(9) INCOME TAXES

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


(in millions)		2017		2016		2015
Current:
Federal	$	(22)	$	(6)	$	1
State		–		(1)		(3)
		(22)		(7)		(2)
Deferred:
Federal		(71)		(22)		(1,697)
State		–		–		(304)
Foreign		–		–		(2)
		(71)		(22)		(2,003)
Benefit for income taxes	$	(93)	$	(29)	$	(2,005)

The provision for income taxes was an effective rate of (10%) in 2017, 1% in 2016 and 31% in 2015. 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:


(in millions)	2017		2016		2015
Expected provision (benefit) at federal statutory rate	$	333	$	(935)	$	(2,296)
Increase (decrease) resulting from:
State income taxes, net of federal income tax effect		16		(79)		(194)
Nondeductible expenses		–		–		–
Rate impacts due to tax reform		370		–		–
Changes to valuation allowance due to tax reform		(370)		–		–
AMT tax reform impact – valuation allowance release		(68)		–		–
Change in uncertain tax positions		(5)		(19)		(7)
Change in valuation allowance		(364)		1,002		495
Other		(5)		2		(3)
Benefit for income taxes	$	(93)	$	(29)	$	(2,005)

Our effective tax rate decreased in 2017, as compared with 2016, primarily due to the Tax Reform impacts on rate, alternative minimum tax and the valuation allowance in place, as well as changes to the overall valuation allowance activity during 2017.

The components of the Company’s deferred tax balances as of December 31, 2017 and 2016 were as follows:


(in millions)	2017		2016
Deferred tax liabilities:
Differences between book and tax basis of property	$	395	$	81
Derivative activity		19		–
Other		1		1
		415		82
Deferred tax assets:
Accrued compensation		29		38
Alternative minimum tax credit carryforward		–		100
Accrued pension costs		14		19
Asset retirement obligations		41		53
Net operating loss carryforward		1,043		1,177
Derivative activity		–		142
Other		20		29
		1,147		1,558
Valuation allowance		(732)		(1,476)
Net deferred tax liability	$	–	$	–

On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (Tax Reform), which made significant changes to the U.S. federal income tax law affecting the Company. Major changes in this legislation applicable to the Company relate to the corporate rate change, repeal of the alternative minimum tax, interest deductibility limitations, net operating loss carryforward limitations, changes to certain executive compensation and full expensing provisions related to business assets. The Company continues to examine the impact of this legislation, and although certain aspects of it are uncertain and subject to future regulations, this legislation is expected to positively impact the Company due to the lower federal rate and the repeal of the alternative minimum tax, as outlined below:

Beginning January 1, 2018, the U.S. corporate income tax rate will be 21%. The Company is required to recognize the impacts of this rate change on its deferred tax assets and liabilities in the period enacted. However, as the Company has a full valuation allowance on its net deferred tax asset, any deferred tax recognized due to the change in rate will be offset with a change in the valuation allowance. Therefore, there is no overall impact to the financial statements in 2017 due to this change in rate.

The Tax Reform also repealed the corporate alternative minimum tax for tax years beginning on or after January 1, 2018 and provides for existing alternative minimum tax credit carryovers to be refunded beginning in 2018. The Company has approximately $68 million in refundable credits that are expected to be fully refunded between 2018 and 2021. As such, the valuation allowance in place at the end of 2017 related to these credits have been released and any credits remaining were reclassed to a receivable.

Other provisions in the legislation, such as interest deductibility and changes to executive compensation plans are not expected to have material implications to the Company’s financial condition due to the Company’s current net operating loss carryforward position.

In 2017, the Company received state income tax refunds of less than $1 million and received $4.2 million in federal income tax refunds. In 2016, the Company paid less than $1 million in state income taxes and received $15 million in federal income tax refunds. The Company’s net operating loss carryforward as of December 31, 2017 was $4.1 billion and $2.7 billion for federal and state reporting purposes, respectively, the majority of which will expire between 2029 and 2037. Additionally, the Company has an income tax net operating loss carryforward related to its Canadian operations of $29 million, with expiration dates of 2030 through 2037. The Company also had a statutory depletion carryforward of $13 million as of December 31, 2017.

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. To assess the likelihood, the Company uses estimates and judgment regarding future taxable income, and considers the tax consequences in the jurisdiction where such taxable income is generated, to determine whether a valuation allowance is required. Such evidence can include current financial position, results of operations, both actual and forecasted, the reversal of deferred tax liabilities, and tax planning strategies as well as current and forecasted business economics of the oil and gas industry.

The Company maintained its net deferred tax asset position at December 31, 2017 primarily due to the prior write-downs of the carrying value of natural gas and oil properties. The Company believes it is more likely than not that these deferred tax assets will not be realized and accordingly maintained our full valuation allowance to adjust the remaining deferred tax asset to zero for the year ended December 31, 2017, reflected $807 million as a component of income tax expense and $63 million as a reduction of equity. 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. In management’s view, the cumulative loss incurred over the three-year period ending December 31, 2017, outweighs any positive factors, such as the possibility of future growth. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income are increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as future expected growth.

A reconciliation of the changes to the valuation allowance is as follows:



		(in millions)
Valuation allowance as of December 31, 2016	$	1,476
Changes based on 2017 activity		(364)
Tax reform – rate change		(370)
Tax reform – AMT repeal		(68)
Release of prior uncertain tax position		(5)
Equity – windfall tax benefit release		59
Equity – pension benefits in OCI		4
Valuation allowance as of December 31, 2017	$	732

On March 30, 2016, the FASB modified its accounting policy on share‐based payments (ASU 2016‐09). Updates included tax impacts related to the treatment of excess tax benefits (“windfalls”) and deficiencies (“shortfalls”) were made and became effective on January 1, 2017. The Company had previously unrecognized tax “windfall” benefits of $149 million as of December 31, 2016, which were released in the first quarter of 2017. The recognition of previously unrecognized windfall tax benefits resulted in a net cumulative-effect adjustment of $59 million, which increased net deferred tax assets and the related income tax valuation allowance by the same amount as of the beginning of 2017. As of December 31, 2017, no unrecognized tax benefits exist related to share-based payments.

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, 2017, the amount of unrecognized tax benefits related to alternative minimum tax was $12 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, 2017, the Company had accrued a liability of less than $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:


(in millions)	2017		2016
Unrecognized tax benefits at beginning of period	$	17	$	37
Additions based on tax positions related to the current year		–		–
Additions to tax positions of prior years		–		–
Reductions to tax positions of prior years		(5)		(20)
Unrecognized tax benefits at end of period	$	12	$	17

The Internal Revenue Service is currently auditing the Company’s federal income tax return for 2014. The income tax years 2014 to 2017 remain open to examination by the major taxing jurisdictions to which the Company is subject.