Cleco
For the successor year ended December 31, 2017, and the successor period April 13, 2016, through December 31, 2016, income tax expense was lower than the amount computed by applying the statutory federal rate. For the predecessor period January 1, 2016, through April 12, 2016, and for the predecessor year ended December 31, 2015, income tax expense was higher than the amount computed by applying the statutory federal rate. The differences are as follows:
|
| | | | | | | | | | | | | | | |
| SUCCESSOR | | PREDECESSOR |
(THOUSANDS, EXCEPT PERCENTAGES) | FOR THE YEAR ENDED DEC. 31, 2017 |
| | APR. 13, 2016 - DEC. 31, 2016 |
| | JAN. 1, 2016 -
APR. 12, 2016 |
| | FOR THE YEAR ENDED DEC. 31, 2015 |
|
Income (loss) before tax | $ | 145,159 |
| | $ | (46,935 | ) | | $ | (492 | ) | | $ | 211,373 |
|
Statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % | | 35.0 | % |
Tax expense (benefit) at federal statutory rate | $ | 50,806 |
| | $ | (16,427 | ) | | $ | (172 | ) | | $ | 73,981 |
|
Increase (decrease) | | | | | |
| | |
|
Plant differences, including AFUDC flowthrough | 743 |
| | (881 | ) | | 823 |
| | 1,875 |
|
Amortization of investment tax credits | (662 | ) | | (371 | ) | | (124 | ) | | (916 | ) |
State income taxes | 4,254 |
| | (4,725 | ) | | (3,078 | ) | | 1,117 |
|
Nondeductible merger costs | 2 |
| | (844 | ) | | 4,282 |
| | — |
|
Return to accrual adjustment | (608 | ) | | (2,943 | ) | | — |
| | — |
|
2017 tax reform | (46,291 | ) | | — |
| | — |
| | — |
|
NMTC | 313 |
| | (181 | ) | | (158 | ) | | 243 |
|
Other | (1,478 | ) | | 3,550 |
| | 1,895 |
| | 1,404 |
|
Total tax expense (benefit) | $ | 7,079 |
| | $ | (22,822 | ) | | $ | 3,468 |
| | $ | 77,704 |
|
Effective rate | 4.9 | % | | 48.6 | % | | (704.9 | )% | | 36.8 | % |
Information about current and deferred income tax expense is as follows:
|
| | | | | | | | | | | | | | | |
| SUCCESSOR | | PREDECESSOR |
(THOUSANDS) | FOR THE YEAR ENDED DEC. 31, 2017 |
| | APR. 13, 2016 - DEC. 31, 2016 |
| | JAN. 1, 2016 -
APR. 12, 2016 |
| | FOR THE
YEAR ENDED
DEC. 31, 2015 |
|
Current federal income tax expense (benefit) | $ | 46,520 |
| | $ | (1,062 | ) | | $ | 1,373 |
| | $ | 1,284 |
|
Deferred federal income tax (benefit) expense | (47,329 | ) | | (16,715 | ) | | 5,297 |
| | 76,219 |
|
Amortization of accumulated deferred investment tax credits | (662 | ) | | (371 | ) | | (124 | ) | | (916 | ) |
Total federal income tax expense (benefit) | $ | (1,471 | ) | | $ | (18,148 | ) | | $ | 6,546 |
| | $ | 76,587 |
|
Current state income tax expense (benefit) | 3,187 |
| | (337 | ) | | — |
| | 3,233 |
|
Deferred state income tax expense (benefit) | 5,363 |
| | (4,337 | ) | | (3,078 | ) | | (2,116 | ) |
Total state income tax expense (benefit) | $ | 8,550 |
| | $ | (4,674 | ) | | $ | (3,078 | ) | | $ | 1,117 |
|
Total federal and state income tax expense (benefit) | $ | 7,079 |
| | $ | (22,822 | ) | | $ | 3,468 |
| | $ | 77,704 |
|
Items charged or credited directly to member’s/shareholders’ equity | | | | | |
| | |
|
Federal deferred | (659 | ) | | 14,593 |
| | (277 | ) | | 3,274 |
|
State deferred | 207 |
| | 2,441 |
| | (45 | ) | | 528 |
|
Total tax (benefit) expense from items charged directly to member’s/shareholders’ equity | $ | (452 | ) | | $ | 17,034 |
| | $ | (322 | ) | | $ | 3,802 |
|
Total federal and state income tax expense (benefit) | $ | 6,627 |
| | $ | (5,788 | ) | | $ | 3,146 |
| | $ | 81,506 |
|
The balance of accumulated deferred federal and state income tax assets and liabilities at December 31, 2017, and 2016 was comprised of the following: |
| | | | | | | |
| AT DEC. 31, | |
(THOUSANDS) | 2017 |
| | 2016 |
|
Depreciation and property basis differences | $ | (596,824 | ) | | $ | (943,552 | ) |
Net operating loss carryforward | 12,873 |
| | 54,727 |
|
NMTC | 96,917 |
| | 89,411 |
|
Fuel costs | (3,283 | ) | | (8,802 | ) |
Other comprehensive income | (490 | ) | | 3,399 |
|
Regulated operations regulatory liability, net | (54,471 | ) | | (91,734 | ) |
Postretirement benefits other than pension | 23,642 |
| | 22,733 |
|
Merger fair value adjustments | (58,251 | ) | | (124,254 | ) |
Other | (34,925 | ) | | (34,983 | ) |
Accumulated deferred federal and state income taxes, net | $ | (614,812 | ) | | $ | (1,033,055 | ) |
Valuation Allowance
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. As of December 31, 2017, and 2016, Cleco had a deferred tax asset resulting from NMTC carryforwards of $97.5 million for each year. If the NMTC carryforwards are not utilized, they will begin to expire in 2029. Management considers it more likely than not that all deferred tax assets related to NMTC carryforwards will be realized; therefore, no valuation allowance has been recorded.
