Income Taxes

General. Our taxable income or loss is included in our parent's (EP Energy Corporation) U.S. federal and certain state returns. EP Energy Corporation pays all consolidated U.S. federal and state income tax directly to the appropriate taxing jurisdictions. We record income taxes on a separate return basis in our financial statements as if we had filed separate income tax returns under our existing structure. In certain states, we also file and pay directly to the state taxing authorities.

Pretax Income (Loss) and Income Tax (Expense) Benefit. The tables below show the pretax loss and the components of income tax expense for the following periods:



	Year Ended December 31,
	2019			2018
	(in millions)
Pretax Loss	$	(943	)	$	(1,003	)

Components of Income Tax Expense
Current
Federal	$	—		$	—
State	—			—
	$	—		$	—

Deferred
Federal	$	—		$	—
State	—			—
	—			—
Total income tax expense	$	—		$	—

Effective Tax Rate Reconciliation. Our income taxes included in net income differ from the amount computed by applying the statutory federal income tax rate of 21% for the following reasons:



	Year Ended December 31,
	2019			2018
	(in millions)
Income taxes at the statutory federal rate	$	198		$	211
Increase (decrease)
State income taxes, net of federal income tax effect	11			8
Change in valuation allowance	(207		)	(218		)
Other	(2		)	(1		)
Income tax expense	$	—		$	—

The effective tax rate for both the years ended December 31, 2019 and 2018 was 0%. Our effective tax rate differed from the statutory rate of 21% primarily due to the change in our valuation allowance on our net deferred tax assets and non-deductible compensation expenses. Changes in our deferred taxes from year to year are offset by changes to our related valuation allowance and thus have the effect of eliminating the impact of federal taxes on our income.

Deferred Tax Assets and Liabilities. The following are the components of net deferred tax assets and liabilities:



	December 31, 2019			December 31, 2018
	(in millions)
Deferred tax assets
Property, plant and equipment	$	238		$	157
Net operating loss carryovers	321			290
Employee benefits	1			2
Lease obligations	4			—
Legal and other reserves	17			9
Asset retirement obligations	10			9
Interest deduction limitation	125			76
Transaction costs	33			14
Total deferred tax assets	749			557
Valuation allowance	(743		)	(536		)
Net deferred tax assets	6			21

Deferred tax liabilities
Operating lease assets	4			—
Financial derivatives	2			21
Total deferred tax liabilities	6			21
Net deferred tax liabilities	$	—		$	—

Unrecognized Tax Benefits. At December 31, 2019 and 2018, the total amount of unrecognized tax benefits was $46 million and $0, respectively. The $46 million recorded in 2019 related to tax positions taken in the current year and reflects the potential impact on the classification of certain tax attributes recorded within the components of net deferred assets and liabilities. We do not expect the settlement of the unrecognized tax benefit to have an impact on the Company's earnings or liquidity.

We did not recognize any interest and penalties related to unrecognized tax benefits (classified as income taxes in our consolidated income statement) in 2019 or 2018, nor do we have any accrued interest and penalties associated with income taxes in our consolidated balance sheets as of December 31, 2019 and 2018. The Company's and certain subsidiaries' income tax years after 2015 remain open and subject to examination by both federal and state tax authorities.

Net Operating Loss and Tax Credit Carryovers. The table below presents the details of our federal and state net operating loss carryover periods as of December 31, 2019 (in millions):



	Expiration Period
	2035 - 2037		No expiration⁽¹⁾		Total
U.S. federal net operating loss carryover	$	1,056	$	428	$	1,484



	2029 - 2038
State net operating loss carryover	$	227


(1)	U.S. federal net operating loss carryovers generated since 2018 do not expire but are limited to 80% of taxable income per year.

Valuation Allowances. As of December 31, 2019 and 2018, we have a valuation allowance on our deferred tax assets of $743 million and $536 million, respectively. These amounts are recorded based on our evaluation of whether it was more likely than not that our deferred tax assets would be realized. Our evaluations considered cumulative book losses, the reversal of existing temporary differences, the existence of taxable income in prior carryback years, tax planning strategies and future taxable income for each of our taxable jurisdictions.