INCOME TAXES

On December 22, 2017, the TCJA was enacted and signed into law by the President of the United States with substantially all of the provisions of the TCJA having an effective date of January 1, 2018. Among other provisions, the reduction of the federal corporate tax rate from 35% to 21%, which required the Company to remeasure its existing deferred income tax balances as of December 31, 2017, had the most impact on PGE’s financial condition. As a result of the Company’s remeasurement, net deferred tax liabilities on the Company’s consolidated balance sheets were reduced by $340 million.

Of the remeasurement amount, $357 million has been deferred as a regulatory liability and is expected to be refunded to customers over time. These deferred tax items relate primarily to Electric utility plant and other rate base items subject to tax normalization rules that require the benefits to be passed on to customers through future prices over the remaining useful life of the underlying assets for which the deferred income taxes relate. The Company plans to use the average rate assumption method to account for the refund to customers. A portion of the remeasurement is not subject to tax normalization rules and will be amortized over time.

The remaining and offsetting remeasurement amount of $17 million represents a reduction to net deferred tax assets related to other business items, primarily comprised of deferred tax assets related to the Company’s NQBPs. The Company has recorded a $17 million charge to the results of operations, reflected as an increase in Income tax expense in the Company’s consolidated statements of income for the period ended December 31, 2017.

Based on the Company’s interpretations of the TCJA as of December 31, 2017, PGE believes it has substantially completed its analysis of the tax effects of the TCJA and has reflected such effects in the remeasurement amounts recorded. However, PGE has not yet finalized its federal tax returns for 2017 and also expects regulatory bodies, such as the U.S. Department of the Treasury, Internal Revenue Service, and OPUC to issue additional guidance or orders in 2018 that may result in changes to the Company’s previously finalized analysis of the TCJA. Such changes could result in material changes to the ultimate impact of the TCJA on PGE’s financial condition, results of operations, and cash flows.

Income tax expense consists of the following (in millions):



	Years Ended December 31,
	2017		2016		2015
Current:
Federal	$	4	$	10	$	4
State and local	12		3		1
	16		13		5
Deferred:
Federal	61		23		26
State and local	9		14		14
	70		37		40
Income tax expense	$	86	$	50	$	45

The significant differences between the U.S. federal statutory rate and PGE’s effective tax rate for financial reporting purposes are as follows:



	Years Ended December 31,
	2017		2016		2015
Federal statutory tax rate	35.0	%	35.0	%	35.0	%
Federal tax credits⁽¹⁾	(14.0	)	(18.2	)	(19.0	)
Change in federal tax law⁽²⁾	6.1		—		—
State and local taxes, net of federal tax benefit	5.0		4.8		4.2
Flow through depreciation and cost basis differences	1.5		0.2		—
Other	(2.1	)	(1.2	)	0.5
Effective tax rate	31.5	%	20.6	%	20.7	%

(1)

Federal tax credits consist primarily of production tax credits (PTCs) earned from Company-owned wind-powered generating facilities. The federal PTCs are earned based on a per-kilowatt hour rate, and as a result, the annual amount of PTCs earned will vary based on weather conditions and availability of the facilities. The PTCs are generated for 10 years from the corresponding facilities’ in service dates. PGE’s PTC generation ends at various dates between 2017 and 2024.

(2) Includes a $17 million increase to Income tax expense related to the remeasurement of deferred income taxes as a result of the enacted tax rate change under the TCJA.

Deferred income tax assets and liabilities consist of the following (in millions):



	As of December 31,
	2017			2016
Deferred income tax assets:
Employee benefits	$	128		$	181
Price risk management	56			59
Regulatory liabilities	14			29
Tax credits	50			56
Other	4			5
Total deferred income tax assets	252			330
Deferred income tax liabilities:
Depreciation and amortization	496			829
Regulatory assets	132			170
Other	—			—
Total deferred income tax liabilities	628			999
Deferred income tax liability, net	$	(376	)	$	(669	)

As of December 31, 2017, PGE has federal credit carryforwards of $50 million, consisting of PTCs, which will expire at various dates through 2037. PGE has analyzed the provisions of the TCJA and its effects on the Company’s deferred income tax assets, and PGE believes that it is more likely than not that its deferred income tax assets as of December 31, 2017 and 2016 will be realized; accordingly, no valuation allowance has been recorded. As of December 31, 2017 and 2016, PGE had no unrecognized tax benefits.

PGE and its subsidiaries file a consolidated federal income tax return. The Company also files income tax returns in the states of Oregon, California, and Montana, and in certain local jurisdictions. The Internal Revenue Service (IRS) has completed its examination of all tax years through 2010 and all issues were resolved related to those years. The Company does not believe that any open tax years for federal or state income taxes could result in any adjustments that would be significant to the consolidated financial statements.