Income Taxes

12 Months Ended

Dec. 31, 2012

Income Taxes

Income Taxes

16. Income Taxes

        Our income from continuing operations before income tax provision and earnings (losses) from unconsolidated affiliates is earned solely in the U.S. CPE Inc. recognizes income taxes on its pretax income, which for periods before the Secondary Offering consisted solely of its share (approximately 51%) of CPE Resources's pretax income. For periods following the Secondary Offering, CPE Inc. recognizes income tax expense on 100% of pretax income. Furthermore, subsequent to the Secondary Offering, CPE Resources is no longer treated as a partnership for income tax purposes and recognizes income taxes on a stand-alone, separate return basis.

CPE Inc.

        The income tax expense consisted of the following for the years ended December 31 (in thousands):

	2012		2011			2010
Current:
Federal	$	18,064	$	20,973		$	3,478
State		2,339		1,700			—
Total current	$	20,403	$	22,673		$	3,478
Deferred:
Federal		40,351		(11,261	)		27,961
State		1,859		37			543
Total deferred		42,210		(11,224	)		28,504
Total income tax expense	$	62,614	$	11,449		$	31,982

        The tax effects of temporary differences that result in deferred tax assets and deferred tax liabilities consisted of the following at December 31 (in thousands):

	2012			2011
Deferred income tax assets:
Property, plant and equipment	$	30,770		$	62,379
Accrued expense and liabilities		32,484			32,324
Pension and other postretirement benefits		16,761			13,126
Investment in joint venture partnerships		8,450			7,349
Accrued reclamation and mine closure costs		41,854			38,091
Contract rights		31,838			30,679
Tax agreement liability		41,954			61,429
AMT Credit		26,816			24,061
Other		5,263			6,433
Total deferred income tax assets		236,190			275,870
Less valuation allowance		(17,231	)		(33,903	)
Net deferred income tax asset		218,960			241,967
Deferred income tax liabilities:
Inventories		(2,919	)		(3,332	)
Mineral rights		(78,936	)		(67,938	)
Mark-to-market gain		(4,861	)		—
Other		(3,057	)		(341	)
Total deferred income tax liabilities		(89,773	)		(71,611	)
Net deferred income tax assets (liabilities)	$	129,187		$	170,356

        CPE Inc. reports differences between tax bases of assets and liabilities and the financial statement carrying amount of these items as deferred income tax assets and liabilities. Included in deferred income tax assets are amounts related to payments it expects to make pursuant to the Tax Receivable Agreement with Rio Tinto, which is recognized as a liability in our consolidated financial statements. Also included in other deferred tax assets are net operating loss carryforwards of $6.1 million that expire in 2029 through 2032 and alternative minimum tax ("AMT") credits of $26.8 million that do not expire.

        Net deferred income tax assets are classified in the consolidated balance sheets at December 31 as follows (in thousands):

	2012		2011
Net current deferred income tax assets	$	28,112	$	37,528
Net noncurrent deferred income tax assets		101,075		132,828
Net deferred income tax assets	$	129,187	$	170,356

        The future realization of deferred income tax assets arising primarily from the increased tax basis arising from the IPO and the Secondary Offering depends on the existence of sufficient future taxable income. Based on our consideration of CPE Resources's historical operations, current forecasts of taxable income over the remaining lives of our mines, the availability of tax planning strategies, and other factors, we determined that $129.2 million of the potential tax benefits are more likely than not to be realized at the statutory federal and state income tax rates. Accordingly, we have provided a $17.2 million valuation allowance to reduce our deferred tax assets to the amount that we determined is more likely than not to be realized.

