Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (tax reform) was signed into law which, among other things, reduced the federal corporate income tax rate from 35% to 21% effective January 1, 2018. As a result, NEP performed an analysis to preliminarily revalue its deferred income taxes and included an estimate of changes in the balances in NEP's December 31, 2017 financial statements. At December 31, 2017, the revaluation reduced NEP’s net deferred income tax assets by approximately $101 million, which decreased NEP’s 2017 net income and net income attributable to NEP. While NEP believes that the provisional tax reform adjustment is a reasonable estimate of the effects on its existing deferred taxes, additional analysis and detailed reviews are still being performed to finalize the accounting for the remeasurement of deferred tax assets and liabilities as a result of the enactment of tax reform.
The components of income before income taxes are as follows:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (millions) |
U.S. | $ | 209 |
| | $ | 395 |
| | $ | 92 |
|
Foreign | 67 |
| | 42 |
| | 48 |
|
Income before income taxes | $ | 276 |
| | $ | 437 |
| | $ | 140 |
|
The components of income tax expense are as follows:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (millions) |
Federal: | | | | | |
Current | $ | — |
| | $ | — |
| | $ | 4 |
|
Deferred | 143 |
| | 51 |
| | 19 |
|
Total federal | 143 |
| | 51 |
| | 23 |
|
State: | | | | | |
Current | — |
| | — |
| | — |
|
Deferred | 8 |
| | 11 |
| | 1 |
|
Total state | 8 |
| | 11 |
| | 1 |
|
Foreign: | | | | | |
Current | 5 |
| | 1 |
| | 5 |
|
Deferred | 11 |
| | (6 | ) | | 4 |
|
Total foreign | 16 |
| | (5 | ) | | 9 |
|
Total income tax expense | $ | 167 |
| | $ | 57 |
| | $ | 33 |
|
A reconciliation of U.S. federal income tax at the statutory rate to the actual income taxes is as follows:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (millions) |
Income tax expense at 35% statutory rate | $ | 97 |
| | $ | 153 |
| | $ | 49 |
|
Increases (reductions) resulting from: | | | | | |
Taxes attributable to U.S. noncontrolling interest | (32 | ) | | (74 | ) | | (13 | ) |
State income taxes, net of federal tax benefit | 6 |
| | 7 |
| | 1 |
|
Tax credits | (1 | ) | | (9 | ) | | (7 | ) |
Valuation allowance | (1 | ) | | (6 | ) | | 9 |
|
Effect of flow through entities and foreign tax differential | (7 | ) | | (6 | ) | | (4 | ) |
U.S. taxes on foreign earnings | 7 |
| | 4 |
| | 2 |
|
Impact of tax reform | 101 |
| | — |
| | — |
|
Withholding taxes, net of U.S. federal tax | — |
| | (2 | ) | | (3 | ) |
Effect of Canadian tax restructuring, net of U.S. federal tax | — |
| | (11 | ) | | — |
|
Other | (3 | ) | | 1 |
| | (1 | ) |
Income tax expense | $ | 167 |
| | $ | 57 |
| | $ | 33 |
|
The effective tax rate was approximately 61%, 13% and 24% for the years ended December 31, 2017, 2016 and 2015, respectively.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. These items are stated at the enacted tax rates that are expected to be in effect when taxes are actually paid or recovered. NEP believes that it is more likely than not that the deferred tax assets at December 31, 2017 shown in the table below, net of the valuation allowances, will be realized due to sufficient future income.
The income tax effects of temporary differences giving rise to NEP's deferred income tax liabilities and assets are as follows:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (millions) |
Deferred tax liabilities: | | | |
Property | $ | (70 | ) | | $ | (51 | ) |
Investment in partnership | (7 | ) | | (120 | ) |
Other | (4 | ) | | (3 | ) |
Total deferred tax liabilities | (81 | ) | | (174 | ) |
Deferred tax asset: | | | |
Net operating loss | 184 |
| | 321 |
|
Investment in partnership | — |
| | 68 |
|
Tax credit carryforwards | 8 |
| | 17 |
|
Other | 8 |
| | 8 |
|
Valuation allowance | (1 | ) | | (1 | ) |
Total deferred tax asset | 199 |
| | 413 |
|
Net deferred tax asset | $ | 118 |
| | $ | 239 |
|
Deferred tax assets and liabilities included on the consolidated balance sheets are as follows:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (millions) |
Deferred income taxes - assets | $ | 181 |
| | $ | 286 |
|
Deferred income taxes - liabilities | (63 | ) | | (47 | ) |
Net deferred income taxes | $ | 118 |
| | $ | 239 |
|
The components of deferred tax assets, before valuation allowance, relating to net operating loss carryforwards and tax credit carryforwards at December 31, 2017 are as follows:
|
| | | | | |
| Amount | | Expiration Dates |
| (millions) | | |
Net operating loss carryforwards: | | | |
Federal | $ | 157 |
| | 2034 - 2037 |
State | 27 |
| | 2024 - 2037 |
Total net operating loss carryforwards | $ | 184 |
| | |
Tax credit carryforwards | $ | 8 |
| | 2019 - 2037 |
During 2014, NEP recorded a liability related to an unrecognized tax benefit of prior year tax positions of approximately $4 million. Due to foreign currency translation, such liability was approximately $3 million at December 31, 2017. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is approximately $3 million. The open tax years in all jurisdictions are 2012 through 2016.