Net Operating Losses
As of December 31, 2017, Cleco had no federal net operating loss carryforward and a state net operating loss carryforward of $81.7 million. The state net operating loss carryforward will begin to expire in 2031. Cleco considers it more likely than not that these income tax losses will be utilized to reduce future payments of income taxes and Cleco expects to utilize the entire net operating loss carryforward within the statutory deadlines.
Cleco Power
For the years ended December 31, 2017, and 2016 income tax expense was lower than the amount computed by applying the statutory rate. For the year ended December 31, 2015, income tax expense was higher than the amount computed by applying the statutory federal rate to income before tax. The differences are as follows:
|
| | | | | | | | | | | |
| FOR THE YEAR ENDED DEC. 31, | |
(THOUSANDS, EXCEPT PERCENTAGES) | 2017 |
| | 2016 |
| | 2015 |
|
Income before tax | $ | 218,069 |
| | $ | 57,497 |
| | $ | 220,644 |
|
Statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Tax expense at federal statutory rate | $ | 76,324 |
| | $ | 20,124 |
| | $ | 77,225 |
|
Increase (decrease) | |
| | |
| | |
Plant differences, including AFUDC flowthrough | 743 |
| | (58 | ) | | 1,875 |
|
Amortization of investment tax credits | (662 | ) | | (494 | ) | | (916 | ) |
State income taxes | 8,156 |
| | (2,573 | ) | | 1,501 |
|
Return to accrual adjustment | (284 | ) | | (2,646 | ) | | — |
|
2017 tax reform | (14,292 | ) | | — |
| | — |
|
Other | (2,654 | ) | | 4,016 |
| | (391 | ) |
Total taxes | $ | 67,331 |
| | $ | 18,369 |
| | $ | 79,294 |
|
Effective rate | 30.9 | % | | 31.9 | % | | 35.9 | % |
Information about current and deferred income tax expense is as follows:
|
| | | | | | | | | | | |
| FOR THE YEAR ENDED DEC. 31, | |
(THOUSANDS) | 2017 |
| | 2016 |
| | 2015 |
|
Current federal income tax expense (benefit) | $ | 87,433 |
| | $ | (1,211 | ) | | $ | 33,138 |
|
Deferred federal income tax (benefit) expense | (29,190 | ) | | 22,647 |
| | 45,572 |
|
Amortization of accumulated deferred investment tax credits | (662 | ) | | (494 | ) | | (916 | ) |
Total federal income tax expense | $ | 57,581 |
| | $ | 20,942 |
| | $ | 77,794 |
|
Current state income tax expense (benefit) | 14,751 |
| | (418 | ) | | 3,397 |
|
Deferred state income tax benefit | (5,001 | ) | | (2,155 | ) | | (1,897 | ) |
Total state income tax expense (benefit) | $ | 9,750 |
| | $ | (2,573 | ) | | $ | 1,500 |
|
Total federal and state income taxes | $ | 67,331 |
| | $ | 18,369 |
| | $ | 79,294 |
|
Items charged or credited directly to members’ equity | |
| | |
| | |
|
Federal deferred | (2,573 | ) | | 1,976 |
| | 106 |
|
State deferred | 240 |
| | 319 |
| | 17 |
|
Total tax (benefit) expense from items charged directly to member’s equity | $ | (2,333 | ) | | $ | 2,295 |
| | $ | 123 |
|
Total federal and state income tax expense | $ | 64,998 |
| | $ | 20,664 |
| | $ | 79,417 |
|
The balance of accumulated deferred federal and state income tax assets and liabilities at December 31, 2017, and 2016 was comprised of the following:
|
| | | | | | | |
| AT DEC. 31, | |
(THOUSANDS) | 2017 |
| | 2016 |
|
Depreciation and property basis differences | $ | (597,838 | ) | | $ | (941,166 | ) |
Net operating loss carryforward | 470 |
| | (362 | ) |
Fuel costs | (3,282 | ) | | (8,802 | ) |
Other comprehensive income | 5,250 |
| | 8,021 |
|
Regulated operations regulatory liability, net | (54,471 | ) | | (91,734 | ) |
Postretirement benefits other than pension | 6,266 |
| | 1,288 |
|
Other | (12,757 | ) | | (35,837 | ) |
Accumulated deferred federal and state income taxes, net | $ | (656,362 | ) | | $ | (1,068,592 | ) |
Valuation Allowance
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Management considers it more likely than not that all deferred tax assets will be realized; therefore, no valuation allowance has been recorded.
