Income Taxes

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.

American Taxpayer Relief Act of 2012 — In 2013, the American Taxpayer Relief Act (ATRA) was signed into law. The ATRA provided for the following:


•	The top tax rate for dividends increased from 15 percent to 20 percent. The 20 percent dividend rate is now consistent with the tax rates for capital gains;


•	The R&E credit was extended for 2012 and 2013;


•	PTCs were extended for projects that began construction before the end of 2013 with certain projects qualifying into future years; and


•	50 percent bonus depreciation was extended one year through 2013. Additionally, some longer production period property placed in service in 2014 is also eligible for 50 percent bonus depreciation.

The accounting related to the ATRA, including the provisions related to 2012, was recorded beginning in the first quarter of 2013 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. 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 March 2016. 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, 2014, the IRS had proposed an adjustment to the federal tax loss carryback claims that would result in $12 million of income tax expense for the 2009 through 2011 claims, the recently filed 2013 claim, and the anticipated claim for 2014. SPS is not expected to accrue any income tax expense related to this adjustment. At Dec. 31, 2014, the IRS has begun the Appeals process; however, 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, 2014, SPS’ earliest open tax year that is subject to examination by state taxing authorities under applicable statutes of limitations is 2009. 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, 2014		Dec. 31, 2013
Unrecognized tax benefit — Permanent tax positions	$	1.5	$	1.2
Unrecognized tax benefit — Temporary tax positions	11.7		2.9
Total unrecognized tax benefit	$	13.2	$	4.1

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



(Millions of Dollars)	2014			2013			2012
Balance at Jan. 1	$	4.1		$	3.9		$	4.8
Additions based on tax positions related to the current year	8.6			1.6			1.1
Reductions based on tax positions related to the current year	—			—			(1.6		)
Additions for tax positions of prior years	2.3			3.1			0.8
Reductions for tax positions of prior years	(0.3		)	(0.3		)	(1.2		)
Settlements with taxing authorities	(0.2		)	(4.2		)	—
Lapse of applicable statutes of limitations	(1.3		)	—			—
Balance at Dec. 31	$	13.2		$	4.1		$	3.9

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, 2014			Dec. 31, 2013
NOL and tax credit carryforwards	$	(4.8	)	$	(2.4	)

It is reasonably possible that SPS’ amount of unrecognized tax benefits could significantly change in the next 12 months as the IRS Appeals process progresses and state audits resume. As the IRS Appeals process moves closer to completion and state audits resume, 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, 2014, 2013 and 2012 were not material. No amounts were accrued for penalties related to unrecognized tax benefits as of Dec. 31, 2014, 2013 or 2012.

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)	2014		2013
Federal NOL carryforward	$	192.4	$	168.7
Federal tax credit carryforwards	2.1		1.7
State NOL carryforwards	58.5		23.6

The federal carryforward periods expire between 2021 and 2034. The state carryforward periods expire between 2016 and 2034.

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:



	2014		2013		2012
Federal statutory rate	35.0	%	35.0	%	35.0	%
Increases (decreases) in tax from:
State income taxes, net of federal income tax benefit	3.4		2.0		2.2
Change in unrecognized tax benefits	0.2		0.7		—
Regulatory differences — utility plant items	(1.6	)	(1.1	)	(0.4	)
Tax credits recognized	(0.4	)	(0.4	)	(0.2	)
Other, net	0.1		(0.1	)	0.3
Effective income tax rate	36.7	%	36.1	%	36.9	%

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



(Thousands of Dollars)	2014			2013			2012
Current federal tax expense (benefit)	$	(57,201	)	$	14,947		$	6,549
Current state tax expense	2,512			2,943			2,712
Current change in unrecognized tax benefit	6,715			(263		)	(824		)
Deferred federal tax expense	121,882			33,489			50,189
Deferred state tax expense	8,025			1,754			3,069
Deferred change in unrecognized tax (benefits) expense	(6,390		)	1,232			861
Deferred investment tax credits	(341		)	(341		)	(327		)
Total income tax expense	$	75,202		$	53,761		$	62,229

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



(Thousands of Dollars)	2014			2013			2012
Deferred tax expense excluding items below	$	124,875		$	38,333		$	55,749
Amortization and adjustments to deferred income taxes on income tax regulatory assets and liabilities	(1,262		)	(1,761		)	(1,533		)
Tax expense allocated to other comprehensive income	(96		)	(97		)	(97		)
Deferred tax expense	$	123,517		$	36,475		$	54,119

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



(Thousands of Dollars)	2014		2013
Deferred tax liabilities:
Differences between book and tax bases of property	$	842,847	$	705,416
Employee benefits	50,696		52,081
Other	28,591		30,066
Total deferred tax liabilities	$	922,134	$	787,563
Deferred tax assets:
NOL carryforward	$	71,956	$	61,330
Rate refund	18,405		17,192
Unbilled revenue - fuel costs	10,866		13,316
Regulatory liabilities	10,794		9,724
Deferred fuel costs	6,006		6,877
Other	6,816		6,708
Total deferred tax assets	$	124,843	$	115,147
Net deferred tax liability	$	797,291	$	672,416