Income Taxes

Tax Increase Prevention Act of 2014 — In 2014, the Tax Increase Prevention Act (TIPA) was signed into law. The TIPA provides for the following:


•	The R&E credit was extended for 2014;


•	PTCs were extended for projects that began construction before the end of 2014 with certain projects qualifying into future years; and


•	50 percent bonus depreciation was extended one year through 2014. Additionally, some longer production period property placed in service in 2015 is also eligible for 50 percent bonus depreciation.

The accounting related to the TIPA was recorded beginning in the fourth quarter of 2014 because a change in tax law is accounted for in the period of enactment.

American Taxpayer Relief Act of 2012 — In 2013, the American Taxpayer Relief Act (ATRA) was signed into law. The ATRA provided for the following:


•	The top tax rate for dividends increased from 15 percent to 20 percent. The 20 percent dividend rate is now consistent with the tax rates for capital gains;


•	The R&E credit was extended for 2012 and 2013;


•	PTCs were extended for projects that began construction before the end of 2013 with certain projects qualifying into future years; and


•	50 percent bonus depreciation was extended one year through 2013. Additionally, some longer production period property placed in service in 2014 is also eligible for 50 percent bonus depreciation.

The accounting related to the ATRA, including the provisions related to 2012, was recorded beginning in the first quarter of 2013 because a change in tax law is accounted for in the period of enactment.

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 March 2016. 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, 2014, the IRS had proposed an adjustment to the federal tax loss carryback claims that would result in $12 million of income tax expense for the 2009 through 2011 claims, the recently filed 2013 claim, and the anticipated claim for 2014. PSCo is not expected to accrue any income tax expense related to this adjustment. At Dec. 31, 2014, the IRS has begun the Appeals process; however, the outcome and timing of a resolution is uncertain.

State Audits — PSCo is a member of the Xcel Energy affiliated group that files consolidated state income tax returns. As of Dec. 31, 2014, PSCo’s earliest open tax year that is subject to examination by state taxing authorities under applicable statutes of limitations is 2009. There are currently 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 benefit is as follows:



(Millions of Dollars)	Dec. 31, 2014		Dec. 31, 2013
Unrecognized tax benefit — Permanent tax positions	$	1.9	$	2.5
Unrecognized tax benefit — Temporary tax positions	10.0		5.9
Total unrecognized tax benefit	$	11.9	$	8.4

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



(Millions of Dollars)	2014			2013			2012
Balance at Jan. 1	$	8.4		$	9.6		$	11.4
Additions based on tax positions related to the current year	3.7			3.9			1.9
Reductions based on tax positions related to the current year	(0.7		)	—			(1.5		)
Additions for tax positions of prior years	2.8			3.3			2.0
Reductions for tax positions of prior years	(1.2		)	(0.9		)	(4.2		)
Settlements with taxing authorities	(1.1		)	(7.5		)	—
Balance at Dec. 31	$	11.9		$	8.4		$	9.6

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, 2014			Dec. 31, 2013
NOL and tax credit carryforwards	$	(3.9	)	$	(7.0	)

It is reasonably possible that PSCo’s amount of unrecognized tax benefits could significantly change in the next 12 months as the IRS Appeals process progresses and state audits resume. As the IRS Appeals process moves closer to completion, it is reasonably possible that the amount of unrecognized tax benefit could decrease up to approximately $1 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, 2014, 2013 and 2012 were not material. No amounts were accrued for penalties related to unrecognized tax benefits as of Dec. 31, 2014, 2013 or 2012.

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)	2014		2013
Federal NOL carryforward	$	319.5	$	315.5
Federal tax credit carryforwards	22.3		19.4
State NOL carryforwards	690.1		664.6
State tax credit carryforwards, net of federal detriment	12.2		11.2

The federal carryforward periods expire between 2021 and 2034. The state carryforward periods expire between 2017 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:



	2014		2013		2012
Federal statutory rate	35.0	%	35.0	%	35.0	%
Increases (decreases) in tax from:
State income taxes, net of federal income tax benefit	2.8		3.0		2.3
Change in unrecognized tax benefits	(0.1	)	0.1		0.1
Regulatory differences — utility plant items	(2.1	)	(1.4	)	(0.6	)
Tax credits recognized, net of federal income tax expense	(0.8	)	(0.8	)	(0.6	)
Prescription drug tax benefit and Medicare Part D	—		—		(2.5	)
Other, net	0.1		(0.3	)	—
Effective income tax rate	34.9	%	35.6	%	33.7	%

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



(Thousands of Dollars)	2014			2013			2012
Current federal tax (benefit) expense	$	9,550		$	(52,408	)	$	176,354
Current state tax (benefit) expense	2,611			(7,252		)	24,502
Current change in unrecognized tax (benefit) expense	6,548			(2,918		)	(3,447		)
Deferred federal tax expense	208,781			273,916			38,309
Deferred state tax expense (benefit)	26,196			38,243			(4,424		)
Deferred change in unrecognized tax expense (benefit)	(7,154		)	4,094			4,207
Deferred investment tax credits	(2,941		)	(2,935		)	(2,957		)
Total income tax expense	$	243,591		$	250,740		$	232,544

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



(Thousands of Dollars)	2014			2013			2012
Deferred tax expense excluding items below	$	254,142		$	335,580		$	41,233
Amortization and adjustments to deferred income taxes on income tax regulatory assets and liabilities	(26,649		)	(19,616		)	(9,574		)
Tax benefit allocated to other comprehensive income and other	330			289			6,433
Deferred tax expense	$	227,823		$	316,253		$	38,092

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



(Thousands of Dollars)	2014		2013
Deferred tax liabilities:
Differences between book and tax bases of property	$	2,467,260	$	2,197,685
Employee benefits	110,556		100,003
Other	140,080		132,436
Total deferred tax liabilities	$	2,717,896	$	2,430,124
Deferred tax assets:
NOL carryforward	$	143,158	$	137,043
Unbilled revenue - fuel costs	57,654		49,171
Rate refund	43,735		26,943
Tax credit carryforward	34,493		30,643
Regulatory liabilities	14,549		14,893
Deferred investment tax credits	13,781		14,905
Other	37,472		37,614
Total deferred tax assets	$	344,842	$	311,212
Net deferred tax liability	$	2,373,054	$	2,118,912