5. INCOME TAXES

Southern Company files a consolidated federal income tax return and combined state income tax returns for the States of Alabama, Georgia, Mississippi, and Texas. Under a joint consolidated income tax allocation agreement, each subsidiary’s current and deferred tax expense is computed on a stand-alone basis and no subsidiary is allocated more expense than would be paid if it filed a separate income tax return. In accordance with IRS regulations, each company is jointly and severally liable for the federal tax liability.

Current and Deferred Income Taxes

Details of income tax provisions are as follows:


	2011		2010			2009

	(in millions)
Federal —
Current	$	57	$	42		$	771
Deferred		1,035		898			40

	$	1,092		940			811

State —
Current		8		(54	)		100
Deferred		119		140			(15)

		127		86			85

Total	$	1,219	$	1,026		$	896

Net cash payments/(refunds) for income taxes in 2011, 2010, and 2009 were $(401) million, $276 million, and $975 million, respectively.

The tax effects of temporary differences between the carrying amounts of assets and liabilities in the financial statements and their respective tax bases, which give rise to deferred tax assets and liabilities, are as follows:


	2011			2010

	(in millions)
Deferred tax liabilities —
Accelerated depreciation	$	7,882		$	6,833
Property basis differences		1,256			1,150
Leveraged lease basis differences		277			263
Employee benefit obligations		499			485
Under recovered fuel clause		82			179
Premium on reacquired debt		111			109
Regulatory assets associated with employee benefit obligations		1,198			814
Regulatory assets associated with asset retirement obligations		546			509
Other		276			215

Total		12,127			10,557

Deferred tax assets —
Federal effect of state deferred taxes		393			386
State effect of federal deferred taxes		1			50
Employee benefit obligations		1,594			1,179
Over recovered fuel clause		33			40
Other property basis differences		134			119
Deferred costs		55			100
Cost of removal		40			52
Tax credit carryforward		129			192
Unbilled revenue		110			126
Other comprehensive losses		81			69
Asset retirement obligations		546			509
Other		357			331

Total		3,473			3,153

Total deferred tax liabilities, net		8,654			7,404
Portion included in prepaid expenses (accrued income taxes), net		125			117
Deferred state tax assets		86			91
Valuation allowance		(56	)		(58)

Accumulated deferred income taxes	$	8,809		$	7,554

At December 31, 2011, Southern Company had subsidiaries with State of Georgia net operating loss (NOL) carryforwards totaling $879 million, which could result in net state income tax benefits of $51 million, if utilized. However, the subsidiaries have established a valuation allowance for the potential $51 million tax benefit due to the remote likelihood that the tax benefit will be realized. These NOLs expire between 2012 and 2021. Beginning in 2002, the State of Georgia allowed Southern Company to file a combined return, which has prevented the creation of any additional NOL carryforwards.

At December 31, 2011, the tax-related regulatory assets to be recovered from customers were $1.4 billion. These assets are attributable to tax benefits that flowed through to customers in prior years, to deferred taxes previously recognized at rates lower than the current enacted tax law, and to taxes applicable to capitalized interest. In 2010, $82 million was deferred as a regulatory asset related to the impact of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (together, the Acts). The Acts eliminated the deductibility of healthcare costs that are covered by federal Medicare subsidy payments. The traditional operating companies will recover and amortize the regulatory asset as approved by the state PSCs over periods not exceeding 15 years.

At December 31, 2011, the tax-related regulatory liabilities to be credited to customers were $224 million. These liabilities are attributable to deferred taxes previously recognized at rates higher than the current enacted tax law and to unamortized investment tax credits.

In accordance with regulatory requirements, deferred investment tax credits are amortized over the life of the related property with such amortization normally applied as a credit to reduce depreciation in the statements of income. Credits amortized in this manner amounted to $19 million in 2011, $23 million in 2010, and $24 million in 2009. At December 31, 2011, all investment tax credits available to reduce federal income taxes payable had not been utilized. The remaining investment tax credits will be carried forward and utilized in future years.

In September 2010, the Small Business Jobs and Credit Act of 2010 (SBJCA) was signed into law. The SBJCA includes an extension of the 50% bonus depreciation for certain property acquired and placed in service in 2010 (and for certain long-term construction projects placed in service in 2011). Additionally, in December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act) was signed into law. Major tax incentives in the Tax Relief Act include 100% bonus depreciation for property placed in service after September 8, 2010 and through 2011 (and for certain long-term construction projects to be placed in service in 2012) and 50% bonus depreciation for property placed in service in 2012 (and for certain long-term construction projects to be placed in service in 2013). The application of the bonus depreciation provisions in these acts significantly increased deferred tax liabilities related to accelerated depreciation.

Effective Tax Rate

A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:


	2011			2010			2009

Federal statutory rate		35.0	%		35.0	%		35.0%
State income tax, net of federal deduction		2.4			1.8			2.1
Employee stock plans dividend deduction		(1.1	)		(1.2	)		(1.4)
Non-deductible book depreciation		0.7			0.8			0.9
Difference in prior years’ deferred and current tax rate		(0.1	)		(0.1	)		(0.1)
AFUDC-Equity		(1.5	)		(2.2	)		(2.7)
Production activities deduction		—			—			(0.7)
ITC basis difference		(0.2	)		(0.4	)		—
Leveraged lease termination		—			—			(0.9)
MC Asset Recovery		—			—			2.7
Donations		—			—			(0.4)
Other		(0.2	)		(0.2	)		(0.1)

Effective income tax rate		35.0	%		33.5	%		34.4%

Southern Company’s effective tax rate is lower than or equal to the statutory rate primarily due to the employee stock plans’ dividend deduction and AFUDC equity, which is not taxable.

Southern Company’s 2011 effective tax rate increased from 2010 primarily due to less AFUDC equity capitalized and no Georgia state income tax credits for activity through Georgia ports available to Southern Company in 2011. Additionally, the tax benefit of the basis difference associated with investment tax credits realized during construction decreased in 2011 as compared to 2010.

Unrecognized Tax Benefits

For 2011, the total amount of unrecognized tax benefits decreased by $176 million, resulting in a balance of $120 million as of December 31, 2011.

Changes during the year in unrecognized tax benefits were as follows:

		0000000000		0000000000		0000000000
	2011		2010		2009

	(in millions)

Unrecognized tax benefits at beginning of year		$ 296		$199		$146
Tax positions from current periods		46		62		53
Tax positions increase from prior periods		1		62		12
Tax positions decrease from prior periods		(111)		(27)		(10)
Reductions due to settlements		(112)		—		—
Reductions due to expired statute of limitations		—		—		(2)

Balance at end of year		$ 120		$296		$199

The tax positions from current periods for 2011 relate primarily to a litigation settlement refund claim in 2009 relating to MC Asset Recovery, LLC, the tax accounting method change for repairs-generation assets, and other miscellaneous tax positions. See “Effective Tax Rate” herein for additional information. The tax positions decrease from prior periods and reductions due to settlements for 2011 relate to the settlement of the Georgia state tax credit litigation on June 10, 2011. See Note 3 under “Income Tax Matters — Georgia State Income Tax Credits” for additional information. In addition, the tax positions decrease from prior periods for 2011 also relates to the uncertain tax position for the tax accounting method change for repairs-transmission and distribution assets. See “Tax Method of Accounting for Repairs” herein for additional information.

