Income Taxes

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2013 and 2012 are presented below (in thousands):



	December 31,
	2013			2012
Deferred tax assets:
Benefit of tax loss carryforwards	$	17,709		$	7,798
Alternative minimum tax credit carryforward	21,638			21,599
Pensions and benefits	54,652			86,816
Asset retirement obligation	23,727			21,710
Deferred fuel	—			1,951
Other	14,485			14,115
Total gross deferred tax assets	132,211			153,989
Deferred tax liabilities:
Plant, principally due to depreciation and basis differences	(511,847		)	(457,127		)
Decommissioning	(35,489		)	(29,416		)
Deferred fuel	(2,171		)	—
Other	(5,664		)	(5,828		)
Total gross deferred tax liabilities	(555,171		)	(492,371		)
Net accumulated deferred income taxes	$	(422,960	)	$	(338,382	)

Based on the average annual book income before taxes for the prior three years, excluding the effects of extraordinary and unusual or infrequent items, the Company believes that the deferred tax assets will be fully realized at current levels of book and taxable income.

The Company recognized income tax expense for 2013, 2012 and 2011 as follows (in thousands):



	Years Ended December 31,
	2013			2012			2011
Income tax expense:
Federal:
Current	$	(2,877	)	$	1,487		$	5,084
Deferred	45,024			43,187			46,864
Total federal income tax	42,147			44,674			51,948
State:
Current	1,854			1,931			2,936
Deferred	(414		)	697			(924		)
Total state income tax	1,440			2,628			2,012
Generation (amortization) of accumulated investment tax credits	68			(323		)	(252		)
Total income tax expense	$	43,655		$	46,979		$	53,708

As of December 31, 2013, the Company had $21.6 million of AMT credit carryforwards that have an unlimited life. As of December 31, 2013, the Company had $17.3 million of federal and $0.4 million of state tax loss carryforwards. If unused, the tax loss carryforwards would expire at the end of 2031 through 2033 and 2016 through 2018, for federal and state, respectively.

Income tax provisions differ from amounts computed by applying the statutory federal income tax rate of 35% to book income before federal income tax as follows (in thousands):



	Years Ended December 31,
	2013			2012			2011
Federal income tax expense computed on income at statutory rate	$	46,283		$	48,239		$	55,036
Difference due to:
State taxes, net of federal benefit	936			1,708			1,308
AEFUDC	(2,149		)	(1,845		)	(2,295		)
Permanent tax differences	(1,153		)	(604		)	(303		)
Other	(262		)	(519		)	(38		)
Total income tax expense	$	43,655		$	46,979		$	53,708
Effective income tax rate	33.0		%	34.1		%	34.2		%

The Company files income tax returns in the United State ("U.S.") federal jurisdiction and in the states of Texas, New Mexico and Arizona. The Company is no longer subject to tax examination by the taxing authorities in the federal jurisdiction for years prior to 2009 and in New Mexico for years prior to 2009. The Company is currently under audit in Texas for tax years 2007 through 2011. A deficiency notice relating to the Company’s 1998 through 2003 and 2006 and 2007 income tax returns in Arizona challenges a pollution control credit, a research and development credit and the payroll, sales and property apportionment factors. The Company is contesting these adjustments.

FASB guidance 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. In January 2010, the Company filed for a change of accounting method with the IRS related to the way in which units of property are determined for purposes of determining capitalized tax assets. The change was included in the 2009 federal income tax return, with additional amounts included in the 2010 to 2012 federal income tax returns. The Company recorded an additional unrecognized tax position of $1.6 million and $2.2 million in 2012 and 2011, respectively, related to the change in accounting method in 2009 through 2012. In 2013, a $4.5 million decrease was made to the reserve related to the change in accounting method. The decrease is primarily the result of the completion of IRS audits for tax years 2009 to 2012. Further changes to the unrecognized tax position may be recognized as the IRS releases additional guidance as it pertains to the repair allowance for generation assets. The Company recorded an unrecognized tax position of $0.5 million and $1.4 million in 2013 and 2012, respectively, related to depreciation amounts deducted in current and prior year Texas franchise tax returns. The Company recorded an unrecognized tax position of $1.3 million (net of a decrease of $0.4 million) in 2013 related to tax credits taken in prior year Arizona income tax returns. A reconciliation of the December 31, 2013, 2012 and 2011 amount of unrecognized tax benefits is as follows (in thousands):



	2013			2012			2011
Balance at January 1	$	9,800		$	9,500		$	7,300
Additions for tax positions related to the current year	600			1,600			2,200
Reductions for tax positions related to the current year	—			(900		)	—
Additions for tax positions of prior years	1,700			1,400			—
Reductions for tax positions of prior years	(4,900		)	(1,800		)	—
Balance at December 31	$	7,200		$	9,800		$	9,500

If recognized, $2.5 million of the unrecognized tax position at December 31, 2013, would affect the effective tax rate. The Company recognized income tax expense for an unrecognized tax position of $1.8 million for the year ended December 31, 2013.

The Company recognizes in tax expense interest and penalties related to tax benefits that have not been recognized. During the year ended December 31, 2012, the Company recognized a benefit of $0.3 million in interest. For both of the years ended December 31, 2013 and 2011, the Company recognized interest expense of $0.2 million. The Company had approximately $0.4 million and $0.1 million accrued for the payment of interest and penalties at December 31, 2013 and 2012, respectively.