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Income Taxes | 6 Months Ended
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Jun. 30, 2011
Income Taxes [Abstract] |
Income Taxes | 9. Income Taxes The table below shows our consolidated income tax expense (benefit) from continuing operations (excluding noncontrolling interest), and our imputed tax rates, as well as intraperiod tax allocations for the periods indicated (in millions):
|  | Three Months Ended June 30, |  |  | Six Months Ended June 30, |
|  | 2011 |  |  | 2010 |  |  | 2011 |  |  | 2010 |
Income tax expense (benefit) |  | $ | 18 |  |  | $ | 6 |  |  | $ | (65 | )(1) |  | $ | 17 | (2)
Imputed tax rate |  |  | (35 | )% |  |  | (5 | )% |  |  | 15 | % |  |  | (11 | )%
Intraperiod tax allocation expense (benefit) |  | $ | 18 |  |  | $ | (31 | ) |  | $ | (16 | ) |  | $ | (17 | )
_________
(1) | Includes a tax benefit of approximately $76 million related to the consolidation of the CCFC and Calpine groups for federal income tax reporting purposes for the six months ended June 30, 2011 (as described below).
(2) | Includes approximately $13 million in intraperiod tax expense related to a prior period with an offsetting benefit in OCI.
Intraperiod Tax Allocation — In accordance with U.S. GAAP, intraperiod tax allocation provisions require allocation of a tax expense (benefit) to continuing operations due to current OCI gains (losses) and income from discontinued operations with an offsetting amount recognized in OCI and discontinued operations. The following table details the effects of our intraperiod tax allocations for the three and six months ended June 30, 2011 and 2010 (in millions).
|  | Three Months Ended June 30, |
|  | Included in continuing operations |  |  | Included in discontinued operations |  |  | Included in OCI |
|  | 2011 |  |  | 2010 |  |  | 2011 |  |  | 2010 |  |  | 2011 |  |  | 2010 |
Intraperiod tax allocation expense (benefit) |  | $ | 18 |  |  | $ | (31 | ) |  | $ | — |  |  | $ | 8 |  |  | $ | (18 | ) |  | $ | 23 |
|  | Six Months Ended June 30, |
|  | Included in continuing operations |  |  | Included in discontinued operations |  |  | Included in OCI |
|  | 2011 |  |  | 2010 |  |  | 2011 |  |  | 2010 |  |  | 2011 |  |  | 2010 |
Intraperiod tax allocations expense (benefit) |  | $ | (16 | ) |  | $ | (17 | ) |  | $ | — |  |  | $ | 8 |  |  | $ | 16 |  |  | $ | 9 |
Accounting for Income Taxes Consolidation of CCFC and Calpine Tax Reporting Groups — For federal income tax reporting purposes, our historical tax reporting group was comprised primarily of two separate groups, CCFC and its subsidiaries, which we referred to as the CCFC group, and Calpine Corporation and its subsidiaries other than CCFC, which we referred to as the Calpine group. During the first quarter of 2011, we elected to consolidate our CCFC and Calpine groups for federal income tax reporting purposes and Calpine will file a consolidated federal income tax return for the year ended December 31, 2011 that will include the CCFC group. As a result of the consolidation, the CCFC group deferred tax liabilities will be eligible to offset existing Calpine group NOLs that were reserved by a valuation allowance. Accordingly, we recorded a one-time federal deferred income tax benefit of approximately $76 million during the first quarter of 2011 to reduce our valuation allowance. For the three and six months ended June 30, 2010, the CCFC group was deconsolidated from the Calpine group for federal income tax reporting purposes. For the three and six months ended June 30, 2011 and 2010, we used the effective rate method to determine both the CCFC and Calpine groups‘ tax provision, as applicable; however, our income tax rates did not bear a customary relationship to statutory income tax rates primarily as a result of the consolidation of the CCFC and Calpine groups for 2011, the impact of state income taxes, changes in unrecognized tax benefits, the Calpine group valuation allowance and intraperiod tax allocations. Valuation Allowance — U.S. GAAP requires that we consider all available evidence, both positive and negative, and tax planning strategies to determine whether, based on the weight of that evidence, a valuation allowance is needed to reduce the value of deferred tax assets. Future realization of the tax benefit of an existing deductible temporary difference or carryforward ultimately depends on the existence of sufficient taxable income of the appropriate character within the carryback or carryforward periods available under the tax law. Due to our history of losses in prior periods, we are unable to assume future profits; however, since our emergence from Chapter 11, we are able to consider available tax planning strategies. Unrecognized Tax Benefits and Liabilities — At June 30, 2011, we had unrecognized tax benefits of $88 million. If recognized, $41 million of our unrecognized tax benefits could impact the annual effective tax rate and $47 million related to deferred tax assets could be offset against the recorded valuation allowance resulting in no impact to our effective tax rate. We also had accrued interest and penalties of $21 million for income tax matters at June 30, 2011. The amount of unrecognized tax benefits at June 30, 2011 remained comparable to the amount of unrecognized tax benefits at December 31, 2010. We believe it is reasonably possible that a decrease within the range of approximately $13 million and $16 million in unrecognized tax benefits could occur within the next 12 months primarily related to federal tax liabilities, interest and penalties. NOL Carryforwards — Under federal income tax law, our NOL carryforwards can be utilized to reduce future taxable income subject to certain limitations, including if we were to undergo an ownership change as defined by Section 382 of the Internal Revenue Code. We experienced an ownership change on the Effective Date as a result of the cancellation of our old common stock and the distribution of our new common stock pursuant to our Plan of Reorganization. However, this ownership change and the resulting annual