Income Taxes

12 Months Ended

Dec. 31, 2012

Income Taxes

4. Income Taxes

In 2012, 2011 and 2010, TECO Energy recorded net tax provisions of $160.2 million, $153.9 million and $170.0 million, respectively. A majority of this provision is non-cash. TECO Energy has net operating losses that are being utilized to reduce its taxable income. As such, cash taxes paid for income taxes as required for the alternative minimum tax, state income taxes, foreign income taxes and prior year audits in 2012, 2011 and 2010 were $7.2 million, $9.4 million and $5.5 million, respectively.

Income tax expense consists of the following:  

Income Tax Expense (Benefit)
(millions)   For the year ended Dec. 31,	2012		2011		2010
Continuing Operations
Current income taxes
Federal		$15.7		$0.0		$5.7
State		1.1		0.9		(5.2)
Deferred income taxes
Federal		102.9		124.0		93.9
State		18.4		18.2		15.6
Amortization of investment tax credits		(0.3)		(0.4)		(0.4)
Income tax expense from continuing operations		$137.8		$142.7		$109.6
Discontinued Operations
Current income taxes
Federal		$0.0		$0.0		$0.0
Foreign		6.8		7.4		7.0
State		0.0		0.0		0.0
Deferred income taxes
Federal		14.9		4.4		53.5
Foreign		0.0		(0.3)		0.0
State		0.7		(0.3)		(0.1)
Income tax expense from discontinued operations		22.4		11.2		60.4
Total income tax expense		$160.2		$153.9		$170.0

Total current income tax expense for the years ended Dec. 31, 2012, 2011 and 2010 was reduced by $13.6 million, $32.1 million and $78.4 million, respectively, to reflect the benefits of operating loss carryforwards.

The reconciliation of the federal statutory rate to the company’s effective income tax rate is as follows:

Effective Income Tax Rate
(millions)   For the year ended Dec. 31,	2012		2011		2010
Income tax expense at the federal statutory rate of 35%		$134.3		$137.7		$112.4
Increase (decrease) due to
State income tax, net of federal income tax		12.7		12.4		6.8
Equity portion of AFUDC		(0.9)		(0.4)		(0.7)
Valuation allowance		1.1		0.0		1.9
Depletion		(8.5)		(9.1)		(9.1)
Other		(0.9)		2.1		(1.7)
Total income tax expense from continuing operations		$137.8		$142.7		$109.6
Income tax expense as a percent of income from continuing operations, before income taxes		35.9%		36.3%		34.1%

For the three years presented, the overall effective tax rate on continuing operations was higher than the 35% U.S. federal statutory rate primarily due to state income taxes offset by depletion.

As discussed in Note 1, TECO Energy uses the asset and liability method to determine deferred income taxes. Based primarily on the reversal of deferred income tax liabilities and future earnings of the company’s utility operations, management has determined that the net deferred tax assets recorded at Dec. 31, 2012 will be realized in future periods.

The major components of the company’s deferred tax assets and liabilities recognized are as follows:

Deferred Income Taxes
(millions) As of Dec. 31,	2012		2011
Deferred tax liabilities (1)
Property related	$	1,023.3	$	884.2
Deferred fuel		11.3		3.9
Pension		43.0		38.4
Total deferred tax liabilities		1,077.6		926.5
Deferred tax assets (1)
Alternative minimum tax credit carryforward		211.8		196.1
Loss and credit carryforwards		473.2		503.4
Other postretirement benefits		68.0		69.5
Other		113.0		89.1
Total deferred tax assets		866.0		858.1
Valuation allowance		(3.0)		(9.7)
Total deferred tax assets, net of valuation allowance		863.0		848.4
Total deferred tax liability, net		214.6		78.1
Less: Current portion of deferred tax asset		(63.3)		(72.7)
Long-term portion of deferred tax liability, net	$	277.9	$	150.8

   (1) Certain property related assets and liabilities have been netted.

At Dec. 31, 2012, the company had cumulative unused federal and state (Florida) NOLs of $1,298.8 million and $326.8 million, respectively, expiring at various times between 2025 and 2028. In addition, the company has unused general business credits of $3.9 million expiring between 2026 and 2031. Due to the sale of the company’s remaining Guatemalan operations, unused foreign tax credits of $38.5 million have been reclassed to net operating loss. During 2012, the company’s available alternative minimum tax credit carryforward for tax purposes increased from $196.1 million to $211.8 million, reflecting the future AMT payable for the amendment of prior years’ federal income tax returns to claim a deduction for foreign tax paid. The alternative minimum tax credit may be used indefinitely to reduce federal income taxes.

The company establishes valuation allowances on its deferred tax assets, including losses and tax credits, when the amount of expected future taxable income is not likely to support the use of the deduction or credit. At Dec. 31, 2011, valuation allowances had been established for state capital loss carryforwards net of federal tax, and foreign tax credits. During 2012, the valuation allowance decreased by $6.7 million. As a result of the company’s intent to amend prior year federal income tax returns, the company reclassified $7.8 million of the foreign tax credit valuation allowance to net operating loss. The company increased the state capital loss valuation allowance by $1.1 million. The company has state capital loss carryforward deferred tax assets of $3.0 million for which a full valuation allowance has been established due to the uncertainty of recognizing the benefit from these losses before they expire in 2013.

