9. Income Taxes

Income tax expense (benefit) from continuing operations is summarized as follows:

	Years Ended December 31,
	2013		2012		2011
	(Thousands)
Current:
Federal	$	100,796	$	3,771	$	30,837
State	46,758		229		1,434
Subtotal	147,554		4,000		32,271
Deferred:
Federal	51,767		56,551		177,474
State	(23,940)		11,014		29,003
Subtotal	27,827		67,565		206,477
Amortization of deferred investment tax credit	(195)		(104)		(211)
Total income taxes	$	175,186	$	71,461	$	238,537

The current income tax expense recorded in 2013 primarily related to federal alternative minimum tax (AMT) and state income taxes as a result of the tax gains generated from the Sunrise Merger as well as the Equitable Gas Transaction. The current income tax expense recorded in 2012 primarily related to AMT as a result of the tax gain generated from the proceeds received relating to the Partnership’s IPO. The current tax expense recorded in 2011 primarily related to AMT and state taxes due as a result of the Company’s sales of Langley and Big Sandy.

The American Taxpayer Relief Act of 2012 was enacted on January 2, 2013 and retroactively extended the research and experimentation (R&E) tax credit (with modifications) for 2012 and 2013 and extended 50% bonus depreciation for property placed in service after December 31, 2012 and before January 1, 2014.

On July 9, 2013, Pennsylvania House Bill 465 was signed into law by the Governor of the Commonwealth of Pennsylvania (the Commonwealth). This legislation adopted multiple changes to the Commonwealth’s tax code, including an intangible expense addback provision effective in 2015, an increase of the cap on the net operating loss (NOL) deduction in 2014 and 2015 and an extension of the franchise tax through 2015. The impact of this law change has been reflected in the Company’s financial statements.

In September 2013, the United States Treasury Department issued final regulations regarding the deduction and capitalization of expenditures related to tangible property and proposed regulations addressing the disposition of tangible property. These regulations do not address the tax treatment for network assets such as natural gas pipelines, do replace previously issued temporary regulations and are effective for tax years beginning January 1, 2014 with optional adoption in 2013. The Company elected not to adopt the regulations in 2013, but performed an analysis of the regulations and does not believe that they will have a material impact on its financial statements.

The Company utilized NOLs for federal tax purposes in 2013, given the aforementioned increase in current taxable income. The Company generated NOLs for federal tax purposes from 2009 to 2012, primarily as a result of intangible drilling costs (IDCs), which are deducted for tax purposes but capitalized for financial statement purposes, and from accelerated and bonus tax depreciation associated with the expansion of the Company’s midstream business. For federal income tax purposes, the Company deducts approximately 83% of drilling costs as IDCs in the year incurred which typically will cause the Company to generate a tax loss for the year. The Company expects to continue to generate tax losses over the next several years as it continues its drilling program in Appalachia, excluding taxable gains which may be recorded from potential future asset sales. IDCs, however, are sometimes limited for AMT purposes which can result in the Company paying AMT despite the fact that taxable income has been fully offset by current tax deductions or NOL carryforwards.

Income tax expense differs from amounts computed at the federal statutory rate of 35% on pre-tax income as follows:

	Years Ended December 31,
	2013		2012		2011
	(Thousands)
Tax at statutory rate	$	182,406	$	77,133	$	230,342
State income taxes	16,180		2,869		18,150
Federal tax credits and incentives	(750)		(439)		(660)
Permanent basis differences	(407)		(2,789)		(2,020)
Noncontrolling partners’ share of Partnership earnings	(16,535)		(4,571)		–
Other	(5,708)		(742)		(7,275)
Income tax expense	$	175,186	$	71,461	$	238,537
Effective tax rate	33.6%		32.4%		36.2%

The Company’s effective tax rate for the year ended December 31, 2013 was 33.6% compared to 32.4% for the year ended December 31, 2012. The increase in the rate from 2012 to 2013 was primarily due to an increase in pre-tax book income on state tax paying entities as well as a shift in the Company’s business to states with higher income tax rates. This was partially offset by state tax benefits of $9.8 million realized in 2013 primarily related to the Sunrise Merger and the Equitable Gas Transaction which allowed the Company to utilize NOLs that had previously been fully reserved. The overall rate was reduced in both periods as a result of the Company consolidating 100% of the pre-tax income related to the noncontrolling public limited partners’ share of partnership earnings but does not record an income tax provision with respect to the portion of the Partnership’s earnings allocated to its noncontrolling public limited partners.

The Company’s effective tax rate for the year ended December 31, 2012 was 32.4% compared to 36.2% for the year ended December 31, 2011. The decrease in the rate from 2011 to 2012 was primarily due to a reduction in pre-tax book income on state tax paying entities and a larger shift occurring in 2011 in the Company’s business to states with higher income tax rates. The overall rate was lower in 2012 as a result of the Company consolidating 100% of the pre-tax income related to the noncontrolling public limited partners’ share of partnership earnings but does not record an income tax provision with respect to the portion of the Partnership’s earnings allocated to its noncontrolling public limited partners.

