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, 2016, 2015 and 2014, are as follows (in millions):



	2016		2015		2014
U.S.	$	116	$	133	$	942
International	24		26		26
Total	$	140	$	159	$	968

The components of income tax expense (benefit) from continuing operations for the years ended December 31, 2016, 2015 and 2014, consisted of the following (in millions):



	2016			2015			2014
Current:
Federal	$	(10	)	$	(1	)	$	(1	)
State	14			10			19
Foreign	1			2			(1		)
Total current	5			11			17
Deferred:
Federal	10			(21		)	—
State	27			1			(1		)
Foreign	6			(67		)	6
Total deferred	43			(87		)	5
Total income tax expense (benefit)	$	48		$	(76	)	$	22

For the years ended December 31, 2016, 2015 and 2014, our income tax rates did not bear a customary relationship to statutory income tax rates, primarily as a result of the effect of our NOLs, valuation allowances and state income taxes. A reconciliation of the federal statutory rate of 35% to our effective rate from continuing operations for the years ended December 31, 2016, 2015 and 2014, is as follows:



	2016		2015		2014
Federal statutory tax expense (benefit) rate	35.0	%	35.0	%	35.0	%
State tax expense, net of federal benefit	19.4		5.1		1.9
Valuation allowances against future tax benefits	(25.0	)	(46.0	)	(35.8	)
Valuation allowance related to foreign taxes	(0.1	)	(49.4	)	—
Distributions from foreign affiliates and foreign taxes	(0.6	)	3.1		1.2
Change in unrecognized tax benefits	(0.1	)	1.2		(0.4	)
Disallowed compensation	0.9		3.1		0.1
Stock-based compensation	2.2		0.6		0.1
Equity earnings	2.0		(0.5	)	—
Other differences	0.6		—		0.2
Effective income tax expense (benefit) rate	34.3	%	(47.8	)%	2.3	%

Deferred Tax Assets and Liabilities

The components of deferred income taxes as of December 31, 2016 and 2015, are as follows (in millions):



	2016			2015
Deferred tax assets:
NOL and credit carryforwards	$	2,728		$	2,842
Taxes related to risk management activities and derivatives	38			53
Reorganization items and impairments	222			212
Deferred tax assets before valuation allowance	2,988			3,107
Valuation allowance	(1,581		)	(1,637		)
Total deferred tax assets	1,407			1,470
Deferred tax liabilities:
Property, plant and equipment	(1,266		)	(1,377		)
Other differences	(93		)	(3		)
Total deferred tax liabilities	(1,359		)	(1,380		)
Net deferred tax asset	48			90
Less: Non-current deferred tax liability	(14		)	—
Deferred income tax asset, non-current	$	62		$	90

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, 2016, 2015 and 2014.

NOL Carryforwards — As of December 31, 2016, our NOL carryforwards consisted primarily of federal NOL carryforwards of approximately $6.7 billion, which expire between 2024 and 2033, and NOL carryforwards in 21 states and the District of Columbia totaling approximately $3.7 billion, which expire between 2017 and 2036, substantially all of which are offset with a full valuation allowance. We also have approximately $647 million in foreign NOLs, which expire between 2025 and 2033, 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.

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, 2016, 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 $56 million for the year ended December 31, 2016, $199 million for the year ended December 31, 2015 and $410 million for the year ended December 31, 2014, 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 an internal restructuring of certain of our international entities by moving certain foreign subsidiaries under a different foreign parent. This restructuring resulted in our ability to further utilize foreign NOLs that were previously unavailable to offset the income tax obligation on future earnings and, thus, resulted in a release of approximately $69 million of valuation allowance against our NOLs. This reorganization did not have a material effect on our financial condition or cash flows.

Unrecognized Tax Benefits

At December 31, 2016, we had unrecognized tax benefits of $59 million. If recognized, $19 million of our unrecognized tax benefits could affect the annual effective tax rate and $40 million, related to deferred tax assets, could be offset against the recorded valuation allowance resulting in no effect to our effective tax rate. We had accrued interest and penalties of $12 million and $12 million for income tax matters at December 31, 2016 and 2015, respectively. We recognize interest and penalties related to unrecognized tax benefits in income tax expense (benefit) on our Consolidated Statements of Operations and recorded nil, $1 million and $(2) million for the years ended December 31, 2016, 2015 and 2014, respectively. We believe that it is reasonably possible that a decrease within the range of nil and $17 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, 2016, 2015 and 2014, is as follows (in millions):



	2016			2015			2014
Balance, beginning of period	$	(58	)	$	(56	)	$	(68	)
Increases related to prior year tax positions	—			—			(4		)
Decreases related to prior year tax positions	1			3			8
Increases related to current year tax positions	(2		)	(5		)	—
Decreases related to settlements	—			—			8
Balance, end of period	$	(59	)	$	(58	)	$	(56	)