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 2012 are subject to examination.

The IRS performed its examination of Chesapeake Utilities' 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 Utilities' 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 Utilities' amended state tax return for 2007. We amended the 2007 Texas state tax return due to a change in the methodology used to calculate gross receipts for determining Texas apportionment. This new methodology was used in Chesapeake Utilities' Texas tax returns for all years after 2006. As a result of this change in methodology and the uncertainty of the examination's outcome, we recorded a liability of $300,000 in 2012 associated with unrecognized tax benefits. As of December 31, 2015 and 2014, the balance of the liability was $50,000 and $100,000, respectively, which was based on the findings of the examination. This unrecognized tax benefit liability was recorded in income taxes payable, which reduced income taxes receivable in the accompanying balance sheets at December 31, 2015 and 2014.

We did not have net operating losses for federal income tax purposes as of December 31, 2015 and 2014. We had state net operating losses of $25.7 million in various states as of December 31, 2015, almost all of which will expire in 2034. We have recorded a deferred tax asset of $884,000 and $1.2 million related to net operating loss carry-forwards at December 31, 2015 and 2014, 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 2015, 2014, and 2013; (b) the reconciliation between the statutory federal income tax rate and the effective income tax rate for 2015, 2014, and 2013; and (c) the components of accumulated deferred income tax assets and liabilities at December 31, 2015 and 2014.



	For the Year Ended December 31,
	2015			2014			2013
(in thousands)
Current Income Tax Expense
Federal	$	4,875		$	434		$	4,882
State	1,533			1,311			2,382
	(23		)	(35		)	(39		)
Total current income tax expense	6,385			1,710			7,225
Deferred Income Tax Expense ⁽¹⁾
Property, plant and equipment	21,205			20,382			16,758
Deferred gas costs	(1,539		)	1,614			(209		)
Pensions and other employee benefits	(84		)	537			(335		)
FPU merger related premium cost and deferred gain	(556		)	(802		)	(686		)
Net operating loss carryforwards	2,078			(112		)	62
Other	(584		)	616			(730		)
Total deferred income tax expense	20,520			22,235			14,860
Total Income Tax Expense	$	26,905		$	23,945		$	22,085


⁽¹⁾	Includes $2.1 million, $2.6 million, and $2.1 million of deferred state income taxes for the years 2015, 2014 and 2013, respectively.



	For the Year Ended December 31,
	2015			2014			2013
(in thousands)
Reconciliation of Effective Income Tax Rates
Continuing Operations
Federal income tax expense ⁽¹⁾	$	23,865		$	21,121		$	19,205
State income taxes, net of federal benefit	3,062			2,946			3,105
ESOP dividend deduction	(263		)	(267		)	(256		)
Other	241			145			31
Total Income Tax Expense	$	26,905		$	23,945		$	22,085
Effective Income Tax Rate	39.54		%	39.88		%	40.25		%


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



	As of December 31,
	2015		2014
(in thousands)
Deferred Income Taxes
Deferred income tax liabilities:
Property, plant and equipment	$	185,448	$	152,877
Acquisition adjustment	15,490		16,140
Loss on reacquired debt	485		529
Deferred gas costs	683		2,222
Other	5,961		4,507
Total deferred income tax liabilities	208,067		176,275
Deferred income tax assets:
Pension and other employee benefits	6,570		6,532
Environmental costs	2,445		2,313
Net operating loss carryforwards	943		1,186
Self insurance	278		275
Storm reserve liability	1,153		1,150
Other	4,078		3,755
Total deferred income tax assets	15,467		15,211
Deferred Income Taxes Per Consolidated Balance Sheets	$	192,600	$	161,064