13. Income Taxes

 

The Company emerged from bankruptcy in October 2016. Under the Bankruptcy Plan, a substantial portion of the Company’s pre-petition debt securities were extinguished. Absent an exception, a debtor recognizes cancellation of indebtedness income (“CODI”) upon discharge of its outstanding indebtedness for an amount of consideration that is less than its adjusted issue price. The Internal Revenue Code of 1986, as amended (“IRC”), provides that a debtor in a bankruptcy case may exclude CODI from taxable income but must reduce certain of its tax attributes by the amount of any CODI realized as a result of the consummation of a plan of reorganization. The amount of CODI realized by a taxpayer is the adjusted issue price of any indebtedness discharged less the sum of (i) the amount of cash paid, (ii) the issue price of any new indebtedness issued and (iii) the fair market value of any other consideration, including equity, issued. As a result of the market value of equity upon emergence from Chapter 11 bankruptcy proceedings, the estimated amount of U.S. CODI is approximately $1.2 billion, which reduced the value of the Company’s U.S. net operating losses and other assets. The actual reduction in tax attributes occurred on the first day of the Company’s tax year subsequent to the date of emergence, or January 1, 2017.

 

The Company had a full reduction of its federal and state NOL carryforwards and a reduction of the tax basis in its fixed assets as of January 1, 2017, pursuant to IRC section 108.

 

On December 22, 2017, the Tax Cuts and Jobs Act (“the Tax Act”) was enacted into law and the new legislation contains several key tax provisions that affected the Company, primarily a reduction of the corporate income tax rate to 21% effective January 1, 2018. The Company is required to recognize the effect of the tax law changes in the period of enactment, such as re-measuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, which allows the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. As the Tax Act was passed late in the fourth quarter of 2017, ongoing guidance from the Department of Treasury and state agencies and accounting interpretation is expected to be issued over the next 12 months. Therefore, the Company considers the accounting of certain items, as discussed below, to be incomplete due to forthcoming guidance and the ongoing analysis of final year-end data and tax positions.

 

The Company has estimated deductions of $10.9 million associated with the full expensing of the costs of qualified property that were incurred and placed in service during the period from September 27, 2017 to December 31, 2017. The Company continues to analyze assets placed in service after September 27, 2017, but not qualifying for full expensing as a result of being acquired under an agreement entered into prior to that date. In addition, further guidance and analysis is required in order to review the terms of our compensation plans and agreements and assess the impact of transitional guidance related to IRC Section 162(m) on awards granted prior to November 2, 2017, subject to the grandfather provisions. As a result, the Company has not adjusted certain tax items previously reported on its financial statements for IRC Section 162(m) until it is able to obtain sufficient information to make a reasonable estimate of the effects of the Tax Act. The Company expects to complete its analysis within the measurement period in accordance with SAB No. 118.

 

As of December 31, 2017, the Company has recorded a full valuation allowance against its net deferred tax assets of $120.1 million, of which $72.6 million relates to deferred tax assets on the Company’s property and equipment. The change in the Company’s valuation allowance was driven by two amounts; (1) a $32.5 million increase due to the Company’s yearly activity from December 31, 2016 to December 31, 2017; and (2) a $73.2 million reduction as a result of the reduction of the corporate tax rate in the Tax Act.

 

As of December 31, 2017, the Company has not recorded a reserve for any uncertain tax positions. The Company believes that there are no new items, nor changes in facts or judgments that should impact the Company’s tax position. No federal income tax payments are expected in the upcoming four quarterly reporting periods.

 

 

The Company’s estimated income tax expense differs from the amount derived by applying the statutory federal rate to pretax income principally due the effect of the following items:

 

 

Deferred income taxes primarily represent the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of our deferred taxes are detailed in the table below (in thousands):