Set forth below is a reconciliation between the income tax provision computed at the United States
statutory rate on income before income taxes and the income tax provision in the accompanying
income statement (in thousands):
Year Ended December 31,
2011
2010
2009
U.S. federal income tax provision at statutory rate . . . . . . . . . . . . $ 119,329 $ 71,404 $ 76,013
State income taxes, net of federal expense . . . . . . . . . . . . . . . . .
9,669 10,041
1,025
Non-deductible expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,389 14,644
15,839
Uncertain tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(6,277)
(1,169)
(18,154)
Non-cash compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-
2,506
4,776
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,152
3,319
1,376
Income tax expense on income before income taxes . . . . . . . . $ 134,262 $100,745 $ 80,875
Tax Relationship with Plains Offshore.
As of December 31, 2011, Plains Offshore was not
consolidated with us for federal income tax purposes. Plains Offshore files a separate federal tax return
and has its own federal tax loss carryforwards and other tax attributes. Plains Offshore may or may not
be combined with us and our other subsidiaries for state tax filing purposes dependent upon the
applicable state tax rules. We and Plains Offshore have entered into a Tax Matters Agreement, or
TMA, which governs Plains Offshore’s and our respective rights, responsibilities, and obligations with
respect to the filing of tax returns, payment of taxes, conduct of tax audits and certain other tax
matters.
Under the TMA, Plains Offshore is obligated to reimburse us for its share of taxes that are paid by
us and can receive payment from us for any Plains Offshore tax attributes utilized by us related to our
tax returns filed on a consolidated, combined or unitary basis including Plains Offshore but only to the
extent and at such time as Plains Offshore would have paid the tax or utilized such attributes on a
separate return basis. To the extent Plains Offshore files tax returns which are not consolidated,
combined or unitary with us, Plains Offshore pays its tax liabilities directly to the applicable taxing
authority.
Tax Loss and Credit Carryovers.
Certain of our U.S. tax loss and credit carryovers obtained as a
result of the acquisitions of Nuevo Energy Company and Pogo are subject to IRC limitations as to the
amount that can be used each year. We do not expect these limitations to materially impact our ability
to utilize these losses.
Valuation Allowance.
In assessing the realizability of deferred tax assets, we consider whether it is
more likely than not that some portion or all of the related deferred tax benefits will not be realized. We
consider the scheduled reversal of deferred tax liabilities, projected future income and tax planning
strategies in making the assessment of whether it is more likely than not that some portion or all of our
deferred tax assets will not be realized. Based on this assessment as of December 31, 2011, no
valuation allowances were necessary.
Other Tax Matters.
We did not record a tax benefit related to non-cash employee compensation
for 2011 since we generated a net operating loss for federal tax purposes in 2011 which will be carried
forward to future periods. As the Company utilizes this net operating loss in future periods, a tax benefit
of $0.2 million will be credited to additional paid-in capital as a result of the non-cash employee
compensation that vested in 2011. In 2010 and 2009 we recorded tax expense of $2.7 million and $5.1
million, respectively, related to non-cash employee compensation that vested in those years.
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