INCOME TAXES

12 Months Ended

Dec. 31, 2011

INCOME TAXES

INCOME TAXES

NOTE 15—INCOME TAXES

Deferred Income Tax Assets and Liabilities

The principal components of deferred income tax assets and liabilities recognized on the balance sheets as of December 31 are included in the table below. Certain temporary differences are netted in the table when the offsetting amount is recorded as a regulatory asset or liability. This is consistent with regulatory treatment.

(Millions)	2011			2010
Deferred income tax assets
Tax credit carryforwards	$	97.6		$	108.6
Employee benefits	—			40.2
Price risk management	70.0			32.3
Other	57.6			94.1
Total deferred income tax assets	$	225.2		$	275.2
Valuation allowance	(8.0		)	(8.2		)
Net deferred income tax assets	$	217.2		$	267.0
Deferred income tax liabilities
Plant-related	$	1,103.0		$	955.0
Regulatory deferrals	43.4			64.3
Employee benefits	9.6			—
Other	37.7			40.5
Total deferred income tax liabilities	$	1,193.7		$	1,059.8
Total net deferred income tax liabilities	$	976.5		$	792.8
Balance Sheet presentation
Current deferred income tax assets	$	94.2		$	67.7
Long-term deferred income tax liabilities	1,070.7			860.5
Net deferred income tax liabilities	$	976.5		$	792.8

Net deferred income tax liabilities increased $183.7 million in 2011. The net increase was driven by 100% bonus depreciation being available throughout 2011. An increase in tax deductions resulting from incremental contributions to our various employee benefit plans also contributed to the increase in net deferred income tax liabilities. Also during 2011, several states signed legislation that impacted the recognition of our deferred income tax assets and liabilities. Illinois made changes to its corporate combined income tax rates, which are effective for the years 2011 through 2024. Michigan replaced its business tax with a state income tax, effective January 1, 2012. The Wisconsin tax code was changed to conform to the federal tax code, retroactive to December 2010. These changes in state income taxes, including regulatory impacts, combined to increase net deferred income tax liabilities by $12.7 million.

Deferred tax credit carryforwards at December 31, 2011, included $74.0 million of alternative minimum tax credits related to tax credits available under Section 45K (formerly Section 29) of the Internal Revenue Code, which can be carried forward indefinitely. Other deferred tax credit carryforwards included $15.0 million of general business credits, which have a carryforward period of 20 years, with the majority of the general business credits to expire in 2028, $7.6 million of foreign tax credits, which have a carryforward period of 10 years, with the majority of the foreign tax credits to expire in 2020, and $1.0 million of state tax credits, which have a carryforward period of 5 years, with the majority of the state tax credits to expire after 2016.

At December 31, 2011, we had deferred income tax assets of $16.9 million reflecting state operating loss carryforwards. The majority of the state operating loss carryforwards will be used over a 20 year period starting in 2012. If the remaining deferred tax assets are not used to offset future state taxable income, they will expire between 2012 and 2029 as follows:

2012 through 2017	$	0.1 million
2018 through 2023	$	3.4 million
2024 through 2029	$	2.9 million

Valuation allowances are established for certain state operating losses and federal tax credits based on our projected ability to realize the benefit of these losses by offsetting future taxable income. Realization is dependent on generating sufficient taxable income prior to expiration. As of December 31, 2011, the entire valuation allowance was related to noncurrent deferred income tax assets. There was no significant change in the valuation allowance during 2011.

Regulated utilities record certain adjustments related to deferred income taxes to regulatory assets and liabilities. As the related temporary differences reverse, the regulated utilities are prospectively refunding taxes to or collecting taxes from customers for which deferred taxes were recorded in prior years at rates potentially different than current rates or upon enactment of changes in tax law. The net regulatory asset for these and other regulatory tax effects totaled $31.2 million and $16.2 million at December 31, 2011, and 2010, respectively.

Income Before Taxes

Income before taxes includes the following components of foreign and domestic income:

	For the Years Ended December 31,
(Millions)	2011			2010		2009
Domestic	$	364.9		$	361.1	$	13.1
Foreign	(0.1		)	10.6		0.3
Total income before taxes	$	364.8		$	371.7	$	13.4

Provision for Income Tax Expense

The components of the provision for income taxes were as follows:

(Millions)	2011			2010			2009
Current provision
Federal	$	(44.6	)	$	(83.7	)	$	1.9
State	5.8			(10.8		)	14.1
Foreign	(0.2		)	6.8			7.1
Total current provision	(39.0		)	(87.7		)	23.1
Deferred provision
Federal	159.7			216.2			62.9
State	14.8			25.3			4.1
Foreign	0.1			(3.8		)	(7.0		)
Total deferred provision	174.6			237.7			60.0
Unrecognized tax benefits	0.9			(0.6		)	(2.0		)
Penalties	0.7			—			—
Investment tax credits, net	(1.1		)	(0.9		)	(1.1		)
Interest	(2.2		)	(0.3		)	3.7
Total provision for income taxes related to continuing operations	133.9			148.2			83.7
Discontinued operations	0.5			0.2			1.7
Total	$	134.4		$	148.4		$	85.4

Statutory Rate Reconciliation

The following table presents a reconciliation of the difference between the effective tax rate and the amount computed by applying the statutory federal tax rate to income before taxes.

