Note 12: Income Taxes

Components of income tax expense from continuing operations for the years ended December 31 are as follows:

	2014			2013			2012
State income taxes
Current	$	11,055		$	7,202		$	26,604
Deferred
Current		(287	)		(405	)		(280	)
Non-current		30,788			26,821			24,256
	$	41,556		$	33,618		$	50,580

Federal income taxes
Current	$	14,767		$	(19,995	)	$	31,482
Deferred
Current		(1,528	)		(1,324	)		(2,031	)
Non-current		226,572			226,295			178,274
Amortization of deferred investment tax credits		(1,394	)		(1,501	)		(1,518	)
		238,417			203,475			206,207
	$	279,973		$	237,093		$	256,787

A reconciliation of income tax expense from continuing operations at the statutory federal income tax rate to actual income tax expense for the years ended December 31 is as follows:

	2014			2013			2012
Income tax at statutory rate	$	248,424		$	212,777		$	220,636
Increases (decreases) resulting from:
State taxes, net of federal taxes		27,011			21,852			32,877
Change in valuation allowance		(2	)		(455	)		143
Flow through differences		3,467			3,217			3,032
Amortization of deferred investment tax credits		(1,394	)		(1,501	)		(1,518	)
Subsidiary preferred dividends		532			584			634
Sec 162(m) Adjustment		980			—			—
Other, net		955			619			983
Actual income tax expense	$	279,973		$	237,093		$	256,787

The following table provides the components of the net deferred tax liability from continuing operations at December 31:

	2014			2013
Deferred tax assets:
Advances and contributions	$	502,069		$	510,122
Deferred investment tax credits		9,452			10,027
Other postretirement benefits		104,723			107,773
Tax losses and credits		197,288			265,640
Pension benefits		124,985			122,143
Unamortized debt discount, net		20,249			20,249
Other		32,159			23,001
		990,925			1,058,955
Valuation allowance		(10,379	)		(13,555	)
	$	980,546		$	1,045,400
Deferred tax liabilities:
Utility plant, principally due to depreciation differences	$	2,676,574		$	2,478,617
Income taxes recoverable through rates		75,538			81,135
Deferred business services project expenses		4,584			4,584
Deferred other postretirement benefits		65,157			65,071
Deferred pension benefits		121,317			169,336
Other		71,514			69,632
		3,014,684			2,868,375
	$	(2,034,138	)	$	(1,822,975	)

At December 31, 2014 and 2013, the Company recorded federal net operating loss (“NOL”) carryforwards of $1,004,705 and $1,182,075, respectively. The 2014 balance includes $14,325 of windfall tax benefits on stock-based compensation that will not be recorded to equity until the benefit is realized. The Company believes the federal NOL carryforwards are more likely than not to be recovered and require no valuation allowance. The Company evaluated its ability to fully utilize the existing federal NOL carryforwards in light of the RWE divestiture in November 2009. Under Internal Revenue Code (“I.R.C.”) Section 382, an ownership change occurs if there is a greater than fifty percent (50%) change in equity ownership of a company over a three-year period determined by reference to the ownership of persons holding five percent (5%) or more of that company’s equity securities. If a company undergoes an ownership change as defined by I.R.C. Section 382, the company’s ability to utilize its pre-change NOL carryforwards to offset post-change income may be limited.

The Company believes that the limitation imposed by I.R.C. Section 382 generally should not preclude use of its federal NOL carryforwards, assuming the Company has sufficient taxable income in future carryforward periods to utilize those NOL carryforwards. The Company’s federal NOL carryforwards do not begin expiring until 2028.

At December 31, 2014 and 2013, the Company had state NOLs of $542,705 and $628,049, respectively, a portion of which are offset by a valuation allowance because the Company does not believe these NOLs are more likely than not to be realized. The state NOL carryforwards will expire between 2015 and 2033.

At December 31, 2014 and 2013, the Company had Canadian NOL carryforwards of $6,498 and $6,323, respectively. The majority of these carryforwards are offset by a valuation allowance because the Company does not believe these NOLs are more likely than not to be realized. The Canadian NOL carryforwards will expire between 2015 and 2033.

The Company had capital loss carryforwards for federal income tax purposes of $3,844 at December 31, 2014 and 2013. The Company has recognized a full valuation allowance for the capital loss carryforwards because the Company does not believe these losses are more likely than not to be recovered.

The Company files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state or local or non-U.S. income tax examinations by tax authorities for years before 2008. For U.S. federal, tax year 2011 is also closed.

The Company has state income tax examinations in progress and does not expect material adjustments to result.

The Patient Protection and Affordable Care Act (the “PPACA”) became law on March 23, 2010, and the Health Care and Education Reconciliation Act of 2010 became law on March 30, 2010, which makes various amendments to certain aspects of the PPACA (together, the “Acts”). The PPACA effectively changes the tax treatment of federal subsidies paid to sponsors of retiree health benefit plans that provide a benefit that is at least actuarially equivalent to the benefits under Medicare Part D. The Acts effectively make the subsidy payments taxable in tax years beginning after December 31, 2012 and as a result, the Company followed its original accounting for the underfunded status of the other postretirement benefits for the Medicare Part D adjustment and recorded a reduction in deferred tax assets and an increase in its regulatory assets amounting to $6,348 and $6,241 at December 31, 2014 and 2013, respectively.

The following table summarizes the changes in the Company’s gross liability, excluding interest and penalties, for unrecognized tax benefits:

Balance at January 1, 2013	$	180,993
Increases in current period tax positions		27,229
Decreases in prior period measurement of tax positions		(30,275	)
Balance at December 31, 2013	$	177,947
Increases in current period tax positions		53,818
Decreases in prior period measurement of tax positions		(36,528	)
Balance at December 31, 2014	$	195,237

The total balance in the table above does not include interest and penalties of $157 and $242 as of December 31, 2014 and 2013, respectively, which is recorded as a component of income tax expense. The majority of the increased tax position is attributable to temporary differences. The increase in 2014 current period tax positions related primarily to the Company’s change in tax accounting method filed in 2008 for repair and maintenance costs on its utility plant. The Company does not anticipate material changes to its unrecognized tax benefits within the next year. If the Company sustains all of its positions at December 31, 2014 and 2013, an unrecognized tax benefit of $9,444 and $7,439, respectively, excluding interest and penalties, would impact the Company’s effective tax rate.

The following table summarizes the changes in the Company’s valuation allowance:

Balance at January 1, 2012	$	21,579
Increases in current period tax positions		—
Decreases in current period tax positions		(2,059	)
Balance at December 31, 2012	$	19,520
Increases in current period tax positions		—
Decreases in current period tax positions		(5,965	)
Balance at December 31, 2013	$	13,555
Increases in current period tax positions		—
Decreases in current period tax positions		(3,176	)
Balance at December 31, 2014	$	10,379

Included in 2013 is a discrete tax benefit totaling $2,979 associated with an entity re-organization within the Company’s Market-Based Operations segment that allowed for the utilization of state net operating loss carryforwards and the release of an associated valuation allowance.