Income Taxes

12 Months Ended

Dec. 31, 2014

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)		2014		2013		2012		2014		2013		2012
Current payable:
Federal	$	(891)	$	(1,508)	$	(6,053)	$	637	$	(448)	$	(5,030)
State		(589)		8,213		436		(451)		8,322		613
Net-deferred:
Federal		39,284		37,203		37,178		38,553		36,937		36,589
State		10,600		1,163		7,618		10,625		1,223		7,523
Amortized investment tax credits		(219)		(212)		(260)		(219)		(212)		(260)
Total income tax provision	$	48,185	$	44,859	$	38,919	$	49,145	$	45,822	$	39,435

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
	2014	2013	2012	2014	2013	2012
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 %	5.1 %	5.0 %	5.1 %	5.1 %	5.0 %
Amortized investment tax credits	(0.2)%	(0.2)%	(0.3)%	(0.2)%	(0.2)%	(0.2)%
Credit for electricity from wind energy	(1.7)%	(1.5)%	(1.6)%	(1.7)%	(1.5)%	(1.5)%
Domestic manufacturing deduction	-%	(0.2)%	0.3 %	-%	(0.2)%	0.3 %
AFUDC equity, net	(0.8)%	(0.7)%	(0.4)%	(0.8)%	(0.7)%	(0.4)%
Other, net, individually insignificant	0.1 %	-%	(0.3)%	0.1 %	-%	(0.5)%
Effective income tax rate	37.5 %	37.5 %	37.7 %	37.5 %	37.5 %	37.7 %

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)		2014		2013		2014		2013
Property-related	$	312,903	$	263,881	$	312,807	$	263,881
Investment in ATC		36,140		32,696		29,156		27,073
Bond transactions		1,420		1,553		1,420		1,553
Pension and other postretirement benefits		57,847		34,478		57,847		34,478
Derivatives		22,331		26,361		22,331		26,361
Tax deductible prepayments		8,077		7,508		8,077		7,508
Other		10,451		1,995		10,259		1,911
Gross deferred income tax liabilities		449,169		368,472		441,897		362,765
Future tax benefit		(4,092)		-		(4,092)		-
Accrued expenses		(32,091)		(17,195)		(32,091)		(17,195)
Pension and other postretirement benefits		(44,994)		(26,838)		(44,994)		(26,838)
Deferred tax regulatory account		(1,211)		(1,402)		(1,211)		(1,402)
Derivatives		(22,331)		(26,361)		(22,331)		(26,361)
Other		(5,957)		(10,369)		(3,746)		(9,356)
Gross deferred income tax assets		(110,676)		(82,165)		(108,465)		(81,152)
Less valuation allowance		70		195		70		195
Net deferred income tax assets		(110,606)		(81,970)		(108,395)		(80,957)
Deferred income taxes	$	338,563	$	286,502	$	333,502	$	281,808

As of December 31, 2014, MGE Energy and MGE have approximately $16.5 million and $5.4 million of state net operating loss and federal tax carryforwards, respectively. The net operating loss and tax credit carryforwards resulted in deferred tax assets of $0.8 million and $5.4 million, respectively, as of December 31, 2014 that are shown net of $2.0 million of unrecognized tax benefits.

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, 2014, both MGE Energy and MGE had approximately $1.4 million of state tax net operating loss deductions subject to a valuation allowance that expire between 2020 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, 2012 to December 31, 2014, is as follows:

(In thousands)
Unrecognized tax benefits:		2014		2013		2012
Unrecognized tax benefits, January 1,	$	2,363	$	3,204	$	2,364
Additions based on tax positions related to the current year		610		377		401
Additions based on tax positions related to the prior years		618		424		580
Reductions based on tax positions related to the current year		-		(40)		-
Reductions based on tax positions related to the prior years		(1,226)		(1,602)		(141)
Unrecognized tax benefits, December 31,	$	2,365	$	2,363	$	3,204

(In thousands)
Interest on unrecognized tax benefits:		2014		2013		2012
Accrued interest on unrecognized tax benefits, January 1,	$	101	$	314	$	216
Reduction in interest expense on uncertain tax positions		(97)		(275)		-
Interest expense on uncertain tax positions		88		62		98
Accrued interest on unrecognized tax benefits, December 31,	$	92	$	101	$	314

Unrecognized tax benefits of $0.4 million and $2.4 million are liabilities shown with other deferred liabilities on the December 31, 2014 and December 31, 2013, consolidated balance sheets, respectively. At December 31, 2014, $2.0 of unrecognized tax benefits are netted with deferred tax assets on the consolidated balance sheet. The interest component is offset by a regulatory asset.

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 in 2013. With the adoption of this new guidance in 2014 unrecognized tax benefits related to electric generation were added. At December 31, 2014 and 2012, 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. At December 31, 2013, MGE Energy and MGE had an unrecognized tax benefit primarily related to temporary tax differences associated with the change in income tax method of accounting for electric and gas distribution repairs. There were no unrecognized tax benefits at December 31, 2014, 2013, or 2012 related to federal permanent differences and tax credits.

The unrecognized tax benefits at December 31, 2014, 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	2011 through 2014
	MGE Energy Wisconsin combined reporting corporation return	2010 through 2014

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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