INCOME TAXES
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the TCJA. The TCJA reduced the U.S. federal corporate tax rate from 35% to 21%. The Company uses the asset and liability method in accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized at currently enacted income tax rates, to reflect the tax effect of temporary differences between the book and tax basis of assets and liabilities as well as operating loss and tax credit carryforwards. As such, the Company has remeasured the deferred income taxes at the 21% federal tax rate as of December 31, 2017. The entities subject to regulatory construct have made their best estimate regarding the probability of settlements of net regulatory liabilities established pursuant to the TCJA. The amount of the settlements may change based on decisions and actions by the rate regulators, which could have a material impact on the Company’s future results of operations, cash flows or financial position. As a result of the revaluation, deferred tax assets and liabilities were reduced by approximately $309 million. Of the $309 million, approximately $301 million is related to our regulated utilities and is reclassified to a regulatory liability. This regulatory liability will generally be amortized over the remaining life of the related assets using the normalization principles as specifically prescribed in the TCJA.
In addition, as allowed under SEC Staff Accounting Bulletin No. 118 (SAB 118), the Company has recorded provisional income tax amounts as of December 31, 2017 for changes pursuant to the TCJA related to depreciation, for which the impacts could not be finalized upon issuance of the Company’s financial statements but reasonable estimates could be determined. The provisional amounts may change as the Company finalizes the analysis and computations, and such changes could be material to the Company’s future results of operations, cash flows or financial position.
Income tax expense (benefit) from continuing operations for the years ended December 31 was (in thousands):
|
| | | | | | | | | |
| 2017 | 2016 | 2015 |
Current: | | | |
Federal | $ | (6,193 | ) | $ | (21,806 | ) | $ | 2,624 |
|
State | (1,432 | ) | (1,797 | ) | 1,329 |
|
| (7,625 | ) | (23,603 | ) | 3,953 |
|
Deferred: | | | |
Federal | 76,567 |
| 78,997 |
| 71,332 |
|
State | 4,470 |
| 3,759 |
| 3,485 |
|
Tax credit amortization | (45 | ) | (52 | ) | (113 | ) |
| 80,992 |
| 82,704 |
| 74,704 |
|
| | | |
| $ | 73,367 |
| $ | 59,101 |
| $ | 78,657 |
|
Included in discontinued operations is a tax benefit of $8.4 million, $49 million and $101 million for 2017, 2016 and 2015, respectively.
The temporary differences, which gave rise to the net deferred tax liability, for the years ended December 31 were as follows (in thousands):
|
| | | | | | |
| 2017 | 2016 |
Deferred tax assets: | | |
Regulatory liabilities | $ | 90,742 |
| $ | 58,200 |
|
Employee benefits | 18,724 |
| 28,873 |
|
Federal net operating loss | 155,276 |
| 252,780 |
|
Other deferred tax assets(a) | 74,561 |
| 83,675 |
|
Less: Valuation allowance | (9,121 | ) | (9,263 | ) |
Total deferred tax assets | 330,182 |
| 414,265 |
|
| | |
Deferred tax liabilities: | | |
Accelerated depreciation, amortization and other property-related differences(b) | (510,774 | ) | (782,674 | ) |
Regulatory assets | (26,245 | ) | (49,471 | ) |
Goodwill | (46,392 | ) | (60,544 | ) |
State deferred tax liability | (58,930 | ) | (50,258 | ) |
Deferred costs | (16,063 | ) | (18,551 | ) |
Other deferred tax liabilities | (8,298 | ) | (14,702 | ) |
Total deferred tax liabilities | (666,702 | ) | (976,200 | ) |
| | |
Net deferred tax liability | $ | (336,520 | ) | $ | (561,935 | ) |
_______________
| |
(a) | Other deferred tax assets consist primarily of alternative minimum tax credit and federal research and development credits. No single item exceeds 5% of the total net deferred tax liability. |
| |
(b) | The net deferred tax liabilities were revalued for the change in federal tax rate to 21% under the TCJA. The revaluation resulted in a reduction to net deferred tax liabilities of approximately $309 million. Due to the regulatory construct, approximately $301 million of the revaluation was reclassified to a regulatory liability. |
The effective tax rate differs from the federal statutory rate for the years ended December 31, as follows:
|
| | | | | | |
| 2017 | 2016 | 2015 |
Federal statutory rate | 35.0 | % | 35.0 | % | 35.0 | % |
State income tax (net of federal tax effect) | 0.9 |
| 1.2 |
| 1.5 |
|
Percentage depletion | (0.6 | ) | (0.8 | ) | (0.7 | ) |
Non-controlling interest (a) | (1.8 | ) | (1.6 | ) | — |
|
Equity AFUDC | (0.2 | ) | (0.5 | ) | (0.1 | ) |
Tax credits | (1.7 | ) | (0.4 | ) | (0.1 | ) |
Transaction costs | — |
| 0.5 |
| — |
|
Accounting for uncertain tax positions adjustment | (0.2 | ) | (2.7 | ) | 0.8 |
|
Flow-through adjustments (b) | (1.1 | ) | (2.1 | ) | (1.0 | ) |
Other tax differences | (0.9 | ) | 0.1 |
| 0.3 |
|
IRC 172(f) carryback claim | (0.7 | ) | — |
| — |
|
Tax Cuts & Jobs Act corporate rate reduction (c) | (2.7 | ) | — |
| — |
|
| 26.0 | % | 28.7 | % | 35.7 | % |
_________________________
| |
(a) | The effective tax rate reflects the income attributable to the noncontrolling interest in Black Hills Colorado IPP for which a tax provision was not recorded. |
| |
(b) | Flow-through adjustments related primarily to accounting method changes for tax purposes that allow us to take a current tax deduction for repair costs and certain indirect costs. We recorded a deferred income tax liability in recognition of the temporary difference created between book and tax treatment and flowed the tax benefit through to tax expense. A regulatory asset was established to reflect the recovery of future increases in taxes payable from customers as the temporary differences reverse. As a result of this regulatory treatment, we continue to record tax benefits consistent with the flow-through method. |
| |
