Entity information:
Income Taxes

Federal Tax Reform — In December 2017, the TCJA was signed into law. While the legislation will require interpretations and regulations to be issued by the IRS, the key provisions impacting Xcel Energy (which includes PSCo), generally beginning in 2018, include:

•
Corporate federal tax rate reduction from 35 percent to 21 percent;
•
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 percent of taxable income);
•
Repeal of the section 199 manufacturing deduction; and
•
Reduced deductions for meals and entertainment as well as state and local lobbying.

Entities are required under ASC Topic 740 to recognize the accounting impacts of a tax law change, including the impacts of a change in tax rates on deferred tax assets and liabilities, in the period including the date of the tax law enactment. The SEC staff issued guidance in SAB 118 that supplements the accounting requirements of ASC Topic 740 if elements of the TCJA assessment are not complete, and provides for up to a one year period to finalize the required accounting. Xcel Energy has estimated the effects of the TCJA, which have been reflected in the Dec. 31, 2017 consolidated financial statements. Issuance of U.S. Treasury regulations interpreting the TCJA, other U.S. Treasury and IRS guidance or interpretations of the application of ASC Topic 740 may result in changes to these estimates.

Overall for Xcel Energy, reductions in deferred tax assets and liabilities due to the reduction in corporate federal tax rates result in a net tax benefit. However, as a result of IRS requirements and past regulatory treatment of deferred taxes in the determination of regulated rates of the utility subsidiaries, including deferred taxes related to regulated plant and certain other deferred tax assets and liabilities, the impact was primarily recognized as a regulatory liability refundable to utility customers.

The fourth quarter 2017 estimated accounting impacts of the December 2017 enactment of the new tax law at PSCo included:

•
$1.1 billion ($1.5 billion grossed-up for tax) of reclassifications of plant-related excess deferred taxes to regulatory liabilities upon valuation at the new 21 percent 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;
•
$54 million and $50 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;
•
$18 million of total estimated income tax benefit related to the federal tax reform implementation, and a $4 million reduction to net income related to the allocation of Xcel Energy Services Inc.’s tax rate change on its deferred taxes.

Xcel Energy has accounted for the state tax impacts of federal tax reform based on currently 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.

Consolidated Appropriations Act, 2016 — In December 2015, the Consolidated Appropriations Act, 2016 (Act) was signed into law. The Act provided for the following:

•
Immediate expensing, or “bonus depreciation,” of 50 percent for property placed in service in 2015, 2016, and 2017;
•
PTCs at 100 percent of the applicable rate 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.

Federal Audit — PSCO is a member of the Xcel Energy affiliated group that files a consolidated federal income tax return. The statutes of limitations applicable to Xcel Energy’s federal income tax returns expire as follows:
Tax Year(s)
 
Expiration
2009 - 2011
 
June 2018
2012 - 2013
 
October 2018
2014
 
September 2018
2015
 
September 2019
2016
 
September 2020


In 2012, the IRS commenced an examination of tax years 2010 and 2011, including the 2009 carryback claim. The IRS proposed an adjustment to the federal tax loss carryback claims that would have resulted 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 the third quarter of 2017, Xcel Energy and Appeals reached an agreement and the benefit related to the agreed upon portions was recognized. PSCo did not accrue any income tax benefit related to this adjustment. As of Dec. 31, 2017, the case has been forwarded to the Joint Committee on Taxation.

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. After evaluating the proposed adjustment, Xcel Energy filed a protest with the IRS. Xcel Energy anticipates the issue will be forwarded to Appeals. As of Dec. 31, 2017, 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 uncertain.

State Audits — PSCo is a member of the Xcel Energy affiliated group that files consolidated state income tax returns. As of Dec. 31, 2017, PSCo’s 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, 2017
 
Dec. 31, 2016
Unrecognized tax benefit — Permanent tax positions
 
$
4.0

 
$
2.9

Unrecognized tax benefit — Temporary tax positions
 
6.1

 
16.8

Total unrecognized tax benefit
 
$
10.1

 
$
19.7



A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:
(Millions of Dollars)
 
2017
 
2016
 
2015
Balance at Jan. 1
 
$
19.7

 
$
17.4

 
$
11.9

Additions based on tax positions related to the current year
 
1.9

 
2.7

 
4.5

Reductions based on tax positions related to the current year
 
(1.5
)
 
—

 
(1.5
)
Additions for tax positions of prior years
 
4.4

 
0.5

 
2.5

Reductions for tax positions of prior years
 
(14.4
)
 
(0.9
)
 
—

Balance at Dec. 31
 
$
10.1

 
$
19.7

 
$
17.4



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, 2017
 
Dec. 31, 2016
NOL and tax credit carryforwards
 
$
(4.0
)
 
$
(5.8
)


It is reasonably possible that PSCo’s amount of unrecognized tax benefits could significantly change in the next 12 months as the IRS Appeals progresses and the IRS and state audits resume. As the IRS Appeals progresses, 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. A reconciliation of the beginning and ending amount of the payable for interest related to unrecognized tax benefits are as follows:
(Millions of Dollars)
 
2017
 
2016
 
2015
Payable for interest related to unrecognized tax benefits at Jan. 1
 
$
(1.1
)
 
$
(0.4
)
 
$
(0.2
)
Interest income (expense) related to unrecognized tax benefits
 
0.8

 
(0.7
)
 
(0.2
)
Payable for interest related to unrecognized tax benefits at Dec. 31
 
$
(0.3
)
 
$
(1.1
)
 
$
(0.4
)


No amounts were accrued for penalties related to unrecognized tax benefits as of Dec. 31, 2017, 2016 or 2015.

