Income Taxes
The following table presents significant components of the provision for income taxes (in thousands):
|
| | | | | | | | | | | | |
| | Year ended December 31, |
| | 2017 | | 2016 | | 2015 |
Current: | | | | | | |
Federal | | $ | — |
| | $ | — |
| | $ | — |
|
State | | — |
| | — |
| | — |
|
Foreign | | 292 |
| | 378 |
| | 489 |
|
Total current expense | | 292 |
| | 378 |
| | 489 |
|
Deferred: | | | | | | |
Federal | | (3,751 | ) | | — |
| | — |
|
State | | — |
| | — |
| | — |
|
Foreign | | 15,193 |
| | 8,301 |
| | 4,454 |
|
Total deferred expense | | 11,442 |
| | 8,301 |
| | 4,454 |
|
Total provision for income taxes | | $ | 11,734 |
| | $ | 8,679 |
| | $ | 4,943 |
|
The following table presents the domestic and foreign components of net loss before income tax provision (in thousands):
|
| | | | | | | | | | | | |
| | Year ended December 31, |
| | 2017 | | 2016 | | 2015 |
U.S. | | $ | (119,067 | ) | | $ | (71,405 | ) | | $ | (66,883 | ) |
Foreign | | 48,391 |
| | 27,785 |
| | 16,219 |
|
Total | | $ | (70,676 | ) | | $ | (43,620 | ) | | $ | (50,664 | ) |
The following table presents a reconciliation of the statutory U.S. federal income tax rate to the Company’s effective tax rate, as a percentage of income before taxes for the following periods:
|
| | | | | | | | | |
| | Year ended December 31, |
| | 2017 | | 2016 | | 2015 |
Computed tax at statutory rate | | 35.0 | % | | 35.0 | % | | 35.0 | % |
Adjustment for income in non-taxable entities allocable to noncontrolling interest | | (32.6 | )% | | (25.6 | )% | | (13.0 | )% |
Foreign rate differential | | | | | | |
Tax rate differential on pre-tax book income | | (16.6 | )% | | (16.9 | )% | | (6.6 | )% |
Local tax on branch profits/(losses)—Puerto Rico | | 0.1 | % | | — | % | | 0.3 | % |
Permanent book/tax differences (domestic only) | | (3.6 | )% | | (0.2 | )% | | (0.1 | )% |
Valuation allowance | | 47.7 | % | | (18.8 | )% | | (25.1 | )% |
Chilean shareholder benefit due to tax regime change | | 0.1 | % | | 0.7 | % | | 0.4 | % |
Tax credits | | 31.6 | % | | 7.6 | % | | — | % |
Effect of U.S. tax rate change under Tax Cuts and Jobs Act | | (78.1 | )% | | — | % | | — | % |
Other | | (0.2 | )% | | (1.6 | )% | | (0.7 | )% |
Effective income tax rate | | (16.6 | )% | | (19.8 | )% | | (9.8 | )% |
Generally, the amount of income tax expense or benefit allocated to continuing operations is determined without regard to the tax effects of other categories of income or loss, such as discontinued operations, extraordinary items, other comprehensive income and items charged or credited to shareholders' equity. However, an exception to the general rule is provided when there is a pre-tax loss from continuing operations, a valuation allowance against deferred tax assets and pre-tax income from other categories in the current year. In such instances, income from other categories must be considered in allocating the total income tax provision for the period among the various categories. Income tax benefit related to continuing operations for the year ended December 31, 2017 includes a benefit of approximately $3.6 million as a result of the application of the exception to the general intra-period tax allocation rule. Accumulated other comprehensive income includes a corresponding amount of income tax expense of approximately $3.6 million for the year ended December 31, 2017.
