Income Tax Matters

Tax (Provision) Benefit. Income (loss) before income taxes by geographic area was as follows (in millions of dollars):



	Year Ended December 31,
	2017		2016		2015
Domestic	$	127.9	$	143.6	$	(373.6	)
Foreign	5.1		3.6		1.8
Income (loss) before income taxes	$	133.0	$	147.2	$	(371.8	)

Income taxes are classified as either domestic or foreign, based on whether payment is made or due to the United States or a foreign country. Certain income classified as foreign is also subject to domestic income taxes.

Income tax (provision) benefit consisted of (in millions of dollars):



	Federal			Foreign			State			Total
2017
Current	$	3.1		$	(0.8	)	$	(1.0	)	$	1.3
Deferred	(82.0		)	(1.0		)	(5.7		)	(88.7		)
Expense applied to increase Retained earnings/ Other comprehensive income (loss)	(0.1		)	(0.1		)	—			(0.2		)
Income tax provision	$	(79.0	)	$	(1.9	)	$	(6.7	)	$	(87.6	)
2016
Current	$	2.7		$	0.6		$	(1.5	)	$	1.8
Deferred	(47.8		)	(1.2		)	(4.7		)	(53.7		)
Expense applied to increase Additional paid in capital/ Other comprehensive income (loss)	(3.2		)	(0.1		)	(0.3		)	(3.6		)
Income tax provision	$	(48.3	)	$	(0.7	)	$	(6.5	)	$	(55.5	)
2015
Current	$	0.7		$	2.1		$	0.4		$	3.2
Deferred	93.2			(1.2		)	1.8			93.8
Benefit applied to decrease Additional paid in capital/Other comprehensive income (loss)	33.5			0.4			4.3			38.2
Income tax benefit	$	127.4		$	1.3		$	6.5		$	135.2

A reconciliation between the (provision for) benefit from income taxes and the amount computed by applying the federal statutory income tax rate to Income (loss) before income taxes is as follows (in millions of dollars):



	Year Ended December 31,
	2017			2016			2015
Amount of federal income tax (provision) benefit based on the statutory rate	$	(46.5	)	$	(51.5	)	$	130.1
(Increase) decrease in federal valuation allowances	0.5			(0.3		)	(0.6		)
Non-deductible compensation (expense) benefit	(2.3		)	0.3			(0.2		)
Non-deductible (expense)	—			(0.3		)	(0.3		)
State income tax (provision) benefit, net of federal benefit¹	(4.3		)	(4.2		)	4.2
Foreign income tax (expense) benefit	(0.1		)	0.5			0.1
Foreign undistributed earnings	(5.9		)	—			—
Expiration of statute of limitations	—			—			1.7
Tax rate change	(29.0		)	—			—
Advance pricing agreement	—			—			(0.2		)
Competent Authority settlement	—			—			0.4
Income tax (provision) benefit	$	(87.6	)	$	(55.5	)	$	135.2

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State income taxes were $4.0 million in 2017, but were increased by a $2.5 million change in tax rates, and offset by a $2.2 million decrease in the valuation allowance relating to certain state net operating losses. The state income taxes were $4.1 million in 2016, but were offset by a $0.2 million decrease due to lower tax rates in various states and a $0.3 million increase in the valuation allowance relating to certain state net operating losses. The state income tax benefit was $10.3 million in 2015, but was offset by a $3.1 million increase due to state tax rate and state law changes and a $3.0 million increase relating to the expiration of certain state net operating losses.

Deferred Income Taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. The components of our net deferred income tax assets were as follows (in millions of dollars):



	Year Ended December 31,
	2017			2016
Deferred income tax assets:
Loss and credit carryforwards	$	98.7		$	191.8
VEBAs (see Note 4)	11.6			23.2
Other assets	21.0			39.8
Inventory	9.3			—
Valuation allowances	(13.0		)	(15.7		)
Total deferred income tax assets	127.6			239.1
Deferred income tax liabilities:
Property, plant and equipment	(57.7		)	(82.7		)
Undistributed foreign earnings	(2.2		)	—
Total deferred income tax liabilities	(59.9		)	(82.7		)
Net deferred income tax assets ¹	$	67.7		$	156.4

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^1.

