Income Taxes

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 June 2015. 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, 2013, the IRS had proposed an adjustment to the federal tax loss carryback claims that would result in $10 million of income tax expense for the 2009 through 2011 claims and the anticipated claim for 2013. SPS is not expected to accrue any income tax expense related to this adjustment. Xcel Energy is continuing to work through the audit process, but the outcome and timing of a resolution are uncertain.

State Audits — SPS is a member of the Xcel Energy affiliated group that files consolidated state income tax returns. As of Dec. 31, 2013, SPS’ earliest open tax year that is subject to examination by state taxing authorities under applicable statutes of limitations is 2008. 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, 2013		Dec. 31, 2012
Unrecognized tax benefit — Permanent tax positions	$	1.2	$	0.2
Unrecognized tax benefit — Temporary tax positions	2.9		3.7
Total unrecognized tax benefit	$	4.1	$	3.9

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



(Millions of Dollars)	2013			2012			2011
Balance at Jan. 1	$	3.9		$	4.8		$	4.3
Additions based on tax positions related to the current year	1.6			1.1			1.5
Reductions based on tax positions related to the current year	—			(1.6		)	(0.2		)
Additions for tax positions of prior years	3.1			0.8			2.5
Reductions for tax positions of prior years	(0.3		)	(1.2		)	(0.3		)
Settlements with taxing authorities	(4.2		)	—			(3.0		)
Balance at Dec. 31	$	4.1		$	3.9		$	4.8

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, 2013			Dec. 31, 2012
NOL and tax credit carryforwards	$	(2.4	)	$	(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. As the IRS examination moves closer to completion, it is reasonably possible that the amount of unrecognized tax benefit could decrease up to approximately $2 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, 2013, 2012 and 2011 were not material. No amounts were accrued for penalties related to unrecognized tax benefits as of Dec. 31, 2013, 2012 or 2011.

Tangible Property Regulations — In September 2013, the U.S. Treasury issued final regulations addressing the tax consequences associated with the acquisition, production and improvement of tangible property. As SPS had adopted certain utility-specific guidance previously issued by the IRS, the issuance is not expected to have a material impact on its financial statements.

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:

The federal carryforward periods expire between 2021 and 2033. 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:



	2013		2012		2011
Federal statutory rate	35.0	%	35.0	%	35.0	%
Increases (decreases) in tax from:
State income taxes, net of federal income tax benefit	2.0		2.2		2.9
Change in unrecognized tax benefits	0.7		—		—
Regulatory differences — utility plant items	(1.1	)	(0.4	)	(0.1	)
Tax credits recognized	(0.4	)	(0.2	)	(0.3	)
Other, net	(0.1	)	0.3		0.5
Effective income tax rate	36.1	%	36.9	%	38.0	%

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



(Thousands of Dollars)	2013			2012			2011
Current federal tax expense (benefit)	$	14,947		$	6,549		$	(1,993	)
Current state tax expense	2,943			2,712			3,287
Current change in unrecognized tax benefit	(263		)	(824		)	(1,394		)
Deferred federal tax expense	33,489			50,189			50,903
Deferred state tax expense	1,754			3,069			3,240
Deferred change in unrecognized tax expense	1,232			861			1,365
Deferred investment tax credits	(341		)	(327		)	(275		)
Total income tax expense	$	53,761		$	62,229		$	55,133

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



(Thousands of Dollars)	2013			2012			2011
Deferred tax expense excluding items below	$	38,333		$	55,749		$	56,181
Amortization and adjustments to deferred income taxes on income tax regulatory assets and liabilities	(1,761		)	(1,533		)	(575		)
Tax expense allocated to other comprehensive income	(97		)	(97		)	(98		)
Deferred tax expense	$	36,475		$	54,119		$	55,508

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



(Thousands of Dollars)	2013		2012
Deferred tax liabilities:
Differences between book and tax bases of property	$	705,416	$	654,259
Employee benefits	52,081		51,394
Other	30,066		24,034
Total deferred tax liabilities	$	787,563	$	729,687
Deferred tax assets:
NOL carryforward	$	61,330	$	59,562
Rate refund	17,192		2,911
Unbilled revenue - fuel costs	13,316		10,555
Regulatory liabilities	9,724		6,176
Deferred fuel costs	6,877		11,952
Other	6,708		4,448
Total deferred tax assets	$	115,147	$	95,604
Net deferred tax liability	$	672,416	$	634,083

(Millions of Dollars)

Federal NOL carryforward

Federal tax credit carryforwards

State NOL carryforwards