limitations are not expected to result in the expiration of our NOL carryforwards if we are able to generate sufficient future taxable income within the carryforward periods. At December 31, 2010, approximately $2.5 billion of our $7.4 billion total NOLs remain subject to annual section 382 limitations with the remaining $4.9 billion no longer subject to the Section 382 limitation. If a subsequent ownership change were to occur as a result of future transactions in our common stock, accompanied by a significant reduction in our market value immediately prior to the ownership change, our ability to utilize the NOL carryforwards may be significantly limited. Under state income tax laws, our NOL carryforwards can be utilized to reduce future taxable income subject to certain limitations, including if we were to undergo an ownership change as defined by Section 382 of the Internal Revenue Code. We are analyzing the effect of our change in ownership on the Effective Date for each of our significant states to determine the amount of our NOL limitation. The analysis will also determine our state NOLs expected to expire unutilized as a result of the cessation of business operations and changes in apportionment as of the Effective Date. Although our analysis is not complete, we believe that the statutory limitations on the use of some of our pre-emergence state NOLs will cause them to expire unutilized. We believe our analysis could result in a reduction of available state NOLs, which had a full valuation allowance at June 30, 2011 and December 31, 2010. Upon completion of the analysis, we will reduce our deferred tax asset for state NOLs that we are unable to utilize and make an equal reduction in our valuation allowance. The result is not expected to have an effect on our income tax expense in 2011. We have certain intercompany accounts payable / receivable balances that we will be eliminating as part of the final steps of our emergence from bankruptcy. We are analyzing the federal and state income tax effects of eliminating these balances and, although our analysis is not complete, we believe that the elimination of some of these pre-petition intercompany balances will have the ultimate effect of recharacterizing a portion of our federal and state ordinary NOLs into either capital losses, which has a shorter carryforward period, or increasing the tax basis in our affiliates, a portion of which will not be recognized until the related entity is sold. Certain of these recharacterizations may result in a reduction of our gross deferred tax asset along with an equal reduction in our valuation allowance. The elimination of these intercompany account balances is not expected to have an effect on our income tax expense in 2011. The State of California enacted legislation in 2010 suspending the ability of taxpayers to use NOLs for tax years 2010 and 2011; however, they have extended the 20 year carryforward period to account for the suspension period. To manage the risk of significant limitations on our ability to utilize our tax NOL carryforwards, our amended and restated certificate of incorporation permits our Board of Directors to meet to determine whether to impose certain transfer restrictions on our common stock in the following circumstances: if, prior to February 1, 2013, our Market Capitalization declines by at least 35% from our Emergence Date Market Capitalization of approximately $8.6 billion (in each case, as defined in and calculated pursuant to our amended and restated certificate of incorporation) and at least 25 percentage points of shift in ownership has occurred with respect to our equity for purposes of Section 382 of the Internal Revenue Code. We believe as of the filing of this Report, an ownership change of 25 percentage points has occurred; however, we have not experienced declines in our stock price of more than 35% from our Emergence Date Market Capitalization. Accordingly, the transfer restrictions have not been put in place by our Board of Directors; however, if both of the foregoing events were to occur together and our Board of Directors was to elect to impose them, they could become operative in the future. There can be no assurance that the circumstances will not be met in the future, or in the event that they are met, that our Board of Directors would choose to impose these restrictions or that, if imposed, such restrictions would prevent an ownership change from occurring. Should our Board of Directors elect to impose these restrictions, they shall have the authority and discretion to determine and establish the definitive terms of the transfer restrictions, provided that the transfer restrictions apply to purchases by owners of 5% or more of our common stock, including any owners who would become owners of 5% or more of our common stock via such purchase. The transfer restrictions will not apply to the disposition of shares provided they are not purchased by a 5% or more owner. Income Tax Audits —We remain subject to various audits and reviews by taxing authorities; however, we do not expect these will have a material effect on our tax provision. Any NOLs we claim in future years to reduce taxable income could be subject to U.S. Internal Revenue Service examination regardless of when the NOLs occurred. Due to significant NOLs, any adjustment of state returns or federal returns from 2007 and forward would likely result in a reduction of deferred tax assets rather than a cash payment of income taxes.

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32537-109319 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 136, 172 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 43, 44, 45, 46, 47, 48, 49 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 08 -Paragraph h -Article 4 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32559-109319 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32639-109319 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32718-109319 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690 + Details
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