The impact on Southern Company’s effective tax rate, if recognized, was as follows:

		0000000000		0000000000		0000000000
	2011		2010		2009

	(in millions)

Tax positions impacting the effective tax rate		$ 69		$217		$199
Tax positions not impacting the effective tax rate		51		79		—

Balance of unrecognized tax benefits		$120		$296		$199

The tax positions impacting the effective tax rate for 2011 primarily relate to the production activities deduction tax position and the 2009 litigation settlement refund claim referenced above. See “Effective Tax Rate” herein for additional information. The tax positions not impacting the effective tax rate for 2011 relate to the timing difference associated with the tax accounting method change for repairs-generation assets. These amounts are presented on a gross basis without considering the related federal or state income tax impact. See “Tax Method of Accounting for Repairs” herein for additional information.

Accrued interest for unrecognized tax benefits was as follows:

		0000000000		0000000000		0000000000
	2011		2010		2009

	(in millions)

Interest accrued at beginning of year		$ 29		$21		$15
Interest reclassified due to settlements		(24)		—		—
Interest accrued during the year		5		8		6

Balance at end of year		$ 10		$29		$21

Southern Company classifies interest on tax uncertainties as interest expense. The interest reclassified due to settlements in 2011 is primarily associated with the Georgia state tax credit litigation settled on June 10, 2011.

Southern Company did not accrue any penalties on uncertain tax positions.

It is reasonably possible that the amount of the unrecognized tax benefits associated with a majority of Southern Company’s unrecognized tax positions will significantly increase or decrease within the next 12 months. The resolution of the tax accounting method change for repairs-generation assets, as well as the conclusion or settlement of federal or state audits, could impact the balances significantly. At this time, an estimate of the range of reasonably possible outcomes cannot be determined.

The IRS has audited and closed all tax returns prior to 2007 and is currently auditing the federal income tax returns for 2007-2009. For tax years 2010 through 2012, Southern Company is in the Compliance Assurance Program of the IRS. The audits for the state returns have either been concluded, or the statute of limitations has expired, for years prior to 2006.

Tax Method of Accounting for Repairs

Southern Company submitted a tax accounting method change for repair costs associated with its subsidiaries’ generation, transmission, and distribution systems with the filing of the 2009 federal income tax return in September 2010. The new tax method resulted in net positive cash flow in 2010 of approximately $297 million for Southern Company on a consolidated basis. On August 19, 2011, the IRS issued a revenue procedure, which provides a safe harbor method of accounting that taxpayers may use to determine repair costs for transmission and distribution property. Based upon this guidance from the IRS, the uncertain tax position for the tax accounting method change for repairs-transmission and distribution assets has been removed. However, the IRS continues to work with the utility industry in an effort to resolve the repair costs for generation assets matter in a consistent manner for all utilities. On December 23, 2011, the IRS published regulations on the deduction and capitalization of expenditures related to tangible property that generally apply for tax years beginning on or after January 1, 2012. The utility industry anticipates more detailed guidance concerning these regulations. Due to the uncertainty regarding the ultimate resolution of the repair costs for generation assets, an unrecognized tax position has been recorded for the tax accounting method change for repairs-generation assets. The ultimate outcome of this matter cannot be determined at this time.

INCOME TAXES

5. INCOME TAXES

On behalf of the Company, Southern Company files a consolidated federal income tax return and combined state income tax returns for the States of Alabama, Georgia, and Mississippi. In addition, the Company files a separate company income tax return for the State of Tennessee. Under a joint consolidated income tax allocation agreement, each subsidiary’s current and deferred tax expense is computed on a stand-alone basis and no subsidiary is allocated more expense than would be paid if it filed a separate income tax return. In accordance with IRS regulations, each company is jointly and severally liable for the federal tax liability.

Current and Deferred Income Taxes

Details of income tax provisions are as follows:


	2011			2010		2009

	(in millions)
Federal —
Current	$	20		$	52	$	374
Deferred		377			333		(41)

	$	397		$	385	$	333

State —
Current	$	(1	)	$	1	$	76
Deferred		82			77		(25)

		81			78		51

Total	$	478		$	463	$	384

The tax effects of temporary differences between the carrying amounts of assets and liabilities in the financial statements and their respective tax bases, which give rise to deferred tax assets and liabilities, are as follows:


	2011		2010

	(in millions)
Deferred tax liabilities:
Accelerated depreciation	$	2,820	$	2,415
Property basis differences		439		396
Premium on reacquired debt		33		31
Pension and other benefits		217		210
Fuel clause under recovered		26		10
Regulatory assets associated with employee benefit obligations		343		239
Regulatory assets associated with asset retirement obligations		233		220
Other		94		85

Total		4,205		3,606

Deferred tax assets:
Federal effect of state deferred taxes		186		177
State effect of federal deferred taxes		—		50
Unbilled revenue		38		41
Storm reserve		38		41
Pension and other benefits		373		264
Other comprehensive losses		14		8
Asset retirement obligations		233		220
Other		97		87

Total		979		888

Total deferred tax liabilities, net		3,226		2,718
Portion included in current assets (liabilities), net		31		29

Accumulated deferred income taxes	$	3,257	$	2,747

At December 31, 2011, the Company’s tax-related regulatory assets to be recovered from customers were $532 million. These assets are attributable to tax benefits that flowed through to customers in prior years, to deferred taxes previously recognized at rates lower than the current enacted tax law, and to taxes applicable to capitalized interest. In 2010, the Company deferred $21 million as a regulatory asset related to the impact of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (together, the Acts). The Acts eliminated the deductibility of healthcare costs that are covered by federal Medicare subsidy payments. The Company will amortize the regulatory asset to income tax expense over the average remaining service period which may range up to 15 years, as approved by the Alabama PSC.

At December 31, 2011, the Company’s tax-related regulatory liabilities to be credited to customers were $83 million. These liabilities are attributable to unamortized investment tax credits.

In accordance with regulatory requirements, deferred investment tax credits are amortized over the life of the related property with such amortization normally applied as a credit to reduce depreciation in the statements of income. Credits amortized in this manner amounted to $8 million in each of 2011, 2010, and 2009. At December 31, 2011, all investment tax credits available to reduce federal income taxes payable had been utilized.

