Income Taxes

Prescription drug tax benefit — In the third quarter of 2012, PSCo implemented a tax strategy related to the allocation of funding of PSCo’s retiree prescription drug plan. This strategy restored a portion of the tax benefit associated with federal subsidies for prescription drug plans that had been accrued since 2004 and was expensed in 2010. As a result, PSCo recognized approximately $17 million of income tax benefit.

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 — PSCo 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 June 2015. In the third quarter of 2012, the IRS commenced an examination of tax years 2010 and 2011, including the 2009 carryback claim. As of Dec. 31, 2013, the IRS had proposed an adjustment to the federal tax loss carryback claims that would result in $10 million of income tax expense for the 2009 through 2011 claims and the anticipated claim for 2013. PSCo is not expected to accrue any income tax expense related to this adjustment. Xcel Energy is continuing to work through the audit process, but the outcome and timing of a resolution are uncertain.

State Audits — PSCo is a member of the Xcel Energy affiliated group that files consolidated state income tax returns. As of Dec. 31, 2013, PSCo’s earliest open tax year that is subject to examination by state taxing authorities under applicable statutes of limitations is 2009. In the fourth quarter of 2013, the state of Colorado completed an examination of tax years 2006 through 2009. No material adjustments were proposed for those tax years. There are currently no other 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 benefit is as follows:



(Millions of Dollars)	Dec. 31, 2013		Dec. 31, 2012
Unrecognized tax benefit — Permanent tax positions	$	2.5	$	1.3
Unrecognized tax benefit — Temporary tax positions	5.9		8.3
Total unrecognized tax benefit	$	8.4	$	9.6

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



(Millions of Dollars)	2013			2012			2011
Balance at Jan. 1	$	9.6		$	11.4		$	11.6
Additions based on tax positions related to the current year	3.9			1.9			3.4
Reductions based on tax positions related to the current year	—			(1.5		)	(0.8		)
Additions for tax positions of prior years	3.3			2.0			5.8
Reductions for tax positions of prior years	(0.9		)	(4.2		)	(0.9		)
Settlements with taxing authorities	(7.5		)	—			(7.7		)
Balance at Dec. 31	$	8.4		$	9.6		$	11.4

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



(Millions of Dollars)	Dec. 31, 2013			Dec. 31, 2012
NOL and tax credit carryforwards	$	(7.0	)	$	(5.3	)

It is reasonably possible that PSCo’s amount of unrecognized tax benefits could significantly change in the next 12 months as the IRS audit progresses and state audits resume. As the IRS examination moves closer to completion, it is reasonably possible that the amount of unrecognized tax benefit could decrease up to approximately $2 million.

The payable for interest related to unrecognized tax benefits is partially offset by the interest benefit associated with NOL and tax credit carryforwards. The payables for interest related to unrecognized tax benefits at Dec. 31, 2013, 2012 and 2011 were not material. No amounts were accrued for penalties related to unrecognized tax benefits as of Dec. 31, 2013, 2012 or 2011.

Tangible Property Regulations — In September 2013, the U.S. Treasury issued final regulations addressing the tax consequences associated with the acquisition, production and improvement of tangible property. As PSCo had adopted certain utility-specific guidance previously issued by the IRS, the issuance is not expected to have a material impact on its consolidated financial statements.

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)	2013		2012
Federal NOL carryforward	$	315.5	$	264.7
Federal tax credit carryforwards	19.4		16.2
State NOL carryforwards	664.6		595.1
State tax credit carryforwards, net of federal detriment	11.2		11.6

The federal carryforward periods expire between 2021 and 2033. The state carryforward periods expire between 2019 and 2033.

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:



	2013		2012		2011
Federal statutory rate	35.0	%	35.0	%	35.0	%
Increases (decreases) in tax from:
State income taxes, net of federal income tax benefit	3.0		2.3		2.5
Change in unrecognized tax benefits	0.1		0.1		(0.1	)
Regulatory differences — utility plant items	(1.4	)	(0.6	)	(0.2	)
Tax credits recognized, net of federal income tax expense	(0.8	)	(0.6	)	(0.8	)
Prescription drug tax benefit and Medicare Part D	—		(2.5	)	(0.1	)
Other, net	(0.3	)	—		0.2
Effective income tax rate	35.6	%	33.7	%	36.5	%

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



(Thousands of Dollars)	2013			2012			2011
Current federal tax (benefit) expense	$	(52,408	)	$	176,354		$	1,889
Current state tax (benefit) expense	(7,252		)	24,502			(796		)
Current change in unrecognized tax (benefit) expense	(2,918		)	(3,447		)	3,326
Deferred federal tax expense	273,916			38,309			207,620
Deferred state tax expense (benefit)	38,243			(4,424		)	22,994
Deferred change in unrecognized tax expense (benefit)	4,094			4,207			(4,059		)
Deferred investment tax credits	(2,935		)	(2,957		)	(2,613		)
Total income tax expense	$	250,740		$	232,544		$	228,361

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



(Thousands of Dollars)	2013			2012			2011
Deferred tax expense excluding items below	$	335,580		$	41,233		$	216,393
Amortization and adjustments to deferred income taxes on income tax regulatory assets and liabilities	(19,616		)	(9,574		)	(1,987		)
Tax benefit allocated to other comprehensive income and other	289			6,433			12,149
Deferred tax expense	$	316,253		$	38,092		$	226,555

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



(Thousands of Dollars)	2013		2012
Deferred tax liabilities:
Differences between book and tax bases of property	$	2,197,685	$	1,838,065
Employee benefits	100,003		99,286
Other	132,436		128,453
Total deferred tax liabilities	$	2,430,124	$	2,065,804
Deferred tax assets:
NOL carryforward	$	137,043	$	129,829
Unbilled revenue - fuel costs	49,171		54,353
Tax credit carryforward	30,643		27,752
Rate refund	26,943		4,533
Deferred investment tax credits	14,905		15,992
Regulatory liabilities	14,893		14,164
Other	37,614		35,849
Total deferred tax assets	$	311,212	$	282,472
Net deferred tax liability	$	2,118,912	$	1,783,332