Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

10.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)	2021			2020			2019			2021			2020			2019
Current payable:
Federal	$	(2,589	)	$	4,179		$	8,017		$	(3,434	)	$	3,716		$	7,616
State		3,002			5,095			4,647			3,163			4,790			4,608
Net-deferred:
Federal		(1,473	)		6,181			3,510			(1,951	)		4,756			2,242
State		6,310			4,182			3,702			5,605			3,787			3,044
Amortized investment tax credits		(1,135	)		(214	)		(92	)		(1,135	)		(214	)		(92	)
Total income tax provision	$	4,115		$	19,423		$	19,784		$	2,248		$	16,835		$	17,418

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
	2021				2020				2019				2021				2020				2019
Statutory federal income tax rate		21.0		%		21.0		%		21.0		%		21.0		%		21.0		%		21.0		%
State income taxes, net of federal benefit		6.2				6.3				6.2				6.2				6.3				6.1
Amortized investment tax credits		(1.5	)			(0.2	)			(0.1	)			(1.5	)			(0.2	)			(0.1	)
Credit for electricity from wind energy		(6.0	)			(6.2	)			(5.7	)			(6.4	)			(6.8	)			(6.2	)
AFUDC equity, net		(0.9	)			(1.2	)			(0.3	)			(1.0	)			(1.4	)			(0.3	)
Amortization of utility excess deferred tax(a)		(14.8	)			(2.0	)			(2.4	)			(15.8	)			(2.2	)			(2.7	)
Other, net, individually insignificant		(0.3	)			(0.3	)			(0.1	)			(0.3	)			(0.3	)			(0.1	)
Effective income tax rate		3.7		%		17.4		%		18.6		%		2.2		%		16.4		%		17.7		%

(a)Included are impacts of the 2017 Tax Act for the regulated utility for excess deferred taxes recognized using a normalization method of accounting in recognition of IRS rules that restrict the rate at which excess deferred taxes may be returned to utility customers. For the years ended December 31, 2021, 2020 and 2019, MGE recognized $2.6 million, $2.2 million, and $2.6 million, respectively. Included in the 2021 rate settlement was a one-time return to customers of the electric portion of excess deferred taxes related to the 2017 Tax Act not restricted by IRS normalization rules. For the year ended December 31, 2021, MGE recognized $13.2 million.

The significant components of deferred tax assets and liabilities that appear on the consolidated balance sheets as of December 31 are as follows:

	MGE Energy					MGE
(In thousands)	2021		2020			2021		2020
Deferred tax assets
Investment in ATC	$	20,868	$	21,688		$	—	$	—
Federal tax credits		39,161		19,199			39,161		20,080
Accrued expenses		11,053		11,115			11,047		11,105
Pension and other postretirement benefits		24,888		35,446			24,888		35,446
Deferred tax regulatory account		42,401		41,318			42,401		41,318
Derivatives		241		3,852			241		3,852
Leases		7,218		6,704			7,218		6,704
Other		17,390		14,073			17,442		14,125
Gross deferred income tax assets		163,220		153,395			142,398		132,630
Less valuation allowance		—		(38	)		—		(38	)
Net deferred income tax assets	$	163,220	$	153,357		$	142,398	$	132,592
Deferred tax liabilities
Property-related	$	274,613	$	257,397		$	274,613	$	257,397
Investment in ATC		52,731		51,518			—		—
Bond transactions		534		595			534		595
Pension and other postretirement benefits		34,781		45,658			34,781		45,658
Derivatives		241		3,852			241		3,852
Tax deductible prepayments		10,222		9,059			10,210		9,059
Leases		7,218		6,704			7,218		6,704
Other		14,029		10,045			13,686		9,717
Gross deferred income tax liabilities		394,369		384,828			341,283		332,982
Deferred income taxes, net	$	231,149	$	231,471		$	198,885	$	200,390

The components of federal and state tax benefit carryovers as of December 31, are as follows:

	MGE Energy						MGE
(In thousands)	2021			2020			2021			2020
Federal tax credits	$	39,161		$	19,199		$	39,161		$	20,080
State net operating losses		3			621			3			621
Valuation allowances for state net operating losses		(3	)		(621	)		(3	)		(621	)

Federal tax credit carryovers begin to expire in 2040 and state net operating loss carryforwards expire in 2023. Federal tax credits represent the deferred tax asset and net operating loss amounts represent the tax loss that is carried forward. The state valuation allowance reduces MGE Energy’s and MGE’s state carryforward losses to estimated realizable value due to the uncertainty of future income in various state tax jurisdictions.

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 interest is as follows:

(In thousands)
Unrecognized Tax Benefits:	2021			2020			2019
Unrecognized tax benefits, January 1,	$	2,281		$	2,093		$	1,949
Additions based on tax positions related to the current year		714			796			741
Additions based on tax positions related to the prior years		-			-			84
Reductions based on tax positions related to the prior years		(642	)		(608	)		(681	)
Unrecognized tax benefits, December 31,	$	2,353		$	2,281		$	2,093
(In thousands)
Interest on Unrecognized Tax Benefits:	2021			2020			2019
Accrued interest on unrecognized tax benefits, January 1,	$	154		$	176		$	191
Reduction in interest expense on uncertain tax positions		(98	)		(124	)		(137	)
Interest expense on uncertain tax positions		94			102			122
Accrued interest on unrecognized tax benefits, December 31,	$	150		$	154		$	176

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, 2021, 2020, and 2019, 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. In addition, as of December 31, 2019, MGE Energy and MGE have unrecognized tax benefits relating to permanent differences and tax credits of less than $0.1 million. As of December 31, 2021 and 2020, there were no unrecognized tax benefits relating to permanent differences and tax credits.

The unrecognized tax benefits as of December 31, 2021, 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	2018 through 2021
MGE Energy Wisconsin combined reporting corporation return	2017 through 2021