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. The fourth quarter 2015 accounting impacts included:


•	Recognition of additional tax deductions for bonus depreciation of $1.2 billion, and as a result, recognition of $4.9 million benefit related to a carryback claim (see additional discussion below) and $3.5 million expense related to valuation allowances and expirations of charitable contribution carryforwards; and


•	Recognition of $6.8 million benefit for federal R&E credits.

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 Tax Loss Carryback Claims — In 2012-2015, Xcel Energy identified certain expenses related to 2009, 2010, 2011, 2013, 2014 and 2015 that qualify for an extended carryback beyond the typical two-year carryback period. As a result of a higher tax rate in prior years, Xcel Energy recognized a tax benefit of approximately $5 million in 2015, $17 million in 2014, $12 million in 2013 and $15 million in 2012.

Federal Audit — Xcel Energy files a consolidated federal income tax return. In 2012, the IRS commenced an examination of tax years 2010 and 2011, including the 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’s proposed adjustment of the carryback claims.

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 — Xcel Energy files consolidated state tax returns based on income in its major operating jurisdictions of Colorado, Minnesota, Texas, and Wisconsin, and various other state income-based tax returns. As of Dec. 31, 2016, Xcel Energy’s earliest open tax years that are subject to examination by state taxing authorities in its major operating jurisdictions were as follows:



State		Year
Colorado		2009
Minnesota		2009
Texas		2009
Wisconsin		2012

In February 2016, Texas began an audit of years 2009 and 2010. As of Dec. 31, 2016, Texas had not proposed any adjustments.

In June 2016, Minnesota began an audit of years 2010 through 2014. As of Dec. 31, 2016, Minnesota had not proposed any adjustments.

In August 2016, Wisconsin began an audit of years 2012 and 2013. As of Dec. 31, 2016, Wisconsin had not proposed any adjustments. As of Dec. 31, 2016, 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	$	29.6	$	25.8
Unrecognized tax benefit — Temporary tax positions	104.1		94.9
Total unrecognized tax benefit	$	133.7	$	120.7

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	$	120.7		$	66.5		$	41.2
Additions based on tax positions related to the current year	8.2			27.1			28.7
Reductions based on tax positions related to the current year	(0.3		)	(4.5		)	(2.0		)
Additions for tax positions of prior years	9.8			34.8			16.0
Reductions for tax positions of prior years	(4.7		)	(2.9		)	(6.0		)
Settlements with taxing authorities	—			(0.3		)	(9.6		)
Lapse of applicable statutes of limitations	—			—			(1.8		)
Balance at Dec. 31	$	133.7		$	120.7		$	66.5

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	$	(43.8	)	$	(36.7	)

It is reasonably possible that Xcel Energy’s amount of unrecognized tax benefits could significantly change in the next 12 months as the IRS Appeals and audit progress, the Minnesota, Texas and Wisconsin audits progress, and other state audits resume. As the IRS Appeals and IRS, Minnesota, Texas and Wisconsin audits progress, it is reasonably possible that the amount of unrecognized tax benefit could decrease up to approximately $61 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 reported are as follows:



(Millions of Dollars)	2016			2015			2014
Payable for interest related to unrecognized tax benefits at Jan. 1	$	(0.1	)	$	(0.3	)	$	(0.6	)
Interest (expense) income related to unrecognized tax benefits	(3.3		)	0.2			0.3
Payable for interest related to unrecognized tax benefits at Dec. 31	$	(3.4	)	$	(0.1	)	$	(0.3	)

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	$	1,916		$	2,153
Federal tax credit carryforwards	424			360
State NOL carryforwards	1,949			2,124
Valuation allowances for state NOL carryforwards	(59		)	(65		)
State tax credit carryforwards, net of federal detriment ^(a)	74			45
Valuation allowances for state credit carryforwards, net of federal benefit ^(b)	(54		)	(24		)


^(a)	State tax credit carryforwards are net of federal detriment of $40 million and $24 million as of Dec. 31, 2016 and 2015, respectively.


^(b)	Valuation allowances for state tax credit carryforwards were net of federal benefit of $29 million and $13 million as of Dec. 31, 2016 and 2015, respectively.

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:
Tax credits recognized, net of federal income tax expense	(4.2	)	(2.7	)	(2.6	)
Regulatory differences — utility plant items	(0.5	)	(1.0	)	(1.3	)
State income taxes, net of federal income tax benefit	4.2		4.1		4.0
Change in unrecognized tax benefits	0.2		0.6		0.2
NOL carryback	—		(0.3	)	(0.9	)
Other, net	(0.6	)	(0.2	)	(0.5	)
Effective income tax rate	34.1	%	35.5	%	33.9	%

The components of Xcel Energy’s income tax expense for the years ending Dec. 31 were:



(Thousands of Dollars)	2016			2015			2014
Current federal tax benefit	$	(2,809	)	$	(36,129	)	$	(73,160	)
Current state tax (benefit) expense	(3,345		)	2,324			9,225
Current change in unrecognized tax expense	5,924			45,933			23,915
Deferred federal tax expense	476,439			480,078			505,236
Deferred state tax expense	112,308			92,132			84,787
Deferred change in unrecognized tax benefit	(2,097		)	(36,342		)	(20,645		)
Deferred investment tax credits	(5,203		)	(5,277		)	(5,543		)
Total income tax expense	$	581,217		$	542,719		$	523,815

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	$	630,877		$	546,664		$	616,934
Amortization and adjustments to deferred income taxes on income tax regulatory assets and liabilities	(44,638		)	(11,810		)	(48,674		)
Tax benefit allocated to OCI	415			1,013			1,117
Other	(4		)	1			1
Deferred tax expense	$	586,650		$	535,868		$	569,378

The components of Xcel Energy’s 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	$	7,696,833		$	7,119,023
Regulatory assets	313,034			308,130
Other	186,007			229,005
Total deferred tax liabilities	$	8,195,874		$	7,656,158

Deferred tax assets:
NOL carryforward	$	753,851		$	851,242
Tax credit carryforward	497,518			404,738
Rate refund	32,810			50,441
Environmental remediation	30,288			38,663
Regulatory liabilities	28,249			36,257
Deferred investment tax credits	27,436			29,650
Deferred fuel costs	11,387			57,220
NOL and tax credit valuation allowances	(57,515		)	(27,679		)
Other	87,531			62,184
Total deferred tax assets	$	1,411,555		$	1,502,716
Net deferred tax liability	$	6,784,319		$	6,153,442