| Income Taxes | 23. Income Taxes Current and Deferred Tax Provision Our provision for income taxes consisted of the following: Year Ended December 31, (in thousands) 2023 2022 2021 Current tax provision: U.S. federal $ — $ — $ (1) State 1,591 1,064 366 Total current 1,591 1,064 365 Deferred tax provision: U.S. federal 32,928 14,320 8,800 State 2,730 909 1,579 Total deferred 35,658 15,229 10,379 Provision for income taxes $ 37,249 $ 16,293 $ 10,744 The provision for income taxes for the years ended December 31, 2023, 2022 and 2021 resulted in effective tax rates of 26%, 27% and 28%, respectively. The reconciliation of these effective tax rates to the U.S. statutory rate of 21% is as follows: Year Ended December 31, (in thousands) 2023 2022 2021 Income taxes at U.S. federal statutory rate $ 29,872 $ 12,724 $ 8,182 Net state income taxes 3,614 1,795 1,374 Tax credits — (26) (720) Unrecognized tax benefits (1) 118 17 598 Valuation allowances and write off of tax attributes (2) 570 (68) (167) Executive compensation limitation 3,470 1,901 1,559 Stock (213) 152 162 Other (182) (202) (244) Provision for income taxes $ 37,249 $ 16,293 $ 10,744 (1) Includes the expiration of statute of limitations. See “Unrecognized Tax Benefits” below for further details. (2) See “Tax Attributes and Valuation Allowances” below for further details. Deferred income tax balances are the direct effect of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the taxes are actually paid or recovered. The tax effects of our temporary differences that gave rise to deferred tax assets and deferred tax liabilities were as follows: December 31, (in thousands) 2023 2022 Deferred tax assets: Net operating loss carryforwards $ 164,972 $ 191,916 Interest expense limitation carryforward 30,343 19,327 Basis difference in unconsolidated affiliate 686 — Accrued liabilities 6,704 4,979 Other 12,015 12,834 214,720 229,056 Valuation allowances (1) (1,177) (607) Total deferred tax assets 213,543 228,449 Deferred tax liabilities: Property, plant and equipment (12,125) (8,386) Basis difference in partnership (197,999) (181,377) Other (5,148) (6,187) Total deferred tax liabilities (215,272) (195,950) Net deferred tax asset (liability) (2) $ (1,729) $ 32,499 (1) See “Tax Attributes and Valuation Allowances” below for further details. (2) The 2023 and 2022 net deferred tax asset or liability are reflected in our consolidated balance sheets as deferred tax assets of $3.2 million and $33.4 million, respectively, and deferred tax liabilities of $4.9 million and $0.9 million, respectively. Both the 2023 and 2022 balances are based on a U.S. federal tax rate of 21%. Tax Attributes and Valuation Allowances Changes in our valuation allowance are as follows: Year Ended December 31, (in thousands) 2023 2022 2021 Balance at beginning of period $ (607) $ (735) $ (1,027) Additions to valuation allowance (742) (88) — Reductions to valuation allowance 172 216 292 Balance at end of period $ (1,177) $ (607) $ (735) Pursuant to Sections 382 and 383 of the Code, utilization of loss and credit carryforwards are subject to annual limitations due to any ownership changes of 5% stockholders. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50% over a rolling three–year period. We do not currently expect that any loss carryforwards or credit carryforwards will expire as a result of any 382 or 383 limitations. Our ability to utilize loss carryforwards and credit carryforwards against future U.S. federal taxable income and future U.S. federal income tax may be limited in the future if we have a 50% or more ownership change in our 5% stockholders. We record valuation allowances when it is more likely than not that some portion or all of our deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character and in the appropriate taxing jurisdictions in the future. If we do not meet our expectations with respect to taxable income, we may not realize the full benefit from our deferred tax assets, which would require us to record a valuation allowance in our tax provision in future years. As of each reporting date, we consider new evidence to evaluate the realizability of our net deferred tax asset position by assessing the available positive and negative evidence. Changes to the valuation allowance are reflected in the statement of operations. The amount of our deferred tax assets considered realizable could be adjusted if projections of future taxable income are reduced or objective negative evidence in the form of a three–year cumulative loss is present or both. Should we no longer have a level of sustained profitability, excluding nonrecurring charges, we will have to rely more on our future projections of taxable income to determine if we have an adequate source of taxable income for the realization of our deferred tax assets, namely NOL, interest expense limitation, and tax credit carryforwards. This may result in the need to record a valuation allowance against all or a portion of our deferred tax assets. As of December 31, 2023, we recorded a valuation allowance of $0.7 million on our deferred tax asset associated with our ECOTEC investment. At December 31, 2023, we had U.S. federal and state NOL carryforwards