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. The Companies 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.

In December 2014, U.S. federal legislation was enacted that provides an extension of the 50% bonus depreciation allowance for qualifying capital expenditures incurred through 2014.

Continuing Operations

Details of income tax expense for continuing operations including noncontrolling interests were as follows:



	Dominion									Virginia Power									Dominion Gas
Year Ended December 31,	2014			2013			2012			2014			2013			2012			2014		2013		2012
(millions)
Current:
Federal	$	(11	)	$	317		$	43		$	85		$	357		$	70		$	86	$	158	$	(8	)
State	14			110			84			67			62			81			32		41		2
Total current expense (benefit)	3			427			127			152			419			151			118		199		(6		)
Deferred:
Federal
Taxes before operating loss carryforwards and investment tax credits	956			563			645			381			224			482			192		92		257
Tax benefit of operating loss carryforwards	(352		)	(18		)	—			—			—			—			—		—		—
Investment tax credits	(152		)	(48		)	—			—			—			—			—		—		—
State	(2		)	(31		)	40			16			17			21			24		10		37
Total deferred expense	450			466			685			397			241			503			216		102		294
Amortization of deferred investment tax credits	(1		)	(1		)	(1		)	(1		)	(1		)	(1		)	—		—		—
Total income tax expense	$	452		$	892		$	811		$	548		$	659		$	653		$	334	$	301	$	288

For continuing operations including noncontrolling interests, the statutory U.S. federal income tax rate reconciles to the Companies' effective income tax rate as follows:



	Dominion						Virginia Power						Dominion Gas
Year Ended December 31,	2014		2013		2012		2014		2013		2012		2014		2013		2012
U.S. statutory rate	35.0	%	35.0	%	35.0	%	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		3.8		3.1		3.9		4.4		4.3		3.4
Investment tax credits	(8.6	)	(1.8	)	—		—		—		—		—		—		—
Production tax credits	(1.2	)	(0.6	)	(0.5	)	(0.6	)	(0.2	)	—		—		—		—
Valuation allowances	0.7		(0.1	)	(0.7	)	—		—		—		—		—		—
AFUDC - equity	—		(0.6	)	(0.9	)	—		(0.8	)	(0.9	)	—		(0.1	)	(0.6	)
Employee stock ownership plan deduction	(0.9	)	(0.6	)	(0.7	)	—		—		—		—		—		—
Other, net	0.4		(0.4	)	(0.6	)	0.8		(0.4	)	0.3		0.1		0.3		0.7
Effective tax rate	25.4	%	33.0	%	35.8	%	39.0	%	36.7	%	38.3	%	39.5	%	39.5	%	38.5	%

Dominion's effective tax rate in 2014 reflects the recognition of state tax credits and previously unrecognized tax benefits due to the expiration of statutes of limitations.

The Companies' deferred income taxes consist of the following:



	Dominion						Virginia Power						Dominion Gas
At December 31,	2014			2013			2014			2013			2014			2013
(millions)
Deferred income taxes:
Total deferred income tax assets	$	2,023		$	2,142		$	500		$	462		$	227		$	216
Total deferred income tax liabilities	8,663			8,463			4,915			4,498			2,289			2,103
Total net deferred income tax liabilities	$	6,640		$	6,321		$	4,415		$	4,036		$	2,062		$	1,887
Total deferred income taxes:
Plant and equipment, primarily depreciation method and basis differences	$	5,895		$	5,383		$	3,965		$	3,628		$	1,417		$	1,266
Nuclear decommissioning	1,241			1,136			474			441			—			—
Deferred state income taxes	659			606			299			285			207			182
Federal benefit of deferred state income taxes	(231		)	(212		)	(105		)	(100		)	(72		)	(64		)
Deferred fuel, purchased energy and gas costs	27			(33		)	18			(50		)	7			13
Pension benefits	272			435			(77		)	(52		)	567			522
Other postretirement benefits	(17		)	(78		)	13			(3		)	(12		)	(13		)
Loss and credit carryforwards	(1,434		)	(797		)	(116		)	(106		)	(10		)	(10		)
Valuation allowances	87			69			—			—			—			—
Partnership basis differences	304			125			—			—			42			42
Other	(163		)	(313		)	(56		)	(7		)	(84		)	(51		)
Total net deferred income tax liabilities	$	6,640		$	6,321		$	4,415		$	4,036		$	2,062		$	1,887

At December 31, 2014, Dominion had the following deductible loss and credit carryforwards:


•	Federal loss carryforwards of $2.2 billion that expire if unutilized during the period 2021 through 2034;


•	Federal investment tax credits of $245 million that expire if unutilized during the period 2033 through 2034;


•	Federal production and other tax credits of $65 million that expire if unutilized during the period 2031 through 2034;


•	State loss carryforwards of $1.7 billion that expire if unutilized during the period 2018 through 2034. A valuation allowance on $962 million of these carryforwards has been established;


•	State minimum tax credits of $194 million that do not expire; and


•	State investment tax credits of $29 million that expire if unutilized during the period 2016 through 2019.

