Notes to Consolidated Condensed Financial Statements

September 30, 2016

NOTE 1    THE SPIN-OFF AND BASIS OF PRESENTATION

The Separation and Spin-off

We are an independent oil and natural gas exploration and production company operating properties exclusively within the State of California. We were incorporated in Delaware as a wholly owned subsidiary of Occidental Petroleum Corporation (Occidental) on April 23, 2014, and remained a wholly owned subsidiary of Occidental until November 30, 2014. Prior to November 30, 2014, all material existing assets, operations and liabilities of Occidental's California business were consolidated under us. On November 30, 2014, Occidental distributed shares of our common stock on a pro rata basis to Occidental stockholders and we became an independent, publicly traded company (the Spin-off). Occidental initially retained approximately 18.5% of our outstanding shares of common stock, which it distributed to Occidental stockholders on March 24, 2016.

Except when the context otherwise requires or where otherwise indicated, all references to ‘‘CRC,’’ the ‘‘Company,’’ ‘‘we,’’ ‘‘us’’ and ‘‘our’’ refer to California Resources Corporation and its subsidiaries.

Basis of Presentation

In the opinion of our management, the accompanying financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to fairly present our financial position as of September 30, 2016 and the statements of operations, comprehensive income, and cash flows for the three and nine months ended September 30, 2016 and 2015 , as applicable. We have eliminated all of our significant intercompany transactions and accounts.

During the third quarter of 2016, we reclassified prior period gains on debt transactions, net of costs, from other (income) expenses, net, to net gain on early extinguishment of debt. Additionally, we reclassified the current portion of deferred taxes of $59 million as of December 31, 2015 from other current assets to other assets, in accordance with the retrospective application of recently issued accounting rules.

We have prepared this report pursuant to the rules and regulations of the United States Securities and Exchange Commission applicable to interim financial information, which permit omission of certain disclosures to the extent they have not changed materially since the latest annual financial statements. We believe our disclosures are adequate to make the information not misleading. This Form 10-Q should be read in conjunction with the consolidated and combined financial statements and the notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2015 .

In August 2016, the Financial Accounting Standards Board (FASB) issued rules that modify how certain cash receipts and cash payments are presented and classified in the statement of cash flows. These rules are effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, with earlier adoption permitted. We are currently evaluating the impact of these rules on our financial statements.

In June 2016, the FASB issued rules that change how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value. These rules are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact of these rules on our financial statements.

In April 2016, the FASB issued rules requiring that entities recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, in March 2016, the FASB issued rules intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations and whether an entity reports revenue on a gross or net basis. These rules have the same effective date, generally in the first interim period of fiscal year 2018, as the related revenue standard issued in 2014. We are currently evaluating the impact of these rules on our financial statements.

In March 2016, the FASB simplified several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. These rules are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted. We early adopted these rules in the second quarter of 2016 with no material changes reflected in our financial statements.

In February 2016, the FASB issued rules requiring lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months and to include qualitative and quantitative disclosures with respect to the amount, timing, and uncertainty of cash flows arising from leases. These rules will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with earlier application permitted. We are currently evaluating the impact of these rules on our financial statements.

In January 2016, the FASB issued rules that modify how entities measure equity investments and present changes in the fair value of financial liabilities. Unless the investments qualify for a practicality exception, the new rules require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under the equity method of accounting or those that result in consolidation of the investee). Entities will have to record changes in instrument-specific credit risk for financial liabilities measured under the fair value option in other comprehensive income. These new rules become effective for fiscal years beginning after December 15, 2017 with no early adoption permitted. We are currently evaluating the impact of these rules, but we do not expect them to have a significant impact on our financial statements.

Other current assets at September 30, 2016 and December 31, 2015 included amounts due from joint interest partners, net, of approximately $36 million and $42 million and derivative assets from commodities contracts of $25 million and $88 million, respectively.

Other assets at December 31, 2015 included deferred tax assets of approximately $258 million (none at September 30, 2016 ).

Accrued liabilities reflected greenhouse gas obligations of $86 million and $6 million at September 30, 2016 and December 31, 2015 , respectively; accrued interest of $67 million and $39 million at September 30, 2016 and December 31, 2015 and derivative liabilities from commodities contracts of $64 million at September 30, 2016 (none at December 31, 2015 ).

