Income Taxes

Income tax expense is comprised of the following (in thousands):



	Year Ended December 31,
	2012			2011			2010
Federal
Current	$	5,358		$	(159	)	$	1,529
Deferred	13,197			18,618			23,322
Investment tax credits	(376		)	(424		)	(427		)
State
Current	(1,411		)	(27		)	7
Deferred	1,321			(7,943		)	1,329
	$	18,089		$	10,065		$	25,760

The following table reconciles our effective income tax rate to the federal statutory rate:



	Year Ended December 31,
	2012		2011		2010
Federal statutory rate	35.0	%	35.0	%	35.0	%
State income, net of federal provisions	0.9		(5.5	)	1.1
Amortization of investment tax credit	(0.3	)	(0.4	)	(0.4	)
Plant and depreciation of flow through items	(1.1	)	(0.3	)	(1.8	)
Flow through repair deduction	(14.0	)	(13.1	)	(9.4	)
State NOL benefit	(2.1	)	(2.3	)	—
Prior year permanent return to accrual adjustments	(1.6	)	(3.8	)	0.3
Other, net	(1.3	)	0.2		0.2
	15.5	%	9.8	%	25.0	%

Our effective tax rate differs from the federal statutory tax rate of 35% primarily due to the regulatory impact of flowing through federal and state tax benefits of repairs deductions and state tax benefit of bonus depreciation deductions. The regulatory accounting treatment of these deductions requires immediate income recognition for temporary tax differences of this type, which is referred to as the flow-through method. When the flow-through method of accounting for temporary differences is reflected in regulated revenues, we record deferred income taxes and establish related regulatory assets and liabilities.

Deferred income taxes relate primarily to the difference between book and tax methods of depreciating property, amortizing tax-deductible goodwill, the difference in the recognition of revenues and expenses for book and tax purposes, certain natural gas and electric costs which are deferred for book purposes but expensed currently for tax purposes, and NOL carry forwards. We have elected under Internal Revenue Code 46(f)(2) to defer investment tax credit benefits and amortize them against expense and customer billing rates over the book life of the underlying plant.

The components of the net deferred income tax liability recognized in our Consolidated Balance Sheets are related to the following temporary differences (in thousands):



	December 31,
	2012			2011
Pension / postretirement benefits	$	59,098		$	41,898
NOL carryforward	—			51,941
Property taxes	18,025			—
Unbilled revenue	15,944			6,577
Customer advances	13,660			16,157
Reserves and accruals	12,457			4,378
Compensation accruals	11,303			7,269
AMT credit carryforward	10,588			6,897
Environmental liability	9,701			9,670
Regulatory liability	1,526			1,098
QF obligations	1,462			20,596
Other, net	3,539			2,300
Valuation allowance	—			(3,834		)
Deferred Tax Asset	157,303			164,947
Excess tax depreciation	(278,051		)	(280,025		)
Goodwill amortization	(118,313		)	(96,233		)
Flow through depreciation	(63,551		)	(49,740		)
Regulatory assets	(24,173		)	(14,323		)
Property taxes	—			(510		)
Deferred Tax Liability	(484,088		)	(440,831		)
Deferred Tax Liability, net	$	(326,785	)	$	(275,884	)

At December 31, 2012 we estimate our total federal NOL carryforward to be approximately $255.1 million. If unused, our federal NOL carryforwards will expire as follows: $2.5 million in 2026; $1.0 million in 2027; $95.5 million in 2028; $23.8 million in 2029; $3.2 million in 2030; $127.5 million in 2031; and $1.6 million in 2032. We estimate our state NOL carryforward as of December 31, 2012 is approximately $201.3 million. If unused, our state NOL carryforwards will expire as follows: $3.0 million in 2013; $0.8 million in 2014; $74.0 million in 2015; $18.6 million in 2016; $2.5 million in 2017; $101.2 million in 2018; and $1.2 million in 2019. We believe it is more likely than not that sufficient taxable income will be generated to utilize these NOL carryforwards.

Uncertain Tax Positions

We recognize tax positions that meet the more-likely-than-not threshold as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. The change in unrecognized tax benefits is as follows (in thousands):



	2012			2011			2010
Unrecognized Tax Benefits at January 1	$	131,949		$	120,859		$	122,844
Gross increases - tax positions in prior period	—			—			—
Gross decreases - tax positions in prior period	(1,766		)	(15,774		)	(5,707		)
Gross increases - tax positions in current period	2,391			26,864			6,202
Gross decreases - tax positions in current period	(19,283		)	—			(2,480		)
Unrecognized Tax Benefits at December 31	$	113,291		$	131,949		$	120,859

Our unrecognized tax benefits include approximately $79.2 million related to tax positions as of each of December 31, 2012 and 2011, that if recognized, would impact our annual effective tax rate. We do not anticipate total unrecognized tax benefits will significantly change due to the settlement of audits or the expiration of statutes of limitations within the next twelve months.

The IRS issued guidance during the third quarter of 2011 providing a safe harbor method for determining the tax treatment of repair costs related to electric transmission and distribution property. That guidance was updated in the third quarter of 2012 to allow companies additional time to adopt the safe harbor method. We are evaluating whether or not we want to elect the safe harbor method, which may result in a change in related repairs deductions and unrecognized tax benefits. We expect to complete our evaluation by the second quarter of 2013.

Our policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. During the years ended December 31, 2012 and 2011, we have not recognized expense for interest or penalties, and do not have any amounts accrued at either December 31, 2012 or 2011, for the payment of interest and penalties.

Our federal tax returns from 2000 forward remain subject to examination by the IRS.