Taxes

12 Months Ended

Dec. 31, 2011

Taxes

Taxes

10  Taxes

The components of income tax expense are as follows:

Year Ended December 31,	2011			2010			2009
	(Dollar amounts in millions)
Income Taxes
Current
Federal	$	(56.0	)	$	(46.9	)	$	891.5
State		23.2			102.0			260.4
Current taxes charged to expense		(32.8	)		55.1			1,151.9
Deferred
Federal		(134.1	)		(521.4	)		1,474.5
State		(59.7	)		(194.9	)		372.5
Deferred taxes (credited) charged to expense		(193.8	)		(716.3	)		1,847.0
Investment tax credit adjustments		(4.3	)		(4.5	)		(12.1	)
Income taxes per Consolidated Statements of Income (Loss)	$	(230.9	)	$	(665.7	)	$	2,986.8

        Total income taxes are different from the amount that would be computed by applying the statutory Federal income tax rate of 35% to book income before income taxes as follows:

Reconciliation of Income Taxes Computed at Statutory Federal Rate to Total Income Taxes
(Loss) Income from continuing operations before income taxes	$	(537.7	)	$	(1,597.5	)	$	7,490.2
Statutory federal income tax rate		35	%		35	%		35	%
Income taxes computed at statutory federal rate		(188.2	)		(559.1	)		2,621.6
Increases (decreases) in income taxes due to
State income taxes, net of federal income tax benefit		(23.8	)		(60.4	)		411.0
Merger-related transaction costs		—			—			(79.3	)
Interest expense on mandatorily redeemable preferred stock		—			—			23.7
Qualified decommissioning impairment losses		—			—			3.1
Amortization of deferred investment tax credits		(4.3	)		(4.5	)		(12.1	)
Noncontrolling interest operating results		(7.1	)		(13.1	)		(16.4	)
Nondeductible international losses		—			—			19.2
Other		(7.5	)		(28.6	)		16.0
Total income taxes	$	(230.9	)	$	(665.7	)	$	2,986.8
Effective income tax rate		42.9	%		41.7	%		39.9	%

        BGE's effective tax rate was 35.1% in 2011, 39.7% in 2010, and 41.3% in 2009. In general, the primary difference between BGE's effective tax rate and the 35% statutory federal income tax rate for all years relates to Maryland corporate income taxes, net of the related federal income tax benefit. The decrease in BGE's effective tax rate in 2011 is primarily due to the favorable impact from the IRS National Office guidance regarding BGE's change of accounting for tax purposes with respect to certain electric transmission and distribution expenditures and the partial reversal of an unfavorable deferred tax adjustment recorded in 2010 as a result of healthcare reform legislation that eliminated the tax exempt treatment of prescription drug subsidies received under Medicare Part D. The partial reversal in 2011 resulted from the Maryland PSC's authorization for BGE to create an electric regulatory asset for this tax law change and amortize the balance over a five-year period. The decrease in BGE's 2010 effective tax rate from 2009 is primarily due to the inclusion of a minority interest loss in pre-tax earnings in 2009 that was not included in 2010 pre-tax earnings because of BGE's sale of the interest in January 2010.

        The major components of our net deferred income tax liability are as follows:

	Constellation Energy						BGE
At December 31,	2011			2010			2011			2010
	(In millions)
Deferred Income Taxes
Deferred tax liabilities
Net property, plant and equipment	$	2,020.4		$	1,768.3		$	1,220.1		$	1,152.3
Regulatory assets, net		282.6			256.8			282.6			256.8
Derivative assets and liabilities, net		(84.6	)		(34.1	)		—			—
Investment in CENG		604.5			1,044.3			—			—
Other		156.3			12.1			21.6			(80.0	)
Total deferred tax liabilities		2,979.2			3,047.4			1,524.3			1,329.1
Deferred tax assets
Defined benefit obligations		305.0			249.0			(93.1	)		(79.7	)
Financial investments and hedging instruments		217.6			111.4			—			—
Asset retirement obligations		10.9			10.9			—			—
Deferred investment tax credits		9.6			10.9			3.1			3.2
Other		263.0			118.9			71.1			20.6
Total deferred tax assets		806.1			501.1			(18.9	)		(55.9	)
Total deferred tax liability, net		2,173.1			2,546.3			1,543.2			1,385.0
Less: Current portion of deferred tax liability/(asset)		(132.0	)		56.5			59.0			30.1
Long-term portion of deferred tax liability, net	$	2,305.1		$	2,489.8		$	1,484.2		$	1,354.9