(c) | On December 22, 2017, the TCJA was signed into law reducing the federal corporate rate from 35% to 21% effective January 1, 2018. The 2017 effective tax rate reduction reflects the revaluation of deferred income taxes associated with non-regulated operations required by the change. |
At December 31, 2017, we have federal and state NOL carryforwards that will expire at various dates as follows (in thousands):
|
| | | | | | | | |
| | Amounts | | Expiration Dates |
Federal Net Operating Loss Carryforward | | $ | 739,184 |
| | 2019 | to | 2037 |
| | | | | | |
State Net Operating Loss Carryforward | | $ | 688,335 |
| | 2017 | to | 2038 |
As of December 31, 2017, we had a $1.3 million valuation allowance against the state NOL carryforwards. Our 2017 analysis of the ability to utilize such NOLs resulted in a slight increase in the valuation allowance of approximately $0.4 million, which resulted in an increase to tax expense. The valuation allowance adjustment was primarily attributable to a projected decrease in state taxable income for years beyond 2017. This projected decrease impacted the utilization of NOL carryforward in those states where the carryforward period is significantly shorter than the federal carryforward period of 20 years. In certain states, the carryforward period is limited to 5 years. Ultimate usage of these NOLs depends upon our future tax filings. If the valuation allowance is adjusted due to higher or lower than anticipated utilization of the NOLs, the offsetting amount will affect tax expense.
The following table reconciles the total amounts of unrecognized tax benefits, without interest, at the beginning and end of the period included in Other deferred credits and other liabilities on the accompanying Consolidated Balance Sheets (in thousands):
|
| | | |
| Changes in Uncertain Tax Positions |
Beginning balance at January 1, 2015 | $ | 32,192 |
|
Additions for prior year tax positions | 3,285 |
|
Reductions for prior year tax positions | (3,491 | ) |
Additions for current year tax positions | — |
|
Settlements | — |
|
Ending balance at December 31, 2015 | 31,986 |
|
Additions for prior year tax positions | 2,423 |
|
Reductions for prior year tax positions | (19,174 | ) |
Additions for current year tax positions | — |
|
Settlements | (11,643 | ) |
Ending balance at December 31, 2016 | 3,592 |
|
Additions for prior year tax positions | 358 |
|
Reductions for prior year tax positions | (5,713 | ) |
Additions for current year tax positions | 5,026 |
|
Settlements | — |
|
Ending balance at December 31, 2017 | $ | 3,263 |
|
The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate is approximately $0.2 million.
We recognized no interest expense for the years ended December 31, 2017 and December 31, 2016, and approximately $1.6 million for the year ended December 31, 2015. We had no accrued interest (before tax effect) associated with income taxes at December 31, 2017 and December 31, 2016.
Black Hills Corporation and its subsidiaries are currently under examination by the IRS for the 2010 to 2012 tax years. A 30-day Letter was received in second quarter 2016 along with a Revenue Agent’s Report from the IRS in regard to the audit of the 2010 to 2012 tax years disallowing certain R&D credits and deductions claimed with respect to certain costs and projects. In response to the 30-day Letter, a protest was timely filed with IRS Appeals in the second quarter of 2016 and a final settlement at IRS Appeals is expected to be reached in 2018. Black Hills Gas, Inc. and subsidiaries, which files a separate consolidated tax return from Black Hills Corporation and subsidiaries, is under examination by the IRS for 2014.
We had deferred a substantial amount of tax payments through various tax planning strategies including the deferral of approximately $125 million in income taxes attributable to the like-kind exchange effectuated in connection with the IPP Transaction and Aquila Transaction that occurred in 2008. The IRS had challenged our position with respect to the like-kind exchange. In the first quarter of 2016, we reached a settlement agreement in principle with IRS Appeals related to both the like-kind exchange transaction in addition to the R&D credits and deductions issues. In 2016, the settlement resulted in a reduction to the liability for unrecognized tax benefits of approximately $29 million excluding interest. Approximately $17 million of the reduction was to restore accumulated deferred income taxes and the remaining portion of approximately $12 million was reclassified to current taxes payable.
As of December 31, 2017, we do not have any tax positions for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease on or before December 31, 2018.
State tax credits have been generated and are available to offset future state income taxes. At December 31, 2017, we had the following state tax credit carryforwards (in thousands):
|
| | | | | | |
State Tax Credit Carryforwards | Expiration Year |
Investment tax credit | $ | 20,285 |
| 2023 | to | 2036 |
Research and development | $ | 179 |
| No expiration |
As of December 31, 2017, we had a $7.8 million valuation allowance against the state tax credit carryforwards. The re-evaluation of our ability to utilize such credits resulted in an increase of the valuation allowance of approximately $1.2 million of which approximately $0.6 million resulted in an increase to tax expense. The remaining $0.6 million increase is attributable to our regulated business and is being accounted for under the deferral method whereby the credits are amortized to tax expense over the estimated useful life of the underlying asset that generated the credit. The valuation allowance adjustment was primarily attributable to the impact of lower projected apportionment factors resulting in decreased state taxable income in years beyond 2017. Ultimate usage of these credits depends upon our future tax filings. If the valuation allowance is adjusted due to higher or lower than anticipated utilization of the state tax credit carryforwards, the offsetting amount will affect tax expense.