INCOME TAXES
The income tax provision consisted of the following:
|
| | | | | | | | | | | | |
(In thousands) | | Current | | Deferred | | Total |
Year ended December 31, 2017 | | | | | | |
U.S. federal | | $ | (45 | ) | | $ | (23,928 | ) | | $ | (23,973 | ) |
State and local | | 95 |
| | (1,211 | ) | | (1,116 | ) |
Foreign | | 220 |
| | 1,789 |
| | 2,009 |
|
Total expense (benefit) | | $ | 270 |
| | $ | (23,350 | ) | | $ | (23,080 | ) |
Tax expense in equity | | — |
| | 14,081 |
| | 14,081 |
|
Total | | $ | 270 |
| | $ | (9,269 | ) | | $ | (8,999 | ) |
| | | | | | |
Year ended December 31, 2016 | | | | | | |
U.S. federal | | $ | 66 |
| | $ | (103 | ) | | $ | (37 | ) |
State and local | | 53 |
| | (1,109 | ) | | (1,056 | ) |
Foreign | | — |
| | 1,587 |
| | 1,587 |
|
Total expense | | $ | 119 |
| | $ | 375 |
| | $ | 494 |
|
Tax expense in equity | | — |
| | 406 |
| | 406 |
|
Total | | $ | 119 |
| | $ | 781 |
| | $ | 900 |
|
| | | | | | |
Year ended December 31, 2015 | | | | | | |
U.S. federal | | $ | 98 |
| | $ | (12,507 | ) | | $ | (12,409 | ) |
State and local | | — |
| | (1,182 | ) | | (1,182 | ) |
Foreign | | 158 |
| | 192 |
| | 350 |
|
Total expense (benefit) | | $ | 256 |
| | $ | (13,497 | ) | | $ | (13,241 | ) |
Tax expense in equity | | — |
| | 14,627 |
| | 14,627 |
|
Total | | $ | 256 |
| | $ | 1,130 |
| | $ | 1,386 |
|
Effective Tax Rate
The income tax provision differed from the amounts computed by applying the statutory U.S. federal income tax rate of 35% to loss before income taxes, as follows:
|
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Income tax benefit at U.S. federal statutory rate | | 35.0 | % | | 35.0 | % | | 35.0 | % |
Increase (reduction) in income taxes: | | | | | | |
State income taxes, net of U.S. federal benefit | | 4.0 |
| | (5.9 | ) | | 1.0 |
|
Foreign operations | | 8.7 |
| | (1.5 | ) | | 9.9 |
|
Non-controlling interest | | (9.4 | ) | | (15.9 | ) | | (20.6 | ) |
Goodwill impairment | | — |
| | (6.2 | ) | | — |
|
Stock-based compensation | | — |
| | — |
| | (2.2 | ) |
Tax Act rate change impact | | 2.0 |
| | — |
| | — |
|
Change in valuation allowance | | (34.1 | ) | | (4.7 | ) | | (17.7 | ) |
Other | | 2.8 |
| | (1.0 | ) | | 0.6 |
|
Effective tax rate | | 9.0 | % | | (0.2 | )% | | 6.0 | % |
Prior to the consummation of the Merger on October 16, 2017, TerraForm Power owned approximately 66% of Terra LLC and SunEdison owned approximately 34% of Terra LLC. On October 16, 2017, pursuant to the Settlement Agreement, SunEdison transferred its interest in Terra LLC to TerraForm Power. As a result of this transaction, TerraForm Power now owns 100% of the capital and profits interest in Terra LLC, except for the IDRs which are owned by Brookfield IDR Holder.
Terraform Power consolidates the results of Terra LLC through its controlling interest. Prior to the consummation of the Merger, it recorded SunEdison's ownership of Terra LLC as a non-controlling interest in the financial statements. Terra LLC is treated as a partnership for income tax purposes. As such, the Company recorded income tax on its share of Terra LLC's taxable income and SunEdison recorded income tax on its share of Terra LLC's taxable income in accordance with the applicable ownership percentages before and after the Merger on October 16, 2017.
