Income Taxes

The components of CERC’s income tax expense (benefit) were as follows:



	Year Ended December 31,
	2017			2016		2015
	(in millions)
Current income tax expense:
State	$	1		$	6	$	3
Total current expense	1			6		3
Deferred income tax expense (benefit):
Federal	(193		)	130		(488		)
State	31			26		(54		)
Total deferred expense (benefit)	(162		)	156		(542		)
Total income tax expense (benefit)	$	(161	)	$	162	$	(539	)

A reconciliation of income tax expense (benefit) using the federal statutory income tax rate to the actual income tax expense and resulting effective income tax rate is as follows:



	Year Ended December 31,
	2017			2016			2015
	(in millions)
Income (loss) before income taxes	$	584		$	407		$	(1,451	)
Federal statutory income tax rate	35		%	35		%	35		%
Expected federal income tax expense (benefit)	204			142			(508		)
Increase (decrease) in tax expense resulting from:
State income tax expense, net of federal income tax	18			17			(33		)
State valuation allowance, net of federal income tax	3			3			—
Federal income tax rate reduction	(396		)	—			—
Other, net	10			—			2
Total	(365		)	20			(31		)
Total income tax expense (benefit)	$	(161	)	$	162		$	(539	)
Effective tax rate	(28		)%	40		%	37		%

In 2017, CERC recognized a $396 million deferred tax benefit from the remeasurement of CERC’s ADFIT liability as a result of the enactment of the TCJA on December 22, 2017, which reduced the U.S. corporate income tax rate from 35% to 21%. For additional information on the 2017 impacts of the TCJA, please see the discussion following the deferred tax assets and liabilities table below.

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities were as follows:



	December 31,
	2017			2016
	(in millions)
Deferred tax assets:
Benefits and compensation	$	27		$	45
Loss and credit carryforwards	288			451
Regulatory liabilities	150			39
Asset retirement obligations	60			64
Other	18			18
Valuation allowance	(7		)	(5		)
Total deferred tax assets	536			612
Deferred tax liabilities:
Property, plant, and equipment	745			1,017
Investment in unconsolidated affiliates	927			1,383
Regulatory assets	38			47
Other	115			90
Total deferred tax liabilities	1,825			2,537
Net deferred tax liabilities	$	1,289		$	1,925

Federal Tax Reform. On December 22, 2017, President Trump signed into law comprehensive tax reform legislation informally called the Tax Cuts and Jobs Acts, or TCJA, which resulted in significant changes to federal tax laws effective January 1, 2018. The new legislation contains several key tax provisions that will impact CERC, including the reduction of the corporate income tax rate from 35% to 21% effective January 1, 2018. The new legislation also includes a variety of other changes, such as, a limitation on the tax deductibility of interest expense, acceleration of business asset expensing, and reduction in the amount of executive pay that may qualify as a tax deduction, among others. Several other provisions of the TCJA are not generally applicable to the public utility industry, including the limitation on the tax deductibility of interest expense and the acceleration of business asset expensing.

While the effective date of the rate change in the legislation is January 1, 2018, ASC 740 requires that deferred tax balances be adjusted in the period of enactment to the rate in which those deferred taxes will reverse. The EDIT from the rate change resulted in an adjustment to income tax expense of $396 million and creation of a net regulatory liability of $478 million (includes $121 million gross-up) for the amount that is likely to be returned to ratepayers. The major components of the $396 million benefit to income tax expense are for the remeasurement of CERC’s deferred taxes associated with its investment in Enable and federal net operating loss carryforwards. The amount and expected amortization of the net regulatory tax liability may differ from the $478 million estimate, possibly materially, due to, among other things, regulatory actions, interpretations and assumptions CERC has made, and any guidance that may be issued in the future. CERC will continue to assess the amount and expected amortization of the net regulatory tax liability as it has proceedings with regulators in future periods. For discussion of risks associated with the amount and expected flow through of EDIT by CERC, see “Management’s Narrative Analysis of Results of Operations — Liquidity and Capital Resources — Regulatory Matters — Tax Reform” in Item 7 of Part II of this report.

CERC is a member of the U.S. federal consolidated income tax return of CenterPoint Energy. CERC reports its income tax provision on a separate entity basis pursuant to a tax sharing agreement with CenterPoint Energy.

Tax Attribute Carryforwards and Valuation Allowance. CERC has $1.1 billion of federal net operating loss carryforwards which begin to expire in 2031. CERC had $865 million of state net operating loss carryforwards which expire between 2018 and 2037 and $12 million of state tax credits which do not expire. A state capital loss carryforward of $244 million expired unutilized at the end of 2017. CERC reported a valuation allowance of $7 million since it is more likely than not that the benefit from certain state net operating loss carryforwards will not be realized.

Uncertain Income Tax Positions. CERC reported no uncertain tax liability as of December 31, 2017, 2016, and 2015. We expect no significant change to the uncertain tax liability over the next twelve months ending December 31, 2018.

Tax Audits and Settlements. Tax years through 2015 have been audited and settled with the IRS. For the 2016 through 2018 tax years, CenterPoint Energy is a participant in the IRS’s Compliance Assurance Process.