Income Taxes

12 Months Ended

Dec. 31, 2020

INCOME TAXES

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


(in millions)	2020		2019		2018
Current:
Federal	$	(2)	$	(1)	$	(5)
State	—		(1)		6
	(2)		(2)		1
Deferred:
Federal	371		(431)		—
State	38		22		—
	409		(409)		—
Provision (benefit) for income taxes	$	407	$	(411)	$	1

The provision for income taxes was an effective rate of (15)% in 2020, (86)% in 2019 and 0% in 2018. The Company’s effective tax rate increased in 2020, as compared with 2019, primarily due to the increase in the valuation allowance in 2020. 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)	2020		2019		2018
Expected provision (benefit) at federal statutory rate	$	(568)	$	101	$	113
Increase (decrease) resulting from:
State income taxes, net of federal income tax effect	(55)		11		13




Change in valuation allowance	1,034		(522)		(121)
Removal of sequestration fee on AMT receivables	—		—		(5)
Other	(4)		(1)		1
Provision (benefit) for income taxes	$	407	$	(411)	$	1

The 2020 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, 2020 and 2019 were as follows:


(in millions)	2020		2019
Deferred tax liabilities:
Differences between book and tax basis of property	$	—	$	312
Derivative activity	—		34
Right of use lease asset	38		37
Other	2		2
	40		385
Deferred tax assets:
Differences between book and tax basis of property	295		—
Accrued compensation	38		33
Accrued pension costs	11		9
Asset retirement obligations	20		13
Net operating loss carryforward	1,117		769
Future lease payments	38		37
Derivative activity	9		—
Capital loss carryover	27		—
Other	24		18
	1,579		879
Valuation allowance	(1,539)		(87)
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. 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. Additionally, in January 2020 the IRS announced that any previously sequestered amounts relating to these alternative minimum tax refunds would also be refunded. The Company had approximately $2 million in sequestered amounts relating to alternative minimum tax refunds. All of those refunds have been received as of December 2020 after the CARES Act (enacted in March 2020) accelerated alternative minimum tax refunds.

In 2020, the Company received refunds related to federal income tax of $32 million. The Company received a refund of $1 million in state income tax in 2019 and paid $6.3 million in state income tax in 2018. The Company’s net operating loss carryforward as of December 31, 2020 was $4.5 billion and $2 billion for federal and state reporting purposes, respectively, the majority of which will expire between 2035 and 2039. Included in the Company's net operating loss carryforward are the net operating loss carryforwards acquired in the Montage acquisition of $1 billion. A portion of the Montage-related net operating loss carryovers are subject to an annual section 382 limitation of $1.7 million, and the Company has appropriately accounted for this limitation in purchase accounting. In addition, certain net operating loss carryovers are subject to a section 382 limitation of $90 million, but the Company does not expect this limit to have a material impact on its net operating loss carryforward balance. 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 2039. The Company also had a statutory depletion carryforward of $13 million and $55 million related to interest deduction carryforward as of December 31, 2020.

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.

Due to unexpected significant pricing declines resulting from the effects of COVID-19 and developments related to Russia/OPEC, as well as the general oversupply of the market along with the material write-down of the carrying value of the Company’s natural gas and oil properties, in addition to other negative evidence, the Company concluded that it was more likely than not that these deferred tax assets will not be realized and recorded a discrete tax expense of $408 million for the increase in its valuation allowance in the first quarter of 2020. The net change in valuation allowance is reflected as a component of income tax expense. The Company also has retained a valuation allowance of $87 million related to net operating losses in jurisdictions in which it no longer operates. Management will continue to assess 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.

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.

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


(in millions)	2020		2019
Valuation allowance at beginning of year	$	87	$	609
Release of valuation allowance	—		(522)
Establishment of valuation allowance on opening deferred balance	408		—
Opening balance adjustments	6		—
Changes based on 2020 activity	626		—

Purchase accounting	412		—

Valuation allowance at end of year	$	1,539	$	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, 2020, 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)	2020		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 2018 to 2020 remain open to examination by the major taxing jurisdictions to which the Company is subject.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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