Income taxes:

12 Months Ended

Dec. 31, 2011

Income taxes:

Income taxes:

3. Income taxes:

    We are a not-for-profit membership corporation subject to federal and state income taxes. As a taxable electric cooperative, we have annually allocated income and deductions between patronage and non-patronage activities.

    Although we believe that treatment of non-member sales as patronage-sourced income is appropriate, this treatment has not been examined by the Internal Revenue Service. If this treatment was not sustained, we believe that the amount of taxes on such non-member sales, after allocating related expenses against the revenues from such sales, would not have a material adverse effect on financial condition or results of operations and cash flows.

    We account for income taxes pursuant to the authoritative guidance for accounting for income taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.

    The difference between the statutory federal income tax rate on income before income taxes and our effective income tax rate is summarized as follows:

	2011		2010		2009
Statutory federal income tax rate	35.0	%	35.0	%	35.0%
Patronage exclusion	(32.6	%)	(32.9	%)	(31.4%)
Tax credits	0.0	%	(0.0	%)	(0.1%)
Other	(2.4	%)	(2.1	%)	(3.6%)
Effective income tax rate	(0.0	%)	(0.0	%)	(0.1%)

    The components of the net deferred tax assets as of December 31, 2011 and 2010 were as follows:

		(dollars in thousands)
		2011			2010
Deferred tax assets
Net operating losses	$	29,724		$	29,724
Tax credits (alternative minimum tax and other)		1,535			1,633
		31,259			31,357
Less: Valuation allowance		(31,259	)		(31,357	)
Net deferred tax assets	$	–		$	–
Deferred tax liabilities
Depreciation	$	–		$	–
		–			–
Net deferred tax liabilities	$	–		$	–

    As of December 31, 2011, we have federal tax net operating loss carryforwards and alternative minimum tax credits as follows:

		(dollars in thousands)
Expiration Date		Minimum Alternative Tax Credits		Tax Credits		NOLs
2018	$	–	$	–	$	61,533
2019		–		–		10,516
2020		–		–		4,362
None		1,633		–		–
	$	1,633	$	–	$	76,411

    The net operating loss expiration dates start in the year 2018 and end in the year 2020. Due to the tax basis method for allocating patronage and as shown by the above valuation allowance, it is not likely that the deferred tax assets related to tax credits and net operating losses will be realized. The change in the valuation allowance from 2010 to 2011 was the result of the reduction in deferred tax assets due to the utilization and expiration of tax credits, net operating losses and the implementation of authoritative guidance.

    The authoritative guidance for income taxes addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. We may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.

    We file a U.S. federal consolidated income tax return. The U.S. federal statute of limitations remains open for the year 2008 forward. State jurisdictions have statutes of limitations generally ranging from three to five years from the filing of an income tax return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. Years still open to examination by tax authorities in major state jurisdictions include 2008 forward.

    As a result of the adoption in 2006 of the authoritative guidance for uncertain tax positions, we recognized a $96,000,000 increase in the liability for unrecognized tax benefits. This change in the liability resulted in no decrease to the January 1, 2009 balance of patronage capital as the effects were offset by recognition of deferred tax assets. During each of the third quarters of 2009 and 2010, the two remaining open years expired. Accordingly, this liability and related deferred tax asset was reduced by $24,000,000 during each third quarter. At the end of the third quarter of 2010, the last open year related to uncertain tax position expired.

    The unrecognized tax benefit reconciliation from beginning balance to ending balance is as follows for the years 2011, 2010, and 2009:

		(dollars in thousands)
Unrecognized tax benefits at year end (December 31, 2009)	$	24,000
Reduction of tax positions as a result of statue of limitation expiration		(24,000	)
Unrecognized tax benefits at year end (December 31, 2010)	$	–
Reduction of tax positions as a result of statue of limitation expiration		–
Unrecognized tax benefits at year end (December 31, 2011)	$	–