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Income Taxes

12 Months Ended

Dec. 31, 2017

Income Tax Disclosure [Abstract]

Note 3 – Income Taxes

Income tax expense differs from the amount computed by applying the statutory rate on book income subject to tax for the following reasons:

		(Thousands of Dollars)
		Years Ended December 31,
		2017				2016				2015
Income Tax at Statutory Rate		$	11,868			$	12,007			$	10,703
Tax Effect of:
Utility Plant Related			(1,016	)			(1,059	)			(920	)
State Income Taxes – Net			895				770				745
Tax Act			(610	)			—				—
Employee Benefits			(43	)			(5	)			7
Other			6				22				16
Total Income Tax Expense		$	11,100			$	11,735			$	10,551

Income tax expense is comprised of the following:

		(Thousands of Dollars)
		Years Ended December 31,
		2017				2016				2015
Current:
Federal		$	2,090			$	7,305			$	(15,203	)
State			1,066				877				1,153
Deferred:
Federal			7,713				3,325				24,686
State			310				307				(6	)
Investment Tax Credits			(79	)			(79	)			(79	)
Total Income Tax Expense		$	11,100			$	11,735			$	10,551

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial purposes and the amounts used for income tax purposes. The components of the net deferred tax liability are as follows:

		(Thousands of Dollars)
		December 31,
		2017				2016
Utility Plant Related		$	41,259			$	69,019
Customer Advances			(3,749	)			(3,430	)
Employee Benefits			4,903				6,904
Investment Tax Credits (ITC)			675				753
Other			72				(421	)
Total Deferred Tax Liability and ITC		$	43,160			$	72,825

The staff of the United States Securities and Exchange Commission (SEC) has recognized the complexity of reflecting the impacts of the Tax Act, and on December 22, 2017 issued guidance in Staff Accounting Bulletin 118 (SAB 118) which clarifies accounting for income taxes if information is not yet available or complete and provides for up to a one year period in which to complete the required analyses and accounting. SAB 118 describes three scenarios or buckets associated with a company’s status of accounting for income tax reform: (1) a company is complete with its accounting for certain effects of tax reform, (2) a company is able to determine a reasonable estimate for certain effects of tax reform and records that estimate as a provisional amount, or (3) a company is not able to determine a reasonable estimate and therefore continues to account for income taxes based on the provisions of the tax laws that were in effect immediately prior to the Tax Act being enacted. The Company has made a reasonable estimate for the measurement and accounting of the effects of the Tax Act which have been reflected in the December 31, 2017 financial statements. However, the final impact of the Tax Act may differ from these estimates due to, among other things, changes in the Company’s interpretations and assumptions and additional guidance that may be issued by the IRS, the Company’s rate regulators or the FASB. The re-measurement of deferred income taxes at the new federal tax rate decreased deferred income tax expense by $0.6 million for the year ending December 31, 2017. Additionally, the re-measurement of deferred income taxes decreased accumulated deferred income taxes by $24.2 million as of December 31, 2017.

As part of its 2014 Federal income tax return, the Company adopted the final IRS regulations pertaining to the tax deductibility of costs that qualify as repairs on tangible property. The adoption resulted in a net reduction of $17.6 million in taxes previously remitted to the IRS, for which the Company has already sought and received refunds pertaining to tax years 2012 through 2014 in accordance with IRS regulations. Subsequently, the Company’s 2014 federal income tax return was selected for examination by the IRS. Concurrently with the IRS examination, the Company agreed to extend the statutory review period for its 2012 thru 2014 tax years. It is unknown at this time whether the results of this examination will result in any changes to the filed 2014 tax return. While the Company believes that its treatment of qualifying tangible property repair costs is proper, its deductibility could be challenged as part of the current examination by the IRS. Therefore, the Company has recorded a provision against refundable taxes of $2.3 million.

It is probable that any net tax benefits that resulted from adopting the regulations will be considered in determining the revenue requirement in the Company’s current rate increase petition (see Note 2 - Rate and Regulatory Matters).

The statutory review periods for income tax returns for the years prior to 2012 have been closed. In the event that there are interest and penalties associated with income tax adjustments in the current examination and future examinations, these amounts will be reported under interest expense and other expense, respectively. Other than the effects of the provision against refundable taxes discussed above, there are no unrecognized tax benefits resulting from prior period tax positions.