INCOME TAXES

We file a consolidated federal income tax return. Income tax expense allocated to our subsidiaries is based upon their respective taxable incomes and tax credits. State income tax returns are filed on a separate company basis in most states where we have operations and/or are required to file.

The IRS performed its examination of Chesapeake's consolidated federal income tax return for 2009 and FPU's consolidated federal income tax return for 2008 and the period from January 1, 2009 to October 28, 2009 (the pre-merger period in 2009, during which FPU was required to file a separate federal income tax return). Both of the IRS examinations were completed in 2012 without any material findings.

The State of Florida performed its examination of Chesapeake’s state income tax returns for 2008, 2009 and 2010 and completed its examination in 2012 without any material findings.

The State of Texas is currently performing its examination of Chesapeake’s amended state tax return for 2007. We amended the 2007 Texas state tax return due to a change in the methodology used to calculate the gross receipts used to determine the Texas apportionment. This new methodology was used in Chesapeake’s Texas tax returns for all years after 2006. In 2012, we recorded a total liability of $300,000 associated with the unrecognized tax benefit related to this change in methodology given the unknown outcome of this examination. We recorded this liability associated with the unrecognized tax benefit as an income tax payable, which reduced the income tax receivable in the accompanying balance sheets at December 31, 2013 and 2012.

We generated net operating losses of $2.0 million in 2011 for federal income tax purposes, primarily from increased book-to-tax timing differences authorized by The Tax Relief Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which allowed bonus depreciation for certain assets. The federal net operating losses from 2011 were fully utilized in our 2012 federal income tax return. None of the federal net operating losses from 2011 remained at December 31, 2013. We also had state net operating losses of $25.0 million in various states as of December 31, 2013, almost all of which will expire in 2030. We have recorded a deferred tax asset of $1.4 million and $1.6 million related to the net operating loss carry-forwards at December 31, 2013 and 2012, respectively. We have not recorded a valuation allowance to reduce the future benefit of the tax net operating losses because we believe they will be fully utilized.

The following tables provide: (a) the components of income tax expense in 2013, 2012, and 2011; (b) the reconciliation between the statutory federal income tax rate and the effective income tax rate for 2013, 2012, and 2011; and (c) the components of accumulated deferred income tax assets and liabilities at December 31, 2013 and 2012.



	For the Year Ended December 31,
	2013			2012			2011
(in thousands)
Current Income Tax Expense
Federal	$	4,882		$	3,483		$	—
State	2,382			1,990			742
Investment tax credit adjustments, net	(39		)	(58		)	(73		)
Total current income tax expense	7,225			5,415			669
Deferred Income Tax Expense ⁽¹⁾
Property, plant and equipment	16,758			13,688			16,670
Deferred gas costs	(209		)	515			591
Pensions and other employee benefits	(335		)	553			786
FPU merger related premium cost and deferred gain	(686		)	(509		)	—
Net operating loss carryforwards	62			740			(1,000		)
Other	(730		)	(1,106		)	273
Total deferred income tax expense	14,860			13,881			17,320
Total Income Tax Expense	$	22,085		$	19,296		$	17,989



Reconciliation of Effective Income Tax Rates
Continuing Operations
Federal income tax expense ⁽²⁾	$	19,205		$	16,745		$	16,146
State income taxes, net of federal benefit	3,105			2,571			2,216
ESOP dividend deduction	(256		)	(235		)	(236		)
Other	31			215			(137		)
Total Income Tax Expense	$	22,085		$	19,296		$	17,989
Effective Income Tax Rate	40.25		%	40.07		%	39.44		%


⁽¹⁾	Includes $2.1 million, $1.9 million, and $2.3 million of deferred state income taxes for the years 2013, 2012 and 2011, respectively.


⁽²⁾	Federal income taxes were recorded at 35% for each year represented.



	As of December 31,
	2013		2012
(in thousands)
Deferred Income Taxes
Deferred income tax liabilities:
Property, plant and equipment	$	134,414	$	118,212
Acquisition adjustment	16,790		17,440
Loss on reacquired debt	573		572
Deferred gas costs	607		816
Other	2,850		2,784
Total deferred income tax liabilities	155,234		139,824
Deferred income tax assets:
Pension and other employee benefits	5,390		7,382
Environmental costs	2,083		1,917
Net operating loss carryforwards	1,444		1,587
Self insurance	403		484
Storm reserve liability	1,109		1,058
Other	3,904		2,982
Total deferred income tax assets	14,333		15,410
Deferred Income Taxes Per Consolidated Balance Sheet	$	140,901	$	124,414