6.Income Taxes

Effective Tax Rate

For the three and nine months ended September 30, 2015, we recorded no income tax expense or benefit, resulting in an effective tax rate of 0%. The significant difference between our effective tax rate and federal statutory income tax rate of 35% is due to a full valuation allowance recorded on net deferred tax assets in excess of deferred tax liabilities.

Immaterial Misstatement of Deferred Tax Assets and Liabilities

As discussed in Note 3, the Company has adjusted the Consolidated Balance Sheet as of December 31, 2014 to adjust for an error in the classification of the current deferred tax liabilities and non-current deferred tax assets resulting from the deferred tax liabilities associated with the 2019 Notes and 2020 Notes which were presented as current as of December 31, 2014, and the effects of adjusting the allocation of the stepped-up basis in certain assets relating to the effects of the Combination. The deferred taxes related to the net operating loss carry forwards and valuation allowance were also adjusted to $180 million and $345 million, respectively. The effects of this misstatement on previously issued disclosures are corrected below. There is no effect to the Statement of Operations as a result of this misstatement.

Net Deferred Tax Assets and Liabilities

The components of net deferred tax assets and liabilities at December 31, 2014 are as follows:


	As of
	December 31, 2014
	(in thousands)
Deferred tax assets:
Property and equipment	$	279,955
Goodwill		9,302
Net operating loss carryforwards		180,134
Other		48,372
Total gross deferred tax assets	$	517,763
Less valuation allowance		(344,740)
Net deferred tax assets	$	173,023

Deferred tax liabilities:
Unrealized gains on derivative instruments, net	$	(27,766)
Long-term liabilities		(143,259)
Other		(1,998)
Total gross deferred tax liabilities	$	(173,023)

Net deferred tax assets	$	—

Current deferred tax assets (liabilities)	$	(117,662)
Non-current deferred tax assets (liabilities)		117,662
Net deferred tax assets (liabilities)	$	—

Net Operating Loss

U.S. federal net operating loss carryforwards (“NOLs”) at December 31, 2014 were adjusted to be approximately $515 million, of which $483 million is subject to limitation under Section 382 of the Internal Revenue Code. The Company increased the NOL by $402 million because there is more likelihood the NOL can be utilized. The NOL balance excludes those NOLs that the Company believes the likelihood of utilization to be remote as a result of limitations imposed under Section 382 of the Internal Revenue Code. Certain of the NOLs are scheduled to expire in 2019 and 2020 and the remaining will expire after 2034. Additional analysis of the IRC 382 limitations will be done upon finalizing the purchase price allocation related to the Combination. This could result in a change to the value of the NOLs. In connection with the Company’s bankruptcy filing, the Company filed a motion to preserve the NOLs.

Valuation Allowance

A valuation allowance is established to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized. The Company believes it is more likely than not that the overall deferred tax asset, including the deferred tax asset related to the NOL, will not be realized. At December 31, 2014, the Company recorded a valuation allowance of $345 million, which is the amount of deferred tax assets that exceed deferred tax liabilities, and are more likely than not that will not be realized.

Accounting for Uncertainty in Income Taxes

The Company increased the gross unrecognized tax benefits by $10 million from $9 million at December 31, 2014 to $19 million at September 30, 2015 related to tax positions taken during a prior period. The Company expects $10 million to reverse in the next twelve months. If recognized, none of the uncertain tax positions would impact tax expense.