INCOME TAXES

The components of Energen's income taxes consisted of the following:



Years ended December 31, (in thousands)	2011		2010		2009
Taxes estimated to be payable currently:
Federal	$	11,595	$	31,920	$	56,821
State	5,065		1,230		2,534
Total current	16,660		33,150		59,355
Taxes deferred:
Federal	125,622		121,804		75,644
State	3,419		12,036		8,972
Total deferred	129,041		133,840		84,616
Total income tax expense	$	145,701	$	166,990	$	143,971

The components of Alagasco's income taxes consisted of the following:



Years ended December 31, (in thousands)	2011			2010		2009
Taxes estimated to be payable currently:
Federal	$	(1,280	)	$	859	$	11,035
State	(108		)	155		61
Total current	(1,388		)	1,014		11,096
Taxes deferred:
Federal	24,938			25,582		13,631
State	3,120			3,279		2,626
Total deferred	28,058			28,861		16,257
Total income tax expense	$	26,670		$	29,875	$	27,353

Temporary differences and carryforwards which gave rise to Energen's deferred tax assets and liabilities were as follows:



(in thousands)	December 31, 2011						December 31, 2010
	Current			Noncurrent			Current			Noncurrent
Deferred tax assets:
Unbilled and deferred revenue	$	9,582		$	—		$	14,495		$	—
Allowance for doubtful accounts	4,848			—			5,626			—
Insurance accruals	2,562			—			2,350			—
Compensation accruals	11,181			—			9,822			—
Inventories	1,438			—			896			—
Other comprehensive income	2,799			12,801			—			46,244
Gas supply adjustment related accruals	1,196			—			1,407			—
Derivative instruments	13,167			—			—			—
State net operating losses and other carryforwards	987			3,022			811			2,866
Other	2,797			27			2,270			501
Total deferred tax assets	50,557			15,850			37,677			49,611
Valuation allowance	(270		)	(2,752		)	(311		)	(2,555		)
Total deferred tax assets	50,287			13,098			37,366			47,056
Deferred tax liabilities:
Depreciation and basis differences	—			791,073			—			632,032
Pension and other costs	—			25,685			—			29,437
Derivative instruments	—			—			333			—
Other comprehensive income	—			—			2,934			—
Other	1,469			2,467			1,367			671
Total deferred tax liabilities	1,469			819,225			4,634			662,140
Net deferred tax assets (liabilities)	$	48,818		$	(806,127	)	$	32,732		$	(615,084	)

Temporary differences and carryforwards which gave rise to Alagasco's deferred tax assets and liabilities were as follows:



(in thousands)	December 31, 2011					December 31, 2010
	Current		Noncurrent			Current		Noncurrent
Deferred tax assets:
Unbilled and deferred revenue	$	9,582	$	—		$	14,495	$	—
Allowance for doubtful accounts	4,575		—			5,369		—
Insurance accruals	2,358		—			2,143		—
Compensation accruals	2,274		—			2,672		—
Inventories	1,438		—			896		—
Gas supply adjustment related accruals	1,196		—			1,407		—
State net operating losses and other carryforwards	987		—			811		—
Other	924		4			753		55
Total deferred tax assets	23,334		4			28,546		55
Deferred tax liabilities:
Depreciation and basis differences	—		156,121			—		114,193
Pension and other costs	—		25,375			—		27,642
Other	1,348		—			1,244		—
Total deferred tax liabilities	1,348		181,496			1,244		141,835
Net deferred tax assets (liabilities)	$	21,986	$	(181,492	)	$	27,302	$	(141,780	)

The Company files a consolidated federal income tax return with all of its subsidiaries. The Company has a current deferred tax asset of $1.0 million relating to Alagasco’s $22.8 million state net operating loss carryforward which will expire beginning in 2023. Alagasco anticipates generating adequate future taxable income to fully realize this benefit. The Company has a full valuation allowance recorded against a noncurrent deferred tax asset of $3.0 million arising from certain state net operating loss and charitable contribution carryforwards. The Company intends to fully reserve this asset until it is determined that it is more likely than not that the asset can be realized through future taxable income in the respective state taxing jurisdictions. No other valuation allowance with respect to deferred taxes is deemed necessary as both the Company and Alagasco anticipate generating adequate future taxable income to realize the benefits of all remaining deferred tax assets on the consolidated balance sheets.

Total income tax expense for the Company differed from the amount which would have been provided by applying the statutory federal income tax rate of 35 percent to earnings before taxes as illustrated below:



Years ended December 31, (in thousands)	2011			2010			2009
Income tax expense at statutory federal income tax rate	$	141,864		$	160,229		$	140,104
Increase (decrease) resulting from:
State income taxes, net of federal income tax benefit	5,544			8,398			7,384
Qualified Section 199 production activities deduction	(593		)	(1,745		)	(2,715		)
401(k) stock dividend deduction	(532		)	(565		)	(567		)
Other, net	(582		)	673			(235		)
Total income tax expense	$	145,701		$	166,990		$	143,971
Effective income tax rate (%)	35.95			36.48			35.97

Total income tax expense for Alagasco differed from the amount which would have been provided by applying the statutory federal income tax rate of 35 percent to earnings before taxes as illustrated below:



