Income Taxes

12 Months Ended

Dec. 31, 2016

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)		2016		2015		2014		2016		2015		2014
Current payable:
Federal	$	16,908	$	16,837	$	(891)	$	17,521	$	19,295	$	637
State		3,287		2,774		(589)		3,497		3,443		(451)
Net-deferred:
Federal		17,571		15,951		39,284		16,391		13,538		38,553
State		4,850		5,976		10,600		4,485		5,305		10,625
Amortized investment tax credits		(103)		(175)		(219)		(103)		(175)		(219)
Total income tax provision	$	42,513	$	41,363	$	48,185	$	41,791	$	41,406	$	49,145

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
	2016	2015	2014	2016	2015	2014
Statutory federal income tax rate	35.0 %	35.0 %	35.0 %	35.0 %	35.0 %	35.0 %
State income taxes, net of federal benefit	5.1 %	5.2 %	5.1 %	5.1 %	5.2 %	5.1 %
Amortized investment tax credits	(0.1)%	(0.2)%	(0.2)%	(0.1)%	(0.2)%	(0.2)%
Credit for electricity from wind energy	(1.6)%	(1.8)%	(1.7)%	(1.7)%	(1.8)%	(1.7)%
Domestic manufacturing deduction	(1.3)%	(1.4)%	-%	(1.3)%	(1.4)%	-%
AFUDC equity, net	(0.2)%	(0.1)%	(0.8)%	(0.2)%	(0.1)%	(0.8)%
Other, net, individually insignificant	(0.9)%	-%	0.1 %	(0.9)%	-%	0.1 %
Effective income tax rate	36.0 %	36.7 %	37.5 %	35.9 %	36.7 %	37.5 %

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

		MGE Energy				MGE
(In thousands)		2016		2015		2016		2015
Property-related	$	344,721	$	327,918	$	344,630	$	327,822
Investment in ATC^(a)		71,898		38,213		-		30,382
Bond transactions		1,324		1,422		1,324		1,422
Pension and other postretirement benefits		63,516		57,697		63,516		57,697
Derivatives		20,304		21,660		20,304		21,660
Tax deductible prepayments		8,404		8,011		8,404		8,011
Other		16,606		14,997		16,571		14,831
Gross deferred income tax liabilities		526,773		469,918		454,749		461,825
Investment in ATC^(a)		(31,212)		-		-		-
Accrued expenses		(22,410)		(21,391)		(22,410)		(21,391)
Pension and other postretirement benefits		(48,860)		(46,582)		(48,860)		(46,582)
Deferred tax regulatory account		(903)		(1,047)		(903)		(1,047)
Derivatives		(20,304)		(21,660)		(20,304)		(21,660)
Other		(19,340)		(18,523)		(19,224)		(18,589)
Gross deferred income tax assets		(143,029)		(109,203)		(111,701)		(109,269)
Less valuation allowance		69		70		69		70
Net deferred income tax assets		(142,960)		(109,133)		(111,632)		(109,199)
Deferred income taxes	$	383,813	$	360,785	$	343,117	$	352,626

(a) As of December 1, 2016, MGE transferred its ownership interest in ATC to MGE Energy, resulting in a deferred intercompany gain and a corresponding step-up in tax basis.

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, 2016, 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.

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, 2014 to December 31, 2016, is as follows:

(In thousands)
Unrecognized Tax Benefits:		2016		2015		2014
Unrecognized tax benefits, January 1,	$	2,528	$	2,365	$	2,363
Additions based on tax positions related to the current year		452		488		610
Additions based on tax positions related to the prior years		39		520		618
Reductions based on tax positions related to the prior years		(532)		(845)		(1,226)
Unrecognized tax benefits, December 31,	$	2,487	$	2,528	$	2,365

(In thousands)
Interest on Unrecognized Tax Benefits:		2016		2015		2014
Accrued interest on unrecognized tax benefits, January 1,	$	311	$	92	$	101
Reduction in interest expense on uncertain tax positions		(27)		(102)		(97)
Interest expense on uncertain tax positions		104		321		88
Accrued interest on unrecognized tax benefits, December 31,	$	388	$	311	$	92

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

At December 31, 2016, 2015, and 2014, MGE Energy and MGE had 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, at December 31, 2016, MGE Energy and MGE had unrecognized tax benefits relating to permanent differences and tax credits of less than $0.1 million. There were no unrecognized tax benefits at December 31, 2015 or 2014, related to federal permanent differences and tax credits.

The unrecognized tax benefits at December 31, 2016, 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	2013 through 2016
	MGE Energy Wisconsin combined reporting corporation return	2012 through 2016