ALLETE INC

INCOME TAX EXPENSE



Income Tax Expense
Year Ended December 31	2017			2016			2015
Millions
Current Income Tax Expense (a)
Federal	—			—			—
State	$0.3			$0.4			$0.2
Total Current Income Tax Expense		$0.3			$0.4			$0.2
Deferred Income Tax Expense
Federal		$12.1			$12.0			$19.4
Federal – Remeasurement of Deferred Income Taxes (b)	(13.0		)	—			—
State	15.8			8.1			6.5
Investment Tax Credit Amortization	(0.5		)	(0.7		)	(0.8		)
Total Deferred Income Tax Expense		$14.4			$19.4			$25.1
Total Income Tax Expense		$14.7			$19.8			$25.3


(a)	For the years ended December 31, 2017, 2016 and 2015, 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. The federal and state NOLs will be carried forward to offset future taxable income.


(b)	Deferred income tax benefit from the remeasurement of deferred income tax assets and liabilities resulting from the TCJA. (See Note 1. Operations and Significant Accounting Policies.)



Reconciliation of Taxes from Federal Statutory
Rate to Total Income Tax Expense
Year Ended December 31	2017			2016			2015
Millions
Income Before Non-Controlling Interest and Income Taxes		$186.9			$175.6			$166.8
Statutory Federal Income Tax Rate	35		%	35		%	35		%
Income Taxes Computed at 35 percent Statutory Federal Rate		$65.4			$61.5			$58.4
Increase (Decrease) in Tax Due to:
State Income Taxes – Net of Federal Income Tax Benefit	10.5			5.6			4.4
Regulatory Differences for Utility Plant	—			(0.1		)	(0.6		)
Production Tax Credits	(45.1		)	(41.5		)	(37.0		)
Change in Fair Value of Contingent Consideration	—			(3.8		)	—
Remeasurement of Deferred Income Taxes (a)	(13.0		)	—			—
Other	(3.1		)	(1.9		)	0.1
Total Income Tax Expense		$14.7			$19.8			$25.3


(a)	Deferred income tax benefit from the remeasurement of deferred income tax assets and liabilities resulting from the TCJA. (See Note 1. Operations and Significant Accounting Policies.)

The effective tax rate was 7.9 percent for 2017 (11.3 percent for 2016; 15.2 percent for 2015). The 2017 effective tax rate was primarily impacted by production tax credits and the remeasurement of deferred income tax assets and liabilities resulting from the TCJA. (See Note 1. Operations and Significant Accounting Policies.) The 2016 and 2015 effective rates were primarily impacted by production tax credits.

NOTE 13. INCOME TAX EXPENSE (Continued)



Deferred Income Tax Assets and Liabilities
As of December 31	2017			2016
Millions
Deferred Income Tax Assets
Employee Benefits and Compensation		$65.9			$104.6
Property Related	104.3			110.5
NOL Carryforwards	99.1			185.6
Tax Credit Carryforwards	294.3			227.4
Power Sales Agreements	35.0			59.3
Regulatory Liabilities	117.7			7.3
Other	33.3			46.9
Gross Deferred Income Tax Assets	749.6			741.6
Deferred Income Tax Asset Valuation Allowance	(60.0		)	(43.0		)
Total Deferred Income Tax Assets		$689.6			$698.6
Deferred Income Tax Liabilities
Property Related		$758.3			$1,039.6
Regulatory Asset for Benefit Obligations	61.4			91.9
Unamortized Investment Tax Credits	32.8			33.3
Partnership Basis Differences	34.9			50.9
Regulatory Assets	32.0			25.6
Other	0.7			11.9
Total Deferred Income Tax Liabilities		$920.1			$1,253.2
Net Deferred Income Taxes (a)		$230.5			$554.6


(a)	Recorded as a net long-term Deferred Income Tax liability on the Consolidated Balance Sheet. Additionally, see Note 1. Operations and Significant Accounting Policies – Revision of Prior Balance Sheet.



NOL and Tax Credit Carryforwards
As of December 31	2017	2016
Millions
Federal NOL Carryforwards (a)	$375.2		$485.3
Federal Tax Credit Carryforwards	$209.2	$163.7
State NOL Carryforwards (a)	$289.9	$294.4
State Tax Credit Carryforwards (b)	$25.6	$21.0


(a)	Pre-tax amounts.


(b)	Net of a $59.5 million valuation allowance as of December 31, 2017 ($42.7 million as of December 31, 2016).

The federal NOL and tax credit carryforward periods expire between 2030 and 2037. We expect to fully utilize the federal NOL and federal tax credit carryforwards; therefore, no federal valuation allowance has been recognized as of December 31, 2017. The state NOL and tax credit carryforward periods expire between 2024 and 2045. We have established a valuation allowance against certain state NOL and tax credits that we do not expect to utilize before their expiration. We do not expect a material impact on the Company’s ability to utilize its federal and state NOL and tax credit carryforwards due to the TCJA.

NOTE 13. INCOME TAX EXPENSE (Continued)



Gross Unrecognized Income Tax Benefits	2017			2016			2015
Millions
Balance at January 1		$2.0			$2.4			$2.0
Additions for Tax Positions Related to the Current Year	0.1			0.1			0.5
Additions for Tax Positions Related to Prior Years	0.1			0.2			0.7
Reductions for Tax Positions Related to Prior Years	(0.1		)	(0.3		)	(0.7		)
Lapse of Statute	(0.4		)	(0.4		)	(0.1		)
Balance as of December 31		$1.7			$2.0			$2.4

Unrecognized tax benefits are the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to the “more-likely-than-not” criteria. The unrecognized tax benefit balance includes permanent tax positions which, if recognized would affect the annual effective income tax rate. In addition, the unrecognized tax benefit balance includes temporary tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. A change in the period of deductibility would not affect the effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period. The gross unrecognized tax benefits as of December 31, 2017, included $0.8 million of net unrecognized tax benefits which, if recognized, would affect the annual effective income tax rate.

As of December 31, 2017, we had no accrued interest (none as of December 31, 2016, and 2015) related to unrecognized tax benefits included on the Consolidated Balance Sheet due to our NOL carryforwards. We classify interest related to unrecognized tax benefits as interest expense and tax-related penalties in operating expenses on the Consolidated Statement of Income. Interest expense related to unrecognized tax benefits on the Consolidated Statement of Income was immaterial in 2017 (immaterial in 2016, and in 2015). There were no penalties recognized in 2017, 2016 or 2015. 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.

No material changes to unrecognized tax benefits are expected during the next 12 months.

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 2013 or state examination for years before 2012.