Income Taxes

12 Months Ended

Dec. 31, 2017

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 March 25, 2014, the state of Indiana amended Indiana Code 6-3-2-1 through Senate Bill 001, which phases in an additional 1.6% reduction to the state corporate income tax rate that was initially being reduced by 2%. While the statutory state income tax rate remained at 6.125% for the calendar year 2017, the deferred tax balances were adjusted according to the anticipated reversal of temporary differences. The change in required deferred taxes on plant and plant-related temporary differences resulted in a reduction to the associated regulatory asset of $1.3 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 $0.1 million. The statutory state corporate income tax rate will be 5.875% for 2018.

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. Beginning in 2010 and through the 2017 tax year, the deduction is equal to 9% of the taxable income attributable to qualifying production activity. The tax benefit associated with the Internal Revenue Code Section 199 domestic production deduction for the 2017 tax year is estimated to be $3.9 million. The tax benefit associated with the Internal Revenue Code Section 199 domestic production deduction for the tax year 2016 was $2.9 million. There was no tax benefit for tax year 2015, primarily due to the election of the final tangible property regulations. Due to the recently enacted TCJA (as described below), the 2017 tax year will be the final year for this deduction.

U.S. Tax Reform

On December 22, 2017, the U.S. federal government enacted the TCJA. The TCJA significantly changes U.S. corporate income tax law.

The Company recognized the income tax effects of the TCJA in accordance with Staff Accounting Bulletin No. 118 (“SAB 118”) which provides SEC guidance on the application of ASC 740, Income Taxes, in the reporting period in which the TCJA was signed into law. Accordingly, the Company’s financial statements reflect the income tax effects of U.S. tax reform for which the accounting is complete and provisional amounts for those impacts for which the accounting under ASC 740 is incomplete, but a reasonable estimate could be determined.

The Company has calculated its best estimate of the impact of the TCJA in its income tax provision for the year ended December 31, 2017 in accordance with its understanding of the TCJA and guidance available as of the date of this filing, and as a result recognized $0.2 million of discrete tax expense in the fourth quarter of 2017.

This total results from the remeasurement of certain deferred tax assets and liabilities from 35% to 21%. The most material deferred taxes to be remeasured related to property, plant and equipment. The remeasurement of deferred tax assets and liabilities related to regulated utility property of $215.5 million was recorded as a regulatory liability, which was a non-cash adjustment. Additional time is required to finalize remeasurement effects in accordance with GAAP.

Income Tax Provision

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



	2017			2016			2015
	(In Thousands)
Charged to utility operating expenses:
Current income taxes:
Federal	$	56,512		$	50,482		$	18,661
State	12,586			12,080			5,758
Total current income taxes	69,098			62,562			24,419
Deferred income taxes:
Federal	(1,668		)	11,885			29,165
State	(354		)	215			5,019
Total deferred income taxes	(2,022		)	12,100			34,184
Net amortization of investment credit	(1,455		)	(1,501		)	(1,319		)
Total charge to utility operating expenses	65,621			73,161			57,284
Charged to other income and deductions:
Current income taxes:
Federal	(13,970		)	(30,558		)	(18,661		)
State	(2,670		)	(4,807		)	(5,758		)
Total current income taxes	(16,640		)	(35,365		)	(24,419		)
Deferred income taxes:
Federal	(52		)	20,998			(2,573		)
State	22			2,415			1,274
Total deferred income taxes	(30		)	23,413			(1,299		)
Net provision to other income and deductions	(16,670		)	(11,952		)	(25,718		)
Total federal and state income tax provisions	$	48,951		$	61,209		$	31,566

Effective and Statutory Rate Reconciliation

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:



	2017		2016		2015
Federal statutory tax rate	35.0	%	35.0	%	35.0	%
State income tax, net of federal tax benefit	4.1	%	4.1	%	4.7	%
Amortization of investment tax credits	(0.9	)%	(0.8	)%	(1.5	)%
Preferred dividends of subsidiary	0.7	%	0.6	%	1.3	%
Depreciation flow through and amortization	(0.1	)%	(0.5	)%	(0.3	)%
Additional funds used during construction - equity	(4.1	)%	(3.8	)%	(3.5	)%
Manufacturers’ Production Deduction (Sec. 199)	(2.5	)%	(1.3	)%	—	%
Other – net	(0.5	)%	(0.9	)%	0.2	%
Effective tax rate	31.7	%	32.4	%	35.9	%

Deferred Income Taxes

The significant items comprising IPALCO’s net accumulated deferred tax liability recognized on the audited Consolidated Balance Sheets as of December 31, 2017 and 2016, are as follows:



	2017		2016
	(In Thousands)
Deferred tax liabilities:
Relating to utility property, net	$	475,911	$	569,204
Regulatory assets recoverable through future rates	66,661		180,608
Other	6,654		11,612
Total deferred tax liabilities	549,226		761,424
Deferred tax assets:
Investment tax credit	240		927
Regulatory liabilities including ARO	278,529		272,001
Employee benefit plans	18,564		27,358
Other	6,636		11,408
Total deferred tax assets	303,969		311,694
Deferred income taxes – net	$	245,257	$	449,730

Uncertain Tax Positions

The following is a reconciliation of the beginning and ending amounts of unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015:



	2017			2016			2015
	(In Thousands)
Unrecognized tax benefits at January 1	$	6,634		$	7,147		$	7,042
Gross increases – current period tax positions	470			724			962
Gross decreases – prior period tax positions	(2,453		)	(1,237		)	(857		)
Unrecognized tax benefits at December 31	$	4,651		$	6,634		$	7,147

The unrecognized tax benefits at December 31, 2017 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. There are no interest or penalties applicable to the periods contained in this report.

