Income Taxes
The following table summarizes the components of income tax expense for the years ended December 31:
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| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Current income taxes | | | | | |
State | $ | 25 |
| | $ | 20 |
| | $ | 10 |
|
Federal | (1 | ) | | 1 |
| | — |
|
Total current income taxes | $ | 24 |
| | $ | 21 |
| | $ | 10 |
|
Deferred income taxes | | | | | |
State | $ | 50 |
| | $ | 24 |
| | $ | 32 |
|
Federal | 413 |
| | 258 |
| | 265 |
|
Amortization of deferred investment tax credits | (1 | ) | | (1 | ) | | (1 | ) |
Total deferred income taxes | 462 |
| | 281 |
| | 296 |
|
Provision for income taxes | $ | 486 |
| | $ | 302 |
| | $ | 306 |
|
The following is a reconciliation between the statutory federal income tax rate and the Company’s effective tax rate for the years ended December 31:
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| | | | | | | | |
| 2017 | | 2016 | | 2015 |
Income tax at statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Increases (decreases) resulting from: | | | | | |
State taxes, net of federal taxes | 5.4 | % | | 3.8 | % | | 3.6 | % |
Tax Cuts and Jobs Act | 13.7 | % | | — | % | | — | % |
Other, net | (0.8 | )% | | 0.4 | % | | 0.5 | % |
Effective tax rate | 53.3 | % | | 39.2 | % | | 39.1 | % |
On December 22, 2017, President Trump signed into law the TCJA. Substantially all of the provisions of the TCJA are effective for taxable years beginning after December 31, 2017. The TCJA includes significant changes to the Internal Revenue Code of 1986, as amended (the “Code”), including amendments which significantly change the taxation of individuals and business entities, and includes specific provisions related to regulated public utilities. The more significant changes that impact the Company included in the TCJA are reductions in the corporate federal income tax rate from 35% to 21%, and several technical provisions including, among others, limiting the utilization of net operating losses (“NOLs”) arising after December 31, 2017 to 80% of taxable income with an indefinite carryforward. The specific provisions related to regulated public utilities in the TCJA generally allow for the continued deductibility of interest expense, the elimination of full expensing for tax purposes of certain property acquired after September 27, 2017 and continue certain rate normalization requirements for accelerated depreciation benefits. Non-regulated segments of the Company’s business will be able to take advantage of the full expensing provisions of the TCJA.
Changes in the Code from the TCJA had a material impact on our financial statements in 2017. Under GAAP, specifically Accounting Standards Codification (“ASC”) Topic 740, Income Taxes, the tax effects of changes in tax laws must be recognized in the period in which the law is enacted. ASC 740 also requires deferred income tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. Thus, at the date of enactment, the Company’s deferred income taxes were re-measured based upon the new tax rate. For the Company’s regulated entities, substantially all of the change in deferred income taxes are recorded as either an offset to a regulatory asset or liability because changes are expected to be recovered by or refunded to customers. For the Company’s unregulated operations, the change in deferred income taxes is recorded as a non-cash re-measurement adjustment to earnings.
The staff of the U.S. Securities and Exchange Commission (the “SEC”) has recognized the complexity of reflecting the impacts of the TCJA, and on December 22, 2017 issued guidance in Staff Accounting Bulletin 118 (“SAB 118”) which clarifies accounting for income taxes under ASC 740 if information is not yet available or complete and provides for up to a one year period in which to complete the required analyses and accounting. SAB 118 describes three scenarios or buckets associated with a company’s status of accounting for income tax reform: (1) a company is complete with its accounting for certain effects of tax reform, (2) a company is able to determine a reasonable estimate for certain effects of tax reform and records that estimate as a provisional amount, or (3) a company is not able to determine a reasonable estimate and therefore continues to apply ASC 740, based on the provisions of the tax laws that were in effect immediately prior to the TCJA being enacted. The Company has made a reasonable estimate for the measurement and accounting of certain effects of the TCJA which have been reflected in the December 31, 2017 financial statements. The re-measurement of deferred income taxes at the new federal tax rate increased the 2017 deferred income tax provision by $125 million for the year ending December 31, 2017. Additionally, the accumulated deferred income tax liability decreased by $1.39 billion and regulatory liabilities increased by $1.51 billion, respectively, as of December 31, 2017.
