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 2015, U.S. federal legislation was enacted, providing an extension of the 50% bonus depreciation allowance for qualifying expenditures incurred in 2015, 2016 and 2017, and a phasing down of the allowance to 40% in 2018 and 30% in 2019 and expiration thereafter. In addition, the legislation extends the 30% investment tax credit for qualifying expenditures incurred through 2019 and provides a phase down of the credit to 26% in 2020, 22% in 2021 and 10% in 2022 and thereafter. U.S. federal legislation had also been enacted in December 2014 to delay the expiration of the bonus depreciation allowance, but only for one year, so that it was available for qualifying expenditures incurred during 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,	2015			2014			2013			2015			2014			2013			2015		2014		2013
(millions)
Current:
Federal	$	(24	)	$	(11	)	$	317		$	316		$	85		$	357		$	90	$	86	$	158
State	75			14			110			92			67			62			30		32		41
Total current expense	51			3			427			408			152			419			120		118		199
Deferred:
Federal
Taxes before operating loss carryforwards and investment tax credits	384			956			563			154			381			224			156		192		92
Tax utilization (benefit) of operating loss carryforwards	539			(352		)	(18		)	96			—			—			6		—		—
Investment tax credits	(134		)	(152		)	(48		)	(11		)	—			—			—		—		—
State	66			(2		)	(31		)	13			16			17			1		24		10
Total deferred expense	855			450			466			252			397			241			163		216		102
Amortization of deferred investment tax credits	(1		)	(1		)	(1		)	(1		)	(1		)	(1		)	—		—		—
Total income tax expense	$	905		$	452		$	892		$	659		$	548		$	659		$	283	$	334	$	301

In 2015, Dominion’s current federal income tax benefit includes the recognition of a $20 million benefit related to a carryback to be filed for nuclear decommissioning expenditures included in its 2014 net operating loss.

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,	2015		2014		2013		2015		2014		2013		2015		2014		2013
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	3.7		—		2.1		3.9		3.8		3.1		2.7		4.4		4.3
Investment tax credits	(4.7	)	(8.6	)	(1.8	)	(0.6	)	—		—		—		—		—
Production tax credits	(0.8	)	(1.2	)	(0.6	)	(0.6	)	(0.6	)	(0.2	)	—		—		—
Valuation allowances	(0.3	)	0.7		(0.1	)	—		—		—		—		—		—
AFUDC - equity	(0.3	)	—		(0.6	)	(0.6	)	—		(0.8	)	0.2		—		(0.1	)
Employee stock ownership plan deduction	(0.6	)	(0.9	)	(0.6	)	—		—		—		—		—		—
Other, net	—		0.4		(0.4	)	0.6		0.8		(0.4	)	0.3		0.1		0.3
Effective tax rate	32.0	%	25.4	%	33.0	%	37.7	%	39.0	%	36.7	%	38.2	%	39.5	%	39.5	%

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. Dominion Gas’ effective tax rate in 2015 reflects a benefit resulting from the impact of changes in the allocation of income among states on existing deferred taxes.

The Companies' deferred income taxes consist of the following:



	Dominion						Virginia Power						Dominion Gas
At December 31,	2015			2014			2015			2014			2015			2014
(millions)
Deferred income taxes:
Total deferred income tax assets	$	1,152		$	2,023		$	164		$	500		$	129		$	227
Total deferred income tax liabilities	8,552			8,663			4,805			4,915			2,343			2,289
Total net deferred income tax liabilities	$	7,400		$	6,640		$	4,641		$	4,415		$	2,214		$	2,062
Total deferred income taxes:
Plant and equipment, primarily depreciation method and basis differences	$	6,299		$	5,895		$	4,133		$	3,965		$	1,541		$	1,417
Nuclear decommissioning	1,158			1,241			378			474			—			—
Deferred state income taxes	646			659			302			299			205			207
Federal benefit of deferred state income taxes	(226		)	(231		)	(106		)	(105		)	(72		)	(72		)
Deferred fuel, purchased energy and gas costs	(1		)	27			(3		)	18			1			7
Pension benefits	291			272			(99		)	(77		)	613			567
Other postretirement benefits	(15		)	(17		)	30			13			(7		)	(12		)
Loss and credit carryforwards	(1,004		)	(1,434		)	(53		)	(116		)	(4		)	(10		)
Valuation allowances	73			87			—			—			—			—
Partnership basis differences	367			304			—			—			41			42
Other	(188		)	(163		)	59			(56		)	(104		)	(84		)
Total net deferred income tax liabilities	$	7,400		$	6,640		$	4,641		$	4,415		$	2,214		$	2,062

At December 31, 2015, Dominion had the following deductible loss and credit carryforwards:


•	Federal loss carryforwards of $594 million that expire if unutilized during the period 2021 through 2034;


•	Federal investment tax credits of $407 million that expire if unutilized during the period 2033 through 2035;


•	Federal production and other tax credits of $89 million that expire if unutilized during the period 2031 through 2035;


•	State loss carryforwards of $1.6 billion that expire if unutilized during the period 2018 through 2034. A valuation allowance on $1.1 billion of these carryforwards has been established;


•	State minimum tax credits of $145 million that do not expire; and


•	State investment tax credits of $40 million that expire if unutilized during the period 2019 through 2024.

