Income Taxes
General. Our taxable income or loss is included in our parent's (EP Energy Corporation) U.S. federal and certain state returns. EP Energy Corporation pays all consolidated U.S. federal and state income tax directly to the appropriate taxing jurisdictions. We record income taxes on a separate return basis in our financial statements as if we had filed separate income tax returns under our existing structure. In certain states, we also file and pay directly to the state taxing authorities.
Pretax Income (Loss) and Income Tax Expense (Benefit). The tables below show the pretax loss and the components of income tax benefit for the following periods:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in millions) |
Pretax Loss | $ | (203 | ) | | $ | (26 | ) | | $ | (4,326 | ) |
| | | | | |
Components of Income Tax Benefit (Expense) | | | |
| | |
|
Current | | | |
| | |
|
Federal | $ | — |
| | $ | 6 |
| | $ | (6 | ) |
State | — |
| | (1 | ) | | — |
|
| $ | — |
| | $ | 5 |
| | $ | (6 | ) |
| | | | | |
Deferred | | | |
| | |
|
Federal | — |
| | — |
| | 1,071 |
|
State | — |
| | — |
| | 49 |
|
| — |
| | — |
| | 1,120 |
|
Total income tax benefit | $ | — |
| | $ | 5 |
| | $ | 1,114 |
|
Effective Tax Rate Reconciliation. Our income taxes included in net income differ from the amount computed by applying the statutory federal income tax rate of 35% for the following reasons:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in millions) |
Income taxes at the statutory federal rate of 35% | $ | 71 |
| | $ | 9 |
| | $ | 1,514 |
|
Increase (decrease) | | | |
| | |
|
State income taxes, net of federal income tax effect | — |
| | 1 |
| | 41 |
|
Change in enacted tax rate | (203 | ) | | — |
| | — |
|
Change in valuation allowance | 124 |
| | (3 | ) | | (439 | ) |
Other | 8 |
| | (2 | ) | | (2 | ) |
Income tax benefit | $ | — |
| | $ | 5 |
| | $ | 1,114 |
|
The effective tax rate for the year ended December 31, 2017 was 0%. Our effective tax rate differed from the statutory rate of 35% primarily due to the change in our valuation allowance on our net deferred tax assets and non-deductible compensation expenses. Changes in our deferred taxes from year to year are offset by changes to our related valuation allowance and thus have the effect of eliminating the impact of federal taxes on our income.
In December 2017, Congress passed into law the Tax Cuts and Jobs Act (the Act) which lowered the federal corporate tax rate from 35% to 21% effective January 1, 2018. The passage of the Act had no effect on our financial statements since the $203 million provisional effect of adjusting the tax rate on all our deferred tax balances was offset by a corresponding adjustment to the valuation allowance on our net deferred assets. While there was no overall impact on our financial statements from the Act, we are still analyzing certain aspects of the Act which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.
The effective tax rate for the year ended December 31, 2016 was 19.97%. Our effective tax rate differed from the statutory rate of 35% as a result of the effects of state income taxes (net of federal income tax effects), non-deductible compensation, and adjustments to the valuation allowance on our net deferred tax assets, which offset a deferred income tax benefit by $3 million.
The effective tax rate for the year ended December 31, 2015 was lower than the statutory rate of 35% as a result of recording a valuation allowance of $439 million against our net deferred tax assets.
Deferred Tax Assets and Liabilities. The following are the components of net deferred tax assets and liabilities:
|
| | | | | | | |
| December 31,
2017 | | December 31,
2016 |
| (in millions) |
| | | |
|
Deferred tax assets | | | |
|
Property, plant and equipment | $ | 50 |
| | $ | 249 |
|
Net operating loss carryovers | 228 |
| | 160 |
|
Employee benefits | 2 |
| | 6 |
|
Financial derivatives | 8 |
| | — |
|
Legal and other reserves | 9 |
| | 6 |
|
Asset retirement obligations | 8 |
| | 15 |
|
Transaction costs | 13 |
| | 18 |
|
Total deferred tax assets | $ | 318 |
| | $ | 454 |
|
Valuation allowance | (318 | ) | | (442 | ) |
Net deferred tax assets | — |
| | 12 |
|
| | | |
Deferred tax liabilities | | | |
|
Financial derivatives | — |
| | 12 |
|
Total deferred tax liabilities | — |
| | 12 |
|
Net deferred tax liabilities | $ | — |
| | $ | — |
|
Unrecognized Tax Benefits. As of December 31, 2017 there were no unrecognized tax benefits as income taxes in our financial statements. We did not recognize any interest and penalties related to unrecognized tax benefits (classified as income taxes in our consolidated income statements) in 2017, 2016 or 2015, nor do we have any accrued interest and penalties associated with income taxes in our consolidated balance sheets as of December 31, 2017 and December 31, 2016. The Company's and certain subsidiaries income tax years after 2013 remain open and subject to examination by both federal and state tax authorities. During the second quarter of 2017, the Internal Revenue Service concluded an examination of our parent's, EPE Acquisition LLC, 2013 U.S. tax return.
Net Operating Loss and Tax Credit Carryovers. The table below presents the details of our federal and state net operating loss carryover periods as of December 31, 2017 (in millions):
|
| | | |
| Expiration Period |
| 2035 - 2037 |
U.S. federal net operating loss carryover | $ | 1,054 |
|
|
| | | |
| 2030 - 2037 |
State net operating loss carryover | $ | 157 |
|
Valuation Allowances. As of December 31, 2017 and 2016, we have a valuation allowance on our deferred tax assets of $318 million and $442 million, respectively. These amounts are recorded based on our evaluation of whether it was more likely than not that our deferred tax assets would be realized. Our evaluations considered cumulative book losses, the reversal of existing temporary differences, the existence of taxable income in prior carryback years, tax planning strategies and future taxable income for each of our taxable jurisdictions.