Taxes

3 Months Ended

Mar. 31, 2018

Taxes - MGE Energy and MGE.

Effective Tax Rate.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the Tax Act). The Tax Act makes broad and complex changes to the U.S. tax code, including the reduction in the U.S. federal corporate tax rate from 35 percent to 21 percent, effective January 1, 2018. MGE Energy and MGE recorded a provisional decrease in deferred tax assets and deferred tax liabilities as of December 31, 2017. In accordance with Staff Accounting Bulletin 118, any subsequent adjustment to these amounts will be recorded in the quarter of 2018 when the analysis is complete. No adjustments have been recorded in the first quarter of 2018. Beginning January 1, 2018, MGE began amortization of the regulated utility excess deferred taxes recognized using a normalization method of accounting. For the three months ended March 31, 2018, MGE recognized $0.6 million of excess deferred taxes as a reduction of revenue and a corresponding increase in a regulatory liability. The amount and timing of the cash impacts will depend on the period over which certain income tax benefits are provided to customers, which will be determined by the PSCW.

Customer rates approved for 2018 reflect an income tax rate of 35 percent. MGE received a PSCW order to defer the over-collection of income tax expense as a result of the decrease in tax rate to 21 percent. As of March 31, 2018, MGE has deferred $3.3 million as a regulatory liability and recorded a corresponding reduction in operating revenues. The PSCW reached a preliminary decision in April 2018 for the return of the over-collection of income tax expense. The preliminary decision includes a one-time bill credit in July of 2018 for the first six months of 2018 over-collection and a monthly bill credit beginning in August 2018 of the estimated remaining annual amount to be returned to customers. Any over/under recovery of the actual costs will be subject to the PSCW's annual review in the following year and is then reflected in future billings to retail customers. A final order is expected in May 2018.

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
Three Months Ended March 31,	2018	2017	2018	2017
Statutory federal income tax rate	21.0 %	35.0 %	21.0 %	35.0 %
State income taxes, net of federal benefit	6.4 %	5.3 %	6.0 %	5.1 %
Amortized investment tax credits	(0.1)%	(0.1)%	(0.1)%	(0.1)%
Credit for electricity from wind energy	(0.5)%	(1.8)%	(0.5)%	(2.0)%
Domestic manufacturing deduction	-%	(1.3)%	-%	(1.4)%
AFUDC equity, net	(0.4)%	(0.2)%	(0.4)%	(0.2)%
Amortization of utility excess deferred tax - tax reform^(a)	(1.8)%	-%	(2.0)%	-%
Other, net, individually insignificant	(0.4)%	(0.2)%	(0.6)%	(0.2)%
Effective income tax rate	24.2 %	36.7 %	23.4 %	36.2 %

(a) Included are impacts of the Tax Act for the regulated utility for excess deferred taxes recognized using a normalization method of accounting.