ACCOUNTING FOR INCOME TAXES

Federal Income Tax Law Changes

On December 22, 2017, the TCJA was signed into law. The legislation includes substantial changes to the taxation of individuals as well as U.S. businesses, multi-national enterprises, and other types of taxpayers. Highlights of provisions most relevant to Avista Corp. include:


•	A permanent reduction in the statutory corporate tax rate from 35 percent to 21 percent, beginning with tax years after 2017;

•

Statutory provisions requiring that excess deferred taxes associated with public utility property be normalized using the ARAM for determining the timing of the return of excess deferred taxes to customers. Excess deferred taxes result from revaluing deferred tax assets and liabilities based on the newly enacted tax rate instead of the previous tax rate, which, for most rate-regulated utilities like Avista Utilities and AEL&P, results in a net benefit to customers that will be deferred as a regulatory liability and passed through to customers over future periods;


•	Repeal of the corporate AMT;


•	Bonus depreciation (expensing of capital investment on an accelerated basis) was removed as a deduction for property predominantly used in certain rate-regulated businesses (like Avista Utilities and AEL&P), but is still allowed for the Company's non-regulated businesses;


•	The deduction for interest expense that is properly allocable to certain rate-regulated trade or businesses is still allowed under the new law, but the deduction is now limited for the Company's non-regulated businesses; and


•	NOL carryback deductions were eliminated, but carryforward deductions are allowed indefinitely with some annual limitations versus the previous 20-year limitation.

The Company's analysis and interpretation of this legislation is complete as it relates to amounts recorded as of December 31, 2017 and based on its evaluation, the reduction of the U.S. corporate income tax rate required a revaluation of the Company's deferred income tax assets and liabilities (including the value of our net operating loss carryforwards) during the fourth quarter of 2017, the period in which the tax legislation was enacted. Because Avista Corp. is predominantly a rate-regulated entity, a large portion of the net effect of the legislation was recorded as a regulatory liability on the Consolidated Balance Sheets and it will be returned to customers through the ratemaking process in future periods. The total net amount of the regulatory liability associated with the TCJA was $442.3 million as of December 31, 2017, which is made up of $339.9 million in excess deferred taxes and $102.4 million for the income tax gross-up of those excess deferred taxes (which, together with the excess deferred tax amount, reflects the revenue amounts to be refunded to customers through the regulatory process). The Company expects the Avista Utilities plant related amounts will be returned to customers over a period of approximately 36 years using the ARAM. The Company expects the AEL&P plant related amounts to be returned to customers over a period of approximately 40 years. The Company does not currently have an estimate for the amortization period for the regulatory liability attributable to non-plant excess deferred taxes items as the Company is waiting for additional implementation guidance from various regulatory agencies.

Because the Company has deferred income tax assets and liabilities related to its unregulated subsidiaries and certain utility expenses which are not being passed through to customers, the impact of the revaluation of the Company's deferred income tax assets and liabilities was recorded as a $10.2 million (net) discrete adjustment to income tax expense in the fourth quarter of 2017. Of this income tax expense amount, $7.5 million related to Avista Utilities and $2.7 million related to the other businesses.

Because most of the provisions of the TCJA are effective as of January 1, 2018 (including a reduction of the income tax rate to 21 percent), but the Company's customers' rates continue to have the 35 percent corporate tax rate built in from prior general rate cases, the Company filed Petitions in January 2018 with the WUTC and OPUC requesting orders authorizing the deferral of the accounting impact of the change in federal income tax expense caused by the enactment of the TCJA (the IPUC on its own ordered deferred accounting for all jurisdictional utilities in January 2018). The Company is requesting to defer the impact of the change in federal income tax expense beginning in January 2018 forward until all benefits are properly captured through the deferral and refunded to customers through tariffs to be reviewed and implemented in future rate proceedings. The IPUC has requested a report on the estimated overall benefit to customers related to the impacts of the TCJA by March 30, 2018. The WUTC has issued a bench request in the Company's 2017 electric and natural gas general rate cases requesting such information by February 28, 2018.

Income Tax Expense

Income tax expense consisted of the following for the years ended December 31 (dollars in thousands):



	2017		2016			2015
Current income tax expense (benefit)	$	13,101	$	(46,457	)	$	12,212
Deferred income tax expense	69,657		124,543			55,237
Total income tax expense	$	82,758	$	78,086		$	67,449

State income taxes do not represent a significant portion of total income tax expense on the Consolidated Statements of Income for any periods presented.

