Income Taxes

12 Months Ended

Dec. 31, 2011

Income Taxes

Income Taxes

18.Income Taxes

The components of the income tax provision for the years ended December 31 are as follows:

	For the Year Ended
(In thousands)	2011		2010			2009
Current:
Federal	$	5,657	$	9,904		$	9,778
State	642		2,251			2,564
Deferred:
Federal	8,209		(1,796		)	2,266
State	337		(1,368		)	(2,209		)
Total Income tax expense	$	14,845	$	8,991		$	12,399

The following is a reconciliation between the statutory federal income tax rate and the Company’s overall effective tax rate for the years ended December 31:

	Year ended December 31,
(In percentages)	2011		2010		2009
Statutory federal income tax rate	35.0		35.0		35.0
State income taxes, net of federal benefit	0.8		(0.1	)	2.9
Other permanent differences	(0.8	)	(0.3	)	0.1
Change in tax reserves	(0.6	)	(10.9	)	—
Change in deferred tax rate	0.9		(1.4	)	(2.7	)
Other	0.2		(1.0	)	(2.9	)
	35.5		21.3		32.4

Cash paid for federal and state income taxes was $8.8 million during 2011, $18.7 million during 2010, and $11.0 million during 2009.

Deferred Taxes

Net deferred taxes consist of the following components at December 31:

	Year ended December 31,
(In thousands)	2011			2010
Current deferred tax assets:
Reserve for uncollectible accounts	$	964		$	1,062
Accrued vacation pay deducted when paid	1,153			1,077
Accrued expenses and deferred revenue	2,708			3,533
	4,825			5,672
Non-current deferred tax assets:
Net operating loss carryforwards	2,216			1,453
Pension and postretirement obligations	34,303			29,559
Stock-based compensation	427			465
Derivative instruments	5,872			10,183
State tax credit carryforwards	2,216			2,272
Other	427			450
	45,461			44,382
Non-current deferred tax liabilities:
Goodwill and other intangibles	(31,106		)	(34,963		)
Partnership investments	(26,985		)	(22,251		)
Property, plant and equipment	(64,697		)	(60,796		)
	(122,788		)	(118,010		)
Net non-current deferred taxes	(77,327		)	(73,628		)
Net deferred income tax liabilities	$	(72,502	)	$	(67,956	)

Deferred income taxes are provided for the temporary differences between assets and liabilities recognized for financial reporting purposes and assets and liabilities recognized for tax purposes.  The ultimate realization of deferred tax assets depends upon taxable income during the future periods in which those temporary differences become deductible.  To determine whether deferred tax assets can be realized, management assesses whether it is more likely than not that some portion or all of the deferred tax assets will not be realized, taking into consideration the scheduled reversal of deferred tax liabilities, projected future taxable income and tax-planning strategies.

Based upon historical taxable income, tax planning strategies and projections for future taxable income over the periods that the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these temporary differences.  However, management may reduce the amount of deferred tax assets it considers realizable in the near term if estimates of future taxable income during the carryforward period are reduced.  The amount of projected future taxable income is expected to allow for the full utilization of the net operating loss (“NOL”) carryforwards as described below.

ETFL, a nonconsolidated subsidiary for federal income tax return purposes, estimates it has available NOL carryforwards at December 31, 2011, of $2.7 million and related deferred tax assets of $0.9 million. ETFL’s federal NOL carryforwards expire from 2019 to 2024.

We estimate that we have available state NOL carryforwards at December 31, 2011, of $20.2 million and related deferred tax assets of $1.3 million.  The state NOL carryforwards expire from 2020 to 2031.

We estimate that we have available state tax credit carryforwards at December 31, 2011, of $3.4 million and related deferred tax assets of $2.2 million.  During 2011, $0.1 million of the state tax credit carryforward was utilized.  The state tax credit carryforward is limited annually and expires in 2027.

On January 13, 2011, Illinois Governor Pat Quinn signed PA. 96-1496 into law.  Included in the law was an increase in the corporate income tax rate.  This resulted in an increase to our net state deferred tax liabilities and a corresponding increase to our state tax provision of $0.3 million which we recognized in the first quarter of 2011.

Unrecognized Tax Benefits

We adopted the accounting guidance applicable to uncertainty in income taxes effective January 1, 2007 with no impact on its results of operations or financial condition, and have analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns as well as all open tax years in these jurisdictions.  This accounting guidance clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements; prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return; and provides guidance on description, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

As of December 31, 2011 and 2010, the amount of unrecognized tax benefits was $1.2 million and $1.5 million, respectively.  The net amount of unrecognized benefits that, if recognized, would result in an impact to the effective tax rate is $0.8 million and $1.0 million, respectively.

For the year ended December 31, 2011, we recognized a net decrease of $0.3 million to our unrecognized tax benefits, which reduced our tax expense by a corresponding amount, due to the expiration of a federal statute of limitations.

Our practice is to recognize interest and penalties related to income tax matters in interest expense and general and administrative expense, respectively.  We had no material interest or penalty expense in 2011.  For the year ending December 31, 2010, we recorded a net decrease to interest expense of $1.0 million and had no material remaining liability for interest or penalties.

The only periods subject to examination for our federal return are years 2008 through 2010.  The periods subject to examination for our state returns are years 2005 through 2010.  We are not currently under examination by federal taxing authorities.  We are currently under examination by state taxing authorities.  We do not expect any settlement or payment that may result from the audit to have a material effect on our results of operations or cash flows.

We do not expect that the total unrecognized tax benefits and related accrued interest will significantly change due to the settlement of audits or the expiration of statute of limitations in the next twelve months.  There were changes to these amounts during 2011 that were not material and that did not have a significant effect on the Company’s effective tax rate.

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

	Liability for Unrecognized Tax Benefits
(In thousands)	2011			2010
Balance at January 1	$	1,496		$	5,659
Additions for tax positions in the current year	—			—
Additions for tax positions of prior years	—			1,224
Settlements with taxing authorities	—			—
Reduction for lapse of federal statute of limitations	(272		)	(5,387		)
Reductions for lapse of state statute of limitations	—			—
Balance at December 31	$	1,224		$	1,496