Note 5. Income Taxes

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 Energy						Virginia Power						Dominion Energy Gas
Nine Months Ended September 30,	2018			2017			2018			2017			2018			2017
U.S. statutory rate		21.0	%		35.0	%		21.0	%		35.0	%		21.0	%		35.0	%
Increases (reductions) resulting from:
State taxes, net of federal benefit		3.3			2.9			4.6			3.7			3.9			2.7
Investment tax credits		(0.9	)		(5.7	)		(1.4	)		(0.8	)		—			—
Production tax credits		(0.7	)		(0.7	)		(0.7	)		(0.5	)		—			—
Reversal of excess deferred income taxes		(1.5	)		—			(1.9	)		—			(1.3	)		—
Federal legislative change		2.0			—			(0.2	)		—			2.0			—
State legislative change		(0.8	)		—			—			—			0.1			—
AFUDC - equity		(0.9	)		(1.3	)		(0.5	)		(0.6	)		(0.4	)		(0.8	)
Other, net		(1.0	)		(2.6	)		(0.3	)		0.2			0.7			(0.1	)
Effective tax rate		20.5	%		27.6	%		20.6	%		37.0	%		26.0	%		36.8	%

The 2017 Tax Reform Act reduced the statutory federal income tax rate to 21% beginning in January 2018. Accordingly, current income taxes, and deferred income taxes that originate in 2018, are being recorded at the new 21% rate. For the Companies’ rate-regulated entities, deferred taxes will reverse at the weighted average rate used to originate the deferred tax liability, which in some cases will be 35%. For the three and nine months ended September 30, 2018, the Companies have recorded an estimate of the portion of excess deferred income tax amortization expected to occur in 2018. The reversal of these excess deferred income taxes will impact the effective tax rate, and may ultimately impact rates charged to customers. As described in Note 13 to the Consolidated Financial Statements, the Companies decreased revenue and increased regulatory liabilities to offset these deferred tax impacts in accordance with applicable regulatory commission orders or formula rate mechanisms. In addition, Dominion Energy and Dominion Energy Gas’ effective tax rates reflect the impacts of a state legislative change enacted in the second quarter of 2018 that was retroactive to January 1, 2018.

Beginning in 2018, the 2017 Tax Reform Act limits the deductibility of interest expense to 30% of adjusted taxable income for certain businesses, with any disallowed interest carried forward indefinitely. Subject to additional guidance in yet to be issued regulations, the Companies expect interest expense to be deductible in 2018.

The Companies continue to evaluate the changes in accelerated depreciation for income tax purposes and state conformity to the provisions of the 2017 Tax Reform Act. As of September 30, 2018, the Companies have applied the provisions of recently proposed regulations addressing the availability of federal bonus depreciation for the period beginning after September 27, 2017 through December 31, 2017. The application of these changes decreased Dominion Energy’s net operating loss carryforward utilization on the 2017 tax return. As a result, Dominion Energy’s effective tax rate reflects a $23 million increase to deferred income tax expense associated with the remeasurement of this deferred tax asset as more federal net operating loss carryforwards will be utilized at the 21% rate. The application of these proposed regulations at Dominion Energy Gas had no impact on income tax expense as the changes in, and remeasurement of, deferred tax liabilities increased regulatory liabilities by $35 million. The effects of these changes at Virginia Power were immaterial. These amounts and adjustments represent the Companies’ best estimate based on available information, and could be subject to change based on additional guidance in yet to be finalized regulations. In addition, changes in estimates of amounts probable of return to customers increased income tax expense at Dominion Energy and Dominion Energy Gas by $8 million, and regulatory liabilities by $11 million. See Note 5 to the Consolidated Financial Statements in the Companies’ Annual Report on Form 10-K for the year ended December 31, 2017, as updated in Current Report on Form 8-K, filed June 6, 2018, for a discussion of the impacts of the 2017 Tax Reform Act.

As of September 30, 2018, there have been no material changes in the Companies’ unrecognized tax benefits or possible changes that could reasonably be expected to occur during the next twelve months. See Note 5 to the Consolidated Financial Statements in the Companies’ Annual Report on Form 10-K for the year ended December 31, 2017, as updated in Current Report on Form 8-K, filed June 6, 2018, for a discussion of these unrecognized tax benefits.