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Income Taxes

12 Months Ended

Dec. 31, 2019

deral Tax Reform — In 2017, the TCJA was signed into law. The key provisions impacting Xcel Energy (which includes NSP-Wisconsin) generally beginning in 2018, included:


•	Corporate federal tax rate reduction from 35% to 21%;


•	Normalization of resulting plant-related excess deferred taxes;


•	Elimination of the corporate alternative minimum tax;


•	Continued interest expense deductibility and discontinued bonus depreciation for regulated public utilities;


•	Limitations on certain executive compensation deductions;


•	Limitations on certain deductions for NOLs arising after Dec. 31, 2017 (limited to 80% of taxable income);


•	Repeal of the section 199 manufacturing deduction; and


•	Reduced deductions for meals and entertainment as well as state and local lobbying.

Reductions in deferred tax assets and liabilities due to a decrease in corporate federal tax rates typically result in a net tax benefit. However, the impacts are primarily recognized as regulatory liabilities refundable to utility customers as a result of IRS requirements and past regulatory treatment.

Estimated impacts of the new tax law for NSP-Wisconsin in December 2017 included:


•	$149 million ($210 million grossed-up for tax) of reclassifications of plant-related excess deferred taxes to regulatory liabilities upon valuation at the new 21% federal rate. The regulatory liabilities will be amortized consistent with IRS normalization requirements, resulting in customer refunds over the average remaining life of the related property;


•	$23 million and $41 million of reclassifications (grossed-up for tax) of excess deferred taxes for non-plant related deferred tax assets and liabilities, respectively, to regulatory assets and liabilities; and


•	An immaterial income tax benefit related to the federal tax reform implementation, and a $1 million reduction to net income related to the allocation of Xcel Energy Services Inc.’s tax rate change on its deferred taxes.

Xcel Energy accounted for the state tax impacts of federal tax reform based on enacted state tax laws. Any future state tax law changes related to the TCJA will be accounted for in the periods state laws are enacted.

Federal Audit — NSP-Wisconsin is a member of the Xcel Energy affiliated group that files a consolidated federal income tax return. Statute of limitations applicable to Xcel Energy’s consolidated federal income tax returns expire as follows:



Tax Year(s)		Expiration
2009 - 2013		June 2020
2014 - 2016		September 2020

In 2015, the IRS commenced an examination of tax years 2012 and 2013. In 2017, the IRS concluded the audit of tax years 2012 and 2013 and proposed an adjustment that would impact Xcel Energy’s NOL and ETR. Xcel Energy filed a protest with the IRS. As of Dec. 31, 2019, the case has been forwarded to the Office of Appeals and Xcel Energy has recognized its best estimate of income tax expense that will result from a final resolution of this issue; however, the outcome and timing of a resolution is unknown.

In 2018, the IRS began an audit of tax years 2014 - 2016. As of Dec. 31, 2019 no adjustments have been proposed.

State Audits — NSP-Wisconsin is a member of the Xcel Energy affiliated group that files consolidated state income tax returns. As of Dec. 31, 2019, NSP-Wisconsin’s earliest open tax year that is subject to examination by state taxing authorities under applicable statutes of limitations is 2014. In 2018, Wisconsin began an audit of tax years 2014 - 2016. As of Dec. 31, 2019 no material adjustments have been proposed.

Unrecognized Tax Benefits — Unrecognized tax benefit balance includes permanent tax positions, which if recognized would affect the annual ETR. 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 ETR, but would accelerate the payment to the taxing authority to an earlier period.

Unrecognized tax benefits — permanent vs. temporary:



(Millions of Dollars)	Dec. 31, 2019		Dec. 31, 2018
Unrecognized tax benefit — Permanent tax positions	$	2.6	$	2.0
Unrecognized tax benefit — Temporary tax positions	0.8		0.8
Total unrecognized tax benefit	$	3.4	$	2.8

Changes in unrecognized tax benefits:



(Millions of Dollars)	2019		2018			2017
Balance at Jan. 1	$	2.8	$	2.4		$	5.3
Additions based on tax positions related to the current year	0.4		0.2			0.4
Reductions based on tax positions related to the current year	—		(0.1		)	(0.3		)
Additions for tax positions of prior years	0.2		0.7			1.3
Reductions for tax positions of prior years	—		(0.3		)	(4.3		)
Settlements with taxing authorities	—		(0.1		)	—
Balance at Dec. 31	$	3.4	$	2.8		$	2.4

Unrecognized tax benefits were reduced by tax benefits associated with NOL and tax credit carryforwards:



(Millions of Dollars)	Dec. 31, 2019			Dec. 31, 2018
NOL and tax credit carryforwards	$	(2.2	)	$	(2.1	)

Net deferred tax liability associated with the unrecognized tax benefit amounts and related NOLs and tax credits carryforwards were $1.2 million and $1.1 million for Dec. 31, 2019 and Dec. 31, 2018, respectively.

