ACCOUNTING FOR INCOME TAXES

Income tax expense consisted of the following for the years ended December 31 (dollars in thousands):



	2013		2012		2011
Taxes currently provided	$	39,698	$	19,812	$	32,625
Deferred income tax expense	23,532		21,449		24,007
Total income tax expense	$	63,230	$	41,261	$	56,632

A reconciliation of federal income taxes derived from statutory federal tax rates (35 percent in 2013, 2012 and 2011) applied to income before income taxes as set forth in the accompanying Consolidated Statements of Income is as follows for the years ended December 31 (dollars in thousands):



	2013			2012			2011
Federal income taxes at statutory rates	$	61,433		$	42,021		$	56,060
Increase (decrease) in tax resulting from:
Tax effect of regulatory treatment of utility plant differences	3,532			2,432			1,798
State income tax expense	1,967			985			687
Settlement of prior year tax returns and adjustment of tax reserves	(1,104		)	(2,198		)	163
Manufacturing deduction	(2,033		)	(1,100		)	(1,099		)
Other	(565		)	(879		)	(977		)
Total income tax expense	$	63,230		$	41,261		$	56,632

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and tax credit carryforwards. The total net deferred income tax liability consisted of the following as of December 31 (dollars in thousands):



	2013		2012
Deferred income tax assets:
Allowance for doubtful accounts	$	12,202	$	12,140
Reserves not currently deductible	6,322		5,923
Net operating loss from subsidiary acquisition	9,258		11,136
Deferred compensation	3,676		3,631
Unfunded benefit obligation	42,230		94,891
Utility energy commodity derivatives	13,303		22,953
Power and natural gas deferrals	9,226		12,490
Tax credits	11,365		19,401
Other	29,133		19,291
Total deferred income tax assets	136,715		201,856
Deferred income tax liabilities:
Intangible assets from subsidiary acquisition	4,271		5,582
Differences between book and tax basis of utility plant	521,238		494,579
Regulatory asset for pensions and other postretirement benefits	54,945		107,243
Power exchange contract	5,484		10,753
Utility energy commodity derivatives	13,305		22,954
Loss on reacquired debt	5,732		6,751
Interest rate swaps	15,097		12,308
Settlement with Coeur d’Alene Tribe	13,190		13,448
Other	14,008		18,227
Total deferred income tax liabilities	647,270		691,845
Net deferred income tax liability	$	510,555	$	489,989
Consolidated balance sheet classification of net deferred income taxes:
Current deferred income tax asset	$	24,788	$	34,281
Ecova long-term deferred income tax asset (1)	—		607
Long-term deferred income tax liability	535,343		524,877
Net deferred income tax liability	$	510,555	$	489,989

(1)

Ecova files its own tax return and its deferred tax assets and liabilities cannot be netted with Avista Corp.'s deferred income tax assets and liabilities. As of December 31, 2012, Ecova had a long-term deferred income tax asset that was included in other deferred charges on the Consolidated Balance Sheet. As of December 31, 2013, Ecova no longer has any long-term deferred tax assets, they are now in a liability position and are included in long-term deferred income tax liabilities on the Consolidated Balance Sheet.

As of December 31, 2013, the Company had $5.9 million of state tax credit carryforwards. State tax credits expire from 2016 to 2027. The Company recognizes the effect of state tax credits generated from utility plant as they are utilized.

The realization of deferred income tax assets is dependent upon the ability to generate taxable income in future periods. The Company evaluated available evidence supporting the realization of its deferred income tax assets and determined it is more likely than not that deferred income tax assets will be realized.

The Company and its eligible subsidiaries file consolidated federal income tax returns. The Company also files state income tax returns in certain jurisdictions, including Idaho, Oregon and Montana. Subsidiaries are charged or credited with the tax effects of their operations on a stand-alone basis. The Internal Revenue Service (IRS) has completed its examination of all tax years through 2009 and all issues were resolved related to these years. The IRS has not completed an examination of the Company’s 2010 through 2012 federal income tax returns. The Company does not believe that any open tax years for federal or state income taxes could result in any adjustments that would be significant to the consolidated financial statements.

The Company did not incur any penalties on income tax positions in 2013, 2012 or 2011. The Company would recognize interest accrued related to income tax positions as interest expense and any penalties incurred as other operating expense.

The Company had net regulatory assets related to the probable recovery of certain deferred income tax liabilities from customers through future rates as of December 31 (dollars in thousands):



	2013		2012
Regulatory assets for deferred income taxes	$	71,421	$	79,406