12 · Income taxes

The components of income taxes attributable to net income for common stock were as follows:



	HEI consolidated									Hawaiian Electric consolidated
Years ended December 31	2014			2013			2012			2014			2013			2012
(in thousands)
Federal
Current, as revised (1)	$	(10,970	)	$	(1,520	)	$	(15,411	)	$	1,108		$	1,313		$	(26,965	)
Deferred, as revised (1)	91,159			73,680			82,138			68,775			58,024			79,437
Deferred tax credits, net	—			224			187			—			224			186
	80,189			72,384			66,914			69,883			59,561			52,658
State
Current	(7,339		)	(1,555		)	(4,654		)	(9,436		)	(3,720		)	(4,940		)
Deferred	12,756			6,719			8,710			14,172			6,483			7,441
Deferred tax credits, net	6,106			6,793			5,889			6,106			6,793			5,889
	11,523			11,957			9,945			10,842			9,556			8,390
Total	$	91,712		$	84,341		$	76,859		$	80,725		$	69,117		$	61,048

(1) As revised for HEI consolidated by $(44,732) for "Current" and $44,732 for "Deferred" for the year ended December 31, 2014 - See Note 1, “Summary of significant accounting policies - Revision and restatements of previously issued financial statements.”

A reconciliation of the amount of income taxes computed at the federal statutory rate of 35% to the amount provided in the consolidated statements of income was as follows:



	HEI consolidated									Hawaiian Electric consolidated
Years ended December 31	2014			2013			2012			2014			2013			2012
(in thousands)
Amount at the federal statutory income tax rate	$	91,672		$	86,711		$	76,092		$	77,126		$	67,914		$	56,812
Increase (decrease) resulting from:
State income taxes, net of federal income tax benefit	7,490			7,772			6,464			7,047			6,211			5,453
Other, net	(7,450		)	(10,142		)	(5,697		)	(3,448		)	(5,008		)	(1,217		)
Total	$	91,712		$	84,341		$	76,859		$	80,725		$	69,117		$	61,048
Effective income tax rate	35.0		%	34.0		%	35.4		%	36.6		%	35.6		%	37.6		%

The Company's effective tax rate increased in 2014 compared to 2013 primarily due to the nondeductibility of merger costs, partly offset by increased tax credits in 2014 and the $2.7 million out-of-period income tax benefits in 2013 (see “Out-of-period income tax benefit”). The Utilities' effective tax rate increased in 2014 compared to 2013 primarily due to the out-of-period income tax benefits.

The Company’s and the Utilities' effective tax rate decreased in 2013 compared to 2012 primarily due to $3.5 million lower deferred taxes related to the tax gross-up of AFUDC-equity and a $3.1 million (including $2.7 million related to the Utilities) out-of-period income tax benefit (see “Out-of-period income tax benefit”).

The tax effects of book and tax basis differences that give rise to deferred tax assets and liabilities were as follows:



	HEI consolidated				Hawaiian Electric consolidated
December 31	2014		2013		2014		2013
(in thousands)
Deferred tax assets
Net operating loss	$	—	$	—	51,936		19,848
Other	58,352		57,239		17,663		17,295
Total deferred tax assets	58,352		57,239		69,599		37,143
Deferred tax liabilities
Property, plant and equipment related	448,723		378,280		446,259		375,771
Repairs deduction	86,408		75,127		86,408		75,127
Regulatory assets, excluding amounts attributable to property, plant and equipment	33,795		33,251		33,795		33,251
Deferred RAM and RBA revenues	32,889		—		32,889		—
Retirement benefits	25,336		29,280		28,758		23,851
Other	62,935		70,561		14,929		15,602
Total deferred tax liabilities	690,086		586,499		643,038		523,602
Net deferred income tax liability	$	631,734	$	529,260	$	573,439	$	486,459
Prepayments and other (Current assets-debit)	$	—	$	—	$	32,915	$	20,702
Other (Current liabilities-credit)	—		—		3,482		—
Deferred income taxes (credit)	631,734		529,260		602,872		507,161
Net deferred income tax liability	$	631,734	$	529,260	$	573,439	$	486,459

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. Based upon historical taxable income and projections for future taxable income, management believes it is more likely than not the Company and the Utilities will realize substantially all of the benefits of the deferred tax assets. As of December 31, 2014, the valuation allowance for deferred tax benefits is not significant. In 2014, the net deferred income tax liability continued to increase primarily as a result of accelerated tax deductions taken for bonus depreciation resulting from the Tax Increase Prevention Act of 2014 and the IRS approval of an accounting method that defers the recognition of Revenue Balance Account income. The Utilities are included in the consolidated federal and Hawaii income tax returns of HEI and are subject to the provisions of HEI’s tax sharing agreement, which determines each subsidiary’s (or subgroup's) income tax return liabilities and refunds on a standalone basis as if it filed a separate return (or subgroup consolidated return). Consequently, although HEI consolidated does not expect any unutilized net operating loss (NOL) as of December 31, 2014, standalone Hawaiian Electric consolidated expects an unutilized NOL for federal tax purposes in accordance with the HEI tax sharing agreement. The deferred tax asset associated with this NOL is $52 million and is included in “Prepayments and other.”

