(10) INCOME TAXES

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


		2015		2014		2013
	(in millions)
Current:
Federal	$	1	$	11	$	(12)
State		(3)		10		1
		(2)		21		(11)
Deferred:
Federal		(1,697)		501		408
State		(304)		2		88
Foreign		(2)		1		1
		(2,003)		504		497
Provision (benefit) for income taxes	$	(2,005)	$	525	$	486

The provision for income taxes was an effective rate of 31% in 2015, 36% in 2014 and 41% in 2013. 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:


		2015		2014		2013
		(in millions)
Expected provision (benefit) at federal statutory rate	$	(2,296)	$	507	$	417
Increase (decrease) resulting from:
State income taxes, net of federal income tax effect		(194)		58		53
Nondeductible expenses		–		3		3
State rate redetermination		–		(48)		4
Change in valuation allowance		488		5		–
Other		(3)		–		9
Provision (benefit) for income taxes	$	(2,005)	$	525	$	486

Our effective tax rate decreased in 2015 as compared with 2014, primarily due to the change in valuation allowance.

The components of the Company’s deferred tax balances as of December 31, 2015 and 2014 were as follows:


		2015		2014
	(in millions)
Deferred tax liabilities:
Differences between book and tax basis of property	$	216	$	2,504
Derivative activity		–		122
Other		9		21
		225		2,647

Deferred tax assets:
Accrued compensation		28		23
Alternative minimum tax credit carryforward		125		131
Accrued pension costs		19		17
Asset retirement obligations		77		79
Net operating loss carryforward		445		323
Other		24		19
		718		592
Valuation allowance		(493)		(5)
Net deferred tax liability	$	–	$	2,060

In 2015, the Company paid less than $1 million in state income taxes and did not pay federal income taxes. In 2014, the Company paid $14 million in state income taxes and paid $14 million in federal income taxes. The Company’s net operating loss carryforward as of December 31, 2015 was $1,278 million and $789 million for federal and state reporting purposes, respectively, the majority of which will expire between 2028 and 2035. Additionally, the Company has an income tax net operating loss carryforward related to its Canadian operations of $51 million, with expiration dates of 2030 through 2035. The Company also had an alternative minimum tax credit carryforward of $125 million and a statutory depletion carryforward of $13 million as of December 31, 2015.

A valuation allowance for deferred tax assets, including net operating losses, is recognized when it is more likely than not that some or all of the benefit from the deferred tax asset will not be realized. Due to the material write-downs of the carrying value of our natural gas and oil properties, the Company ended the year in a net deferred tax asset position. We believe it is more likely than not that these deferred tax assets will not be realized, and recorded a $488 million tax expense for the increase in our valuation allowance. The net change in valuation allowance is reflected as a component of income tax expense. Management assesses available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit the use of deferred tax assets. The amount of the deferred tax asset considered realizable, however, could be adjusted based on changes in subjective estimates of future taxable income or if objective negative evidence is no longer present.

Deferred tax assets relating to tax benefits of employee stock option grants have been reduced to reflect exercises. 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 2015 due to net operating loss carryforwards, these “windfall” tax benefits are not reflected in its net operating losses in deferred tax assets for 2015. Windfalls included in net operating loss carryforwards but not reflected in deferred tax assets for 2015 were $149 million.

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, 2015, the amount of unrecognized tax benefits related to alternative minimum tax was $37 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, 2015, the Company had accrued a liability of $2 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:


	2015		2014
	(in millions)
Unrecognized tax benefits at beginning of period	$	44	$	–
Additions based on tax positions related to the current year		7		15
Additions to tax positions of prior years		–		29
Reductions to tax positions of prior years		(14)		–
Unrecognized tax benefits at end of period	$	37	$	44

The income tax years 2012 to 2015 remain open to examination by the major taxing jurisdictions to which the Company is subject.