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 NSP-Minnesota) generally beginning in 2018, include:

•
Corporate federal tax rate reduction from 35 percent to 21 percent 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 NSP-Minnesota 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;
•
$133 million and $56 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;
•
$19 million of total estimated income tax expense related to the federal tax reform implementation, and a $5 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 Tax Loss Carryback Claims — In 2012-2015, NSP-Minnesota 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, NSP-Minnesota 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 — NSP-Minnesota 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. 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 — NSP-Minnesota is a member of the Xcel Energy affiliated group that files consolidated state income tax returns. As of Dec. 31, 2017, NSP-Minnesota’s earliest open tax year that is subject to examination by state taxing authorities under applicable statutes of limitations is 2009. In 2016, the state of Minnesota began an audit of years 2010 through 2014. As of Dec. 31, 2017, Minnesota had not proposed any material adjustments.

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
 
$
10.2

 
$
21.5

Unrecognized tax benefit — Temporary tax positions
 
7.9

 
39.3

Total unrecognized tax benefit
 
$
18.1

 
$
60.8



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
 
$
60.8

 
$
55.4

 
$
30.4

Additions based on tax positions related to the current year
 
2.7

 
3.7

 
14.0

Reductions based on tax positions related to the current year
 
(1.7
)
 
(0.2
)
 
(2.1
)
Additions for tax positions of prior years
 
5.7

 
3.9

 
14.0

Reductions for tax positions of prior years
 
(49.4
)
 
(2.0
)
 
(0.9
)
Balance at Dec. 31
 
$
18.1

 
$
60.8

 
$
55.4



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
 
$
(12.8
)
 
$
(19.3
)


It is reasonably possible that NSP-Minnesota’s amount of unrecognized tax benefits could significantly change in the next 12 months as the IRS Appeals progresses and audit resumes, the Minnesota audit progresses, and other state audits resume. As the IRS Appeals and Minnesota audit progresses, it is reasonably possible that the amount of unrecognized tax benefit could decrease up to approximately $7 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)
 
Dec. 31, 2017
 
Dec. 31, 2016
 
Dec. 31, 2015
Payable for interest related to unrecognized tax benefits at Jan. 1
 
$
(2.0
)
 
$
(0.2
)
 
$
(0.1
)
Interest income (expense) income related to unrecognized tax benefits
 
1.1

 
(1.8
)
 
(0.1
)
Payable for interest related to unrecognized tax benefits at Dec. 31
 
$
(0.9
)
 
$
(2.0
)
 
$
(0.2
)


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
 
$
632

 
$
974

Federal tax credit carryforwards
 
302

 
227

State NOL carryforwards
 
276

 
254

Valuation allowances for state NOL carryforwards
 
(1
)
 
(1
)
State tax credit carryforwards, net of federal detriment (a)
 
91

 
68

Valuation allowances for state credit carryforwards, net of federal detriment (b) 
 
(82
)
 
(60
)


(a) 
State tax credit carryforwards are net of federal detriment of $24 million and $37 million as of Dec. 31, 2017 and 2016, respectively.
(b) 
Valuation allowances for state tax credit carryforwards were net of federal benefit of $22 million and $33 million as of Dec. 31, 2017 and 2016, respectively.

The federal carryforward periods expire between 2021 and 2037. The state carryforward periods expire between 2019 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:
 
 
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
 
5.8
 %
 
5.8
 %
 
5.8
 %
Increases (decreases) in tax from:
 


 


 


Wind production tax credits recognized
 
(11.4
)
 
(8.2
)
 
(5.1
)
Other tax credits recognized, net of federal income tax expense
 
(1.1
)
 
(0.8
)
 
(1.2
)
Tax reform
 
2.7

 
—

 
—

Change in unrecognized tax benefits
 
(1.6
)
 
0.2

 
1.5

Regulatory differences - effects of rate changes (a)
 
(0.1
)
 
(0.1
)
 
(0.2
)
Regulatory differences - other utility plant items
 
(0.2
)
 
(0.2
)
 
(1.4
)
NOL carryback
 
—

 
—

 
(0.9
)
Other, net
 
(0.2
)
 
(0.2
)
 
0.1

Effective income tax rate
 
28.9
 %
 
31.5
 %
 
33.6
 %


(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)
 
$
29,694

 
$
19,300

 
$
(41,031
)
Current state tax expense (benefit)
 
14,704

 
9,386

 
(3,974
)
Current change in unrecognized tax (benefit) expense
 
(36,242
)
 
1,284

 
20,632

Deferred federal tax expense
 
121,598

 
142,324

 
167,486

Deferred state tax expense
 
46,647

 
53,816

 
52,107

Deferred change in unrecognized tax expense (benefit)
 
24,927

 
72

 
(12,757
)
Deferred investment tax credits
 
(1,648
)
 
(1,663
)
 
(1,729
)
Total income tax expense
 
$
199,680

 
$
224,519

 
$
180,734


The components of deferred income tax expense for the years ending Dec. 31 were:
(Thousands of Dollars)
 
2017
 
2016
 
2015
Deferred tax expense excluding items below
 
$
(1,176,411
)
 
$
225,127

 
$
205,262

Amortization and adjustments to deferred income taxes on income tax regulatory assets and liabilities
 
1,369,948

 
(28,692
)
 
1,401

Tax (expense) benefit allocated to other comprehensive income, net of adoption of ASU No. 2018-02, and other
 
(365
)
 
(223
)
 
173

Deferred tax expense
 
$
193,172

 
$
196,212

 
$
206,836



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
 
$
2,269,525

 
$
3,286,091

Regulatory assets
 
223,344

 
78,655

Pension expense
 
54,190

 
64,223

Other
 
17,292

 
22,807

Total deferred tax liabilities
 
$
2,564,351

 
$
3,451,776

Deferred tax assets:
 


 


Regulatory liabilities
 
$
387,232

 
$
(66,962
)
Tax credit carryforward
 
310,157

 
234,078

NOL carryforward
 
153,476

 
361,391

Other employee benefits
 
37,289

 
57,210

Deferred investment tax credits
 
6,839

 
10,663

Rate refund
 
6,602

 
21,094

Other
 
50,415

 
45,550

Total deferred tax assets
 
$
952,010

 
$
663,024

Net deferred tax liability
 
$
1,612,341

 
$
2,788,752



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