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Income Taxes | 12 Months Ended
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Dec. 31, 2012
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes Income Tax Expense (Benefit) The jurisdictional components of income (loss) from continuing operations before income tax expense (benefit), attributable to Calpine, for the years ended December 31, 2012, 2011 and 2010, are as follows (in millions):
| 2012 |  | 2011 |  | 2010
U.S. | $ | 194 |  |  | $ | (232 | ) |  | $ | (226 | )
International | 24 |  |  | 20 |  |  | (4 | )
Total | $ | 218 |  |  | $ | (212 | ) |  | $ | (230 | )
The components of income tax expense (benefit) from continuing operations for the years ended December 31, 2012, 2011 and 2010, consisted of the following (in millions):
| 2012 |  | 2011 |  | 2010 |
Current: |  |  |  |  |  |
Federal | $ | (12 | ) |  | $ | (16 | ) |  | $ | (1 | ) |
State | 16 |  |  | 12 |  |  | 10 |  |
Foreign | 14 |  |  | 3 |  |  | 3 |  |
Total current | 18 |  |  | (1 | ) |  | 12 |  |
Deferred: |  |  |  |  |  |
Federal | 11 |  |  | (33 | ) |  | (70 | ) |
State | (5 | ) |  | 9 |  |  | — |  |
Foreign | (5 | ) |  | 3 |  |  | (10 | ) |
Total deferred | 1 |  |  | (21 | ) |  | (80 | ) |
Total income tax expense (benefit) | $ | 19 |  |  | $ | (22 | ) |  | $ | (68 | ) | (1 | )
_________
(1) | Includes approximately $13 million in intraperiod tax expense related to a prior period with an offsetting benefit in OCI.
For the years ended December 31, 2012, 2011 and 2010, our income tax rates did not bear a customary relationship to statutory income tax rates, primarily as a result of the impact of our valuation allowance, state income taxes and changes in unrecognized tax benefits. A reconciliation of the federal statutory rate of 35% to our effective rate from continuing operations for the years ended December 31, 2012, 2011 and 2010, is as follows:
| 2012 |  | 2011 |  | 2010
Federal statutory tax expense (benefit) rate | 35.0 | % |  | (35.0 | )% |  | (35.0 | )%
State tax expense, net of federal benefit | 3.2 |  |  | 6.5 |  |  | 2.8 |
Depletion in excess of basis | (0.2 | ) |  | — |  |  | (1.3 | )
Preferred interest expense | 2.0 |  |  | 0.4 |  |  | 0.5 |
Federal refunds | (4.7 | ) |  | — |  |  | — |
Valuation allowances against future tax benefits | (32.3 | ) |  | 56.7 |  |  | 33.6 |
Valuation allowances related to reconsolidation of CCFC | — |  |  | (36.0 | ) |  | — |
Valuation allowances related to foreign taxes | (8.2 | ) |  | — |  |  | — |
Foreign taxes | 3.7 |  |  | (0.9 | ) |  | 9.9 |
Non-deductible reorganization items | 0.1 |  |  | 0.5 |  |  | 0.3 |
Intraperiod allocation | 4.6 |  |  | 19.9 |  |  | (40.1 | )
Bankruptcy settlement | — |  |  | (15.7 | ) |  | — |
Change in unrecognized tax benefits | 5.1 |  |  | (6.6 | ) |  | 0.6 |
Permanent differences and other items | 0.4 |  |  | (0.2 | ) |  | (0.9 | )
Effective income tax expense (benefit) rate | 8.7 | % |  | (10.4 | )% |  | (29.6 | )%
Deferred Tax Assets and Liabilities The components of the deferred income taxes as of December 31, 2012 and 2011, are as follows (in millions):
| 2012 |  | 2011
Deferred tax assets: |  |  |
NOL and credit carryforwards | $ | 3,073 |  |  | $ | 3,290 |
Taxes related to risk management activities and derivatives | 90 |  |  | 58 |
Reorganization items and impairments | 315 |  |  | 318 |
Foreign capital losses | 25 |  |  | 24 |
Other differences | 60 |  |  | 26 |
Deferred tax assets before valuation allowance | 3,563 |  |  | 3,716 |
Valuation allowance | (2,222 | ) |  | (2,336 | )
Total deferred tax assets | 1,341 |  |  | 1,380 |
Deferred tax liabilities: property, plant and equipment | (1,316 | ) |  | (1,364 | )
Net deferred tax asset | 25 |  |  | 16 |
Less: Current portion deferred tax liability | (3 | ) |  | (2 | )
Less: Non-current deferred tax asset | 28 |  |  | 18 |
Deferred income tax liability, non-current | $ | — |  |  | $ | — |
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 filed a consolidated federal income tax return for the year ended December 31, 2011 that included 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 year ended December 31, 2010, the CCFC group was deconsolidated from the Calpine group for federal income tax reporting purposes. 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 a partial offsetting amount recognized in OCI and discontinued operations. The following table details the effects of our intraperiod tax allocations for the years ended December 31, 2012, 2011 and 2010 (in millions).
