6. Income Taxes

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 — SPS 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 September 2013. In the third quarter of 2012, the IRS commenced an examination of tax years 2010 and 2011. As of Dec. 31, 2012, the IRS had not proposed any material adjustments to tax years 2010 and 2011.

State Audits — SPS is a member of the Xcel Energy affiliated group that files consolidated state income tax returns. As of Dec. 31, 2012, SPS' earliest open tax year that is subject to examination by state taxing authorities under applicable statutes of limitations is 2008. As of Dec. 31, 2012, there were 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, 2012		Dec. 31, 2011
Unrecognized tax benefit - Permanent tax positions	$	0.2	$	0.2
Unrecognized tax benefit - Temporary tax positions		3.7		4.6
Total unrecognized tax benefit	$	3.9	$	4.8

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

(Millions of Dollars)	2012			2011			2010
Balance at Jan. 1	$	4.8		$	4.3		$	2.9
Additions based on tax positions related to the current year		1.1			1.5			1.3
Reductions based on tax positions related to the current year		(1.6	)		(0.2	)		-
Additions for tax positions of prior years		0.8			2.5			0.2
Reductions for tax positions of prior years		(1.2	)		(0.3	)		(0.1	)
Settlements with taxing authorities		-			(3.0	)		-
Balance at Dec. 31	$	3.9		$	4.8		$	4.3

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, 2012				Dec. 31, 2011
NOL and tax credit carryforwards		$	(2.0	)		$	(2.0	)

It is reasonably possible that SPS' amount of unrecognized tax benefits could significantly change in the next 12 months as the IRS audit progresses and state audits resume. At this time, due to the uncertain nature of the audit process, an overall range of possible change cannot be reasonably estimated.

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, 2012, 2011, and 2010 were not material. No amounts were accrued for penalties related to unrecognized tax benefits as of Dec. 31, 2012, 2011 or 2010.

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)	2012		2011
Federal NOL carryforward	$	158.0	$	175.1
Federal tax credit carryforwards		1.3		1.3
State NOL carryforwards		21.0		37.3

The federal carryforward periods expire between 2021 and 2031. The state carryforward periods expire between 2014 and 2031.

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:

	2012			2011			2010
Federal statutory rate		35.0	%		35.0	%		35.0	%
Increases (decreases) in tax from:
State income taxes, net of federal income tax benefit		2.2			2.9			1.7
Regulatory differences - utility plant items		(0.4	)		(0.1	)		0.2
Tax credits recognized		(0.2	)		(0.3	)		(0.4	)
Medicare Part D		-			-			1.5
Other, net		0.3			0.5			0.5
Effective income tax rate		36.9	%		38.0	%		38.5	%

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

(Thousands of Dollars)	2012			2011			2010
Current federal tax expense (benefit)	$	6,549		$	(1,993	)	$	19,850
Current state tax expense		2,712			3,287			2,669
Current change in unrecognized tax (benefit) expense		(824	)		(1,394	)		1,376
Deferred federal tax expense		50,189			50,903			25,905
Deferred state tax expense		3,069			3,240			747
Deferred change in unrecognized tax expense (benefit)		861			1,365			(1,340	)
Deferred investment tax credits		(327	)		(275	)		(341	)
Total income tax expense	$	62,229		$	55,133		$	48,866

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

(Thousands of Dollars)	2012			2011			2010
Deferred tax expense excluding items below	$	55,749		$	56,181		$	25,318
Amortization and adjustments to deferred income taxes on income tax regulatory assets and liabilities		(1,533	)		(575	)		90
Tax expense allocated to other comprehensive income		(97	)		(98	)		(96	)
Deferred tax expense	$	54,119		$	55,508		$	25,312

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

(Thousands of Dollars)	2012		2011
Deferred tax liabilities:
Difference between book and tax bases of property	$	654,259	$	597,122
Employee benefits		51,394		56,069
Other		24,034		21,359
Total deferred tax liabilities	$	729,687	$	674,550

Deferred tax assets:
NOL carryforward	$	59,562	$	65,278
Deferred fuel costs		11,952		2,473
Unbilled revenue - fuel costs		10,555		13,138
Regulatory liabilities		6,176		7,501
Other		7,359		7,826
Total deferred tax assets	$	95,604	$	96,216
Net deferred tax liability	$	634,083	$	578,334