Income Taxes

12 Months Ended

Dec. 31, 2019

Income Taxes

On December 22, 2017, the TCJA was enacted. The TCJA includes significant changes to the Internal Revenue Code of 1986, including amendments that significantly changed the taxation of business entities and includes specific provisions related to regulated public utilities. The more significant changes that impact the Company included in the TCJA are reductions in the federal corporate income tax rate from 35% to 21%, elimination of the corporate alternative minimum tax provision, additional limitations on deductions of executive compensation, and limitations on the utilization of NOLs arising after December 31, 2017, to 80% of taxable income with no carryback but with an indefinite carryforward. The specific provisions related to regulated public utilities in the TCJA generally provide for the continued deductibility of interest expense, the elimination of bonus depreciation for property acquired and placed into service after December 31, 2017, and the continuance of rate normalization requirements for accelerated depreciation benefits and changes to deferred tax balances as a result of the change in the federal corporate income tax rate. Although the Company recorded provisional estimates of the impact of the TCJA, as of the date of enactment, no significant subsequent adjustments to the provisional estimates were recorded during the one-year measurement period as permitted by the U.S. Securities and Exchange Commission ("SEC") in Staff Accounting Bulletin No. 118.

Reductions in accumulated deferred federal income taxes due to the reduction in the corporate income tax rate to 21% under the provisions of the TCJA will result in amounts previously collected from utility customers for these deferred taxes to be refundable to such customers, generally through reductions in future rates. The TCJA includes provisions that stipulate how these excess deferred taxes are to be returned to customers for certain accelerated tax depreciation benefits. Potential refunds of other excess deferred taxes will be determined by the Company’s regulators.

In February 2018, the FASB issued ASU 2018-02, which addresses concerns that the tax reduction due to the change in the corporate tax rate from 35% to 21% would be "stranded" in AOCI. ASU 2018-02 allows companies an election to reclassify stranded taxes from AOCI to retained earnings. The Company adopted ASU 2018-02 on January 1, 2019, and elected to not reclassify stranded taxes from AOCI to retain earnings. See Part II, Item 8, Financial Statements and Supplementary Data, Note B of Notes to Financial Statements for further discussion on new accounting standards.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2019 and 2018 are presented below (in thousands):



	December 31,
	2019			2018
Deferred tax assets:
Benefit of tax loss carryforwards	$	—		$	12,521
Alternative minimum tax credit carryforward	—			8,855
Pensions and benefits	33,456			31,874
Asset retirement obligations	23,239			21,305
Regulatory liabilities related to income taxes	63,103			63,378
Deferred fuel	4,124			2,483
Other	—			2,673
Total gross deferred tax assets	123,922			143,089
Deferred tax liabilities:
Plant, principally related to depreciation and basis differences	(432,073		)	(437,465		)
Decommissioning	(39,737		)	(30,757		)
Other	(510		)	—
Total gross deferred tax liabilities	(472,320		)	(468,222		)
Net accumulated deferred income taxes	$	(348,398	)	$	(325,133	)

As of December 31, 2019, the Company had fully utilized all alternative minimum tax credit carryforwards and all other tax loss and credit carryforwards. Based on the average annual earnings before taxes for the prior three years, and excluding the effects of unusual or infrequent items, the Company believes that the deferred tax assets will be fully realized.

The Company recognized income tax expense for 2019, 2018 and 2017 as follows (in thousands):



	Years Ended December 31,
	2019			2018			2017
Income tax expense (benefit):
Federal:
Current	$	4,827		$	(4,638	)	$	2,507
Deferred	28,637			24,121			46,089
Total federal income tax	33,464			19,483			48,596
State:
Current	2,061			1,888			(897		)
Deferred	(744		)	1,941			1,816
Total state income tax	1,317			3,829			919
Generation (amortization) of accumulated investment tax credits	(750		)	3,056			1,489
Total income tax expense	$	34,031		$	26,368		$	51,004

Income tax provisions differ from amounts computed by applying the statutory federal income tax rate of 21% in 2019 and 2018, and 35% in 2017 to book income before federal income tax as follows (in thousands):



	Years Ended December 31,
	2019			2018			2017
Federal income tax expense computed on income at statutory rate	$	32,984		$	23,243		$	52,243
Difference due to:
State taxes, net of federal benefit	1,041			3,059			597
Permanent tax differences	(1,405		)	(682		)	(2,562		)
Other	1,411			748			726
Total income tax expense	$	34,031		$	26,368		$	51,004
Effective income tax rate	21.7		%	23.8		%	34.2		%

The Company files income tax returns in the 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, Arizona and New Mexico jurisdictions for years prior to 2015. In August 2017, the Company reached an agreement with the Texas Comptroller of Public Accounts and settled audits in Texas for tax years 2007 through 2011.

The 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. The Company recorded a decrease of $0.4 million, and a decrease of $1.2 million (net of an increase of $0.5 million), in 2019 and 2017, respectively, related to transmission and distribution costs and other amounts deducted in current and prior year Texas franchise tax returns. The Company recorded an unrecognized tax position of $0.3 million, $0.5 million, and $0.1 million in 2019, 2018 and 2017, respectively, related to tax credits taken and apportionment factors used in prior year Arizona income tax returns, which have been settled through audit. A reconciliation of the December 31, 2019, 2018 and 2017 amounts of unrecognized tax benefits are as follows (in thousands):



	2019			2018			2017
Balance at January 1	$	4,700		$	4,200		$	5,300
Additions for tax positions related to the current year	—			—			200
Reductions for tax positions related to the current year	—			(200		)	—
Additions for tax positions of prior years	400			700			400
Reductions for tax positions of prior years	(500		)	—			(1,700		)
Balance at December 31	$	4,600		$	4,700		$	4,200

If recognized, $1.9 million of the unrecognized tax position at December 31, 2019, would reduce the effective tax rate. The Company recognized an income tax benefit for the decrease in unrecognized tax positions of $0.3 million for the year ended December 31, 2019.

The Company recognizes in tax expense interest and penalties related to tax benefits that have not been recognized. For the years ended December 31, 2019 and 2018, the Company recognized tax expense interest of $0.2 million and $0.6 million, respectively. For the year ended December 31, 2017 the Company recognized a tax benefit of $0.2 million. The Company had approximately $1.4 million and $1.2 million accrued for the payment of interest and penalties at December 31, 2019 and 2018, respectively.