of $727.5 million and $283.9 million, respectively, included in our NOL deferred tax asset that are available to offset future taxable income. If not used, the federal and state NOL carryforwards will begin to expire in 2037 and 2024, respectively, though $629.3 million of the U.S. federal and $167.2 million of the state NOL carryforwards have no expiration date. In connection with the state NOL deferred tax asset, we recorded a valuation allowance of $0.5 million and $0.6 million as of December 31, 2023 and 2022, respectively. At December 31, 2023, we had a U.S. federal tax credit carryforward of $3.0 million. If not used, the federal tax credit carryforward will begin to expire in 2037. As of December 31, 2023, we had U.S. federal and state interest expense limitation carryforwards of $135.3 million and $43.8 million, respectively, included in our interest expense limitation deferred tax asset that are available to offset future taxable income. These carryforwards have no expiration. Unrecognized Tax Benefits Changes in our unrecognized tax benefits (including discontinued operations) are as follows: Year Ended December 31, (in thousands) 2023 2022 2021 Beginning balance $ 19,651 $ 19,594 $ 18,892 Additions based on tax positions related to current year 1,886 2,151 2,246 Additions based on tax positions related to prior years — 6 632 Reductions based on tax positions related to prior years (7) (105) (138) Reductions based on lapse of statute of limitations (2,065) (1,995) (2,038) Ending balance $ 19,465 $ 19,651 $ 19,594 We had $19.5 million, $19.7 million and $19.6 million of unrecognized tax benefits at December 31, 2023, 2022 and 2021, respectively, of which $1.1 million, $1.1 million and $2.1 million, respectively, would affect the effective tax rate if recognized and $7.9 million, $7.9 million and $7.9 million, respectively, would be reflected in income from discontinued operations, net of tax if recognized. We recorded $2.5 million, $2.1 million and $2.2 million of potential interest expense and penalties related to unrecognized tax benefits associated with uncertain tax positions (including discontinued operations) in our consolidated balance sheets as of year ended December 31, 2023, 2022 and 2021, respectively. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as reductions in income tax expense. We recorded $0.3 million of potential expenses or releases of interest or penalties in our consolidated statements of operations during 2023, no potential interest expense and penalties during 2022, and $0.1 million of potential interest expense and penalties during 2021. Subject to the provisions of our tax matters agreement with Exterran Corporation, both parties agreed to indemnify the primary obligor of any return for tax periods beginning before and ending before or after the Spin–off (including any ongoing or future amendments and audits for these returns) for the portion of the tax liability (including interest and penalties) that relates to their respective operations reported in the filing. As of December 31, 2023 and 2022, we recorded an indemnification asset (including penalties and interest) of $7.9 million and $7.9 million, respectively, which is related to unrecognized tax benefits in our consolidated balance sheets (see Note 27 (“Discontinued Operations”)). We and our subsidiaries file consolidated and separate income tax returns in the U.S. federal jurisdiction and in numerous state jurisdictions. U.S. federal income tax returns are generally subject to examination for up to three years after filing the returns. Due to our NOL carryforwards, our U.S. federal income tax returns can be examined back to the inception of our NOL carryforwards; therefore, expanding our examination period beyond 20 years. State income tax returns are generally subject to examination for a period of three to five years after filing the returns. However, the state impact of any U.S. federal audit adjustments and amendments remains subject to examination by various states for up to one year after formal notification to the states. We are not currently involved in any state audits. As of December 31, 2023, we believe it is reasonably possible that $3.3 million of our unrecognized tax benefits, including penalties, interest and discontinued operations, will be reduced prior to December 31, 2024 due to the settlement of audits or the expiration of statutes of limitations or both. However, due to the uncertain and complex application of the tax regulations, it is possible that the ultimate resolution of these matters may result in liabilities that could materially differ from this estimate. Impact of New Legislation The OECD has proposed a framework to implement a global minimum tax of 15% for companies with global revenues and profits above certain thresholds (referred to as Pillar 2). During 2023, many countries took steps to incorporate Pillar 2 model rule concepts into their domestic laws. While it is uncertain whether the U.S. will enact legislation to adopt Pillar 2, certain countries in which our unconsolidated affiliates operate have adopted legislation. We do not expect Pillar 2 to have a material impact on our financial statements. |
