Income Taxes

Income tax (benefit) expense is summarized as follows:



	Years Ended December 31,
	2017			2016			2015
	(Thousands)
Current:
Federal	$	(65,034	)	$	(82,905	)	$	85,696
State	27			(298		)	1,103
Subtotal	(65,007		)	(83,203		)	86,799
Deferred:
Federal	(998,483		)	(117,155		)	(109,642		)
State	(52,129		)	(63,106		)	127,518
Subtotal	(1,050,612		)	(180,261		)	17,876
Total income taxes	$	(1,115,619	)	$	(263,464	)	$	104,675

The Company recorded a current federal income tax benefit in 2017 primarily as a result of carrying back federal and alternative minimum tax (AMT) net operating losses (NOLs) generated in 2016 and 2017. The Company will file carryback claims requesting a refund of a portion of the amounts paid relating to the 2015 federal tax return. The current federal income tax benefit in 2016 primarily related to amended return refund claims filed in 2016 and 2017 for open tax years 2010 through 2013. The current federal and state income tax expense in 2015 primarily related to tax gains generated as a result of EQGP's IPO and the sale of NWV Gathering to EQM in that year.

On December 22, 2017, the U.S. Congress enacted the law known as the Tax Cuts and Jobs Act of 2017 (Tax Reform Legislation), which made significant changes to U.S. federal income tax law, including lowering the federal corporate tax rate to 21% from 35% beginning January 1, 2018. As a result of the change in the corporate tax rate the Company recorded a deferred tax benefit of $1.2 billion during the year ended December 31, 2017 to revalue its existing net deferred tax liabilities to the lower rate.

The Tax Reform Legislation preserved deductibility of intangible drilling costs (IDCs) for federal income tax purposes, which allows the Company to deduct a portion of drilling costs in the year incurred and minimizes current taxes payable in periods of taxable income. IDCs have historically been limited for AMT purposes, which has resulted in the Company paying AMT in periods when no other federal taxes were currently payable. The Tax Reform Legislation also repealed the AMT for tax years beginning January 1, 2018 and provides that existing AMT credit carryforwards can be utilized to offset current federal taxes owed in tax years 2018 through 2020. In addition, 50% of any unused AMT credit carryforwards can be refunded during these years with any remaining AMT credit carryforward being fully refunded in 2021. The Company had approximately $435 million of AMT credit carryforward as of December 31, 2017.

The Tax Reform Legislation contains several other provisions, such as limiting the deductibility of interest expense, that are not expected to have a material effect on the Company's results of operations. As of December 31, 2017, the Company has not completed its accounting for the effects of the Tax Reform Legislation; however, provisional amounts are recorded to revalue deferred tax assets and liabilities and reflect the state income tax effects related to the Tax Reform Legislation. The Company also considered whether existing deferred tax amounts will be recovered in future periods under the new law. However, the Company is still analyzing certain aspects of the Tax Reform Legislation and refining calculations, which could potentially impact the measurement of these balances or potentially give rise to new deferred tax amounts. The Company will refine its estimates to incorporate new or better information as it comes available through the filing date of its 2017 U.S. income tax returns in the fourth quarter of 2018.

The Protecting Americans from Tax Hikes (PATH) Act of 2015 was enacted on December 18, 2015 and retroactively and permanently extended the research and experimentation (R&E) tax credit for 2015 forward. The PATH Act also reinstated and extended through the end of 2017 50% bonus depreciation. In addition, the Tax Reform Legislation provides for 100% bonus depreciation on some tangible property expenditures through 2022.

The Company has federal NOL carryforwards related to the Rice Merger discussed in Note 2 and NOLs generated in 2017 in excess of the amount carried back to 2015. The Company also has NOLs related to the Trans Energy Merger discussed in Note 10, of which a nominal amount is available to be utilized annually over the next 20 years. The Tax Reform Legislation limits the utilization of NOLs generated after December 31, 2017 that are carried forward into future years to 80% of taxable income and eliminates the ability to carry NOLs back to earlier tax years for refunds of taxes paid.

Income tax (benefit) expense differed from amounts computed at the federal statutory rate of 35% on pre-tax income as follows:



	Years Ended December 31,
	2017			2016			2015
	(Thousands)
Tax at statutory rate	$	259,884		$	(138,084	)	$	149,296
Federal tax reform	(1,205,140		)	—			—
State income taxes	(52,606		)	(71,613		)	(7,566		)
Valuation allowance	10,680			23,808			91,144
Noncontrolling partners’ share of earnings	(122,365		)	(112,672		)	(82,850		)
Regulatory liability/asset	10,488			35,438			(35,438		)
Federal tax credits	(34,956		)	(4,539		)	(7,243		)
Other	18,396			4,198			(2,668		)
Income tax (benefit) expense	$	(1,115,619	)	$	(263,464	)	$	104,675
Effective tax rate	(150.2		)%	66.8		%	24.5		%

All of EQGP's, RMP’s and Strike Force Midstream’s income is included in the Company's pre-tax income (loss). However, the Company is not required to record income tax expense with respect to the portion of EQGP's and RMP’s income allocated to the noncontrolling public limited partners of EQGP, EQM and RMP or to the portion of Strike Force Midstream’s income allocated to the minority owner, which reduces the Company's effective tax rate in periods when the Company has consolidated pre-tax income and increases the Company's effective tax rate in periods when the Company has consolidated pre-tax loss.