Indianapolis Power And Light Company [Member]

Entity Information [Line Items]

Income Taxes

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.

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. Beginning in 2010 and through the 2017 tax year, the deduction is equal to 9% of the taxable income attributable to qualifying production activity. The tax benefit associated with the Internal Revenue Code Section 199 domestic production deduction for the 2017 tax year is estimated to be $4.8 million. The tax benefit associated with the Internal Revenue Code Section 199 domestic production deduction for 2016 and 2015 was $5.7 million and $1.7 million, respectively. Due to the recently enacted TCJA (as described below), the 2017 tax year will be the final year for this deduction.

U.S. Tax Reform

On December 22, 2017, the U.S. federal government enacted the TCJA. The TCJA significantly changes U.S. corporate income tax law.

IPL recognized the income tax effects of the TCJA in accordance with Staff Accounting Bulletin No. 118 (“SAB 118”) which provides SEC guidance on the application of ASC 740, Income Taxes, in the reporting period in which the TCJA was signed into law. Accordingly, IPL’s financial statements reflect the income tax effects of U.S. tax reform for which the accounting is complete and provisional amounts for those impacts for which the accounting under ASC 740 is incomplete, but a reasonable estimate could be determined.

IPL has calculated its best estimate of the impact of the TCJA in its income tax provision for the year ended December 31, 2017 in accordance with its understanding of the TCJA and guidance available as of the date of this filing. The change in required deferred taxes on non-operating related temporary differences resulted in an immaterial tax benefit.

Income Tax Provision

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



	2017			2016			2015
	(In Thousands)
Charged to utility operating expenses:
Current income taxes:
Federal	$	56,512		$	50,482		$	18,661
State	12,586			12,080			5,758
Total current income taxes	69,098			62,562			24,419
Deferred income taxes:
Federal	(1,668		)	11,885			29,165
State	(354		)	215			5,019
Total deferred income taxes	(2,022		)	12,100			34,184
Net amortization of investment credit	(1,455		)	(1,501		)	(1,319		)
Total charge to utility operating expenses	65,621			73,161			57,284
Charged to other income and deductions:
Current income taxes:
Federal	(135		)	(1,009		)	(1,715		)
State	70			(16		)	(240		)
Total current income taxes	(65		)	(1,025		)	(1,955		)
Deferred income taxes:
Federal	34			552			740
State	1			13			150
Total deferred income taxes	35			565			890
Net provision to other income and deductions	(30		)	(460		)	(1,065		)
Total federal and state income tax provisions	$	65,591		$	72,701		$	56,219

Effective and Statutory Rate Reconciliation



	2017		2016		2015
Federal statutory tax rate	35.0	%	35.0	%	35.0	%
State income tax, net of federal tax benefit	4.0	%	4.0	%	4.4	%
Amortization of investment tax credits	(0.7	)%	(0.7	)%	(0.8	)%
Depreciation flow through and amortization	(0.1	)%	(0.4	)%	(0.2	)%
Additional funds used during construction - equity	(3.1	)%	(3.2	)%	(1.9	)%
Manufacturers’ Production Deduction (Sec. 199)	(2.4	)%	(2.2	)%	(1.0	)%
Other – net	(0.2	)%	(0.8	)%	0.1	%
Effective tax rate	32.5	%	31.7	%	35.6	%

Deferred Income Taxes

The significant items comprising IPL’s net accumulated deferred tax liability recognized on the audited Consolidated Balance Sheets as of December 31, 2017 and 2016, are as follows:



	2017		2016
	(In Thousands)
Deferred tax liabilities:
Relating to utility property, net	$	475,911	$	569,204
Regulatory assets recoverable through future rates	66,661		180,608
Other	6,256		11,090
Total deferred tax liabilities	548,828		760,902
Deferred tax assets:
Investment tax credit	240		927
Regulatory liabilities including ARO	278,529		272,001
Employee benefit plans	18,564		27,358
Other	6,683		11,396
Total deferred tax assets	304,016		311,682
Deferred income taxes – net	$	244,812	$	449,220

Uncertain Tax Positions

The following is a reconciliation of the beginning and ending amounts of unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015:



	2017			2016			2015
	(In Thousands)
Unrecognized tax benefits at January 1	$	6,634		$	7,147		$	7,042
Gross increases – current period tax positions	470			724			962
Gross decreases – prior period tax positions	(2,453		)	(1,237		)	(857		)
Unrecognized tax benefits at December 31	$	4,651		$	6,634		$	7,147