In September 2010, the Small Business Jobs and Credit Act of 2010 (SBJCA) was signed into law. The SBJCA includes an extension of the 50% bonus depreciation for certain property acquired and placed in service in 2010 (and for certain long-term construction projects placed in service in 2011). Additionally, in December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act) was signed into law. Major tax incentives in the Tax Relief Act include 100% bonus depreciation for property placed in service after September 8, 2010 and through 2011 (and for certain long-term construction projects to be placed in service in 2012) and 50% bonus depreciation for property placed in service in 2012 (and for certain long-term construction projects to be placed in service in 2013). The application of the bonus depreciation provisions in these acts significantly increased deferred tax liabilities related to accelerated depreciation.

Effective Tax Rate

A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:


	2011	2010	2009

Federal statutory rate	35.0%	35.0%	35.0%
State income tax, net of federal deduction	4.3	4.2	3.0
Non-deductible book depreciation	0.8	0.8	0.8
Differences in prior years’ deferred and current tax rates	(0.1)	(0.1)	(0.2)
AFUDC-equity	(0.6)	(1.0)	(2.5)
Production activities deduction	—	—	(0.8)
Other	(0.4)	(0.6)	(0.2)

Effective income tax rate	39.0%	38.3%	35.1%

State income tax, net of federal deduction in 2011, was not materially different when compared to 2010. In 2010, state income tax, net of federal deduction increased due to a decrease in the state deduction for federal income taxes paid, which is a result of increased bonus depreciation and pension contributions.

The tax benefit of AFUDC-equity decreased in 2011 and 2010 from prior years due to a decrease in AFUDC, resulting from the completion of construction projects related to environmental mandates at generating facilities. See Note 1 under “Allowance for Funds Used During Construction (AFUDC)” for additional information.

Unrecognized Tax Benefits

For 2011, the total amount of unrecognized tax benefits decreased by $11 million, resulting in a balance of $32 million as of December 31, 2011.

Changes during the year in unrecognized tax benefits were as follows:

	(in millions)	(in millions)	(in millions)
	2011	2010	2009

		(in millions)
Unrecognized tax benefits at beginning of year	$ 43	$ 6	$ 3
Tax positions from current periods	6	6	2
Tax positions from prior periods	(17)	31	1
Reductions due to settlements	—	—	—
Reductions due to expired statute of limitations	—	—	—

Balance at end of year	$ 32	$43	$ 6

The tax positions from current periods for 2011 relate primarily to the tax accounting method change for repairs-generation assets. The tax positions decrease from prior periods for 2011 relates to the uncertain tax position for the tax accounting method change for repairs-transmission and distribution assets. See “Tax Method of Accounting for Repairs” herein for additional information.

The impact on the Company’s effective tax rate, if recognized, was as follows:

	(in millions)	(in millions)	(in millions)
	2011	2010	2009

		(in millions)
Tax positions impacting the effective tax rate	$ 5	$ 6	$ 6
Tax positions not impacting the effective tax rate	27	37	—

Balance of unrecognized tax benefits	$ 32	$43	$ 6

The tax positions impacting the effective tax rate for 2011 primarily relate to the production activities deduction tax position. The tax positions not impacting the effective tax rate for 2011 relate to the timing difference associated with the tax accounting method change for repairs-generation assets. These amounts are presented on a gross basis without considering the related federal or state income tax impact. See “Tax Method of Accounting for Repairs” herein for additional information.

Accrued interest for unrecognized tax benefits was as follows:

	(in millions)	(in millions)	(in millions)
	2011	2010	2009

		(in millions)
Interest accrued at beginning of year	$1.5	$0.3	$0.3
Interest reclassified due to settlements	—	—	—
Interest accrued during the year	0.4	1.2	—

Balance at end of year	$1.9	$1.5	$0.3

The Company classifies interest on tax uncertainties as interest expense. The Company did not accrue any penalties on uncertain tax positions.

It is reasonably possible that the amount of the unrecognized tax benefits associated with a majority of the Company’s unrecognized tax positions will significantly increase or decrease within the next 12 months. The resolution of the tax accounting method change for repairs-generation assets, as well as the conclusion or settlement of federal or state audits, could impact the balances significantly. At this time, an estimate of the range of reasonably possible outcomes cannot be determined.

The IRS has audited and closed all tax returns prior to 2007 and is currently auditing the federal income tax returns for 2007-2009. For tax years 2010 through 2012, the Company is in the Compliance Assurance Program of the IRS. The audits for the state returns have either been concluded, or the statute of limitations has expired, for years prior to 2006.

Tax Method of Accounting for Repairs

The Company submitted a tax accounting method change for repair costs associated with its generation, transmission, and distribution systems with the filing of the 2009 federal income tax return in September 2010. The new tax method resulted in net positive cash flow in 2010 of approximately $141 million for the Company. On August 19, 2011, the IRS issued a revenue procedure, which provides a safe harbor method of accounting that taxpayers may use to determine repair costs for transmission and distribution property. Based upon this guidance from the IRS, the uncertain tax position for the tax accounting method change for repairs-transmission and distribution assets has been removed. However, the IRS continues to work with the utility industry in an effort to resolve the repair costs for generation assets matter in a consistent manner for all utilities. On December 23, 2011, the IRS published regulations on the deduction and capitalization of expenditures related to tangible property that generally apply for tax years beginning on or after January 1, 2012. The utility industry anticipates more detailed guidance concerning these regulations. Due to the uncertainty regarding the ultimate resolution of the repair costs for generation assets, an unrecognized tax position has been recorded for the tax accounting method change for repairs-generation assets. The ultimate outcome of this matter cannot be determined at this time.

INCOME TAXES

5. INCOME TAXES

On behalf of the Company, Southern Company files a consolidated federal income tax return and combined state income tax returns for the States of Alabama, Georgia, and Mississippi. Under a joint consolidated income tax allocation agreement, each subsidiary’s current and deferred tax expense is computed on a stand-alone basis and no subsidiary is allocated more expense than would be paid if it filed a separate income tax return. In accordance with IRS regulations, each company is jointly and severally liable for the federal tax liability.

Current and Deferred Income Taxes

Details of income tax provisions are as follows:


	2011			2010				2009

	(in millions)
Federal –
Current		$	106		$	147			$	211
Deferred			479			312				175

			585			459				386

State –
Current			19			(36	)			7
Deferred			21			30				17

			40			(6	)			24

Total		$	625		$	453			$	410

The tax effects of temporary differences between the carrying amounts of assets and liabilities in the financial statements and their respective tax bases, which give rise to deferred tax assets and liabilities, are as follows:


	2011		2010

	(in millions)
Deferred tax liabilities –
Accelerated depreciation	$	3,687	$	3,184
Property basis differences		804		746
Employee benefit obligations		257		251
Fuel clause under recovery		56		162
Premium on reacquired debt		72		71
Regulatory assets associated with employee benefit obligations		481		336
Asset retirement obligations		299		275
Other		103		70

Total		5,759		5,095

Deferred tax assets –
Federal effect of state deferred taxes		157		159
Employee benefit obligations		585		433
Other property basis differences		106		111
Other deferred costs		55		72
Cost of removal obligations		40		52
State tax credit carry forward		52		192
Unbilled fuel revenue		45		57
Asset retirement obligations		299		275
Other		63		44

Total		1,402		1,395

Total deferred tax liabilities, net		4,357		3,700
Portion included in current assets/(liabilities), net		31		18

Accumulated deferred income taxes	$	4,388	$	3,718

At December 31, 2011, tax-related regulatory assets were $760 million. These assets are attributable to tax benefits that flowed through to customers in prior years, to deferred taxes previously recognized at rates lower than the current enacted tax law, and to taxes applicable to capitalized interest. In 2010, the Company deferred $51 million as a regulatory asset related to the impact of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (together, the Acts). The Acts eliminated the deductibility of healthcare costs that are covered by federal Medicare subsidy payments. The Company began amortizing the regulatory asset in 2011 to income tax expense over 12 years under the 2010 ARP.

