Income Taxes
The Tax Cuts and Jobs Act was enacted on December 22, 2017. The Tax Cuts and Jobs Act significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018, while also repealing the deduction for domestic production activities, implementing a territorial tax system, limiting the deduction for interest expense, limiting the use of net operating losses generated on or after January 1, 2018 to offset taxable income and repealing the corporate alternative minimum tax ("AMT") and triggering refunds of prior year AMT credits. 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 (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act. The Company has recognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities and the impact to AMT tax credits and included these amounts in its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Cuts and Jobs Act. The accounting is expected to be complete when the Company's 2017 U.S. corporate income tax return is filed in 2018.
Amounts recorded for the period ended December 31, 2017 (Successor) principally relate to the remeasurement of the deferred tax assets and liabilities due to the reduction in the U.S. corporate income tax rate from 35% to 21%. This remeasurement resulted in the Company reporting an income tax benefit of approximately $1.7 million due to the remeasurement of the deferred tax liability associated with the indefinitely lived asset that will now reverse at the new 21% rate along with a corresponding valuation allowance release. The remeasurement of the other deferred tax assets and liabilities had a corresponding adjustment to the valuation allowance which resulted in no tax expense or benefit. The Company has made calculations to reflect the changes for the Tax Cuts and Jobs Act based on currently available information and subsequent guidance may result in a change to the current estimates. Additionally, the Tax Cuts and Jobs Act eliminated the AMT regime after 2017 and provided for a refunding of AMT tax amounts paid in earlier years. This change resulted in a tax benefit, net of the current sequestration rate, as the valuation allowance on AMT credit carryforwards was reversed. Additionally, the Company reclassified these AMT credits to income taxes receivable. The amount of AMT credits recorded as long-term income taxes receivable is $39.3 million, which is net of a sequestration estimate of $2.8 million. These AMT credits are expected to be received in 2019 to 2022. The actual recovery will result in an income tax expense or benefit for the difference between the actual sequestration rate and the current estimated 6.6% sequestration rate.
The Company records deferred tax assets to the extent these assets will more likely than not be realized. In making such determination, the Company considered all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, historical financial performance, our industry's historically cyclical financial results and tax planning strategies. In 2016, the Company recorded a full valuation allowance against its deferred tax assets due to its cumulative three-year loss position compounded by negative industry-wide business trends at that time. Despite strong recent financial performance in 2017, the Company concluded as of December 31, 2017 (Successor) that the valuation allowance was still needed on its net deferred tax assets based upon the weight of the factors described above, especially considering the history of losses. The Company continues to evaluate its cumulative loss position and income trend as well as its future projections of sustained profitability and whether this profitability trend constitutes sufficient positive evidence to support a reversal of its valuation allowance (in full or in part).
Results of operations of the Predecessor have historically been included in the federal and state income tax returns of the Parent. Accordingly, the income tax provision included in the Predecessor financial statements was calculated using a method consistent with a separate return basis, as if the Predecessor had been a separate taxpayer. Similarly, historical tax attributes (net operating losses, alternative minimum tax credits, etc.) have been allocated to the Predecessor’s business utilizing a reasonable method of allocation.
Income tax expense (benefit) consisted of the following (in thousands):
|
| | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| For the year ended
December 31, | | For the nine months ended
December 31, | | | For the three
months ended
March 31, | | For the year ended December 31, |
| 2017 | | 2016 | | | 2016 | | 2015 |
Current | | | | | | | | |
Federal | $ | (36,906 | ) | | $ | (526 | ) | | | $ | — |
| | $ | — |
|
State | — |
| | — |
| | | — |
| | — |
|
| (36,906 | ) | | (526 | ) | | | — |
| | — |
|
Deferred | | | | | | | | |
Federal | (1,712 | ) | | 542 |
| | | 16 |
| | (40,789 | ) |
State | 26 |
| | 2 |
| | | 2 |
| | — |
|
| (1,686 | ) | | 544 |
| | | 18 |
| | (40,789 | ) |
Total | $ | (38,592 | ) | | $ | 18 |
| | | $ | 18 |
| | $ | (40,789 | ) |
The income tax expense (benefit) at the Company’s and Predecessor’s effective tax rate differed from the U.S. statutory rate of 35% as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| For the year ended
December 31, | | For the nine months ended
December 31, | | | For the three
months ended
March 31, | | For the year ended December 31, |
| 2017 | | 2016 | | | 2016 | | 2015 |
Income (loss) before income tax expense (benefit) | $ | 416,454 |
| | $ | (49,655 | ) | | | $ | (61,798 | ) | | $ | (351,370 | ) |
Tax expense (benefit) at statutory tax rate of 35% | 145,759 |
| | (17,379 | ) | | | (21,629 | ) | | (122,980 | ) |
Effect of: |