At December 31, 2015, Virginia Power had the following deductible loss and credit carryforwards:


•	Federal loss carryforwards of $7 million that expire if unutilized during the period 2031 through 2034;


•	Federal investment, production and other tax credits of $38 million that expire if unutilized during the period 2031 through 2035; and


•	State investment tax credits of $9 million that expire if unutilized by 2024.

At December 31, 2015, Dominion Gas had federal loss carryforwards of $10 million that expire if unutilized during the period 2031 through 2034 and no credit carryforwards.

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



	Dominion									Virginia Power									Dominion Gas
	2015			2014			2013			2015			2014			2013			2015		2014		2013
(millions)
Balance at January 1	$	145		$	222		$	293		$	36		$	39		$	57		$	29	$	29	$	30
Increases-prior period positions	2			24			17			—			2			12			—		—		—
Decreases-prior period positions	(40		)	(26		)	(99		)	(25		)	(16		)	(42		)	—		—		(1		)
Increases-current period positions	8			16			30			1			11			14			—		—		—
Decreases-current period positions	—			—			(5		)	—			—			—			—		—		—
Settlements with tax authorities	(5		)	—			(2		)	—			—			(2		)	—		—		—
Expiration of statutes of limitations	(7		)	(91		)	(12		)	—			—			—			—		—		—
Balance at December 31	$	103		$	145		$	222		$	12		$	36		$	39		$	29	$	29	$	29

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 $69 million, $77 million and $126 million at December 31, 2015, 2014 and 2013, respectively. For Dominion, the change in these unrecognized tax benefits decreased income tax expense by $6 million, $47 million and $29 million in 2015, 2014 and 2013, respectively. For Virginia Power, these unrecognized tax benefits were $8 million at December 31, 2015, 2014 and 2013. For Virginia Power, the change in these unrecognized tax benefits affected income tax expense by less than $1 million in both 2015 and 2014 and increased income tax expense by $4 million in 2013. For Dominion Gas, these unrecognized tax benefits were $19 million at December 31, 2015, 2014 and 2013. For Dominion Gas, the change in these unrecognized tax benefits affected income tax expense by less than $1 million in 2015, 2014 and 2013.

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 U.S. Congressional Joint Committee on Taxation for review. Early in 2014, Dominion received notification that the matter had been resolved with no further adjustments.

Effective for its 2014 tax year, Dominion was accepted into the CAP. Through the CAP, Dominion has 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 agreed to by the IRS. Under a Pre-CAP plan, the IRS audit of tax years 2012 and 2013 began in early 2014 and concluded in late 2015. The IRS audit of CAP tax year 2014 also began in 2014. The IRS issued a partial acceptance letter in late 2015 and completed its post-filing review of the 2014 tax year in early 2016. The IRS audit of CAP tax year 2015 began in 2015. Accordingly, Dominion’s earliest tax year remaining open for federal examination is 2015.

It is reasonably possible that settlement negotiations and expiration of statutes of limitations could result in a decrease in unrecognized tax benefits in 2016 by up to $30 million for Dominion and $22 million for Dominion Gas. 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 $15 million for Dominion and $10 million for Dominion Gas.

Otherwise, with regard to 2015 and prior years, Dominion and Dominion Gas cannot estimate the range of reasonably possible changes to unrecognized tax benefits that may occur in 2016.

After considering the possibility of potential changes in the status of its remaining unrecognized tax benefits, Virginia Power has concluded that no significant changes are reasonably possible to occur in 2016.

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	2012
Virginia⁽²⁾	2012
West Virginia⁽¹⁾	2012
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 generally subject to examination.

Discontinued Operations

Details of income tax expense for Dominion's discontinued operations were as follows:



Year Ended December 31,	2013
(millions)
Current:
Federal	(274	)
State	(41	)
Total current benefit	(315	)
Deferred:
Federal	232
State	40
Total deferred expense	272
Total income tax benefit	(43	)

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.