Other long-term liabilities included asset retirement obligations of $332 million and $343 million at September 30, 2016 and December 31, 2015 , respectively.

Other revenue largely comprised sales of the portion of electricity generated by our power plant that is sold to third parties, and the related costs are included in other expenses. In the nine months ended September 30, 2016 , other expenses also included a $31 million of gain from the sale of non-core assets.

Fair Value of Financial Instruments

The carrying amounts of cash and other on-balance sheet financial instruments, other than debt, approximate fair value.

Supplemental Cash Flow Information

We did not make United States federal and state income tax payments during the nine-month periods ended September 30, 2016 and 2015 . Interest paid totaled approximately $244 million and $248 million for the nine months ended September 30, 2016 and 2015 , respectively.

Reverse Stock Split

Our stockholders approved a reverse stock split at the Company's annual stockholders’ meeting on May 4, 2016. Following this approval, our board of directors authorized a reverse split using a ratio of one share of common stock for every ten shares then outstanding. The split occurred on May 31, 2016 with trading on a post-split basis commencing the following day. Share and per share amounts included in this report have been restated to reflect this reverse stock split.

The split proportionally decreased the number of authorized shares of common stock from 2.0 billion shares to 200 million shares and preferred stock from 200 million to 20 million shares. The compensation committee of our board approved proportionate adjustments to the number of shares outstanding and available for issuance under our stock-based compensation plans and to the exercise price, grant price or purchase price relating to any award under the plans, using the same reverse split ratio, pursuant to existing authority granted to the committee under the plans.

At September 30, 2016 , deferred gain and issuance costs were $410 million net, consisting of $507 million of deferred gains offset by $97 million of deferred issuance costs. The December 31, 2015 deferred gain and issuance costs were $491 million net, consisting of $560 million of deferred gains offset by $69 million of deferred issuance costs.

Credit Facilities

Our first lien, first out credit facility (2014 First Out Credit Facilities) comprises (i) a $671 million senior term loan facility (the Term Loan Facility) and (ii) a $1.4 billion senior revolving loan facility (the Revolving Credit Facility). We are permitted to increase the size of the Revolving Credit Facility by up to $250 million if we obtain additional commitments from new or existing lenders. The facility matures at the earlier of November 2019 and the 182nd day prior to the maturity of our 5% senior unsecured notes due January 15, 2020 (the 2020 notes), to the extent more than $100 million of such notes remain outstanding at such date. As of September 30, 2016 , we had $193 million in aggregate principal amount of outstanding 2020 notes. The Revolving Credit Facility includes a sub-limit of $400 million for the issuance of letters of credit.

As of February 2016, we amended the 2014 First Out Credit Facilities to change certain of our financial and other covenants. We again amended this agreement in April 2016 to facilitate certain types of deleveraging transactions and in August 2016 to further change certain of our covenants, grant additional collateral to our lenders and permit the incurrence of debt under a new first-lien, second-out term loan credit facility (2016 Second Out Credit Agreement). Borrowings under the 2014 First Out Credit Facility are subject to a borrowing base that was reaffirmed at $2.3 billion as of November 2016. We have granted the lenders under the 2014 First Out Credit Facilities a first-priority lien in a substantial majority of our assets, including our Elk Hills power plant and midstream assets. We also granted a lien in the same assets to the lenders under our 2016 Second Out Credit Agreement and the holders of our senior second lien secured notes due in 2022.

As of September 30, 2016 and December 31, 2015, we had outstanding borrowings under our Revolving Credit Facility of $772 million and $739 million, respectively, and outstanding borrowings of $671 million and $1 billion under the Term Loan Facility, respectively. We made scheduled quarterly payments on the Term Loan Facility during the quarters ended March 31, 2016, June 30, 2016 and September 30, 2016, an $11 million prepayment from the proceeds of non-core asset sales in the quarter ended June 30, 2016 and a $250 million prepayment from proceeds of the 2016 Second Out Credit Agreement.

