INCOME TAXES

The provisions for income taxes consist of the following:



	2018			2017			2016
Current expense (benefit):
Federal	$	(26,952	)	$	(12,253	)	$	(17,845	)
State	10,729			5,739			6,805
Total current (benefit) expense	(16,223		)	(6,514		)	(11,040		)
Deferred expense (benefit):
Federal	60,766			70,293			71,005
State	1,486			8,593			6,262
Investment tax credit amortization	(318		)	(318		)	(329		)
Total deferred expense	61,934			78,568			76,938
Total income tax expense	$	45,711		$	72,054		$	65,898

A reconciliation from the U.S. federal statutory tax rate to our effective tax rate is as follows:



	2018		2017		2016
U.S. federal statutory tax rate	24.5	%	35.0	%	35.0	%
Difference in tax rate due to:
State income taxes, net of federal benefit	4.7		5.0		5.2
Effect of tax rate changes - TCJA	(3.8	)	—		—
Excess tax benefits on share-based payments	(0.5	)	(0.9	)	—
Other, net	(1.4	)	(0.8	)	0.2
Effective tax rate	23.5	%	38.3	%	40.4	%

On December 22, 2017, the TCJA was enacted into law. The significant changes resulting from the law that impacted UGI Utilities included a reduction in the U.S. federal income tax rate from 35% to 21%, effective January 1, 2018 (resulting in a blended rate of 24.5% for Fiscal 2018) and eliminated bonus depreciation on regulated utility property beginning in Fiscal 2019.

As a result of the TCJA, we reduced our net deferred income tax liabilities by $296,677 during Fiscal 2018 due to the remeasuring of our existing federal deferred income tax assets and liabilities from 35% to 21%. Because a significant amount of the reduction relates to our regulated utility plant assets, most of the reduction to our deferred income taxes is not being recognized immediately in income tax expense. For the fiscal year ended September 30, 2018, the amount of the reduction in our net deferred income tax liabilities that reduced income tax expense, including adjustments to provisional amounts previously recorded, totaled $7,315.

At September 30, 2018, the accounting for certain income tax effects of the TCJA with respect to existing deferred tax balances reflect provisional amounts. We have made a reasonable estimate of the effects in accordance with U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 118 and are still analyzing certain aspects of the TCJA and refining our calculations, which could potentially result in changes to our current estimates. Revisions to our estimates, if any, will be made by the first quarter of the fiscal year ending September 30, 2019.

In order for utility assets to continue to be eligible for accelerated tax depreciation, current law requires that excess deferred federal income taxes resulting from the measurement of deferred taxes on regulated utility plant be amortized no more rapidly than over the remaining lives of the assets that gave rise to the excess deferred income taxes. For Fiscal 2018, we initially recorded a net regulatory liability of $205,759 associated with the excess deferred federal income taxes related to our regulated utility plant assets. This regulatory liability was increased, and a federal deferred income tax asset recorded, in the amount of $83,603 to reflect the tax benefit generated by the amortization of the excess deferred federal income taxes. This regulatory liability is being amortized to income tax expense over the remaining lives of the assets that gave rise to the excess deferred income taxes. For further information on these regulatory assets and liabilities, see Note 4.

As further described in Note 4, on May 17, 2018, the PUC issued a Temporary Rates Order for all PUC-regulated utilities with regard to the TCJA. Among other things, the Temporary Rates Order required Pennsylvania utilities to establish a regulatory liability for tax benefits that accrued during the period January 1, 2018 through June 30, 2018, resulting from the change in the federal income tax rate from 35% to 21%. In order to reflect the effects of the tax savings from the change in the federal income tax rate for the period January 1, 2018 to June 30, 2018, during Fiscal 2018, UGI Utilities reduced its combined utility revenues by $24,098, and recorded a regulatory liability in an equal amount. The reduction reflects (1) $17,135 of tax benefits accrued during the period January 1, 2018, to June 30, 2018, plus (2) $6,963 to reflect tax benefits expected to be generated by the future amortization of the regulatory liability.

Pennsylvania utility ratemaking practice permits the flow through to ratepayers of state tax benefits resulting from accelerated tax depreciation. For Fiscal 2018, Fiscal 2017 and Fiscal 2016, the beneficial effects of state tax flow through of accelerated depreciation reduced tax expense by $4,211, $2,537 and $1,344, respectively.

Deferred tax liabilities (assets) comprise the following at September 30:



	2018			2017
Excess book basis over tax basis of property, plant and equipment	$	441,154		$	564,327
Goodwill	37,414			49,588
Derivative financial instruments	579			—
Regulatory assets	90,022			136,093
Other	3,375			3,140
Gross deferred tax liabilities	572,544			753,148
Pension plan liabilities	(19,831		)	(57,011		)
Allowance for doubtful accounts	(2,820		)	(1,681		)
Deferred investment tax credits	(760		)	(1,224		)
Employee-related expenses	(4,581		)	(6,793		)
Regulatory liabilities	(118,506		)	(12,780		)
Environmental liabilities	(14,551		)	(22,224		)
Derivative financial instruments	—			(354		)
Other	(10,571		)	(15,616		)
Gross deferred tax assets	(171,620		)	(117,683		)
Net deferred tax liabilities	$	400,924		$	635,465

We join with UGI and its subsidiaries in filing a consolidated federal income tax return. We are charged or credited for our share of current taxes resulting from the effects of our transactions in the UGI consolidated federal income tax return including giving effect to intercompany transactions. UGI’s federal income tax returns are settled through the tax year 2014.

We file separate company income tax returns in various other states but are subject to state income tax principally in Pennsylvania. Pennsylvania income tax returns are generally subject to examination for a period of three years after the filing of the respective returns.

During Fiscal 2018, Fiscal 2017 and Fiscal 2016, interest expense (income) of $6, $(73) and $204, respectively, was recognized in income taxes in the Consolidated Statements of Income.

As of September 30, 2018, we have unrecognized income tax benefits totaling $688 including related accrued interest of $6. If these unrecognized tax benefits were subsequently recognized, $688 would be recorded as a benefit to income taxes on the Consolidated Statement of Income and, therefore, would impact the reported effective tax rate. Generally, a net reduction in unrecognized tax benefits could occur because of the expiration of the statute of limitations in certain jurisdictions or as a result of settlements with tax authorities. There is no material change expected in unrecognized tax benefits and related interest in the next twelve months.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:



	2018			2017			2016
Unrecognized tax benefits – beginning of year	$	1,829		$	2,055		$	—
Additions for tax positions taken in prior years	6			604			2,055
Settlements with tax authorities/statute lapses	(1,147		)	(830		)	—
Unrecognized tax benefits – end of year	$	688		$	1,829		$	2,055