At December 31, 2011, tax-related regulatory liabilities to be credited to customers were $184 million. These liabilities are attributable to deferred taxes previously recognized at rates higher than current enacted tax law and to unamortized investment tax credits. In 2011, the Company recorded a regulatory liability of $62 million related to a settlement with the Georgia DOR resolving claims for tax credits in its 2005 through 2009 income tax filings. See Note 3 under “Income Tax Matters” for additional information.

In accordance with regulatory requirements, deferred investment tax credits are amortized over the life of the related property with such amortization normally applied as a credit to reduce depreciation in the statements of income. Credits amortized in this manner amounted to $9 million in 2011, $13 million in 2010, and $14 million in 2009. At December 31, 2011, all investment tax credits available to reduce federal income taxes payable had been utilized.

In September 2010, the Small Business Jobs and Credit Act of 2010 (SBJCA) was signed into law. The SBJCA includes an extension of the 50% bonus depreciation for certain property acquired and placed in service in 2010 (and for certain long-term construction projects placed in service in 2011). Additionally, in December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act) was signed into law. Major tax incentives in the Tax Relief Act include 100% bonus depreciation for property placed in service after September 8, 2010 and through 2011 (and for certain long-term construction projects to be placed in service in 2012) and 50% bonus depreciation for property placed in service in 2012 (and for certain long-term construction projects to be placed in service in 2013). The application of the bonus depreciation provisions in these acts significantly increased deferred tax liabilities related to accelerated depreciation.

Effective Tax Rate

A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:


	2011			2010			2009

Federal statutory rate		35.0	%		35.0	%		35.0	%
State income tax, net of federal deduction		1.5			(0.3	)		1.2
Non-deductible book depreciation		0.8			1.0			1.1
AFUDC equity		(1.9	)		(3.6	)		(2.7	)
Donations		—			—			(0.8	)
Other		(0.5	)		(0.2	)		(0.8	)

Effective income tax rate		34.9	%		31.9	%		33.0	%

The increase in the Company’s 2011 effective tax rate is primarily the result of decreases in non-taxable AFUDC equity and state tax credits. The decrease in the Company’s 2010 effective tax rate from 2009 is primarily the result of an increase in non-taxable AFUDC equity, an increase in state tax credits earned on ongoing construction projects, and a decrease in tax deductions related to unrecognized tax benefits. See “Unrecognized Tax Benefits” herein for additional information on unrecognized tax benefits related to state tax credits.

Unrecognized Tax Benefits

For 2011, the total amount of unrecognized tax benefits decreased by $190 million, resulting in a balance of $47 million as of December 31, 2011.

Changes during the year in unrecognized tax benefits were as follows:


	2011		2010		2009

	(in millions)
Unrecognized tax benefits at beginning of year		$237		$181		$137
Tax positions from current periods		9		52		44
Tax positions increase from prior periods		—		27		6
Tax positions decrease from prior periods		(87)		(23)		(5)
Reductions due to settlements		(112)		—		—
Reductions due to expired statute of limitations		—		—		(1)

Balance at end of year		$47		$237		$181

The tax positions from current periods for 2011 relate primarily to the tax accounting method change for repairs-generation assets, and other miscellaneous tax positions. The tax positions decrease from prior periods and reductions due to settlements for 2011 relate to the settlement of the Georgia state tax credit litigation on June 10, 2011. See Note 3 under “Income Tax Matters – Georgia State Income Tax Credits” for additional information. In addition, the tax positions decrease from prior periods for 2011 also relates to the uncertain tax position for the tax accounting method change for repairs-transmission and distribution assets. See “Tax Method of Accounting for Repairs” herein for additional information.

The impact on the Company’s effective tax rate, if recognized, was as follows:


	2011		2010		2009

	(in millions)
Tax positions impacting the effective tax rate		$28		$202		$181
Tax positions not impacting the effective tax rate		19		35		—

Balance of unrecognized tax benefits		$47		$237		$181

The tax positions impacting the effective tax rate for 2011 relate primarily to the production activities deduction and other miscellaneous tax positions. The tax positions not impacting the effective tax rate for 2011 relate to the timing difference associated with the tax accounting method change for repairs-generation assets. These amounts are presented on a gross basis without considering the related federal or state income tax impact. See “Tax Method of Accounting for Repairs” herein for additional information.

Accrued interest for unrecognized tax benefits was as follows:


	2011			2010		2009

	(in millions)
Interest accrued at beginning of year		$27			$20		$14
Interest reclassified due to settlements		(24	)		—		—
Interest accrued during the year		3			7		6

Balance at end of year		$6			$27		$20

The Company classifies interest on tax uncertainties as interest expense. The interest for all years presented was primarily associated with the state tax credit litigation settled on June 10, 2011. The Company did not accrue any penalties on uncertain tax positions.

It is reasonably possible that the amount of the unrecognized tax benefits associated with a majority of the Company’s unrecognized tax positions will significantly increase or decrease within the next 12 months. The resolution of the tax accounting method change for repairs - generation assets, as well as the conclusion or settlement of federal or state audits, could impact the balances significantly. At this time, an estimate of the range of reasonably possible outcomes cannot be determined.

The IRS has audited and closed all tax returns prior to 2007 and is currently auditing the federal income tax returns for 2007-2009. For tax years 2010 through 2012, the Company is in the Compliance Assurance Program of the IRS. The audits for the state returns have either been concluded, or the statute of limitations has expired, for years prior to 2006.

