INCOME TAXES
The reconciliation of the federal statutory income tax rate to our effective income tax rate is as follows:
|
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
U.S. federal statutory tax rate | | 35.0 | % | | 35.0 | % | | 35.0 | % |
U.S. tax reform rate change | | (121.1 | )% | | — | % | | — | % |
Other | | (0.2 | )% | | — | % | | — | % |
Valuation allowance | | 86.3 | % | | (35.0 | )% | | (35.0 | )% |
Effective tax rate | | — | % | | — | % | | — | % |
Significant components of our deferred tax assets at December 31, 2017 and 2016 are as follows (in thousands):
|
| | | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
Deferred tax assets | | | | |
Federal net operating loss carryforward | | $ | 49,194 |
| | $ | 53,618 |
|
Derivative instruments | | 15,487 |
| | 46,754 |
|
Long-term debt | | 14,270 |
| | 15,953 |
|
Property, plant and equipment | | 9,143 |
| | 13,680 |
|
Other | | 303 |
| | 393 |
|
Less: valuation allowance | | (88,397 | ) | | (130,398 | ) |
Total net deferred tax asset | | $ | — |
| | $ | — |
|
At December 31, 2017, we had federal net operating loss (“NOL”) carryforwards of approximately $234 million. These NOL carryforwards will expire between 2035 and 2037.
We did not have any uncertain tax positions which required accrual or disclosure as of December 31, 2017 and 2016. We have elected to report future interest and penalties related to unrecognized tax benefits, if any, as income tax expense in our Consolidated Statements of Operations.
Due to our historical losses and other available evidence related to our ability to generate taxable income, we have established a valuation allowance to fully offset our federal deferred tax assets as of December 31, 2017 and 2016. We will continue to evaluate the realizability of our deferred tax assets in the future. The decrease in the valuation allowance was $41.4 million for the year ended December 31, 2017.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation (Tax Cuts and Jobs Act), which reduced the top U.S. corporate income tax rate from 35% to 21%. As a result of the legislation, we remeasured our December 31, 2017 U.S. deferred tax assets and liabilities. The result of the remeasurement was a $58.9 million reduction to our U.S. net deferred tax assets and represents a 121.1% decrease to our effective tax rate. A corresponding change, reducing the effective tax rate, was recorded to the valuation allowance, and therefore there was no impact to current period income tax expense.
Our taxable income or loss is included in the consolidated federal income tax return of Cheniere. Cheniere’s federal and state tax returns for the years after 2013 remain open for examination. Tax authorities may have the ability to review and adjust carryover attributes that were generated prior to these periods if utilized in an open tax year.
Cheniere experienced an ownership change within the provisions of U.S. Internal Revenue Code (“IRC”) Section 382 in 2008, 2010 and 2012. An analysis of the annual limitation on the utilization of Cheniere’s NOLs was performed in accordance with IRC Section 382. It was determined that IRC Section 382 will not limit the use of Cheniere’s NOLs in full over the carryover period. Cheniere will continue to monitor trading activity in its respective shares which may cause an additional ownership change which could ultimately affect our ability to fully utilize Cheniere’s existing NOL carryforwards.