Income Taxes
Tax Cuts and Jobs Act
On December 22, 2017, the United States government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“TCJA”). The TCJA makes broad and complex changes to the Internal Revenue Code (“IRC”), many of which are effective on January 1, 2018, including, but not limited to, (1) reducing the Federal corporate income tax rate from 35 percent to 21 percent, (2) eliminating the use of bonus depreciation for regulated utilities, while permitting full expensing of qualified property for non-regulated entities, (3) eliminating the domestic production activities deduction previously allowable under Section 199 of the IRC, (4) creating a new limitation on the deductibility of interest expense for non-regulated businesses, (5) eliminating the corporate Alternative Minimum Tax (“AMT”) and changing how existing AMT credits can be realized, (6) limiting the deductibility of certain executive compensation, (7) restricting the deductibility of entertainment and lobbying-related expenses, (8) requiring regulated entities to employ the average rate assumption method (“ARAM”) to refund excess deferred taxes created by the rate change to their customers, and (9) changing the rules under Section 118 of the IRC regarding taxability of contributions made by government or civic groups.
Consolidated results reflect a net tax benefit of $45.3 million for the period ending December 31, 2017 from the enactment of the TCJA. This benefit is associated with the impact of the corporate rate reduction on the Company’s deferred income tax balances resulting in a $23.2 million benefit for the Utility Group, $22.3 million benefit for the Nonutility businesses, and $0.2 million expense for Corporate & Other. The portion of the benefit attributable to Utility Group operations relates to assets which are not included for regulatory rate making purposes, such as goodwill associated with past acquisitions.
In addition, the reduction in the federal corporate rate results in $333.4 million in excess federal deferred income taxes for the Utility Group.
The Company's gas and electric utilities currently recover corporate income tax expense in Commission approved rates charged to customers. The IURC and PUCO both issued orders which initiated proceedings to investigate the impact of the TCJA on utility companies and customers within each state. In addition, both Commissions have ordered each utility to establish regulatory assets and liabilities to record all estimated impacts of tax reform starting January 1, 2018. The Company is complying with both orders. In Indiana, the IURC held an initial conference of parties on February 6, 2018, and an order was issued by the Commission on February 16, 2018, outlining the process the utility companies are to follow. In accordance with the order, the Company expects to initiate proceedings to effect the timely reduction in customer bills due to the lower corporate federal income tax rate in the very near term. In Ohio, in response to the PUCO's request for comments from utilities, Vectren submitted its response indicating that the issues should be address in its base rate case, for which the pre-filing notice was filed February 21, 2018.
A reconciliation of the federal statutory rate to the effective income tax rate follows:
|
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Statutory rate: | | 35.0 | % | | 35.0 | % | | 35.0 | % |
State & local taxes-net of federal benefit | | 3.4 |
| | 2.8 |
| | 3.6 |
|
Deferred tax revaluation-tax law change | | (17.3 | ) | | — |
| | — |
|
Amortization of investment tax credit | | (0.2 | ) | | (0.3 | ) | | (0.2 | ) |
Domestic production deduction | | (1.4 | ) | | (0.4 | ) | | (1.0 | ) |
Energy efficiency building deductions | | — |
| | (1.7 | ) | | (2.3 | ) |
Research and development credit | | (0.3 | ) | | (0.6 | ) | | (1.6 | ) |
Other tax credits | | (0.1 | ) | | (0.1 | ) | | (0.1 | ) |
All other-net | | (1.4 | ) | | 0.1 |
| | 0.2 |
|
Effective tax rate | | 17.7 | % | | 34.8 | % | | 33.6 | % |
On February 9, 2018, through the signing into law of the Bipartisan Budget Act of 2018, Section 179D of the Internal Revenue Code, which provides for the energy efficiency commercial buildings tax deduction, was retroactively extended to 2017 for one year. Any impacts will be reflected in 2018 results pursuant to ASC 740 related to accounting for retroactive effects of legislation.