Years ended December 31, (in thousands)	2011			2010		2009
Income tax expense at statutory federal income tax rate	$	25,645		$	26,865	$	25,469
Increase (decrease) resulting from:
State income taxes, net of federal income tax benefit	2,059			2,157		2,045
Reversal of tax reserves from audit settlements, net	(1,365		)	—		—
Other, net	331			853		(161		)
Total income tax expense	$	26,670		$	29,875	$	27,353
Effective income tax rate (%)	36.40			38.92		37.59

A reconciliation of Energen’s beginning and ending amount of unrecognized tax benefits is as follows:



(in thousands)
Balance as of December 31, 2008	$	16,805
Additions based on tax positions related to the current year	2,530
Additions for tax positions of prior years	841
Reductions for tax positions of prior years (lapse of statute of limitations)	(2,379		)
Balance as of December 31, 2009	17,797
Additions based on tax positions related to the current year	1,436
Additions for tax positions of prior years	11,703
Reductions for tax positions of prior years	(3,624		)
Lapse of statute of limitations	(1,313		)
Settlements	(1,409		)
Balance as of December 31, 2010	24,590
Additions based on tax positions related to the current year	3,644
Additions for tax positions of prior years	2,324
Reductions for tax positions of prior years	(39		)
Lapse of statute of limitations	(1,482		)
Settlements	(18,444		)
Balance as of December 31, 2011	$	10,593

The reduction for settlements in 2011 and the increase in the additions for tax positions of prior years in 2010 are primarily related to Alagasco's tax accounting method change for the recovery of its gas distribution property that was in dispute under an Internal Revenue Service (IRS) examination of the Company's 2007-2008 federal consolidated income tax returns. In September 2010, the IRS made certain assessments primarily related to Alagasco's tax accounting method change for the recovery of its gas distribution property. The Company subsequently filed a petition in United States Tax Court challenging the IRS assessment. During the second quarter of 2011, the Company entered into a settlement agreement with the IRS. Under this settlement, Alagasco was allowed the full repair tax deductions as originally claimed in the 2007 and 2008 federal income tax returns. The Chief Judge of the United States Tax Court signed and entered the Decision putting this settlement agreement into effect on June 16, 2011.

During 2010, the Company had a gross reduction of $3.6 million and recognized in its effective income tax rate a $2.4 million net benefit associated with the release of an unrecognized income tax benefit liability. The Company reassessed its measurement due to recent developments related to the issue and believed that the full amount of the tax benefit has a greater than 50 percent chance of being fully realized. During 2011, the Company had a gross addition of $5.9 million and recognized in its effective income tax rate $2.9 million of income tax expense for additional unrecognized tax benefit liabilities. These liabilities were partially

offset by a $1.5 million benefit for the release of the unrecognized income tax benefit liability due to the Company's settlement with the IRS discussed above.

The amount of unrecognized tax benefits at December 31, 2011 that would favorably impact the Company's effective tax rate, if recognized, is $4.1 million. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the years ended December 31, 2011, 2010, and 2009, the Company recognized approximately $1.4 million of income, $0.8 million of expense and $0.1 million of expense for interest (net of tax benefit) and penalties, respectively. The Company had approximately $0.2 million and $1.6 million for the payment of interest (net of tax benefit) and penalties accrued at December 31, 2011 and 2010, respectively.

A reconciliation of Alagasco’s beginning and ending amount of unrecognized tax benefits is as follows:



(in thousands)
Balance as of December 31, 2008	$	6,890
Additions based on tax positions related to the current year	821
Additions for tax positions of prior years	197
Reductions for tax positions of prior years (lapse of statute of limitations)	(287		)
Balance as of December 31, 2009	7,621
Additions based on tax positions related to the current year	9
Additions for tax positions of prior years	11,645
Reductions for tax positions of prior years (lapse of statute of limitations)	(90		)
Settlements	(244		)
Balance as of December 31, 2010	18,941
Additions based on tax positions related to the current year	13
Additions for tax positions of prior years	1
Reductions for tax positions of prior years (lapse of statute of limitations)	(409		)
Settlements	(18,444		)
Balance as of December 31, 2011	$	102

The reduction for settlements in 2011 and the increase in the additions for tax positions of prior years in 2010 are primarily related to Alagasco's tax accounting method change for the recovery of its gas distribution property discussed above. The amount of unrecognized tax benefits at December 31, 2011 that would favorably impact Alagasco's effective tax rate, if recognized, is $16,000. Alagasco recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the years ended December 31, 2011, 2010, and 2009, Alagasco recognized approximately $1.4 million of income, $1.0 million of expense and $0.1 million of expense for interest (net of tax benefit) and penalties, respectively. Alagasco had approximately $5,000 and $1.4 million for the payment of interest (net of tax benefit) and penalties accrued at December 31, 2011 and 2010, respectively.

The Company and Alagasco's tax returns for years 2008-2010 remain open to examination by the IRS and major state taxing jurisdictions. The Company and Alagasco have on-going income tax examinations under various U.S. and state tax jurisdictions. Accordingly, it is reasonably possible that significant changes to the reserve for uncertain tax benefits may occur as a result of the completion of various audits and the expiration of statute of limitations. Although the timing and outcome of these tax examinations is highly uncertain, the Company does not expect the change in the unrecognized tax benefit within the next 12 months would have a material impact to the financial statements.