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Income Taxes
 12 Months Ended
Dec. 31, 2012
Income Taxes Disclosure [Abstract]  
Income Taxes

12.       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, MGE Energy's and MGE's income tax provision consists of the following provision (benefit) components for the years ended December 31:

  MGE Energy MGE
(In thousands) 2012 2011 2010 2012 2011 2010
Current payable:            
Federal$(6,053)$(1,504)$6,148$(5,030)$(607)$7,499
State 436 4,580 2,603 613 4,658 2,764
Net-deferred:            
Federal 37,178 30,115 20,811 36,589 29,255 19,861
State 7,618 3,102 4,570 7,523 3,034 4,493
Amortized investment tax credits (260) (301) (312) (260) (301) (312)
Total income tax provision$38,919$35,992$33,820$39,435$36,039$34,305

MGE Energy's and MGE's 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 
  2012 2011 2010 2012 2011 2010 
 Statutory federal income tax rate35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 
 State income taxes, net of federal benefit5.0% 5.1% 5.1% 5.0% 5.1% 5.1% 
 Amortized investment tax credits(0.3)% (0.3)% (0.3)% (0.2)% (0.3)% (0.3)% 
 Credit for electricity from wind energy(1.6)% (1.8)% (1.7)% (1.5)% (1.8)% (1.7)% 
 Domestic manufacturing deduction0.3% (0.7)% (0.4)% 0.3% (0.7)% (0.4)% 
 AFUDC Equity, net(0.4)% 0.0% 0.0% (0.4)% 0.0% 0.0% 
 Other, net, individually insignificant(0.3)% (0.2)% (0.7)% (0.5)% (0.3)% (0.7)% 
 Effective income tax rate37.7% 37.1% 37.0% 37.7% 37.0% 37.0% 

The significant components of deferred tax liabilities (assets) that appear on MGE Energy's and MGE's consolidated balance sheets as of December 31 as follows:

   MGE Energy MGE 
 (In thousands) 2012 2011 2012 2011 
 Property-related$248,545$188,235$248,545$188,235 
 Investment in ATC 29,147 26,896 24,993 23,594 
 Bond transactions 1,643 1,746 1,643 1,746 
 Pension and other postretirement benefits 82,072 68,352 82,072 68,352 
 Derivatives 29,134 16,498 29,134 16,498 
 Tax deductible prepayments 7,233 7,276 7,233 7,276 
 Other 10,662 12,714 10,634 12,697 
  Gross deferred income tax liabilities 408,436 321,717 404,254 318,398 
 Future federal tax benefit (25,626) 0 (25,899) 0 
 Accrued expenses (30,277) (28,458) (30,228) (28,438) 
 Pension and other postretirement benefits (69,941) (69,646) (69,941) (69,646) 
 Deferred tax regulatory account (1,551) (1,828) (1,551) (1,828) 
 Derivatives (29,134) (16,498) (29,134) (16,498) 
 Other (5,345) (2,782) (4,940) (2,783) 
  Gross deferred income tax assets (161,874) (119,212) (161,693) (119,193) 
  Less valuation allowance 365 365 365 365 
  Net deferred income tax assets (161,509) (118,847) (161,328) (118,828) 
  Deferred income taxes$246,927$202,870$242,926$199,570 

As of December 31, 2012, MGE Energy had approximately $63.4 million and $3.4 million of net operating loss and tax credit carryforwards, respectively. The net operating loss and tax credit carryforwards resulted in deferred tax assets of $22.2 million and $3.4 million, respectively, as of December 31, 2012.

 

As of December 31, 2012, MGE had approximately $64.2 million and $3.4 million of net operating loss and tax credit carryforwards, respectively. The net operating loss and tax credit carryforwards resulted in deferred tax assets of $22.5 million and $3.4 million, respectively, as of December 31, 2012.

 

The net operating loss carryforwards and tax credit carryforwards begin to expire in 2031. Both MGE Energy and MGE anticipate having future taxable income sufficient to utilize these deferred tax assets.