Significant components of the net deferred tax liability follow:
|
| | | | | | | | |
| | At December 31, |
(In millions) | | 2017 | | 2016 |
Noncurrent deferred tax liabilities (assets): | | | | |
Depreciation & cost recovery timing differences | | $ | 593.7 |
| | $ | 902.4 |
|
Regulatory assets recoverable through future rates | | 7.9 |
| | 17.6 |
|
Alternative minimum tax carryforward | | (12.2 | ) | | (29.3 | ) |
Employee benefit obligations | | (9.3 | ) | | (8.1 | ) |
Net operating loss & other carryforwards (net of valuation allowances) | | (4.1 | ) | | (3.2 | ) |
U.S. federal charitable contributions carryforwards | | (12.2 | ) | | — |
|
Regulatory liabilities to be settled through future rates | | (116.2 | ) | | (15.9 | ) |
Impairments | | (0.6 | ) | | (2.5 | ) |
Deferred fuel costs-net | | 16.2 |
| | 25.9 |
|
Other-net | | 28.1 |
| | 18.8 |
|
Net noncurrent deferred tax liability | | $ | 491.3 |
| | $ | 905.7 |
|
At December 31, 2017 and 2016, investment tax credits totaling $1.2 million and $1.6 million respectively, are included in Deferred credits & other liabilities. At December 31, 2017, the Company has alternative minimum tax credit carryforwards which do not expire. The TCJA eliminated the alternative minimum tax after 2017. Pursuant to the TCJA, the Company will be able to recover its alternative minimum tax carryforwards in future periods.
In addition, the Company has $4.1 million in state net operating losses and $12.2 million in U.S. federal charitable contributions carryforwards, which will expire in 5 to 20 years. The net operating loss carryforward and other carryforwards were reduced for the impacts of unrecognized tax benefits and a valuation allowance relating primarily to state net operating loss carryforwards. At December 31, 2017 and 2016, the valuation allowance was $10.1 million and $8.3 million, respectively.
The components of income tax expense follow:
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
(In millions) | | 2017 | | 2016 | | 2015 |
Current: | | | | | | |
Federal | | $ | 20.5 |
| | $ | 6.8 |
| | $ | 10.8 |
|
State | | 6.9 |
| | 6.0 |
| | 8.5 |
|
Total current taxes | | 27.4 |
| | 12.8 |
| | 19.3 |
|
Deferred: | | |
| | |
| | |
|
Federal | | 16.7 |
| | 97.6 |
| | 79.0 |
|
State | | 2.7 |
| | 3.6 |
| | 2.0 |
|
Total deferred taxes | | 19.4 |
| | 101.2 |
| | 81.0 |
|
Amortization of investment tax credits | | (0.4 | ) | | (1.1 | ) | | (0.6 | ) |
Total income tax expense | | $ | 46.4 |
| | $ | 112.9 |
| | $ | 99.7 |
|
Uncertain Tax Positions
Unrecognized tax benefits for all periods presented were not material to the Company. The net liability on the Consolidated Balance Sheet for unrecognized tax benefits inclusive of interest and penalties totaled $1.3 million and $1.2 million, respectively, at December 31, 2017 and 2016.
The Company and/or certain of its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states. The Internal Revenue Service (IRS) has concluded examinations of the Company's U.S. federal income tax returns for tax years through December 31, 2012. The State of Indiana, the Company's primary state tax jurisdiction, has conducted examinations of state income tax returns for tax years through December 31, 2010. The statutes of limitations for assessment of federal income tax and Indiana income tax have expired with respect to tax years through 2014 except to the extent of refunds claimed on amended tax returns. The statutes of limitations for assessment of the 2013 tax year related to the amended federal return will expire in 2020. The statutes of limitations for assessment of the 2009 and 2011 through 2014 tax years related to the amended Indiana income tax returns will expire in 2018 through 2020.
Indiana Senate Bill 1
In March 2014, Indiana Senate Bill 1 was signed into law. This legislation phases in a 1.6 percent rate reduction to the Indiana Adjusted Gross Income Tax Rate for corporations over a six year period. Pursuant to this legislation, the tax rate will be lowered by 0.25 percent each year for the first five years and 0.35 percent in year six beginning on July 1, 2016 to the final rate of 4.9 percent effective July 1, 2021. Pursuant to FASB guidance, the Company accounted for the effect of the change in tax law on its deferred taxes in the first quarter of 2014, the period of enactment. The impact was not material to results of operations.