 

Borrowings under the 2014 First Out Credit Facilities bear interest, at our election, at either a LIBOR rate or an alternate base rate (ABR) (equal to the greatest of (i) the administrative agent’s prime rate, (ii) the one-month LIBOR rate plus 1.00% and (iii) the federal funds effective rate plus 0.50%), in each case plus an applicable margin. This applicable margin is based, while our total leverage ratio exceeds 3.00:1.00, on our borrowing base utilization and will vary from (a) in the case of LIBOR loans, 2.50% to 3.50% and (b) in the case of ABR loans, 1.50% to 2.50%. The unused portion of the Revolving Credit Facility commitments, as limited by the borrowing base, is subject to a commitment fee equal to 0.50% per annum. We also pay customary fees and expenses under the 2014 First Out Credit Facilities. Interest on ABR loans is payable quarterly in arrears.  Interest on LIBOR loans is payable at the end of each LIBOR period, but not less than quarterly.

Our financial performance covenants under the 2014 First Out Credit Facilities require that (i) the ratio of our first priority, first out secured debt to trailing four quarter EBITDAX (the First-Lien First-Out Leverage Ratio) not exceed 3.50 to 1.00 at any quarter end through the quarter ending June 30, 2017 and 3.25 to 1.00 for the quarters ending September 30 and December 31, 2017 and (ii) the total interest expense coverage ratio at each quarter end not be less than 1.20 to 1.00 at any quarter end through the quarter ending December 31, 2017. Starting with the end of the first quarter of 2018, the First-Lien First-Out Leverage Ratio may not exceed 2.25 to 1.00 and the total interest expense coverage ratio may not be less than 2.00 to 1.00. The covenants also include a new first-lien asset coverage ratio of 1.20 to 1.00 as of any June 30 and December 31 beginning December 31, 2016, which is consistent with a covenant included in the 2016 Second Out Credit Agreement described below.

Our 2014 First Out Credit Facilities require us to apply 100% of the proceeds from asset sales to repay loans outstanding under the 2014 First Out Credit Facilities, except that we are permitted to use up to 40% (or, if our leverage ratio is less than 4:00 to 1:00, 60%) of proceeds from non-borrowing base asset monetizations to repurchase our notes to the extent available at a significant minimum discount to par, as specified in the 2014 First Out Credit Facilities. The 2014 First Out Credit Facilities also permit us to incur up to an additional $50 million of non-credit-facility indebtedness, which may be secured by non-borrowing base assets, subject to compliance with our financial covenants and indentures; the proceeds of which must be applied to repay the Term Loan Facility. We must apply cash on hand in excess of $150 million daily to repay amounts outstanding under our Revolving Credit Facility. Further, we are restricted from (i) paying dividends or making other distributions to common stockholders and (ii) making capital investments in excess of $125 million during 2016 or in excess of $200 million during 2017 with a carryover of unused 2016 amounts. The amount permitted to be invested can be increased dollar-for-dollar at any time after June 30, 2017 by the lesser of (a) $50 million and (b) the positive difference between (i) a measure of our liquidity as of June 30, 2017 and (ii) the sum of $500 million and net cash proceeds obtained from non-borrowing base asset dispositions.

Our borrowing base under the 2014 First Out Credit Facilities is redetermined each May 1 and November 1. The borrowing base will be based upon a number of factors, including commodity prices and reserves. Increases in our borrowing base require approval of at least 80% of our revolving lenders, as measured by exposure, while decreases or affirmations require a two-thirds approval. We and the lenders (requiring a request from the lenders holding two-thirds of the revolving commitments and outstanding loans) each may request a special redetermination once in any period between three consecutive scheduled redeterminations. We will be permitted to have collateral released when both (i) our credit ratings are at least Baa3 from Moody's and BBB- from S&P, in each case with a stable or better outlook, and (ii) certain permitted liens securing other debt are released.

Substantially all of the restrictions imposed by the February 2016 amendment to the 2014 First Out Credit Facilities, other than the requirement for semiannual borrowing base redeterminations, may terminate in the future if we are able to comply with the financial covenants as they existed prior to giving effect to the amendment.

