(10) INCOME TAXES

The provision (benefit) for income taxes included the following components:


		2014		2013		2012
	(in millions)
Current:
Federal	$	11	$	(12)	$	16
State		10		1		3
		21		(11)		19

Deferred:
Federal		501		408		(388)
State		2		88		(72)
Foreign		1		1		(2)

		504		497		(462)
Provision (benefit) for income taxes	$	525	$	486	$	(443)

The provision for income taxes was an effective rate of 36% in 2014, 41% in 2013 and 39% in 2012. The following reconciles the provision for income taxes included in the consolidated statements of operations with the provision which would result from application of the statutory federal tax rate to pre-tax financial income:


		2014		2013		2012
	(in millions)
Expected provision (benefit) at federal statutory rate	$	507	$	417	$	(403)
Increase (decrease) resulting from:
State income taxes, net of federal income tax effect		58		53		(44)
Nondeductible expenses		3		3		2
State rate redetermination		(48)		4		2
Other		5		9		–
Provision (benefit) for income taxes	$	525	$	486	$	(443)

The components of the Company’s net deferred tax liability as of December 31, 2014 and 2013 were as follows:


		2014		2013
	(in millions)
Deferred tax liabilities:
Differences between book and tax basis of property	$	2,504	$	2,115
Derivative activity		122		13
Other		21		11
		2,647		2,139

Deferred tax assets:
Accrued compensation		23		16
Alternative minimum tax credit carryforward		131		77
Stored natural gas		5		9
Accrued pension costs		17		2
Asset retirement obligations		79		54
Net operating loss carryforward		318		412
Differences between book and tax basis of property - state		6		11
Other		8		7
		587		588
Net deferred tax liability	$	2,060	$	1,551

The net deferred tax liability as of December 31, 2014 was comprised of net long-term deferred income tax liabilities of $1,951 million, in addition to a net current deferred income tax liability of $109 million. The net deferred tax liability at December 31, 2013 was comprised of net long-term deferred income tax liabilities of $1,527 million, in addition to a net current deferred income tax liability of $24 million. In 2014, the Company paid $14 million in state income taxes and paid $14 million in federal income taxes. In 2013, the Company paid $3 million in state income taxes and paid $16 million in federal income taxes. The Company’s net operating loss carryforward as of December 31, 2014 was $988 million and $556 million for federal and state reporting purposes, respectively, the majority of which will expire between 2028 and 2034. As of December 31, 2014, the Company has recorded a $5 million valuation allowance against its deferred tax asset for various state net operating losses. The Company also had an alternative minimum tax credit carryforward of $131 million and a statutory depletion carryforward of $13 million as of December 31, 2014.

Our effective tax rate decreased in 2014 as compared with 2013. This was primarily due to a redetermination of the deferred state tax liability to reflect updated state apportionment factors in certain states.

Deferred tax assets relating to tax benefits of employee stock option grants have been reduced to reflect exercises in 2014. Some exercises resulted in tax deductions in excess of previously recorded benefits based on the option value at the time of the grant (“windfalls”). Although these additional tax benefits or “windfalls” are reflected in net operating loss carryforwards, the additional tax benefit associated with the windfall is not recognized until the deduction reduces taxes payable. Accordingly, since the tax benefit does not reduce the Company’s current taxes payable in 2014 due to net operating loss carryforwards, these “windfall” tax benefits are not reflected in its net operating losses in deferred tax assets for 2014. Windfalls included in net operating loss carryforwards but not reflected in deferred tax assets for 2014 were $152 million.

The Company has an income tax net operating loss carryforward related to its Canadian operations of $26 million, and has expiration dates of 2030 through 2034. The Company assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax asset associated with the Canadian net operating loss. Based on this assessment, the Company did not record a valuation allowance as of December 31, 2014.

A tax position must meet certain thresholds for any of the benefit of the uncertain tax position to be recognized in the financial statements. As of December 31, 2014, the amount of unrecognized tax benefits related to alternative minimum tax was $44 million. The uncertain tax position identified would not have a material effect on the effective tax rate. No material changes to the current uncertain tax position are expected within the next 12 months. As of December 31, 2014, the Company had accrued a liability of $1 million of interest related to this uncertain tax position. The Company recognizes penalties and interest related to uncertain tax positions in income tax expense.

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


		2014
		(in millions)
Unrecognized tax benefits at beginning of period	$	-
Additions based on tax positions related to the current year		15
Additions to tax positions of prior years		29
Settlements		-
Unrecognized tax benefits at end of period	$	44

The income tax years 2011 to 2014 remain open to examination by the major taxing jurisdictions to which the Company is subject.