INCOME TAXES

6 Months Ended

Jun. 30, 2011

INCOME TAXES

INCOME TAXES

NOTE 5—INCOME TAXES

Our effective tax rate was 39.7% for the three months ended June 30, 2011, and 36.0% for the six months ended June 30, 2011.  Our effective tax rate was 34.8% for the three months ended June 30, 2010, and 37.5% for the six months ended June 30, 2010.

We calculate our provision for income taxes based on an interim effective tax rate that reflects our projected annual effective tax rate before certain discrete items.

Our effective tax rate for the quarter ended June 30, 2011, was higher than the federal tax rate of 35%.  This difference was primarily due to state income taxes and a tax law change in Wisconsin in the second quarter of 2011.  The Wisconsin tax code was conformed to the federal tax code through passage of a budget bill, retroactive to December 2010.  In accounting for this tax law change, we expensed an additional $1.6 million of deferred income taxes in 2011 related to the Medicare Part D subsidy discussed below.  An increase in wind production tax credits partially offset the higher effective tax rate.

Our effective tax rate for the six months ended June 30, 2010, was higher than the federal tax rate of 35%.  This difference was primarily due to state income taxes and the 2010 federal health care reform.  The 2010 federal health care reform eliminated the tax deduction for retiree prescription drug charges that are paid by employers and are offset by the receipt of a federal Medicare Part D subsidy.  As a result, we expensed $4.5 million of deferred income taxes during the first quarter of 2010.  An increase in wind production tax credits partially offset the higher effective tax rate.

In the second quarter of 2011, we decreased our liability for unrecognized tax benefits by $4.2 million.  For the six months ended June 30, 2011, we decreased our liability for unrecognized tax benefits by $4.6 million.  The decreases were driven by the effective settlement of an IRS examination for the 2006 through 2008 tax years in the second quarter of 2011.