A reconciliation of federal income taxes derived from statutory federal tax rates (35 percent in 2017, 2016 and 2015) applied to income before income taxes as set forth in the accompanying Consolidated Statements of Income is as follows for the years ended December 31 (dollars in thousands):



	2017					2016					2015
Federal income taxes at statutory rates	$	69,542		35.0	%	$	75,391		35.0	%	$	64,967		35.0	%
Increase (decrease) in tax resulting from:
Tax effect of regulatory treatment of utility plant differences	3,482			1.7		3,297			1.5		4,358			2.3
State income tax expense	1,110			0.6		1,316			0.6		1,012			0.5
Settlement of prior year tax returns and adjustment of tax reserves	(384		)	(0.2	)	13			—		(992		)	(0.5	)
Manufacturing deduction	(1,119		)	(0.6	)	—			—		(1,198		)	(0.6	)
Settlement of equity awards	(1,439		)	(0.7	)	(1,597		)	(0.7	)	—			—
Acquisition costs	2,491			1.3		—			—		—			—
Federal income tax rate change	10,169			5.1		—			—		—			—
Other	(1,094		)	(0.5	)	(334		)	(0.1	)	(698		)	(0.4	)
Total income tax expense	$	82,758		41.7	%	$	78,086		36.3	%	$	67,449		36.3	%

Deferred Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and tax credit carryforwards. The total net deferred income tax liability consisted of the following as of December 31 (dollars in thousands):



	2017			2016
Deferred income tax assets:
Unfunded benefit obligation	$	41,944		$	80,230
Utility energy commodity and interest rate swap derivatives	23,364			31,872
Regulatory deferred tax credits	6,359			15,192
Tax credits	23,042			27,931
Power and natural gas deferrals	14,379			19,415
Deferred compensation	7,080			11,141
Deferred taxes on regulatory liabilities	105,508			6,604
Other	15,892			22,908
Total gross deferred income tax assets	237,568			215,293
Valuation allowances for deferred tax assets	(10,982		)	(7,946		)
Total deferred income tax assets after valuation allowances	226,586			207,347
Deferred income tax liabilities:
Differences between book and tax basis of utility plant	494,783			812,916
Regulatory asset on utility, property plant and equipment	81,860			37,301
Regulatory asset for pensions and other postretirement benefits	43,914			84,040
Utility energy commodity and interest rate swap derivatives	23,364			31,871
Long-term debt and borrowing costs	19,992			31,955
Settlement with Coeur d’Alene Tribe	6,802			11,711
Other regulatory assets	16,695			30,183
Other	5,806			8,298
Total deferred income tax liabilities	693,216			1,048,275
Net long-term deferred income tax liability	$	466,630		$	840,928

The realization of deferred income tax assets is dependent upon the ability to generate taxable income in future periods. The Company evaluated available evidence supporting the realization of its deferred income tax assets and determined it is more likely than not that deferred income tax assets will be realized.

As of December 31, 2017, the Company had $19.6 million of state tax credit carryforwards. Of the total amount, the Company believes that it is more likely than not that it will only be able to utilize $8.6 million of the state tax credits. As such, the Company has recorded a valuation allowance of $11.0 million against the state tax credit carryforwards and reflected the net amount of $8.6 million as an asset as of December 31, 2017. State tax credits expire from 2019 to 2028. The Company also has approximately $3.5 million of federal tax credit carryforwards and the Company believes that it is more likely than not all the federal credits will be utilized. The federal tax credits expire in 2036.

Status of Internal Revenue Service (IRS) Examinations

The Company and its eligible subsidiaries file consolidated federal income tax returns. The Company also files state income tax returns in certain jurisdictions, including Idaho, Oregon, Montana and Alaska. Subsidiaries are charged or credited with the tax effects of their operations on a stand-alone basis. The IRS has completed its examination of all tax years through 2011 and all issues were resolved related to these years. The statute of limitations for the IRS to review the 2012 and 2013 tax years has expired, and the Company has received a notice of an IRS review in 2018 for tax years 2014 through 2016. The Company believes that any open tax years for federal or state income taxes will not result in adjustments that would be significant to the consolidated financial statements.

Regulatory Assets and Liabilities Associated with Income Taxes

The Company had regulatory assets and liabilities related to the probable recovery/refund of certain deferred income tax assets and liabilities through future customer rates as of December 31 (dollars in thousands):



	2017		2016
Regulatory assets for deferred income taxes	$	90,315	$	109,853
Regulatory liabilities for deferred income taxes	460,542		28,966