Cabot Oil & Gas (COG)

Uncertain Tax Positions

In June 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109.” This Interpretation provides guidance for recognizing and measuring uncertain tax

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Index to Financial Statements

positions as defined in SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a two-step process for accounting for income tax uncertainties. First, a threshold condition of “more likely than not” should be met to determine whether any of the benefit of the uncertain tax position should be recognized in the financial statements. If the recognition threshold is met, FIN 48 provides additional guidance on measuring the amount of the uncertain tax position. Under FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Guidance is also provided regarding derecognition, classification, interest and penalties, interim period accounting, transition and increased disclosure of these uncertain tax position. FIN 48 is effective for fiscal years beginning after December 15, 2006.

The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no change to the liability for unrecognized tax benefits.

The Company recognizes accrued interest related to uncertain tax positions in Interest Expense and Other and accrued penalties related to such positions in General and Administrative expense in the Consolidated Statement of Operations, which is consistent with the recognition of these items in prior reporting periods. As of December 31, 2008, the Company determined that no accrual for penalties was required.

As of December 31, 2008 and 2007, the Company’s unrecognized tax benefits were $0.5 million and $2.4 million, respectively. These amounts, if recognized, would not have a significant impact on the effective tax rate.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

During 2008, the Company executed a final settlement agreement with the Internal Revenue Service that reduced unrecognized tax benefits by $1.9 million. This reduction did not affect the effective tax rate. The amount of remaining unrecognized tax benefits as of December 31, 2008, if recognized, would not have a significant impact on the effective tax rate. It is possible that the amount of unrecognized tax benefits will change in the next twelve months. The Company does not expect that a change would have a significant impact on its results of operations, financial position or cash flows.

The Company files income tax returns in the U.S. federal jurisdiction, various states and Canada. The Company is no longer subject to examinations by state authorities before 2001. The Company is currently under examination by the Internal Revenue Service for 2006.

Uncertain Tax Positions

13. UNCERTAIN TAX POSITIONS

As of December 31, 2007, the unrecognized tax benefits were $2.4 million. During the quarter ended September 30, 2008, the Company executed a final settlement agreement with the Internal Revenue Service that reduced unrecognized tax benefits by $1.9 million. This reduction did not affect the effective tax rate. The amount of remaining unrecognized tax benefits as of September 30, 2008, if recognized, would not have a significant impact on the effective tax rate.

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Uncertain Tax Positions

In June 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109.” This Interpretation provides guidance for recognizing and measuring uncertain tax positions as defined in SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a two-step process for accounting for income tax uncertainties. First, a threshold condition of “more likely than not” should be met to determine whether any of the benefit of the uncertain tax position should be recognized in the financial statements. If the recognition threshold is met, FIN 48 provides additional guidance on measuring the amount of the uncertain tax position. Under FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Guidance is also provided regarding derecognition, classification, interest and penalties, interim period accounting, transition and increased disclosure of these uncertain tax position. FIN 48 is effective for fiscal years beginning after December 15, 2006.

The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no change to the liability for unrecognized tax benefits.

The Company recognizes accrued interest related to uncertain tax positions in Interest Expense and Other and accrued penalties related to such positions in General and Administrative expense in the Consolidated Statement of Operations, which is consistent with the recognition of these items in prior reporting periods. As of January 1, 2007, the Company had recorded a liability of approximately $0.9 million for interest. During 2007, the Company reversed this liability and recorded interest receivable of $0.4 million. This resulted in an adjustment to net interest expense of $1.3 million. As of December 31, 2007, the Company determined that no accrual for penalties was required.

As of January 1, 2007, after the implementation of FIN 48, the Company’s unrecognized tax benefits were $1.0

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million. This amount, if recognized, would not affect the effective tax rate. As of December 31, 2007, it is reasonably possible that the 2001-2004 years currently pending before the IRS Appeals Division will be settled within the next twelve months. Discussions are ongoing with the taxing authorities regarding these years. The amounts recorded reflect the Company’s estimate as to the ultimate resolution of these matters. For the year ended December 31, 2007, the unrecognized tax benefit increased by $1.4 million. The amount of unrecognized tax benefits, if recognized, would not have a significant impact on the effective tax rate.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

It is possible that the amount of unrecognized tax benefits will change in the next twelve months. The Company does not expect that a change would have a significant impact on its results of operations, financial position or cash flows.

