Income Taxes

Impact of the Tax Cuts and Jobs Act of 2017

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "TCJA") was signed into law. The TCJA introduced several significant changes to corporate income tax laws in the United States. The most significant change that affects Atmos Energy is the reduction of the federal statutory income tax rate from 35% to 21%. As a rate-regulated entity, the accelerated capital expensing and the limitation on interest deductibility provisions included in the TCJA are not applicable to us.

Under generally accepted accounting principles, we use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

At September 30, 2017, we measured our net deferred tax liability using the enacted federal statutory tax rate of 35%. The enactment of the TCJA on December 22, 2017 required us to remeasure our deferred tax assets and liabilities, including our U.S. federal income tax net operating loss carryforwards, at the newly enacted federal statutory income tax rate of 21%. As the Company’s fiscal year end is September 30, 2018, the Internal Revenue Code requires the Company to use a blended statutory federal corporate income tax rate of 24.5% for fiscal 2018.

The decrease in the federal statutory income tax rate reduced our net deferred tax liability by $905.3 million. Of this amount, $746.5 million relates to regulated operations and has been recorded as a regulatory liability, a portion of which is currently being returned to utility customers in accordance with issued regulatory orders and the Internal Revenue Code. The remaining $158.8 million has been reflected as a one-time income tax benefit in our consolidated statement of income for the year ended September 30, 2018, because these taxes are not related to our cost of service ratemaking.

The SEC issued guidance in Staff Accounting Bulletin 118 (SAB 118), which allows us to record provisional amounts during a one-year measurement period, similar to the measurement period in accounting for business combinations. The Company has determined a reasonable estimate for the measurement and accounting for certain effects of the TCJA, including the remeasurement of our net deferred tax liabilities and the establishment of a regulatory liability, which have been reflected as provisional amounts in the September 30, 2018 consolidated financial statements. The amounts represent our best estimates based upon records, information and current guidance. We are still analyzing certain aspects of the TCJA, refining our calculations and expecting additional guidance relating to the TCJA from the U.S. Department of the Treasury and the Internal Revenue Service. Any additional guidance issued or future actions of our regulators could potentially affect the final determination of the accounting effects arising from the implementation of the TCJA.

We have and continue to work with our regulators in each jurisdiction to determine the amortization of the excess deferred taxes regulatory liability of $746.5 million of which the balance is $744.9 million as of September 30, 2018. In addition, we have recorded a cost of service regulatory liability of $22.5 million as of September 30, 2018. Accounting orders were issued for all our service areas that required us to establish, effective January 1, 2018, a separate regulatory liability for the difference in taxes included in our rates that have been calculated based on a 35% statutory income tax rate and the new 21% statutory income tax rate. The establishment of this regulatory liability relating to our cost of service rates resulted in a reduction to our revenues beginning in the second quarter of fiscal 2018.

We have received approval from regulators to update our cost of service rates to reflect the decrease in the statutory income tax rate in our Colorado, Kansas, Kentucky, Louisiana and Texas service areas. We are still working with regulators in Mississippi, Tennessee and Virginia to reflect the effects of the lower statutory income tax rate in our cost of service in rates. As of September 30, 2018, we received approval from regulators to return amounts to customers related to the regulatory liabilities recorded for differences in our cost of service rates due to change in the federal statutory income tax rate in Colorado and Kansas.

As of September 30, 2018, we received approval from regulators to return amounts to customers related to the regulatory liabilities recorded for the excess deferred taxes created upon implementation of the TCJA in Colorado, Kentucky and Louisiana in accordance with regulatory proceedings on a provisional basis over periods ranging from 18 to 40 years. In our remaining jurisdictions, the treatment of the effects of the TCJA in rates is being addressed in ongoing or will be addressed in future regulatory proceedings.

Income Tax Expense

The components of income tax expense from continuing operations for 2018, 2017 and 2016 were as follows:



	2018			2017		2016
	(In thousands)
Current
Federal	$	(10,099	)	$	—	$	—
State	11,075			9,022		5,667
Deferred
Federal	150,556			197,013		178,630
State	15,330			15,348		12,350
TCJA Impact	(158,782		)	—		—
Investment tax credits	—			—		(5		)
	$	8,080		$	221,383	$	196,642

Reconciliations of the provision for income taxes computed at the statutory rate to the reported provisions for income taxes from continuing operations for 2018, 2017 and 2016 are set forth below:



	2018			2017			2016
	(In thousands)
Tax at statutory rate⁽¹⁾	$	149,730		$	211,433		$	189,764
Common stock dividends deductible for tax reporting	(1,745		)	(2,584		)	(2,570		)
State taxes (net of federal benefit)	19,826			16,100			11,133
Change in valuation allowance	—			—			1,324
Amortization of excess deferred taxes	(1,219		)	—			—
Remeasurement due to TCJA	(158,782		)	—			—
Other, net	270			(3,566		)	(3,009		)
Income tax expense	$	8,080		$	221,383		$	196,642


(1)	Tax expense is calculated at the statutory federal income tax rate of 24.5% for the year ended September 30, 2018 and 35% for the years ended September 30, 2017 and 2016.