The net borrowings under the 2016 Second Out Credit Agreement were used to (i) prepay $250 million of the Term Loan Facility and (ii) reduce our Revolving Credit Facility by $740 million. The proceeds received were net of a $10 million original issue discount. The term loans bear interest at a floating rate per annum equal to 10.375% plus LIBOR, subject to a 1.00% LIBOR floor, determined for the applicable interest period (or ABR rates in certain circumstances). Interest on ABR loans is payable quarterly in arrears.  Interest on LIBOR loans is payable at the end of each LIBOR period, but not less than quarterly.

The 2016 Second Out Credit Agreement is secured by a security interest in the same collateral used to secure the 2014 First Out Credit Facilities, but, under intercreditor arrangements with our 2014 First Out Credit Facilities lenders, are second in collateral recovery behind such lenders. Prepayment of the 2016 Second Out Credit Agreement is subject to a make-whole premium prior to the third anniversary of closing and a premium to par equal to 50% of coupon between the third anniversary and the fourth anniversary. Following the fourth anniversary, we may redeem at par. The 2016 Second Out Credit Agreement matures on December 31, 2021, but if the aggregate principal amount outstanding of either our 2020 Notes or our 5½% senior unsecured notes due September 15, 2021 (the 2021 Notes) exceeds $100 million 91 days prior to their respective maturity dates, the maturity date of the term loans will accelerate to such prior 91st day. As of September 30, 2016, we had $193 million and $149 million in aggregate principal amount of outstanding 2020 notes and 2021 notes, respectively.

The 2016 Second Out Credit Agreement provides for customary covenants and events of default consistent with, or generally less restrictive than, the covenants in our 2014 First Out Credit Facilities, including limitations on additional indebtedness, liens, asset dispositions, investments, restricted payments and other negative covenants, in each case subject to certain limitations and exceptions. Additionally, the 2016 Second Out Credit Agreement requires us to maintain a first-lien asset coverage ratio of 1.20 to 1.00 as of any June 30 and December 31 beginning December 31, 2016, consistent with the 2014 First Out Credit Facilities.

All obligations under the 2014 First Out Credit Facilities and the 2016 Second Out Credit Agreement (Credit Facilities) are guaranteed jointly and severally by all of our material wholly owned subsidiaries. The assets and liabilities of subsidiaries not guaranteeing the debt are de minimis.

At September 30, 2016, we were in compliance with the financial and other covenants under our Credit Facilities.

Senior Notes

In October 2014, we issued $5.00 billion in aggregate principal amount of our senior unsecured notes, including $1.00 billion of 2020 notes, $1.75 billion of 2021 notes and $2.25 billion of 6% senior unsecured notes due November 15, 2024 (the 2024 notes and together with the 2020 notes and the 2021 notes, the unsecured notes). The unsecured notes were issued at par and are fully and unconditionally guaranteed on a senior unsecured basis by all of our material subsidiaries. We used the net proceeds from the issuance of the unsecured notes to make a $4.95 billion cash distribution to Occidental in October 2014.

In December 2015, we exchanged $534 million, $921 million and $1,358 million in aggregate principal amount of the 2020 notes, the 2021 notes, and the 2024 notes, respectively, for $2.25 billion in aggregate principal amount of newly issued 8% senior secured second lien notes due December 15, 2022 (the 2022 notes). We recorded a deferred gain of approximately $560 million on the debt exchange, which will be amortized using the effective interest rate method over the term of the 2022 notes. Additionally, we incurred approximately $28 million in third-party costs which were fully expensed in 2015. The second 2022 notes are secured on a second-priority basis, subject to the terms of an intercreditor agreement and collateral trust agreement, by a lien on the same collateral used to secure our obligations under our Credit Facilities.

During the three months ended March 31, 2016, we repurchased over $100 million in aggregate principal amount of the senior unsecured notes for under $13 million in cash. During the three months ended June 30, 2016, we entered into privately negotiated exchange agreements with a holder of our 6% Senior Notes due 2024 and our 5 ½% Senior Notes due 2021 to exchange a total of approximately 2.1 million shares of our common stock on a post-split basis for notes in the aggregate principal amount of $80 million.

In August 2016 we repurchased $197 million, $605 million and $613 million in aggregate principal amount of our 2020 notes, 2021 notes and 2024 notes, respectively, for $750 million, resulting in a $660 million pre-tax gain, net of related expenses. Additionally, we wrote off approximately $12 million of deferred costs related to the repurchased notes.

