Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

10.Income Taxes.

a.MGE Energy and MGE Income Taxes.

MGE Energy files a consolidated federal income tax return that includes the operations of all subsidiary companies. The subsidiaries calculate their respective federal income tax provisions as if they were separate taxable entities.

On a consolidated and separate company basis, the income tax provision consists of the following provision (benefit) components for the years ended December 31:

	MGE Energy									MGE
(In thousands)	2022			2021			2020			2022			2021			2020
Current payable:
Federal	$	2,102		$	(2,589	)	$	4,179		$	934		$	(3,434	)	$	3,716
State		2,385			3,002			5,095			2,060			3,163			4,790
Net-deferred:
Federal		14,770			(1,473	)		6,181			14,397			(1,951	)		4,756
State		8,665			6,310			4,182			8,370			5,605			3,787
Amortized investment tax credits		(1,698	)		(1,135	)		(214	)		(1,698	)		(1,135	)		(214	)
Total income tax provision	$	26,224		$	4,115		$	19,423		$	24,063		$	2,248		$	16,835

The consolidated income tax provision differs from the amount computed by applying the statutory federal income tax rate to income before income taxes, as follows:

	MGE Energy												MGE
	2022				2021				2020				2022				2021				2020
Statutory federal income tax rate		21.0		%		21.0		%		21.0		%		21.0		%		21.0		%		21.0		%
State income taxes, net of federal benefit		6.2				6.2				6.3				6.2				6.2				6.3
Amortized investment tax credits		(0.7	)			(1.5	)			(0.2	)			(0.7	)			(1.5	)			(0.2	)
Credit for electricity from wind energy		(5.4	)			(6.0	)			(6.2	)			(5.7	)			(6.4	)			(6.8	)
AFUDC equity, net		(0.3	)			(0.9	)			(1.2	)			(0.3	)			(1.0	)			(1.4	)
Amortization of utility excess deferred tax(a)		(2.0	)			(14.8	)			(2.0	)			(2.1	)			(15.8	)			(2.2	)
Other, net, individually insignificant		0.3				(0.3	)			(0.3	)			0.2				(0.3	)			(0.3	)
Effective income tax rate		19.1		%		3.7		%		17.4		%		18.6		%		2.2		%		16.4		%

(a)Included are impacts of the 2017 Tax Act for the regulated utility for excess deferred taxes recognized using a normalization method of accounting in recognition of IRS rules that restrict the rate at which the excess deferred taxes may be returned to utility customers. For the years ended December 31, 2022, 2021, and 2020, MGE recognized $4.1 million, $2.6 million, and $2.2 million, respectively. Included in the 2021 rate settlement was a one-time return to customers of the electric portion of excess deferred taxes related to the 2017 Tax Act not restricted by IRS normalization rules. For the year ended December 31, 2021, MGE recognized $13.2 million. Included in the 2022 and 2023 rate settlement was a net collection from customers of the gas portion of deficient deferred taxes related to the 2017 Tax Act not restricted by IRS normalization rules. For the year ended December 31, 2022, MGE recognized $1.3 million.

The significant components of deferred tax assets and liabilities that appear on the consolidated balance sheets as of December 31 are as follows:

	MGE Energy				MGE
(In thousands)	2022		2021		2022		2021
Deferred tax assets
Investment in ATC	$	20,098	$	20,868	$	—	$	—
Federal tax credits		46,282		39,161		46,282		39,161
Accrued expenses		10,642		11,053		10,644		11,047
Pension and other postretirement benefits		20,687		24,888		20,687		24,888
Deferred tax regulatory account		42,999		42,401		42,999		42,401
Derivatives		1,416		241		1,416		241
Leases		7,137		7,218		7,137		7,218
Other		17,438		17,390		17,490		17,442
Gross deferred income tax assets		166,699		163,220		146,655		142,398
Less valuation allowance		—		—		—		—
Net deferred income tax assets	$	166,699	$	163,220	$	146,655	$	142,398
Deferred tax liabilities
Property-related	$	295,872	$	274,613	$	295,872	$	274,613
Investment in ATC		52,840		52,731		—		—
Bond transactions		472		534		472		534
Pension and other postretirement benefits		35,590		34,781		35,590		34,781
Derivatives		1,416		241		1,416		241
Tax deductible prepayments		10,308		10,222		10,308		10,210
Leases		7,137		7,218		7,137		7,218
Other		15,254		14,029		15,118		13,686
Gross deferred income tax liabilities		418,889		394,369		365,913		341,283
Deferred income taxes, net	$	252,190	$	231,149	$	219,258	$	198,885

The components of federal and state tax benefit carryovers as of December 31, are as follows:

	MGE Energy						MGE
(In thousands)	2022			2021			2022			2021
Federal tax credits	$	46,282		$	39,161		$	46,282		$	39,161
State net operating losses		3			3			3			3
Valuation allowances for state net operating losses		(3	)		(3	)		(3	)		(3	)

Federal tax credit carryovers begin to expire in 2040 and state net operating loss carryforwards expire in 2023. Federal tax credits represent the deferred tax asset and net operating loss amounts represent the tax loss that is carried forward. The state valuation allowance reduces state carryforward losses to estimated realizable value due to the uncertainty of future income in various state tax jurisdictions.

b.Accounting for Uncertainty in Income Taxes - MGE Energy and MGE.

The difference between the tax benefit amount taken on prior year tax returns, or expected to be taken on a current year tax return, and the tax benefit amount recognized in the financial statements is accounted for as an unrecognized tax benefit.

A tabular reconciliation of unrecognized tax benefits and interest is as follows:

(In thousands)
Unrecognized Tax Benefits:	2022			2021			2020
Unrecognized tax benefits, January 1,	$	2,353		$	2,281		$	2,093
Additions based on tax positions related to the current year		731			714			796
Additions based on tax positions related to the prior years		—			—			—
Reductions based on tax positions related to the prior years		(599	)		(642	)		(608	)
Unrecognized tax benefits, December 31,	$	2,485		$	2,353		$	2,281
(In thousands)
Interest on Unrecognized Tax Benefits:	2022			2021			2020
Accrued interest on unrecognized tax benefits, January 1,	$	150		$	154		$	176
Reduction in interest expense on uncertain tax positions		(95	)		(98	)		(124	)
Interest expense on uncertain tax positions		134			94			102
Accrued interest on unrecognized tax benefits, December 31,	$	189		$	150		$	154

Unrecognized tax benefits are classified with "Other deferred liabilities" on the consolidated balance sheets. The interest component recoverable in rates is offset by a regulatory asset.

As of December 31, 2022, 2021, and 2020, MGE Energy and MGE have an unrecognized tax benefit primarily related to temporary tax differences associated with the change in income tax method of accounting for electric generation and electric and gas distribution repairs. As of December 31, 2022, 2021, and 2020, there were no unrecognized tax benefits relating to permanent differences and tax credits.

The unrecognized tax benefits as of December 31, 2022, are not expected to significantly increase or decrease within the next twelve months. In addition, statutes of limitations will expire for MGE Energy and MGE tax returns. The impact of the statutes of limitations expiring is not anticipated to be material. The following table shows tax years that remain subject to examination by major jurisdiction:

Taxpayer	Open Years
MGE Energy and consolidated subsidiaries in federal return	2019 through 2022
MGE Energy Wisconsin combined reporting corporation return	2018 through 2022