Income Taxes

12 Months Ended

Dec. 31, 2015

4. Income Taxes

Income Tax Expense

In 2015, 2014 and 2013, TECO Energy recorded net tax provisions from continuing operations of $155.3 million, $138.9 million and $112.6 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 and prior year audits in 2015, 2014 and 2013 were $14.5 million, $2.9 million and $1.8 million, respectively.

Income tax expense consists of the following:

Income Tax Expense (Benefit)

(millions)
For the year ended Dec. 31,	2015			2014			2013
Continuing Operations
Current income taxes
Federal	$	(0.5	)	$	0.5		$	2.2
State		0.0			0.0			0.0
Deferred income taxes
Federal		133.2			111.0			98.8
State		21.1			27.7			11.9
Amortization of investment tax credits		1.5			(0.3	)		(0.3	)
Income tax expense from continuing operations		155.3			138.9			112.6
Discontinued Operations
Current income taxes
Federal		0.0			0.0			0.0
State		(0.3	)		(0.4	)		(3.5	)
Deferred income taxes
Federal		(34.7	)		(44.0	)		(0.3	)
State		(3.6	)		(5.0	)		0.0
Income tax expense from discontinued operations		(38.6	)		(49.4	)		(3.8	)
Total income tax expense	$	116.7		$	89.5		$	108.8

During 2015, 2014 and 2013, TECO Energy increased its net operating loss carryforward.

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,	2015			2014			2013
Income tax expense at the federal statutory rate of 35%	$	138.8		$	120.9		$	105.5
Increase (decrease) due to:
State income tax, net of federal income tax		13.6			17.0			7.5
Valuation allowance		0.1			0.9			0.0
Other		2.8			0.1			(0.4	)
Total income tax expense from continuing operations	$	155.3		$	138.9		$	112.6
Income tax expense as a percent of income from continuing operations, before income taxes		39.2	%		40.2	%		37.4	%

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. For 2015, the effective tax rate decreased as a result of a lower state consolidated tax adjustment, offset by a tax expense related to stock-based compensation.

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, 2015 will be realized in future periods.

Deferred Income Taxes

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

(millions)
As of Dec. 31,	2015			2014
Deferred tax liabilities ⁽¹⁾
Property related	$	1,519.3		$	1,391.3
Pension		86.6			62.3
Total deferred tax liabilities		1,605.9			1,453.6
Deferred tax assets ⁽¹⁾
Alternative minimum tax credit carryforward		213.5			214.0
Loss and credit carryforwards ⁽²⁾		637.5			566.7
Other postretirement benefits		69.5			71.5
Other		117.5			159.6
Total deferred tax assets		1,038.0			1,011.8
Valuation allowance ⁽³⁾		(2.0	)		(4.6	)
Total deferred tax assets, net of valuation allowance		1,036.0			1,007.2
Total deferred tax liability, net		569.9			446.4
Less: Current portion of deferred tax asset		0.0			(72.8	)
Less: Long term portion of deferred tax asset		(0.8	)		0.0
Long-term portion of deferred tax liability, net	$	570.7		$	519.2

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

(2)

As a result of certain realization requirements of accounting guidance, loss carryforwards do not include certain deferred tax assets as of Dec. 31, 2015 that arose directly from tax deductions related to equity compensation greater than compensation recognized for financial reporting. Stockholder’s equity will be increased by $2.6 million when such deferred tax assets are ultimately realized. The company uses tax law ordering when determining when excess tax benefits have been realized.

(3)	During 2015, the valuation allowance related to discontinued operations decreased from $3.6 million to $1.0 million.

At Dec. 31, 2015, the company had cumulative unused federal, Florida and New Mexico NOLs for income tax purposes of $1,728.6 million, $675.2 million and $85.8 million, respectively, expiring at various times between 2025 and 2034, with the majority expiring in 2025. The federal NOL includes $121.6 million of NOLs due to the 2014 acquisition of NMGI. In addition, the company has unused general business credits of $5.8 million expiring between 2026 and 2034. During 2015, the company’s available AMT credit carryforward decreased from $214.0 million to $213.5 million. The AMT credit may be used indefinitely to reduce federal income taxes.

The company’s consolidated balance sheet reflects loss carryforwards excluding amounts resulting from excess stock-based compensation. Accordingly, such losses from excess stock-based compensation tax deductions are accounted for as an increase to additional paid-in capital if and when realized through a reduction in income taxes payable.

