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 (“SAB 118”) during 2017. SAB 118 provided SEC staff guidance for the application of ASC Topic 740, Income Taxes, and allowed 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 reflected the provisional income tax effects of the 2017 Tax Act for which the accounting under ASC Topic 740 was 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. Additional clarifying guidance and law corrections were issued by the U.S. government during 2018 related to the 2017 Tax Act, which provided further insight into properly accounting for the impacts of U.S. tax reform. During 2018, we finalized our accounting for this matter and concluded that no adjustments were required from our provisionally recorded amounts from 2017. We no longer have any provisionally recorded items related to the enactment of the 2017 Tax Act as of December 31, 2018.

The components of our income tax expense are as follows (in thousands):



	Successor						Predecessor
	Year Ended December 31, 2018		Year Ended December 31, 2017		Period from December 16, 2016 through December 31, 2016		Period from January 1, 2016 through December 15, 2016
Current income tax (expense) benefit	$	1,979	$	1,667	$	—	$	(2,042	)
Deferred income tax (expense) benefit	—		35		—		(787		)
Total income tax (expense) benefit	$	1,979	$	1,702	$	—	$	(2,829	)

We made federal income tax payments of zero for the years ended December 31, 2018 and 2017, the period from December 16, 2016 through December 31, 2016 and the period from January 1, 2016 through December 15, 2016, respectively. In addition, we received federal income tax refunds of $1.1 million, zero, 0.4 million and 6.9 million during the years ended December 31, 2018 and 2017, the period from December 16, 2016 through December 31, 2016 and the period from January 1, 2016 through December 15, 2016, respectively.

Income tax (expense) benefit differs from amounts computed by applying the statutory federal rate as follows:



	Successor						Predecessor
	Year Ended December 31, 2018		Year Ended December 31, 2017		Period from December 16, 2016 through December 31, 2016		Period from January 1, 2016 through December 15, 2016
Income tax benefit computed at Federal statutory rate	21.0	%	35.0	%	35.0	%	35.0	%
State taxes	(0.2	)%	—	%	—	%	(9.1	)%
Meals and entertainment	(0.4	)%	(0.4	)%	—	%	(0.3	)%
Foreign rate difference	—	%	0.4	%	—	%	(0.3	)%
Non-deductible goodwill and asset impairments	—	%	—	%	—	%	(4.0	)%
Non-deductible bankruptcy costs	—	%	—	%	—	%	(15.7	)%
Non-taxable cancellation of debt income	2.6	%	—	%	—	%	154.6	%
Penalties and other non-deductible expenses	—	%	—	%	—	%	(2.3	)%
Sale of Mexico	—	%	—	%	—	%	16.5	%
Change in valuation allowance	(20.1	)%	(33.8	)%	(35.0	)%	(171.1	)%
Equity compensation	(0.7	)%	(1.0	)%	—	%	—	%
U.S. tax reform - impact to deferred tax assets and liabilities	—	%	(67.4	)%	—	%	—	%
U.S. tax reform - change in valuation allowance	—	%	67.4	%	—	%	—	%
Other	—	%	1.2	%	—	%	(5.5	)%
Effective income tax rate	2.2	%	1.4	%	—	%	(2.2	)%

As of December 31, 2018 and 2017, our deferred tax assets and liabilities consisted of the following (in thousands):



	December 31,
	2018			2017
Deferred tax assets:
Net operating loss and tax credit carryforwards	$	113,230		$	103,251
Capital loss carryforwards	15,826			16,375
Foreign tax credit carryforward	17,095			17,095
Self-insurance reserves	8,581			8,734
Interest expense limitation	6,055			—
Accrued liabilities	9,213			9,479
Share-based compensation	1,221			513
Intangible assets	44,748			52,146
Other	670			1,036
Total deferred tax assets	216,639			208,629
Valuation allowance for deferred tax assets	(190,791		)	(175,577		)
Net deferred tax assets	25,848			33,052
Deferred tax liabilities:
Property and equipment	(25,848		)	(33,052		)
Total deferred tax liabilities	(25,848		)	(33,052		)
Net deferred tax asset (liability), net of valuation allowance	$	—		$	—

The December 31, 2018 net deferred tax asset is comprised of $216.6 million deferred tax assets before valuation allowance, and $25.8 million deferred tax liabilities. The valuation allowance against the net deferred tax asset increased by approximately $15.2 million from December 31, 2017 to December 31, 2018.

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, 2018, 2017 and 2016, we have available $434.2 million, $373.1 million and $252.8 million (after attribute reduction), 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, 2018 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, 2018, 2017 and 2016, we have available $429.3 million, $485.6 million and $378.8 million, respectively, of state net operating loss carryforwards that will expire between 2019 and 2038. We estimate that we have remaining capital loss carryforward of $75.3 million. Our remaining capital loss carryforwards will expire in 2021.

We are no longer subject examination for tax years before 2015 in federal and most state jurisdictions.

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 did 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, 2018, December 31, 2017, December 31, 2016 and December 16, 2016 we had zero, $0.1 million, $0.4 million and $0.4 million, respectively, of unrecognized tax benefits which, if recognized, would impact our effective tax rate. We recognized a net tax benefit $0.1 million in 2018, $0.3 million in 2017, zero for the period ended December 31, 2016, $0.2 million for the period ended December 15, 2016 for statutes of limitations expiration. As of December 31, 2018 our ending balance for uncertain tax position reserves in zero, due to the statute of limitations lapse. A reconciliation of the gross change in the unrecognized tax benefits is as follows (in thousands):



Predecessor:
Balance at December 31, 2015	$	566
Reductions as a result of a lapse of the applicable statute of limitations	(206		)
Balance at December 15, 2016	360


Successor:
Balance at December 15, 2016	360
Reductions as a result of a lapse of the applicable statute of limitations	—
Balance at December 31, 2016	360
Reductions as a result of a lapse of the applicable statute of limitations	(252		)
Year Ended December 31, 2017	108
Reductions as a result of a lapse of the applicable statute of limitations	(108		)
Year Ended December 31, 2018	$	—