INCOME TAXES

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



Years ended December 31, (in thousands)	2013			2012		2011
Taxes estimated to be payable currently:
Federal	$	23,342		$	16,295	$	11,595
State	2,516			3,125		5,065
Total current	25,858			19,420		16,660
Taxes deferred:
Federal	85,950			119,053		125,622
State	(2,300		)	5,346		3,419
Total deferred	83,650			124,399		129,041
Total income tax expense	$	109,508		$	143,819	$	145,701

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



Years ended December 31, (in thousands)	2013		2012			2011
Income tax expense from continuing operations	$	105,282	$	144,534		$	126,322
Income tax expense (benefit) from discontinued operations	2,215		(715		)	19,379
Income tax expense from gain on disposal of discontinued operations	2,011		—			—
Total income tax expense	$	109,508	$	143,819		$	145,701

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



Years ended December 31, (in thousands)	2013		2012		2011
Taxes estimated to be payable currently:
Federal	$	17,495	$	18,227	$	(1,280	)
State	2,192		739		(108		)
Total current	19,687		18,966		(1,388		)
Taxes deferred:
Federal	13,252		9,066		24,938
State	1,748		2,212		3,120
Total deferred	15,000		11,278		28,058
Total income tax expense	$	34,687	$	30,244	$	26,670

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



(in thousands)	December 31, 2013						December 31, 2012
	Current			Noncurrent			Current			Noncurrent
Deferred tax assets:
Unbilled and deferred revenue	$	12,547		$	—		$	10,137		$	—
Allowance for doubtful accounts	2,066			—			2,408			—
Insurance and other accruals	4,851			—			3,821			—
Compensation accruals	15,405			—			13,116			—
Inventories	1,260			—			1,664			—
Other comprehensive income	—			15,350			—			19,158
Gas supply adjustment related accruals	698			—			969			—
Derivative instruments	10,769			—			—			—
State net operating losses and other carryforwards	—			4,577			—			3,577
Other	1,219			1			1,340			25
Total deferred tax assets	48,815			19,928			33,455			22,760
Valuation allowance	(299		)	(2,674		)	(268		)	(2,793		)
Total deferred tax assets	48,516			17,254			33,187			19,967
Deferred tax liabilities:
Depreciation and basis differences	—			1,008,026			—			898,625
Pension and other costs	—			15,379			—			20,143
Derivative instruments	—			2,048			4,272			3,162
Other comprehensive income	5,540			—			18,133			—
Other	1,677			5,046			2,262			3,638
Total deferred tax liabilities	7,217			1,030,499			24,667			925,568
Net deferred tax assets (liabilities)	$	41,299		$	(1,013,245	)	$	8,520		$	(905,601	)

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



(in thousands)	December 31, 2013					December 31, 2012
	Current		Noncurrent			Current		Noncurrent
Deferred tax assets:
Unbilled and deferred revenue	$	12,547	$	—		$	10,137	$	—
Allowance for doubtful accounts	1,815		—			2,155		—
Insurance accruals	1,769		—			1,856		—
Compensation accruals	2,480		—			2,645		—
Inventories	1,260		—			1,664		—
Gas supply adjustment related accruals	698		—			969		—
Other	984		1			774		2
Total deferred tax assets	21,553		1			20,200		2
Deferred tax liabilities:
Depreciation and basis differences	—		186,601			—		167,329
Pension and other costs	—		19,031			—		22,054
Other	1,504		—			1,401		—
Total deferred tax liabilities	1,504		205,632			1,401		189,383
Net deferred tax assets (liabilities)	$	20,049	$	(205,631	)	$	18,799	$	(189,381	)

The Company files a consolidated federal income tax return with all of its subsidiaries. The Company has a noncurrent deferred tax asset of $1.6 million relating to Energen Resources’ $35.0 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 $3.0 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 the Company anticipates generating adequate future taxable income to realize the benefits of all remaining deferred tax assets on the consolidated balance sheets.

In accordance with Accounting Standards Codification 740-30-25-7, the Company has not recognized a deferred tax liability for the difference between the book basis and the tax basis in the stock of its subsidiaries. The unrecorded gross outside basis difference for Alagasco exceeds the recorded inside asset basis difference by approximately $37.0 million and would result in an additional deferred tax liability of $14.0 million.

Total income tax expense from continuing operations 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)	2013			2012			2011
Income tax expense at statutory federal income tax rate	$	104,450		$	139,914		$	122,719
Increase (decrease) resulting from:
State income taxes, net of federal income tax benefit	3,799			4,755			8,341
Impact of state law changes	(1,966		)	—			(2,059		)
Qualified Section 199 production activities deduction	—			(61		)	(495		)
401(k) stock dividend deduction	(449		)	(514		)	(532		)
Other, net	(552		)	440			(1,652		)
Total income tax expense	$	105,282		$	144,534		$	126,322
Effective income tax rate (%)	35.28			36.16			36.03

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)	2013			2012		2011
Income tax expense at statutory federal income tax rate	$	32,230		$	27,876	$	25,645
Increase (decrease) resulting from:
State income taxes, net of federal income tax benefit	2,588			2,238		2,059
Reversal of tax reserves from audit settlements, net	—			—		(1,365		)
Other, net	(131		)	130		331
Total income tax expense	$	34,687		$	30,244	$	26,670
Effective income tax rate (%)	37.67			37.97		36.40

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



(in thousands)
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
Additions based on tax positions related to the current year	4,546
Additions for tax positions of prior years	366
Reductions for tax positions of prior years	(46		)
Lapse of statute of limitations	(1,435		)
Balance as of December 31, 2013	$	15,986

The reduction for settlements in 2011 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 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, 2013 that would favorably impact the Company’s effective tax rate, if recognized, is $6.9 million. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the years ended December 31, 2013, 2012, and 2011, the Company recognized approximately $15,000 of expense, $25,000 of income and $1.4 million of income 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, 2013 and 2012, respectively.

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



(in thousands)
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
Reductions for tax positions of prior years (lapse of statute of limitations)	(31		)
Balance as of December 31, 2013	$	276

The reduction for settlements in 2011 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, 2013 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, 2013, 2012, and 2011, Alagasco recognized approximately $4,000 of expense, $1,000 of income and $1.4 million of income for interest (net of tax benefit) and penalties, respectively. Alagasco had approximately $8,000 and $4,000 for the payment of interest (net of tax benefit) and penalties accrued at December 31, 2013 and 2012, respectively.

The Company and Alagasco’s tax returns for years 2010-2012 remain open and subject to examination by the IRS and major state taxing jurisdictions. Accordingly, it is reasonably possible that significant changes to the reserve for uncertain tax benefits may occur as a result of various audits and the expiration of the statute of limitations. Although the timing and outcome of 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 statement