NOTE 23. INCOME TAXES
Dominion Energy Midstream is organized as an MLP, a pass-through entity for U.S. federal and state income tax purposes. Each unitholder is responsible for taking into account the unitholder’s respective share of Dominion Energy Midstream’s items of taxable income, gain, loss and deduction in the preparation of income tax returns. Upon the closing of the Offering, Cove Point became a pass-through entity for U.S. federal and state income tax purposes. Effective April 1, 2015, the date of the DECG Acquisition, DECG is treated as a component of Dominion Energy Midstream for income tax purposes. Effective December 1, 2016, the date of the Dominion Energy Questar Pipeline Acquisition, Dominion Energy Questar Pipeline is treated as a component of Dominion Energy Midstream for income tax purposes. Accordingly, Dominion Energy Midstream’s Consolidated Financial Statements do not include income taxes for the period subsequent to the Offering, with the exception of income taxes attributable to the DECG Predecessor and Dominion Energy Questar Pipeline Predecessor.
DECG operated as a taxable corporation at the time of Dominion Energy's acquisition of DECG. In March 2015, DECG converted to a single member limited liability company and as a result, became a disregarded entity for income tax purposes and was treated as a taxable division of its corporate parent. Its business activities from the time of Dominion Energy's acquisition of DECG through March 2015 were included in the consolidated U.S. federal and certain state income tax returns of Dominion Energy for 2015. Dominion Energy Questar Pipeline is a disregarded entity for income tax purposes and was treated as a taxable division of its corporate parent. Its business activities from the time of Dominion Energy’s acquisition of Dominion Energy Questar through November 2016 were included in the consolidated U.S. federal and certain state income tax returns of Dominion Energy. Dominion Energy Midstream’s Consolidated Financial Statements reflect income taxes for the same period. For periods prior to Dominion Energy's acquisition of Dominion Energy Questar in September 2016, Dominion Energy Questar Pipeline was included in the consolidated federal and certain state tax returns of its parent, Dominion Energy Questar.
Current income taxes for DECG and Dominion Energy Questar Pipeline were based on taxable income or loss, determined on a separate company basis, and, where applicable, settled in accordance with the principles of Dominion Energy’s intercompany tax sharing agreement. The settlements of DECG's and Dominion Energy Questar Pipeline's federal and state income taxes payable and net deferred income taxes are reflected as equity transactions in Dominion Energy Midstream's Consolidated Financial Statements.
The income tax (benefit) provision is summarized as follows:
|
Year Ended December 31, |
|
2016(1) |
|
|
2015(2) |
|
||
|
(millions) |
|
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
7.2 |
|
|
$ |
0.5 |
|
|
State |
|
|
0.6 |
|
|
|
0.1 |
|
|
Total current expense |
|
|
7.8 |
|
|
|
0.6 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
Federal |
|
|
(1.3 |
) |
|
|
1.3 |
|
|
State |
|
|
(0.2 |
) |
|
|
0.2 |
|
|
Total deferred expense (benefit) |
|
|
(1.5 |
) |
|
|
1.5 |
|
|
Total income tax expense |
|
$ |
6.3 |
|
|
$ |
2.1 |
|
|
(1) |
2016 income taxes are attributable to the Dominion Energy Questar Pipeline Predecessor. |
|
(2) |
2015 income taxes are attributable to the DECG Predecessor. |
The statutory U.S. federal income tax rate reconciles to the effective income tax rate as follows:
|
Year Ended December 31, |
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
U.S. statutory rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
Partnership income not subject to income taxes(1) |
|
|
(35.0 |
) |
|
|
(32.4 |
) |
|
|
(34.1 |
) |
|
Increases resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
State taxes, net of federal benefit |
|
|
— |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
Other, net |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Effective tax rate |
|
|
— |
% |
|
|
2.7 |
% |
|
|
1.0 |
% |
|
(1) |
Reflects the pass-through entity status of Dominion Energy Midstream, including the operations of Dominion Energy Questar Pipeline subsequent to the Dominion Energy Questar Pipeline Acquisition and DECG subsequent to the DECG Acquisition. |
In 2017, 2016 and 2015, there were no unrecognized tax benefits.
Dominion Energy participates in the CAP which provides 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. In 2016 and 2017 Dominion Energy submitted research credit claims for tax years 2012-2016. These claims are currently under IRS examination. With the exception of these research credit claims, the IRS has completed its audit of tax years through 2015. The statute of limitations has not yet expired for tax years after 2012. Although Dominion Energy has not received a final letter indicating no changes to its taxable income for tax year 2016, no material adjustments are expected. The IRS examination of tax year 2017 is ongoing. For Dominion Energy Questar and its consolidated subsidiaries which also participate in a CAP maintenance program, the IRS has completed its examination of tax years through 2015, and the examination of tax year 2016 is ongoing. For Dominion Energy Questar’s consolidated returns, the statute of limitations has expired for tax years prior to 2014.
For Cove Point, the earliest tax year remaining open for examination by Maryland tax authorities is 2014. Since DECG was included in SCANA's consolidated South Carolina tax returns for periods prior to being acquired by Dominion Energy in January 2015, SCANA is obligated for any additional taxes assessed for those periods.
Dominion Energy Questar Pipeline was included in Dominion Energy Questar’s consolidated Utah and Colorado returns for periods prior to Dominion Energy’s acquisition of Dominion Energy Questar and were included in Dominion Energy’s consolidated Utah and Colorado returns for tax year 2016. The earliest year open for examination of both Dominion Energy Questar’s consolidated Utah and Colorado returns is 2014.
Dominion Energy will pay any additional income taxes assessed by tax authorities related to Dominion Energy Questar Pipeline's business activities for periods prior to December 1, 2016 and DECG's business activities during the period January 31, 2015 through March 31, 2015.