Income Taxes

12 Months Ended

Dec. 31, 2019

INCOME TAXES

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


(in millions)	2019		2018		2017
Current:
Federal	$	(1)	$	(5)	$	(22)
State	(1)		6		—
	(2)		1		(22)
Deferred:
Federal	(431)		—		(71)
State	22		—		—
	(409)		—		(71)
Provision (benefit) for income taxes	$	(411)	$	1	$	(93)

The provision for income taxes was an effective rate of (86)% in 2019, 0% in 2018 and (10)% in 2017. The Company’s effective tax rate decreased in 2019, as compared with 2018, primarily due to the release of a valuation allowance in 2019. 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)	2019		2018		2017
Expected provision at federal statutory rate	$	101	$	113	$	333
Decrease resulting from:
State income taxes, net of federal income tax effect	11		13		16
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)
Change in valuation allowance	(522)		(121)		(364)
Removal of sequestration fee on AMT receivables	—		(5)		—
Other	(1)		1		(5)
Provision (benefit) for income taxes	$	(411)	$	1	$	(93)

The 2019 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, 2019 and 2018 were as follows:


(in millions)	2019		2018
Deferred tax liabilities:
Differences between book and tax basis of property	$	312	$	226
Derivative activity	34		12
Right of use lease asset	37		—
Other	2		2
	385		240
Deferred tax assets:
Accrued compensation	33		33
Accrued pension costs	9		10
Asset retirement obligations	13		15
Net operating loss carryforward	769		777
Future lease payments	37		—
Other	18		14
	879		849
Valuation allowance	(87)		(609)
Net deferred tax asset	$	407	$	—

The Tax Reform Act 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. The adjustments required to deferred taxes as a result of the Tax Reform Act have been reflected in the Company’s tax provision.

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 $30 million in refundable credits remaining that are expected to be fully refunded by 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 2019, the Company received refunds related to state income tax of $1.0 million. In 2018, the Company paid $6.3 million in state income tax. The Company’s net operating loss carryforward as of December 31, 2019 was $3.0 billion and $2.3 billion for federal and state reporting purposes, respectively, the majority of which will expire between 2035 and 2039. 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 and $29 million related to interest deduction carryforward as of December 31, 2019.

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 assets will not be realized. To assess that 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.

For the years ended December 31, 2018 and 2017, the Company maintained a full valuation allowance against its deferred tax assets based on its conclusion, considering all available evidence (both positive and negative), that it was more likely than not that the deferred tax assets would not be realized. A significant item of objective negative evidence considered was the cumulative pre-tax loss incurred over the three-year period ended December 31, 2018, primarily due to non-cash impairments of proved natural gas and oil properties recognized in 2015 and 2016. As of the first quarter of 2019, the Company had sustained a three-year cumulative level of profitability. Based on this factor and other positive evidence including forecasted taxable income, the Company concluded that it was more likely than not that the deferred tax assets would be realized and determined that $522 million of the valuation allowance would be released during 2019. Accordingly, a tax benefit of $522 million was recorded. As of December 31, 2019, the Company expects to retain a valuation allowance of $87 million related to net operating losses in jurisdictions in which it no longer operates. The Company is continually evaluating deferred tax asset realizability, and if pricing changes occur that would significantly affect the forecast, the Company will reconsider the need for a valuation allowance at such time.

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


(in millions)
Valuation allowance as of December 31, 2018	$	609

Release of valuation allowance in 2019	(522)


Valuation allowance as of December 31, 2019	$	87

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, 2019, there were no unrecognized tax positions identified that would have a material effect on the effective tax rate. All positions booked as of December 31, 2018 were released in 2019 due to audit completion and statute expirations.

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


(in millions)	2019		2018
Unrecognized tax benefits at beginning of year	$	7	$	12
Additions based on tax positions related to the current year	—		—
Additions to tax positions of prior years	—		—
Reductions to tax positions of prior years	(7)		(5)
Unrecognized tax benefits at end of year	$	—	$	7

The Internal Revenue Service closed the 2014 audit of the Company’s federal return in 2019 with no change and is currently auditing the Company’s 2016 and 2017 tax periods. The income tax years 2016 to 2019 remain open to examination by the major taxing jurisdictions to which the Company is subject.