Income Taxes

12 Months Ended

Dec. 31, 2019



(12) Income Taxes

Income tax (benefit) expense is comprised of the following (in thousands):



	Year Ended December 31,
	2019			2018			2017
Federal
Current	$	(6,076	)	$	(5,526	)	$	806
Deferred	(15,169		)	(15,588		)	17,378
Investment tax credits	(12		)	(33		)	166
State
Current	27			38			33
Deferred	1,305			2,399			(5,015		)
Income Tax (Benefit) Expense	$	(19,925	)	$	(18,710	)	$	13,368

Our effective tax rate typically differs from the federal statutory tax rate primarily due to the regulatory impact of flowing through the federal and state tax benefit of repairs deductions, state tax benefit of accelerated tax depreciation deductions

(including bonus depreciation when applicable) and production tax credits. The lower federal statutory tax rate in 2019 and 2018 reduces the impact of these deductions as compared with 2017. The regulatory accounting treatment of these deductions requires immediate income recognition for temporary tax differences of this type, which is referred to as the flow-through method. When the flow-through method of accounting for temporary differences is reflected in regulated revenues, we record deferred income taxes and establish related regulatory assets and liabilities.

The following table reconciles our effective income tax rate to the federal statutory rate:



	Year Ended December 31,
	2019		2018		2017
Federal statutory rate	21.0	%	21.0	%	35.0	%
State income tax, net of federal provisions	0.7		0.9		(1.9	)
Recognition of unrecognized tax benefit	(12.5	)	—		—
Flow-through repairs deductions	(10.8	)	(10.8	)	(17.3	)
Production tax credits	(6.3	)	(6.1	)	(6.3	)
Plant and depreciation of flow through items	(2.2	)	(1.2	)	(1.3	)
Amortization of excess DIT	(0.9	)	(2.1	)	—
Impact of Tax Cuts and Jobs Act	(0.1	)	(11.1	)	—
Prior year permanent return to accrual adjustments	0.3		(1.7	)	(0.3	)
Other, net	(0.1	)	0.6		(0.3	)
Effective tax rate	(10.9	)%	(10.5	)%	7.6	%

The table below summarizes the significant differences in income tax (benefit) expense based on the differences between our effective tax rate and the federal statutory rate (in thousands).



	Year Ended December 31,
	2019			2018			2017
Income Before Income Taxes	$	182,195		$	178,250		$	176,071

Income tax calculated at federal statutory rate	38,261			37,433			61,625

Permanent or flow through adjustments:
State income, net of federal provisions	1,251			1,613			(3,258		)
Recognition of unrecognized tax benefit	(22,825		)	—			—
Flow-through repairs deductions	(19,706		)	(19,323		)	(30,490		)
Production tax credits	(11,483		)	(10,890		)	(11,032		)
Plant and depreciation of flow through items	(3,952		)	(2,175		)	(2,208		)
Amortization of excess DIT	(1,688		)	(3,731		)	—
Impact of Tax Cuts and Jobs Act	(198		)	(19,840		)	—
Prior year permanent return to accrual adjustments	559			(2,978		)	(629		)
Other, net	(144		)	1,181			(640		)
	(58,186		)	(56,143		)	(48,257		)

Income Tax (Benefit) Expense	$	(19,925	)	$	(18,710	)	$	13,368

The income tax benefit during the twelve months ended December 31, 2019, reflects the release of approximately $22.8 million of unrecognized tax benefits, including approximately $2.7 million of accrued interest and penalties, net of tax, due to the lapse of statutes of limitation in the second quarter of 2019. The income tax benefit during the twelve months ended December 31, 2018, includes finalization of the remeasurement of deferred income taxes associated with the Tax Cuts and Jobs Act following the conclusion of the associated regulatory dockets.

The components of the net deferred income tax liability recognized in our Consolidated Balance Sheets are related to the following temporary differences (in thousands):



	December 31,
	2019			2018
Production tax credit	$	50,440		$	38,956
Pension / postretirement benefits	30,041			30,634
Customer advances	14,975			13,190
Compensation accruals	13,163			11,885
NOL carryforward	10,050			28,326
Unbilled revenue	9,820			12,305
Reserves and accruals	7,069			1,100
Environmental liability	5,938			5,810
Interest rate hedges	3,956			4,074
AMT credit carryforward	3,400			6,799
Other, net	1,801			1,353
Deferred Tax Asset	150,653			154,432
Excess tax depreciation	(393,287		)	(371,216		)
Goodwill amortization (1)	(82,595		)	(81,104		)
Flow through depreciation	(71,679		)	(57,456		)
Regulatory assets and other (1)	(51,078		)	(39,274		)
Deferred Tax Liability	(598,639		)	(549,050		)
Deferred Tax Liability, net	$	(447,986	)	$	(394,618	)

___________________________

(1) The presentation of the December 31, 2018, deferred tax liabilities has been corrected to reflect a decrease of $38.3 million in deferred tax liabilities from goodwill amortization and a corresponding increase in deferred tax liabilities from regulatory assets and other related to amortization of intangible assets. This correction in presentation had no effect on income tax expense (benefit), or net income, or the presentation of deferred taxes on the consolidated balance sheets.

At December 31, 2019 our total federal NOL carryforward was approximately $181.9 million prior to consideration of unrecognized tax benefits. If unused, our federal NOL carryforwards will expire as follows: $103.7 million in 2036 and $78.2 million in 2037. Our state NOL carryforward as of December 31, 2019 was approximately $121.4 million. If unused, our state NOL carryforwards will expire as follows: $60.3 million in 2023 and $61.1 million in 2024. We believe it is more likely than not that sufficient taxable income will be generated to utilize these NOL carryforwards.

Uncertain Tax Positions

We recognize tax positions that meet the more-likely-than-not threshold as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. The change in unrecognized tax benefits is as follows (in thousands):



	2019			2018			2017
Unrecognized Tax Benefits at January 1	$	56,150		$	57,473		$	88,429
Gross increases - tax positions in prior period	539			—			—
Gross decreases - tax positions in prior period	—			—			(22,973		)
Gross increases - tax positions in current period	—			338			—
Gross decreases - tax positions in current period	(1,489		)	(1,661		)	(7,983		)
Lapse of statute of limitations	(20,115		)	—			—
Unrecognized Tax Benefits at December 31	$	35,085		$	56,150		$	57,473

The reduction in unrecognized tax benefits during the twelve months ended December 31, 2017 reflects the effect of the lower statutory rate in the Tax Cuts and Jobs Act. Our unrecognized tax benefits include approximately $28.0 million and $47.5 million related to tax positions as of December 31, 2019 and 2018, respectively that, if recognized, would impact our annual effective tax rate. We do not anticipate that total unrecognized tax benefits will significantly change due to the settlement of audits or the expiration of statutes of limitation within the next twelve months.

Our policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. As discussed above, during the twelve months ended December 31, 2019, we released $2.7 million of accrued interest in the Consolidated Statements of Income. As of December 31, 2019, we did not have any amounts accrued for the payment of interest and penalties. During the year ended December 31, 2018, we recognized $1.2 million of expense for interest and penalties in the Consolidated Statements of Income. As of December 31, 2018, we had $2.7 million of interest accrued in the Consolidated Balance Sheets.

Tax years 2016 and forward remain subject to examination by the IRS and state taxing authorities. In addition, the available federal net operating loss carryforward may be reduced by the IRS for losses originating in certain tax years from 2002 forward.