Tax Method of Accounting for Repairs

The Company submitted a tax accounting method change for repair costs associated with its generation, transmission, and distribution systems with the filing of the 2009 federal income tax return in September 2010. The new tax method resulted in net positive cash flow in 2010 of approximately $133 million for the Company. On August 19, 2011, the IRS issued a revenue procedure which provides a safe harbor method of accounting that taxpayers may use to determine repair costs for transmission and distribution property. Based upon this guidance from the IRS, the uncertain tax position for the tax accounting method change for repairs - transmission and distribution assets has been removed. However, the IRS continues to work with the utility industry in an effort to resolve the repair costs for generation assets matter in a consistent manner for all utilities. On December 23, 2011, the IRS published regulations on the deduction and capitalization of expenditures related to tangible property that generally apply for tax years beginning on or after January 1, 2012. The utility industry anticipates more detailed guidance concerning these regulations. Due to the uncertainty regarding the ultimate resolution of the repair costs for generation assets, an unrecognized tax position has been recorded for the tax accounting method change for repairs-generation assets. The ultimate outcome of this matter cannot be determined at this time.

INCOME TAXES

5. INCOME TAXES

On behalf of the Company, Southern Company files a consolidated federal income tax return and combined state income tax returns for the States of Alabama, Georgia, and Mississippi. In addition, the Company files a separate company income tax return for the State of Florida. Under a joint consolidated income tax allocation agreement, each subsidiary’s current and deferred tax expense is computed on a stand-alone basis and no subsidiary is allocated more expense than would be paid if it filed a separate income tax return. In accordance with IRS regulations, each company is jointly and severally liable for the federal tax liability.

Current and Deferred Income Taxes

Details of income tax provisions are as follows:


	2011			2010			2009
	(in thousands)
Federal -
Current	$	(1,548	)	$	(14,115	)	$	62,980
Deferred		56,087			77,452			(14,453	)
		54,539			63,337			48,527
State -
Current		(412	)		2,948			6,590
Deferred		7,141			5,229			(2,092	)
		6,729			8,177			4,498
Total	$	61,268		$	71,514		$	53,025

The tax effects of temporary differences between the carrying amounts of assets and liabilities in the financial statements and their respective tax bases, which give rise to deferred tax assets and liabilities, are as follows:


	2011		2010
	(in thousands)
Deferred tax liabilities-
Accelerated depreciation	$	496,392	$	413,490
Fuel recovery clause		—		7,062
Pension and other employee benefits		25,268		23,990
Regulatory assets associated with employee benefit obligations		44,871		29,054
Regulatory assets associated with asset retirement obligations		4,345		4,646
Other		14,804		15,793
Total		585,680		494,035
Deferred tax assets-
Federal effect of state deferred taxes		16,684		14,757
Postretirement benefits		16,769		20,723
Fuel recovery clause		2,531		—
Pension and other employee benefits		49,116		33,047
Property reserve		13,159		12,712
Other comprehensive loss		1,353		1,712
Asset retirement obligations		4,345		4,646
Alternative minimum tax carryforward		7,151		—
Other		20,191		19,727
Total		131,299		107,324
Net deferred tax liabilities		454,381		386,711
Portion included in current assets (liabilities), net		4,597		(3,835	)
Accumulated deferred income taxes	$	458,978	$	382,876

At December 31, 2011, the tax-related regulatory assets to be recovered from customers were $48.5 million. These assets are attributable to tax benefits that flowed through to customers in prior years, to deferred taxes previously recognized at rates lower than the current enacted tax law, and to taxes applicable to capitalized AFUDC. In 2010, the Company deferred $4.5 million as a regulatory asset related to the impact of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (together, the Acts). The Acts eliminated the deductibility of healthcare costs that are covered by federal Medicare subsidy payments. The Company will amortize the regulatory asset to amortization expense over the remaining average service life of 14 years. Amortization amounted to $0.3 million in 2011.

At December 31, 2011, the tax-related regulatory liabilities to be credited to customers were $8.1 million. These liabilities are attributable to deferred taxes previously recognized at rates higher than the current enacted tax law and to unamortized investment tax credits.

In accordance with regulatory requirements, deferred investment tax credits are amortized over the lives of the related property with such amortization normally applied as a credit to reduce depreciation in the statements of income. Credits amortized in this manner amounted to $1.3 million in 2011, $1.5 million in 2010, and $1.6 million in 2009. At December 31, 2011, all investment tax credits available to reduce federal income taxes payable had been utilized.

In September 2010, the Small Business Jobs and Credit Act of 2010 (SBJCA) was signed into law. The SBJCA includes an extension of the 50% bonus depreciation for certain property acquired and placed in service in 2010 (and for certain long-term construction projects placed in service in 2011). Additionally, in December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act) was signed into law. Major tax incentives in the Tax Relief Act include 100% bonus depreciation for property placed in service after September 8, 2010 and through 2011 (and for certain long-term construction projects to be placed in service in 2012) and 50% bonus depreciation for property placed in service in 2012 (and for certain long-term construction projects to be placed in service in 2013). The application of the bonus depreciation provisions in these acts significantly increased deferred tax liabilities related to accelerated depreciation.

Effective Tax Rate

A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:


	2011			2010			2009
Federal statutory rate		35.0	%		35.0	%		35.0	%
State income tax, net of federal deduction		2.5			2.7			1.7
Non-deductible book depreciation		0.5			0.3			0.3
Difference in prior years’ deferred and current tax rate		(0.3	)		(0.3	)		(0.4	)
Production activities deduction		—			—			(0.9	)
AFUDC equity		(2.0	)		(1.3	)		(4.9	)
Other, net		(0.2	)		(0.5	)		0.3
Effective income tax rate		35.5	%		35.9	%		31.1	%

The decrease in the 2011 effective tax rate is primarily the result of an increase in AFUDC equity, which is not taxable.

Unrecognized Tax Benefits

For 2011, the total amount of unrecognized tax benefits decreased by $1.0 million, resulting in a balance of $2.9 million as of December 31, 2011.

Changes during the year in unrecognized tax benefits were as follows:


	2011			2010		2009
	(in thousands)
Unrecognized tax benefits at beginning of year	$	3,870		$	1,639	$	294
Tax positions from current periods		540			1,027		455
Tax positions from prior periods		(1,518	)		1,204		890
Reductions due to settlements		—			—		—
Reductions due to expired statute of limitations		—			—		—
Balance at end of year	$	2,892		$	3,870	$	1,639

The tax positions increase from current periods for 2011 relate primarily to the tax accounting method change for repairs-generation assets. The tax positions decrease from prior periods for 2011 also relates to the uncertain tax position for the tax accounting method change for repairs-transmission and distribution assets. See “Tax Method of Accounting for Repairs” herein for additional information.

The impact on the Company’s effective tax rate, if recognized, was as follows:


	2011		2010		2009
	(in thousands)
Tax positions impacting the effective tax rate	$	1,804	$	1,826	$	1,639
Tax positions not impacting the effective tax rate		1,088		2,044		—
Balance of unrecognized tax benefits	$	2,892	$	3,870	$	1,639

The tax positions impacting the effective tax rate for 2011 relate primarily to the production activities deduction. The tax positions not impacting the effective tax rate for 2011 relate to the timing difference associated with the tax accounting method change for repairs-generation assets. These amounts are presented on a gross basis without considering the related federal or state income tax impact. See “Tax Method of Accounting for Repairs” herein for additional information.

