10. INCOME TAXES

Income tax expense consists of the following components:

	For the Year Ended
(In thousands)	2013		2012		2011

Current:
Federal	$	1,381	$	340	$	4,118
State	86		1,078		477
Total current expense (benefit)	1,467		1,418		4,595

Deferred:
Federal	15,929		1,998		8,209
State	116		(2,755)		337
Total deferred expense (benefit)	16,045		(757)		8,546
Total income tax expense	$	17,512	$	661	$	13,141

The following is a reconciliation of the federal statutory tax rate to the effective tax rate for the years ended December 31, 2013, 2012 and 2011:

	Year Ended December 31,
(In percentages)	2013	2012	2011

Statutory federal income tax rate	35.0	35.0	35.0
State income taxes, net of federal benefit	1.7	(12.8)	0.5
Transaction costs	–	14.9	–
Other permanent differences	–	(1.1)	(0.9)
Change in uncertain tax positions	(1.7)	–	(0.7)
Change in deferred tax rate	–	(19.7)	1.1
Provision to return	1.3	(4.2)	–
Other	0.6	(0.4)	0.1
	36.9	11.7	35.1

Deferred Taxes

The components of the net deferred tax liability are as follows:

	Year Ended December 31,
(In thousands)	2013		2012

Current deferred tax assets:
Reserve for uncollectible accounts	$	615	$	1,815
Accrued vacation pay deducted when paid	2,196		1,727
Accrued expenses and deferred revenue	5,149		5,458
	7,960		9,000
Non-current deferred tax assets:
Net operating loss carryforwards	18,809		32,506
Pension and postretirement obligations	28,072		60,252
Stock-based compensation	495		450
Derivative instruments	1,004		3,004
Financing costs	1,503		567
Tax credit carryforwards	3,143		2,437
Other	-		305
	53,026		99,521
Valuation allowance	(535)		(535)
Net non-current deferred tax assets	52,491		98,986

Non-current deferred tax liabilities:
Goodwill and other intangibles	(28,515)		(27,376)
Basis in investment	(38)		(120)
Partnership investments	(25,523)		(26,413)
Property, plant and equipment	(178,274)		(182,578)
	(232,350)		(236,487)
Net non-current deferred taxes	(179,859)		(137,501)
Net deferred income tax liabilities	$	(171,899)	$	(128,501)

Deferred income taxes are provided for the temporary differences between assets and liabilities recognized for financial reporting purposes and assets and liabilities recognized for tax purposes. The ultimate realization of deferred tax assets depends upon taxable income during the future periods in which those temporary differences become deductible. To determine whether deferred tax assets can be realized, management assesses whether it is more likely than not that some portion or all of the deferred tax assets will not be realized, taking into consideration the scheduled reversal of deferred tax liabilities, projected future taxable income and tax-planning strategies.

Based upon historical taxable income, taxable temporary differences, available and prudent tax planning strategies and projections for future pre-tax book income over the periods that the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these temporary differences. However, management may reduce the amount of deferred tax assets it considers realizable in the near term if estimates of future taxable income during the carryforward period are reduced. Estimates of future taxable income are based on the estimated recognition of taxable temporary differences, available and prudent tax planning strategies, and projections of future pre-tax book income. The amount of estimated future taxable income is expected to allow for the full utilization of the net operating loss (“NOL”) carryforwards, as described below.

Consolidated and its wholly owned subsidiaries, which file a consolidated federal income tax return, estimates it has available federal NOL carryforwards at December 31, 2013, of $43.0 million and related deferred tax assets of $15.0 million. The federal NOL carryforwards expire from 2026 to 2032. Management believes that the future utilization of $1.5 million and related deferred tax asset of $0.5 million subject to Separate Return Limitation Year is uncertain and has placed a full valuation allowance on this amount of the available federal NOL carryforwards. The related NOL carryforward expires in 2026. The valuation allowance was recorded as a result of the acquisition of SureWest during 2012. If or when recognized, the tax benefits related to any reversal of the valuation allowance will be accounted for as a reduction of income tax expense.

ETFL, a nonconsolidated subsidiary for federal income tax return purposes, estimates it has available NOL carryforwards at December 31, 2013, of $2.3 million and related deferred tax assets of $0.8 million. ETFL’s federal NOL carryforwards expire from 2020 to 2024.

We estimate that we have available state NOL carryforwards at December 31, 2013, of $85.8 million and related deferred tax assets of $2.9 million. The state NOL carryforwards expire from 2016 to 2033.

We estimate that we have available federal alternative minimum tax (“AMT”) credit carryforwards at December 31, 2013, of $0.5 million and related deferred tax assets of $0.5 million. The AMT credits are available to offset future tax liabilities only to the extent that the Company has regular tax liabilities in excess of AMT tax liabilities. The federal AMT credit carryforward does not expire.

We estimate that we have available state tax credit carryforwards at December 31, 2013, of $4.1 million and related deferred tax assets of $2.7 million. The state tax credit carryforward are limited annually and expire from 2016 to 2027.

On September 13, 2013, Treasury and the Internal Revenue Service issued final regulations regarding the deduction and capitalization of expenditures related to tangible property. The final regulations under Internal Revenue Code Sections 162, 167 and 263(a) apply to amounts paid to acquire, produce, or improve tangible property as well as dispositions of such property and are generally effective for tax years beginning on or after January 1, 2014. We have evaluated these regulations and we do not expect they will have a material impact on our consolidated results of operations, cash flows or financial position.

Unrecognized Tax Benefits

Under the accounting guidance applicable to uncertainty in income taxes we have analyzed filing positions in all of the federal and state jurisdictions where we are required to file income tax returns as well as all open tax years in these jurisdictions. This accounting guidance clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements; prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return; and provides guidance on description, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

Our unrecognized tax benefits as of December 31, 2013 and 2012 were $0 and $1.2 million, respectively. Due to the expiration of a state statute of limitations, during 2013 we recognized $1.2 million of our previously unrecognized tax benefits, which resulted in a decrease to our tax expense of approximately $0.8 million. The tax benefit attributable to the decrease in unrecognized tax benefits did not have a significant effect on our effective tax rate.

Our practice is to recognize interest and penalties related to income tax matters in interest expense and general and administrative expense, respectively. During 2013 and 2012 we did not record any material interest or penalty expense and have no material remaining liability for interest or penalties.

The periods subject to examination for our federal return are years 2010 through 2012. The periods subject to examination for our state returns are years 2005 through 2012. We are currently under examination by federal and state taxing authorities. We have received proposed assessments in connection with our federal examination for tax years ended December 31, 2010 and 2011. We are in the process of responding to the IRS and providing support for our tax position. We believe that our tax position will be upheld based on the technical merits of our position. Accordingly, the Company has not made any adjustments to its unrecognized tax benefits for the proposed assessments. We do not expect any settlement or payment that may result from the audits to have a material effect on our results of operations or cash flows.

The following is a reconciliation of the unrecognized tax benefits for the years ended December 31, 2013 and 2012:

	Liability for
	Unrecognized
	Tax Benefits
(In thousands)	2013		2012

Balance at January 1	$	1,224	$	1,224
Additions for tax positions in the current year	–		–
Additions for tax positions of prior years	–		–
Settlements with taxing authorities	–		–
Reduction for lapse of federal statute of limitations	–		–
Reduction for lapse of state statute of limitations	(1,224)		–
Balance at December 31	$	-	$	1,224