Uncertain Tax Positions
Cleco classifies all interest related to uncertain tax positions as a component of interest payable and interest expense. At December 31, 2017, and 2016, Cleco and Cleco Power had no interest payable related to uncertain tax positions. For the years ended December 31, 2017, 2016, and 2015, Cleco and Cleco Power had no interest expense related to uncertain tax positions.
At December 31, 2017, and 2016, Cleco had no liability for unrecognized tax positions. Cleco estimates that it is reasonably possible that the balance of unrecognized tax benefits as of December 31, 2017, for Cleco and Cleco Power would be unchanged in the next 12 months. The settlement of open tax years could involve the payment of additional taxes, and/or the recognition of tax benefits, which may have an effect on Cleco’s effective income tax rate.
The federal income tax years that remain subject to examination by the IRS are 2013, 2014, 2015, and 2016.
Beginning with the 2013 tax year, Cleco entered into the IRS’s Compliance Assurance Process which allows taxpayers to work collaboratively with an IRS team to identify and resolve potential tax issues before the federal tax return is filed each year. Cleco must apply for admission to the program each year. Cleco has been approved for the Compliance Assurance Process through the 2018 tax year.
The state income tax years that remain subject to examination by the Louisiana Department of Revenue are 2014, 2015, and 2016. In August 2015, Cleco reached a settlement for tax years 2011 through 2013. The favorable impact from the settlement was reflected in various line items in the financial statements.
Cleco classifies income tax penalties as a component of other expenses. For the years ended December 31, 2017, 2016, and 2015, no penalties were recognized.
2017 Tax Reform
On December 22, 2017, the President signed into law the TCJA. Substantially all of the provisions of the TCJA are effective for taxable years beginning after December 31, 2017. The TCJA includes significant changes to the IRC, as amended, including amendments which significantly change the taxation of business entities and includes specific provisions related to rate regulated activities, including Cleco Power. The most significant change that impacts Cleco is the reduction in the corporate federal income tax rate from 35% to 21%. The specific provisions related to the rate regulated activities in the TCJA generally allow for the continued deductibility of interest expense, the elimination of full expensing for tax purposes of certain property acquired after September 27, 2017, and the continuation of certain rate normalization requirements for accelerated depreciation benefits.
Changes to the IRC from the TCJA had a material impact on the Registrants’ financial statements in 2017. The tax effects of changes in tax laws must be recognized in the period in which the law is enacted. Also, the deferred tax assets and liabilities must be measured at the enacted tax rate expected to be applied when temporary differences are to be realized or settled. As a result, at the date of the enactment, the Registrants’ deferred taxes were remeasured based upon the new tax rate. For Cleco Power’s rate regulated activities, the change in deferred taxes were recorded as a regulatory liability. For Cleco’s unregulated activities, the change in the deferred taxes was recorded as an adjustment to deferred tax expense.
The SEC Staff has recognized the complexity of reflecting the impacts of the TCJA and issued guidance which clarifies accounting for income taxes if information is not yet available or complete and provides for up to a one-year period in which to complete the required analysis and accounting (the measurement period).
The Registrants have made a reasonable estimate for the measurement and accounting of certain effects of the TCJA which have been reflected in the December 31, 2017, financial statements. The accounting for these provisional items decreased deferred income tax expense for Cleco and Cleco Power by $46.3 million and $14.3 million, respectively, for the year ended December 31, 2017. The TCJA also resulted in a decrease in the accumulated deferred income tax liability for Cleco and Cleco Power by $394.9 million and $362.9 million, respectively, at December 31, 2017.
The impacts of the TCJA discussed above, including the effects on income tax expense, regulatory liabilities, and effects on future periods are provisional and subject to change. The accounting is not complete due to the timing of the final passage of the TCJA, the complexity of the TCJA, the complexity of remeasuring ADIT, and the uncertainty of regulatory treatment. Additional analysis of the TCJA, the inventory of items that give rise to temporary differences, and additional analysis of items requiring normalization is required before accounting for the TCJA is considered complete under the authoritative guidance for income taxes. Cleco expects any final adjustments to the provisional amounts to be recorded by the fourth quarter of 2018, which could have a material adverse effect on the results of operations of Cleco.