The U.S. federal statute of limitations remains open for years 2001 and onward. State income tax returns are generally subject to examination for a period of three to four years after filing of the respective return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. Years still open to examination by state authorities in major jurisdictions include Texas and West Virginia (2001 onward). The Company is not currently under examination, nor has it been notified of an upcoming examination, by West Virginia. The Company has been audited by Texas for report years through 2006. The audits were resolved successfully and no material adjustments were made.

Uncertain Tax Positions

In June 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109.” This
Interpretation provides guidance for recognizing and measuring uncertain tax positions as defined in SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a two-step process for accounting for income tax uncertainties. First,
a threshold condition of “more likely than not” should be met to determine whether any of the benefit of the uncertain tax position should be recognized in the financial statements. If the recognition threshold is met, FIN 48 provides
additional guidance on measuring the amount of the uncertain tax position. Under FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement. Guidance is also provided regarding derecognition, classification, interest and penalties, interim period accounting, transition and increased disclosure of these uncertain tax position. FIN 48
is effective for fiscal years beginning after December 15, 2006.

The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of
the implementation of FIN 48, the Company recognized no change to the liability for unrecognized tax benefits.

The Company recognizes accrued interest
related to uncertain tax positions in Interest Expense and Other and accrued penalties related to such positions in General and Administrative expense in the Consolidated Statement of Operations, which is consistent with the recognition of these
items in prior reporting periods. As of January 1, 2007, the Company had recorded a liability of approximately $0.9 million for interest. During 2007, the Company reversed this liability and recorded interest receivable of $0.4 million. This
resulted in an adjustment to net interest expense of $1.3 million. As of December 31, 2007, the Company determined that no accrual for penalties was required.

SIZE="2">As of January 1, 2007, after the implementation of FIN 48, the Company’s unrecognized tax benefits were $1.0

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Index to Financial Statements

million. This amount, if recognized, would not affect the effective tax rate. As of December 31, 2007, it is reasonably possible that the 2001-2004
years currently pending before the IRS Appeals Division will be settled within the next twelve months. Discussions are ongoing with the taxing authorities regarding these years. The amounts recorded reflect the Company’s estimate as to the
ultimate resolution of these matters. For the year ended December 31, 2007, the unrecognized tax benefit increased by $1.4 million. The amount of unrecognized tax benefits, if recognized, would not have a significant impact on the effective tax
rate.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

12. UNCERTAIN TAX POSITIONS

In June 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109.” This Interpretation provides guidance for recognizing and measuring uncertain tax positions as defined in SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a two-step process for accounting for income tax uncertainties. First, a threshold condition of “more likely than not” should be met to determine whether any of the benefit of the uncertain tax position should be recognized in the financial statements. If the recognition threshold is met, FIN 48 provides additional guidance on measuring the amount of the uncertain tax position. Under FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Guidance is also provided regarding derecognition, classification, interest and penalties, interim period accounting, transition and increased disclosure of these uncertain tax position. FIN 48 is effective for fiscal years beginning after December 15, 2006.

The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no change to the liability for unrecognized tax benefits.

As of January 1, 2007, after the implementation of FIN 48, the Company’s unrecognized tax benefits are $1.0 million. This amount, if recognized, would not affect the effective tax rate.

The Company recognizes interest accrued related to uncertain tax positions in the Interest Expense and Other line and penalties accrued in the General and Administrative line in the Condensed Consolidated Statement of Operations, which is consistent with the recognition of these items in prior reporting periods. During the first half of 2007, the Company recorded $0.2 million of interest expense related to uncertain tax positions. As of January 1, 2007, the Company had recorded a liability of approximately $0.9 million for interest. As of June 30, 2007, the Company determined that no accrual for penalties was appropriate.

As of January 1, 2007, it is reasonably possible that the 2001-2004 years currently pending before the IRS Appeals Division will be settled within the next twelve months. However, no increase or decrease to the total amount of unrecognized tax benefits can be anticipated. All issues pending before Appeals relate to the proper timing of deductions for tax purposes.

It is possible that the amount of unrecognized tax benefits will change in the next twelve months. The Company does not expect that a change would have a significant impact on its results of operations, financial position or cash flows.

The U.S. federal statute of limitations remains open for years 2001 and onward. State income tax returns are generally subject to examination for a period of three to four years after filing of the respective return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. Years still open to examination by state authorities in major jurisdictions include Texas and West Virginia (2001 onward). The Company is not currently under examination, nor has it been notified of an upcoming examination, by West Virginia. The Company has been audited by Texas. The audits were resolved successfully and no material adjustments were needed.

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Index to Financial Statements