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INCOME TAXES (Notes)
12 Months Ended
Dec. 31, 2017
Income Tax Disclosure [Abstract]  
INCOME TAXES
INCOME TAXES
The U.S. Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted on December 22, 2017. The 2017 Tax Act is comprehensive tax reform legislation that contains significant changes to corporate taxation. Provisions on the enacted law include a permanent reduction of the corporate income tax rate from 35% to 21%, imposing a mandatory one-time tax on un-repatriated accumulated earnings of foreign subsidiaries, a partial limitation on the deductibility of business interest expense, a limitation on net operating losses to 80% of taxable income each year, a shift of the U.S. taxation of multinational corporations from a tax on worldwide income to a partial territorial system (along with rules that create a new U.S. minimum tax on earnings of foreign subsidiaries), and other related provisions to maintain the U.S. tax base.
We recognized the income tax effects of the 2017 Tax Act in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes. The guidance allows for a measurement period of up to one year after the enactment date to finalize the recording of the related tax impacts. As such, our 2017 financial results reflect the provisional income tax effects of the 2017 Tax Act for which the accounting under ASC Topic 740 is incomplete but a reasonable estimate could be determined. We did not identify any items for which the income tax effects of the 2017 Tax Act could not be reasonably estimated as of December 31, 2017. Due to the changes to U.S. tax laws as a result of the 2017 Tax Act, we recorded a provisional amount related to the following:
Reduction of the U.S. Corporate Income Tax Rate- We measure deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to reverse. Accordingly, our deferred tax assets and liabilities were re-measured to reflect the reduction in the U.S. corporate income tax rate from 35% to 21%, resulting in a provisional $82.4 million income tax expense recorded. However, this change also resulted in a corresponding provisional $82.4 million income tax benefit with respect to the existing valuation allowance recorded against our net deferred tax assets as of December 31, 2017. Both offsetting provisional amounts were recorded during the fourth quarter of 2017.
As we do not have all the necessary information to analyze all effects of the 2017 Tax Act, we believe the provisional amounts recorded during the fourth quarter of 2017 represent a reasonable estimate of the accounting implications of this U.S. tax reform. Our ultimate determination of the tax impacts may differ from the provisional amounts recorded during the fourth quarter of 2017 due to regulatory guidance expected to be issued in the future, any tax law technical corrections, and possible changes in the our interpretations, assumptions, and actions taken as a result of tax legislation clarification. In addition, we are still analyzing certain aspects of the 2017 Tax Act and refining our calculations, which could potentially affect the measurement of these provisional balances. We will continue to evaluate the 2017 Tax Act, and any adjustment to these provisional amounts will be reported in the reporting period in which any such adjustments are determined, which will be no later than the fourth quarter of 2018.
The components of our income tax expense are as follows (in thousands):
 
Successor
 
 
Predecessor
 
Year Ended December 31, 2017
 
Period from December 16, 2016 through December 31, 2016
 
 
Period from January 1, 2016 through December 15, 2016
 
Year Ended December 31, 2015
Current income tax (expense) benefit
$
1,667

 
$

 
 
$
(2,042
)
 
$
3,522

Deferred income tax (expense) benefit
35

 

 
 
(787
)
 
189,327

Total income tax (expense) benefit
$
1,702

 
$

 
 
$
(2,829
)
 
$
192,849



We made federal income tax payments of zero for the year ended December 31, 2017, the period from December 16, 2016 through December 31, 2016, the period from January 1, 2016 through December 15, 2016 and the year ended December 31, 2015, respectively. In addition, we received federal income tax refunds of zero, $0.4 million, $6.9 million and $11.9 million during the year ended December 31, 2017, the period from December 16, 2016 through December 31, 2016, the period from January 1, 2016 through December 15, 2016 and the year ended December 31, 2015, respectively.
Income tax (expense) benefit differs from amounts computed by applying the statutory federal rate as follows:
 
Successor
 
 
Predecessor
 
Year Ended December 31, 2017
 
Period from December 16, 2016 through December 31, 2016
 
 
Period from January 1, 2016 through December 15, 2016
 
Year Ended December 31, 2015
Income tax benefit computed at Federal statutory rate
35.0
 %
 
