
5.	Income Taxes

Our effective income tax rate for the three and nine months ended September 30, 2011 was 32.3% and 34.0%, respectively, compared with 37.3% and 39.8% for the comparable prior year periods. We evaluate our effective income tax rate at each interim period and adjust it accordingly as facts and circumstances warrant. The differences between federal income taxes computed at the federal statutory rate and reported income taxes for the three and nine months ended September 30, 2011 were primarily due to the favorable impact of federal tax credits, audit settlements and adjustments to our accruals due to the filing of our 2010 income tax returns offset in part by the unfavorable impact of state and local income taxes. The differences between federal income taxes computed at the federal statutory rate and reported income taxes for the three and nine months ended September 30, 2010 were primarily due to an increase in our state deferred income taxes to reflect the impact of changes in the estimated income tax rate at which temporary differences would be realized and the unfavorable impact of state and local income taxes, offset in part by the favorable impact of federal tax credits.

Investment in Refined Coal Facility — In January 2011, we acquired a noncontrolling interest in a limited liability company, which was established to invest in and manage a refined coal facility in North Dakota. The facility’s refinement processes qualify for federal tax credits that are expected to be realized through 2019 in accordance with Section 45 of the Internal Revenue Code. Our initial consideration for this investment consisted of a cash payment of $48 million.

We account for our investment in this entity using the equity method of accounting, recognizing our share of the entity’s results and other reductions in “Equity in net losses of unconsolidated entities,” within our Condensed Consolidated Statement of Operations. Losses relating to our investment in this entity were immaterial for the three and nine months ended September 30, 2011. Our tax provision for the three and nine months ended September 30, 2011 was reduced by $4 million and $11 million, respectively, primarily as a result of tax credits realized from this investment. See Note 14 for additional information related to this investment.

Investment in Federal Low-income Housing Tax Credits — In April 2010, we acquired a noncontrolling interest in a limited liability company established to invest in and manage low-income housing properties. The entity’s low-income housing investments qualify for federal tax credits that are expected to be realized through 2020 in accordance with Section 42 of the Internal Revenue Code.

We account for our investment in this entity using the equity method of accounting. We recognize our share of the entity’s results and reductions in the value of our investment in “Equity in net losses of unconsolidated entities,” within our Condensed Consolidated Statement of Operations. The value of our investment decreases as the tax credits are generated and utilized. During the three and nine months ended September 30, 2011, we recognized $5 million and $17 million of losses relating to our equity investment in this entity, $2 million and $6 million of interest expense, and a reduction in our tax provision of $9 million (including $7 million of tax credits) and $27 million (including $18 million of tax credits), respectively. During the three and nine months ended September 30, 2010, we recognized $4 million and $12 million of losses associated with our equity investment, $3 million and $4 million of interest expense, and a reduction in our tax provision of $7 million (including $4 million of tax credits) and $18 million (including $12 million of tax credits), respectively.

Recent Legislation — The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act, signed into law on December 17, 2010, included an extension of the bonus depreciation allowance through the end of 2012 and increased the amount of qualifying capital expenditures that can be depreciated immediately from 50 percent to 100 percent. The 100 percent depreciation deduction applies to qualifying property placed in service from September 8, 2010 through December 31, 2011. The acceleration of deductions on 2011 capital expenditures resulting from the bonus depreciation provision will have no impact on our effective tax rate. However, the ability to accelerate depreciation deductions is expected to decrease our 2011 cash taxes by approximately $190 million. Taking the accelerated tax depreciation in the current period will result in increased cash taxes in future periods when the accelerated deductions for these capital expenditures would have otherwise been taken.