INCOME TAXES

The table below presents the components of our provision for income taxes from continuing operations for the years presented:



	Year Ended December 31,
	2013		2012			2011
	(in thousands)
Current:
Federal	$	1,355	$	—		$	2,594
State	199		(199		)	750
Total current income taxes	1,554		(199		)	3,344
Deferred:
Federal	11,145		12,133			(13,309		)
State	2,098		767			(1,835		)
Total deferred income taxes	13,243		12,900			(15,144		)
Income tax benefit (expense) from continuing operations	$	14,797	$	12,701		$	(11,800	)

In 2012 and 2011, we continued to utilize tax deferral strategies such as bonus depreciation, accelerated depreciation and intangible drilling cost expense elections to minimize our current taxes. As a result of these elections and deferral strategies, we generated federal and state net operating losses (“NOLs”) in 2012 and 2011. In 2013 we limited our deferral strategies to only the continued utilization of accelerated depreciation in an effort to utilize our federal NOLs. The majority of our federal NOLs and some of our state NOLs, except for Colorado due to statutory limits, are being utilized in 2013 to offset the 2013 taxable gain on the sale of our non-core Colorado assets. See Note 14, Assets Held for Sale, Divestitures and Discontinued Operations, for additional information regarding the sale of our non-core Colorado assets. The remaining federal NOLs and state NOLs will be carried forward to offset taxable income in 2014 or prospective years.

The following table presents a reconciliation of the statutory rate to the effective tax rate related to our provision for income taxes from continuing operations:



	Year Ended December, 31,
	2013		2012		2011

Statutory tax rate	35.0	%	35.0	%	35.0	%
State income tax, net	3.3		1.0		2.0
Percentage depletion	1.8		1.9		(2.5	)
Non-deductible compensation	(3.4	)	(0.5	)	—
Non-deductible meals and entertainment	(0.5	)	(0.5	)	0.3
State deferred rate change	—		—		1.3
Unrecognized tax benefits	(0.1	)	—		(2.6	)
Federal return examination adjustments	—		—		0.4
Return to provision adjustments	(0.5	)	—		0.3
Other	0.3		—		0.1
Effective tax rate	35.9	%	36.9	%	34.3	%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2013 and 2012 are presented below:



	As of December 31,
	2013		2012
	(in thousands)
Deferred tax assets:
Net change in fair value of unsettled derivatives	$	6,205	$	—
Deferred compensation	8,507		7,216
Asset retirement obligations	11,630		10,325
State NOL and tax credit carryforwards, net	5,182		6,117
Percentage depletion - carryforward	4,570		4,702
Alternative minimum tax - credit carryforward	3,165		2,351
Federal NOL carryforward	4,601		21,281
Other	6,229		2,276
Deferred tax assets	50,089		54,268

Deferred tax liabilities:
Properties and equipment	120,746		122,742
Investment in PDCM	21,962		31,445
Net change in fair value of unsettled derivatives	—		7,163
Convertible debt	3,774		5,194
Total gross deferred tax liabilities	146,482		166,544
Net deferred tax liability	$	96,393	$	112,276

Classification in the consolidated balance sheets:
Deferred income tax assets	$	22,374	$	36,151
Deferred income tax liability	118,767		148,427
Net deferred tax liability	$	96,393	$	112,276

Deferred tax assets decreased primarily due to the utilization of a significant portion of our federal NOL carryforward in 2013. This decrease was partially offset by the addition of the deferred tax asset associated with the unrealized tax loss for the fair value of unsettled derivatives.

Deferred tax liabilities for properties and equipment remained relatively unchanged in 2013 primarily as a result of our tax gain on the sale of our non-core Colorado properties and equipment being offset by our continued use of statutory provisions for accelerated amortization of intangible drilling costs and accelerated tax depreciation. The deferred tax liability associated with our investment in PDCM decreased due to PDCM’s sale of its shallow Devonian assets. In addition, the fair value of derivatives at December 31, 2013 resulted in an unrealized tax loss versus an unrealized tax gain at December 31, 2012.

As of December 31, 2013, we have state NOL carryforwards of $136.1 million that begin to expire in 2030, state credit carryforwards of $1.1 million that begin to expire in 2023 and federal NOL carryforwards of $13.6 million that will expire in 2032. Approximately $0.2 million of excess tax benefits relating to stock-based compensation that are a component of our NOL carryforwards, when realized, will be credited to APIC.

Unrecognized tax benefits were immaterial for each of the years in the three-year period ended December 31, 2013. 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, 2013. The total amount of unrecognized tax benefits that would affect the effective tax rate, if recognized, was $0.1 million as of December 31, 2013 and $0.2 million as of December 31, 2012. As of December 31, 2013, we expect a decrease in the unrecognized tax benefit in the next twelve months due to the expiration of the relevant statute of limitations. During 2013, we reduced our liability for any uncertain tax benefits, of which the remaining balance is related to our state tax filings, due to the expiration of the relevant statute of limitations. The statute of limitations for most of our state tax jurisdictions is open from 2009 forward.

In accordance with the CAP program, the IRS completed its “post filing review” of our 2011 tax return in January 2013 and they are currently completing their “post filing review” of our 2012 tax return. We have been issued a “no change” letter for both of the reviewed tax years. 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. We are currently participating in the CAP program for the review of our 2013 tax year and we have been invited and have accepted continued participation in the program for our 2014 tax year. Participation in the CAP program has enabled us to currently have no uncertain tax benefits associated with our federal tax return filings. During 2011, we reduced our liability for uncertain tax benefits by $0.8 million due to the accelerated examination and settlement of our 2007-2009 tax years upon entering the CAP program.

As of December 31, 2013, we were current with our income tax filings in all applicable state jurisdictions. In 2013, the State of Colorado examined our 2008 through 2011 Colorado Corporate Income Tax Returns and proposed no adjustments.