8	)	(0.6	)	—		—
Production tax credits	(0.7	)	(0.5	)	—		—
Valuation allowances	(0.6	)	0.1		—		—
Other, net	(1.3	)	(0.2	)	0.1		0.1
Effective tax rate	35.5	%	36.9	%	38.2	%	38.4	%

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 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. In addition, as disclosed in Note 15, in the third quarter of 2012, Dominion announced its intention to sell Brayton Point. Based on an evaluation of state tax credits previously recognized for Brayton Point, Dominion recorded an $11 million increase in valuation allowance related to credit carryforwards and a $14 million deferred tax liability, representing potential recapture of credits claimed in prior years. Dominion will continue to evaluate the likelihood of realizing these tax benefits on a quarterly basis.

As of September 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 nine months ended September 30, 2012 reflects the dispositions of State Line and Salem Harbor.

Dominion's effective tax rate for the nine months ended September 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.