INCOME TAXES
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the TCJA. The TCJA reduced the U.S. federal corporate tax rate from 35% to 21%. The Company uses the asset and liability method in accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized at currently enacted income tax rates, to reflect the tax effect of temporary differences between the financial and tax basis of assets and liabilities as well as operating loss and tax credit carryforwards. As such, the Company has remeasured the deferred income taxes at the 21% federal tax rate as of December 31, 2017. We have made our best estimate regarding the probability of settlements of net regulatory liabilities established pursuant to the TCJA. The amount of the settlements may change based on decisions and actions by the rate regulators, which could have a material impact on the Company’s future results of operations, cash flows or financial position.
In addition, as allowed under SEC Staff Accounting Bulletin No. 118 (SAB 118), the Company has recorded provisional income tax amounts as of December 31, 2017 for changes pursuant to the TCJA related to depreciation for which the impacts could not be finalized upon issuance of the Company’s financial statements, but reasonable estimates could be determined. However, the provisional amounts may change as the Company finalizes the analysis and computations and such changes could be material to the Company’s future results of operations, cash flows or financial position.
Income tax expense (benefit) from continuing operations for the years ended December 31 was as follows (in thousands):
|
| | | | | | | | | |
| 2017 | 2016 | 2015 |
Current | $ | 13,124 |
| $ | 1,838 |
| $ | 14,910 |
|
Deferred | 1,004 |
| 20,690 |
| 7,690 |
|
Total income tax expense | $ | 14,128 |
| $ | 22,528 |
| $ | 22,600 |
|
The temporary differences, which gave rise to the net deferred tax liability, for the years ended December 31 were as follows (in thousands):
|
| | | | | | |
| 2017 | 2016 |
Deferred tax assets: | | |
Employee benefits | $ | 3,012 |
| $ | 5,163 |
|
Regulatory liabilities | 24,984 |
| 9,099 |
|
Other | 1,678 |
| 1,815 |
|
Total deferred tax assets | 29,674 |
| 16,077 |
|
| | |
Deferred tax liabilities: | | |
Accelerated depreciation and other plant related differences (a) | (122,002 | ) | (202,047 | ) |
Regulatory assets | (7,008 | ) | (4,391 | ) |
Employee benefits | (2,595 | ) | (3,075 | ) |
Deferred costs | (8,447 | ) | (16,920 | ) |
Other | (240 | ) | (1,087 | ) |
Total deferred tax liabilities | (140,292 | ) | (227,520 | ) |
| | |
Net deferred tax liability | $ | (110,618 | ) | $ | (211,443 | ) |
| |
(a) | The net deferred tax liabilities were revalued for the change in federal tax rate to 21% under the TCJA. The revaluation resulted in a reduction to net deferred tax liabilities of approximately $103 million. Due to the regulatory construct, approximately $97 million of the revaluation was reclassified to a regulatory liability. |
The effective tax rate differs from the federal statutory rate for the years ended December 31, as follows:
|
| | | |
| 2017 | 2016 | 2015 |
Federal statutory rate | 35.0% | 35.0% | 35.0% |
Amortization of excess deferred and investment tax credits | (0.1) | (0.4) | (0.1) |
AFUDC Equity | (1.0) | (0.9) | (0.6) |
Flow through adjustments (a) | (1.8) | (0.9) | (0.9) |
Tax credits | — | (0.1) | — |
Tax reform (b) | (9.2) | — | — |
Other | (1.3) | 0.6 | — |
| 21.6% | 33.3% | 33.4% |
_________________________
| |
(a) | Flow-through adjustments related primarily to an accounting method change for tax purposes that allows us to take a current tax deduction for repair costs. We recorded a deferred income tax liability in recognition of the temporary difference created between book and tax treatment and we flowed the tax benefit through to tax expense. |
| |
(b) | On December 22, 2017, the TCJA was signed into law reducing the federal corporate rate from 35% to 21%, effective January 1, 2018. The 2017 effective tax rate reduction reflects the revaluation of deferred income taxes associated with non-regulated operations required by the change. |
The following table reconciles the total amounts of unrecognized tax benefits, without interest, included in Other deferred credits and other liabilities on the accompanying Balance Sheet (in thousands):
|
| | | | | | |
| 2017 | 2016 |
Unrecognized tax benefits at January 1 | $ | 493 |
| $ | 2,264 |
|
Additions for current year tax positions | 13 |
| — |
|
Additions for prior year tax positions | — |
| 1,194 |
|
Reductions for prior year tax positions | (204 | ) | (682 | ) |
Settlements for prior year tax positions | — |
| (2,283 | ) |
Unrecognized tax benefits at December 31 | $ | 302 |
| $ | 493 |
|
The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate is not material to the financial results of the Company.
It is the Company’s continuing practice to recognize interest and/or penalties related to income tax matters in income tax expense. During the years ended December 31, 2017 and 2016, the interest expense recognized was not material to the financial results of the Company.
We do not anticipate that total unrecognized tax benefits will significantly change due to the settlement of any audits or the expiration of statutes of limitations on or before December 31, 2018.
We file income tax returns in the United States federal jurisdictions as a member of the BHC consolidated group.
At December 31, 2016, we were no longer in a federal NOL carryforward position.