Income Taxes

Income Tax Expense

The jurisdictional components of income from continuing operations before income tax expense, attributable to Calpine, for the years ended December 31, 2014, 2013 and 2012, are as follows (in millions):



	2014		2013			2012
U.S.	$	942	$	(13	)	$	194
International	26		29			24
Total	$	968	$	16		$	218

The components of income tax expense from continuing operations for the years ended December 31, 2014, 2013 and 2012, consisted of the following (in millions):



	2014			2013			2012
Current:
Federal	$	(1	)	$	(2	)	$	(12	)
State	19			(9		)	16
Foreign	(1		)	(1		)	14
Total current	17			(12		)	18
Deferred:
Federal	—			1			11
State	(1		)	4			(5		)
Foreign	6			9			(5		)
Total deferred	5			14			1
Total income tax expense	$	22		$	2		$	19

For the years ended December 31, 2014, 2013 and 2012, 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, 2014, 2013 and 2012, is as follows:



	2014		2013		2012
Federal statutory tax expense (benefit) rate	35.0	%	35.0	%	35.0	%
State tax expense (benefit), net of federal benefit	1.9		(69.8	)	3.2
Depletion in excess of basis	(0.3	)	(14.7	)	(0.2	)
Federal refunds	—		—		(4.7	)
Valuation allowances against future tax benefits	(35.8	)	89.8		(30.3	)
Valuation allowance related to foreign taxes	—		(19.8	)	(8.2	)
Distributions from foreign affiliates and foreign taxes	1.2		(10.8	)	3.7
Intraperiod allocation	—		4.5		4.6
Change in unrecognized tax benefits	(0.4	)	(30.1	)	5.1
Disallowed compensation	0.1		11.7		0.4
Stock-based compensation	0.1		8.6		0.2
Lobbying contributions	0.1		3.3		0.3
Other differences	0.4		4.8		(0.4	)
Effective income tax expense rate	2.3	%	12.5	%	8.7	%

Deferred Tax Assets and Liabilities

The components of deferred income taxes as of December 31, 2014 and 2013, are as follows (in millions):



	2014			2013
Deferred tax assets:
NOL and credit carryforwards	$	2,873		$	3,120
Taxes related to risk management activities and derivatives	61			60
Reorganization items and impairments	216			262
Foreign capital losses	16			18
Other differences	—			104
Deferred tax assets before valuation allowance	3,166			3,564
Valuation allowance	(1,836		)	(2,246		)
Total deferred tax assets	1,330			1,318
Deferred tax liabilities:
Property, plant and equipment	(1,305		)	(1,310		)
Other differences	(21		)	—
Total deferred tax liabilities	(1,326		)	(1,310		)
Net deferred tax asset	4			8
Less: Current portion deferred tax asset (liability)	(14		)	12
Less: Non-current deferred tax asset	19			7
Deferred income tax liability, non-current	$	(1	)	$	(11	)

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) with a partial offsetting amount recognized in OCI. The following table details the effects of our intraperiod tax allocations for the years ended December 31, 2014, 2013 and 2012 (in millions).



	2014		2013			2012
Intraperiod tax allocation expense included in continuing operations	$	—	$	1		$	9
Intraperiod tax allocation benefit included in OCI	$	—	$	(1	)	$	(9	)

NOL Carryforwards — As of December 31, 2014, our NOL carryforwards consisted primarily of federal NOL carryforwards of approximately $6.9 billion, which expire between 2023 and 2033, and NOL carryforwards in 22 states and the District of Columbia totaling approximately $4.0 billion, which expire between 2015 and 2034, substantially all of which are offset with a full valuation allowance. We also have approximately $800 million in foreign NOLs, which expire between 2026 and 2034, 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.