The following table presents significant components of the Company’s deferred tax assets and deferred tax liabilities as follows (in thousands):
|
| | | | | | | | |
| | 2017 | | 2016 |
Deferred tax assets: | | | | |
Accruals and prepaids | | $ | 2,769 |
| | $ | 2,331 |
|
Basis difference in derivatives | | — |
| | 3,411 |
|
Hatchet Ridge financing | | 17,351 |
| | 27,521 |
|
Asset retirement obligation | | 6,321 |
| | 9,012 |
|
Unrealized loss on derivatives | | 1,570 |
| | 6,372 |
|
Net operating loss carryforwards | | 274,730 |
| | 344,522 |
|
Foreign currency translation adjustments | | 3,239 |
| | 12,314 |
|
Other deferred tax assets | | 1,490 |
| | — |
|
Tax credits | | 41,563 |
| | 19,270 |
|
Total gross deferred tax assets | | 349,033 |
| | 424,753 |
|
Less: Valuation allowance | | (141,317 | ) | | (171,020 | ) |
Total gross deferred tax assets net of valuation allowance | | $ | 207,716 |
| | $ | 253,733 |
|
| | | | |
Deferred tax liabilities: | | | | |
Property, plant and equipment | | $ | (189,342 | ) | | $ | (246,267 | ) |
Partnership interest | | (65,124 | ) | | (27,440 | ) |
Deferred interest, commitment fees and financing costs | | (1,551 | ) | | (4,543 | ) |
Basis difference in subsidiaries | | (1,087 | ) | | (865 | ) |
Basis difference in derivatives | | (268 | ) | | — |
|
Other deferred tax liabilities | | (486 | ) | | (818 | ) |
Total gross deferred tax liabilities | | (257,858 | ) | | (279,933 | ) |
| | | | |
Total net deferred tax assets/(liabilities) | | $ | (50,142 | ) | | $ | (26,200 | ) |
On December 22, 2017, the Tax Act was enacted, which significantly revises the ongoing U.S. corporate income tax law by lowering the U.S. federal corporate income tax rate from 35% to 21%, implementing a territorial tax system and imposing a one-time tax on foreign unremitted earnings. The Tax Act also establishes several new tax provisions effective in 2018.
ASC 740 requires a company to record the effects of a tax law change in the period of enactment. On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. SAB 118 allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. The measurement period ends when the company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year. Accordingly, the Company's U.S. provision is based on the reasonable estimate guidance provided by SAB 118. The Company made a reasonable estimate of the impact of several provisions of the Tax Act, including the repatriation provisions and the Tax Act’s reduction of the U.S. federal tax rate from 35% to 21% which impacts the Company's U.S. deferred tax assets and deferred liabilities. The U.S operations are in a net deferred tax asset position offset by a full valuation allowance and thus, any adjustments to the deferred accounts should not impact the tax provision. Although the Company has made a reasonable estimate of the amounts related to the repatriation provisions and deferred tax assets and deferred tax liabilities disclosed, a final determination of the Tax Act’s impact on the Company’s tax provision and deferred tax assets and deferred tax liabilities and related valuation allowance requirements remains incomplete pending a full analysis of the provisions and their interpretations.
The Tax Act also includes a provision to tax global intangible low-taxed income (GILTI) of foreign subsidiaries and a base erosion anti-abuse tax (BEAT) measure that taxes certain payments between a U.S. corporation and its subsidiaries. The Company may be subject to the GILTI and/or BEAT provisions effective beginning January 1, 2018 and is in the process of analyzing their effects, including how to account for the GILTI provision from an accounting policy standpoint.
The deferred tax assets and deferred tax liabilities resulted primarily from temporary differences between book and tax basis of assets and liabilities. The U.S. operations are in a net deferred tax asset position offset by full valuation allowance. The change in net deferred tax assets during the period ended December 31, 2017 was mainly due to the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Act. The Company revalued its ending deferred tax assets and liabilities at December 31, 2017 due to the change in tax rate resulting in a reduction of net deferred tax assets and corresponding valuation allowance of $55.3 million. The change was also due to deferred tax assets established for potential future U.S. foreign tax credits of $28.2 million that may be generated by the reversal of the deferred tax liability (foreign taxes paid) related to temporary differences from Canadian operations that are conducted through a branch for U.S. tax purposes.