        The effective tax rate is reconciled to the U.S. federal statutory income tax rate for the years ended December 31 as follows:

	2012			2011			2010
United States federal statutory income tax rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal tax benefit		1.2			0.9			0.4
Percentage depletion deduction		(2.3	)		(3.2	)		(3.0	)
Section 199 domestic manufacturing deduction		(0.6	)		(0.3	)		(0.1	)
Change in valuation allowance		(7.1	)		(25.4	)		9.0
Noncontrolling interest		—			—			(18.9	)
Prior year return-to-actual		0.3			(1.3	)		(0.4	)
Other		0.2			—			(0.1	)
Effective tax rate		26.7	%		5.7	%		21.9	%

        As of December 31, 2012 and 2011, we had no unrecognized tax benefits. We are open to federal and state tax audits until the applicable statutes of limitations expire.

CPE Resources

        The income tax expense (benefit) consisted of the following for the years ended December 31 (in thousands):

	2012		2011		2010
Current:
Federal	$	15,467	$	671	$	—
State		2,345		534		—
Total current	$	17,812	$	1,205	$	—
Federal		30,946		17,340		(755	)
State		3,278		1,438		(25	)
Total deferred		34,224		18,778		(780	)
Total income tax expense (benefit)	$	52,036	$	19,983	$	(780	)

        The tax effects of temporary differences that result in deferred tax assets and deferred tax liabilities consisted of the following at December 31 (in thousands):

	2012			2011
Deferred income tax assets:
Property, plant and equipment	$	30,770		$	62,379
Accrued expense and liabilities		32,484			32,324
Pension and other postretirement benefits		16,761			13,126
Investment in joint venture partnerships		8,450			7,349
Accrued reclamation and mine closure costs		41,854			38,091
Contract rights		31,838			30,679
AMT Credit		26,816			24,061
Other		5,261			6,434
Total deferred income tax assets		194,235			214,443
Less valuation allowance		(17,231	)		(33,903	)
Net deferred income tax asset		177,004			180,540
Deferred income tax liabilities:
Inventories		(2,919	)		(3,332	)
Mineral rights		(78,936	)		(67,938	)
Mark-to-market		(4,861	)		—
Other		(3,057	)		(342	)
Total deferred income tax liabilities		(89,773	)		(71,612	)
Net deferred income tax assets (liabilities)	$	87,232		$	108,928

        CPE Resources reports differences between tax bases of assets and liabilities and the financial statement carrying amount of these items as deferred income tax assets and liabilities. Included in other deferred tax assets are net operating loss carryforwards of $6.1 million that expire in 2029 through 2032 and AMT credits of $26.8 million that do not expire.

        Net deferred income tax assets are classified in the consolidated balance sheets at December 31 as follows (in thousands):

	2012		2011
Net current deferred income tax assets	$	21,096	$	30,648
Net noncurrent deferred income tax assets		66,136		78,280
Net deferred income tax assets	$	87,232	$	108,928

        The future realization of deferred income tax assets arising primarily from the increased tax basis arising from the IPO and the Secondary Offering depends on the existence of sufficient future taxable income. Based on our consideration of CPE Resources's historical operations, current forecasts of taxable income over the remaining lives of our mines, the availability of tax planning strategies, and other factors, we determined that $87.2 million of the potential tax benefits are more likely than not to be realized at the statutory federal and state income tax rates. Accordingly, we have provided a $17.2 million valuation allowance to reduce our deferred tax assets to the amount that we determined is more likely than not to be realized.

        The effective tax rate is reconciled to the U.S. federal statutory income tax rate for the years ended December 31 as follows:

	2012			2011			2010
United States federal statutory income tax rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal tax benefit		1.2			0.9			—
Income not taxable to CPE Resources		—			—			(35.0	)
Percentage depletion deduction		(2.6	)		(2.9	)		(0.2	)
Section 199 domestic manufacturing deduction		(0.7	)		(0.3	)		(0.1	)
Change in valuation allowance		(8.1	)		(23.1	)		0.6
Prior year return-to-actual		0.3			(0.6	)		(0.8	)
Other		0.1			0.1			—
Effective tax rate		25.3	%		9.1	%		(0.5	)%

        As of December 31, 2012 and 2011, we had no unrecognized tax benefits. We are open to federal and state tax audits until the applicable statutes of limitations expire.