Chesapeake Energy 2013 Annual Report Download - page 109

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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stock option or restricted stock value at the time of grant (windfalls). Although these additional tax benefits or windfalls
are reflected in NOL carryforwards in the tax return, the additional tax benefit associated with the windfalls is not
recognized until the deduction reduces taxes payable pursuant to accounting for stock compensation under U.S. GAAP.
Accordingly, since the tax benefit does not reduce Chesapeake's current taxes payable due to NOL carryforwards,
these windfall tax benefits are not reflected in Chesapeake's NOLs in deferred tax assets. Windfalls included in NOL
carryforwards but not reflected in deferred tax assets as of December 31, 2013 totaled $24 million. Any shortfalls
resulting from tax deductions that were less than the previously recorded benefits were recorded as reductions to
additional paid-in capital.
At December 31, 2013, Chesapeake had federal income tax NOL carryforwards of approximately $592 million
and state NOL carryforwards of approximately $7.0 billion (deferred tax assets related to these state NOL carryforwards
were $328 million), which excludes the NOL carryforwards related to unrecognized tax benefits and stock compensation
windfalls that have not been recognized under U.S. GAAP. Additionally, we had $51 million of alternative minimum tax
(AMT) NOL carryforwards, net of unrecognized tax benefits, available as a deduction against future AMT income and
$599 million of AMT NOL carrybacks to be used against prior year AMT income. The NOL carryforwards expire from
2025 through 2033. The value of these carryforwards depends on the ability of Chesapeake to generate taxable income.
As of December 31, 2013 and 2012, we had deferred tax assets of $1.621 billion and $1.726 billion, respectively, upon
which we had a valuation allowance of $148 million and $160 million, respectively, for certain state NOL carryforwards
that we have concluded are not more likely than not to be utilized prior to expiration. The net decrease in the valuation
allowance of $12 million is reflected as a reduction to the 2013 income tax provision and is due to changes in judgment
regarding the future realizability of our state NOL carryforwards.
The ability of Chesapeake to utilize NOL carryforwards to reduce future federal taxable income and federal income
tax is subject to various limitations under the Internal Revenue Code of 1986, as amended (the Code). The utilization
of such carryforwards may be limited upon the occurrence of certain ownership changes, including the issuance or
exercise of rights to acquire stock, the purchase or sale of stock by 5% stockholders, as defined in the Treasury
regulations, and the offering of stock by us during any three-year period resulting in an aggregate change of more than
50% in the beneficial ownership of Chesapeake.
In the event of an ownership change (as defined for income tax purposes), Section 382 of the Code imposes an
annual limitation on the amount of a corporation's taxable income that can be offset by these carryforwards. The
limitation is generally equal to the product of (i) the fair market value of the equity of the corporation multiplied by (ii)
a percentage approximately equivalent to the yield on long-term tax exempt bonds during the month in which an
ownership change occurs. In addition, the limitation is increased if there are recognized built-in gains during any post-
change year, but only to the extent of any net unrealized built-in gains (as defined in the Code) inherent in the assets
at the time of the ownership change. Certain NOLs acquired through various acquisitions are also subject to limitations.
The following table summarizes our federal and AMT NOLs as of December 31, 2013 and any related limitations:
Total Total Limitation Annual Limitation
($ in millions)
Federal net operating loss ....................................................................... $ 592 $ 49 $ 15
AMT net operating loss ............................................................................ $ 650 $ 35 $ 15
As of December 31, 2013, we do not believe that an ownership change has occurred. Future equity transactions
by Chesapeake or by 5% stockholders (including relatively small transactions and transactions beyond our control)
could cause an ownership change and therefore a limitation on the annual utilization of NOLs.
Accounting guidance for recognizing and measuring uncertain tax positions prescribes a threshold condition that
a tax position must meet for any of the benefit of the uncertain tax position to be recognized in the financial statements.
Guidance is also provided regarding de-recognition, classification and disclosure of these uncertain tax positions. As
of December 31, 2013 and 2012, the amount of unrecognized tax benefits related to NOL carryforwards and state tax
liabilities associated with uncertain tax positions was $644 million and $599 million, respectively. Of these amounts,
$4 million and $1 million, respectively, are related to state tax liabilities while the remainder is related to NOL
carryforwards. If these unrecognized tax benefits are disallowed and our NOL carryforwards are reduced, the reduction
will be offset by additional tax basis that will generate future deductions. The uncertain tax positions identified would
not have a material effect on the effective tax rate. No material changes to the current uncertain tax positions are