On December 22, 2017 the Tax Cuts and Jobs Act (H.R.1) (Tax Legislation) was signed into law, which resulted in significant changes to U.S. federal income tax law. QEP expects that these changes will positively impact QEP's future after-tax earnings in the U.S., primarily due to the lower federal statutory tax rate of 21% compared to 35%. The Tax Legislation also repeals the corporate alternative minimum tax (AMT). Several provisions of the new tax law such as limitations on the deductibility of interest expense and certain executive compensation and the inability to use Section 1031 like-kind exchanges for assets such as machinery and equipment could apply to QEP; however, we do not believe that they will materially impact QEP's financial statements. The impact of the Tax Legislation may differ from the statements above due to, among other things, changes in interpretations and assumptions the Company has made and actions the Company may take as a result of the Tax Legislation. Additionally, guidance issued by the relevant regulatory authorities regarding the Tax Legislation may materially impact QEP's financial statements. The Company will continue to analyze the Tax Legislation to determine the full impact of the new law, on the Company's consolidated financial statements and operations.
Details of income tax provisions and deferred income taxes from continuing operations are provided in the following tables.
The components of income tax provisions and benefits were as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Federal income tax provision (benefit) | (in millions) |
Current | $ | 2.1 |
| | $ | (55.5 | ) | | $ | (112.3 | ) |
Deferred | (339.8 | ) | | (614.3 | ) | | 34.5 |
|
State income tax provision (benefit) | | | | | |
Current | 0.5 |
| | (1.5 | ) | | (6.6 | ) |
Deferred | 25.0 |
| | (36.9 | ) | | (9.2 | ) |
Total income tax provision (benefit) | $ | (312.2 | ) | | $ | (708.2 | ) | | $ | (93.6 | ) |
The difference between the statutory federal income tax rate and the Company's effective income tax rate is explained as follows:
|
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Federal income taxes statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Increase (decrease) in rate as a result of: | | | | | |
State income taxes, net of federal income tax benefit(1) | (40.1 | )% | | 2.4 | % | | 4.2 | % |
Federal rate change(2) | 741.3 | % | | — | % | | — | % |
State rate change | 2.1 | % | | (1.1 | )% | | — | % |
Penalties | (0.4 | )% | | — | % | | (0.3 | )% |
Return to provision adjustment | (0.7 | )% | | — | % | | (0.3 | )% |
Uncertain tax provision (federal rate change) | (7.7 | )% | | — | % | | — | % |
Other | (1.8 | )% | | — | % | | (0.1 | )% |
Effective income tax rate | 727.7 | % | | 36.3 | % | | 38.5 | % |
____________________________
| |
(1) | State income taxes changed significantly from prior years mainly due to the change in valuation allowance during the year of $36.2 million. |
| |
(2) | The new tax legislation changed the federal corporate income tax rate from 35% to 21% starting in 2018. The rate change caused the Company to revalue its deferred tax liabilities and assets as of December 31, 2017 from a 35% to 21% federal corporate income tax rate which caused the majority of the change in rate. |
Significant components of the Company's deferred income taxes were as follows:
|
| | | | | | | |
| December 31, |
| 2017(1) | | 2016 |
Deferred tax liabilities | (in millions) |
Property, plant and equipment | $ | 898.7 |
| | $ | 1,135.0 |
|
Deferred tax assets | | | |
Net operating loss and tax credit carryforwards | $ | 308.8 |
| | $ | 161.6 |
|
Employee benefits and compensation costs | 26.4 |
| | 49.0 |
|
Bonus and vacation accrual | 6.2 |
| | 11.4 |
|
Commodity price derivatives | 29.9 |
| | 74.3 |
|
Other | 9.4 |
| | 12.8 |
|
Total deferred tax assets | 380.7 |
| | 309.1 |
|
Net deferred income tax liability | $ | 518.0 |
|
| $ | 825.9 |
|
Balance sheet classification | | | |
Deferred income tax liability – noncurrent | 518.0 |
| | 825.9 |
|
Net deferred income tax liability | $ | 518.0 |
| | $ | 825.9 |
|
____________________________
| |
(1) | The $307.9 million decrease in net deferred income tax liability as of December 31, 2017 is primarily related to a $318.0 million decrease from the federal rate change from 35% to 21%. |
The amounts and expiration dates of net operating loss and tax credit carryforwards at December 31, 2017, are as follows:
|
| | | | | |
| Expiration Dates | | Amounts |
| | | (in millions) |
State net operating loss and tax credit carryforwards | 2018-2037 | | $ | 95.8 |
|
State net operating loss valuation allowance | | | $ | (56.8 | ) |
U.S. net operating loss | 2036-2037 | | $ | 250.4 |
|
U.S. alternative minimum tax credit | Indefinite | | $ | 19.5 |
|
The valuation allowance of $56.8 million was established in 2014 and 2017 against the available state net operating loss and is related primarily to losses incurred in Oklahoma and Louisiana. Due to the 2014 property sales in the Other Southern area in which the Company sold its interests in most of its properties in Oklahoma, the Company does not forecast sufficient taxable income to utilize the net operating loss in Oklahoma. In 2017, a valuation allowance of $31.8 million was established against Louisiana's net operating loss as the Company does not forecast sufficient taxable income to utilize the entire net operating loss in Louisiana.
The Tax Legislation eliminated AMT, and allowed the ability to offset our regular tax liability or claim refunds for taxable years 2018 through 2021 for AMT credits carried forward from prior years. The Company currently anticipates it will realize approximately $19.5 million in AMT value over the next four years with approximately half of this value estimated to be realized in 2019 for taxable year 2018.
Unrecognized Tax Benefit
As of December 31, 2017 and 2016, QEP had $19.0 million and $15.6 million, respectively, of unrecognized tax benefits related to uncertain tax positions for asset sales that occurred in 2014, which were recorded within "Other long-term liabilities" on the Consolidated Balance Sheets. The $15.6 million uncertain tax position the Company reported during the year ended December 31, 2016, was expensed during the year ended December 31, 2014, with an additional $3.4 million expensed during the year ended December 31, 2017 with the new Tax Legislation. The benefits of uncertain tax positions taken or expected to be taken on income tax returns is recognized in the consolidated financial statements at the largest amount that is more likely than not to be sustained upon examination by the relevant taxing authorities. Our policy is to recognize any interest expense related to uncertain tax positions in "Interest expense" on the Consolidated Statements of Operations and to recognize any penalties related to uncertain tax positions in "General and administrative" expense on the Consolidated Statements of Operations. During the year ended December 31, 2017, the Company incurred $0.7 million of estimated interest expense related to uncertain tax positions. During the year ended December 31, 2016, the Company incurred $0.7 million of estimated interest expense and $0.6 million of estimated penalties related to uncertain tax positions.
The following is a reconciliation of our beginning and ending amounts of unrecognized tax benefits for the years ended December 31, 2017 and 2016:
|
| | | | | | | |
| Unrecognized Tax Benefits |
| 2017 | | 2016 |
| (in millions) |
Balance as of January 1, | $ | 15.6 |
| | $ | 15.6 |
|
Federal benefit of state (change from 35% to 21%) | 3.4 |
| | — |
|
Balance as of December 31, | $ | 19.0 |
| | $ | 15.6 |
|
As of December 31, 2017 and 2016, QEP had approximately $19.0 million and $15.6 million, respectively, of unrecognized tax benefit that would impact its effective tax rate if recognized. The difference is due to the change in the Federal tax rate in 2017 from 35% to 21%, which affects the federal benefit of the state deduction to the unrecognized tax position.