Income Taxes

2017 Tax Act

In December 2017, the 2017 Tax Act was signed into law, reducing the corporate federal tax rate from 35 percent to 21 percent for tax years beginning in 2018. ASC 740, "Income Taxes," requires deferred tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized and settled. Entities subject to ASC 980, "Accounting for Regulated Entities," such as OG&E, are required to recognize a regulatory liability for the decrease in taxes payable for the change in tax rates that are expected to be returned to customers through future rates and to recognize a regulatory asset for the increase in taxes receivable for the change in tax rates that are expected to be recovered from customers through future rates. At December 31, 2017, as a result of remeasuring existing deferred taxes at the lower 21 percent tax rate, the Company reduced net deferred income tax liabilities and increased regulatory liabilities. As of December 31, 2018, the Company's regulatory liability for income taxes refundable to customers, net was $1.022 billion, as a result of the change in the corporate federal tax rate.

As a result of the 2017 Tax Act, in early January 2018: (i) the OCC ordered OG&E to record a reserve, including accrued interest, to reflect the reduced federal corporate tax rate, among other tax implications, on an interim basis, subject to refund until utility rates were adjusted to reflect the federal tax savings; (ii) the APSC ordered OG&E to book regulatory liabilities to record the current and deferred impacts of the 2017 Tax Act until the resulting benefits, including carrying charges, are returned to customers; and (iii) through a Section 206 filing with the FERC, modifications were requested to be made to OG&E's transmission formula rates to reflect the impacts of the 2017 Tax Act. Further discussion regarding OG&E's response to OCC, APSC and FERC proceedings, including reserves to revenue for each jurisdiction, can be found in Note 15 under "Oklahoma Rate Review Filing - January 2018," "APSC Order - 2017 Tax Act," "FERC - Request for Waiver" and "FERC - Section 206 Filing." As of December 31, 2018, the total recorded reserve was $15.4 million, which is included in Other Current Liabilities in the Company's Consolidated Balance Sheets.

Staff Accounting Bulletin No. 118

Staff Accounting Bulletin No. 118 addresses the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. The Company recognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities as of December 31, 2017, as the Company had not completed its accounting for income tax effects of the 2017 Tax Act. As of December 31, 2018, the Company has completed its accounting for the enactment-date income tax effects of the 2017 Tax Act. Upon further analysis of certain aspects of the 2017 Tax Act and refinement of the final calculations during the 12 months ended December 31, 2018, the Company adjusted its provisional amount by an increase to tax expense of $2.1 million and increased regulatory liabilities by $7.4 million.

Income Tax Expense (Benefit)

The items comprising income tax expense (benefit) are as follows:



Year Ended December 31 (In millions)	2018			2017			2016
Provision (benefit) for current income taxes:
Federal	$	(1.9	)	$	4.9		$	—
State	(4.4		)	(4.2		)	(5.7		)
Total provision (benefit) for current income taxes	(6.3		)	0.7			(5.7		)
Provision (benefit) for deferred income taxes, net:
Federal	74.7			(75.9		)	126.0
State	3.7			26.0			28.0
Total provision (benefit) for deferred income taxes, net	78.4			(49.9		)	154.0
Deferred federal investment tax credits, net	0.1			(0.1		)	(0.2		)
Total income tax expense (benefit)	$	72.2		$	(49.3	)	$	148.1

The Company files consolidated income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal tax examinations by tax authorities for years prior to 2015 or state and local tax examinations by tax authorities for years prior to 2014. Income taxes are generally allocated to each company in the affiliated group based on its stand-alone taxable income or loss. Federal investment tax credits previously claimed on electric utility property have been deferred and are being amortized to income over the life of the related property. OG&E earns both federal and Oklahoma state tax credits associated with production from its wind farms and earns Oklahoma state tax credits associated with its investments in electric generating facilities which reduce the Company's effective tax rate.

