Income Taxes
The components of CenterPoint Energy’s income tax expense (benefit) were as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in millions) |
Current income tax expense (benefit): | | | | | |
Federal | $ | 32 |
| | $ | 23 |
| | $ | (37 | ) |
State | 9 |
| | 18 |
| | 12 |
|
Total current expense (benefit) | 41 |
| | 41 |
| | (25 | ) |
Deferred income tax expense (benefit): | |
| | |
| | |
|
Federal | (806 | ) | | 185 |
| | (359 | ) |
State | 36 |
| | 28 |
| | (54 | ) |
Total deferred expense (benefit) | (770 | ) | | 213 |
| | (413 | ) |
Total income tax expense (benefit) | $ | (729 | ) | | $ | 254 |
| | $ | (438 | ) |
A reconciliation of income tax expense (benefit) using the federal statutory income tax rate to the actual income tax expense and resulting effective income tax rate is as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in millions) |
Income (loss) before income taxes | $ | 1,063 |
| | $ | 686 |
| | $ | (1,130 | ) |
Federal statutory income tax rate | 35 | % | | 35 | % | | 35 | % |
Expected federal income tax expense (benefit) | 372 |
| | 240 |
| | (396 | ) |
Increase (decrease) in tax expense resulting from: | |
| | |
| | |
|
State income tax expense, net of federal income tax | 26 |
| | 27 |
| | (27 | ) |
State valuation allowance, net of federal income tax | 3 |
| | 3 |
| | — |
|
Federal income tax rate reduction | (1,113 | ) | | — |
| | — |
|
Other, net | (17 | ) | | (16 | ) | | (15 | ) |
Total | (1,101 | ) | | 14 |
| | (42 | ) |
Total income tax expense (benefit) | $ | (729 | ) | | $ | 254 |
| | $ | (438 | ) |
Effective tax rate | (69 | )% | | 37 | % | | 39 | % |
In 2017, CenterPoint Energy recognized a $1.1 billion deferred tax benefit from the remeasurement of CenterPoint Energy’s ADFIT liability as a result of the enactment of the TCJA on December 22, 2017 which reduced the U.S. corporate income tax rate from 35% to 21%. For additional information on the 2017 impacts of the TCJA, please see the discussion following the deferred tax assets and liabilities table below.
In 2016, CenterPoint Energy recognized a $6 million deferred tax expense due to Louisiana state law change and recorded an additional $3 million valuation allowance on certain state carryforwards.
In 2015, CenterPoint Energy’s effective tax rate was higher than the statutory rate primarily due to lower earnings from the impairment of CenterPoint Energy’s equity method investment in Enable. The impairment loss reduced the deferred tax liability on CenterPoint Energy’s equity method investment in Enable.
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities were as follows:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (in millions) |
Deferred tax assets: | | | |
Benefits and compensation | $ | 162 |
| | $ | 316 |
|
Regulatory liabilities | 347 |
| | 57 |
|
Loss and credit carryforwards | 90 |
| | 79 |
|
Asset retirement obligations | 68 |
| | 77 |
|
Other | 16 |
| | 21 |
|
Valuation allowance | (7 | ) | | (5 | ) |
Total deferred tax assets | 676 |
| | 545 |
|
Deferred tax liabilities: | |
| | |
|
Property, plant, and equipment | 1,808 |
| | 2,603 |
|
Investment in unconsolidated affiliates | 927 |
| | 1,383 |
|
Regulatory assets | 473 |
| | 940 |
|
Investment in marketable securities and indexed debt | 502 |
| | 772 |
|
Indexed debt securities derivative | 13 |
| | 4 |
|
Other | 127 |
| | 106 |
|
Total deferred tax liabilities | 3,850 |
| | 5,808 |
|
Net deferred tax liabilities | $ | 3,174 |
| | $ | 5,263 |
|
Federal Tax Reform. On December 22, 2017, President Trump signed into law comprehensive tax reform legislation informally called the Tax Cuts and Jobs Acts, or TCJA, which resulted in significant changes to federal tax laws effective January 1, 2018. The new legislation contains several key tax provisions that will impact CenterPoint Energy, including the reduction of the corporate income tax rate from 35% to 21% effective January 1, 2018. The new legislation also includes a variety of other changes, such as, a limitation on the tax deductibility of interest expense, acceleration of business asset expensing and reduction in the amount of executive pay that may qualify for a tax deduction, among others. Several other provisions of the TCJA are not generally applicable to the public utility industry, including the limitation on the tax deductibility of interest expense and the acceleration of business asset expensing.
While the effective date of the rate change in the legislation is January 1, 2018, ASC 740 requires that deferred tax balances be adjusted in the period of enactment to the rate in which those deferred taxes will reverse. The EDIT from the rate change resulted in an adjustment to income tax expense of approximately $1.1 billion and creation of a net regulatory liability of $1.3 billion (includes $0.3 billion gross-up) for the amount that is likely to be returned to ratepayers. The major components of the $1.1 billion benefit to income tax expense are for the remeasurement of CenterPoint Energy's deferred taxes associated with its investment in Enable, investment in marketable securities (ZENS) and stranded costs related to the Securitization Bonds. The amount and expected amortization of the net regulatory tax liability may differ from the $1.3 billion estimate, possibly materially, due to, among other things, regulatory actions, interpretations and assumptions CenterPoint Energy has made, and any guidance that may be issued in the future. CenterPoint Energy will continue to assess the amount and expected amortization of the net regulatory tax liability as it has proceedings with regulators in future periods. For the discussion of risks associated with the amount and expected flow through of EDIT by Houston Electric and NGD, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Regulatory Matters —Tax Reform” in Item 7 of Part II of this report.
Tax Attribute Carryforwards and Valuation Allowance. CenterPoint Energy has no remaining federal net operating loss carryforward or federal tax credits as of December 31, 2017. As of December 31, 2017, CenterPoint Energy had $870 million of state net operating loss carryforwards that expire between 2018 and 2037 and $12 million of state tax credits that do not expire. A state capital loss carryforward of $244 million expired unutilized at the end of 2017. CenterPoint Energy reported a valuation allowance of $7 million because it is more likely than not that the benefit from certain state net operating loss carryforwards will not be realized.
Uncertain Income Tax Positions. CenterPoint Energy reported no uncertain tax liability as of December 31, 2017, 2016 and 2015. CenterPoint Energy expects no significant change to the uncertain tax liability over the next 12 months ending December 31, 2018.
Tax Audits and Settlements. Tax years through 2015 have been audited and settled with the IRS. For the 2016 through 2018 tax years, CenterPoint Energy is a participant in the IRS’s Compliance Assurance Process.