Accrued interest for unrecognized tax benefits was as follows:


	2011		2010		2009
	(in thousands)
Interest accrued at beginning of year	$	210	$	90	$	17
Interest reclassified due to settlements		—		—		—
Interest accrued during the year		73		120		73
Balance at end of year	$	283	$	210	$	90

The Company classifies interest on tax uncertainties as interest expense. The Company did not accrue any penalties on uncertain tax positions.

It is reasonably possible that the amount of the unrecognized tax benefits associated with a majority of the Company’s unrecognized tax positions will significantly increase or decrease within the next 12 months. The resolution of the tax accounting method change for repairs-generation assets, as well as the conclusion or settlement of federal or state audits, could impact the balances significantly. At this time, an estimate of the range of reasonably possible outcomes cannot be determined.

The IRS has audited and closed all tax returns prior to 2007 and is currently auditing the federal income tax returns for 2007-2009. For tax years 2010-2012, the Company is in the Compliance Assurance Program of the IRS. The audits for the state returns have either been concluded, or the statute of limitations has expired, for years prior to 2006.

Tax Method of Accounting for Repairs

The Company submitted a tax accounting method change for repair costs associated with its generation, transmission, and distribution systems with the filing of the 2009 federal income tax return in September 2010. The new tax method resulted in net positive cash flow in 2010 of approximately $8 million for the Company. On August 19, 2011, the IRS issued a revenue procedure, which provides a safe harbor method of accounting that taxpayers may use to determine repair costs for transmission and distribution property. Based upon this guidance from the IRS, the uncertain tax position for the tax accounting method change for repairs-transmission and distribution assets has been removed. However, the IRS continues to work with the utility industry in an effort to resolve the repair costs for generation assets matter in a consistent manner for all utilities. On December 23, 2011, the IRS published regulations on the deduction and capitalization of expenditures related to tangible property that generally apply for tax years beginning on or after January 1, 2012. The utility industry anticipates more detailed guidance concerning these regulations. Due to the uncertainty regarding the ultimate resolution of the repair costs for generation assets, an unrecognized tax position has been recorded for the tax accounting method change for repairs - generation assets. The ultimate outcome of this matter cannot be determined at this time.

INCOME TAXES

5. INCOME TAXES

On behalf of the Company, Southern Company files a consolidated federal income tax return and combined state income tax returns for the States of Alabama and Mississippi. Under a joint consolidated income tax allocation agreement, each subsidiary’s current and deferred tax expense is computed on a stand-alone basis and no subsidiary is allocated more expense than would be paid if it filed a separate income tax return. In accordance with IRS regulations, each company is jointly and severally liable for the federal tax liability.

Current and Deferred Income Taxes

Details of income tax provisions are as follows:


	2011			2010		2009
	(in thousands)
Federal —
Current	$	(27,099	)	$	5,399	$	77,619
Deferred		65,206			35,367		(32,980	)
		38,107			40,766		44,639
State —
Current		(2,473	)		3,319		12,444
Deferred		6,559			2,190		(6,869	)
		4,086			5,509		5,575
Total	$	42,193		$	46,275	$	50,214

The tax effects of temporary differences between the carrying amounts of assets and liabilities in the financial statements and their respective tax bases, which give rise to deferred tax assets and liabilities, are as follows:


	2011		2010
	(in thousands)
Deferred tax liabilities —
Accelerated depreciation	$	356,857	$	321,918
Basis differences		48,268		1,499
Energy cost management clause under recovered		7,880		10,216
Regulatory assets associated with asset retirement obligations		7,557		7,338
Pensions and other benefits		18,283		14,739
Regulatory assets associated with employee benefit obligations		52,410		35,021
Regulatory assets associated with the Kemper IGCC		4,618		4,640
Long-term service agreement		5,231		—
OCI		—		1
Other		32,202		25,677
Total		533,306		421,049

Deferred tax assets —
Federal effect of state deferred taxes		10,899		11,323
Fuel clause over recovered		30,050		39,779
Other property basis differences		2,918		3,013
Pension and other benefits		70,255		53,213
Property insurance		25,349		23,880
Premium on long-term debt		29,820		—
Unbilled fuel		14,951		16,703
Long-term service agreement		—		4,740
Asset retirement obligations		7,557		7,338
Interest rate hedges		5,763		—
Investment tax credit carryforward		77,400		—
Other		21,571		21,614
Total		296,533		181,603
Total deferred tax liabilities, net		236,773		239,446
Portion included in (accrued) prepaid income taxes, net		33,624		42,521
Accumulated deferred income taxes	$	270,397	$	281,967

At December 31, 2011, the tax-related regulatory assets and liabilities were $26.5 million and $12.1 million, respectively. These assets are attributable to tax benefits that flowed through to customers in prior years, to deferred taxes previously recognized at rates lower than the current enacted tax law, and to taxes applicable to capitalized interest. These liabilities are attributable to deferred taxes previously recognized at rates higher than the current enacted tax law and to unamortized investment tax credits. In 2010, the Company deferred $5.5 million as a regulatory asset related to the impact of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (together, the Acts). The Acts eliminated the deductibility of healthcare costs that are covered by federal Medicare subsidy payments. The Company will amortize the regulatory asset to income tax expense over 10 years beginning January 1, 2012, as approved by the Mississippi PSC for the retail portion and over five years for the wholesale portion, as approved by the FERC.

In accordance with regulatory requirements, deferred investment tax credits are amortized over the life of the related property with such amortization normally applied as a credit to reduce depreciation in the statements of income. Credits amortized in this manner amounted to $1.3 million, $1.3 million, and $1.2 million for 2011, 2010, and 2009, respectively. At December 31, 2011, all investment tax credits available to reduce federal income taxes payable had been utilized. In 2010, the Company began recognizing investment tax credits associated with the construction expenditures related to the Kemper IGCC. At December 31, 2011, the Company had $99.6 million in unamortized investment tax credits associated with the Kemper IGCC, which will be amortized over the life of the Kemper IGCC once placed in service. As a result of 100% bonus tax depreciation on certain assets placed, or to be placed, in service in 2011 and 2012, and the subsequent reduction in federal taxable income, the Company estimates that it will not be able to utilize $77.4 million of these tax credits until after 2012. IRS guidelines allow the resultant unused credits to be carried forward for 20 years expiring at the end of 2031, if not utilized before then.

In September 2010, the Small Business Jobs and Credit Act of 2010 (SBJCA) was signed into law. The SBJCA includes an extension of the 50% bonus depreciation for certain property acquired and placed in service in 2010 (and for certain long-term construction projects placed in service in 2011). Additionally, in December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act) was signed into law. Major tax incentives in the Tax Relief Act include 100% bonus depreciation for property placed in service after September 8, 2010 and through 2011 (and for certain long-term construction projects to be placed in service in 2012) and 50% bonus depreciation for property placed in service in 2012 (and for certain long-term construction projects to be placed in service in 2013). The application of the bonus depreciation provisions in these acts significantly increased deferred tax liabilities related to accelerated depreciation.