Deferred income taxes reflect the tax effect of differences between the basis of assets and liabilities for book and tax purposes. The tax effect of temporary differences that gave rise to significant components of the deferred tax liabilities and deferred tax assets at September 30, 2018 and 2017 are presented below:



	2018			2017
	(In thousands)
Deferred tax assets:
Employee benefit plans	$	72,745		$	121,288
Interest rate agreements	27,135			65,171
Net operating loss carryforwards	461,481			555,043
Charitable and other credit carryforwards	6,818			18,873
Regulatory excess deferred tax	169,947			—
Other	13,804			10,218
Total deferred tax assets	751,930			770,593
Valuation allowance	(1,465		)	(5,403		)
Net deferred tax assets	750,465			765,190
Deferred tax liabilities:
Difference in net book value and net tax value of assets	(1,859,787		)	(2,528,485		)
Pension funding	(6,986		)	(13,101		)
Gas cost adjustments	1,005			(60,376		)
Other	(38,764		)	(41,927		)
Total deferred tax liabilities	(1,904,532		)	(2,643,889		)
Net deferred tax liabilities	$	(1,154,067	)	$	(1,878,699	)
Deferred credits for rate regulated entities	$	762		$	985

At September 30, 2018, we had $430.0 million of federal net operating loss carryforwards. The federal net operating loss carryforwards are available to offset taxable income and will begin to expire in 2029. The Company also has $10.1 million of federal alternative minimum tax credit carryforwards, which do not expire and are expected to be fully refunded to us between 2019 and 2022 as a result of changes introduced by the TCJA. These credit carryforwards are now reflected as taxes receivable within the deferred charges and other assets line item on our consolidated balance sheet. In addition, the Company has $5.3 million in remeasured charitable contribution carryforwards to offset future taxable income. The Company’s charitable contribution carryforwards expiration period begins in 2019.

The Company also has $31.4 million of state net operating loss carryforwards (net of $8.4 million of remeasured federal effects) and $1.5 million of state tax credits carryforwards (net of $0.4 million of remeasured federal effects). Depending on the jurisdiction in which the state net operating loss was generated, the carryforwards expiration period begins in 2019.

Due to the changes introduced by the TCJA, we now believe it is more likely than not that the benefit from certain charitable contribution carryforwards for which a valuation allowance was previously established will be realized. As a result, we reduced our valuation allowance by $4.2 million during the first quarter of fiscal 2018. This amount is included in the $158.8 million one-time income tax benefit.

We believe it is more likely than not that the benefit from certain state net operating loss carryforwards and state credit carryforwards will not be realized. Due to the uncertainty of realizing a benefit from the deferred tax asset recorded for the carryforwards, a re-measured valuation allowance of $1.5 million continues to be established for the year ended September 30, 2018. No additional valuation allowance was recorded for the year ended September 30, 2018.

At September 30, 2018, we had recorded liabilities associated with unrecognized tax benefits totaling $26.2 million. The following table reconciles the beginning and ending balance of our unrecognized tax benefits:



	2018			2017			2016
	(In thousands)
Unrecognized tax benefits - beginning balance	$	23,719		$	20,298		$	17,069
Increase (decrease) resulting from prior period tax positions	22			(366		)	(290		)
Increase resulting from current period tax positions	2,462			3,787			3,519
Unrecognized tax benefits - ending balance	26,203			23,719			20,298
Less: deferred federal and state income tax benefits	(5,503		)	(8,302		)	(7,104		)
Total unrecognized tax benefits that, if recognized, would impact the effective income tax rate as of the end of the year	$	20,700		$	15,417		$	13,194

The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties included within interest charges in our consolidated statement of income. During the years ended September 30, 2018, 2017 and 2016, the Company recognized approximately $1.6 million, $1.1 million and $2.5 million in interest and penalties. The Company had approximately $6.1 million, $4.5 million and $3.3 million for the payment of interest and penalties accrued at September 30, 2018, 2017 and 2016.

We file income tax returns in the U.S. federal jurisdiction as well as in various states where we have operations. We have concluded substantially all U.S. federal income tax matters through fiscal year 2009 and concluded substantially all Texas income tax matters through fiscal year 2010.