 

The valuation allowance reduces MGE Energy's and MGE's deferred tax assets for state carryforward losses to estimated realizable value due to the uncertainty of future income estimates in various state tax jurisdictions.

 

For tax purposes, as of December 31, 2012, both MGE Energy and MGE had approximately $7.5 million of state tax net operating loss deductions that expire between 2013 and 2023 if unused.

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

 

MGE Energy and MGE account for 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 as an unrecognized tax benefit.

 

A tabular reconciliation of unrecognized tax benefits and interest from January 1, 2010 to December 31, 2012, is as follows:

 (In thousands)       
 Unrecognized tax benefits: 2012 2011 2010 
 Unrecognized tax benefits, January 1,$2,364$4,377$176 
 Additions based on tax positions related to the current year 401 128 386 
 Additions based on tax positions related to the prior years 580 427 3,815 
 Reductions based on tax positions related to the prior years (141) (2,568) 0 
 Unrecognized tax benefits, December 31,$3,204$2,364$4,377 
         
 (In thousands)       
 Interest on unrecognized tax benefits: 2012 2011 2010 
 Accrued interest on unrecognized tax benefits, January 1,$216$214$21 
 Interest expense on uncertain tax positions 98 2 193 
 Accrued interest on unrecognized tax benefits, December 31,$314$216$214 

Unrecognized tax benefits are liabilities shown with Other Deferred Liabilities on the December 31, 2012 and December 31, 2011, consolidated balance sheets. The interest component is offset by a regulatory asset.

 

MGE Energy filed an application with its 2009 tax returns to change its income tax methods of accounting for electric generation, transmission and distribution repairs and its 2010 tax returns for gas distribution repairs. These method changes accelerated tax deductions for repairs in accordance with Treasury Regulations and case law, as compared to the prior method of claiming tax depreciation on project costs. During 2011, the IRS issued guidance on the treatment of electric transmission and distribution repairs. This guidance has prompted the reversal of a majority of the unrecognized tax benefits for these repairs. At December 31, 2012, MGE Energy and MGE have an unrecognized tax benefit in the amount of $3.2 million related to temporary tax differences associated with the change in income tax method of accounting for electric generation, transmission and distribution repairs and gas distribution repairs. At December 31, 2011, unrecognized tax benefits in the amount of $2.4 million primarily related to temporary tax differences associated with the change in income tax method of accounting for electric generation repairs, and gas distribution repairs. There were no unrecognized tax benefits at December 31, 2012 related to federal permanent differences and tax credits. Unrecognized tax benefits at December 31, 2011 related to federal permanent differences and tax credits was $0.2 million.

 

The unrecognized tax benefits at December 31, 2012, are not expected to significantly increase or decrease within the next twelve months. However, the IRS may issue guidance on the treatment of electric generation and/or gas distribution repairs. 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. Due to the filing of an amended return and subsequent examination, the 2007 federal and Wisconsin returns remains open. The following table shows tax years that remain subject to examination by major jurisdiction:

 TaxpayerOpen Years 
 MGE Energy and consolidated subsidiaries in federal return2007 through 2012 
 MGE Energy Wisconsin separate corporation return2007 through 2008 
 MGE Wisconsin separate corporation return2007 through 2008 
 MGE Energy Wisconsin combined reporting corporation return2009 through 2012 

c.       Medicare Part D Subsidy - MGE Energy and MGE.

 

In March 2010, the Patient Protection and Affordable Care Act (the PPACA) was enacted. The PPACA effectively changes the tax treatment of federal subsidies paid to sponsors of retiree health benefit plans that provide a benefit that is at least actuarially equivalent to the benefits under Medicare Part D. As a result of the PPACA, these subsidy payments will become taxable in tax years beginning after December 31, 2012. In connection with accounting for Income Taxes, companies are required to reflect the impact of the change in tax law in the period that includes the enactment date of March 23, 2010. MGE anticipates recovery in rates of the incremental tax expense as a result of the legislation. In 2012, MGE specifically identified amounts within the retiree health benefit plans to be used for payment of future health insurance premiums, reducing the amount that MGE anticipates recovering in rates.