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, 2014, a $4.6 million valuation allowance had been established for state NOL carryforwards and state deferred tax assets, net of federal tax. During 2015, the valuation allowance decreased by $2.6 million. As a result of the company’s sale of its 100% interest in TECO Coal, the company released a $3.6 million valuation allowance previously recorded in 2014 related to state NOL carryforwards and deferred tax assets, net of federal tax, with a corresponding write off of the gross deferred tax assets since the likelihood that the company will ever utilize those carryforwards is remote. The TECO Coal sale also generated a federal capital loss carryforward deferred tax asset of $1.0 million for which a full valuation allowance has been established due to the uncertainty of recognizing the benefit from this loss, before it expires in 2020.

Unrecognized Tax Benefits

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:

(millions)	2015		2014		2013
Balance at Jan. 1,	$	0.0	$	0.0	$	2.9
Decreases due to expiration of statute of limitations		0.0		0.0		(2.9	)
Balance at Dec. 31	$	0.0	$	0.0	$	0.0

The company recognizes interest accruals related to uncertain tax positions in “Other income” or “Interest expense”, as applicable, and penalties in “Operation and maintenance other expense” in the Consolidated Statements of Income. In 2015, 2014 and 2013, the company recognized $0.0 million, $0.0 million and $(0.9) million, respectively, of pretax charges (benefits) for interest only. Additionally, the company did not have any accrued interest at Dec. 31, 2015 and 2014. No amounts have been recorded for penalties.

The company’s subsidiaries join in the filing of a U.S. federal consolidated income tax return. The IRS concluded its examination of the company’s 2014 consolidated federal income tax return in December 2015. The U.S. federal statute of limitations remains open for the year 2012 and forward. Years 2015 and 2016 are currently under examination by the IRS under its Compliance Assurance Program. U.S. state and foreign jurisdictions have statutes of limitations generally ranging from three to four years from the filing of an income tax return. Additionally, any state net operating losses that were generated in prior years and are still being utilized are subject to examination by state jurisdictions. 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 and foreign jurisdictions include 2005 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 Company [Member]

Income Taxes

4. Income Taxes

Income Tax Expense

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.

Income tax expense consists of the following components:

Income Tax Expense (Benefit)

(millions)
For the year ending Dec. 31,	2015		2014			2013
Current income taxes
Federal	$	38.2	$	54.8		$	19.4
State		8.4		8.9			1.3
Deferred income taxes
Federal		102.9		79.0			99.8
State		14.5		13.5			18.6
Amortization of investment tax credits		1.5		(0.3	)		(0.3	)
Total income tax expense	$	165.5	$	155.9		$	138.8

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,	2015			2014			2013
Income tax expense at the federal statutory rate of 35%	$	154.6		$	145.7		$	127.5
Increase (decrease) due to
State income tax, net of federal income tax		14.8			14.5			13.0
Other		(3.9	)		(4.3	)		(1.7	)
Total income tax expense on consolidated statements of income	$	165.5		$	155.9		$	138.8
Income tax expense as a percent of income from continuing operations, before income taxes		37.5	%		37.5	%		38.1	%

Deferred Income Taxes

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:

(millions)
As of Dec. 31,	2015		2014
Deferred tax liabilities ⁽¹⁾
Property related	$	1,431.9	$	1,328.8
Pension and postretirement benefits		92.0		72.5
Pension		71.1		51.8
Total deferred tax liabilities		1,595.0		1,453.1
Deferred tax assets ⁽¹⁾
Loss and credit carryforwards		80.0		77.7
Medical benefits		47.7		51.0
Insurance reserves		27.6		29.0
Pension and postretirement benefits		92.0		72.5
Capitalized energy conservation assistance costs		21.4		20.3
Other		17.5		18.3
Total deferred tax assets		286.2		268.8
Total deferred tax liability, net		1,308.8		1,184.3
Less: Current portion of deferred tax asset		0.0		(24.8	)
Long-term portion of deferred tax liability, net	$	1,308.8	$	1,209.1

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

At Dec. 31, 2015, TEC had cumulative unused federal and Florida NOLs for income tax purposes of $194.1 million and $268.5 million, respectively, expiring in 2033. In addition, TEC has unused general business credits of $1.9 million, expiring between 2028 and 2035.

Unrecognized Tax Benefits

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, 2015 and 2014, TEC does not have a liability for unrecognized tax benefits. Based on current information, TEC does not anticipate that this will change materially in 2016. As of Dec. 31, 2015 and 2014, TEC does not have a liability recorded for payment of interest and penalties associated with uncertain tax positions.

The IRS concluded its examination of TECO Energy’s 2014 consolidated federal income tax return in December 2015. The U.S. federal statute of limitations remains open for the year 2012 and onward. Years 2015 and 2016 are currently under examination by the IRS under its Compliance Assurance Program. 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 2005 and forward as a result of TECO Energy’s consolidated Florida net operating loss still being utilized. TEC does not expect the settlement of audit examinations to significantly change the total amount of unrecognized tax benefits within the next 12 months.