	2011					2010					2009
(Millions, except for percentages)	Rate		Amount			Rate		Amount			Rate		Amount
Statutory federal income tax	35.0	%	$	127.7		35.0	%	$	130.1		35.0	%	$	4.7
State income taxes, net	5.3		19.2			5.1		19.1			105.2		14.1
Plant-related	0.5		1.7			—		0.1			(12.7	)	(1.7		)
Unrecognized tax benefits and interest	0.2		0.6			(0.2	)	(0.9		)	12.7		1.7
Goodwill	—		—			—		—			486.6		65.2
Investment tax credit — amortization	(0.5	)	(1.8		)	(0.5	)	(1.8		)	(19.4	)	(2.6		)
Federal tax credits	(1.9	)	(7.1		)	(1.8	)	(6.7		)	8.2		1.1
Benefits and compensation	(2.3	)	(8.4		)	1.3		5.0			(26.9	)	(3.6		)
Other differences, net	0.4		2.0			1.0		3.3			35.9		4.8
Effective income tax	36.7	%	$	133.9		39.9	%	$	148.2		624.6	%	$	83.7

Unrecognized Tax Benefits

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

(Millions)	2011			2010			2009
Balance at January 1	$	30.4		$	31.8		$	22.4
Increase related to tax positions taken in prior years	3.1			9.2			10.2
Decrease related to tax positions taken in prior years	(1.6		)	(10.6		)	(0.2		)
Increase related to tax positions taken in current year	0.9			—			—
Decrease related to tax positions taken in current year	—			—			(0.1		)
Decrease related to settlements	(9.4		)	—			(0.3		)
Decrease related to lapse of statutes	(1.0		)	—			(0.2		)
Balance at December 31	$	22.4		$	30.4		$	31.8

We had accrued interest of $5.0 million and accrued penalties of $3.6 million related to unrecognized tax benefits at December 31, 2011. We had accrued interest of $6.9 million and accrued penalties of $3.0 million related to unrecognized tax benefits at December 31, 2010.

As of December 31, 2011, recognition in subsequent periods of $5.1 million of unrecognized tax benefits related to continuing operations could affect our effective tax rate. Also, recognition in subsequent periods of $9.7 million of unrecognized tax benefits related to discontinued operations could affect our provision for income taxes.

Our subsidiaries file income tax returns in the United States federal jurisdiction, in various state and local jurisdictions, and in Canada.

With a few exceptions, we are no longer subject to federal income tax examinations by the IRS for years prior to 2009. During 2011, we effectively settled the majority of our IRS audits for the 2004 through 2008 tax years, which decreased our liability for unrecognized tax benefits by $9.4 million. In 2011, the IRS commenced examinations of tax years 2009 and 2010.

We file state tax returns based on income in our major operating jurisdictions of Wisconsin, Illinois, Michigan, and Minnesota. We also file tax returns in other state and local jurisdictions with varying statutes of limitations. With a few exceptions, we are no longer subject to state and local tax examinations by tax authorities for years prior to 2007. As of December 31, 2011, we were subject to examination by state or local tax authorities for the 2007 through 2010 tax years. As of December 31, 2011, our earliest open tax years that were subject to examination by state taxing authorities in our major operating jurisdictions were as follows:

State	Year
Illinois	2003
Wisconsin	2005
Michigan	2007
Minnesota	2007

During 2011, Wisconsin commenced an examination of tax years 2007 and 2008. During 2011, the Illinois taxing authority continued its examination of the 2007 tax year, which began in 2010. The Illinois taxing authority also continued its examination of the 2003 through 2006 tax years of PELLC and its consolidated subsidiaries, which began in 2007.

As of December 31, 2011, we were subject to examination by foreign income tax authorities for the 2007 through 2010 tax years. With a few exceptions, we are no longer subject to foreign income tax examinations by tax authorities for years prior to 2007.

In the next 12 months, it is reasonably possible that we and our subsidiaries will settle open examinations in multiple taxing jurisdictions related to tax years prior to 2011, resulting in a decrease in unrecognized tax benefits of as much as $13.0 million.