I. INCOME TAXES

The provision for income taxes is composed of the following:

The provision for income tax expense (benefit) for the years ended December 31, 2013, 2012, and 2011 consists of the following:
	(in thousands)
	Years ended December 31,
	2013		2012			2011
Current income tax expense (benefit)
Federal	$	--	$	--		$	--
State		--		--			--
	$	--	$	--		$	--

Deferred income tax expense (benefit)
Federal	$	--	$	(1,093	)	$	(3,316	)
State		--		(64	)		(195	)
	$	--	$	(1,157	)	$	(3,511	)

The effective income tax rate differs from the U.S. Federal Statutory income tax rate due to the following:

	(in thousands)
	Years ended December 31,
	2013			2012			2011

Federal statutory income tax rate	$	(2,509	)	$	(4,164	)	$	(2,828	)
State income taxes, net of federal benefit		(158	)		(245	)		(166	)
Incentive stock options		43			12			246
Percent depletion carryover		(174	)		(177	)		(807	)
Valuation analysis		2,717			3,512			--
Other		81			(95	)		44
	$	--		$	(1,157	)	$	(3,511	)

The components of deferred tax assets and liabilities as of December 31, 2013 and 2012 are as follows:

	December 31,			December 31,
	2013			2012

Deferred tax assets:
Net operating loss	$	6,930		$	2,899
Derivative instruments		96			(170	)
Asset retirement obligation		294			247
Stock based compensation		228			313
Deferred compensation		385			382
Alternative minimum tax credit		706			706
Contribution carryover		37			37
Equity investments		643			(91	)
Percentage depletion carryover		2,421			2,100
	$	11,740		$	6,423

Deferred tax liabilities:
Property and equipment		(5,446	)		(2,854	)
State tax		(9	)		--
Marketable securities		(16	)		(57	)
	$	(5,471	)	$	(2,911	)

Net deferred tax assets (liabilities)		6,269			3,512
Less: Valuation Allowance		(6,269	)		(3,512	)
Deferred tax liability	$	--		$	--

During the year ended December 31, 2013, deferred tax assets increased $5.3 million and deferred tax liabilities increased by $2.8 million. The change in net deferred tax assets was an increase of $3.0 million compared to the previous year. This resulted in a net deferred asset of $6.3 million, which is fully offset by a valuation allowance.

USE has net operating loss carryovers as of December 31, 2013 of $20.9 million for federal income tax purposes and $18.3 million for financial reporting purposes. The difference of $2.6 million relates to tax deductions for compensation expense for financial reporting purposes for which the benefit will not be recognized until the related deductions reduce taxes payable. The net operating loss carryovers may be carried back two years and forward twenty years from the year the net operating loss was generated. The net operating losses may be used to offset taxable income through 2032. In addition, USE has alternative minimum tax credit carry-forwards of $706,000 which are available to offset future federal income taxes over an indefinite period.

The statute of limitations is closed for the tax years through 2009.

USE adopted the applicable provisions of ASC 740 to recognize, measure, and disclose uncertain tax positions in the financial statements. Under ASC 740, tax positions must meet a “more-likely-than-not” recognition threshold to be recognized. During the year ended December 31, 2013, no adjustments were recognized for uncertain tax positions. USE recognizes interest and penalties related to uncertain tax positions in income tax expense (benefit). No interest or penalties related to uncertain tax positions have been accrued.