Income Taxes

12 Months Ended

Dec. 31, 2012

Income Taxes

10. INCOME TAXES

IPALCO follows a policy of comprehensive interperiod income tax allocation. Investment tax credits related to utility property have been deferred and are being amortized over the estimated useful lives of the related property.

AES files federal and state income tax returns which consolidate IPALCO and its subsidiaries. Under a tax sharing agreement with AES, IPALCO is responsible for the income taxes associated with its own taxable income and records the provision for income taxes as if IPALCO and its subsidiaries each filed separate income tax returns. IPALCO is no longer subject to U.S. or state income tax examinations for tax years through March 27, 2001, but is open for all subsequent periods.

On May 10, 2011, the state of Indiana enacted House Bill 1004, which phases in over four years a 2% reduction to the state corporate income tax rate. Upon enactment of the law in the second quarter of 2011, an initial adjustment to the deferred tax balances was recorded according to the anticipated reversal of temporary differences. In the fourth quarter of each tax year until the tax rate becomes final with the 2016 tax year, the reversal of the temporary differences is to be re-evaluated and the appropriate adjustment to the deferred tax balances is to be recorded. The change in required deferred taxes on plant and plant-related temporary differences for 2012 tax year re-evaluation resulted in a reduction of the associated regulatory asset of $0.9 million. The change in required deferred taxes on non-property related temporary differences which are not probable to cause a reduction in future base customer rates resulted in a tax benefit of $0.2 million in 2012. The statutory state corporate income tax rate will be 7.75% for 2013.

In December 2011, the Internal Revenue Service published regulations (T.D. 9564) under Internal Revenue Code Section 263(a) on the deduction and capitalization of expenditures related to tangible property. These regulations are applicable to taxable years beginning on or after January 1, 2014 (as amended, IRS Announcement 2013-7). We are evaluating the application of these tax provisions which may significantly change the timing of future income tax payments.

The following is a reconciliation of the beginning and ending amounts of unrecognized tax benefits for the year ended December 31, 2012, 2011 and 2010:

	2012		2011			2010
	(In Thousands)
Unrecognized tax benefits at January 1	$	5,354	$	4,757	$	7,947
Gross increases - current period tax positions		997		753		753
Gross decreases - prior period tax positions		(213)		(156)		(3,943)
Unrecognized tax benefits at December 31	$	6,138	$	5,354	$	4,757

The unrecognized tax benefits at December 31, 2012, represent tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the timing of the deductions will not affect the annual effective tax rate but would accelerate the tax payments to an earlier period.

Tax-related interest expense and income is reported as part of the provision for federal and state income taxes. Penalties, if incurred, would also be recognized as a component of tax expense. The income tax provision includes interest expense/(income) of ($0.0 million), ($0.0 million), and $(0.7 million) million for the years ended December 31, 2012, 2011 and 2010, respectively.

Federal and state income taxes charged to income are as follows:

	2012		2011		2010
	(In Thousands)
Charged to utility operating expenses:
Current income taxes:
Federal	$	55,201	$	54,377	$	61,999
State		16,641		16,539		18,818
Total current income taxes		71,842		70,916		80,817
Deferred income taxes:
Federal		(3,285)		(5,027)		(4,697)
State		204		(1,608)		1,539
Total deferred income taxes		(3,081)		(6,635)		(3,158)
Net amortization of investment credit		(1,599)		(1,672)		(1,720)
Total charge to utility operating expenses		67,162		62,609		75,939
Charged to other income and deductions:
Current income taxes:
Federal		(15,646)		(19,639)		(19,239)
State		(4,127)		(5,255)		(5,291)
Total current income taxes		(19,773)		(24,894)		(24,530)
Deferred income taxes:
Federal		251		(476)		(692)
State		59		(106)		(188)
Total deferred income taxes		310		(582)		(880)
Net credit to other income and deductions		(19,463)		(25,476)		(25,410)
Total federal and state income tax provisions	$	47,699	$	37,133	$	50,529