At December 31, 2014, Virginia Power had the following deductible loss and credit carryforwards:


•	Federal loss carryforwards of $279 million that expire if unutilized during the period 2031 through 2033; and


•	Federal production and other tax credits of $14 million that expire if unutilized during the period 2031 through 2034.

At December 31, 2014, Dominion Gas had the following deductible loss carryforwards:


•	Federal loss carryforwards of $25 million that expire if unutilized during the period 2031 through 2033; and


•	State loss carryforwards of $4 million that expire if unutilized during the period 2031 through 2032.

Dominion Gas had no credit carryforwards at December 31, 2014.

A reconciliation of changes in the Companies' unrecognized tax benefits follows:



	Dominion									Virginia Power									Dominion Gas
	2014			2013			2012			2014			2013			2012			2014		2013			2012
(millions)
Balance at January 1	$	222		$	293		$	347		$	39		$	57		$	114		$	29	$	30		$	30
Increases-prior period positions	24			17			28			2			12			4			—		—			—
Decreases-prior period positions	(26		)	(99		)	(106		)	(16		)	(42		)	(80		)	—		(1		)	—
Increases-current period positions	16			30			43			11			14			24			—		—			—
Decreases-current period positions	—			(5		)	—			—			—			—			—		—			—
Settlements with tax authorities	—			(2		)	(4		)	—			(2		)	(4		)	—		—			—
Expiration of statutes of limitations	(91		)	(12		)	(15		)	—			—			(1		)	—		—			—
Balance at December 31	$	145		$	222		$	293		$	36		$	39		$	57		$	29	$	29		$	30

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 $77 million, $126 million and $167 million at December 31, 2014, 2013 and 2012, respectively. For Dominion, the change in these unrecognized tax benefits decreased income tax expense by $47 million and $29 million in 2014 and 2013, respectively, and increased income tax expense by $1 million in 2012. For Virginia Power, these unrecognized tax benefits were $8 million at December 31, 2014 and 2013, and $13 million at December 31, 2012. For Virginia Power, the change in these unrecognized tax benefits decreased income tax expense by less than $1 million in 2014 and increased income tax expense by $4 million and $1 million in 2013 and 2012, respectively. For Dominion Gas, these unrecognized tax benefits were $19 million at December 31, 2014 and 2013 and $20 million at December 31, 2012. For Dominion Gas, the change in these unrecognized tax benefits affected income tax expense by less than $1 million in 2014, 2013 and 2012.

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, 2010 and 2011 concluded in late 2013, resulting in a payment of $46 million, and an adjustment to a refund previously received by Dominion for its carryback of 2008 losses to 2007. The loss carryback, as adjusted, was submitted to the Joint Committee for review. Early in 2014, Dominion received notification that the matter had been resolved with no further adjustments. Accordingly, 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 began in early 2014.

It is reasonably possible that settlement negotiations and expiration of statutes of limitations could result in a decrease in unrecognized tax benefits in 2015 by up to $30 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 $10 million for Dominion and $7 million for Virginia Power.

Otherwise, with regard to 2014 and prior years, Dominion and Virginia Power cannot estimate the range of reasonably possible changes to unrecognized tax benefits that may occur in 2015.

After considering the possibility of potential changes in the status of its remaining unrecognized tax benefits, Dominion Gas has concluded that no significant changes are reasonably possible to occur in 2015.

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⁽¹⁾	2010
Connecticut	2011
Virginia⁽²⁾	2011
West Virginia⁽¹⁾	2011
New York⁽¹⁾	2007


(1)	Considered a major state for Dominion Gas' operations.


(2)	Considered a major state for Virginia Power's operations.

The Companies 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 Dominion's discontinued operations were as follows:



Year Ended December 31,	2013		2012
(millions)
Current:
Federal	(274	)	(248	)
State	(41	)	(6	)
Total current benefit	(315	)	(254	)
Deferred:
Federal	232		(368	)
State	40		(70	)
Total deferred expense (benefit)	272		(438	)
Total income tax benefit	(43	)	(692	)

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.