Income Taxes

12 Months Ended

Dec. 31, 2018

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, the income tax provision consists of the following provision (benefit) components for the years ended December 31:

		MGE Energy						MGE
(In thousands)		2018		2017		2016		2018		2017		2016
Current payable:
Federal	$	18,622	$	21,125	$	16,908	$	19,926	$	21,512	$	17,521
State		5,163		5,129		3,287		5,704		5,316		3,497
Net-deferred:
Federal		120		(8,346)		17,571		(2,563)		(11,195)		16,391
State		3,629		4,264		4,850		2,494		3,435		4,485
Amortized investment tax credits		(100)		(78)		(103)		(100)		(78)		(103)
Total income tax provision	$	27,434	$	22,094	$	42,513	$	25,461	$	18,990	$	41,791

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
	2018	2017	2016	2018	2017	2016
Statutory federal income tax rate	21.0 %	35.0 %	35.0 %	21.0 %	35.0 %	35.0 %
State income taxes, net of federal benefit	6.3 %	5.1 %	5.1 %	6.2 %	5.1 %	5.1 %
Amortized investment tax credits	(0.1)%	-%	(0.1)%	(0.1)%	-%	(0.1)%
Credit for electricity from wind energy	(0.3)%	(1.6)%	(1.6)%	(0.4)%	(1.7)%	(1.7)%
Domestic manufacturing deduction	-%	(1.4)%	(1.3)%	-%	(1.5)%	(1.3)%
AFUDC equity, net	(0.6)%	(0.2)%	(0.2)%	(0.5)%	(0.2)%	(0.2)%
Federal income tax rate reduction	-%	(18.1)%	-%	-%	(19.3)%	-%
Amortization of utility excess deferred tax^(a)	(1.8)%	-%	-%	(2.0)%	-%	-%
Other, net, individually insignificant	0.1 %	(0.3)%	(0.9)%	0.2 %	(0.4)%	(0.9)%
Effective income tax rate	24.6 %	18.5 %	36.0 %	24.4 %	17.0 %	35.9 %

		MGE Energy				MGE
(In thousands)		2018		2017		2018		2017
Deferred tax assets
Investment in ATC		23,638		24,781		-		-
Accrued expenses		15,385		15,135		15,385		15,135
Pension and other postretirement benefits		34,914		32,196		34,914		32,196
Deferred tax regulatory account		37,121		36,124		37,121		36,124
Derivatives		8,861		11,525		8,861		11,525
Other		15,137		12,790		15,185		12,831
Gross deferred income tax assets		135,056		132,551		111,466		107,811
Less valuation allowance		(86)		(86)		(86)		(86)
Net deferred income tax assets		134,970		132,465		111,380		107,725

Deferred tax liabilities
Property-related	$	244,114	$	238,437	$	244,114	$	238,544
Investment in ATC		50,771		48,324		-		-
Bond transactions		765		832		765		832
Pension and other postretirement benefits		47,644		42,919		47,644		42,919
Derivatives		8,861		11,525		8,861		11,525
Tax deductible prepayments		6,014		6,169		6,014		6,169
Other		8,753		9,389		8,598		9,222
Gross deferred income tax liabilities		366,922		357,595		315,996		309,211
Deferred income taxes	$	231,952	$	225,130	$	204,616	$	201,486

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 a reduction in the U.S. federal corporate tax rate from 35 percent to 21 percent.

The SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting for certain income tax effects. In accordance with SAB 118 any subsequent adjustment to these amounts would be recorded in 2018 when the analysis is complete. The analysis was completed and no material adjustments have been recorded during 2018.

The Tax Act reduced the corporate tax rate to 21 percent, effective January 1, 2018. The one-time impacts recorded to remeasure deferred income tax balances at the 21 percent corporate federal income tax rate as of December 31, 2017 were as follows:

(In thousands)		MGE Energy		MGE
Net Decrease in Deferred Tax Liability	$	176,871	$	156,493
Decrease in Regulatory Asset		4,347		4,347
Increase in Regulatory Liability^(b)		130,497		130,497
Decrease in Investment ATC		20,375		-
Net Deferred Income Tax Benefit Recorded^(c)		21,651		21,649

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

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 is accounted for as an unrecognized tax benefit.

A tabular reconciliation of unrecognized tax benefits and is as follows:

(In thousands)
Unrecognized Tax Benefits:		2018		2017		2016
Unrecognized tax benefits, January 1,	$	1,924	$	2,487	$	2,528
Additions based on tax positions related to the current year		425		552		452
Additions based on tax positions related to the prior years		272		19		39
Reductions based on tax positions related to the prior years		(672)		(1,134)		(532)
Unrecognized tax benefits, December 31,	$	1,949	$	1,924	$	2,487

(In thousands)
Interest on Unrecognized Tax Benefits:		2018		2017		2016
Accrued interest on unrecognized tax benefits, January 1,	$	165	$	388	$	311
Reduction in interest expense on uncertain tax positions		(136)		(312)		(27)
Interest expense on uncertain tax positions		162		89		104
Accrued interest on unrecognized tax benefits, December 31,	$	191	$	165	$	388

Unrecognized tax benefits are classified with "Other deferred liabilities" on the consolidated balance sheets. The interest component recoverable in rates is offset by a regulatory asset.

As of December 31, 2018, 2017, and 2016, unrecognized tax benefits 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. In addition, as of December 31, 2018, unrecognized tax benefits relating to permanent differences and tax credits was $0.3 million. As of December 31, 2017 and 2016, unrecognized tax benefits relating to permanent differences and tax credits was less than $0.1 million.

The unrecognized tax benefits as of December 31, 2018, 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	2015 through 2018
	MGE Energy Wisconsin combined reporting corporation return	2013 through 2018