Avangrid, Inc.

Note 14. Income Taxes

The Tax Act changes significantly the federal taxation of business entities, including among other things, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017. We have made a reasonable estimate of the effects of the Tax Act and recorded provisional amounts for the income tax effects related to the remeasurement of our deferred tax assets and liabilities and the associated regulatory liabilities established by our regulated utility companies in our consolidated financial statements as of December 31, 2017. As we complete our analysis of the Tax Act, collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, we may make adjustments to the provisional amounts. Those adjustments may materially impact our provision for income taxes in the period in which the adjustments are made.

Current and deferred taxes charged to (benefit) expense for the years ended December 31, 2017, 2016 and 2015 consisted of:

Years Ended December 31,	2017			2016			2015
(Millions)
Current
Federal	$	(20	)	$	(6	)	$	(20	)
State		12			8			(33	)
Current taxes charged to (benefit) expense		(8	)		2			(53	)
Deferred
Federal		(124	)		412			131
State		(73	)		2			(6	)
Deferred taxes charged to (benefit) expense		(197	)		414			125
Production tax credits		(53	)		(38	)		(42	)
Investment tax credits		(1	)		(1	)		(1	)
Total Income Tax (Benefit) Expense	$	(259	)	$	377		$	29

The differences between tax expense per the statements of income and tax expense at the 35% statutory federal tax rate for the years ended December 31, 2017, 2016 and 2015 consisted of:

Years Ended December 31,	2017			2016			2015
(Millions)
Tax expense at federal statutory rate	$	43		$	353		$	106
Depreciation and amortization not normalized		9			61			15
Investment tax credit amortization		(1	)		(1	)		(1	)
Tax return related adjustments		7			(2	)		6
Production tax credits		(53	)		(38	)		(42	)
Tax equity financing arrangements		(10	)		(27	)		(42	)
Federal tax rate impact on held for sale classification		82			—			—
State tax (benefit) expense, net of federal benefit		(40	)		7			(25	)
Tax Act - remeasurement		(328	)		—			—
Non-deductible acquisition costs		—			—			9
Other, net		32			24			3
Total Income Tax (Benefit) Expense	$	(259	)	$	377		$	29

Deferred tax assets and liabilities as of December 31, 2017 and 2016 consisted of:

As of December 31,	2017			2016
(Millions)
Non-current Deferred Income Tax Liabilities (Assets)
Property related	$	3,543		$	5,195
Unfunded future income taxes		75			216
Federal and state tax credits		(574	)		(417	)
Accumulated deferred investment tax credits		14			14
Federal and state NOL’s		(975	)		(1,397	)
Joint ventures/partnerships		302			565
Nontaxable grant revenue		(449	)		(581	)
Pension and other post-retirement benefits		(33	)		52
Tax Act - tax on regulatory remeasurement		(401	)		—
Other		(58	)		(223	)
Non-current Deferred Income Tax Liabilities		1,444			3,424
Add: Valuation allowance		21			31
Total Non-current Deferred Income Tax Liabilities		1,465			3,455
Less amounts classified as regulatory liabilities
Non-current deferred income taxes		13			565
Non-current Deferred Income Tax Liabilities	$	1,452		$	2,890
Deferred tax assets	$	2,490		$	2,617
Deferred tax liabilities		3,955			6,072
Net Accumulated Deferred Income Tax Liabilities	$	1,465		$	3,455

Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that all or a portion of a tax benefit will not be realized. The valuation allowance for deferred tax assets as of December 31, 2017 and 2016 was $21 million and $31 million, respectively. Valuation allowances have been established on various state net operating losses and tax credit carryforwards. The Company has not recorded a valuation allowance on its federal net operating losses or tax credit carryforwards. The $10 million decrease (net of federal benefit) in valuation allowance was primarily driven by a reduction of $15.9 million for Connecticut general business credits resulting from a change in state tax law, an increase of $8.5 million for additional valuation on state net operating losses, a release of $5.3 million in Maine super credits, offset by an increase of $3.0 million resulting from the change in corporate tax rate from 35% to 21%, reducing the federal benefit of state taxes.

The reconciliation of unrecognized income tax benefits for the years ended December 31, 2017, 2016 and 2015 consisted of:

Years ended December 31,	2017			2016			2015
(Millions)
Beginning Balance	$	40		$	36		$	38
Increases for tax positions related to prior years		23			8			1
Decreases for tax positions related to prior years		(16	)		(4	)		—
Reduction for tax position related to settlements with taxing authorities		(2	)		—			(3	)
Ending Balance	$	45		$	40		$	36

Unrecognized income tax benefits represent income tax positions taken on income tax returns but not yet recognized in the consolidated financial statements. The accounting guidance for uncertainty in income taxes provides that the financial effects of a tax position shall initially be recognized when it is more likely than not based on the technical merits the position will be sustained upon examination, assuming the position will be audited and the taxing authority has full knowledge of all relevant information.

Accruals for interest and penalties on tax reserves were $0.4 million, $2 million, and $2 million for the years ended December 31, 2017, 2016 and 2015, respectively. If recognized, $14 million of the total gross unrecognized tax benefits would affect the effective tax rate.

It is estimated that no unrecognized tax benefits are anticipated to result in a net increase or decrease within 12 months of December 31, 2017.

AVANGRID and its subsidiaries, without ARHI, have been audited for the federal tax years 1998 through 2009. The results of these audits, net of reserves already provided, were immaterial. Tax years 2010 and forward are open for potential federal adjustments. All New York state returns, which were filed without ARHI, are closed through 2011 and Maine state returns are closed through 2015.

All federal tax returns filed by ARHI from the periods ended March 31, 2004, to December 31, 2009, are closed for adjustment. Generally, the adjustment period for the individual states we filed in is at least as long as the federal period.

As of December 31, 2017, UIL is subject to audit of its federal tax return for years 2013 and 2014. UIL income tax years 2010 through 2014 are open and subject to Connecticut and Massachusetts audit.

As of December 31, 2017, we had federal tax net operating losses of $3.6 billion, federal renewable energy and investment tax credits, federal R&D tax credits and other federal credits of $404 million, state tax net operating losses of $231 million in several jurisdictions and miscellaneous state tax credits of $37 million available to carry forward and reduce future income tax liabilities. For state purposes, we recognized a valuation allowance of $21 million. The federal net operating losses begin to expire in 2028, while the federal tax credits begin to expire in 2023. The more significant state net operating losses begin to expire in 2021.