Deferred tax assets relating to tax benefits of employee stock-based compensation do not reflect stock options exercised and restricted stock that vested between 2011 and 2014. 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 NOL 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 for the years ended December 31, 2014 and 2013 due to NOL carryforwards, these windfall tax benefits are not reflected in our NOLs in deferred tax assets at December 31, 2014 and 2013. The cumulative windfall balance included in federal and state NOL carryforwards, but not reflected in gross deferred tax assets as of December 31, 2014 and 2013 were $37 million and $25 million for federal, respectively, and $21 million and $16 million for state, respectively.

Income Tax Audits — We remain subject to periodic audits and reviews by taxing authorities; however, we do not expect these audits 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. Any adjustment of state or federal returns would likely result in a reduction of deferred tax assets rather than a cash payment of income taxes in tax jurisdictions where we have NOLs.

Canadian Tax Audits — In January 2013, we received an adjusted reassessment on one of two transfer pricing issues that we were disputing with the Canadian Revenue Authority (“CRA”). We proposed a settlement of the adjusted reassessment with the CRA and the CRA accepted our proposal. The adjustment to our transfer pricing increased taxable income and was offset by existing NOLs to which a valuation allowance had been applied and did not have a material impact on our Consolidated Financial Statements.

On January 28, 2014, we received a letter from the CRA which informed us that they did not agree with our transfer price on the second issue and proposed an increase to taxable income for tax years 2006 and 2007. On June 6, 2014, we proposed a settlement, and on June 14, 2014, the CRA accepted our proposal. The adjustment to our transfer price increased taxable income for one of our Canadian affiliates and was offset by existing NOLs to which a valuation allowance had been applied. As part of the settlement, we agreed to pay some interest and withholding taxes which did not have a material impact on our Consolidated Financial Statements.

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, we are able to consider available tax planning strategies.

As of December 31, 2014, we have provided a valuation allowance of approximately $1.8 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 $410 million for the year ended December 31, 2014 and $114 million for the year ended December 31, 2012 and an increase of $24 million for the year ended December 31, 2013, respectively; all primarily related to income generated in these periods.

As a result of a recent favorable response to an IRS letter ruling request, during the first quarter of 2014, we made an election which increased the tax basis of certain assets resulting in an increase to our net state deferred tax assets by approximately $18 million with a corresponding decrease in our state income tax expense.

Tangible Property Regulations — On September 13, 2013, the United States Treasury Department and the IRS issued final regulations providing comprehensive guidance on the tax treatment of costs incurred to acquire, repair or improve tangible property. The final regulations are generally effective for taxable years beginning on or after January 1, 2014. On January 24, 2014, the IRS issued procedural guidance pursuant to which taxpayers will be granted automatic consent to change their tax accounting methods to comply with the final regulations. These regulations did not have a material impact on our financial condition, results of operations or cash flows.

Unrecognized Tax Benefits

At December 31, 2014, we had unrecognized tax benefits of $56 million. If recognized, $13 million of our unrecognized tax benefits could impact the annual effective tax rate and $43 million, related to deferred tax assets, could be offset against the recorded valuation allowance resulting in no impact to our effective tax rate. We had accrued interest and penalties of $11 million and $13 million for income tax matters at December 31, 2014 and 2013, respectively. We recognize interest and penalties related to unrecognized tax benefits in income tax expense on our Consolidated Statements of Operations and recorded $(2) million, $(11) million and $4 million for the years ended December 31, 2014, 2013 and 2012, respectively.

A reconciliation of the beginning and ending amounts of our unrecognized tax benefits for the years ended December 31, 2014, 2013 and 2012, is as follows (in millions):



	2014			2013			2012
Balance, beginning of period	$	(68	)	$	(92	)	$	(74	)
Increases related to prior year tax positions	(4		)	(7		)	(19		)
Decreases related to prior year tax positions	8			8			1
Decreases related to settlements	8			10			—
Decrease related to lapse of statute of limitations	—			13			—
Balance, end of period	$	(56	)	$	(68	)	$	(92	)

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.