Income Taxes

12 Months Ended

Dec. 31, 2015

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)		2015		2014		2013		2015		2014		2013
Current payable:
Federal	$	16,837	$	(891)	$	(1,508)	$	19,295	$	637	$	(448)
State		2,774		(589)		8,213		3,443		(451)		8,322
Net-deferred:
Federal		15,951		39,284		37,203		13,538		38,553		36,937
State		5,976		10,600		1,163		5,305		10,625		1,223
Amortized investment tax credits		(175)		(219)		(212)		(175)		(219)		(212)
Total income tax provision	$	41,363	$	48,185	$	44,859	$	41,406	$	49,145	$	45,822

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
	2015	2014	2013	2015	2014	2013
Statutory federal income tax rate	35.0 %	35.0 %	35.0 %	35.0 %	35.0 %	35.0 %
State income taxes, net of federal benefit	5.2 %	5.1 %	5.1 %	5.2 %	5.1 %	5.1 %
Amortized investment tax credits	(0.2)%	(0.2)%	(0.2)%	(0.2)%	(0.2)%	(0.2)%
Credit for electricity from wind energy	(1.8)%	(1.7)%	(1.5)%	(1.8)%	(1.7)%	(1.5)%
Domestic manufacturing deduction	(1.4)%	-%	(0.2)%	(1.4)%	-%	(0.2)%
AFUDC equity, net	(0.1)%	(0.8)%	(0.7)%	(0.1)%	(0.8)%	(0.7)%
Other, net, individually insignificant	-%	0.1 %	-%	-%	0.1 %	-%
Effective income tax rate	36.7 %	37.5 %	37.5 %	36.7 %	37.5 %	37.5 %

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

		MGE Energy				MGE
(In thousands)		2015		2014		2015		2014
Property-related	$	327,918	$	312,903	$	327,822	$	312,807
Investment in ATC		38,213		36,140		30,382		29,156
Bond transactions		1,422		1,420		1,422		1,420
Pension and other postretirement benefits		57,697		57,847		57,697		57,847
Derivatives		21,660		22,331		21,660		22,331
Tax deductible prepayments		8,011		8,077		8,011		8,077
Other		14,997		10,451		14,831		10,259
Gross deferred income tax liabilities		469,918		449,169		461,825		441,897
Future tax benefit		-		(4,092)		-		(4,092)
Accrued expenses		(21,391)		(32,091)		(21,391)		(32,091)
Pension and other postretirement benefits		(46,582)		(44,994)		(46,582)		(44,994)
Deferred tax regulatory account		(1,047)		(1,211)		(1,047)		(1,211)
Derivatives		(21,660)		(22,331)		(21,660)		(22,331)
Other		(18,523)		(5,957)		(18,589)		(3,746)
Gross deferred income tax assets		(109,203)		(110,676)		(109,269)		(108,465)
Less valuation allowance		70		70		70		70
Net deferred income tax assets		(109,133)		(110,606)		(109,199)		(108,395)
Deferred income taxes	$	360,785	$	338,563	$	352,626	$	333,502

As of December 31, 2015, MGE Energy and MGE did not have federal net operating losses or federal tax credit carryforwards. As of December 31, 2014, MGE Energy and MGE had approximately $16.5 million and $5.4 million of state net operating loss and federal tax credit 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 and reflected in deferred tax liabilities on the consolidated balance sheets.

Our state 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, 2015, 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.

In November 2015, the FASB issued authoritative accounting guidance on the presentation of deferred taxes in the financial statements. Prior to the authoritative guidance, deferred taxes were presented as a net current asset or liability and net noncurrent asset or liability. As a result of the Accounting Standard Update (ASU), all deferred tax assets and liabilities, along with any related valuation allowance, will be classified as noncurrent on the consolidated balance sheets. The authoritative guidance states that early adoption of the ASU is permitted using either prospective or retrospective application. MGE Energy and MGE have adopted this standard early by retrospectively applying the guidance to all prior periods presented in addition to the current year ended December 31, 2015. For MGE Energy and MGE, as of December 31, 2014, current assets ("Deferred income taxes") decreased by approximately $3.5 million and $1.3 million, respectively, and noncurrent liabilities ("Deferred income taxes") decreased by approximately $3.5 million and $1.3 million, respectively, as a cumulative result of the guidance.

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, 2013 to December 31, 2015, is as follows:

(In thousands)
Unrecognized Tax Benefits:		2015		2014		2013
Unrecognized tax benefits, January 1,	$	2,365	$	2,363	$	3,204
Additions based on tax positions related to the current year		488		610		377
Additions based on tax positions related to the prior years		520		618		424
Reductions based on tax positions related to the current year		-		-		(40)
Reductions based on tax positions related to the prior years		(845)		(1,226)		(1,602)
Unrecognized tax benefits, December 31,	$	2,528	$	2,365	$	2,363

(In thousands)
Interest on Unrecognized Tax Benefits:		2015		2014		2013
Accrued interest on unrecognized tax benefits, January 1,	$	92	$	101	$	314
Reduction in interest expense on uncertain tax positions		(102)		(97)		(275)
Interest expense on uncertain tax positions		321		88		62
Accrued interest on unrecognized tax benefits, December 31,	$	311	$	92	$	101

Unrecognized tax benefits of $2.5 million and $0.4 million are liabilities shown with "Other deferred liabilities" on the December 31, 2015 and 2014, consolidated balance sheets, respectively. At December 31, 2014, $2.0 million of unrecognized tax benefits are netted with deferred tax liabilities 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, 2015 and 2014, 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, 2015, 2014, or 2013 related to federal permanent differences and tax credits.

The unrecognized tax benefits at December 31, 2015, 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	2012 through 2015
	MGE Energy Wisconsin combined reporting corporation return	2011 through 2015