Income Taxes

Our effective tax rate was 20% for the three months ended March 31, 2012 as compared with 22% for the three months ended March 31, 2011. The following table summarizes the significant differences from the federal statutory rate, which resulted in reduced income tax expense (in thousands):



	Three Months Ended March 31,
	2012			2011
Income Before Income Taxes	$	40,055		$	41,753

Income tax calculated at 35% federal statutory rate	(14,019		)	(14,614		)

Permanent or flow through adjustments:
Flow-through repairs deductions	5,571			3,982
Flow-through of state bonus depreciation deduction	1,371			2,603
Recognition of state net operating loss benefit/valuation allowance release	—			847
State income tax & other, net	(935		)	(1,996		)
	$	6,007		$	5,436

Income tax expense	$	(8,012	)	$	(9,178	)

Our effective tax rate differs from the federal statutory tax rate of 35% primarily due to the regulatory impact of flowing through federal and state tax benefits of repairs deductions and state tax benefit of 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.

Uncertain Tax Positions

We have unrecognized tax benefits of approximately $132.6 million as of March 31, 2012, including approximately $79.6 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 three months ended March 31, 2012, we have not recognized expense for interest or penalties, and do not have any amounts accrued at March 31, 2012 and December 31, 2011, respectively, for the payment of interest and penalties.

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