Income Tax Expense (Benefit)

The jurisdictional components of income from continuing operations before income tax expense (benefit), attributable to Calpine, for the years ended December 31, 2015, 2014 and 2013, are as follows (in millions):



	2015		2014		2013
U.S.	$	133	$	942	$	(13	)
International	26		26		29
Total	$	159	$	968	$	16

The components of income tax expense (benefit) from continuing operations for the years ended December 31, 2015, 2014 and 2013, consisted of the following (in millions):



	2015			2014			2013
Current:
Federal	$	(1	)	$	(1	)	$	(2	)
State	10			19			(9		)
Foreign	2			(1		)	(1		)
Total current	11			17			(12		)
Deferred:
Federal	(21		)	—			1
State	1			(1		)	4
Foreign	(67		)	6			9
Total deferred	(87		)	5			14
Total income tax expense (benefit)	$	(76	)	$	22		$	2

For the years ended December 31, 2015, 2014 and 2013, our income tax rates did not bear a customary relationship to statutory income tax rates, primarily as a result of the impact of our NOLs, valuation allowances, 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, 2015, 2014 and 2013, is as follows:



	2015		2014		2013
Federal statutory tax expense (benefit) rate	35.0	%	35.0	%	35.0	%
State tax expense (benefit), net of federal benefit	5.1		1.9		(69.8	)
Depletion in excess of basis	—		(0.3	)	(14.7	)
Valuation allowances against future tax benefits	(46.3	)	(35.8	)	89.8
Valuation allowance related to foreign taxes	(49.4	)	—		(19.8	)
Distributions from foreign affiliates and foreign taxes	3.1		1.2		(10.8	)
Intraperiod allocation	—		—		4.5
Change in unrecognized tax benefits	1.2		(0.4	)	(30.1	)
Disallowed compensation	3.1		0.1		11.7
Stock-based compensation	0.6		0.1		8.6
Lobbying contributions	0.5		0.1		3.3
Other differences	(0.7	)	0.4		4.8
Effective income tax expense (benefit) rate	(47.8	)%	2.3	%	12.5	%

Deferred Tax Assets and Liabilities

The components of deferred income taxes as of December 31, 2015 and 2014, are as follows (in millions):



	2015⁽¹⁾			2014
Deferred tax assets:
NOL and credit carryforwards	$	2,842		$	2,873
Taxes related to risk management activities and derivatives	53			61
Reorganization items and impairments	212			216
Foreign capital losses	—			16
Deferred tax assets before valuation allowance	3,107			3,166
Valuation allowance	(1,637		)	(1,836		)
Total deferred tax assets	1,470			1,330
Deferred tax liabilities:
Property, plant and equipment	(1,377		)	(1,305		)
Other differences	(3		)	(21		)
Total deferred tax liabilities	(1,380		)	(1,326		)
Net deferred tax asset	90			4
Less: Current portion deferred tax liability	—			(14		)
Less: Non-current deferred tax liability	—			(1		)
Deferred income tax asset, non-current	$	90		$	19

___________


(1)	We prospectively early adopted Accounting Standards Update 2015-17 during the fourth quarter of 2015 which requires the presentation of deferred tax assets and liabilities as non-current in our Consolidated Balance Sheet. See Note 2 for further information regarding the adoption of Accounting Standards Update 2015-17.

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 intraperiod tax allocation included in continuing operations is not material for the years ended December 31, 2015, 2014 and 2013.

NOL Carryforwards — As of December 31, 2015, our NOL carryforwards consisted primarily of federal NOL carryforwards of approximately $6.9 billion, which expire between 2024 and 2033, and NOL carryforwards in 21 states and the District of Columbia totaling approximately $4.1 billion, which expire between 2016 and 2035, substantially all of which are offset with a full valuation allowance. We also have approximately $655 million in foreign NOLs, which expire between 2026 and 2035, of which a portion is offset with a 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 2015. 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, 2015 and 2014 due to NOL carryforwards, these windfall tax benefits are not reflected in our NOLs in deferred tax assets at December 31, 2015 and 2014. The cumulative windfall balance included in federal and state NOL carryforwards, but not reflected in gross deferred tax assets as of December 31, 2015 and 2014 were $46 million and $37 million for federal, respectively, and $25 million and $21 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.

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, 2015, we have provided a valuation allowance of approximately $1.6 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 $199 million for the year ended December 31, 2015 and $410 million for the year ended December 31, 2014 and an increase of $24 million for the year ended December 31, 2013, respectively; all primarily related to income generated in these periods.

In the normal course of business, we evaluate our existing corporate structure and continue to simplify where possible. In 2015, we implemented such a reorganization that resulted in a release of approximately $69 million of valuation allowance against our NOLs; however, we do not anticipate the reorganization will have a material impact on our financial condition or cash flows.

Unrecognized Tax Benefits

At December 31, 2015, we had unrecognized tax benefits of $58 million. If recognized, $17 million of our unrecognized tax benefits could impact the annual effective tax rate and $41 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 $12 million and $11 million for income tax matters at December 31, 2015 and 2014, respectively. We recognize interest and penalties related to unrecognized tax benefits in income tax expense (benefit) on our Consolidated Statements of Operations and recorded $1 million, $(2) million and $(11) million for the years ended December 31, 2015, 2014 and 2013, respectively. We believe that it is reasonably possible that a decrease within the range of nil and $1 million in unrecognized tax benefits could occur within the next twelve months primarily related to foreign tax issues.

A reconciliation of the beginning and ending amounts of our unrecognized tax benefits for the years ended December 31, 2015, 2014 and 2013, is as follows (in millions):



	2015			2014			2013
Balance, beginning of period	$	(56	)	$	(68	)	$	(92	)
Increases related to prior year tax positions	—			(4		)	(7		)
Decreases related to prior year tax positions	3			8			8
Increases related to current year tax positions	(5		)	—			—
Decreases related to settlements	—			8			10
Decrease related to lapse of statute of limitations	—			—			13
Balance, end of period	$	(58	)	$	(56	)	$	(68	)