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.

Federal Audit — SPS is a member of the Xcel Energy affiliated group that files a consolidated federal income tax return. In 2012, the IRS commenced an examination of tax years 2010 and 2011, including a 2009 carryback claim. As of Dec. 31, 2016, 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 claims, and the 2013 through 2015 claims. In the fourth quarter of 2015, the IRS forwarded the issue to the Office of Appeals (Appeals). In 2016 the IRS audit team and Xcel Energy presented their cases to Appeals; however, the outcome and timing of a resolution is uncertain. The statute of limitations applicable to Xcel Energy’s 2009 through 2011 federal income tax returns, following extensions, expires in December 2017. Xcel Energy has recognized its best estimate of income tax expense that will result from a final resolution of the IRS’ proposed adjustment of the carryback claims. SPS is not expected to accrue any income tax expense related to this adjustment.

In the third quarter of 2015, the IRS commenced an examination of tax years 2012 and 2013. As of Dec. 31, 2016, the IRS had not proposed any material adjustments to tax years 2012 and 2013. Subsequent to year-end, the IRS proposed an adjustment to tax years 2012 through 2013 that may impact Xcel Energy’s NOL and tax credit carryforwards and ETR. However, Xcel Energy is continuing to evaluate the IRS’ proposal and the outcome and timing of a resolution is uncertain.

State Audits — SPS is a member of the Xcel Energy affiliated group that files consolidated state income tax returns. As of Dec. 31, 2016, SPS’ earliest open tax year that is subject to examination by state taxing authorities under applicable statutes of limitations is 2009. In February 2016, Texas began an audit of years 2009 and 2010. As of Dec. 31, 2016, Texas had not proposed any adjustments, and there were 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, 2016		Dec. 31, 2015
Unrecognized tax benefit — Permanent tax positions	$	4.5	$	2.6
Unrecognized tax benefit — Temporary tax positions	24.2		22.1
Total unrecognized tax benefit	$	28.7	$	24.7

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



(Millions of Dollars)	2016			2015			2014
Balance at Jan. 1	$	24.7		$	13.2		$	4.1
Additions based on tax positions related to the current year	1.4			4.2			8.6
Reductions based on tax positions related to the current year	—			(0.6		)	—
Additions for tax positions of prior years	3.9			9.0			2.3
Reductions for tax positions of prior years	(1.3		)	(1.1		)	(0.3		)
Settlements with taxing authorities	—			—			(0.2		)
Lapse of applicable statutes of limitations	—			—			(1.3		)
Balance at Dec. 31	$	28.7		$	24.7		$	13.2

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, 2016			Dec. 31, 2015
NOL and tax credit carryforwards	$	(5.9	)	$	(5.0	)

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, the Texas audit progresses, and other state audits resume. As the IRS Appeals, IRS audit, and Texas audit progress, it is reasonably possible that the amount of unrecognized tax benefit could decrease up to approximately $10 million.

The payable for interest related to unrecognized tax benefits is partially offset by the interest benefit associated with NOL and tax credit carryforwards. A reconciliation of the beginning and ending amount of the payable for interest related to unrecognized tax benefits are as follows:



(Millions of Dollars)	2016			2015			2014
Payable for interest related to unrecognized tax benefits at Jan. 1	$	—		$	(0.1	)	$	—
Interest (expense) income related to unrecognized tax benefits	(0.9		)	0.1			(0.1		)
Payable for interest related to unrecognized tax benefits at Dec. 31	$	(0.9	)	$	—		$	(0.1	)

No amounts were accrued for penalties related to unrecognized tax benefits as of Dec. 31, 2016, 2015, or 2014.

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)	2016		2015
Federal NOL carryforward	$	275	$	306
Federal tax credit carryforwards	4		3
State NOL carryforwards	60		79
Valuation allowances for state NOL carryforwards	—		(11		)

The federal carryforward periods expire between 2021 and 2036. The state carryforward periods expire between 2017 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:



	2016		2015		2014
Federal statutory rate	35.0	%	35.0	%	35.0	%
Increases (decreases) in tax from:
State income taxes, net of federal income tax benefit	1.5		2.6		3.4
Change in unrecognized tax benefits	0.8		0.5		0.2
Regulatory differences — utility plant items	(1.0	)	(0.8	)	(1.6	)
Tax credits recognized, net of federal income tax expense	(0.5	)	(0.3	)	(0.4	)
Other, net	(0.7	)	0.1		0.1
Effective income tax rate	35.1	%	37.1	%	36.7	%

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



(Thousands of Dollars)	2016			2015			2014
Current federal tax benefit	$	(40,853	)	$	(1,327	)	$	(57,201	)
Current state tax (benefit) expense	(2,929		)	2,448			2,512
Current change in unrecognized tax expense	3,126			11,281			6,715
Deferred federal tax expense	116,404			67,640			121,882
Deferred state tax expense	7,757			5,399			8,025
Deferred change in unrecognized tax benefit	(1,178		)	(10,203		)	(6,390		)
Deferred investment tax credits	(213		)	(213		)	(341		)
Total income tax expense	$	82,114		$	75,025		$	75,202

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



(Thousands of Dollars)	2016			2015			2014
Deferred tax expense excluding items below	$	128,393		$	63,453		$	124,875
Amortization and adjustments to deferred income taxes on income tax regulatory assets and liabilities	(5,416		)	(780		)	(1,262		)
Tax benefit (expense) allocated to other comprehensive income and other	6			163			(96		)
Deferred tax expense	$	122,983		$	62,836		$	123,517

The components of the net deferred tax liability at Dec. 31 were as follows:



(Thousands of Dollars)	2016		2015
Deferred tax liabilities:
Differences between book and tax bases of property	$	1,034,675	$	945,142
Employee benefits	42,239		50,097
Other	35,975		18,260
Total deferred tax liabilities	$	1,112,889	$	1,013,499
Deferred tax assets:
NOL carryforward	$	100,179	$	112,060
Deferred fuel costs	10,226		23,127
Regulatory liabilities	3,380		10,480
Other	9,967		7,088
Total deferred tax assets	$	123,752	$	152,755
Net deferred tax liability	$	989,137	$	860,744