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. Our returns for tax years after 2011 are subject to examination.

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 performed 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. In 2014, we reduced this liability to $100,000 based on the result of the examination by the State of Texas. 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, 2014 and 2013.

We did not have net operating losses for federal income tax purposes as of December 31, 2014 and 2013. We had state net operating losses of $29.1 million in various states as of December 31, 2014, almost all of which will expire in 2030. We have recorded a deferred tax asset of $1.2 million and $1.4 million related to net operating loss carry-forwards at December 31, 2014 and 2013, 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 2014, 2013, and 2012; (b) the reconciliation between the statutory federal income tax rate and the effective income tax rate for 2014, 2013, and 2012; and (c) the components of accumulated deferred income tax assets and liabilities at December 31, 2014 and 2013.



	For the Year Ended December 31,
	2014			2013			2012
(in thousands)
Current Income Tax Expense
Federal	$	434		$	4,882		$	3,483
State	1,311			2,382			1,990
Investment tax credit adjustments, net	(35		)	(39		)	(58		)
Total current income tax expense	1,710			7,225			5,415
Deferred Income Tax Expense ⁽¹⁾
Property, plant and equipment	20,382			16,758			13,688
Deferred gas costs	1,614			(209		)	515
Pensions and other employee benefits	537			(335		)	553
FPU merger related premium cost and deferred gain	(802		)	(686		)	(509		)
Net operating loss carryforwards	(112		)	62			740
Other	616			(730		)	(1,106		)
Total deferred income tax expense	22,235			14,860			13,881
Total Income Tax Expense	$	23,945		$	22,085		$	19,296


⁽¹⁾	Includes $2.6 million, $2.1 million, and $1.9 million of deferred state income taxes for the years 2014, 2013 and 2012, respectively.



	For the Year Ended December 31,
	2014			2013			2012
(in thousands)
Reconciliation of Effective Income Tax Rates
Continuing Operations
Federal income tax expense ⁽¹⁾	$	21,121		$	19,205		$	16,745
State income taxes, net of federal benefit	2,946			3,105			2,571
ESOP dividend deduction	(267		)	(256		)	(235		)
Other	145			31			215
Total Income Tax Expense	$	23,945		$	22,085		$	19,296
Effective Income Tax Rate	39.88		%	40.25		%	40.07		%


⁽¹⁾	Federal income taxes were recorded at 35% for each year represented.



	As of December 31,
	2014		2013
(in thousands)
Deferred Income Taxes
Deferred income tax liabilities:
Property, plant and equipment	$	152,877	$	134,414
Acquisition adjustment	16,140		16,790
Loss on reacquired debt	529		573
Deferred gas costs	2,222		607
Other	4,507		2,850
Total deferred income tax liabilities	176,275		155,234
Deferred income tax assets:
Pension and other employee benefits	6,532		5,390
Environmental costs	2,313		2,083
Net operating loss carryforwards	1,186		1,444
Self insurance	275		403
Storm reserve liability	1,150		1,109
Other	3,755		3,904
Total deferred income tax assets	15,211		14,333
Deferred Income Taxes Per Consolidated Balance Sheets	$	161,064	$	140,901