For the year ended December 31, 2017, the overall effective tax rate was different than the statutory rate of 35% primarily due to loss allocated to the recording of a valuation allowance on certain tax benefits attributed to the Company, loss
allocated to non-controlling interests, the revaluation of deferred federal and state tax balances and the effect of foreign and state taxes. For the year ended December 31, 2016, the overall effective tax rate was different than the statutory rate of 35% primarily due to loss allocated to the recording of a valuation allowance on certain tax benefits attributed to the Company, loss allocated to non-controlling interests, the impairment of goodwill at Capital Dynamics and the effect of state taxes. For the year ended December 31, 2015, the overall effective tax rate was different than the statutory rate of 35% primarily due to the recording of a valuation allowance on certain tax benefits attributed to the Company, loss allocated to non-controlling interests and due to the application of the intraperiod allocation rules, resulting in a significant tax provision recorded in other comprehensive income. As of December 31, 2017 and 2016, most jurisdictions were in a net deferred tax asset position. A valuation allowance is recorded against the deferred tax assets primarily because of the history of losses in those jurisdictions.
The tax effects of the major items recorded as deferred tax assets and liabilities were as follows:
|
| | | | | | | | |
| | As of December 31, |
(In thousands) | | 2017 | | 2016 |
Deferred tax assets: | | | | |
Net operating losses and tax credit carryforwards | | $ | 402,162 |
| | $ | 463,940 |
|
Deferred revenue | | — |
| | 743 |
|
Other | | — |
| | 5,445 |
|
Total deferred tax assets | | 402,162 |
| | 470,128 |
|
Valuation allowance | | (152,142 | ) | | (419,875 | ) |
Net deferred tax assets | | 250,020 |
| | 50,253 |
|
Deferred tax liabilities: | | | | |
Investment in partnership | | 234,312 |
| | 73,629 |
|
Renewable energy facilities | | 29,541 |
| | 4,347 |
|
Deferred revenue | | 13 |
| | — |
|
Other | | 4,790 |
| | — |
|
Total deferred tax liabilities | | 268,656 |
| | 77,976 |
|
Net deferred tax liabilities | | $ | 18,636 |
| | $ | 27,723 |
|
The underlying renewable energy facilities are controlled under Terra LLC, and thus deferred tax assets and liabilities at the Company's portfolio companies are captured within the deferred tax asset for investment in partnership. The Company has gross net operating loss carryforwards of $1.4 billion in the U.S. and gross net operating loss carryforwards of $138.4 million in foreign jurisdictions that will both expire beginning in 2035. The Company believes that it is more likely than not that it will not generate sufficient taxable income to realize the deferred tax assets associated with its net operating losses and tax credit carryforwards and has recorded a valuation allowance against its deferred tax assets, with the exception of $31.4 million of net operating losses at its Canadian operations. The Company is currently performing an analysis of limitations on the use of net operating losses under Section 382. The results of this analysis may impact the Company's ability to utilize portions of its net operating losses in future periods or could reduce the net operating losses available for carryover and utilization in future periods.
The decrease in the valuation allowance during 2017 was primarily driven by a $75.9 million decrease resulting from the reduction of the U.S. federal tax rate to 21% due to the enactment of the Tax Act, a $43.0 million U.S. return to provision adjustment and a $150.0 million decrease related to an offsetting adjustment to deferred tax liabilities to correct the outside basis in the partnership.
During the fourth quarter of 2017, management identified an immaterial error resulting from the ownership percentages used to allocate lower-tier partnership income to a subsidiary of the Company included in the U.S. tax provision. The error caused an overstatement of taxable income used in the income tax provision calculation in 2016 of approximately $16.2 million, which resulted in an error in the income tax provision. This 2016 error was corrected in the fourth quarter of 2017, which resulted in an increase to the net operating loss carryforward deferred tax asset at the corresponding subsidiary and an offsetting $6.4 million increase in the income tax benefit recognized. Management determined that this error did not have an impact on its previously issued filings for the first, second and third quarter of 2017.
As of December 31, 2017 and 2016, the Company had not identified any uncertain tax positions for which a liability was required.