(15) Income Taxes

Income tax expense consists of the following for the years ended December 31 (in millions):



	2011			2010			2009
Current:
Federal	$	(820	)	$	(822	)	$	(648	)
State	9			40			(36		)
Foreign	168			126			102
	(643		)	(656		)	(582		)
Deferred:
Federal	1,012			940			842
State	(11		)	(34		)	13
Foreign	(59		)	(46		)	15
	942			860			870

Investment tax credits	(5		)	(6		)	(6		)
Total	$	294		$	198		$	282

A reconciliation of the federal statutory income tax rate to the effective income tax rate applicable to income before income tax expense is as follows for the years ended December 31:



	2011		2010		2009

Federal statutory income tax rate	35	%	35	%	35	%
Federal and state income tax credits	(11	)	(10	)	(9	)
State income tax, net of federal income tax benefit	2		3		2
Income tax method changes	(2	)	(4	)	(4	)
Income tax effect of foreign income	(2	)	(4	)	(2	)
Effects of ratemaking	(1	)	(3	)	(2	)
Change in United Kingdom corporate income tax rate	(3	)	(2	)	—
Other, net	—		(1	)	—
Effective income tax rate	18	%	14	%	20	%

Federal and state income tax credits primarily relate to production tax credits at the Utilities. The Utilities' wind-powered generating facilities are eligible for federal renewable electricity production tax credits for 10 years from the date the facilities were placed in service.

In 2009 and 2010, MidAmerican Energy changed the method by which it determines current income tax deductions for administrative and general costs ("A&G Deduction") and the Utilities changed the method by which they determine current income tax deductions for repair costs ("Repairs Deduction") related to certain of their regulated utility assets. These changes result in current deductibility for those costs, which are capitalized for book purposes. The Utilities were allowed to retroactively apply the method changes and deduct amounts related to prior years' costs on the tax return that includes the year of change. State utility rate regulation in Iowa requires that the tax effect of certain temporary differences be flowed through immediately to customers. Therefore, amounts that would otherwise have been recognized in income tax expense have been included as changes in regulatory assets. This treatment of such temporary differences impacts income tax expense and effective tax rates from year to year.

Accordingly, MidAmerican Energy's A&G Deduction computed for tax years prior to 2010 resulted in the recognition of $44 million of net tax benefits in earnings for the year ended December 31, 2010. Additionally, earnings for the year ended December 31, 2010 reflect $17 million of net tax benefits recognized in connection with the Repairs Deduction for tax years prior to 2010 related to MidAmerican Energy's regulated natural gas utility assets and jointly owned regulated electric utility assets. The Repairs Deduction for prior tax years related to the majority of MidAmerican Energy's regulated electric utility assets resulted in the recognition of $55 million of net tax benefits in earnings for the year ended December 31, 2009. Additionally, regulatory assets increased $88 million and $95 million for the 2010 and 2009 method changes, respectively, in recognition of MidAmerican Energy's ability to recover increased tax expense when such temporary differences reverse.

In 2011, MidAmerican Energy recognized $35 million of net tax benefits in conjunction with the partial resolution of certain tax issues related to tax positions taken for these income tax method changes. The ongoing impact of these method changes, along with other items recognized currently in income tax expense as the result of ratemaking, is reflected in the effects of ratemaking line above.

In July 2011, the Company recognized $40 million of deferred income tax benefits upon the enactment of a reduction in the United Kingdom corporate income tax rate from 27% to 26% effective April 1, 2011, and a further reduction to 25% effective April 1, 2012. In July 2010, the Company recognized $25 million of deferred income tax benefits upon the enactment of the reduction in the United Kingdom corporate income tax rate from 28% to 27% effective April 1, 2011.

The net deferred income tax liability consists of the following as of December 31 (in millions):



	2011			2010
Deferred income tax assets:
Regulatory liabilities	$	716		$	685
State and federal carryforwards	314			248
Employee benefits	311			269
AROs	179			153
Foreign carryforwards	152			293
Derivative contracts	175			226
Other	414			294
Total deferred income tax assets	2,261			2,168
Valuation allowances	(14		)	(13		)
Total deferred income tax assets, net	2,247			2,155

Deferred income tax liabilities:
Property related items	(7,638		)	(6,672		)
Regulatory assets	(1,119		)	(917		)
Investments	(177		)	(427		)
Other	(254		)	(377		)
Total deferred income tax liabilities	(9,188		)	(8,393		)
Net deferred income tax liability	$	(6,941	)	$	(6,238	)

Reflected as:
Current assets	$	149		$	103
Current liabilities	(14		)	(43		)
Non-current liabilities	(7,076		)	(6,298		)
	$	(6,941	)	$	(6,238	)

As of December 31, 2011, the Company has available state carryforwards, principally for net operating losses, totaling $277 million and federal carryforwards totaling $37 million, which expire at various intervals between 2012 and 2031. As of December 31, 2011, the Company has available $152 million of foreign carryforwards, principally foreign tax credit carryforwards that expire 10 years after the date the foreign earnings are repatriated through actual or deemed dividends and foreign net operating loss carryforwards that expire in 2028. As of December 31, 2011, the statute of limitation had not begun on the foreign tax credit carryforwards.

The United States Internal Revenue Service has closed examination of the Company's income tax returns through February 2006. In the United Kingdom, each legal entity is subject to examination by HM Revenue and Customs ("HMRC"), the United Kingdom equivalent of the United States Internal Revenue Service. HMRC has closed examination of the Company's income tax returns through 2008. In addition, state jurisdictions have closed examination of the Company's income tax returns through at least February 9, 2006, except for PacifiCorp where the examinations have been closed through 1993 in most cases. The Company's income tax returns in the Philippines, the most significant other foreign jurisdiction, have been closed through at least 2005.

A reconciliation of the beginning and ending balances of the Company's net unrecognized tax benefits is as follows for the years ended December 31 (in millions):



	2011			2010

Beginning balance	$	308		$	273
Additions based on tax positions related to the current year	15			3
Additions for tax positions of prior years	15			62
Reductions for tax positions of prior years	(58		)	(19		)
Statute of limitations	(12		)	(14		)
Settlements	—			(4		)
Interest and penalties	(3		)	7
Ending balance	$	265		$	308

As of December 31, 2011 and 2010, the Company had unrecognized tax benefits totaling $156 million and $189 million, respectively, that, if recognized, would have an impact on the effective tax rate. The remaining unrecognized tax benefits relate to tax positions for which ultimate deductibility is highly certain but for which there is uncertainty as to the timing of such deductibility. Recognition of these tax benefits, other than applicable interest and penalties, would not affect the Company's effective tax rate.