Income Tax Audits

        We file income tax returns in the United States and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for the years before 2008. In August 2011, we formally agreed to an assessment of tax by the IRS for the 2005 - 2007 tax years. The assessment did not have a material impact on our, or BGE's, financial condition or results of operation.

        The IRS has audited our consolidated federal income tax return for the 2008 tax year and completion of the audit is awaiting additional industry guidance from the IRS National Office regarding BGE's change of accounting for tax purposes with respect to certain electric and gas transmission and distribution expenditures. IRS industry guidance on electric transmission and distribution expenditures was issued in August 2011 and additional guidance on gas transmission and distribution expenditures is expected in 2012. Application and compliance with the IRS industry guidance for electric and gas transmission and distribution expenditures should result in the completion of the IRS examination for the 2008 tax year. The IRS is also currently auditing our consolidated federal income tax returns for the 2009 - 2010 tax years as well as examining the 2011 tax year concurrently as part of the IRS Compliance Assurance Process. Although the final outcome of the 2008 - 2011 IRS audit and future tax audits is uncertain, we believe that adequate provisions for income taxes have been made for potential liabilities resulting from such matters.

Unrecognized Tax Benefits

        The following table summarizes the change in unrecognized tax benefits during 2011 and 2010 and our total unrecognized tax benefits at December 31, 2011 and 2010:

	2011			2010
	(In millions)
Total unrecognized tax benefits, January 1	$	239.8		$	312.5
Increases in tax positions related to the current year		3.1			5.9
Increases in tax positions related to prior years		29.6			26.0
Reductions in tax positions related to prior years		(90.6	)		(104.0	)
Reductions in tax positions as a result of a lapse of the applicable statute of limitations		(0.8	)		(0.6	)
Total unrecognized tax benefits, December 31 (1)	$	181.1		$	239.8

(1)

BGE's portion of our total unrecognized tax benefits at December 31, 2011 and 2010 was $11.4 million and $72.9 million, respectively.

        If the total amount of unrecognized tax benefits of $181.1 million were ultimately realized, our income tax expense would decrease by approximately $169 million. However, the $169 million includes state tax refund claims of $55.9 million that have been disallowed by tax authorities and are subject to appeals.

        It is reasonably possible that unrecognized tax benefits could decrease within the next year by approximately $108 million as a result of a potential resolution with the IRS regarding BGE's change of accounting method for tax purposes with respect to certain gas transmission and distribution expenditures and certain state positions that are currently under audit or litigation. This decrease is not expected to have a material impact on our, or BGE's, financial condition or results of operation.

        The decrease in unrecognized tax positions for the year ended December 31, 2011 is primarily related to the issuance of guidance from the IRS National Office in August 2011 regarding electric transmission and distribution expenditures. The decrease did not have a material impact on BGE's financial condition or results of operations.

        Interest and penalties recorded in our Consolidated Statements of Income (Loss) as tax expense (benefit) relating to liabilities for unrecognized tax benefits were as follows:

	For the Year Ended December 31,
	2011		2010			2009
	(In millions)
Interest and penalties recorded as tax expense (benefit)	$	6.1	$	(6.3	)	$	12.8

BGE's portion of interest and penalties was immaterial for all years.

        Accrued interest and penalties recognized in our Consolidated Balance Sheets were $22.9 million, of which BGE's portion was $1.2 million at December 31, 2011, and $16.8 million, of which BGE's portion was $3.8 million, at December 31, 2010.