Of the total net deferred income tax assets of $67.7 million, $72.0 million was presented as Deferred tax assets, net and $4.3 million was presented as Deferred tax liabilities on the Consolidated Balance Sheet as of December 31, 2017. Of the total net deferred income tax assets of $156.4 million, $159.7 million was presented as Deferred tax assets, net and $3.3 million was presented as Deferred tax liabilities on the Consolidated Balance Sheet as of December 31, 2016.

Tax Attributes. At December 31, 2017, we had $275.1 million of net operating loss ("NOL") carryforwards available to reduce future cash payments for federal income taxes in the United States. H.R.1, commonly referred to as the Tax Cut and Jobs Act ("Tax Act"), allows net operating losses generated prior to December 31, 2017 (including our NOL carryforwards) to be fully deducted against 100% of taxable income until fully utilized or expired (see "Tax Cuts and Jobs Act" below for further discussion of the Tax Act). Our NOL carryforwards expire periodically through 2030.

We also had $23.3 million of alternative minimum tax ("AMT") credit carryforwards available to offset regular federal income tax requirements. Since the corporate AMT has been repealed in the Tax Act for tax years beginning after December 31, 2017, our AMT credit carryforwards that have not yet been used are refundable in future years. We will use AMT credits to offset any regular income tax liability in years 2018 through 2020, with 50% of remaining AMT credits refunded in each of the 2018, 2019, and 2020 tax years and all remaining credits refunded in tax year 2021 (see "Tax Cuts and Jobs Act" below for further discussion of the Tax Act).

In assessing the realizability of deferred tax assets, management considers whether it is "more likely than not" that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers taxable income in carryback years, the scheduled reversal of deferred tax liabilities, tax planning strategies and projected future taxable income in making this assessment. Due to uncertainties surrounding the realization of some of our deferred tax assets, primarily including state NOL carryforwards sustained during the prior years and expiring tax benefits, we have a valuation allowance against our deferred tax assets. When recognized, the tax benefits relating to any reversal of this valuation allowance will be recorded as a reduction of income tax expense. The (decrease) increase in the valuation allowance was $(2.7) million, $(5.5) million and $2.0 million in 2017, 2016 and 2015, respectively.

The decrease in the valuation allowance for 2017 was primarily due to the expiration of state NOL carryforwards and the related reversal of their valuation allowances and the utilization of capital losses. The decrease in the valuation allowance for 2016 was primarily due to the expiration of state NOL carryforwards and the related reversal of their valuation allowances. The increase in the valuation allowance in 2015 was primarily due to unutilized state NOL carryforwards and Federal Separate Return Limitation Year losses that were expected to expire.

Other. We and our subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions.

Our tax returns for certain past years are still subject to examination by taxing authorities and the use of NOL carryforwards in future periods could trigger a review of attributes and other tax matters in years that are not otherwise subject to examination.

We have gross unrecognized benefits relating to uncertain tax positions. A reconciliation of changes in the gross unrecognized tax benefits is as follows (in millions of dollars):



	Year Ended December 31,
	2017			2016		2015
Gross unrecognized tax benefits at beginning of period	$	1.8		$	1.7	$	2.2
Gross increases for tax positions of prior years	—			0.1		0.1
Gross decreases for tax positions of prior years	(0.3		)	—		—
Gross decrease for tax positions relating to lapse of a statute of limitation	—			—		(0.6		)
Gross unrecognized tax benefits at end of period	$	1.5		$	1.8	$	1.7

If and when the $1.5 million, $1.8 million and $1.7 million of gross unrecognized tax benefits at December 31, 2017, December 31, 2016 and December 31, 2015, respectively, are recognized, $0.4 million, $0.7 million and $0.6 million will be reflected, respectively, in our income tax provision and thus affect the effective tax rate in future periods.