| 2012 |  | 2011 |  | 2010
Intraperiod tax allocation expense (benefit) included in continuing operations | $ | 9 |  |  | $ | 42 |  |  | $ | (86 | )
Intraperiod tax allocation expense included in discountinued operations | $ | — |  |  | $ | — |  |  | $ | 59 |
Intraperiod tax allocation expense (benefit) included in OCI | $ | (9 | ) |  | $ | (45 | ) |  | $ | 27 |
NOL Carryforwards — Our NOL carryforwards consist primarily of federal NOL carryforwards of approximately $7.3 billion, which expire between 2023 and 2031, and NOL carryforwards in 33 states and the District of Columbia totaling approximately $4.0 billion, which expire between 2013 and 2031, substantially all of which are offset with a full valuation allowance. We also have approximately $1.0 billion in foreign NOLs, substantially all of which are offset with a full valuation allowance. The NOL carryforwards available are subject to limitations on their annual usage. Under federal and applicable state income tax laws, a corporation is generally permitted to deduct from taxable income in any year NOLs carried forward from prior years subject to certain time limitations as prescribed by the taxing authorities. 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 IRC. 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, 2012, approximately $2.4 billion of our $7.3 billion federal NOLs are not subject to annual Section 382 limitations. When considering our cumulative annual Section 382 limitations, in addition to our post-Effective Date NOLs that are not limited, our total unrestricted NOLs are approximately $7.1 billion. 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. Deferred tax assets relating to tax benefits of employee stock-based compensation do not reflect stock options exercised and restricted stock that vested in 2012. Some stock option exercises and restricted stock vestings result in tax deductions in excess of previously recorded deferred tax benefits based on the equity award value at the grant date. Although these additional tax benefits or “windfalls” are reflected in net operating tax carryforwards pursuant to accounting for stock-based compensation under U.S. GAAP, the additional tax benefit associated with the windfall is not recognized until the deduction reduces taxes payable, which will not occur for Calpine until a future period. Accordingly, since the tax benefit does not reduce our current taxes payable in 2012 due to NOL carryforwards, these “windfall” tax benefits are not reflected in our NOL in deferred tax assets for 2012. Windfalls included in NOL carryforwards, but not reflected in deferred tax assets as of December 31, 2012 were $10 million. 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 IRC. During 2011, we analyzed 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 determined that $640 million of our state NOLs are expected to expire unutilized as a result of statutory limitations on the use of some of our pre-emergence date NOLs as of the Effective Date or the cessation of business operations in various tax jurisdictions. We reduced our deferred tax asset for state NOLs that we are unable to utilize and made an equal reduction in our valuation allowance in 2011. The result did not have an impact on our income tax expense in 2011. We estimate that approximately $117 million of our state NOLs expired unutilized during 2012 as a result of statutory state limitations relating to the time period NOLs can be carried forward, and accordingly, we reduced our deferred tax asset and made an equal reduction in our valuation allowance. The reduction did not have an impact to our income tax expense in 2012. We will likely make future annual adjustments to our state NOLs that have expired or are limited under Section 382 of the IRC. In 2011, we had certain intercompany accounts payable/receivable balances that were eliminated as part of the final steps of our emergence from bankruptcy. There was no effect to our federal NOLs, however, there was a reduction in our state NOLs of $44 million which was partially offset by a reduction in current state taxable income of $24 million. The resulting net reduction to our state NOLs was offset by an equal reduction in our valuation allowance. The reduction did not have an impact on our income tax expense in 2011. As a result of the settlement of certain bankruptcy claims and the final distribution to the holders of allowed unsecured claims in accordance with our Plan of Reorganization in 2011, we recognized approximately $66 million and $39 million for federal and state income tax purposes, respectively, in cancellation of debt income related to this distribution for federal income tax reporting in 2011. 