INCOME TAXES

The table below presents the components of tax expense (benefit) from continuing operations for the years presented.



	Year Ended December 31,
	2011			2010			2009
	(in thousands)
Current:
Federal	$	(3,172	)	$	(1,616	)	$	(29,071	)
State	(172		)	904			312
Total current income taxes	(3,344		)	(712		)	(28,759		)
Deferred:
Federal	2,868			3,990			(11,546		)
State	293			(2,626		)	(4,749		)
Total deferred income taxes	3,161			1,364			(16,295		)
Income tax provision (benefit) from continuing operations	$	(183	)	$	652		$	(45,054	)

For 2011, we plan to utilize statutory 100% bonus depreciation and not to expense any intangible drilling costs ("IDC"). For 2010 and 2009, we elected to expense approximately $8.5 million and $80 million, respectively, of IDC. We also continued to utilize other tax deferral strategies such as statutory bonus and accelerated depreciation, special partnership formation statutes and regulations and Internal Revenue Code ("IRC") Section 1031 like-kind exchange ("LKE") strategies to reduce our current tax expense, resulting in a correspondingly higher deferred tax expense. As a result of these elections and deferral strategies, we have generated federal and state tax net operating losses (“NOLs”) in 2011, 2010 and 2009. The 2010 NOL was carried back to 2008 generating a refund of $4.6 million, which was received in the fourth quarter of 2011. This benefit is reflected in the 2010 current federal provision. Our 2011 federal NOL is being carried forward to 2012 and is expected to provide a $11.7 million tax benefit as an offset to 2012 taxable income. This benefit is reflected in the 2011 deferred federal provision. The Worker, Homeownership, and Business Assistance Act of 2009 increased the statutory carry-back from two years to five years for losses incurred in 2008 and 2009. We carried back our 2009 tax loss to the 2005 and 2006 tax years, generating a refund of $25.9 million, which was received in the second quarter of 2010. The benefit is reflected in the 2009 current federal provision. Our state NOLs from the years ended 2011, 2010 and 2009 were statutorily not permitted to be “carried back” in the majority of our state taxing jurisdictions. These state NOLs provide a deferred tax benefit and are noted below in the table of deferred tax assets and liabilities.

The following table presents a reconciliation of the statutory rate to the effective tax rate related to income from continuing operations.



	Year Ended December, 31,
	2011		2010		2009

Statutory tax rate	35.0	%	35.0	%	35.0	%
State income tax, net	(9.4	)	1.3		3.3
Percentage depletion	(29.5	)	(11.3	)	0.5
Non-deductible compensation	—		4.4		0.1
Non-deductible meals and entertainment	3.1		—		—
State deferred rate change	15.4		(26.2	)	(0.9	)
Unrecognized tax benefits	(30.3	)	2.4		0.7
State tax credits	—		(3.3	)	0.3
2007-2009 federal return examination adjustments	4.2		4.7		—
2010 return to provision adjustments	3.7		—		—
Non-deductible expenditures - PDCM	—		—		(1.8	)
Other	1.5		2.7		(1.2	)
Effective tax rate	(6.3	)%	9.7	%	36.0	%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2011 and 2010, are presented below.



	As of December 31,
	2011			2010
	(in thousands)
Deferred tax assets:
Provision for underpayment of natural gas sales	$	3,334		$	2,711
Deferred compensation	4,319			3,986
Asset retirement obligations	9,438			6,716
State NOL and tax credit carryforwards, net	5,240			4,624
Percentage depletion - carryforward	3,733			2,422
Alternative minimum tax - credit carryforward	2,351			2,069
Federal NOL carryforward	12,210			—
Other	2,621			2,247
Total gross deferred tax assets	43,246			24,775
Deferred tax assets	43,246			24,775

Deferred tax liabilities:
Properties and equipment	(184,657		)	(164,586		)
Investment in PDCM	(30,919		)	(31,149		)
Unrealized gains - derivatives	(12,612		)	(3,082		)
Convertible debt	(6,504		)	(7,873		)
Total gross deferred tax liabilities	(234,692		)	(206,690		)
Net deferred tax liability	$	(191,446	)	$	(181,915	)

Classification in the balance sheets:
Prepaid expenses and other current assets	$	16,127		$	6,084
Deferred income taxes	(207,573		)	(187,999		)
Net deferred tax liability	$	(191,446	)	$	(181,915	)

Deferred tax liabilities for properties and equipment increased in 2011, primarily as a result of our continued utilization of statutory provisions for bonus and accelerated tax depreciation.

As of December 31, 2011, we have state NOL carryforwards of $124.1 million that begin to expire in 2029, state credit carryforwards of $1.3 million that begin to expire in 2020 and federal NOL carryforwards of $34.9 million that will expire in 2030.

The following table presents a reconciliation of the total amounts of unrecognized tax benefits.



	2011			2010		2009
	(in thousands)

Balance beginning of year, January 1	$	1,093		$	566	$	1,271
Additions for tax positions of prior years	—			253		43
Additions for tax positions of current year	—			274		7
Reductions due to settlements	(782		)	—		(406		)
Reductions due to lapse of statute of limitations	(132		)	—		(349		)
Balance end of year, December 31	$	179		$	1,093	$	566

Interest and penalties related to uncertain tax positions are recognized in income tax expense. Accrued interest and penalties related to uncertain tax positions were immaterial for each of the years in the three-year period ended December 31, 2011. The total amount of unrecognized tax benefits that would affect the effective tax rate, if recognized, was $0.2 million as of December 31, 2011 and $1 million as of December 31, 2010. As of December 31, 2011, we do not expect a decrease in the unrecognized tax benefit in the next twelve months.

In June 2011, the Internal Revenue Service ("IRS") completed its examination of our 2007, 2008 and 2009 tax years. In addition, in accordance with the Compliance Assurance Process ("CAP"), the IRS completed its “post filing review” of our 2010 tax return and have issued a “no change” letter. The CAP audit employs a real-time review of our books and tax records by the IRS that is intended to permit issue resolution prior to, or shortly after, the filing of the tax returns. During the twelve months ended 2011, we reduced our liability by $0.8 million for uncertain tax benefits that were resolved. The statute of limitation for most of our state tax jurisdictions is open from 2007 forward.