The effective tax rate for the year ended December 31, 2017 was lower than the U.S. federal statutory rate primarily due to the effect of the Tax Reform Legislation. The primary impact of the Tax Reform Legislation on the Company's effective tax rate was to revalue the Company's deferred tax liability at the new corporate tax rate of 21%. The effective tax rate was also lower due to the effect of income allocated to the noncontrolling limited partners of EQGP, EQM and RMP and the minority owner of Strike Force Midstream as well as for federal tax credits generated during the year. These credits increased for the year ended December 31, 2017 as a result of $30.2 million of federal marginal well tax credit. The IRS Notice supporting the calculation of the credit was not published until 2017 and the Company was unable to estimate the amount of this credit absent the IRS Notice. As a result, $6.1 million of this credit recorded in 2017 related to 2016 activity.

For the year ended December 31, 2017, the Company realized a $10.5 million tax expense associated with FERC regulated assets as a result of the corporate tax rate reduction in the Tax Reform Legislation. Following the normalization rules of the IRC, this regulatory liability is amortized on a straight-line basis over the estimated remaining life of the related assets.

The effective tax rate for the year ended December 31, 2016 was higher than the U.S. federal statutory rate of 35% primarily due to the effect of income allocated to the noncontrolling limited partners of EQGP and EQM. Due to the Company's consolidated pre-tax loss for the year ended December 31, 2016, EQGP's income allocated to noncontrolling limited partners increased the effective income tax rate for the year ended December 31, 2016. The increase in the effective income tax rate was also partly attributable to the tax benefit generated from pre-tax loss on state income tax paying entities and was partially offset by the $35.4 million regulatory asset write-off described in the following paragraph.

For the year ended December 31, 2015, the Company realized a $35.4 million regulatory asset tax benefit in connection with IRS guidance received by the Company regarding a like-kind exchange of regulated assets which resulted in tax deferral for the Company. In order to be in compliance with the normalization rules of the IRC, the IRS guidance held that the deferred tax liability associated with the exchanged regulatory assets should not be considered for ratemaking purposes. As a result, during the second quarter of 2015, the Company recorded a regulatory asset equal to the taxes deferred from the exchange and an associated income tax benefit. The Company sold the assets on which it deferred the underlying taxes to EQM as part of the October 2016 Sale; as a result, the regulatory asset and deferred tax benefit reversed during the fourth quarter of 2016.

The Company believes that it is more likely than not that the benefit from certain state NOL carryforwards and certain federal NOLs acquired in recent acquisitions will not be realized. A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. All available evidence, both positive and negative, must be considered in determining the need for a valuation allowance. At December 31, 2017, 2016 and 2015, positive evidence considered included reversals of financial to tax temporary differences, the implementation of and/or ability to employ various tax planning strategies and the estimation of future taxable income. Negative evidence considered included historical pre-tax book losses of the EQT Production business segment. A review of positive and negative evidence regarding these tax benefits resulted in the conclusion that valuation allowances for certain NOLs were warranted as it was more likely than not that the Company would not utilize them prior to expiration. Uncertainties such as future commodity prices can affect the Company's calculations and its ability to utilize these NOLs prior to expiration. Management will continue to assess the potential for realizing deferred tax assets based upon income forecast data and the feasibility of future tax planning strategies and may record adjustments to the related valuation allowances in future periods that could materially impact net income.

The following table reconciles the beginning and ending amount of reserve for uncertain tax positions (excluding interest and penalties):



	2017			2016			2015
	(Thousands)
Balance at January 1	$	252,434		$	259,301		$	56,957
Additions based on tax positions related to current year	50,469			23,978			152,983
Additions for tax positions of prior years	8,978			20,336			50,688
Reductions for tax positions of prior years	(10,323		)	(51,181		)	(1,327		)
Lapse of statute of limitations	—			—			—
Balance at December 31	$	301,558		$	252,434		$	259,301

Included in the balance above are unrecognized tax benefits that, if recognized, would affect the effective tax rate of $120.5 million, $102.0 million and $94.1 million as of December 31, 2017, 2016 and 2015, respectively. Additionally, there were uncertain tax positions included in the balance above of $84.1 million, $75.4 million, and $114.2 million for the years ended December 31, 2017, 2016 and 2015, respectively, that have been recorded in the Consolidated Balance Sheets as a reduction of the related deferred tax asset for AMT credit carryforwards and NOLs. The deferred tax asset was reduced for uncertain tax positions of approximately $0.3 million and $0.5 million during the years ended December 31, 2017 and 2016, respectively.