HEI consolidated. In 2014, 2013 and 2012, credit adjustments to interest expense on income taxes was reflected in “Interest expense – other than on deposit liabilities and other bank borrowings” in the amount of $1.7 million, $0.3 million and $1.4 million, respectively. The credit adjustments to interest expense were primarily due to the resolution of tax issues with the Internal Revenue Service (IRS). As of December 31, 2014 and 2013, the total amount of accrued interest related to uncertain tax positions and recognized on the balance sheet in “Interest and dividends payable” was nil and $0.4 million, respectively.

As of December 31, 2014, the total amount of liability for uncertain tax positions was nil.

Hawaiian Electric consolidated. In 2014, 2013 and 2012, credit adjustments to interest expense on income taxes was reflected in “Interest and other charges” in the amount of $0.7 million, $0.3 million and $0.5 million, respectively. The credit adjustments to interest expense were primarily due to the resolution of tax issues with the IRS. As of December 31, 2014 and 2013, the total amount of accrued interest related to uncertain tax positions was nil.

As of December 31, 2014, the total amount of liability for uncertain tax positions was nil.

The changes in total unrecognized tax benefits were as follows:



	HEI consolidated									Hawaiian Electric consolidated
(in millions)	2014			2013			2012			2014			2013			2012
Unrecognized tax benefits, January 1	$	0.9		$	0.8		$	5.7		$	0.5		$	0.4		3.7
Additions based on tax positions taken during the year	—			—			0.3			—			—			0.3
Reductions based on tax positions taken during the year	—			—			—			—			—			—
Additions for tax positions of prior years	0.1			0.5			—			0.1			0.5			—
Reductions for tax positions of prior years	—			(0.4		)	(4.1		)	—			(0.4		)	(3.6		)
Settlements	(1.0		)	—			—			(0.6		)	—			—
Lapses of statute of limitations	—			—			(1.1		)	—			—			—
Unrecognized tax benefits, December 31	$	—		$	0.9		$	0.8		$	—		$	0.5		$	0.4

The 2012 reduction in unrecognized tax benefits was primarily due to the IRS’s acceptance of the deductibility of costs of repairs to utility generation property for tax years 2007-2009.

In 2014, the IRS completed its examination of the Company’s federal income tax returns for tax years 2010 and 2011. The Company and the IRS reached an agreement on all adjustments, primarily related to depreciation, and the Congressional Joint Committee on Taxation approved the resulting tax adjustments in October 2014. The income statement impact of the agreement was not material. Tax years 2007, 2009, and 2010 to 2013 remain subject to examination by the Department of Taxation of the State of Hawaii.

As of December 31, 2014, the disclosures above present the Company’s and the Utilities' accruals for potential tax liabilities and related interest. Based on information currently available, the Company and the Utilities believe these accruals have adequately provided for potential income tax issues with federal and state tax authorities and related interest, and that the ultimate resolution of tax issues for all open tax periods will not have a material adverse effect on its results of operations, financial condition or liquidity.

Out-of-period income tax benefit. During 2013, the Company recorded a $3.1 million (including $2.7 million related to the Utilities) out-of-period income tax benefit, resulting primarily from the reversal of deferred tax liabilities due to errors in the amount of book over tax basis differences in plant and equipment. Management concluded that this out-of-period adjustment was not material to either the current or any prior period financial statements.

Recent tax developments. In September 2013, the IRS issued final regulations addressing the acquisition, production and improvement of tangible property, which are effective January 1, 2014. Management evaluated the impact of these new regulations, and does not expect a material impact on the Utilities since specific guidance on network (i.e., transmission and distribution) assets and generation property has already been received and accounted for in its tax computations. The IRS also proposed regulations addressing the disposition of property.

The Utilities adopted the safe harbor guidelines with respect to network assets in 2011 and in June 2013, the IRS released a revenue procedure relating to deductions for repairs of generation property, which provides some guidance (that is elective) for taxpayers that own steam or electric generation property. This guidance defines the relevant components of generation property to be used in determining whether such component expenditures should be deducted as repairs or capitalized and depreciated by taxpayers. The revenue procedure also provides an extrapolation methodology that could be used by taxpayers in determining deductions for prior years’ repairs without going back to the specific documentation of those years. The guidance does not provide specific methods for determining the repairs amount. Management intends to adopt a method consistent with this guidance in its 2014 tax return.