Effective Tax Rate

A reconciliation of the federal statutory income tax rate to the effective income tax rate was as follows:


	2011			2010			2009
Federal statutory rate		35.0	%		35.0	%		35.0	%
State income tax, net of federal deduction		1.9			2.8			2.7
Non-deductible book depreciation		0.3			0.3			0.3
Medicare subsidy		(0.1	)		(0.2	)		(0.4	)
AFUDC-equity		(6.3	)		(1.0	)		(0.1	)
Other		(0.2	)		(0.8	)		(0.8	)
Effective income tax rate		30.6	%		36.1	%		36.7	%

The Company’s 2011 effective tax rate decreased from 2010 primarily due to the increase in non-taxable AFUDC equity related to increased construction expenditures.

Unrecognized Tax Benefits

For 2011, the total amount of unrecognized tax benefits increased by $0.7 million, resulting in a balance of $5.0 million as of December 31, 2011.

Changes during the year in unrecognized tax benefits were as follows:


	2011			2010			2009
	(in thousands)
Unrecognized tax benefits at beginning of year	$	4,288		$	3,026		$	1,772
Tax positions from current periods		1,486			868			1,309
Tax positions from prior periods		(810	)		611			(55	)
Reductions due to settlements		—			—			—
Reductions due to expired statute of limitations		—			(217	)		—
Balance at end of year	$	4,964		$	4,288		$	3,026

The change in tax positions from current periods for 2011 relates primarily to the tax accounting method change for repairs-generation assets and State of Mississippi tax credits. The tax positions decrease from prior periods for 2011 relates to the uncertain tax position for the tax accounting method change for repairs-transmission and distribution assets. See “Tax Method of Accounting for Repairs” below for additional information.

The impact on the Company’s effective tax rate, if recognized, was as follows:

		$4,144		$4,144		$4,144
	2011		2010		2009
	(in thousands)
Tax positions impacting the effective tax rate	$	4,144	$	3,058	$	3,026
Tax positions not impacting the effective tax rate		820		1,230		—
Balance of unrecognized tax benefits	$	4,964	$	4,288	$	3,026

The tax positions impacting the effective tax rate for 2011 primarily relate to the State of Mississippi Investment Tax Credit and the production activities deduction tax position. See “Effective Tax Rate” above for additional information. The tax positions not impacting the effective tax rate for 2011 relate to the timing difference associated with the tax accounting method change for repairs - generation assets. These amounts are presented on a gross basis without considering the related federal or state income tax impact.

Accrued interest for unrecognized tax benefits was as follows:

		$4,14		$4,14		$4,14
	2011		2010		2009
	(in thousands)
Interest accrued at beginning of year	$	413	$	230	$	203
Interest reclassified due to settlements		—		—		—
Interest accrued during the year		267		183		27
Balance at end of year	$	680	$	413	$	230

The Company classifies interest on tax uncertainties as interest expense. The Company did not accrue any penalties on uncertain tax positions.

It is reasonably possible that the amount of the unrecognized tax benefits associated with a majority of the Company’s unrecognized tax positions will significantly increase or decrease within the next 12 months. The resolution of the tax accounting method change for repairs-generation assets, as well as the conclusion or settlement of federal or state audits, could also impact the balances significantly. At this time, an estimate of the range of reasonably possible outcomes cannot be determined.

The IRS has audited and closed all tax returns prior to 2007 and is currently auditing the federal income tax returns for 2007-2009. For tax years 2010 through 2012, the Company is in the Compliance Assurance Program of the IRS. The audits for the state returns have either been concluded, or the statute of limitations has expired, for years prior to 2007.

Tax Method of Accounting for Repairs

The Company submitted a tax accounting method change for repair costs associated with its generation, transmission, and distribution systems with the filing of the 2009 federal income tax return in September 2010. The new tax method resulted in net positive cash flow in 2010 of approximately $5 million for the Company. On August 19, 2011, the IRS issued a revenue procedure, which provides a safe harbor method of accounting that taxpayers may use to determine repair costs for transmission and distribution property. Based upon this guidance from the IRS, the uncertain tax position for the tax accounting method change for repairs - transmission and distribution assets has been removed. However, the IRS continues to work with the utility industry in an effort to resolve the repair costs for generation assets matter in a consistent manner for all utilities. On December 23, 2011, the IRS published regulations on the deduction and capitalization of expenditures related to tangible property that generally apply for tax years beginning on or after January 1, 2012. The utility industry anticipates more detailed guidance concerning these regulations. Due to uncertainty regarding the ultimate resolution of the repair costs for generation assets, an unrecognized tax position has been recorded for the tax accounting method change for repairs-generation assets. The ultimate outcome of this matter cannot be determined at this time.

INCOME TAXES

5. INCOME TAXES

On behalf of the Company, Southern Company files a consolidated federal income tax return and combined state income tax returns for the States of Georgia, Alabama, Mississippi, and Texas. In addition, the Company files separate company income tax returns for the States of Florida, New Mexico, and North Carolina. Under a joint consolidated income tax allocation agreement, each subsidiary’s current and deferred tax expense is computed on a stand-alone basis and no subsidiary is allocated more expense than would be paid if it filed a separate income tax return. In accordance with IRS regulations, each company is jointly and severally liable for the federal tax liability.

Current and Deferred Income Taxes

Details of income tax provisions are as follows:


	2011			2010		2009

	(in millions)
Federal —
Current	$	61.6		$	4.3	$	55.0
Deferred		12.4			46.5		19.3

		74.0			50.8		74.3

State —
Current		9.8			6.5		7.7
Deferred		(7.9	)		18.1		3.7

		1.9			24.6		11.4

Total	$	75.9		$	75.4	$	85.7

The tax effects of temporary differences between the carrying amounts of assets and liabilities in the financial statements and their respective tax bases, which give rise to deferred tax assets and liabilities, are as follows:


	2011		2010

	(in millions)
Deferred tax liabilities —
Accelerated depreciation and other property basis differences	$	393.5	$	387.9
Basis difference on asset transfers		3.3		3.5
Other		4.6		5.1

Total		401.4		396.5

Deferred tax assets —
Federal effect of state deferred taxes		18.5		20.2
Net basis difference on convertible investment tax credits		21.8		14.0
Basis differences on asset transfers		3.7		5.9
Alternative minimum tax carryforward		1.1		—
Other comprehensive loss on interest rate swaps		19.1		24.4
Levelized capacity revenues		8.2		12.7
Other		11.1		10.7

Total		83.5		87.9

Total deferred tax liabilities, net		317.9		308.6
Portion included in current income taxes		1.9		(0.6)

Accumulated deferred income taxes	$	319.8	$	308.0

Deferred tax liabilities are the result of property related timing differences. The transfer of the Plant McIntosh construction project to GPC in 2004 resulted in a deferred gain for federal income tax purposes. GPC is reimbursing the Company for the related tax liability balance of $3.3 million. Of this total, $0.2 million is included in the balance sheets in “Receivables — Affiliated companies” and the remainder is included in “Other deferred charges and assets — affiliated.”