In October 2016, we entered into privately negotiated exchange agreements with certain holders of our 6% Senior Notes due 2024 and 5 1/2% Senior Notes due 2021 to exchange a total of 1.3 million shares of our common stock for notes in the aggregate principal amount of $23 million.

We will pay interest semiannually in cash in arrears on January 15 and July 15 for the 2020 notes, on March 15 and September 15 for the 2021 notes, on June 15 and December 15 for the 2022 notes and on May 15 and November 15 for the 2024 notes.

The indentures governing the senior unsecured notes and the second lien secured notes each include covenants that, among other things, limit our and our subsidiaries’ ability to incur debt secured by liens. The indentures also restrict our ability to merge or consolidate with, or transfer all or substantially all of our assets to, another entity. These covenants are subject to a number of important qualifications and limitations that are set forth in the indenture. The covenants are not, however, directly linked to measures of our financial performance. In addition, if we experience a “change of control triggering event” (as defined in the indentures) with respect to a series of notes, we will be required, unless we have exercised our right to redeem the notes of such series, to offer to purchase the notes of such series at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest. The indenture governing our second lien secured notes also restricts our ability to sell certain assets and to release collateral from liens securing the second lien secured notes, unless the collateral is released in compliance with our Credit Facilities.

Other

We estimate the fair value of fixed-rate debt, which is classified as Level 1, based on prices from known market transactions for our instruments. The estimated fair value of our debt at September 30, 2016 and December 31, 2015, including the fair value of the variable rate portion, was approximately $4.3 billion and $3.6 billion, respectively, compared to a carrying value of approximately $5.2 billion and $6.1 billion . A one-eighth percent change in the variable interest rates on the borrowings under our Credit Facilities on September 30, 2016 , would result in a $3 million change in annual interest expense.

As of September 30, 2016 and December 31, 2015, we had letters of credit in the aggregate amount of approximately $127 million and $70 million (including $122 million and $49 million under the Revolving Credit Facility), respectively, which were issued to support ordinary course marketing, insurance, regulatory and other matters.

NOTE 6    LAWSUITS, CLAIMS, COMMITMENTS AND CONTINGENCIES

We, or certain of our subsidiaries, are involved, in the normal course of business, in lawsuits, environmental and other claims and other contingencies that seek, among other things, compensation for alleged personal injury, breach of contract, property damage or other losses, punitive damages, civil penalties, or injunctive or declaratory relief.

 

On April 21, 2016, a purported class action was filed against us in the United States District Court for the Southern District of New York on behalf of all beneficial owners of our unsecured notes from November 12, 2015 to the present.  The complaint alleges that our December 2015 debt exchange excluded non-qualified institutional holders in violation of the Trust Indenture Act of 1939 and related law and, thereby, impaired their rights to receive principal and interest payments.  The purported class action seeks declaratory relief that the debt exchange and the liens securing the new notes are null and void and that the debt exchange resulted in a default.  The plaintiff also seeks monetary damages and attorneys’ fees.  The Company plans to vigorously defend against the claims made by the plaintiff.

We accrue reserves for currently outstanding lawsuits, claims and proceedings when it is probable that a liability has been incurred and the liability can be reasonably estimated. Reserves balances at September 30, 2016 and December 31, 2015 were not material to our balance sheets as of such dates. We also evaluate the amount of reasonably possible losses that we could incur as a result of these matters. We believe that reasonably possible losses that we could incur in excess of reserves accrued on our balance sheet would not be material to our consolidated financial position or results of operations.

We, our subsidiaries, or both, have indemnified various parties against specific liabilities those parties might incur in the future in connection with the Spin-off, purchases and other transactions that they have entered into with us. These indemnities include indemnities made to Occidental against certain tax-related liabilities that may be incurred by Occidental relating to the Spin-off and liabilities related to operation of our business while it was still owned by Occidental. As of September 30, 2016 , we are not aware of material indemnity claims pending or threatened against the Company.

We were contacted by the Internal Revenue Service for examination of our U.S. federal income tax return for the one month ended December 2014. Subsequent taxable years and state returns remain subject to examination.

