Accounting For Income Taxes

12 Months Ended

Dec. 31, 2019

ACCOUNTING FOR INCOME TAXES

Federal Income Tax Law Changes

On December 22, 2017, the TCJA was signed into law. The legislation included substantial changes to the taxation of individuals as well as U.S. businesses, multi-national enterprises, and other types of taxpayers. Highlights of provisions most relevant to Avista Corp. included:


•	A permanent reduction in the statutory corporate tax rate from 35 percent to 21 percent, beginning with tax years after 2017;

•

Statutory provisions requiring that excess deferred taxes associated with public utility property be normalized using the ARAM or the Reverse South Georgia Method for determining the timing of the return of excess deferred taxes to customers. Excess deferred taxes result from revaluing deferred tax assets and liabilities based on the newly enacted tax rate instead of the previous tax rate, which, for most rate-regulated utilities like Avista Utilities and AEL&P, results in a net benefit to customers that will be deferred as a regulatory liability and passed through to customers over future periods;


•	Repeal of the corporate AMT;


•	Bonus depreciation (expensing of capital investment on an accelerated basis) was removed as a deduction for property predominantly used in certain rate-regulated businesses (like Avista Utilities and AEL&P), but is still allowed for the Company's non-regulated businesses; and


•	NOL carryback deductions were eliminated, but carryforward deductions are allowed indefinitely with some annual limitations versus the previous 20-year limitation.

As a result of the TCJA and its reduction of the corporate income tax rate from 35 percent to 21 percent (among many other changes in the law), the Company recorded a regulatory liability associated with the revaluing of its deferred income tax assets and liabilities to the new corporate tax rate. The total net amount of the regulatory liability for excess deferred income taxes associated with the TCJA is $416.7 million as of December 31, 2019, compared to $436.7 million as of December 31, 2018, which reflects the amounts to be refunded to customers through the regulatory process. The Avista Utilities amounts related to utility plant commenced being returned to customers in 2018 and the Company expects they will be returned to customers over a period of approximately 36 years using the ARAM. The AEL&P amounts related to utility plant commenced being returned to customers in 2018 and the Company expects they will be returned to customers over a period of approximately 40 years using the Reverse South Georgia Method. The return of the regulatory liability attributable to non-plant excess deferred taxes has begun through tariffs or other regulatory mechanisms or proceedings.

Because most of the provisions of the TCJA were effective as of January 1, 2018 but customers' rates included a 35 percent corporate tax rate built in from prior general rate cases, the Company began accruing for a refund to customers for the change in federal income tax expense beginning January 1, 2018 forward. For Washington and Idaho, this accrual was recorded until all benefits prior to a permanent rate change were properly captured through the deferral process. For Oregon, this accrual was recorded through 2019 with new customer rates effective January 15, 2020. Refunds have begun to Washington, Idaho, and Oregon customers through tariffs or other regulatory mechanisms or proceedings.

Income Tax Expense

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



	2019		2018		2017
Current income tax expense	$	16,276	$	17,490	$	13,101
Deferred income tax expense	15,098		8,570		69,657
Total income tax expense	$	31,374	$	26,060	$	82,758

State income taxes do not represent a significant portion of total income tax expense on the Consolidated Statements of Income for any periods presented.

A reconciliation of federal income taxes derived from statutory federal tax rates (21 percent in 2019 and 2018 and 35 percent in 2017) 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):



	2019					2018					2017
Federal income taxes at statutory rates	$	47,909		21.0	%	$	34,158		21.0	%	$	69,542		35.0	%
Increase (decrease) in tax resulting from:
Tax effect of regulatory treatment of utility plant differences	(9,967		)	(4.3	)	(8,153		)	(5.0	)	3,482			1.7
State income tax expense	1,465			0.6		1,191			0.7		1,110			0.6
Settlement of prior year tax returns and adjustment of tax reserves	643			0.3		(140		)	(0.1	)	(384		)	(0.2	)
Manufacturing deduction	—			—		—			—		(1,119		)	(0.6	)
Settlement of equity awards	612			0.3		(990		)	(0.6	)	(1,439		)	(0.7	)
Acquisition costs	(1,712		)	(0.7	)	329			0.2		2,491			1.3
Federal income tax rate change	—			—		—			—		10,169			5.1
Non-plant excess deferred turnaround	(5,690		)	(2.5	)	—			—		—			—
Tax loss on sale of METALfx	(1,272		)	(0.6	)	—			—		—			—
Valuation allowance	267			0.1		—			—		—			—
Other	(881		)	(0.4	)	(335		)	(0.2	)	(1,094		)	(0.5	)
Total income tax expense	$	31,374		13.8	%	$	26,060		16.0	%	$	82,758		41.7	%

Deferred Income Taxes

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):



	2019			2018
Deferred income tax assets:
Unfunded benefit obligation	$	43,224		$	45,842
Utility energy commodity and interest rate swap derivatives	8,436			11,724
Regulatory deferred tax credits	6,394			6,244
Tax credits	21,696			21,008
Power and natural gas deferrals	8,624			17,618
Deferred compensation	7,171			5,536
Deferred taxes on regulatory liabilities	101,648			106,909
Other	17,423			16,793
Total gross deferred income tax assets	214,616			231,674
Valuation allowances for deferred tax assets	(16,550		)	(13,651		)
Total deferred income tax assets after valuation allowances	198,066			218,023
Deferred income tax liabilities:
Differences between book and tax basis of utility plant	525,931			509,789
Regulatory asset on utility, property plant and equipment	86,701			83,141
Regulatory asset for pensions and other postretirement benefits	43,838			47,893
Utility energy commodity and interest rate swap derivatives	8,436			11,724
Long-term debt and borrowing costs	26,552			24,609
Settlement with Coeur d’Alene Tribe	6,250			6,400
Other regulatory assets	20,137			15,318
Other	8,734			6,751
Total deferred income tax liabilities	726,579			705,625
Net long-term deferred income tax liability	$	528,513		$	487,602

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.

As of December 31, 2019, the Company had $22.3 million of state tax credit carryforwards. Of the total amount, the Company believes that it is more likely than not that it will only be able to utilize $6.0 million of the state tax credits. As such, the Company has recorded a valuation allowance of $16.3 million against the state tax credit carryforwards and reflected the net amount of $6.0 million as an asset as of December 31, 2019. State tax credits expire from 2020 to 2033.

Status of Internal Revenue Service (IRS) and State Examinations

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, Montana and Alaska. Subsidiaries are charged or credited with the tax effects of their operations on a stand-alone basis. All tax years after 2016 are open for an IRS tax examination.

The Idaho State Tax Commission is currently reviewing tax years 2014 through 2017. The statute of limitations for Montana and Oregon to review 2015 and earlier tax years has expired.

The Company believes that any open tax years for federal or state income taxes will not result in adjustments that would be significant to the consolidated financial statements.