Income Taxes

Federal Tax Reform — In 2017, the TCJA was signed into law. The key provisions impacting Xcel Energy (which includes SPS), generally beginning in 2018, include:


•	Corporate federal tax rate reduction from 35% to 21%;


•	Normalization of resulting plant-related excess deferred taxes;


•	Elimination of the corporate alternative minimum tax;


•	Continued interest expense deductibility and discontinued bonus depreciation for regulated public utilities;


•	Limitations on certain executive compensation deductions;


•	Limitations on certain deductions for NOLs arising after Dec. 31, 2017 (limited to 80% of taxable income);


•	Repeal of the section 199 manufacturing deduction; and,


•	Reduced deductions for meals and entertainment as well as state and local lobbying.

Xcel Energy estimated the effects of the TCJA, which have been reflected in the consolidated financial statements.

Reductions in deferred tax assets and liabilities due to a decrease in corporate federal tax rates typically result in a net tax benefit. However, the impacts are primarily recognized as regulatory liabilities refundable to utility customers as a result of IRS requirements and past regulatory treatment.

Estimated impacts of the new tax law for SPS in December 2017 included:


•	$426 million ($559 million grossed-up for tax) of reclassifications of plant-related excess deferred taxes to regulatory liabilities upon valuation at the new 21% federal rate. The regulatory liabilities will be amortized consistent with IRS normalization requirements, resulting in customer refunds over the average remaining life of the related property;


•	$45 million and $28 million of reclassifications (grossed-up for tax) of excess deferred taxes for non-plant related deferred tax assets and liabilities, respectively, to regulatory assets and liabilities; and,


•	$8 million of total estimated income tax benefit related to the federal tax reform implementation, and a $2 million reduction to net income related to the allocation of Xcel Energy Services Inc.’s tax rate change on its deferred taxes.

Xcel Energy accounted for the state tax impacts of federal tax reform based on enacted state tax laws. Any future state tax law changes related to the TCJA will be accounted for in the periods state laws are enacted.

Federal Audit — SPS is a member of the Xcel Energy affiliated group that files a consolidated federal income tax return. Statute of limitations applicable to Xcel Energy’s consolidated federal income tax returns expire as follows:



Tax Year(s)		Expiration
2009 - 2014		October 2019
2015		September 2019
2016		September 2020
2017		September 2021

In 2012, the IRS commenced an examination of tax years 2010 and 2011, including the 2009 carryback claim. In 2017, Xcel Energy and the Office of Appeals reached an agreement and the benefit related to the agreed upon portions was recognized. SPS did not accrue any income tax benefit related to this adjustment. In the second quarter of 2018, the Joint Committee on Taxation completed its review and took no exception to the agreement. As a result, the remaining unrecognized tax benefit was released and recorded as a payable to the IRS.

In the third quarter of 2015, the IRS commenced an examination of tax years 2012 and 2013. In the third quarter of 2017, the IRS concluded the audit of tax years 2012 and 2013 and proposed an adjustment that would impact Xcel Energy’s NOL and ETR. Xcel Energy filed a protest with the IRS. As of Dec. 31, 2018, the case has been forwarded to the Office of Appeals and Xcel Energy has recognized its best estimate of income tax expense that will result from a final resolution of this issue; however, the outcome and timing of a resolution is unknown.

In the fourth quarter of 2018, the IRS began an audit of tax years 2014 - 2016, however no adjustments have been proposed.

State Audits — SPS is a member of the Xcel Energy affiliated group that files consolidated state income tax returns. As of Dec. 31, 2018, SPS’ earliest open tax year that is subject to examination by state taxing authorities under applicable statutes of limitations is 2010. There are currently no state income tax audits in progress.

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

Unrecognized tax benefits - permanent vs temporary:



(Millions of Dollars)	Dec. 31, 2018		Dec. 31, 2017
Unrecognized tax benefit — Permanent tax positions	$	3.0	$	2.3
Unrecognized tax benefit — Temporary tax positions	1.5		2.0
Total unrecognized tax benefit	$	4.5	$	4.3

Changes in unrecognized tax benefits:



(Millions of Dollars)	2018			2017			2016
Balance at Jan. 1	$	4.3		$	28.7		$	24.7
Additions based on tax positions related to the current year	0.6			0.9			1.4
Reductions based on tax positions related to the current year	(0.1		)	(0.6		)	—
Additions for tax positions of prior years	0.1			1.3			3.9
Reductions for tax positions of prior years	(0.3		)	(19.9		)	(1.3		)
Settlements with taxing authorities	(0.1		)	(6.1		)	—
Balance at Dec. 31	$	4.5		$	4.3		$	28.7

Unrecognized tax benefits were reduced by tax benefits associated with NOL and tax credit carryforwards:



(Millions of Dollars)	Dec. 31, 2018			Dec. 31, 2017
NOL and tax credit carryforwards	$	(3.8	)	$	(5.9	)

Net deferred tax liability associated with the unrecognized tax benefit amounts and related NOLs and tax credits carryforwards were $0.8 million and $2.7 million at Dec. 31, 2018 and Dec. 31, 2017, respectively.