NOTE 7    DERIVATIVES

General

We use a variety of derivative instruments to protect our cash flows, margins and capital investment program from the cyclical nature of commodity prices and to improve our ability to comply with our credit facility covenants in case of further price deterioration. We will continue to be strategic and opportunistic in implementing our hedging program as market conditions permit.

Derivatives are carried at fair value and on a net basis when a legal right of offset exists with the same counterparty. We apply hedge accounting when transactions meet specified criteria for cash-flow hedge treatment and management elects and documents such treatment. Otherwise, we recognize any fair value gains or losses, over the remaining term of the hedge instrument, in earnings in the current period.

 

As of September 30, 2016 , we did not have any derivatives designated as hedges. Unless otherwise indicated, we use the term "hedge" to describe derivative instruments that are designed to achieve our hedging program goals, even though they are not necessarily accounted for as cash flow or fair value hedges. As part of our hedging program, we entered into a number of derivative transactions that resulted in the following Brent-based crude oil and PG&E City Gate-based gas hedge positions as of September 30, 2016 :

Certain of our 2017 crude oil swaps grant our counterparty a quarterly option to increase volumes by up to 10,000 barrels per day for that quarter at a weighted-average Brent price of $55.46.

Subsequent to September 30, 2016, we acquired additional hedges bringing our total swaps on our 2017 oil production to 20,000 barrels per day with a weighted-average Brent price of $53.98. We also purchased derivative assets that partially reduced our call exposure on our 2017 production to a total of 15,500 barrels per day with a weighted-average Brent ceiling of $54.17. Additionally, we reduced our Q4 2016 natural gas swaps to 3,800 MMBTU per day at a weighted-average price of $3.49 and our 2017 natural gas forward contracts to 4,700 MMBTU per day at a weighted-average price of $3.53.

NOTE 8    EARNINGS PER SHARE

We compute earnings per share (EPS) using the two-class method required for participating securities. Undistributed earnings allocated to participating securities are subtracted from net income in determining net income attributable to common stockholders in any period that we issue dividends. Restricted and performance stock awards are considered participating securities because holders of such shares have non-forfeitable dividend rights in the event of our declaration of a dividend for common shares.

The denominator of basic EPS is the sum of the weighted-average number of common shares outstanding during the periods presented and vested stock awards that have not yet been issued as common stock; however, it excludes outstanding shares related to unvested stock awards. The denominator of diluted EPS is based on the basic shares outstanding, adjusted for the effect of unvested stock awards and outstanding option awards, to the extent they are dilutive, and participating securities. The effect of the stock options granted in August 2015 and December 2014 was anti-dilutive for the periods presented.

During the nine months ended September 30, 2016, we entered into privately negotiated exchange agreements with a holder of our 6% Senior Notes due 2024 and our 5 ½% Senior Notes due 2021 to exchange a total of approximately 2.1 million shares of our common stock on a post-split basis for notes in the aggregate principal amount of $80 million. In October 2016, we entered into privately negotiated exchange agreements with certain holders of our 6% Senior Notes due 2024 and 5 ½% Senior Notes due 2021 to exchange a total of 1.3 million shares of our common stock for notes in the aggregate principal amount of $23 million.

For the three and nine months ended September 30, 2016 , we issued approximately 53,000 shares and 237,000 shares, respectively, of common stock in connection with our employee stock purchase plan.

The following table presents the calculation of basic and diluted EPS for the three- and nine-month periods ended September 30, 2016 and 2015 :

We contributed $1 million to our defined benefit pension plans during the three months ended September 30, 2016 ; however, no contributions were made during the same period of 2015 . We contributed $7 million and $3 million to our defined benefit pension plans during the nine months ended September 30, 2016 and 2015 , respectively. We expect to satisfy minimum funding requirements with contributions of $1 million to our defined benefit pension plans during the remainder of 2016. The 2016 and 2015 settlements were associated with early retirements.

NOTE 10    INCOME TAXES

For the nine months ended September 30, 2016 , we had an income tax benefit of $78 million reflecting a change in the valuation allowance on our deferred tax assets. While we had pre-tax income of $278 million for the period, we had no income tax expense during the first nine months of 2016 because we expect a tax loss for 2016 for which no tax benefit has been recognized.