Deferred tax assets consist primarily of timing differences related to net basis differences on convertible ITCs, the recognition of capacity revenues, and the deferred loss on interest rate swaps reflected in OCI. The transfer of Plants Dahlberg, Wansley, and Franklin to the Company from GPC in 2001 also resulted in a deferred gain for federal income tax purposes. The Company will reimburse GPC for the related tax asset of $4.9 million. Of this total, $1.3 million is included in the balance sheets in “Accounts payable — Affiliated” and the remainder is included in “Other deferred credits and liabilities — affiliated.”

At December 31, 2011 and December 31, 2010, the Company had a State of New Mexico net operating loss (NOL) carryforward of $88.7 million and $103.3 million, respectively. The NOL carryforward resulted in a deferred tax asset as of December 31, 2011 and December 31, 2010 of $4.0 million and $4.7 million, respectively. However, the Company has established a valuation allowance due to the remote likelihood that the full tax benefit will be realized. The valuation allowance was $3.0 million as of December 31, 2011 and $3.3 million as of December 31, 2010. During 2011, the estimated amount of NOL utilization increased resulting in a $0.3 million reduction of the valuation allowance. The NOLs expire in 2015.

In September 2010, the Small Business Jobs and Credit Act of 2010 (SBJCA) was signed into law. The SBJCA includes an extension of the 50% bonus depreciation for certain property acquired and placed in service in 2010 (and for certain long-term construction projects placed in service in 2011). Additionally, in December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act) was signed into law. Major tax incentives in the Tax Relief Act include 100% bonus depreciation for property placed in service after September 8, 2010 and through 2011 (and for certain long-term construction projects to be placed in service in 2012) and 50% bonus depreciation for property placed in service in 2012 (and for certain long-term construction projects to be placed in service in 2013). The application of the bonus depreciation provisions in these acts significantly increased deferred tax liabilities related to accelerated depreciation.

Effective Tax Rate

A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:


	2011			2010			2009

Federal statutory rate		35.0	%		35.0	%		35.0%
State income tax, net of federal deduction		0.6			7.7			3.1
ITC basis difference		(3.1	)		(5.6	)		(1.2)
Other		(0.7	)		(0.7	)		(1.4)

Effective income tax rate		31.8	%		36.4	%		35.5%

The Company’s effective tax rate decreased in 2011 primarily as a result of a decrease in state taxes. The decrease was due to a reduction in state income taxes due to a decrease in taxes apportioned to the States of Georgia and Alabama.

Convertible ITCs received in 2011 for the construction of the Nacogdoches biomass plant and Plant Cimarron were $84.7 million, which includes $42.9 million earned in 2010. The tax benefit of the basis difference reduced income tax expense by $7.3 million. See Note 1 under “Convertible Investment Tax Credits” for additional information.

Convertible ITCs received in 2010 for the construction of the Nacogdoches biomass plant were $26.4 million; the tax benefit of the basis difference reduced income tax expense by $6.9 million. The tax benefit of the basis difference related to ITCs associated with the construction of Plant Cimarron reduced tax expense by $4.6 million in 2010.

Convertible ITCs received in 2009 for the construction of the Nacogdoches biomass plant were $16.8 million; the tax benefit of the basis difference reduced income tax expense by $2.9 million.

Unrecognized Tax Benefits

For 2011, the total amount of unrecognized tax benefits increased $0.3 million, resulting in a balance of $2.6 million as of December 31, 2011.

Changes during the year in unrecognized tax benefits were as follows:


	2011			2010		2009

	(in millions)
Unrecognized tax benefits at beginning of year		$ 2.3			$0.1		$ 0.5
Tax positions from current periods		0.4			0.7		0.3
Tax positions from prior periods		(0.1	)		1.5		(0.7)
Reductions due to settlements		—			—		—
Reductions due to expired statute of limitations		—			—		—

Balance at end of year		$ 2.6			$2.3		$ 0.1

The increase in unrecognized tax benefits from current periods for 2011 relates primarily to the tax accounting method change for repairs-generation assets. See “Tax Method of Accounting for Repairs” herein for additional information.

The impact on the Company’s effective tax rate, if recognized, was as follows:


	2011		2010		2009

	(in millions)
Tax positions impacting the effective tax rate		$0.5		$0.6		$0.1
Tax positions not impacting the effective tax rate		2.1		1.7		—

Balance of unrecognized tax benefits		$2.6		$2.3		$0.1

The tax positions impacting the effective tax rate for 2011 primarily relate to the production activities deduction. The tax positions not impacting the effective tax rate for 2011 relate to the timing difference associated with the tax accounting method change for repairs-generation assets. These amounts are presented on a gross basis without considering the related federal or state income tax impact. See “Tax Method of Accounting for Repairs” herein for additional information.

Accrued interest for unrecognized tax benefits was as follows:


	2011		2010		2009

	(in millions)
Interest accrued at beginning of year		$ —		$—		$—
Interest accrued during the year		0.1		—		—

Balance at end of year		$0.1		$—		$—

The Company classifies interest on tax uncertainties as interest expense. The Company did not accrue any penalties on uncertain tax positions.

It is reasonably possible that the amount of the unrecognized tax benefits associated with a majority of the Company’s unrecognized tax positions will significantly increase or decrease within the next 12 months. The resolution of the tax accounting method change for repairs-generation assets, as well as the conclusion or settlement of federal or state audits, could impact the balances significantly. At this time, an estimate of the range of reasonably possible outcomes cannot be determined.

The IRS has audited and closed all tax returns prior to 2007 and is currently auditing the federal income tax returns for 2007 through 2009. For tax years 2010 through 2012, the Company is in the Compliance Assurance Program of the IRS. The audits for the state returns have either been concluded, or the statute of limitations has expired, for years prior to 2006.

Tax Method of Accounting for Repairs

The Company submitted a tax accounting method change for repair costs associated with its generation assets with the filing of the 2009 federal income tax return in September 2010. The new tax method resulted in net positive cash flow in 2010 of approximately $6 million for the Company on a consolidated basis. The IRS continues to work with the utility industry in an effort to resolve the repair costs for generation assets matter in a consistent manner for all utilities. On December 23, 2011, the IRS published regulations on the deduction and capitalization of expenditures related to tangible property that generally apply for tax years beginning on or after January 1, 2012. The utility industry anticipates more detailed guidance concerning these regulations. Due to the uncertainty regarding the ultimate resolution of the repair costs for generation assets, an unrecognized tax position has been recorded for the tax accounting method change for repairs-generation assets. The ultimate outcome of this matter cannot be determined at this time.