The provision for income taxes (including net investment tax credit adjustments) is different than the amount computed by applying the statutory tax rate to pretax income. The reasons for the difference, stated as a percentage of pretax income, are as follows:

	2012	2011	2010
Federal statutory tax rate	35.0%	35.0%	35.0%
State income tax, net of federal tax benefit	7.2	6.7	7.7
Amortization of investment tax credits	(1.4)	(1.8)	(1.4)
Preferred dividends of subsidiary	1.0	1.2	0.9
Depreciation flow through and amortization	1.4	1.3	0.5
Manufacturers' Production Deduction (Sec. 199)	(3.7)	(3.5)	(3.4)
Change in tax reserves	0.0	0.0	(0.3)
Other - net	1.4	0.4	0.7
Effective tax rate	40.9%	39.3%	39.7%

Internal Revenue Code Section 199 permits taxpayers to claim a deduction from taxable income attributable to certain domestic production activities. IPL's electric production activities qualify for this deduction. The deduction was equal to 9% of qualifying production activity beginning in 2010 and thereafter. The tax benefit associated with the Internal Revenue Code Section 199 domestic production deduction for 2011 and 2010 was $3.1 million and $4.3 million, respectively. The benefit for 2012 is estimated to be $4.3 million.

The significant items comprising IPALCO's net accumulated deferred tax liability recognized on the audited Consolidated Balance Sheets as of December 31, 2012 and 2011, are as follows:

	2012		2011
	(In Thousands)
Deferred tax liabilities:
Relating to utility property, net	$	475,517	$	483,261
Regulatory assets recoverable through future rates		197,909		181,593
Other		12,674		15,117
Total deferred tax liabilities		686,100		679,971
Deferred tax assets:
Investment tax credit		3,216		3,855
Regulatory liabilities including ARO		229,025		220,491
Employee benefit plans		114,420		106,243
Other		8,389		10,573
Total deferred tax assets		355,050		341,162
Accumulated net deferred tax liability		331,050		338,809
Less: Net current deferred tax asset		(10,809)		(12,352)
Accumulated deferred income taxes - net	$	341,859	$	351,161

Indianapolis Power And Light Company [Member]

Income Taxes

10. INCOME TAXES

IPL follows a policy of comprehensive interperiod income tax allocation. Investment tax credits related to utility property have been deferred and are being amortized over the estimated useful lives of the related property.

AES files federal and state income tax returns which consolidate IPALCO and IPL. Under a tax sharing agreement with IPALCO, IPL is responsible for the income taxes associated with its own taxable income and records the provision for income taxes as if IPL filed separate income tax returns. IPL is no longer subject to U.S. or state income tax examinations for tax years through March 27, 2001, but is open for all subsequent periods.

On May 10, 2011, the state of Indiana enacted House Bill 1004, which phases in over four years a 2% reduction to the state corporate income tax rate. Upon enactment of the law in the second quarter of 2011, an initial adjustment to the deferred tax balances was recorded according to the anticipated reversal of temporary differences. In the fourth quarter of each tax year until the tax rate becomes final with the 2016 tax year, the reversal of the temporary differences is to be re-evaluated and the appropriate adjustment to the deferred tax balances is to be recorded. The change in required deferred taxes on plant and plant-related temporary differences for 2012 tax year re-evaluation resulted in a reduction of the associated regulatory asset of $0.9 million. The change in required deferred taxes on non-property related temporary differences which are not probable to cause a reduction in future base customer rates resulted in a tax benefit of $0.2 million in 2012. The statutory state corporate income tax rate will be 7.75% for 2013.

In December 2011, the Internal Revenue Service published regulations (T.D. 9564) under Internal Revenue Code Section 263(a) on the deduction and capitalization of expenditures related to tangible property. These regulations are applicable to taxable years beginning on or after January 1, 2014 (as amended, IRS Announcement 2013-7). We are evaluating the application of these tax provisions which may significantly change the timing of future income tax payments.

