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Income Taxes

12 Months Ended

Dec. 31, 2019

December 2017 the Tax Legislation was signed into law, which resulted in significant changes to U.S. federal income tax law. QEP expects that these changes will positively impact QEP's future after-tax earnings in the U.S., primarily due to the lower federal statutory tax rate of 21% compared to 35%. The impact of the Tax Legislation may differ from the statements above due to, among other things, changes in interpretations and assumptions the Company has made and actions the Company may take as a result of the Tax Legislation. Additionally, guidance issued by the relevant regulatory authorities regarding the Tax Legislation may materially impact QEP's financial statements. As additional guidance to the Tax Legislation is published in the form of Treasury Regulations and other IRS communications, the Company will monitor, assess, and determine the impact of these communications on the Company's consolidated financial statements and operations.

Details of income tax provisions and deferred income taxes from continuing operations are provided in the following tables.

The components of income tax provisions and benefits were as follows:



	Year Ended December 31,
	2019			2018			2017
Federal income tax provision (benefit)	(in millions)
Current	$	(32.2	)	$	(71.3	)	$	2.1
Deferred	55.7			(257.8		)	(339.8		)
State income tax provision (benefit)
Current	(15.1		)	1.5			0.5
Deferred	(51.4		)	10.2			25.0
Total income tax provision (benefit)	$	(43.0	)	$	(317.4	)	$	(312.2	)

The difference between the statutory federal income tax rate and the Company's effective income tax rate is explained as follows:



	Year Ended December 31,
	2019		2018		2017
Federal income taxes statutory rate⁽¹⁾	21.0	%	21.0	%	35.0	%
Increase (decrease) in rate as a result of:
State income taxes, net of federal income tax benefit	(2.5	)%	4.1	%	44.3	%
Federal rate change⁽¹⁾	—	%	—	%	741.3	%
State rate change⁽²⁾	20.9	%	(2.9	)%	2.1	%
Valuation allowance⁽³⁾	(18.0	)%	(1.9	)%	(84.4	)%
Permanent adjustments⁽⁴⁾	(7.1	)%	(0.1	)%	(0.4	)%
Return to provision adjustment	2.7	%	(0.1	)%	(0.7	)%
Uncertain tax provision⁽⁵⁾	13.6	%	—	%	(7.7	)%
AMT Credit Reclass due to NOL Carryback⁽⁶⁾	—	%	3.8	%	(1.8	)%
Effective income tax rate	30.6	%	23.9	%	727.7	%

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⁽¹⁾	The Tax Legislation changed the federal corporate income tax rate from 35% to 21% starting in 2018. The rate change caused the Company to revalue its deferred tax liabilities and assets as of December 31, 2017 from a 35% to 21% federal corporate income tax rate which caused the majority of the change in rate.


⁽²⁾	During the year ended December 31, 2019, the state rate change was primarily the result of the re-measurement of QEP's deferred tax assets and liabilities at a lower blended state tax rate due to exiting the state of Louisiana.

⁽³⁾

During the year ended December 31, 2019, the Company recognized an additional valuation allowance of $25.3 million on its Louisiana state NOL. The Company does not expect that it will have sufficient taxable income to utilize the state NOL it is carrying forward due to the Haynesville Divestiture. During the years ended December 31, 2018 and 2017, the Company also increased its valuation allowance by $25.5 million and $36.2 million, respectively, against its Louisiana net operating loss as the Company did not forecast sufficient taxable income to utilize the entire net operating loss in Louisiana at December 31, 2018 and 2017.


⁽⁴⁾	During the year ended December 31, 2019, the permanent items primarily related to disallowed officer compensation under Section 162(m) of the Internal Revenue Code of $6.1 million and share-based compensation shortfalls of $4.0 million.


⁽⁵⁾	During the year ended December 31, 2019, the Company recognized a tax benefit of $19.0 million due to the expiration of the statute of limitations related to the Company's uncertain tax position. During the year ended December 31, 2017 the decrease in the tax rate was due to the federal corporate income tax rate change related to the Tax Legislation.


⁽⁶⁾	During the year ended December 31, 2018, QEP agreed to an IRS proposed change to the initial treatment of the 2016 carryback of net operating losses (NOL). This change resulted in a reduction of available NOL carryforwards valued at $75.7 million and an increase in AMT credit carryforwards of $126.0 million. The net change in value of $50.3 million was recorded in deferred income taxes.