The following schedule reconciles the statutory tax rates to the effective income tax rate:



Year Ended December 31	2018		2017		2016
Statutory federal tax rate	21.0	%	35.0	%	35.0	%
Federal deferred tax revaluation	0.4		(41.2	)	—
Other	0.4		(0.1	)	0.1
State income taxes, net of federal income tax benefit	0.4		2.0		1.9
Executive compensation limitation	0.2		—		—
Federal renewable energy credit (A)	(5.1	)	(4.8	)	(6.8	)
Amortization of net unfunded deferred taxes	(2.1	)	0.7		0.7
Remeasurement of state deferred tax liabilities	(0.4	)	0.4		0.9
401(k) dividends	(0.3	)	(0.5	)	(0.6	)
Federal investment tax credits, net	—		(0.1	)	(0.8	)
Uncertain tax positions	—		—		0.1
Effective income tax rate	14.5	%	(8.6	)%	30.5	%


(A)	Represents credits associated with the production from OG&E's wind farms.

The deferred tax provisions are recognized as costs in the ratemaking process by the commissions having jurisdiction over the rates charged by OG&E. The components of Deferred Income Taxes at December 31, 2018 and 2017 were as follows:



December 31 (In millions)	2018			2017
Deferred income tax liabilities, net:
Accelerated depreciation and other property related differences	$	1,605.3		$	1,449.6
Investment in Enable	469.9			441.7
Regulatory assets	17.4			18.9
Company Pension Plan	7.6			11.5
Bond redemption-unamortized costs	2.4			2.6
Derivative instruments	1.7			1.6
Other	1.1			(0.9		)
Income taxes recoverable from customers, net	(239.6		)	(244.3		)
Federal tax credits	(237.8		)	(218.5		)
State tax credits	(156.0		)	(141.7		)
Regulatory liabilities	(78.8		)	(16.8		)
Postretirement medical and life insurance benefits	(23.6		)	(25.2		)
Asset retirement obligations	(21.5		)	(19.2		)
Net operating losses	(20.2		)	(21.1		)
Accrued liabilities	(12.5		)	(7.4		)
Accrued vacation	(2.3		)	(2.1		)
Deferred federal investment tax credits	(1.8		)	(0.5		)
Uncollectible accounts	(0.4		)	(0.4		)
Total deferred income tax liabilities, net	$	1,310.9		$	1,227.8

As of December 31, 2018, the Company has classified $16.4 million of unrecognized tax benefits as a reduction of deferred tax assets recorded. Management is currently unaware of any issues under review that could result in significant additional payments, accruals or other material deviation from this amount.

Following is a reconciliation of the Company's total gross unrecognized tax benefits as of the years ended December 31, 2018, 2017 and 2016.



(In millions)	2018		2017		2016
Balance at January 1	$	20.7	$	20.7	$	20.2
Tax positions related to current year:
Additions	—		—		0.5
Balance at December 31	$	20.7	$	20.7	$	20.7

As of December 31, 2018, 2017 and 2016, there were $16.4 million, $16.4 million and $13.5 million of unrecognized tax benefits that, if recognized, would affect the annual effective tax rate.

Where applicable, the Company classifies income tax-related interest and penalties as interest expense and other expense, respectively. During the year ended December 31, 2018, there were no income tax-related interest or penalties recorded with regard to uncertain tax positions.

The Company sustained federal and state tax operating losses through 2012 caused primarily by bonus depreciation and other book versus tax temporary differences. As a result, the Company had accrued federal and state income tax benefits carrying into 2017, when the remaining federal net operating loss was utilized. State operating losses are being carried forward for utilization in future years. In addition to the tax operating losses, the Company was unable to utilize the various tax credits that were generated during these years. These tax losses and credits are being carried as deferred tax assets and will be utilized in future periods. Under current law, the Company anticipates future taxable income will be sufficient to utilize remaining losses and credits before they begin to expire. The following table summarizes these carry forwards:



(In millions)	Carry Forward Amount		Deferred Tax Asset		Earliest Expiration Date
State operating loss	$	451.8	$	20.2	2030
Federal tax credits	$	237.8	$	237.8	2032
State tax credits:
Oklahoma investment tax credits	$	161.6	$	127.7	N/A
Oklahoma capital investment board credits	$	8.9	$	8.9	N/A
Oklahoma zero emission tax credits	$	24.1	$	19.4	2020

N/A - not applicable