Income Taxes

Consolidated Appropriations Act, 2016 - In December 2015, the Consolidated Appropriations Act, 2016 (Act) was signed into law. The Act provides for the following:


•	Immediate expensing, or “bonus depreciation,” of 50 percent for property placed in service in 2015, 2016, and 2017; 40 percent for property placed in service in 2018; and 30 percent for property placed in service in 2019. Additionally, some longer production period property placed in service in 2020 will be eligible for bonus depreciation;

•

PTCs at 100 percent of the credit rate ($0.023 per KWh) for wind energy projects that begin construction by the end of 2016; 80 percent of the credit rate for projects that begin construction in 2017; 60 percent of the credit rate for projects that begin construction in 2018; and 40 percent of the credit rate for projects that begin construction in 2019. The wind energy PTC was not extended for projects that begin construction after 2019;


•	ITCs at 30 percent for commercial solar projects that begin construction by the end of 2019; 26 percent for projects that begin construction in 2020; 22 percent for projects that begin construction in 2021; and 10 percent for projects thereafter;


•	R&E credit was permanently extended; and


•	Delay of two years (until 2020) of the excise tax on certain employer-provided health insurance plans.

The accounting related to the Act was recorded beginning in the fourth quarter of 2015 because a change in tax law is accounted for beginning in the period of enactment.

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.

Federal Audit — SPS is a member of the Xcel Energy affiliated group that files a consolidated federal income tax return. 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, 2015, the IRS had proposed an adjustment to the federal tax loss carryback claims that would result in $14 million of income tax expense for the 2009 through 2011 and 2013 claims, the recently filed 2014 claim, and the anticipated claim for 2015. SPS is not expected to accrue any income tax expense related to this adjustment. In the fourth quarter of 2015, the IRS forwarded the issue to the Office of Appeals (Appeals); however, the outcome and timing of a resolution are uncertain. The statute of limitations applicable to Xcel Energy's 2009 through 2011 federal income tax returns expires in December 2016 following an extension to allow additional time for the Appeals process. In the third quarter of 2015, the IRS commenced an examination of tax years 2012 and 2013. As of Dec. 31, 2015, the IRS had not proposed any material adjustments to tax years 2012 and 2013.

State Audits — SPS is a member of the Xcel Energy affiliated group that files consolidated state income tax returns. As of Dec. 31, 2015, SPS’ 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, 2015		Dec. 31, 2014
Unrecognized tax benefit — Permanent tax positions	$	2.6	$	1.5
Unrecognized tax benefit — Temporary tax positions	22.1		11.7
Total unrecognized tax benefit	$	24.7	$	13.2

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



(Millions of Dollars)	2015			2014			2013
Balance at Jan. 1	$	13.2		$	4.1		$	3.9
Additions based on tax positions related to the current year	4.2			8.6			1.6
Reductions based on tax positions related to the current year	(0.6		)	—			—
Additions for tax positions of prior years	9.0			2.3			3.1
Reductions for tax positions of prior years	(1.1		)	(0.3		)	(0.3		)
Settlements with taxing authorities	—			(0.2		)	(4.2		)
Lapse of applicable statutes of limitations	—			(1.3		)	—
Balance at Dec. 31	$	24.7		$	13.2		$	4.1

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, 2015			Dec. 31, 2014
NOL and tax credit carryforwards	$	(5.0	)	$	(4.8	)

It is reasonably possible that SPS’ amount of unrecognized tax benefits could significantly change in the next 12 months as the IRS Appeals and audit progress and state audits resume. As the IRS Appeals and audit progress, it is reasonably possible that the amount of unrecognized tax benefit could decrease up to approximately $7 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, 2015, 2014 and 2013 were not material. No amounts were accrued for penalties related to unrecognized tax benefits as of Dec. 31, 2015, 2014 or 2013.

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)	2015			2014
Federal NOL carryforward	$	306		$	192
Federal tax credit carryforwards	3			2
State NOL carryforwards	79			59
Valuation allowances for state NOL carryforwards	(11		)	—

The federal carryforward periods expire between 2021 and 2035. The state carryforward periods expire between 2016 and 2035.

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:



	2015		2014		2013
Federal statutory rate	35.0	%	35.0	%	35.0	%
Increases (decreases) in tax from:
State income taxes, net of federal income tax benefit	2.6		3.4		2.0
Change in unrecognized tax benefits	0.5		0.2		0.7
Regulatory differences — utility plant items	(0.8	)	(1.6	)	(1.1	)
Tax credits recognized, net of federal income tax expense	(0.3	)	(0.4	)	(0.4	)
Other, net	0.1		0.1		(0.1	)
Effective income tax rate	37.1	%	36.7	%	36.1	%

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



(Thousands of Dollars)	2015			2014			2013
Current federal tax (benefit) expense	$	(1,327	)	$	(57,201	)	$	14,947
Current state tax expense	2,448			2,512			2,943
Current change in unrecognized tax expense (benefit)	11,281			6,715			(263		)
Deferred federal tax expense	67,640			121,882			33,489
Deferred state tax expense	5,399			8,025			1,754
Deferred change in unrecognized tax (benefits) expense	(10,203		)	(6,390		)	1,232
Deferred investment tax credits	(213		)	(341		)	(341		)
Total income tax expense	$	75,025		$	75,202		$	53,761

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



(Thousands of Dollars)	2015			2014			2013
Deferred tax expense excluding items below	$	63,453		$	124,875		$	38,333
Amortization and adjustments to deferred income taxes on income tax regulatory assets and liabilities	(780		)	(1,262		)	(1,761		)
Tax expense allocated to other comprehensive income	163			(96		)	(97		)
Deferred tax expense	$	62,836		$	123,517		$	36,475

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



(Thousands of Dollars)	2015		2014
Deferred tax liabilities:
Differences between book and tax bases of property	$	945,142	$	842,847
Employee benefits	50,097		50,696
Other	19,593		28,591
Total deferred tax liabilities	$	1,014,832	$	922,134
Deferred tax assets:
NOL carryforward	$	112,060	$	71,956
Rate refund	1,395		18,405
Unbilled revenue - fuel costs	10,808		10,866
Regulatory liabilities	10,480		10,794
Deferred fuel costs	12,319		6,006
Other	7,026		6,816
Total deferred tax assets	$	154,088	$	124,843
Net deferred tax liability	$	860,744	$	797,291