Significant components of the Company's deferred income taxes were as follows:



	December 31,
	2019			2018
Deferred tax liabilities	(in millions)
Property, plant and equipment	$	592.9		$	665.1
Commodity price derivatives	—			30.1
Operating lease right-of-use assets	12.7			—
Other	0.9			2.6
Total deferred tax liabilities	606.5			697.8
Deferred tax assets
NOL and tax credit carryforwards	$	337.7		$	467.9
State NOL valuation allowance	(98.8		)	(82.3		)
Employee benefits and compensation costs	22.3			33.2
Interest carryforward⁽¹⁾	45.7			—
Commodity price derivatives	3.9			—
Operating lease liabilities	14.1			—
Other	7.1			9.8
Total deferred tax assets	332.0			428.6
Net deferred income tax liability	$	274.5		$	269.2
Balance sheet classification
Deferred income tax liability – noncurrent	274.5			269.2
Net deferred income tax liability	$	274.5		$	269.2

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⁽¹⁾	During the year ended December 31, 2019, the amount of interest the Company could deduct was limited under Section 163(j) of the Internal Revenue Code. This interest can be carried forward indefinitely to offset future taxable income within the code limitations.

The tax effected amounts and expiration dates of NOL and tax credit carryforwards at December 31, 2019, are as follows:



	Expiration Dates	Amounts
		(in millions)
State NOL and tax credit carryforwards	2020-2038	$	114.7
U.S. NOL⁽¹⁾	2037-Indefinite	182.1
U.S. alternative minimum tax credit	Indefinite	37.1
General business credits	2036-2037	3.8
Total NOL and tax credit carryforwards		$	337.7

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⁽¹⁾	Federal NOL's created in tax years beginning after December 31, 2017 can be carried forward indefinitely under the Tax Legislation (limited to 80% of taxable income computed without the NOL deduction). Of the Company's U.S. NOL, $54.5 million has an indefinite carryforward period but its use is limited to 80% of taxable income.

The Company assesses the available evidence to determine if sufficient future taxable income will be generated to use the existing deferred tax assets. The Company maintains a valuation allowance to offset the uncertain realization of certain of its state NOL's. The Company had a valuation allowance of $98.8 million and $82.3 million for the years ended December 31, 2019 and 2018, respectively, for state NOL's outside of our current core operations and primarily relate to state NOL's in Colorado, Louisiana, Utah and Oklahoma. Due to the various divestitures over the last several years, and focus of our operations, we do not expect to have sufficient taxable income in these states to utilize the NOL's we are carrying forward.

The Tax Legislation eliminated corporate AMT which allowed QEP the ability to offset its regular tax liability or claim refunds for taxable years 2018 through 2021 for AMT credits carried forward from prior years. The Company received $73.9 million of AMT credit refunds in 2019 and anticipates it will realize approximately $74.6 million in AMT credit refunds over the next three years with $37.5 million expected to be realized in 2020 for tax years 2018 and 2019, which is shown in "Income tax receivable" with the remaining $37.1 million included in "Deferred income taxes" on the Consolidated Balance Sheet as of December 31, 2019.

Pursuant to Section 382 and 383 of the Internal Revenue Code, utilization of the Company’s NOL's and credits may be subject to annual limitations in the event of any significant future changes in its ownership structure. These annual limitations may result in the expiration of NOL's and credits prior to utilization.

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. For federal tax purposes, the Company has been a participant in the IRS Compliance Assurance Process through the 2018 tax year, which provides examination of the tax return prior to filing. Generally, for state tax purposes, the Company’s 2016 through 2018 tax years remain open for examination by the taxing authorities under a three-year statute of limitations. Should the Company utilize any of its state loss carryforwards, their carryforward losses would be subject to examination.

Unrecognized Tax Benefit

The benefits of uncertain tax positions taken or expected to be taken on income tax returns is recognized in the Consolidated Financial Statements at the largest amount that is more likely than not to be sustained upon examination by the relevant taxing authorities. As of December 31, 2018, QEP had $19.0 million of unrecognized tax benefit related to uncertain tax positions for asset sales that occurred in 2014, which were recorded within "Other long-term liabilities" on the Consolidated Balance Sheets.

During the year ended December 31, 2019, the statute of limitations related to the Company's uncertain tax position expired, and upon expiration, the Company recognized a $19.0 million tax benefit as well as recorded a $4.1 million reduction in "Interest expense" and a $2.5 million reduction in "General and administrative" expense on the Consolidated Statements of Operations related to accrued interest and penalties that were recorded in prior periods. During the years ended December 31, 2018 and 2017, the Company incurred $0.7 million of estimated interest expense related to uncertain tax positions.

The following is a reconciliation of our beginning and ending amounts of unrecognized tax benefits for the years ended December 31, 2019 and 2018:



	Unrecognized Tax Benefits
	2019			2018
	(in millions)
Balance as of January 1,	$	19.0		$	19.0
Recognized tax benefits	(19.0		)	—
Balance as of December 31,	$	—		$	19.0