Income Tax Expense

3 Months Ended

Mar. 31, 2020

INCOME TAX EXPENSE



	Three Months Ended
	March 31,
	2020		2019
Millions
Current Income Tax Expense (a)
Federal	—		—
State	—			$0.3
Total Current Income Tax Expense	—			$0.3
Deferred Income Tax Expense (Benefit)
Federal (b)	$(17.6)		$(9.7)
State (c)	4.0		12.5
Investment Tax Credit Amortization	(0.2	)	(0.2		)
Total Deferred Income Tax Expense (Benefit)	$(13.8)			$2.6
Total Income Tax Expense (Benefit)	$(13.8)			$2.9

(a)

For each of the three months ended March 31, 2020, and 2019, the federal and state current tax expense was minimal due to NOLs which resulted from the bonus depreciation provisions of the Protecting Americans from Tax Hikes Act of 2015, the Tax Increase Prevention Act of 2014 and the American Taxpayer Relief Act of 2012. Federal and state NOLs are being carried forward to offset current and future taxable income.


(b)	For each of the three months ended March 31, 2020, and 2019, the federal income tax benefit is primarily due to production tax credits.


(c)	For the three months ended March 31, 2019, the state income tax expense is primarily related to the sale of U.S. Water Services.

The Company's tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter, the Company updates its estimate of the annual effective tax rate and if the estimated annual effective tax rate changes, the Company would make a cumulative adjustment in that quarter.



	Three Months Ended
Reconciliation of Taxes from Federal Statutory	March 31,
Rate to Total Income Tax Expense	2020			2019
Millions
Income Before Income Taxes		$50.7			$73.4
Statutory Federal Income Tax Rate	21		%	21		%
Income Taxes Computed at Statutory Federal Rate		$10.6			$15.4
Increase (Decrease) in Income Tax Due to:
State Income Taxes – Net of Federal Income Tax Benefit	3.2			10.1
Production Tax Credits	(23.8		)	(16.3		)
Regulatory Differences – Excess Deferred Tax	(4.4		)	(3.2		)
U.S. Water Services Sale of Stock Basis Difference	—			2.4
Share-Based Compensation	(0.1		)	(0.9		)
Other	0.7			(4.6		)
Total Income Tax Expense (Benefit)	$(13.8)			$2.9

For the three months ended March 31, 2020, the effective tax rate was a benefit of 27.2 percent (expense of 4.0 percent for the three months ended March 31, 2019). The effective tax rate for 2020 was primarily impacted by production tax credits. The effective tax rate for 2019 was primarily impacted by production tax credits and the gain on sale of U.S. Water Services.

Uncertain Tax Positions. As of March 31, 2020, we had gross unrecognized tax benefits of $1.4 million ($1.4 million as of December 31, 2019). Of the total gross unrecognized tax benefits, $0.6 million represents the amount of unrecognized tax benefits included on the Consolidated Balance Sheet that, if recognized, would favorably impact the effective income tax rate. The unrecognized tax benefit amounts have been presented as reductions to the tax benefits associated with NOL and tax credit carryforwards on the Consolidated Balance Sheet.

NOTE 8. INCOME TAX EXPENSE (Continued)

ALLETE and its subsidiaries file a consolidated federal income tax return as well as combined and separate state income tax returns in various jurisdictions. ALLETE has no open federal or state audits, and is no longer subject to federal examination for years before 2016, or state examination for years before 2015.