(10) INCOME TAXES

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


(in millions)		2018		2017		2016
Current:
Federal	$	(5)	$	(22)	$	(6)
State		6		–		(1)
		1		(22)		(7)
Deferred:
Federal		–		(71)		(22)
State		–		–		–
		–		(71)		(22)
Provision (benefit) for income taxes	$	1	$	(93)	$	(29)

The provision for income taxes was an effective rate of 0% in 2018, (10%) in 2017 and 1% in 2016. The Company’s effective tax rate increased in 2018, as compared with 2017, primarily due to state income taxes resulting from the Fayetteville Shale sale and the impact of the Tax Cuts and Jobs Act (“Tax Reform Act”) on the tax rate and alternative minimum taxes, as well as changes to the overall valuation allowance activity during 2018. 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)	2018		2017		2016
Expected provision (benefit) at federal statutory rate	$	113	$	333	$	(935)
Increase (decrease) resulting from:
State income taxes, net of federal income tax effect		13		16		(79)
Rate impacts due to tax reform		–		370		–
Changes to valuation allowance due to tax reform		–		(370)		–
AMT tax reform impact – valuation allowance release		–		(68)		–
Changes in uncertain tax positions		–		(5)		(19)
Change in valuation allowance		(121)		(364)		1,002
Removal of sequestration fee on AMT receivables		(5)		–		–
Other		1		(5)		2
Provision (benefit) for income taxes	$	1	$	(93)	$	(29)

The 2018 tax accrual calculated under the estimated annual effective tax rate method reflects the Tax Reform Act changes that took effect January 1, 2018. The components of the Company’s deferred tax balances as of December 31, 2018 and 2017 were as follows:


(in millions)	2018		2017
Deferred tax liabilities:
Differences between book and tax basis of property	$	226	$	395
Derivative activity		12		19
Other		2		1
		240		415
Deferred tax assets:
Accrued compensation		33		29
Accrued pension costs		10		14
Asset retirement obligations		15		41
Net operating loss carryforward		777		1,043
Other		14		20
		849		1,147
Valuation allowance		(609)		(732)
Net deferred tax liability	$	–	$	–

On December 22, 2017, the United States enacted the Tax Reform Act, 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 reduction in the corporate tax rate to 21%, repeal of the alternative minimum tax, interest deductibility and net operating loss carryforward limitations, changes to certain executive compensation and full expensing provisions related to business assets. Due to the tax valuation allowance currently in place, any adjustments required to deferred taxes as a result of the Tax Reform Act were fully offset by valuation allowance adjustments, and the Company continues to examine the impact of this legislation and future regulations.

As the Tax Reform Act repealed the corporate alternative minimum tax for tax years beginning on or after January 1, 2018 and provided 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 2019 and 2021. Accordingly, in 2017 the valuation allowance in place prior to the Tax Reform Act related to these credits was released, and any credits remaining were reclassed to a receivable.

In February 2018, the FASB issued Accounting Standards Update No. 2018-02 (“Update 2018-02”) amending the FASB Accounting Standards relating to tax effects in accumulated other comprehensive income. In the first quarter of 2018, the Company elected to early adopt the amendments of Update 2018-02. The implementation did not have a material impact on the Company’s consolidated statements of operations, financial position or cash flows due to the tax valuation allowance currently in place. See Note 1 for more information regarding this update.

In 2018, the Company made state income tax payments of $6.3 million. In 2017, the Company received less than $1 million in state income tax refunds and received $4.2 million in federal income tax refunds. The Company’s net operating loss carryforward as of December 31, 2018 was $3.0 billion and $2.1 billion for federal and state reporting purposes, respectively, the majority of which will expire between 2035 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 2038. The Company also had a statutory depletion carryforward of $13 million as of December 31, 2018.

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, 2018 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, 2018. During 2018, the valuation allowance was reduced $123 million, $121 million as a component of income tax expense and $2 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, 2018, 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. It is reasonably possible that a release of the valuation allowance could occur as early as the first quarter of 2019 if the Company moves into a three-year pre-tax income position combined with other positive evidence of future taxable income.

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


(in millions)
Valuation allowance as of December 31, 2017	$	732
Changes based on 2018 activity		(121)
Equity – pension benefits in OCI		(2)
Valuation allowance as of December 31, 2018	$	609

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, 2018, 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, 2018, the amount of unrecognized tax benefits related to alternative minimum tax was $7 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, 2018, 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)	2018		2017
Unrecognized tax benefits at beginning of period	$	12	$	17
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)		(5)
Unrecognized tax benefits at end of period	$	7	$	12

The Internal Revenue Service is currently auditing the Company’s federal income tax return for 2014. The income tax years 2014 to 2018 remain open to examination by the major taxing jurisdictions to which the Company is subject.