Income Taxes
On December 22, 2017, the President signed into law the TCJA, which, among other things, enacted significant changes to the Internal Revenue Code of 1986, as amended, including a reduction in the maximum U.S. federal corporate income tax rate from 35% to 21%, and certain other provisions related specifically to the public utility industry, including the continuation of certain interest expense deductibility. These changes are effective January 1, 2018. Under GAAP, the effects of a change in tax law are recorded as a discrete item in the period of enactment.
Rates for NiSource’s regulated customers include provisions for the collection of U.S. federal income taxes. Accordingly, accounting effects related to changes in tax rates at NiSource that would normally be recognized as a component of income tax expense may instead be deferred as a regulatory asset or liability and reflected in future ratemaking. In December 2017, NiSource remeasured its deferred tax assets and liabilities to the new federal corporate income tax rate. The result of this remeasurement was a reduction in the net deferred tax liability of approximately $1.3 billion, including approximately $0.4 billion of regulatory "gross up" to account for over-collection of past taxes from customers. Offsetting the reduction in net deferred tax liabilities was an increase in regulatory liabilities of approximately $1.5 billion and an increase in income tax expense of $0.2 billion. These changes are discussed in further detail below.
On December 22, 2017, the SEC issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for tax effects of the TCJA. SAB 118 provides a measurement period that should not extend beyond one year from the TCJA enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the TCJA for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the TCJA is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate to be included in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provision of the tax laws that were in effect immediately before the enactment of the TCJA. While NiSource was able to make reasonable estimates of the impact of the reduction in corporate rate on our net deferred income tax liability balances, the final impact of the TCJA may differ from these estimates, due to, among other things, changes in NiSource's interpretations and assumptions, additional guidance that may be issued by the IRS, and actions NiSource may take. NiSource is continuing to gather additional information to determine the final impact.
The components of income tax expense (benefit) were as follows:
|
| | | | | | | | | | | |
Year Ended December 31, (in millions) | 2017 | | 2016 | | 2015 |
Income Taxes | | | | | |
Current | | | | | |
Federal | $ | — |
| | $ | — |
| | $ | — |
|
State | 7.8 |
| | (0.1 | ) | | 6.0 |
|
Total Current | 7.8 |
| | (0.1 | ) | | 6.0 |
|
Deferred | | | | | |
Federal | 302.7 |
| | 165.6 |
| | 124.1 |
|
State | 5.0 |
| | 18.0 |
| | 13.6 |
|
Total Deferred | 307.7 |
| | 183.6 |
| | 137.7 |
|
Deferred Investment Credits | (1.0 | ) | | (1.4 | ) | | (2.4 | ) |
Income Taxes from Continuing Operations | $ | 314.5 |
| | $ | 182.1 |
| | $ | 141.3 |
|
Total income taxes from continuing operations were different from the amount that would be computed by applying the statutory federal income tax rate to book income before income tax. The major reasons for this difference were as follows:
|
| | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, (in millions) | 2017 | | 2016 | | 2015 |
Book income from Continuing Operations before income taxes | $ | 443.1 |
| | | | $ | 510.2 |
| | | | $ | 339.9 |
| | |
Tax expense at statutory Federal income tax rate | 155.0 |
| | 35.0 | % | | 178.6 |
| | 35.0 | % | | 118.9 |
| | 35.0 | % |
Increases (reductions) in taxes resulting from: | | | | | | | | | | | |
State income taxes, net of Federal income tax benefit | 6.9 |
| | 1.5 |
| | 11.3 |
| | 2.2 |
| | 14.8 |
| | 4.4 |
|
Property and plant (including accelerated depreciation) | (2.4 | ) | | (0.5 | ) | | (1.5 | ) | | (0.3 | ) | | (1.6 | ) | | (0.4 | ) |
Charitable contribution carryover | (1.2 | ) | | (0.3 | ) | | 2.8 |
| | 0.5 |
| | 17.8 |
| | 5.2 |
|
Remeasurement due to TCJA | 161.1 |
| | 36.4 |
| | — |
| | — |
| | — |
| | — |
|
Employee stock ownership plan dividends and other compensation | (6.5 | ) | | (1.5 | ) | | (9.5 | ) | | (1.9 | ) | | (2.9 | ) | | (0.9 | ) |
Tax accrual adjustments and other, net | 1.6 |
| | 0.4 |
| | 0.4 |
| | 0.2 |
| | (5.7 | ) | | (1.7 | ) |
Income Taxes from Continuing Operations | $ | 314.5 |
| | 71.0 | % | | $ | 182.1 |
| | 35.7 | % | | $ | 141.3 |
| | 41.6 | % |
The effective income tax rates were 71.0%, 35.7% and 41.6% in 2017, 2016 and 2015, respectively. The 35.3% increase in the overall effective tax rate in 2017 versus 2016 was primarily the result of a $161.1 million increase in income taxes related to implementing the provisions of the TCJA. The charge to income tax expense resulting from implementation of the TCJA relates primarily to remeasurement of parent company deferred tax assets for NOL carryforwards.