The Company regularly assesses the likelihood that future taxable income levels will be sufficient to ultimately realize the tax benefits of the deferred tax assets. Should the Company determine that future realization of the tax benefits is not more likely than not, additional valuation allowance would be established which would increase the Company’s tax provision in the period of such determination. The net deferred tax assets and net deferred tax liabilities as of December 31, 2017 and 2016 are attributed primarily to the Company’s Canadian, Puerto Rican and Chilean entities. The net change in valuation allowance was a decrease of $29.7 million during the year ended December 31, 2017. The decrease was primarily driven by operating losses in the U.S. federal and state jurisdictions offset by a change in tax rate in the U.S. federal jurisdiction, as well as potential U.S. foreign tax credits related to Canada branch operations.
As of December 31, 2017, the Company has U.S federal and state net operating loss (NOL) carryforwards in the amount of $1.0 billion and $197.6 million, respectively, which begin to expire in the year ending December 31, 2032 for federal and state purposes. The Company also has foreign net operating loss carryforwards in Canada of $75.2 million which begin to expire in the year ending December 31, 2029, foreign net operating loss carryforwards in Puerto Rico of $9.2 million that begins to expire in the year ending December 31, 2022, and foreign net operating loss carryforwards in Chile of $61.4 million that can be carried forward indefinitely. The Company's production tax credits of $13.7 million begin to expire in the year ending December 31, 2033.
Internal Revenue Code Section 382 places a limitation (the Section 382 Limitation) on the amount of taxable income that can be offset by NOL and credit carryforwards, as well as built-in loss items, after a change in control (generally greater than 50% change in ownership) of a loss corporation. California has similar rules. The Company did not have any historic U.S. NOLs prior to October 2, 2013 except for NOLs from its Puerto Rico entity which may be subject to Section 382 Limitation.
The Company experienced a change in ownership on May 14, 2014. As a result, the Company’s NOL carryforwards and credits generated through the date of change are subject to an annual limitation under Section 382. Accordingly, if the Company generates sufficient taxable income, the NOL carryforwards or credits prior to the change in ownership are not expected to expire.
The Company is required to recognize in the financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. As of December 31, 2017, the Company does not have any unrecognized tax benefits and does not have any tax positions for which it is reasonably possible that the amount of gross unrecognized tax benefits will increase or decrease within 12 months after the year ended December 31, 2017.
The Company files income tax returns in the U.S. federal jurisdiction, various state jurisdictions and foreign jurisdictions for its Canadian, Chilean and Puerto Rican operations. The Company’s U.S. and foreign income tax returns for 2012 through 2017 are subject to examination.
The Company has a policy to classify accrued interest and penalties associated with uncertain tax positions together with the related liability, and the expenses incurred related to such accruals are included in the provision for income taxes. The Company did not incur any interest expenses or penalties or have outstanding liabilities on the balance sheet associated with unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015.
The Company operates under a tax holiday in Puerto Rico which enacted a special tax rate of 4% for businesses dedicated to the production of energy for consumption through the use of renewal sources. The Company previously operated under the "Economic Incentives for the Development of Puerto Rico Act" (Act 73) which was enacted in order to promote the development of green energy projects through economic incentives to reduce the island’s dependency on oil. On September 15, 2016, the Company surrendered operations under Act 73 and commenced operations under the "Green Energy Incentives Act of Puerto Rico" (Act 83) which affords the Company identical tax benefits to Act 73 and extends the special tax rate for 25 years at the date of conversion. The impact of the tax holiday decreased foreign deferred tax benefit by $0.6 million for the year ended December 31, 2017. The impact of the tax holiday on basic and diluted net loss per share of Class A common stock for the year ended December 31, 2017 was $0.01.