Income Taxes
The components of Houston Electric’s income tax expense (benefit) were as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in millions) |
Current income tax expense: | | | | | |
Federal | $ | 70 |
| | $ | 165 |
| | $ | 106 |
|
State | 19 |
| | 18 |
| | 21 |
|
Total current expense | 89 |
| | 183 |
| | 127 |
|
Deferred income tax expense (benefit): | |
| | |
| | |
|
Federal | (98 | ) | | (34 | ) | | 18 |
|
Total deferred expense (benefit) | (98 | ) | | (34 | ) | | 18 |
|
Total income tax expense (benefit) | $ | (9 | ) | | $ | 149 |
| | $ | 145 |
|
A reconciliation of income tax expense (benefit) using the federal statutory income tax rate to the actual income tax expense and resulting effective income tax rate is as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in millions) |
Income before income taxes | $ | 424 |
| | $ | 425 |
| | $ | 406 |
|
Federal statutory income tax rate | 35 | % | | 35 | % | | 35 | % |
Expected federal income tax expense | 148 |
| | 149 |
| | 142 |
|
Increase (decrease) in tax expense resulting from: | | | | | |
State income tax expense, net of federal income tax | 12 |
| | 12 |
| | 14 |
|
Federal income tax rate reduction | (158 | ) | | — |
| | — |
|
Other, net | (11 | ) | | (12 | ) | | (11 | ) |
Total | (157 | ) | | — |
| | 3 |
|
Total income tax expense (benefit) | $ | (9 | ) | | $ | 149 |
| | $ | 145 |
|
Effective tax rate | (2 | )% | | 35 | % | | 36 | % |
In 2017, Houston Electric recognized a $158 million deferred tax benefit from the remeasurement of Houston Electric’s ADFIT liability as a result of the enactment of the TCJA on December 22, 2017, which reduced the U.S. corporate income tax rate from 35% to 21%. For additional information on the 2017 impacts of the TCJA, please see the discussion following the deferred tax assets and liabilities table below.
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities were as follows:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (in millions) |
Deferred tax assets: | | | |
Benefits and compensation | $ | 28 |
| | $ | 47 |
|
Asset retirement obligations | 7 |
| | 12 |
|
Regulatory liabilities | 198 |
| | 17 |
|
Other | 3 |
| | 4 |
|
Total deferred tax assets | 236 |
| | 80 |
|
| | | |
Deferred tax liabilities: | |
| | |
|
Property, plant, and equipment | 1,030 |
| | 1,541 |
|
Regulatory assets | 265 |
| | 542 |
|
Total deferred tax liabilities | 1,295 |
| | 2,083 |
|
Net deferred tax liabilities | $ | 1,059 |
| | $ | 2,003 |
|
Federal Tax Reform. On December 22, 2017, President Trump signed into law comprehensive tax reform legislation informally called The Tax Cuts and Jobs Acts, or TCJA, which resulted in significant changes to federal tax laws effective January 1, 2018. The new legislation contains several key tax provisions that will impact Houston Electric, including the reduction of the corporate income tax rate from 35% to 21% effective January 1, 2018. The new legislation also includes a variety of other changes, such as, a limitation on the tax deductibility of interest expense, acceleration of business asset expensing, and reduction in the amount of executive pay that may qualify for a tax deduction, among others. Several provisions of the TCJA are not generally applicable to the public utility industry, including the limitation on the tax deductibility of interest expense and acceleration of business asset expensing.
While the effective date of the rate change in the legislation is January 1, 2018, ASC 740 requires that deferred tax balances be adjusted in the period of enactment to the rate in which those deferred taxes will reverse. The EDIT from the rate change resulted in an adjustment to income tax expense of $158 million and creation of a net regulatory liability of $829 million (includes $180 million gross-up) for the amount that is likely to be returned to ratepayers. The $158 million benefit to income tax expense is for the remeasurement of Houston Electric’s stranded costs related to the Securitization Bonds. The amount and expected amortization of the net regulatory tax liability may differ from the $829 million estimate, possibly materially, due to, among other things, regulatory actions, interpretations and assumptions Houston Electric has made, and any guidance that may be issued in the future. Houston Electric will continue to assess the amount and expected amortization of the net regulatory tax liability as it has proceedings with regulators in future periods. For the discussion of risks associated with the amount and expected flow through of EDIT by Houston Electric, see “Management’s Narrative Analysis of Results of Operations—Liquidity and Capital Resources—Regulatory Matters—Tax Reform” in Item 7 of Part II of this report.
Houston Electric is a member of the U.S. federal consolidated income tax return of CenterPoint Energy. Houston Electric reports its income tax provision on a separate entity basis pursuant to a tax sharing agreement with CenterPoint Energy.
Uncertain Income Tax Positions. Houston Electric reported no uncertain tax liability as of December 31, 2017, 2016, and 2015. Houston Electric expects no significant change to the uncertain tax liability over the next 12 months ending December 31, 2018.
Tax Audits and Settlements. Tax years through 2015 have been audited and settled with the IRS. For the 2016 through 2018 tax years, CenterPoint Energy is a participant in the IRS’s Compliance Assurance Process.