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 IRS examination regardless of when the NOLs occurred. Due to significant NOLs, any adjustment of state returns or federal returns would likely result in a reduction of deferred tax assets rather than a cash payment of income taxes. Canadian Tax Audits — In September 2009, we received notice from the Canadian Revenue Authority, or CRA, of their intent to conduct a limited scope income tax audit on four of our Canadian subsidiaries for the tax years 2005 through 2008. The CRA concluded that there were no adjustments on two of the subsidiaries, but further review was required on the remaining two subsidiaries. On April 23, 2012, the remaining two subsidiaries received proposed adjustments from the CRA regarding our transfer pricing positions. On June 21, 2012, we met with the CRA to discuss their proposed adjustments and provided clarification where we believed it was needed. In July 2012, we received additional questions from the CRA as a result of our meeting, and we responded to their request in September and October 2012. In December 2012, we received and responded to additional questions from the CRA. In January 2013, we received an adjusted reassessment on one of the two transfer pricing issues that we are disputing with the CRA and are currently evaluating the merits of the adjusted reassessment. If accepted, any adjustments to our transfer pricing would increase taxable income and would be offset entirely by existing NOL's to which a valuation allowance has been applied. Any interest assessments resulting from acceptance of the CRA offer would be immaterial. We continue to evaluate the remaining proposed adjustments on our other Canadian subsidiary; however, based on our current analysis which is supported by our tax advisors, we believe that our transfer pricing positions and policies are appropriate, and we intend to challenge the CRA’s proposed adjustments. If we are unsuccessful in our challenge, any adjustment to Canadian taxable income would first be offset against the existing NOLs that are available; however, we do not believe any reassessment resulting in an adjustment to taxable income which is greater than our existing NOLs, or including interest or penalties which cannot be offset by existing NOLs, would have a material adverse effect on our financial condition, results of operations or cash flows. 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, we were unable to assume future profits; however, since our emergence from Chapter 11, we are able to consider available tax planning strategies. As of December 31, 2012, we have provided a valuation allowance of approximately $2.2 billion on certain federal, state and foreign tax jurisdiction deferred tax assets to reduce the amount of these assets to the extent necessary to result in an amount that is more likely than not to be realized. The net change in our valuation allowance was a decrease of $114 million, $50 million and $186 million for the years ended December 31, 2012, 2011 and 2010, respectively; all primarily related to changes in our estimates of our ability to utilize our NOL carryforwards. Unrecognized Tax Benefits At December 31, 2012, we had unrecognized tax benefits of $92 million. If recognized, $36 million of our unrecognized tax benefits could impact the annual effective tax rate and $56 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 $24 million for income tax matters at December 31, 2012. We recognize interest and penalties related to unrecognized tax benefits in income tax expense (benefit) on our Consolidated Statements of Operations. We believe that it is reasonably possible that a decrease within the range of approximately nil and $28 million in unrecognized tax benefits could occur within the next 12 months primarily related to state and foreign tax issues. A reconciliation of the beginning and ending amounts of our unrecognized tax benefits for the years ended December 31, 2012, 2011 and 2010, is as follows (in millions):
| 2012 |  | 2011 |  | 2010
Balance, beginning of period | $ | (74 | ) |  | $ | (88 | ) |  | $ | (98 | )
Increases related to prior year tax positions | (19 | ) |  | — |  |  | (1 | )
Decreases related to prior year tax positions | 1 |  |  | 1 |  |  | 11 |
Decrease related to lapse of statute of limitations | — |  |  | 13 |  |  | — |
Balance, end of period | $ | (92 | ) |  | $ | (74 | ) |  | $ | (88 | )
U.S. Federal Income Tax Refund In 2004, we deducted a portion of our foreign dividends as allowed by the IRC when we filed our federal income tax return. Upon further review and analysis, we determined our foreign dividends should have been offset against our current 2004 operating loss. In 2009, we filed an amended federal income tax return that reflected this change and would result in a refund of approximately $10 million. This amended federal return has been under audit by the IRS since it was filed. In October 2012, the IRS approved our amended tax return, and we received a refund of approximately $13 million which included approximately $3 million in accrued interest. The benefit of this refund is reflected in our Consolidated Financial Statements in the fourth quarter of 2012.

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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 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 2: 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 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 08 -Paragraph h -Article 4 Reference 4: 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 5: 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 6: 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 7: 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 8: 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 + Details
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