As the IRS Appeals and federal audit progress and state audits resume, it is reasonably possible that the amount of unrecognized tax benefit could decrease up to approximately $3.6 million in the next 12 months.

Payable for interest related to unrecognized tax benefits is partially offset by the interest benefit associated with NOL and tax credit carryforwards.

Interest payable related to unrecognized tax benefits:



(Millions of Dollars)	2018		2017			2016
Receivable (payable) for interest related to unrecognized tax benefits at Jan. 1	$	0.5	$	(0.9	)	$	—
Interest income (expense) related to unrecognized tax benefits	0.2		1.4			(0.9		)
Receivable (payable) for interest related to unrecognized tax benefits at Dec. 31	$	0.7	$	0.5		$	(0.9	)

No amounts were accrued for penalties related to unrecognized tax benefits as of Dec. 31, 2018, 2017, or 2016.

Other Income Tax Matters — NOL amounts represent 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)	2018		2017
Federal NOL carryforward	$	—	$	115.0
Federal tax credit carryforwards	5.7		5.2
State NOL carryforwards	2.9		40.5

Federal carryforward periods expire between 2021 and 2038 and state carryforward periods expire between 2021 and 2036.

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.

Effective income tax rate for years ended Dec. 31:



	2018		2017 ^(a)		2016 ^(a)
Federal statutory rate	21.0	%	35.0	%	35.0	%
State income tax on pretax income, net of federal tax effect	2.3	%	2.0	%	2.2	%
Increases (decreases) in tax from:
Regulatory differences - ARAM ^(b)	(4.2	)	—		—
Tax Reform	—		(3.5	)	—
Adjustments attributable to tax returns	(1.5	)	(0.4	)	(1.1	)
Regulatory differences - other utility plant items	(1.3	)	(0.8	)	(1.0	)
Amortization of excess nonplant deferred taxes	(1.2	)	—		—
Tax credits recognized, net of federal income tax expense	(0.7	)	(0.7	)	(0.5	)
Regulatory differences - Deferral of ARAM ^(c)	0.7		—		—
Change in unrecognized tax benefits	0.1		(1.0	)	0.8
Other, net	0.2		(0.5	)	(0.4	)
Effective income tax rate	15.4	%	30.1	%	35.0	%


^(a)	Prior periods have been reclassified to conform to current year presentation.


^(b)	ARAM is a method to flow back excess deferred taxes to customers.


^(c)	ARAM has been deferred when regulatory treatment has not been established. As Xcel Energy received direction from its regulatory commissions regarding the return of excess deferred taxes to customers, the ARAM deferral was reversed. This resulted in a reduction to tax expense with a corresponding reduction to revenue.

Components of income tax expense for years ended Dec. 31:



(Millions of Dollars)	2018			2017			2016
Current federal tax expense (benefit)	$	12.3		$	(20.9	)	$	(40.9	)
Current state tax expense (benefit)	2.3			(12.8		)	(2.9		)
Current change in unrecognized tax expense (benefit)	2.3			(24.3		)	3.1
Deferred federal tax expense	20.5			89.9			116.4
Deferred state tax expense	3.6			14.5			7.8
Deferred change in unrecognized tax (benefit) expense	(2.0		)	22.1			(1.2		)
Deferred ITCs	(0.1		)	(0.1		)	(0.2		)
Total income tax expense	$	38.9		$	68.4		$	82.1

Components of deferred income tax expense as of Dec. 31:



(Millions of Dollars)	2018			2017			2016
Deferred tax expense (benefit) excluding items below	$	44.2		$	(414.2	)	$	128.4
Amortization and adjustments to deferred income taxes on income tax regulatory assets and liabilities	(22.0		)	540.7			(5.4		)
Tax (expense) benefit allocated to other comprehensive income, net of adoption of ASU No. 2018-02, and other	(0.1		)	—			—
Deferred tax expense	$	22.1		$	126.5		$	123.0

Components of the net deferred tax liability as of Dec. 31:



(Millions of Dollars)	2018		2017
Deferred tax liabilities:
Differences between book and tax bases of property	$	680.6	$	654.4
Regulatory assets	49.2		46.8
Pension expense	32.3		33.8
Other	2.9		4.6
Total deferred tax liabilities	$	765.0	$	739.6

Deferred tax assets:
Regulatory liabilities	116.8		114.6
NOL carryforward	0.2		26.2
Deferred fuel costs	12.7		10.4
Other employee benefits	5.6		5.8
Tax credit carryforward	5.7		5.2
Other	4.9		2.5
Total deferred tax assets	$	145.9	$	164.7
Net deferred tax liability	$	619.1	$	574.9