INCOME TAXES

We file a consolidated federal income tax return. Income tax expense allocated to our subsidiaries is based upon their respective taxable incomes and tax credits. State income tax returns are filed on a separate company basis in most states where we have operations and/or are required to file. Our returns for tax years after 2013 are subject to examination.

We had no net operating loss for federal income tax purposes as of December 31, 2017. As of December 31, 2016, we had a net operating loss for federal income tax purposes of $14.0 million, which we carried back two years. For state income tax purposes, we had net operating losses in various states of $34.2 million and $19.6 million as of December 31, 2017 and 2016, respectively, almost all of which will expire in 2036. We have recorded deferred tax assets of $1.6 million and $893,000 related to state net operating loss carry-forwards at December 31, 2017 and 2016, respectively, but we have not recorded a valuation allowance to reduce the future benefit of the tax net operating losses because we believe they will be fully utilized.

Federal Tax Reform

On December 22, 2017, President Trump signed into law the TCJA. Substantially all of the provisions of the TCJA are effective for taxable years beginning on or after January 1, 2018. The provisions significantly impacting us include the reduction of the corporate federal income tax rate from 35 percent to 21 percent and several technical provisions, including, among others, limiting the utilization of net operating losses arising after December 31, 2017 to 80 percent of taxable income with an indefinite carryforward. Our federal income tax expense for periods beginning on January 1, 2018 will be based on the new federal corporate income tax rate. The specific TCJA provisions related to regulated public utilities generally allow for the continued deductibility of interest expense, the elimination of full expensing for tax purposes of certain property acquired after September 27, 2017, and continuation of certain rate normalization requirements for accelerated depreciation benefits.

Additionally, enactment of the TCJA resulted in changes to the Internal Revenue Code, which materially impacted our 2017 financial statements. ASC 740, Income Taxes, requires recognition of the effects of changes in tax laws in the period in which the law is enacted. ASC 740 requires deferred tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. We have completed and have made a reasonable estimate of the measurement and accounting of certain effects of the TCJA, which have been reflected in the December 31, 2017 consolidated financial statements, the period in which the TCJA was enacted. At the date of enactment, we re-measured deferred income taxes based upon the new corporate tax rate. For our regulated businesses, the change in deferred income taxes of $98.5 million was recorded as an offset to a regulatory liability, some portion of which may ultimately be subject to refund to customers. We are at various stages of discussion with our regulatory jurisdictions. For our unregulated businesses, the change in deferred income taxes of $14.3 million was recorded as an adjustment to our deferred income taxes and increased our net income.

The following tables provide: (a) the components of income tax expense in 2017, 2016, and 2015; (b) the reconciliation between the statutory federal income tax rate and the effective income tax rate for 2017, 2016, and 2015; and (c) the components of accumulated deferred income tax assets and liabilities at December 31, 2017 and 2016.



	For the Year Ended December 31,
	2017			2016			2015
(in thousands)
Current Income Tax Expense
Federal	$	2,803		$	(4,898	)	$	4,875
State	492			2,053			1,533
Other	(71		)	(71		)	(23		)
Total current income tax expense	3,224			(2,916		)	6,385
Deferred Income Tax Expense ⁽¹⁾
Property, plant and equipment	8,314			31,062			21,205
Deferred gas costs	2,002			1,163			(1,539		)
Pensions and other employee benefits	180			237			(84		)
FPU merger-related premium cost and deferred gain	(1,148		)	(572		)	(556		)
Net operating loss carryforwards	193			(9		)	2,078
Other	1,544			(624		)	(584		)
Total deferred income tax expense	11,085			31,257			20,520
Total Income Tax Expense	$	14,309		$	28,341		$	26,905

⁽¹⁾Includes $873,000, $2.1 million and $2.1 million of deferred state income taxes for the years 2017, 2016 and 2015, respectively.



	For the Year Ended December 31,
	2017			2016			2015
(in thousands)
Reconciliation of Effective Income Tax Rates
Federal income tax expense ⁽¹⁾	$	25,351		$	22,759		$	23,865
State income taxes, net of federal benefit	1,894			3,422			3,062
ESOP dividend deduction	(257		)	(264		)	(263		)
Revaluation of deferred tax assets and liabilities	(14,299		)	—			—
Other	1,620			2,424			241
Total Income Tax Expense	$	14,309		$	28,341		$	26,905
Effective Income Tax Rate ⁽²⁾	19.75		%	38.81		%	39.54		%


⁽¹⁾	Federal income taxes were calculated at 35 percent for each year represented.


⁽²⁾	Effective tax rate for 2017 includes the impact of the revaluation of deferred tax assets and liabilities for our unregulated businesses due to implementation of the TCJA.



	As of December 31,
	2017		2016
(in thousands)
Deferred Income Taxes
Deferred income tax liabilities:
Property, plant and equipment	$	133,581	$	218,074
Acquisition adjustment	9,323		14,840
Loss on reacquired debt	153		442
Deferred gas costs	2,574		1,846
Other	5,422		6,375
Total deferred income tax liabilities	151,053		241,577
Deferred income tax assets:
Pension and other employee benefits	4,698		6,230
Environmental costs	1,744		2,592
Net operating loss carryforwards	1,625		952
Investment tax credit carryforwards	—		2,643
Self insurance	164		189
Storm reserve liability	717		1,131
Other	6,255		4,946
Total deferred income tax assets	15,203		18,683
Deferred Income Taxes Per Consolidated Balance Sheets	$	135,850	$	222,894