Income Tax Expense

6 Months Ended

Jun. 30, 2011

Income Tax Expense [Abstract]

Income Tax Expense

NOTE 9.  INCOME TAX EXPENSE

	Quarter Ended		Six Months Ended
	June 30,		June 30,
	2011	2010	2011	2010
Millions
Current Tax Expense (Benefit)
Federal (a)	-	-	-	$7.2
State (a)	$0.1	$(1.9)	$0.2	(1.0)
Total Current Tax Expense (Benefit)	0.1	(1.9)	0.2	6.2
Deferred Tax Expense
Federal (b)	4.0	8.2	10.8	18.0
State (b)	-	3.3	1.5	5.5
Deferred Tax Credits	(0.3)	(0.2)	(0.5)	(0.4)
Total Deferred Tax Expense	3.7	11.3	11.8	23.1
Total Income Tax Expense	$3.8	$9.4	$12.0	$29.3

(a) For the quarter and six months ended June 30, 2011, the federal and state current tax expense was affected by a net operating loss (NOL) which resulted primarily from the bonus depreciation provision of tax legislation passed in 2010. The 2011 federal and state NOL will be carried forward to offset future taxable income. For the six months ended June 30, 2010, we recorded federal current tax expense, as the 2010 tax legislation allowing bonus depreciation was not enacted until the third quarter of 2010. The state current benefit for the quarter and six months ended June 30, 2010, was due to the completion of a state audit and state renewable tax credits.

(b) The quarter ended June 30, 2011, includes a $2.9 million income tax benefit related to the MPUC approval of our request to defer the retail portion of the tax charge taken in 2010 resulting from PPACA. The six months ended June 30, 2011, includes the second quarter item above and the reversal in the first quarter of 2011 of a $6.2 million deferred tax liability related to a revenue receivable that Minnesota Power agreed to forgo as part of a stipulation and settlement agreement in its 2010 rate case. Included in the six months ended June 30, 2010, is a charge of $4.0 million as a result of PPACA (See Note 5. Regulatory Matters).

For the six months ended June 30, 2011, the effective tax rate was 18.2 percent (41.0 percent for the six months ended June 30, 2010). The effective tax rate for the six months ended June 30, 2011, was lowered by 4.4 percent due to the non-recurring income tax benefit related to the MPUC approval of our request to defer the retail portion of the tax charge taken in 2010 resulting from PPACA and by 9.4 percent due to the non-recurring reversal of the deferred tax liability related to a revenue receivable that Minnesota Power agreed to forgo as part of a stipulation and settlement agreement in its 2010 rate case. The effective tax rate deviated from the statutory rate of approximately 41 percent primarily due to non-recurring items discussed above, deductions for AFUDC-Equity, investment tax credits, renewable tax credits and depletion.

Uncertain Tax Positions. As of June 30, 2011, we had gross unrecognized tax benefits of $11.3 million. Of this total, $0.6 million represents the amount of unrecognized tax benefits that, if recognized, would favorably impact the effective income tax rate.

We expect that the total amount of unrecognized tax benefits as of June 30, 2011, will change by an immaterial amount in the next 12 months.