INCOME TAXES

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



Years ended December 31, (in thousands)	2012		2011		2010
Taxes estimated to be payable currently:
Federal	$	16,295	$	11,595	$	31,920
State	3,125		5,065		1,230
Total current	19,420		16,660		33,150
Taxes deferred:
Federal	119,053		125,622		121,804
State	5,346		3,419		12,036
Total deferred	124,399		129,041		133,840
Total income tax expense	$	143,819	$	145,701	$	166,990

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



Years ended December 31, (in thousands)	2012		2011			2010
Taxes estimated to be payable currently:
Federal	$	18,227	$	(1,280	)	$	859
State	739		(108		)	155
Total current	18,966		(1,388		)	1,014
Taxes deferred:
Federal	9,066		24,938			25,582
State	2,212		3,120			3,279
Total deferred	11,278		28,058			28,861
Total income tax expense	$	30,244	$	26,670		$	29,875

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



(in thousands)	December 31, 2012						December 31, 2011
	Current			Noncurrent			Current			Noncurrent
Deferred tax assets:
Unbilled and deferred revenue	$	10,137		$	—		$	9,582		$	—
Allowance for doubtful accounts	2,408			—			4,848			—
Insurance accruals	2,021			—			2,562			—
Compensation accruals	13,116			—			11,181			—
Inventories	1,664			—			1,438			—
Other comprehensive income	—			19,158			2,799			12,801
Gas supply adjustment related accruals	969			—			1,196			—
Derivative instruments	—			—			13,167			—
State net operating losses and other carryforwards	—			3,577			987			3,022
Other	3,140			25			2,797			27
Total deferred tax assets	33,455			22,760			50,557			15,850
Valuation allowance	(268		)	(2,793		)	(270		)	(2,752		)
Total deferred tax assets	33,187			19,967			50,287			13,098
Deferred tax liabilities:
Depreciation and basis differences	—			898,625			—			791,073
Pension and other costs	—			20,143			—			25,685
Derivative instruments	4,272			3,162			—			—
Other comprehensive income	18,133			—			—			—
Other	2,262			3,638			1,469			2,467
Total deferred tax liabilities	24,667			925,568			1,469			819,225
Net deferred tax assets (liabilities)	$	8,520		$	(905,601	)	$	48,818		$	(806,127	)

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



(in thousands)	December 31, 2012					December 31, 2011
	Current		Noncurrent			Current		Noncurrent
Deferred tax assets:
Unbilled and deferred revenue	$	10,137	$	—		$	9,582	$	—
Allowance for doubtful accounts	2,155		—			4,575		—
Insurance accruals	1,856		—			2,358		—
Compensation accruals	2,645		—			2,274		—
Inventories	1,664		—			1,438		—
Gas supply adjustment related accruals	969		—			1,196		—
State net operating losses and other carryforwards	—		—			987		—
Other	774		2			924		4
Total deferred tax assets	20,200		2			23,334		4
Deferred tax liabilities:
Depreciation and basis differences	—		167,329			—		156,121
Pension and other costs	—		22,054			—		25,375
Other	1,401		—			1,348		—
Total deferred tax liabilities	1,401		189,383			1,348		181,496
Net deferred tax assets (liabilities)	$	18,799	$	(189,381	)	$	21,986	$	(181,492	)

The Company files a consolidated federal income tax return with all of its subsidiaries. The Company has a noncurrent deferred tax asset of $0.5 million relating to Energen Resources’ $12.2 million state net operating loss carryforward which will expire beginning in 2027. Energen Resources 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 $3.1 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 the Company anticipates 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)	2012			2011			2010
Income tax expense at statutory federal income tax rate	$	139,083		$	141,864		$	160,229
Increase (decrease) resulting from:
State income taxes, net of federal income tax benefit	4,904			5,544			8,398
Qualified Section 199 production activities deduction	(94		)	(593		)	(1,745		)
401(k) stock dividend deduction	(514		)	(532		)	(565		)
Other, net	440			(582		)	673
Total income tax expense	$	143,819		$	145,701		$	166,990
Effective income tax rate (%)	36.19			35.95			36.48

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)	2012		2011			2010
Income tax expense at statutory federal income tax rate	$	27,876	$	25,645		$	26,865
Increase (decrease) resulting from:
State income taxes, net of federal income tax benefit	2,238		2,059			2,157
Reversal of tax reserves from audit settlements, net	—		(1,365		)	—
Other, net	130		331			853
Total income tax expense	$	30,244	$	26,670		$	29,875
Effective income tax rate (%)	37.97		36.40			38.92

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



(in thousands)
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
Additions based on tax positions related to the current year	3,731
Additions for tax positions of prior years	269
Reductions for tax positions of prior years	(446		)
Lapse of statute of limitations	(1,592		)
Balance as of December 31, 2012	$	12,555

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, 2012 that would favorably impact the Company's effective tax rate, if recognized, is $5.1 million. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the years ended December 31, 2012, 2011, and 2010, the Company recognized approximately $25,000 of income, $1.4 million of income and $0.8 million of expense for interest (net of tax benefit) and penalties, respectively. The Company had approximately $0.2 million and $0.2 million for the payment of interest (net of tax benefit) and penalties accrued at December 31, 2012 and 2011, respectively.

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



(in thousands)
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
Additions based on tax positions related to the current year	62
Additions for tax positions of prior years	201
Reductions for tax positions of prior years (lapse of statute of limitations)	(58		)
Balance as of December 31, 2012	$	307

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. None of Alagasco's unrecognized tax benefits at December 31, 2012 would impact the Company's effective tax rate, if recognized. Alagasco recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the years ended December 31, 2012, 2011, and 2010, Alagasco recognized approximately $1,000 of income, $1.4 million of income and $1.0 million of expense for interest (net of tax benefit) and penalties, respectively. Alagasco had approximately $4,000 and $5,000 for the payment of interest (net of tax benefit) and penalties accrued at December 31, 2012 and 2011, respectively.

The Company and Alagasco's tax returns for years 2009-2011 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.