Income Taxes

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2011 and 2010 are presented below (in thousands):



	December 31,
	2011			2010
Deferred tax assets:
Benefit of tax loss carryforwards	$	21,737		$	286
Alternative minimum tax credit carryforward	19,863			18,370
Pensions and benefits	87,946			62,821
Asset retirement obligation	20,100			33,904
Deferred fuel	—			7,317
Other	20,524			21,093
Total gross deferred tax assets	170,170			143,791
Deferred tax liabilities:
Plant, principally due to depreciation and basis differences	(424,319		)	(359,838		)
Decommissioning	(22,633		)	(37,936		)
Deferred fuel	(2,493		)	—
Other	(6,448		)	(6,929		)
Total gross deferred tax liabilities	(455,893		)	(404,703		)
Net accumulated deferred income taxes	$	(285,723	)	$	(260,912	)

Based on the average annual book income before taxes for the prior three years, excluding the effects of extraordinary and unusual or infrequent items, the Company believes that the deferred tax assets will be fully realized at current levels of book and taxable income.

The Company recognized income tax expense for 2011, 2010 and 2009 as follows (in thousands):



	Years Ended December 31,
	2011			2010			2009
Income tax expense:
Federal:
Current	$	5,084		$	19,251		$	(10,123	)
Deferred	46,612			31,279			39,537
Total federal income tax	51,696			50,530			29,414
State:
Current	2,936			4,308			2,321
Deferred	(924		)	1,947			1,309
Total state income tax	2,012			6,255			3,630
Total income tax expense	53,708			56,785			33,044
Tax expense classified as extraordinary gain	—			(5,769		)	—
Total income tax expense before extraordinary item	$	53,708		$	51,016		$	33,044

Current federal income tax expense for 2010 reflects taxes accrued under the alternative minimum tax (“AMT”). Deferred federal income tax for 2010 includes an offsetting AMT benefit of $10.2 million. There was no offsetting AMT benefit for 2011 or 2009. As of December 31, 2011, the Company had $19.9 million of AMT credit carryforwards that have an unlimited life. As of December 31, 2011, the Company had tax loss carryforwards of $21.1 million and $0.6 million that have lives of 20 years and 5 years, respectively.

Income tax provisions differ from amounts computed by applying the statutory federal income tax rate of 35% to book income before federal income tax as follows (in thousands):



	Years Ended December 31,
	2011			2010			2009
Federal income tax expense computed on income at statutory rate	$	55,036		$	55,086		$	34,992
Difference due to:
State taxes, net of federal benefit	1,308			4,066			2,360
AEFUDC	(2,295		)	(3,578		)	(3,051		)
Permanent tax differences	(303		)	(3,103		)	(618		)
Patient Protection and Affordable Care Act	—			4,787			—
Other	(38		)	(473		)	(639		)
Total income tax expense	53,708			56,785			33,044
Tax expense classified as extraordinary gain	—			(5,769		)	—
Total income tax expense before extraordinary item	$	53,708		$	51,016		$	33,044
Effective income tax rate	34.2		%	36.1		%	33.1		%
Effective income tax rate without PPACA	34.2		%	33.0		%	33.1		%

The Company files income tax returns in the U.S. federal jurisdiction and in the states of Texas, New Mexico and Arizona. The Company is no longer subject to tax examination by the taxing authorities in the federal jurisdiction for years prior to 2007 and in the state jurisdictions for years prior to 1998. A deficiency notice relating to the Company’s 1998 through 2003 income tax returns in Arizona contests a pollution control credit, a research and development credit and the sales and property apportionment factors. The Company is contesting these adjustments.

On March 23, 2010, the Patient Protection and Affordable Care Act (“PPACA”) was signed into law. A major provision of the law is that, beginning in 2013, the income tax deductions for the cost of providing certain prescription drug coverage will be reduced by the amount of the Medicare Part D subsidies received. The Company was required to recognize the impacts of the tax law change at the time of enactment and recorded a one-time non-cash charge to income tax expense of approximately $4.8 million in the first quarter of 2010.

FASB guidance 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. In January 2010, the Company filed for a change of accounting method with the IRS related to the way in which units of property are determined for purposes of determining capitalized tax assets. The change was included in the 2009 federal income tax return, with additional amounts included in the 2010 federal income tax return. The Company recorded an additional unrecognized tax position of $2.2 million and $6.3 million, respectively, related to the change in accounting method in 2011 and 2010. An additional unrecognized tax position may be recognized after the IRS audits the 2009 and 2010 tax returns. A reconciliation of the December 31, 2011, 2010 and 2009 amount of unrecognized tax benefits is as follows (in thousands):



	2011		2010		2009
Balance at January 1	$	7,300	$	600	$	500
Additions/(reductions) based on tax positions related to the current year	2,200		6,300		—
Additions for tax positions of prior years	—		400		400
Reductions for tax positions of prior years	—		—		(300		)
Balance at December 31	$	9,500	$	7,300	$	600

If recognized, $1.1 million of the unrecognized tax position at December 31, 2011, would affect the effective tax rate. The Company recognized income tax expense for an unrecognized tax position of $0.1 million for the year ended December 31, 2009.

The Company recognizes in tax expense interest and penalties related to tax benefits that have not been recognized. During the years ended December 31, 2011, 2010 and 2009, the Company recognized expense of $0.2 million and benefits of approximately $0.1 million and $0.2 million, respectively, in interest. The Company had approximately $0.4 million and $0.2 million for the payment of interest and penalties accrued at December 31, 2011 and 2010, respectively.