6.	Income Taxes

Medicare Part D — In March 2010, the Patient Protection and Affordable Care Act was signed into law. The law includes provisions to generate tax revenue to help offset the cost of the new legislation. One of these provisions reduces the deductibility of retiree health care costs to the extent of federal subsidies received by plan sponsors that provide retiree prescription drug benefits equivalent to Medicare Part D coverage, beginning in 2013.

Federal Audit — NSP-Wisconsin is a member of the Xcel Energy affiliated group that files a consolidated federal income tax return. The statute of limitations applicable to Xcel Energy's 2008 federal income tax return expired in September 2012. The statute of limitations applicable to Xcel Energy's 2009 federal income tax return expires in September 2013. In the third quarter of 2012, the IRS commenced an examination of tax years 2010 and 2011. As of Dec. 31, 2012, the IRS had not proposed any material adjustments to tax years 2010 and 2011.

State Audits — NSP-Wisconsin is a member of the Xcel Energy affiliated group that files consolidated state income tax returns. As of Dec. 31, 2012, NSP-Wisconsin's earliest open tax year that is subject to examination by state taxing authorities under applicable statutes of limitations is 2008. As of Dec. 31, 2012, there were no state income tax audits in progress.

Unrecognized Tax Benefits —The 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 of cash to the taxing authority to an earlier period.

A reconciliation of the amount of unrecognized tax benefits is as follows:

(Millions of Dollars)	Dec. 31, 2012		Dec. 31, 2011
Unrecognized tax benefit - Permanent tax positions	$	0.1	$	-
Unrecognized tax benefit - Temporary tax positions		1.2		1.5
Total unrecognized tax benefit	$	1.3	$	1.5

A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:

(Millions of Dollars)	2012			2011			2010
Balance at Jan. 1	$	1.5		$	1.9		$	1.2
Additions based on tax positions related to the current year		0.5			0.6			0.7
Reductions based on tax positions related to the current year		(0.2	)		(0.1	)		-
Additions for tax positions of prior years		0.3			0.7			0.1
Reductions for tax positions of prior years		(0.8	)		(0.3	)		(0.1	)
Settlements with taxing authorities		-			(1.2	)		-
Lapse of applicable statutes of limitations		-			(0.1	)		-
Balance at Dec. 31	$	1.3		$	1.5		$	1.9

The unrecognized tax benefit balance was reduced by the tax benefits associated with NOL and tax credit carryforwards. The amounts of tax benefits associated with NOL and tax credit carryfowards are as follows:

(Millions of Dollars)		Dec. 31, 2012				Dec. 31, 2011
NOL and tax credit carryforwards		$	(0.9	)		$	(1.1	)

It is reasonably possible that NSP-Wisconsin's amount of unrecognized tax benefits could significantly change in the next 12 months as the IRS audit progresses and state audits resume. At this time, due to the uncertain nature of the audit process, an overall range of possible change cannot be reasonably estimated.

The payable for interest related to unrecognized tax benefits is partially offset by the interest benefit associated with NOL carryforwards. The payables for interest related to unrecognized tax benefits at Dec. 31, 2012, 2011, and 2010 were not material. No amounts were accrued for penalties related to unrecognized tax benefits as of Dec. 31, 2012, 2011 or 2010.

Other Income Tax Matters — NOL amounts represent the amount of 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)	2012		2011
Federal NOL carryforward	$	44.3	$	59.3
Federal tax credit carryforwards		8.0		8.0
State NOL carryforward		3.4		3.5

The federal carryforward periods expire between 2021 and 2032. The state carryforward periods expire in 2031.

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. The following reconciles such differences for the years ending Dec. 31:

	2012			2011			2010
Federal statutory rate		35.0	%		35.0	%		35.0	%
Increases (decreases) in tax from:
State income taxes, net of federal income tax benefit		3.4			4.4			3.5
Change in unrecognized tax benefits		0.1			(0.2	)		-
Tax credits recognized		(0.9	)		(0.9	)		(1.1	)
Regulatory differences — utility plant items		(0.3	)		0.5			(0.7	)
Medicare Part D		-			-			1.0
Other, net		(0.1	)		0.9			0.2
Effective income tax rate		37.2	%		39.7	%		37.9	%

The components of income tax expense for the years ending Dec. 31 were:

(Thousands of Dollars)	2012			2011			2010
Current federal tax expense (benefit)	$	930		$	(1,540	)	$	3,754
Current state tax expense		2,216			1,573			1,536
Current change in unrecognized tax (benefit) expense		(69	)		(1,418	)		730
Deferred federal tax expense		25,089			30,251			19,133
Deferred state tax expense		1,890			4,105			2,288
Deferred change in unrecognized tax expense (benefit)		128			1,254			(707	)
Deferred investment tax credits		(626	)		(611	)		(622	)
Total income tax expense	$	29,558		$	33,614		$	26,112

The components of deferred income tax expense for the years ending Dec. 31 were:

(Thousands of Dollars)	2012			2011			2010
Deferred tax expense excluding items below	$	27,995		$	34,017		$	20,987
Amortization and adjustments to deferred income taxes on
income tax regulatory assets and liabilities		(837	)		1,644			(222	)
Tax expense allocated to other comprehensive income		(51	)		(51	)		(51	)
Deferred tax expense	$	27,107		$	35,610		$	20,714

The components of the net deferred tax liability (current and noncurrent portions) at Dec. 31 were:

(Thousands of Dollars)	2012		2011
Deferred tax liabilities:
Difference between book and tax bases of property	$	265,202	$	241,003
Regulatory assets		52,898		52,131
Employee benefits		16,862		21,013
Other		10,535		9,328
Total deferred tax liabilities	$	345,497	$	323,475

Deferred tax assets:
Environmental remediation	$	43,344	$	44,154
NOL carryforward		17,588		22,318
Tax credit carryforward		8,011		7,998
Regulatory liabilities		5,927		6,222
Deferred investment tax credits		5,766		5,705
Other		2,191		2,403
Total deferred tax assets	$	82,827	$	88,800
Net deferred tax liability	$	262,670	$	234,675