Income Taxes

12 Months Ended

Dec. 31, 2013

Income Tax Disclosure [Abstract]

Income Taxes

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)		2013		2012		2011		2013		2012		2011
Current payable:
Federal	$	(1,508)	$	(6,053)	$	(1,504)	$	(448)	$	(5,030)	$	(607)
State		8,213		436		4,580		8,322		613		4,658
Net-deferred:
Federal		37,203		37,178		30,115		36,937		36,589		29,255
State		1,163		7,618		3,102		1,223		7,523		3,034
Amortized investment tax credits		(212)		(260)		(301)		(212)		(260)		(301)
Total income tax provision	$	44,859	$	38,919	$	35,992	$	45,822	$	39,435	$	36,039

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
	2013	2012	2011	2013	2012	2011
Statutory federal income tax rate	35.0%	35.0%	35.0%	35.0%	35.0%	35.0%
State income taxes, net of federal benefit	5.1%	5.0%	5.1%	5.1%	5.0%	5.1%
Amortized investment tax credits	(0.2)%	(0.3)%	(0.3)%	(0.2)%	(0.2)%	(0.3)%
Credit for electricity from wind energy	(1.5)%	(1.6)%	(1.8)%	(1.5)%	(1.5)%	(1.8)%
Domestic manufacturing deduction	(0.2)%	0.3%	(0.7)%	(0.2)%	0.3%	(0.7)%
AFUDC Equity, net	(0.7)%	(0.4)%	0.0%	(0.7)%	(0.4)%	0.0%
Other, net, individually insignificant	(0.0)%	(0.3)%	(0.2)%	(0.0)%	(0.5)%	(0.3)%
Effective income tax rate	37.5%	37.7%	37.1%	37.5%	37.7%	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)		2013		2012		2013		2012
Property-related	$	263,881	$	248,545	$	263,881	$	248,545
Investment in ATC		32,696		29,147		27,073		24,993
Bond transactions		1,553		1,643		1,553		1,643
Pension and other postretirement benefits		34,478		82,072		34,478		82,072
Derivatives		26,361		29,134		26,361		29,134
Tax deductible prepayments		7,508		7,233		7,508		7,233
Other		1,995		10,662		1,911		10,634
Gross deferred income tax liabilities		368,472		408,436		362,765		404,254
Future federal tax benefit		0		(25,626)		0		(25,899)
Accrued expenses		(17,195)		(30,277)		(17,195)		(30,228)
Pension and other postretirement benefits		(26,838)		(69,941)		(26,838)		(69,941)
Deferred tax regulatory account		(1,402)		(1,551)		(1,402)		(1,551)
Derivatives		(26,361)		(29,134)		(26,361)		(29,134)
Other		(10,369)		(5,345)		(9,356)		(4,940)
Gross deferred income tax assets		(82,165)		(161,874)		(81,152)		(161,693)
Less valuation allowance		195		365		195		365
Net deferred income tax assets		(81,970)		(161,509)		(80,957)		(161,328)
Deferred income taxes	$	286,502	$	246,927	$	281,808	$	242,926

As of December 31, 2013, MGE Energy did not have a federal net operating loss or tax credit carryforwards. 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, 2013, MGE did not have a federal net operating loss or tax credit carryforwards. 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 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, 2013, both MGE Energy and MGE had approximately $4.0million of Illinois state tax net operating loss deductions that expire between 2014 and 2024 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, 2011 to December 31, 2013, is as follows:

(In thousands)
Unrecognized tax benefits:		2013		2012		2011
Unrecognized tax benefits, January 1,	$	3,204	$	2,364	$	4,377
Additions based on tax positions related to the current year		377		401		128
Additions based on tax positions related to the prior years		424		580		427
Reductions based on tax positions related to the current year		(40)		0		0
Reductions based on tax positions related to the prior years		(1,602)		(141)		(2,568)
Unrecognized tax benefits, December 31,	$	2,363	$	3,204	$	2,364
(In thousands)
Interest on unrecognized tax benefits:		2013		2012		2011
Accrued interest on unrecognized tax benefits, January 1,	$	314	$	216	$	214
Reduction in interest expense on uncertain tax positions		(275)		0		0
Interest expense on uncertain tax positions		62		98		2
Accrued interest on unrecognized tax benefits, December 31,	$	101	$	314	$	216

Unrecognized tax benefits are liabilities shown with Other Deferred Liabilities on the December 31, 2013 and December 31, 2012, 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. During 2013, the IRS issued guidance on the treatment of electric generation repairs. This guidance prompted the reversal of the unrecognized tax benefits for these repairs. At December 31, 2013, MGE Energy and MGE have an unrecognized tax benefit in the amount of $2.4 million related to temporary tax differences associated with the change in income tax method of accounting for electric transmission and distribution repairs and gas distribution repairs. At December 31, 2012, MGE Energy and MGE had an unrecognized tax benefit in the amount of $3.2 million primarily 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, MGE Energy and MGE had an unrecognized tax benefit 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, 2013or December 31, 2012related to federal permanent differences and tax credits. Unrecognized tax benefits at December 31, 2011 related to federal permanent differences and tax credits were$0.2million.

The unrecognized tax benefits at December 31, 2013, are not expected to significantly increase or decrease within the next twelve months. However, the IRS may issue guidance on the treatment of 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. 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	2010 through 2013
MGE Energy Wisconsin combined reporting corporation return	2009 through 2013

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 became taxable in tax years beginning after December 31, 2012. In 2012, MGE was able to specifically identifyassets within the retiree health benefit plans to be used for payment of future health insurance premiums and prescription drug coverage. This process will allow certain Medicare Part D subsidy receipts to be non-taxable.

d.Final Tangible Property Regulations.

In September 2013, the IRS and Treasury Department released final regulations under Section 162(a) and 263(a) on the deduction and capitalization of expenditures related to tangible property, replacing the 2011 temporary regulations issued in December 2011. The final regulations did not have a material impact on MGE Energy's and MGE's consolidated financial statements.