The following is a reconciliation of the beginning and ending amounts of unrecognized tax benefits for the year ended December 31, 2012, 2011 and 2010:

	2012		2011			2010
	(In Thousands)
Unrecognized tax benefits at January 1	$	5,354	$	4,757	$	7,947
Gross increases - current period tax positions		997		753		753
Gross decreases - prior period tax positions		(213)		(156)		(3,943)
Unrecognized tax benefits at December 31	$	6,138	$	5,354	$	4,757

The unrecognized tax benefits at December 31, 2012, represent tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the timing of the deductions will not affect the annual effective tax rate but would accelerate the tax payments to an earlier period.

Tax-related interest expense and income is reported as part of the provision for federal and state income taxes. Penalties, if incurred, would also be recognized as a component of tax expense. The income tax provision includes interest expense/(income) of ($0.0 million), ($0.0 million), and $(0.7 million) million for the years ended December 31, 2012, 2011 and 2010, respectively.

Federal and state income taxes charged to income are as follows:

	2012		2011		2010
	(In Thousands)
Charged to utility operating expenses:
Current income taxes:
Federal	$	55,201	$	54,377	$	61,999
State		16,641		16,539		18,818
Total current income taxes		71,842		70,916		80,817
Deferred income taxes:
Federal		(3,285)		(5,027)		(4,697)
State		204		(1,608)		1,539
Total deferred income taxes		(3,081)		(6,635)		(3,158)
Net amortization of investment credit		(1,599)		(1,672)		(1,720)
Total charge to utility operating expenses		67,162		62,609		75,939
Charged to other income and deductions:
Current income taxes:
Federal		395		2,883		(286)
State		245		916		39
Total current income taxes		640		3,799		(247)
Deferred income taxes:
Federal		10		(5)		(1)
State		4		5		(4)
Total deferred income taxes		14		-		(5)
Net credit to other income and deductions		654		3,799		(252)
Total federal and state income tax provisions	$	67,816	$	66,408	$	75,687

The provision for income taxes (including net investment tax credit adjustments) is different than the amount computed by applying the statutory tax rate to pretax income. The reasons for the difference, stated as a percentage of pretax income, are as follows:

	2012	2011	2010
Federal statutory tax rate	35.0%	35.0%	35.0%
State income tax, net of federal tax benefit	6.5	6.0	6.8
Amortization of investment tax credits	(0.9)	(1.0)	(0.9)
Depreciation flow through and amortization	1.0	0.7	0.4
Manufacturers' Production Deduction (Sec. 199)	(3.0)	(2.4)	(2.7)
Change in tax reserves	(0.0)	(0.0)	(0.2)
Other - net	0.9	0.4	0.3
Effective tax rate	39.5%	38.7%	38.7%

Internal Revenue Code Section 199 permits taxpayers to claim a deduction from taxable income attributable to certain domestic production activities. IPL's electric production activities qualify for this deduction. The deduction was equal to 9% of qualifying production activity beginning in 2010 and thereafter. The tax benefit associated with the Internal Revenue Code Section 199 domestic production deduction for 2011 and 2010 was $4.0 million and $5.0 million, respectively. The benefit for 2012 is estimated to be $5.2 million.

The significant items comprising IPL's net accumulated deferred tax liability recognized on the audited Consolidated Balance Sheets as of December 31, 2012 and 2011, are as follows:

	2012		2011
	(In Thousands)
Deferred tax liabilities:
Relating to utility property, net	$	475,517	$	483,261
Regulatory assets recoverable through future rates		197,909		181,593
Other		12,643		15,288
Total deferred tax liabilities		686,069		680,142
Deferred tax assets:
Investment tax credit		3,216		3,855
Regulatory liabilities including ARO		229,025		220,491
Employee benefit plans		114,420		106,243
Other		8,276		10,366
Total deferred tax assets		354,937		340,955
Accumulated net deferred tax liability		331,132		339,187
Less: Net current deferred tax asset		(10,782)		(12,323)
Accumulated deferred income taxes - net	$	341,914	$	351,510