The 5.9% decrease in the overall effective tax rate in 2016 versus 2015 was primarily the result of a $7.2 million decrease in income taxes related to Federal tax benefits on stock compensation and the absence of $15.0 million of lost Federal tax benefit primarily related to charitable contribution carryforward adjustments recorded in the prior year.
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. Among other provisions, the standard requires that all income tax effects of awards are recognized in the income statement when the awards vest and are distributed.
On December 18, 2015, the President signed into law the PATH. PATH, among other provisions, extended and modified bonus depreciation through 2019. As a result of PATH and 50% bonus depreciation being extended, NiSource recorded tax expense of $5.8 million in 2015 for the expiration of unused charitable contribution carryforwards which expired due to the 5 year carryover limitation. NiSource also recorded a valuation allowance for an additional $12.0 million of charitable contribution carryforwards that are set to expire in 2016-2019 in the event that NiSource does not have sufficient taxable income to utilize the carryforward amounts.
Deferred income taxes result from temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The principal components of NiSource’s net deferred tax liability were as follows:
|
| | | | | | | |
At December 31, (in millions) | 2017 | | 2016 |
Deferred tax liabilities | | | |
Accelerated depreciation and other property-related differences | $ | 2,260.7 |
| | $ | 3,323.5 |
|
Unrecovered gas and fuel costs | — |
| | 25.9 |
|
Other regulatory assets | 309.5 |
| | 449.2 |
|
Total Deferred Tax Liabilities | 2,570.2 |
| | 3,798.6 |
|
Deferred tax assets | | | |
Other regulatory liabilities including impact of TCJA | 406.0 |
| | 93.1 |
|
Pension and other postretirement/postemployment benefits | 136.7 |
| | 261.7 |
|
Net operating loss carryforward and Alternative Minimum Tax credit carryforward | 576.0 |
| | 646.2 |
|
Environmental liabilities | 24.0 |
| | 47.0 |
|
Other accrued liabilities | 37.2 |
| | 45.5 |
|
Other, net | 97.4 |
| | 177.1 |
|
Total Deferred Tax Assets | 1,277.3 |
| | 1,270.6 |
|
Net Deferred Tax Liabilities | $ | 1,292.9 |
| | $ | 2,528.0 |
|
State income tax net operating loss benefits are recorded at their realizable value. NiSource anticipates it is more likely than not that it will realize $65.8 million and $43.6 million of these tax benefits as of December 31, 2017 and 2016, respectively, prior to their expiration. These tax benefits are primarily related to Indiana and Pennsylvania. The carryforward periods for these tax benefits expire in various tax years from 2028 to 2037. The remaining net operating loss carryforward tax benefit represents a Federal carryforward of $508.5 million that will expire in 2037 and an Alternative Minimum Tax credit of $1.7 million that will carry forward indefinitely.
Unrecognized tax benefits for the periods reported are immaterial. NiSource recognizes accrued interest on unrecognized tax benefits, accrued interest on other income tax liabilities and tax penalties in income tax expense. Interest expense recorded on unrecognized tax benefits and other income tax liabilities was immaterial for all periods presented. There were no accruals for penalties recorded in the Statements of Consolidated Income for the years ended December 31, 2017, 2016 and 2015, and there were no balances for accrued penalties recorded on the Consolidated Balance Sheets as of December 31, 2017 and 2016.
NiSource is subject to income taxation in the United States and various state jurisdictions, primarily Indiana, Pennsylvania, Kentucky, Massachusetts, Maryland and Virginia.
Because NiSource is part of the IRS’s Large and Mid-Size Business program, each year’s federal income tax return is typically audited by the IRS. As of December 31, 2017, tax years through 2016 have been audited and are effectively closed to further assessment. The audit of tax year 2017 under the CAP program is expected to be completed in 2018. NiSource has been accepted into the CAP maintenance program for the audit of tax year 2018.
The statute of limitations in each of the state jurisdictions in which NiSource operates remains open until the years are settled for federal income tax purposes, at which time amended state income tax returns reflecting all federal income tax adjustments are filed. As of December 31, 2017, there were no state income tax audits in progress that would have a material impact on the consolidated financial statements.