4. Income Taxes

On December 22, 2017, the U.S. Tax Cuts and Jobs Act of 2017 (the Act) was signed into legislation. The Act includes a broad range of tax reform proposals affecting businesses, effective January 1, 2018 which provide a corporate federal tax rate reduction from 35% to 21%, 100% asset expensing, limitation of interest deduction, the repeal of section 199 domestic production deduction and the preservation of the existing normalization rules. The Act also provides that regulated electric and gas companies are exempt from the 100% asset expensing and interest expense deduction limitation. In accordance with U.S. accounting standards, TEC is required to revalue its deferred income tax assets and liabilities based on the new 21% federal tax rate. Additionally, under FPSC rules TEC is required to adjust deferred income tax assets and liabilities for changes in tax rates with a corresponding regulatory liability for the excess deferred taxes generated by the tax rate differential. See Note 3.

TEC has provisionally revalued all deferred tax assets and liabilities, $199 million and $1,024 million, respectively, based on the rates at which they are expected to reverse in the future, which is 21% for federal tax purposes. TEC is still analyzing certain aspects of the Act, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. Provisional amounts primarily relate to the uncertainty of the application of 100% asset expensing rules after September 27, 2017. Further adjustments, if any, will be recorded by TEC during the measurement period in 2018 as permitted by SEC Staff Accounting Bulletin 118, Income tax Accounting Implications of the Tax Cuts and Jobs Act.

Income Tax Expense

Effective July 1, 2016 and due to the Merger with Emera, TEC is included in a consolidated U.S. federal income tax return with EUSHI and its subsidiaries. Prior to the Merger, TEC was included in the filing of a consolidated federal income tax return with TECO Energy and its subsidiaries. TEC’s income tax expense is based upon a separate return method, modified for the benefits-for-loss allocation in accordance with respective tax sharing agreements of TECO Energy and EUSHI. To the extent that TEC’s cash tax positions are settled differently than the amount reported as realized under the tax sharing agreement, the difference is accounted for as either a capital contribution or a distribution.

In 2017, 2016 and 2015, TEC recorded net tax provisions of $197 million, $152 million and $166 million, respectively.

Income tax expense consists of the following components:

Income Tax Expense (Benefit)

(millions)
For the year ended December 31,	2017			2016		2015
Current income taxes
Federal	$	(1	)	$	53	$	38
State		6			12		8
Deferred income taxes
Federal		170			76		105
State		23			11		15
Investment tax credits, net of amortization		(1	)		0		0
Total income tax expense	$	197		$	152	$	166

For the three years presented, the overall effective tax rate differs from the 35% U.S. federal statutory rate as presented below:

Effective Income Tax Rate

(millions)
For the year ended December 31,	2017			2016			2015
Income before provision for income taxes	$	513		$	438		$	442
Federal statutory income tax rates		35	%		35	%		35	%
Income taxes, at statutory income tax rate		180			153			155
Increase (decrease) due to
State income tax, net of federal income tax		19			15			15
AFUDC-equity		(1	)		(8	)		(6	)
Tax credits		(3	)		(7	)		0
Other		2			(1	)		2
Total income tax expense on consolidated statements of income	$	197		$	152		$	166
Income tax expense as a percent of income from continuing operations, before income taxes		38.4	%		34.8	%		37.5	%

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 December 31,	2017			2016
Deferred tax liabilities ⁽¹⁾
Property related	$	924		$	1,549
Pension and postretirement benefits		57			105
Pension		43			69
Total deferred tax liabilities		1,024			1,723
Deferred tax assets ⁽¹⁾
Loss and credit carryforwards ⁽²⁾		91			91
Medical benefits		24			47
Insurance reserves		(5	)		27
Pension and postretirement benefits		57			105
Capitalized energy conservation assistance costs		13			23
Other		19			23
Total deferred tax assets		199			316
Total deferred tax liability, net	$	825		$	1,407

(1)

Certain property related assets and liabilities have been netted.

(2)

Deferred tax assets for net operating loss and tax credit carryforwards have been reduced by unrecognized tax benefits of $8 million.

As a result of tax reform, Tampa Electric recorded a change in net deferred taxes with an offset to a regulatory tax liability in the amount of $755 million, subject to refund to customers over time as required by order of the FPSC. At December 31, 2017, TEC had cumulative unused federal and Florida NOLs for income tax purposes of $345 million and $273 million, respectively, expiring between 2033 and 2037. TEC has unused general business credits of $23 million, expiring between 2028 and 2037. As a result of the Merger with Emera, TECO Energy’s NOLs and credits will be utilized by EUSHI, in accordance with the benefits-for-loss allocation which provide that tax attributes are utilized by the consolidated tax return group of EUSHI.

Unrecognized Tax Benefits

TEC accounts for uncertain tax positions as required by U.S. GAAP. 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. Authoritative guidance related to accounting for uncertainty in income taxes requires an enterprise to recognize in its financial statements the best estimate of the impact of a tax position by determining if the weight of the available evidence indicates that it is more likely than not, based solely on the technical merits, that the position will be sustained upon examination, including resolution of any related appeals and litigation processes.

The following table provides details of the change in unrecognized tax benefits as follows:

(millions)	2017		2016		2015
Balance at January 1,	$	7	$	0	$	0
Increases due to tax positions related to current year		1		7		0
Balance at December 31	$	8	$	7	$	0

As of December 31, 2017 and 2016, TEC’s uncertain tax positions for federal R&D tax credits were $8 million and $7 million, respectively, all of which was recorded as a reduction of deferred income tax assets for tax credit carryforwards. TEC believes that the total unrecognized tax benefits will decrease and be recognized within the next twelve months due to the ongoing audit examination of TECO Energy’s consolidated federal income tax return for the short tax year ending June 30, 2016. TEC had $8 million of unrecognized tax benefits at December 31, 2017, that, if recognized, would reduce TEC’s effective tax rate.

TEC 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 2017, 2016 and 2015, TEC did not recognize any pre-tax charges (benefits) for interest. Additionally, TEC did not have any accrued interest at December 31, 2017, 2016 and 2015. No amounts have been recorded for penalties.

The IRS concluded its examination of TECO Energy’s 2015 consolidated federal income tax return in March 2017 with no changes required. The U.S. federal statute of limitations remains open for the year 2014 and forward. The short tax year ending June 30, 2016 is currently under examination by the IRS under its Compliance Assurance Program (CAP). Prior to July 1, 2016, TEC was included in a consolidated U.S. federal income tax return with TECO Energy and subsidiaries. Due to the Merger with Emera, TECO Energy is only able to participate in the CAP through its short tax year ending June 30, 2016. 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.