The change during 2017 was primarily due to a change in tax positions. The change in gross unrecognized tax benefits during 2016 was primarily due to a change in tax positions. The change in gross unrecognized tax benefits during 2015 was primarily due to the expiration of statutes.

In addition, we recognize interest and penalties related to unrecognized tax benefits in the income tax provision. We had $0.1 million and $0.2 million accrued for interest and penalties at December 31, 2017 and December 31, 2016, respectively. Of these amounts, none were considered current and, as such, were included in Long-term liabilities on the Consolidated Balance Sheets at December 31, 2017 and December 31, 2016. We recognized a decrease in interest and penalty of $0.1 million in our tax provision in 2017. There was no change to interest and penalty in 2016. We recognized decrease in interest and penalty of $1.2 million in our tax provision in 2015.

In connection with the gross unrecognized tax benefits (including interest and penalties) denominated in foreign currency, we incurred a foreign currency translation adjustment in 2015. During 2015, the foreign currency impact on such liabilities resulted in currency translation adjustments of $0.1 million, which increased Other comprehensive income.

We do not expect our gross unrecognized tax benefits to significantly change within the next 12 months.

Tax Cuts and Jobs Act. On December 22, 2017, the U.S. government enacted the Tax Act, which makes broad and complex changes to the U.S. tax code, including, but not limited to: (i) reducing the U.S. federal corporate tax rate from 35% to 21%; (ii) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (iii) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (iv) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (v) eliminating the corporate AMT and changing how existing AMT credits can be realized; (vi) creating a new limitation on deductible interest expense; and (vii) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.

The SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740 (see Note 1). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

Our accounting for the following elements of the Tax Act is incomplete. However, we were able to make reasonable estimates of certain effects and, therefore, recorded provisional adjustments in the fourth quarter of 2017 as described below.

Reduction of US Federal Corporate Tax Rate. The Tax Act reduces the corporate tax rate to 21%, effective January 1, 2018. For certain of our deferred tax assets, we have recorded a provisional decrease of $29.0 million, with a corresponding net increase to deferred income tax expense for the year ended December 31, 2017. While we are able to make a reasonable estimate of the impact of the reduction in corporate rate, our estimate may be affected by other analyses related to the Tax Act, including, but not limited to, our calculation of deemed repatriation of deferred foreign income and the state tax effect of adjustments made to federal temporary differences.

Deemed Repatriation Transition Tax. The Deemed Repatriation Transition Tax ("Transition Tax") is a tax on previously untaxed accumulated and current earnings and profits ("E&P") of certain of our foreign subsidiaries. To determine the amount of the Transition Tax, we must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. We were able to make a reasonable estimate of the Transition Tax and recorded a provisional Transition Tax obligation of $3.7 million. In addition, we have accrued $2.2 million for withholding tax since our earnings in Canada are no longer permanently reinvested. However, we are continuing to gather additional information to more precisely compute the amount of the Transition Tax.

Internal Revenue Code Section 162(m). The Tax Act modifies Section 162(m) of the Internal Revenue Code ("Section 162(m)") by: (i) expanding the scope of covered employees to include the chief financial officer; (ii) providing that any individual that becomes a covered employee for a taxable year beginning after December 31, 2016 would remain a covered employee for all future years; and (iii) eliminating the exceptions for commissions and performance-based compensation from the $1.0 million deduction limit. These changes do not apply to compensation stemming from contracts entered into on or before November 2, 2017, unless such contracts were materially modified on or after that date. Compensation agreements entered into and share-based payment awards granted after this date will be subject to the revised terms of Section 162(m). We were able to make a reasonable estimate of the Tax Act modifications to Section 162(m) and recorded a provisional Section 162(m) obligation of $2.3 million. However, we are continuing to gather additional information to more precisely compute the amount of the Section 162(m) limitation.