The following table reconciles the beginning and ending amount of reserve for uncertain tax positions (excluding interest and penalties):

	2013		2012		2011
	(Thousands)
Balance at January 1	$	17,858	$	30,730	$	37,943
Additions based on tax positions related to current year	49,289		2,165		1,245
Additions for tax positions of prior years	–		2,320		184
Settlements	–		–		–
Reductions for tax positions of prior years	(790)		(12,235)		(7,886)
Lapse of statute of limitations	(9,270)		(5,122)		(756)
Balance at December 31	$	57,087	$	17,858	$	30,730

Included in the tabular reconciliation above at December 31, 2013, 2012 and 2011 are $7.6 million, $6.4 million and $15.9 million, respectively, for tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of tax deductions. Because of the impact of deferred tax accounting, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash taxes to an earlier period. Additionally, there are uncertain tax positions of $9.8 million and $14.6 million for the years ended December 31, 2013 and 2012, respectively, that are included in the tabular reconciliation above, but recorded in the Consolidated Balance Sheets as a reduction of the related deferred tax asset for NOLs and R&E tax credit carryforwards.

The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. The Company reversed approximately $0.5 million, $1.8 million and $9.7 million of previously recorded interest expense in 2013, 2012 and 2011, respectively. Interest and penalties of $0.2 million, $0.5 million and $2.3 million were included in the balance sheet reserve at December 31, 2013, 2012 and 2011, respectively.

There were no material changes to the Company’s methodology for unrecognized tax benefits during 2013. The total amount of unrecognized tax benefits (excluding interest and penalties) that, if recognized, would affect the effective tax rate was $33.3 million, $5.3 million and $5.2 million as of December 31, 2013, 2012 and 2011, respectively.

Decreases to the unrecognized tax benefits during 2013, 2012, and 2011 were primarily attributable to the reversal of certain prior year tax positions related to state taxes and the related interest expense as well as the lapse of applicable statutes of limitations. As of December 31, 2013, the Company does not expect any of its unrecognized tax benefits to decrease within the next 12 months due to potential settlements with taxing authorities, legal or administrative guidance by relevant taxing authorities or the lapse of applicable statutes of limitation.

The consolidated federal income tax liability of the Company has been settled with the Internal Revenue Service through 2009 and the 2010 and 2011 tax years are currently under examination. The Company also is the subject of various state income tax examinations. The Company believes that it is appropriately reserved for uncertain tax positions.

The following table summarizes the source and tax effects of temporary differences between financial reporting and tax bases of assets and liabilities:

	As of December 31,
	2013		2012
	(Thousands)
Deferred income taxes:
Total deferred income tax assets .	$	(670,368)	$	(696,252)
Total deferred income tax liabilities	2,295,128		2,122,377
Total net deferred income tax liabilities	1,624,760		1,426,125
Total deferred income tax liabilities (assets)
Drilling and development costs expensed for income tax reporting	1,181,375		933,800
Tax depreciation in excess of book depreciation	923,443		924,229
Investment in Partnership	101,569		108,764
Accumulated OCI	28,597		81,087
Post-retirement benefits	(3,946)		(3,784)
Incentive compensation	(60,982)		(28,811)
Alternative minimum tax credit carryforward	(246,157)		(69,901)
Net operating loss carryforwards	(359,283)		(593,756)
Other	3,740		8,261
Total excluding valuation allowances	1,568,356		1,359,889
Valuation allowance	56,404		66,236
Total (including amounts classified as current assets of $31,005 and $15,946, respectively)	$	1,624,760	$	1,426,125

The net deferred tax liability relating to the Company’s accumulated OCI balance as of December 31, 2013 consisted of a $38.7 million deferred tax liability related to the Company’s net unrealized gain from hedging transactions, a $5.3 million deferred tax asset related to other post-retirement benefits, and a $4.8 million deferred tax asset related to the Company’s pension plans. The net deferred tax liability relating to the Company’s accumulated OCI balance as of December 31, 2012 consisted of an $88.8 million deferred tax liability related to the Company’s net unrealized gain from hedging transactions, a $3.6 million deferred tax asset related to other post-retirement benefits, and a $4.1 million deferred tax asset related to the Company’s pension plans.

The Company also has a total deferred tax asset of $183.2 million at December 31, 2013 related to the federal NOL carryforward from 2012 of $166.1 million and 2011 of $17.1 million, respectively. The deferred tax asset has been increased for uncertain tax positions of approximately $10.6 million as of December 31, 2013, and reduced for approximately $3.7 million as of December 31, 2012. The federal NOL carryforward period is 20 years and, if unused, the loss carryforward, in excess of the 2013 NOL utilization, for 2012 and 2011 will expire in 2032 and 2031, respectively.

The Company is subject to the AMT if the computed AMT liability exceeds the regular tax liability for the year. As a result of certain AMT preference items related to IDCs, the Company has generated AMT carryforwards. Because AMT taxes paid can be credited against regular tax and have an indefinite carryforward period, this item is reflected as a deferred tax asset on the Company’s Consolidated Balance Sheets.

As of December 31, 2013, the Company had a deferred tax asset of $118.2 million, net of valuation allowances of $56.4 million, related to tax benefits from state NOL carryforwards with various expiration dates ranging from 2014 to 2033. As of December 31, 2012, the Company had a deferred tax asset of $86.0 million, net of valuation allowances of $66.2 million, related to tax benefits from state NOL carryforwards with various expiration dates ranging from 2013 to 2032. The deferred tax asset has been reduced for uncertain tax positions of approximately $0.5 million during the years ended December 31, 2013 and 2012, respectively.

During the years ended December 31, 2012 and 2011, share-based payment arrangements paid in stock generated an $8.1 million and $6.6 million excess tax benefit, respectively, which was not recorded in the financial statements as an addition to common stockholders’ equity due to the Company’s NOL position. Due to taxable income generated in the year ended December 31, 2013, the Company has recorded tax benefits of $12.2 million in the financial statements as an addition to common stockholders’ equity as these tax benefits reduced taxes payable in the current year. The Company uses tax law ordering when determining when excess tax benefits have been realized.