35.0
 %
 
 
35.0
 %
 
35.0
 %
State taxes
 %
 
 %
 
 
(9.1
)%
 
1.6
 %
Meals and entertainment
(0.4
)%
 
 %
 
 
(0.3
)%
 
(0.1
)%
Foreign rate difference
0.4
 %
 
 %
 
 
(0.3
)%
 
(1.3
)%
Non-deductible goodwill and asset impairments
 %
 
 %
 
 
(4.0
)%
 
(4.8
)%
Non-deductible bankruptcy costs
 %
 
 %
 
 
(15.7
)%
 
 %
Non-taxable cancellation of debt income
 %
 
 %
 
 
154.6
 %
 
 %
Penalties and other non-deductible expenses
 %
 
 %
 
 
(2.3
)%
 
 %
Sale of Mexico
 %
 
 %
 
 
16.5
 %
 
 %
Change in valuation allowance
(33.8
)%
 
(35.0
)%
 
 
(171.1
)%
 
(12.9
)%
Equity compensation
(1.0
)%
 
 %
 
 
 %
 
 %
US tax reform - impact to deferred tax assets and liabilities
(67.4
)%
 
 %
 
 
 %
 
 %
US tax reform - change in valuation allowance
67.4
 %
 
 %
 
 
 %
 
 %
Other
1.2
 %
 
 %
 
 
(5.5
)%
 
(0.1
)%
Effective income tax rate
1.4
 %
 
 %
 
 
(2.2
)%
 
17.4
 %

     As of December 31, 2017 and 2016, our deferred tax assets and liabilities consisted of the following (in thousands):
 
December 31,
 
2017
 
2016
Deferred tax assets:
 
 
 
Net operating loss and tax credit carryforwards
$
103,251

 
$
99,636

Capital loss carryforwards
16,375

 
49,901

Foreign tax credit carryforward
17,095

 
18,587

Self-insurance reserves
8,734

 
12,576

Accrued liabilities
9,479

 
16,542

Share-based compensation
513

 

Intangible assets
52,146

 
93,453

Other
1,036

 
2,946

Total deferred tax assets
208,629

 
293,641

Valuation allowance for deferred tax assets
(175,577
)
 
(227,402
)
Net deferred tax assets
33,052

 
66,239

Deferred tax liabilities:
 
 
 
Property and equipment
(33,052
)
 
(64,609
)
Other

 
(1,665
)
Total deferred tax liabilities
(33,052
)
 
(66,274
)
Net deferred tax asset (liability), net of valuation allowance
$

 
$
(35
)


The December 31, 2017 net deferred tax asset is comprised of $208.6 million deferred tax assets before valuation allowance, and $33.1 million deferred tax liabilities. The valuation allowance against the net deferred tax asset decreased by approximately $51.8 million from December 31, 2016 to December 31, 2017. The decrease was primarily due to the reduction of the U.S. corporate income tax rate from enactment of the 2017 Tax Act.

Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences between the tax basis of an asset or liability and its reported amount in the Consolidated Financial Statements. The measurement of deferred tax assets and liabilities is based on enacted tax laws and rates currently in effect in each of the jurisdictions in which we have operations.
In recording deferred income tax assets, we consider whether it is more likely than not that some portion or all of the deferred income tax assets will be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income of the appropriate character during the periods in which those deferred income tax assets would be deductible. We consider the scheduled reversal of deferred income tax liabilities and projected future taxable income for this determination. Due to the history of losses in recent years and the continued challenges in the oil and gas industry, management continues to believe that it is more likely than not that we will not be able to realize our net deferred tax assets, and therefore a valuation allowance remains on the net deferred tax asset balance.
We estimate that as of December 31, 2017, 2016 and 2015, we have available $373.1 million, $252.8 million (after attribute reduction) and $243.8 million, respectively, of federal net operating loss carryforwards. However, Internal Revenue Code Sections 382 and 383 impose limitations on a corporation’s ability to utilize tax attributes if the corporation experiences an “ownership change.” The Company experienced an ownership change on December 15, 2016, as the emergence of the Company and certain of its domestic subsidiaries from chapter 11 bankruptcy proceedings is considered a change in ownership for purposes of IRC Section 382. As a result, approximately $2.4 million of our net operating losses as of December 31, 2017 are subject to Section 382 limitation and expire in 2019 to 2020. If a subsequent ownership change were to occur as a result of future transactions in the Company’s stock, the Company’s use of remaining U.S. tax attributes may be further limited.
We estimate that as of December 31, 2017, 2016 and 2015, we have available $485.6 million, $378.8 million and $258.9 million, respectively, of state net operating loss carryforwards that will expire between 2018 and 2037. We estimate that we have remaining capital loss carryforward of $78.0 million, as $61.2 million expired during 2017. Our remaining capital loss carryforwards will expire in 2021.
We did not provide for U.S. income taxes or withholding taxes on unremitted earnings of our subsidiary in Canada, as these earnings are considered permanently reinvested because the cash flow generated by this business is needed to fund additional equipment and working capital requirements in this jurisdiction. Furthermore, we did not provide for U.S. income taxes on unremitted earnings of our other foreign subsidiaries, because as of December 31, 2017, the Company’s non-Canadian foreign subsidiaries had an accumulated deficit in earnings. The Company does not intend to repatriate the earnings of its foreign subsidiaries.
We file income tax returns in the U.S., including federal and various state filings, and certain foreign jurisdictions. The number of years that are open under the statute of limitations and subject to audit varies depending on the tax jurisdiction. In 2014 the Internal Revenue Service (“IRS”) concluded their audit of our returns for the tax years ended December 31, 2010, 2011 and 2012 with no material changes. In 2015 the IRS concluded their audit of our returns for the tax year ended December 31, 2014 with no changes. Our other significant filings, which are in Mexico, have been examined through tax years 2010.
Under the Plan, a substantial portion of the Company’s pre-petition debt securities, revolving credit facility and other obligations were extinguished. Absent an exception, a debtor recognizes cancellation of indebtedness income (“CODI”) upon discharge of its outstanding indebtedness for an amount of consideration that is less than its adjusted issue price. The Internal Revenue Code of 1986, as amended (“IRC”), provides that a debtor in a bankruptcy case may exclude CODI from taxable income but must reduce certain of its tax attributes by the amount of any CODI realized as a result of the consummation of a plan of reorganization. The amount of CODI realized by a taxpayer is the adjusted issue price of any indebtedness discharged less the sum of (i) the amount of cash paid, (ii) the issue price of any new indebtedness issued and (iii) the fair market value of any other consideration, including equity, issued. As a result of the market value of equity upon emergence from chapter 11 bankruptcy proceedings, the estimated amount of U.S. CODI is approximately $295.8 million, which will reduce the value of Key’s U.S. net operating losses including federal and state that had a value of $518.8 million as of December 15, 2016. The actual reduction in tax attributes does not occur until the first day of the Company’s tax year subsequent to the date of emergence, or December 16, 2016.
Uncertainty in Income Taxes
As of December 31, 2017, December 31, 2016, December 16, 2016, and December 31, 2015 we had $0.1 million, $0.4 million, $0.4 million and $0.6 million, respectively, of unrecognized tax benefits which, if recognized, would impact our effective tax rate. We recognized a net tax benefit $0.3 million in 2017, zero for the period ended December 31, 2016, $0.2 million for the period ended December 15, 2016, and $0.9 million in 2015 for statutes of limitations expiration. We expect our remaining reserve for uncertain tax positions to reverse within the next twelve months. A reconciliation of the gross change in the unrecognized tax benefits is as follows (in thousands):
Predecessor:
 
Balance at January 1, 2015
$
1,449

Additions based on tax positions related to the current year

Reductions as a result of a lapse of the applicable statute of limitations
(883
)
Settlements

Balance at December 31, 2015
566

Additions based on tax positions related to the current period

Reductions as a result of a lapse of the applicable statute of limitations
(206
)
Settlements

Balance at December 15, 2016
$
360

 
 
 
 
Successor:
 
Balance at December 15, 2016
$
360

Additions based on tax positions related to the current period

Reductions as a result of a lapse of the applicable statute of limitations

Settlements

Balance at December 31, 2016
$
360

Additions based on tax positions related to the current period

Reductions as a result of a lapse of the applicable statute of limitations
(252
)
Settlements

Balance at December 31, 2017
$
108