The company accounts for uncertain tax positions in accordance with FASB guidance. This guidance addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under the guidance, the company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The guidance also provides standards on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Unrecognized Tax Benefits
(millions)	2012			2011
Balance at Jan. 1,		$4.1			$4.1
Decreases due to tax positions related to prior years		0.0			0.0
Decreases due to settlements with taxing authorities		0.0			0.0
Decreases due to expiration of statute of limitations		0.0			0.0
Dispositions		(1.2	)		0.0
Balance at Dec. 31,		$2.9			$4.1

The company recognizes interest and penalties associated with uncertain tax positions in “Operation other expense – Other” in the Consolidated Statements of Income. In 2012, 2011 and 2010, the company recognized $0.3 million, $0.2 million and $(1.1) million, respectively, of pretax charges (benefits) for interest only. Additionally, the company had $0.9 million of interest accrued at Dec. 31, 2012. No amounts have been recorded for penalties. As a result of the sale of TCAE, interest and penalties recorded on TCAE’s books for an uncertain tax position have been removed from the company’s unrecognized tax benefits, (see Note 19).

The company believes that it is reasonably possible that the remaining unrecognized tax benefits may be recognized by the end of 2013 as a result of a lapse of the statute of limitations, which would affect the annual effective tax rate.

The company’s U.S. subsidiaries join in the filing of a U.S. federal consolidated income tax return. The IRS concluded its examination of the company’s 2011 consolidated federal income tax return during 2012. The U.S. federal statute of limitations remains open for the year 2009 and forward. The federal income tax return for calendar year 2012 is part of the IRS’s Compliance Assurance Program. As a result, the IRS audit of such return is expected to be completed in 2013. U.S. state jurisdictions have statutes of limitations generally ranging from three to four years from the filing of an income tax return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. Years still open to examination by taxing authorities in major state jurisdictions include 2009 and forward. The company does not expect the settlement of audit examinations to significantly change the total amount of unrecognized tax benefits within the next 12 months.

TAMPA ELECTRIC CO [Member]

Income Taxes

4. Income Taxes

TEC is included in the filing of a consolidated federal income tax return with TECO Energy and its affiliates. TEC’s income tax expense is based upon a separate return computation. For the three years presented, TEC’s effective tax rate differs from the statutory rate principally due to state income taxes, domestic production deduction and AFUDC equity benefit. The increase in the 2012 effective tax rate compared to 2011 is principally due to decreased domestic production deduction.

Income tax expense consists of the following components:

Income Tax Expense (Benefit)
(millions)
For the year ending Dec. 31,	2012		2011		2010
Current income taxes
Federal	$	(19.5)	$	(30.7)	$	60.1
State		5.6		2.9		13.6
Deferred income taxes
Federal		141.2		155.6		63.0
State		14.7		18.0		7.4
Amortization of investment tax credits		(0.3)		(0.4)		(0.4)
Total income tax expense	$	141.7	$	145.4	$	143.7

The total income tax provisions differ from amounts computed by applying the federal statutory tax rate to income before income taxes as follows:

Effective Income Tax Rate
(millions)
For the years ended Dec. 31,	2012			2011			2010
Income tax expense at the federal statutory rate of 35%	$	129.1		$	133.2		$	135.3
Increase (decrease) due to
State income tax, net of federal income tax		13.2			13.6			13.6
Equity portion of AFUDC		(0.9)			(0.4)			(0.7)
Domestic production deduction		(0.4)			(1.5)			(3.2)
Other		0.7			0.5			(1.3)
Total income tax expense on consolidated statements of income	$	141.7		$	145.4		$	143.7
Income tax expense as a percent of income from continuing operations,  before income taxes		38.4	%		38.2	%		37.2%

Deferred taxes result from temporary differences in the recognition of certain liabilities or assets for tax and financial reporting purposes. The principal components of TEC’s deferred tax assets and liabilities recognized in the balance sheet are as follows:

Deferred Income Taxes
(millions)
As of Dec. 31,	2012		2011
Deferred tax liabilities (1)
Property related	$	1,016.2	$	879.1
Deferred fuel		11.3		3.9
Pension and postretirement benefits		106.6		99.0
Pension		36.7		31.7
Other		22.2		14.3
Total deferred tax liabilities		1,193.0		1,028.0
Deferred tax assets (1)
Medical benefits		49.0		50.0
Insurance reserves		31.1		28.2
Investment tax credits		5.5		5.7
Hedging activities		5.5		2.9
Pension and postretirement benefits		106.6		99.0
Unbilled revenue		14.8		19.6
Capitalized energy conservation assistance costs		19.6		20.0
Total deferred tax assets		232.1		225.4
Total deferred tax liability, net		960.9		802.6
Less: Current portion of deferred tax asset		(20.0)		(30.4)
Long-term portion of deferred tax liability, net	$	980.9	$	833.0

(1) Certain property related assets and liabilities have been netted.

TEC accounts for uncertain tax positions as required by FASB accounting guidance. This guidance addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under the guidance, TEC may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The guidance also provides standards on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.

As of Dec. 31 2012 and 2011, TEC did not have a liability for unrecognized tax benefits. Based on current information, TEC does not anticipate that this will change materially in 2013. As of Dec. 31, 2012, TEC does not have a liability recorded for payment of interest and penalties associated with uncertain tax positions.

The IRS concluded its examination of federal income tax returns for the year 2011 during 2012. The U.S. federal statute of limitations remains open for the year 2009 and onward. The federal income tax return for calendar year 2012 is part of the IRS’s Compliance Assurance Program. As a result, the IRS audit of such return is expected to be completed in 2013. Florida’s statute of limitations is three years from the filing of an income tax return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. Years still open to examination by Florida’s tax authorities include 2009 and onward. TEC does not expect the settlement of audit examinations to significantly change the total amount of unrecognized tax benefits within the next 12 months.