| | | | | | | |
Depletion | (25,212 | ) | | — |
| | | — |
| | — |
|
Estimate of the Tax Cuts and Jobs Act impact | (38,592 | ) | | — |
| | | — |
| | — |
|
State and local income tax, net of federal effect | 9,620 |
| | (1,051 | ) | | | (1,615 | ) | | (8,888 | ) |
Valuation allowance on deferred tax assets | (129,245 | ) | | 14,460 |
| | | 22,204 |
| | 81,370 |
|
Non-deductible transaction costs | 4,506 |
| | 4,318 |
| | | — |
| | — |
|
Impact of restructuring | — |
| | — |
| | | 1,111 |
| | 10,067 |
|
Other | (5,428 | ) | | (330 | ) | | | (53 | ) | | (358 | ) |
Tax expense (benefit) recognized | $ | (38,592 | ) | | $ | 18 |
| | | $ | 18 |
| | $ | (40,789 | ) |
Deferred income tax assets and liabilities reflect the effects of tax losses, credits, and the future income tax effects of temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Significant components of the Company's deferred income tax assets and liabilities were (in thousands):
|
| | | | | | | |
| Successor |
| December 31, 2017 | | December 31, 2016 |
Deferred income tax assets: | | | |
Net operating loss and credit carryforwards | $ | 395,526 |
| | $ | 896,181 |
|
Inventory | 1,083 |
| | 851 |
|
Asset retirement obligations | 23,765 |
| | 37,425 |
|
Black lung obligations | 7,991 |
| | 10,826 |
|
Accrued expenses | 561 |
| | 2,501 |
|
Other | 197 |
| | 1,963 |
|
Total | 429,123 |
| | 949,747 |
|
Less: valuation allowance for deferred income tax assets | (312,493 | ) | | (767,290 | ) |
Net deferred income tax assets | 116,630 |
| | 182,457 |
|
Deferred income tax liabilities: | | | |
Prepaid expenses | (9,416 | ) | | (8,073 | ) |
Property, plant and equipment | (105,715 | ) | | (174,098 | ) |
Other | (1,757 | ) | | (2,230 | ) |
Total deferred income tax liabilities | (116,888 | ) | | (184,401 | ) |
Net deferred income tax liability | $ | (258 | ) | | $ | (1,944 | ) |
On March 31, 2016, the Company experienced an ownership change for purposes of Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"). As a result of such ownership change, absent an applicable exception to such rules, an annual limitation under Section 382 would apply for federal and certain state income tax purposes with respect to the utilization of net operating loss carryforwards ("NOLs"). In 2017, the Company requested a private letter ruling ("PLR") from the Internal Revenue Service ("IRS") to clarify certain matters, that if ruled favorably on by the IRS, would allow the Company to qualify for an exception to the aforementioned rules limiting its utilization of its NOLs. On September 18, 2017, the IRS issued to the Company a favorable PLR. Prior to the issuance of the PLR, the Company operated and prepared its financial statements based on an assumption that an annual limitation on the utilization of the NOLs existed. As a result of qualifying for such exception, the Company's gross federal and state NOLs were revised downward to approximately $1.9 billion and $2.0 billion, respectively, as of December 31, 2016 (Successor) and $1.6 billion for both federal and state NOLs as of December 31, 2017 (Successor). This revision reflected a decrease to the NOL deferred tax asset and a corresponding adjustment to the valuation allowance recorded against those NOLs. Under the aforementioned exception to the Code Section 382 limitation, if the Company were to undergo a subsequent ownership change within two years of the consummation of the Asset Acquisition, or at any time prior to April 1, 2018, its NOLs would effectively be reduced to zero. A subsequent ownership change could severely limit or eliminate the Company's ability to utilize its NOLs and other tax attributes.
A roll forward of the deferred tax asset valuation allowance is as follows (in thousands):
|
| | | | | | | |
| Successor |
| December 31, 2017 | | December 31, 2016 |
Beginning balance | $ | 767,290 |
| | $ | — |
|
Addition/(Reduction) - current tax expense/(benefit) | (129,245 | ) | | 14,460 |
|
Additions - purchase accounting | — |
| | 752,830 |
|
Reduction due to application of IRC Section 382 | (130,327 | ) | | — |
|
Estimate of Tax Cuts and Jobs Act impact | (195,225 | ) | | — |
|
Ending balance | $ | 312,493 |
| | $ | 767,290 |
|
The Parent filed income tax returns in the U.S. and in various state and local jurisdictions which are routinely examined by tax authorities in these jurisdictions. Net operating losses and carryforwards are subject to adjustments based on examination and the statute of limitations is currently open for all such loss and credit carryforwards. The Company and the Predecessor had no unrecognized tax benefits or accruals for unrecognized tax benefits as of December 31, 2017 and 2016, respectively.
The Company has federal net operating loss carryforwards of approximately $1.6 billion as of December 31, 2017 (Successor), which expire predominantly in December 31, 2034 through December 31, 2036. The Company has state net operating loss carryforwards of approximately $1.6 billion, which expire predominantly in December 31, 2029 through December 31, 2031. In addition, the Company has approximately $6.6 million of general business credits which begin to expire in December 31, 2027 and fully expire in December 31, 2034. Additionally, the Company has $39.3 million of AMT credits, net of estimated sequestration impacts, which it has recorded as a long-term income tax receivable and are expected to be received in 2019 through 2022. Included in other receivables are income tax receivables of $9.1 million, which represents estimated overpayments of income tax in 2017.
The Company did not record any interest or penalties associated with income taxes but would record interest and penalties within income tax expense.