In December 2017, the Tax Cuts and Jobs Act of 2017 was signed into law. Substantially all of the provisions of the new law are effective for taxable years beginning after December 31, 2017. The new law includes significant changes to the Code, including amendments which significantly change the taxation of business entities and includes specific provisions related to regulated public utilities. The more significant changes that impact us include reductions in the corporate federal statutory income tax rate to 21 percent from 35 percent, and several technical provisions including, among others, the elimination of full expensing for tax purposes of certain property acquired after September 27, 2017, the continuation of certain rate normalization requirements for accelerated depreciation benefits and the general allowance for the continued deductibility of interest expense. Additionally, the new law limits the utilization of NOLs arising after December 31, 2017, to 80 percent of taxable income with an indefinite carryforward.
The staff of the SEC has recognized the complexity of reflecting the impacts of the Tax Cuts and Jobs Act of 2017 and 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. We have completed or made a reasonable estimate for the measurement and accounting of the effects of the Tax Cuts and Jobs Act of 2017, which have been reflected in our December 31, 2017, consolidated financial statements. We are still analyzing certain aspects of the Tax Cuts and Jobs Act of 2017, refining our calculations and expect additional guidance from the U.S. Department of the Treasury and the Internal Revenue Service. Any additional issued guidance or future actions of our regulators could potentially affect the final determination of the accounting effects arising from the implementation of the Tax Cuts and Jobs Act of 2017.
The following table sets forth our provision for income taxes for the periods indicated:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (Thousands of dollars) |
Current income tax provision | | | | | |
Federal | $ | — |
| | $ | (2,016 | ) | | $ | 7,135 |
|
State | 750 |
| | 471 |
| | 2,055 |
|
Total current income tax provision | 750 |
| | (1,545 | ) | | 9,190 |
|
Deferred income tax provision | | | | | |
Federal | 83,138 |
| | 76,247 |
| | 56,440 |
|
State | 9,255 |
| | 10,541 |
| | 7,349 |
|
Total deferred income tax provision | 92,393 |
| | 86,788 |
| | 63,789 |
|
Total provision for income taxes | $ | 93,143 |
| | $ | 85,243 |
| | $ | 72,979 |
|
The following table is a reconciliation of our income tax provision for the periods indicated:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (Thousands of dollars) |
Income before income taxes | $ | 256,138 |
| | $ | 225,338 |
| | $ | 192,009 |
|
Federal statutory income tax rate | 35 | % | | 35 | % | | 35 | % |
Provision for federal income taxes | 89,648 |
| | 78,868 |
| | 67,203 |
|
State income taxes, net of federal tax benefit | 6,503 |
| | 7,158 |
| | 6,114 |
|
Nonregulated deferred tax rate decrease | 2,162 |
| | — |
| | — |
|
Tax benefit of employee share based compensation | (5,162 | ) | | — |
| | — |
|
Other, net | (8 | ) | | (783 | ) | | (338 | ) |
Total provision for income taxes | $ | 93,143 |
| | $ | 85,243 |
| | $ | 72,979 |
|
The following table sets forth the tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities for the periods indicated:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (Thousands of dollars) |
Deferred tax assets | | | |
Employee benefits and other accrued liabilities | $ | 40,277 |
| | $ | 123,333 |
|
Regulatory adjustments for enacted tax rate changes | 129,421 |
| | — |
|
Net operating loss | 24,712 |
| | 23,094 |
|
Other | 2,984 |
| | 5,716 |
|
Total deferred tax assets | 197,394 |
| | 152,143 |
|
Deferred tax liabilities | | | |
Excess of tax over book depreciation | 677,249 |
| | 990,682 |
|
Purchased-gas cost adjustment | 13,805 |
| | 13,822 |
|
Other regulatory assets and liabilities, net | 106,285 |
| | 186,207 |
|
Total deferred tax liabilities | 797,339 |
| | 1,190,711 |
|
Net deferred tax liabilities | $ | 599,945 |
| | $ | 1,038,568 |
|
As a result of the enactment of the Tax Cuts and Jobs Act of 2017, we remeasured our deferred income taxes based upon the new tax rate enacted in 2017. As a regulated entity, the change in deferred income taxes applicable to amounts previously recovered through rates is deferred as a regulatory liability. The effect on the net deferred income tax liability for the enacted decrease in the federal tax rate was $517.2 million, of which $519.4 million was recorded as a reduction to the deferred income tax liabilities and deferred as a regulatory liability for ratemaking purposes and offset by $2.2 million recorded as an increase in deferred income tax expense attributable to the remeasured deferred income taxes associated with certain expenses not currently recovered in our rates. These adjustments had no impact on our 2017 cash flows.
Reductions in our ADIT balances to reflect the reduced corporate income tax rate of 21 percent will result in amounts previously collected from utility customers for these deferred income taxes to be refundable to such customers. The Tax Cuts and Jobs Act of 2017 retains the provisions of the Code that stipulate how these excess deferred income taxes are to be passed back to customers for certain accelerated tax depreciation benefits. Potential refunds of these and other deferred income taxes will be determined by our regulators.
We are working with our regulators in each of the states that we operate to address the impact of the Tax Cuts and Jobs Act of 2017 on our rates. In each state, we have received or expect to receive accounting orders requiring us to establish a separate regulatory liability for the difference in taxes included in our rates that have been calculated based on a 35 percent statutory income tax rate and the new 21 percent statutory income tax rate beginning in January 2018. The establishment of this regulatory liability will result in a reduction to our revenues beginning in the first quarter of fiscal 2018. The amount, period and timing of the return of these liabilities to utility customers will be determined by our regulators in each of our jurisdictions.
As of December 31, 2017, we have federal and state income tax NOL carryforwards of $96.9 million and $96.6 million, respectively, which will expire at various dates from 2025 through 2037. We believe that it is more likely than not that the tax benefits of the NOL carryforwards will be utilized prior to their expirations; therefore, no valuation allowance is necessary.
We have filed our consolidated federal and state tax returns for years 2014, 2015 and 2016.