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)
 
2017
 
2016
Federal NOL carryforward
 
$
68

 
$
260

Federal tax credit carryforwards
 
30

 
25

State NOL carryforwards
 
679

 
684

State tax credit carryforwards, net of federal detriment (a)
 
17

 
13

Valuation allowances for state credit carryforwards, net of federal detriment (b)
 
(7
)
 
(3
)


(a) 
State tax credit carryforwards are net of federal detriment of $4 million and $7 million as of Dec. 31, 2017 and 2016, respectively.
(b) 
Valuation allowances for state tax credit carryforwards were net of federal benefit of $2 million and $2 million as of Dec. 31, 2017 and 2016, respectively.

The federal carryforward periods expire between 2021 and 2037.  The state carryforward periods expire between 2018 and 2033.

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:
 
 
2017
 
2016 (b)
 
2015 (b)
Federal statutory rate
 
35.0
 %
 
35.0
 %
 
35.0
 %
State income tax on pretax income, net of federal tax effect
 
3.0
 %
 
3.0
 %
 
3.0
 %
Increases (decreases) in tax from:
 


 


 


Tax reform
 
(2.4
)
 
—

 
—

Tax credits recognized, net of federal income tax expense
 
(0.9
)
 
(0.7
)
 
(0.7
)
Regulatory differences - effects of rate changes (a)
 
(0.1
)
 
(0.1
)
 
(0.1
)
Regulatory differences - other utility plant items
 
(0.9
)
 
(0.5
)
 
(0.3
)
Change in unrecognized tax benefits
 
0.2

 
—

 
0.1

Other, net
 
(0.1
)
 
0.4

 
0.4

Effective income tax rate
 
33.8
 %
 
37.1
 %
 
37.4
 %


(a) 
The amortization of excess deferred taxes.
(b) 
The prior periods included in this footnote have been reclassified to conform to current year presentation.

The components of income tax expense for the years ending Dec. 31 were:
(Thousands of Dollars)
 
2017
 
2016
 
2015
Current federal tax expense (benefit)
 
$
40,386

 
$
45,287

 
$
(1,166
)
Current state tax expense (benefit)
 
14,577

 
8,754

 
(727
)
Current change in unrecognized tax (benefit) expense
 
(7,798
)
 
680

 
5,244

Deferred federal tax expense
 
176,410

 
195,064

 
246,096

Deferred state tax expense
 
22,513

 
27,216

 
36,450

Deferred change in unrecognized tax expense (benefit)
 
8,894

 
(278
)
 
(4,650
)
Deferred investment tax credits
 
(2,803
)
 
(2,805
)
 
(2,807
)
Total income tax expense
 
$
252,179

 
$
273,918

 
$
278,440


The components of deferred income tax expense for the years ending Dec. 31 were:
(Thousands of Dollars)
 
2017
 
2016
 
2015
Deferred tax (benefit) expense excluding items below
 
$
(1,244,653
)
 
$
230,931

 
$
285,144

Amortization and adjustments to deferred income taxes on income tax regulatory assets and liabilities
 
1,453,080

 
(8,418
)
 
(7,229
)
Tax expense allocated to other comprehensive income, net of adoption of ASU No. 2018-02, and other
 
(610
)
 
(511
)
 
(19
)
Deferred tax expense
 
$
207,817

 
$
222,002

 
$
277,896



The components of the net deferred tax liability at Dec. 31 were as follows:
(Thousands of Dollars)
 
2017
 
2016 (a)
Deferred tax liabilities:
 
 
 
 
Differences between book and tax bases of property
 
$
1,797,023

 
$
2,967,162

Regulatory assets
 
252,353

 
102,967

Pension expense
 
60,032

 
10,016

Other
 
3,994

 
3,920

Total deferred tax liabilities
 
$
2,113,402

 
$
3,084,065

Deferred tax assets:
 
 

 
 

Regulatory liabilities
 
$
337,973

 
$
(35,813
)
NOL carryforward
 
39,347

 
115,328

Tax credit carryforward
 
39,323

 
34,658

Deferred investment tax credits
 
6,872

 
11,653

Other employee benefits
 
6,779

 
15,274

Deferred fuel costs
 
6,523

 
10,070

Rate refund
 
890

 
7,221

Other
 
31,219

 
36,545

Total deferred tax assets
 
$
468,926

 
$
194,936

Net deferred tax liability
 
$
1,644,476

 
$
2,889,129



(a) 
The prior period included in this footnote has been reclassified to conform to current year presentation.