Included in the tabular reconciliation above at December 31, 2017, 2016 and 2015 are $4.7 million, $5.5 million and $6.4 million, respectively, for tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of tax deductions. Any disallowance of the shorter deductibility period would accelerate the payment of cash taxes to an earlier period but would not affect the Company's annual effective tax rate.

The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. The Company recorded interest and penalties of approximately $3.2 million, $1.6 million and $1.6 million for 2017, 2016 and 2015, respectively. Interest and penalties of $8.4 million, $5.2 million and $3.6 million were included in the Consolidated Balance Sheets at December 31, 2017, 2016 and 2015, respectively.

As of December 31, 2017, the Company believed that it is reasonably possible that a decrease of $42.5 million in unrecognized tax benefits related to federal tax positions may be necessary within 12 months as a result of potential settlements with, or legal or administrative guidance by, relevant taxing authorities or the lapse of applicable statutes of limitation. As of December 31, 2016 and 2015, the Company did not expect any of its unrecognized tax benefits to decrease within the next 12 months.

The consolidated federal income tax liability of the Company has been settled with the IRS through 2009. The IRS has completed its review of the 2010, 2011 and 2012 tax years and the Company is in the process of appealing its R&E tax credit claim for such years. In addition, the Company has filed refund claims relating to R&E and AMT preference adjustments for the years 2010 through 2013. These claims are under review by the IRS. The Company also is the subject of various state income tax examinations. With few exceptions, as of December 31, 2017, the Company is no longer subject to state examinations by tax authorities for years before 2012.

There were no material changes to the Company’s methodology for accounting for unrecognized tax benefits during 2017.

The following table summarizes the source and tax effects of temporary differences between financial reporting and tax bases of assets and liabilities:



	As of December 31,
	2017			2016
	(Thousands)
Deferred income taxes:
Total deferred income tax assets	$	(971,184	)	$	(875,303	)
Total deferred income tax liabilities	2,740,084			2,635,307
Total net deferred income tax liabilities	1,768,900			1,760,004
Total deferred income tax liabilities (assets):
Drilling and development costs expensed for income tax reporting	2,074,091			1,473,355
Tax depreciation in excess of book depreciation	644,590			1,161,952
Incentive compensation and deferred compensation plans	(43,822		)	(77,743		)
Net operating loss carryforwards	(564,180		)	(282,943		)
Investment in partnerships	(132,667		)	(386,676		)
Alternative minimum tax credit carryforward	(435,190		)	(224,428		)
Federal tax credits	(50,341		)	(2,508		)
Unrealized hedge (losses) gains	21,403			(101,430		)
Other	(7,376		)	(997		)
Total excluding valuation allowances	1,506,508			1,558,582
Valuation allowances	262,392			201,422
Total net deferred income tax liabilities	$	1,768,900		$	1,760,004

The net deferred tax liability decrease of $1.2 billion as a result of the decrease in the corporate tax rate in the Tax Reform Legislation and was partially offset by a $1.1 billion net deferred tax liability recognized as a result of the Rice Mergers discussed in Note 2.

As of December 31, 2017, the Company had a deferred tax asset of $194.3 million, net of valuation allowances of $22.9 million, related to tax benefits from federal NOL carryforwards expiring in 2036 to 2037. As of December 31, 2017, the Company had a deferred tax asset of $130.0 million, net of valuation allowances of $217.0 million, related to tax benefits from state NOL carryforwards with various expiration dates ranging from 2018 to 2037. On October 30, 2017, Pennsylvania enacted a change in the limitation on Pennsylvania NOL utilization to 35% of taxable income from 30% of taxable income for tax years beginning in 2018 and to 40% of taxable income for tax years beginning in 2019 and thereafter. As a result, the Company's valuation allowance for state NOLs was reduced by $21.2 million during 2017. In addition, the Company recorded a valuation allowance of $22.5 million on AMT credits related to the federal sequestration of refunds, which reduces refunds claims for NOLs by 6.6% in fiscal 2017. As of December 31, 2016, the Company had a deferred tax asset of $81.5 million, net of valuation allowances of $201.4 million, related to tax benefits from state NOL carryforwards with various expiration dates ranging from 2018 to 2035.

As discussed in Note 1, effective for the year ended December 31, 2017, EQT adopted ASU No. 2016-09 to simplify accounting for employee share-based payment transactions and eliminated excess tax benefits. The Company recorded tax benefits of $0.9 million for the year ended December 31, 2016, in the Consolidated Financial Statements as additions to common shareholders’ equity, which reduced taxes payable for the respective year.