As the IRS Appeals and federal and Wisconsin audits progress, it is reasonably possible that the amount of unrecognized tax benefit could decrease up to approximately $2.2 million in the next 12 months.

Payable for interest related to unrecognized tax benefits is partially offset by the interest benefit associated with NOL and tax credit carryforwards. Payables for interest related to unrecognized tax benefits at Dec. 31, 2019, 2018 and 2017 were not material. No amounts were accrued for penalties related to unrecognized tax benefits as of Dec. 31, 2019, 2018 or 2017.

Other Income Tax Matters — NOL amounts represent the tax loss that is carried forward and tax credits represent the deferred tax asset. NOL and tax credit carryforwards as of Dec. 31 were as follows:



(Millions of Dollars)	2019		2018
Federal tax credit carryforwards	$	4.9	$	4.7
State NOL carryforward	2.4		2.5
State tax credit carryforwards, net of federal detriment	0.2		—

Federal carryforward periods expire between 2023 and 2039 and state carryforward periods expire between 2031 and 2034.

Total income tax expense from operations differs from the amount computed by applying the statutory federal income tax rate to income before income tax expense.

Effective income tax rate for years ended Dec. 31:



	2019		2018 ^(a)		2017 ^(a)
Federal statutory rate	21.0	%	21.0	%	35.0	%
State income tax on pretax income, net of federal tax effect	6.2	%	6.2	%	5.1	%
Increases (decreases) in tax from:
Plant regulatory differences ^(b)	(5.2	)	(1.5	)	(1.8	)
Reversal of prior regulatory differences	(3.6	)	—		—
Other tax credits, net of NOL & tax credit allowances	(1.8	)	(0.8	)	(1.0	)
Adjustments attributable to tax returns	(0.7	)	(0.6	)	(2.3	)
Change in unrecognized tax benefits	0.7		0.4		0.8
Tax reform	—		—		—
Other, net	—		0.1		—
Effective income tax rate	16.6	%	24.8	%	35.8	%


^(a)	Prior periods have been reclassified to conform to current year presentation.


^(b)	Regulatory differences for income tax primarily relate to the credit of excess deferred taxes to customers through the average rate assumption method. Income tax benefits associated with the credit of excess deferred credits are offset by corresponding revenue reductions.

Components of income tax expense for years ended Dec. 31:



(Millions of Dollars)	2019			2018			2017
Current federal tax expense	$	5.6		$	7.6		$	2.8
Current state tax expense	4.7			1.7			—
Current change in unrecognized tax expense (benefit)	0.5			0.2			(3.7		)
Deferred federal tax expense	3.0			15.6			32.9
Deferred state tax expense	2.3			7.4			8.0
Deferred change in unrecognized tax expense	0.1			0.3			4.7
Deferred ITCs	(0.5		)	(0.5		)	(0.5		)
Total income tax expense	$	15.7		$	32.3		$	44.2

Components of deferred income tax expense as of Dec. 31:



(Millions of Dollars)	2019			2018			2017
Deferred tax expense (benefit) excluding items below	$	17.4		$	24.0		$	(173.9	)
Amortization and adjustments to deferred income taxes on income tax regulatory assets and liabilities	(11.9		)	(0.7		)	219.5
Other	(0.1		)	—			—
Deferred tax expense	$	5.4		$	23.3		$	45.6

Components of net deferred tax liability as of Dec. 31:



(Millions of Dollars)	2019		2018 ^(a)
Deferred tax liabilities:
Difference between book and tax bases of property	$	304.1	$	281.1
Regulatory assets	54.9		55.4
Pension expense	14.2		13.9
Other	6.6		6.9
Total deferred tax liabilities	$	379.8	$	357.3

Deferred tax assets:
Regulatory liabilities	$	51.4	$	53.4
Rate refund	8.8		1.3
Environmental remediation	6.4		7.8
Tax credit carryforward	5.0		4.7
Other employee benefits	3.9		4.1
Deferred ITCs	2.7		3.0
NOL carryforward	0.2		0.4
Other	3.3		1.9
Total deferred tax assets	$	81.7	$	76.6
Net deferred tax liability	$	298.1	$	280.7

^(a)Prior periods have been reclassified to conform to current year presentation.