Income Taxes

Our effective tax rate was 4.1% and 13.7% for the three and nine months ended September 30, 2011 as compared with 24.7% and 24.8% for the three and nine months ended September 30, 2010. The following table summarizes the significant components of the income tax expense:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
	(in thousands)
Income Before Income Taxes	$	15,530		$	19,108		$	67,737		$	72,818

Income tax calculated at 35% Federal statutory rate	(5,435		)	(6,687		)	(23,707		)	(25,485		)

Permanent or flow through adjustments:
Flow-through repairs deductions	3,243			2,341			8,745			6,902
Flow-through of state bonus depreciation deduction	1,170			—			4,452			—
Recognition of state NOL benefit/valuation allowance release	—			—			2,402			2,178
State income tax & other, net	387			(383		)	(1,189		)	(1,625		)
	$	4,800		$	1,958		$	14,410		$	7,455

Income tax expense	$	(635	)	$	(4,729	)	$	(9,297	)	$	(18,030	)

Our effective tax rate differs from the federal tax rate of 35% primarily due to repairs and state tax bonus depreciation deductions. The regulatory accounting treatment of these deductions requires immediate income recognition for temporary tax differences of this type, which is referred to as the flow-through method. When the flow-through method of accounting for temporary differences is reflected in regulated revenues we record deferred income taxes and establish related regulatory assets and liabilities.

In addition we maintain a valuation allowance against certain state net operating loss (NOL) carryforwards based on our forecast of taxable income and our estimate that a portion of these NOL carryforwards will more likely than not expire before we can use them. The nine months ended September 30, 2011 includes a $2.4 million favorable state NOL carryforward utilization benefit due to 2010 taxable income being higher than our original estimate. By comparison, we had recognized a $2.2 million valuation allowance release for the nine months ended September 30, 2010 based on our forecast of 2010 taxable income at that time. We reversed this benefit during the fourth quarter of 2010 after the law extending bonus depreciation was implemented.

Uncertain Tax Positions

We have unrecognized tax benefits of approximately $131.4 million as of September 30, 2011, including approximately $79.8 million that, if recognized, would impact our effective tax rate. We do not anticipate that total unrecognized tax benefits will significantly change due to the settlement of audits or the expiration of statutes of limitations within the next twelve months.

The Internal Revenue Service (IRS) issued guidance during the third quarter of 2011 providing a safe harbor method for determining the tax treatment of repair costs related to electric transmission and distribution property. We are evaluating whether or not we want to elect the safe harbor method, which may result in a change in related repairs deductions and unrecognized tax benefits.

Our policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. During the nine months ended September 30, 2011, we have not recognized expense for interest or penalties, and do not have any amounts accrued at September 30, 2011 and December 31, 2010, respectively, for the payment of interest and penalties.

Our federal tax returns from 2000 forward remain subject to examination by the IRS.