Income Taxes

The components of CERC’s income tax expense (benefit) were as follows:



	Year Ended December 31,
	2015			2014		2013
	(in millions)
Current income tax expense:
Federal	$	—		$	—	$	5
State	3			10		9
Total current expense	3			10		14
Deferred income tax expense (benefit):
Federal	(488		)	171		350
State	(54		)	7		7
Total deferred expense (benefit)	(542		)	178		357
Total income tax expense (benefit)	$	(539	)	$	188	$	371

A reconciliation of income tax expense (benefit) using the federal statutory income tax rate to the actual income tax expense and resulting effective income tax rate is as follows:



	Year Ended December 31,
	2015			2014			2013
	(in millions)
Income (loss) before income taxes	$	(1,451	)	$	511		$	435
Federal statutory income tax rate	35		%	35		%	35		%
Expected federal income tax expense (benefit)	(508		)	179			152
Increase (decrease) in tax expense resulting from:
State income tax expense, net of federal income tax	(33		)	11			23
Decrease in settled and uncertain income tax positions	—			—			(2		)
Tax effect related to the formation of Enable Midstream Partnership	—			—			198
Other, net	2			(2		)	—
Total	(31		)	9			219
Total income tax expense (benefit)	$	(539	)	$	188		$	371
Effective tax rate	37.1		%	36.8		%	85.3		%

In 2013, CERC recorded a deferred tax expense of $225 million at the formation of Enable related to the book-to-tax basis difference for contributed non-tax deductible goodwill and recognized a tax benefit of $27 million associated with the remeasurement of state deferred taxes at formation. In addition, CERC recognized a tax benefit of $2 million based on the settlement with the Internal Revenue Service (IRS) of outstanding tax claims for the 2002 and 2003 tax years.

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities were as follows:



	December 31,
	2015			2014
	(in millions)
Deferred tax assets:
Benefits and compensation	$	39		$	48
Loss and credit carryforwards	388			326
Asset retirement obligations	59			52
Other	39			28
Valuation allowance	(2		)	(2		)
Total deferred tax assets	523			452
Deferred tax liabilities:
Property, plant, and equipment	929			803
Investment in unconsolidated affiliates	1,277			1,788
Regulatory assets/liabilities, net	—			13
Other	91			99
Total deferred tax liabilities	2,297			2,703
Net deferred tax liabilities	$	1,774		$	2,251

Effective December 31, 2015, all deferred taxes for 2014 and 2015 are classified as noncurrent. See Note 2.

CERC is included in the consolidated income tax returns of CenterPoint Energy. CERC calculates its income tax provision on a separate return basis under a tax sharing agreement with CenterPoint Energy.

Tax Attribute Carryforwards and Valuation Allowance. CERC has $946 million of federal net operating loss carryforwards which expire between 2031 and 2035, $23 million of federal capital loss carryforwards which expire between 2018 and 2019, and $1 million of charitable contribution carryforwards which expire between 2018 and 2020.

CERC has $905 million of state net operating loss carryforwards which expire between 2016 and 2035, $7 million of state tax credits which do not expire, and $244 million of state capital loss carryforwards which expire in 2017. Management has established a valuation allowance of $2 million net of federal tax on certain state net operating losses and the full amount of the state capital loss carryforwards. The valuation allowance was established based upon management’s evaluation that certain state carryforwards may not be fully realized.

Uncertain Income Tax Positions. The following table reconciles the beginning and ending balance of CERC’s unrecognized tax benefits (expenses):



	December 31,
	2015		2014		2013
	(in millions)
Balance, beginning of year	$	—	$	—	$	(20	)
Tax Positions related to prior years:
Reductions	—		—		(2		)
Tax Positions related to current year:
Settlements	—		—		22
Balance, end of year	$	—	$	—	$	—

CERC reported no uncertain tax liability as of December 31, 2015 and expects no significant change to the uncertain tax liability over the next twelve months ending December 31, 2016.

CERC recognizes interest and penalties as a component of income tax expense. CERC recognized $4 million of income tax expense related to interest on tax positions during 2013.

Tax Audits and Settlements. CenterPoint Energy’s tax years through 2013 have been audited and settled with the IRS. For 2014 and 2015, CenterPoint Energy is a participant in the IRS’s Compliance Assurance Process. CenterPoint Energy has considered the effects of these examinations in its accrual for settled issues and liability for uncertain income tax positions (if any) as of December 31, 2015.