As provided for under SAB 118, the Company has not recorded the impact for certain items under TCJA for which it has not yet been able to gather, prepare and analyze the necessary information in reasonable detail to complete the ASC 740 accounting. For these items, which include the impact of TCJA on state income taxes, the current and deferred income taxes were recognized and measured based on the provisions of the tax laws that were in effect immediately prior to the TCJA being enacted. The current and deferred state taxes are $25 million and $50 million as of December 31, 2017, respectively. The determination of the impact of the income tax effects of these items and the items reflected as provisional amounts will require additional analysis of historical records and further interpretation of the TCJA from yet to be issued U.S. Treasury regulations which will require more time, information and resources than currently available to the Company.
The following table provides the components of the net deferred tax liability as of December 31:
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| | | | | | | |
| 2017 | | 2016 |
Deferred tax assets | | | |
Advances and contributions | $ | 395 |
| | $ | 540 |
|
Tax losses and credits | 256 |
| | 301 |
|
Regulatory income tax assets | 327 |
| | — |
|
Pension and other postretirement benefits | 96 |
| | 173 |
|
Other | 49 |
| | 90 |
|
Total deferred tax assets | 1,123 |
| | 1,104 |
|
Valuation allowance | (13 | ) | | (6 | ) |
Total deferred tax assets, net of allowance | $ | 1,110 |
| | $ | 1,098 |
|
Deferred tax liabilities | | | |
|
Property, plant and equipment | $ | 2,489 |
| | $ | 3,339 |
|
Deferred pension and other postretirement benefits | 69 |
| | 126 |
|
Other | 103 |
| | 229 |
|
Total deferred tax liabilities | 2,661 |
| | 3,694 |
|
Total deferred tax liabilities, net of deferred tax assets | $ | (1,551 | ) | | $ | (2,596 | ) |
As of December 31, 2017 and 2016, the Company recognized federal NOL carryforwards of $1.05 billion and $1.23 billion, respectively. The Company believes the federal NOL carryforwards are more likely than not to be recovered and require no valuation allowance. The Company’s federal NOL carryforwards will begin to expire in 2028.
As of December 31, 2017 and 2016, the Company had state NOLs of $322 million and $625 million, respectively, a portion of which are offset by a valuation allowance because the Company does not believe these NOLs are more likely than not to be realized. The state NOL carryforwards will begin to expire in 2018 through 2037.
As of December 31, 2017 and 2016, the Company had an insignificant amount of Canadian NOL carryforwards and capital loss carryforwards for federal income tax purposes.
The Company files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state or local or non-U.S. income tax examinations by tax authorities for years on or before 2012. The Company has state income tax examinations in progress and does not expect material adjustments to result.
The following table summarizes the changes in the Company’s gross liability, excluding interest and penalties, for unrecognized tax benefits:
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| | | |
Balance as of January 1, 2016 | $ | 233 |
|
Increases in current period tax positions | 10 |
|
Decreases in prior period measurement of tax positions | (74 | ) |
Balance as of December 31, 2016 | $ | 169 |
|
Increases in current period tax positions | 8 |
|
Decreases in prior period measurement of tax positions | (71 | ) |
Balance as of December 31, 2017 | $ | 106 |
|
The Company’s tax positions relate primarily to the deductions claimed for repair and maintenance costs on its utility plant. The gross liability was reduced primarily as a result of the Section 481(a) adjustment allocated for the current year when the Company filed the accounting method change with its 2015 tax return. The Company does not anticipate material changes to its unrecognized tax benefits within the next year. If the Company sustains all of its positions as of December 31, 2017, an unrecognized tax benefit of $10 million, excluding interest and penalties, would impact the Company’s effective tax rate. The Company had an insignificant amount of interest and penalties related to its tax positions as of December 31, 2017 and 2016.
The following table summarizes the changes in the Company’s valuation allowance:
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| | | |
Balance as of January 1, 2015 | $ | 10 |
|
Decreases in current period tax positions | (2 | ) |
Balance as of December 31, 2015 | $ | 8 |
|
Decreases in current period tax positions | (2 | ) |
Balance as of December 31, 2016 | $ | 6 |
|
Increases in current period tax positions | 7 |
|
Balance as of December 31, 2017 | $ | 13 |
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