Taxes

9 Months Ended

Sep. 30, 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 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 fourth quarter of 2018 when the analysis is complete. No adjustments have been recorded during 2018. Beginning January 1, 2018, MGE began amortizing the regulated utility excess deferred taxes recognized using a normalization method of accounting. For the three and nine months ended September 30, 2018, MGE recognized $0.7 million and $1.9 million, respectively, 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. In January 2018, the PSCW issued an order directing Wisconsin investor-owned utilities to defer the over-collection of income tax expense as a result of the decrease in tax rate to 21 percent. The PSCW issued an order in May 2018 to return to customers the estimated 2018 over-collection of income tax expense. The decision includes a one-time bill credit on customer bills to reflect the estimate of the over-collection for January through June 2018, along with a monthly volumetric bill credit which began in July 2018 and continues through the remainder of 2018 for the estimated remaining annual amount. As of September 30, 2018, MGE returned $5.9 million to customers through bill credits. Any over/under recovery of the actual costs will be subject to the PSCW's review in a future rate case. As of September 30, 2018, MGE has deferred $2.6 million as a regulatory liability and recorded a corresponding reduction in operating revenues for over-collection of income tax expense (net of customer bill credits).

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 September 30,	2018	2017	2018	2017
Statutory federal income tax rate	21.0 %	35.0 %	21.0 %	35.0 %
State income taxes, net of federal benefit	6.3 %	5.2 %	6.2 %	5.1 %
Amortized investment tax credits	(0.1)%	(0.3)%	(0.1)%	(0.4)%
Credit for electricity from wind energy	(0.3)%	(1.1)%	(0.2)%	(1.1)%
Domestic manufacturing deduction	-%	(1.5)%	-%	(1.4)%
AFUDC equity, net	(0.6)%	(0.1)%	(0.6)%	(0.1)%
Amortization of utility excess deferred tax - tax reform^(a)	(1.8)%	-%	(1.8)%	-%
Other, net, individually insignificant	-%	(0.3)%	0.1 %	(0.4)%
Effective income tax rate	24.5 %	36.9 %	24.6 %	36.7 %

	MGE Energy		MGE
Nine Months Ended September 30,	2018	2017	2018	2017
Statutory federal income tax rate	21.0 %	35.0 %	21.0 %	35.0 %
State income taxes, net of federal benefit	6.3 %	5.2 %	6.2 %	5.1 %
Amortized investment tax credits	(0.1)%	(0.3)%	(0.1)%	(0.4)%
Credit for electricity from wind energy	(0.3)%	(1.3)%	(0.3)%	(1.4)%
Domestic manufacturing deduction	-%	(1.6)%	-%	(1.7)%
AFUDC equity, net	(0.8)%	(0.2)%	(0.8)%	(0.2)%
Amortization of utility excess deferred tax - tax reform^(a)	(1.8)%	-%	(2.0)%	-%
Other, net, individually insignificant	-%	(0.2)%	0.1 %	(0.1)%
Effective income tax rate	24.3 %	36.6 %	24.1 %	36.3 %

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