4. Income Taxes

Income Tax Expense

Effective July 1, 2016 and due to the Merger with Emera, TEC is included in a consolidated U.S. federal income tax return with EUSHI and its subsidiaries. Prior to the Merger, TEC was included in the filing of a consolidated federal income tax return with TECO Energy and its subsidiaries. TEC’s income tax expense is based upon a separate return method, modified for the benefits-for-loss allocation in accordance with respective tax sharing agreements of TECO Energy and EUSHI. To the extent that TEC’s cash tax positions are settled differently than the amount reported as realized under the tax sharing agreement, the difference is accounted for as either a capital contribution or a distribution.

In 2016, 2015 and 2014, TEC recorded net tax provisions of $152.2 million, $165.5 million and $155.9 million, respectively.

Income tax expense consists of the following components:

Income Tax Expense (Benefit)

(millions)
For the year ended December 31,	2016		2015		2014
Current income taxes
Federal	$	52.7	$	38.2	$	54.8
State		11.8		8.4		8.9
Deferred income taxes
Federal		75.7		102.9		79.0
State		11.0		14.5		13.5
Investment tax credits, net of amortization		1.0		1.5		(0.3	)
Total income tax expense	$	152.2	$	165.5	$	155.9

For the three years presented, the overall effective tax rate differs from the 35% U.S. federal statutory rate as presented below:

Effective Income Tax Rate

(millions)
For the year ended December 31,	2016			2015			2014
Income before provision for income taxes	$	437.9		$	441.8		$	416.2
Federal statutory income tax rates		35	%		35	%		35	%
Income taxes, at statutory income tax rate		153.3			154.6			145.7
Increase (decrease) due to
State income tax, net of federal income tax		14.8			14.8			14.5
AFUDC-equity		(8.4	)		(6.0	)		(3.7	)
Tax credits		(6.8	)		0.0			0.0
Other		(0.7	)		2.1			(0.6	)
Total income tax expense on consolidated statements of income	$	152.2		$	165.5		$	155.9
Income tax expense as a percent of income from continuing operations, before income taxes		34.8	%		37.5	%		37.5	%

Deferred Income Taxes

Deferred taxes result from temporary differences in the recognition of certain liabilities or assets for tax and financial reporting purposes. The principal components of TEC’s deferred tax assets and liabilities recognized in the balance sheet are as follows:

(millions)
As of December 31,	2016		2015
Deferred tax liabilities ⁽¹⁾
Property related	$	1,549.1	$	1,431.9
Pension and postretirement benefits		105.0		92.0
Pension		69.2		71.1
Total deferred tax liabilities		1,723.3		1,595.0
Deferred tax assets ⁽¹⁾
Loss and credit carryforwards ⁽²⁾		91.3		80.0
Medical benefits		46.9		47.7
Insurance reserves		27.3		27.6
Pension and postretirement benefits		105.0		92.0
Capitalized energy conservation assistance costs		22.9		21.4
Other		23.3		17.5
Total deferred tax assets		316.7		286.2
Total deferred tax liability, net	$	1,406.6	$	1,308.8

(1)

Certain property related assets and liabilities have been netted.

(2)

Deferred tax assets for net operating loss and tax credit carryforwards have been reduced by unrecognized tax benefits of $6.8 million.

At December 31, 2016, TEC had cumulative unused federal and Florida NOLs for income tax purposes of $202.8 million and $272.6 million, respectively, expiring between 2033 and 2036. TEC has unused general business credits of $10.0 million, expiring between 2028 and 2036. As a result of the Merger with Emera, TECO Energy’s NOLs and credits will be utilized by EUSHI, in accordance with the benefits-for-loss allocation which provide that tax attributes are utilized by the consolidated tax return group of EUSHI.

Unrecognized Tax Benefits

TEC accounts for uncertain tax positions as required by U.S. GAAP. This guidance addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Authoritative guidance related to accounting for uncertainty in income taxes requires an enterprise to recognize in its financial statements the best estimate of the impact of a tax position by determining if the weight of the available evidence indicates that it is more likely than not, based solely on the technical merits, that the position will be sustained upon examination, including resolution of any related appeals and litigation processes.

The following table provides details of the change in unrecognized tax benefits as follows:

(millions)	2016		2015		2014
Balance at January 1,	$	0.0	$	0.0	$	0.0
Increases due to tax positions related to current year		6.8		0.0		0.0
Balance at December 31	$	6.8	$	0.0	$	0.0

As of December 31, 2016 and 2015, TEC’s uncertain tax positions were $6.8 million and zero, respectively, all of which was recorded as a reduction of deferred income tax assets for tax credit carryforwards. The increase was due to an uncertain tax position related to federal R&D tax credits. TEC believes that the total unrecognized tax benefits will decrease within the next twelve months due to the expected audit examination of TECO Energy’s consolidated federal income tax return for the short tax year ending June 30, 2016. As of December 31, 2016, if recognized, $6.8 million of the unrecognized tax benefits would reduce TEC’s effective tax rate.

TEC recognizes interest accruals related to uncertain tax positions in “Other income” or “Interest expense”, as applicable, and penalties in “Operation and maintenance other expense” in the Consolidated Statements of Income. In 2016, 2015 and 2014, TEC did not recognize any pretax charges (benefits) for interest. Additionally, TEC did not have any accrued interest at December 31, 2016, 2015 and 2014. No amounts have been recorded for penalties.

Years 2015 and the short tax year ending June 30, 2016 are currently under examination by the IRS under its Compliance Assurance Program (CAP). Prior to July 1, 2016, TEC was included in a consolidated U.S. federal income tax return with TECO Energy and subsidiaries. Due to the Merger with Emera, TECO Energy is only able to participate in the CAP through its short tax year ending June 30, 2016. The U.S. federal statute of limitations remains open for the year 2013 and onward. Florida’s statute of limitations is three years from the filing of an income tax return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. Years still open to examination by Florida’s tax authorities include 2005 and forward as a result of TECO Energy’s consolidated Florida net operating loss still being utilized.