Income Taxes

We provide for income taxes on temporary differences resulting from the use of alternative methods of income and expense recognition for financial and tax reporting purposes. The differences result primarily from the use of accelerated tax depreciation methods for certain properties versus the straight-line depreciation method for financial reporting purposes, differences in capitalization thresholds for tax reporting purposes versus financial reporting purposes, differences in recognition of purchased natural gas costs and certain accruals which are not currently deductible for income tax purposes. We utilize the asset and liability method for accounting for income taxes, which requires that deferred income tax assets and liabilities be computed using tax rates that will be in effect when the book and tax temporary differences reverse. Changes in tax rates applied to accumulated deferred income taxes are not immediately recognized in operating results because of ratemaking treatment. A regulatory liability has been established to recognize the regulatory obligation to refund these excess deferred taxes through customer rates. The net deferred income tax liability is presented as non-current in deferred income taxes on the accompanying Consolidated Balance Sheets. The temporary differences which gave rise to the net accumulated deferred income tax liability for the periods are as follows:



($000)	2016		2015

Deferred Tax Liabilities
Deferred natural gas cost	(256	)	—
Prepaid expenses	(392	)	(452	)
Accelerated depreciation	(38,862	)	(38,108	)
Prepaid pension	—		(805	)
Regulatory assets - asset retirement obligations	(981	)	(876	)
Regulatory assets - loss on extinguishment of debt	(1,021	)	(1,107	)
Regulatory assets - unrecognized accrued pension	(4,110	)	(2,718	)
Regulatory liabilities	(837	)	(1,268	)
Other	(1,084	)	(1,119	)

Total deferred tax liabilities	(47,543	)	(46,453	)

Deferred Tax Assets
Bad debt reserve	114		98
Accrued pension	516		—
Accrued employee benefits	875		1,131
Asset retirement obligations	1,425		1,378
Investment tax credits	—		7
Regulatory liabilities	1,084		1,540
Section 263(a) capitalized costs	32		64
Other	92		105

Total deferred tax assets	4,138		4,323

Net accumulated deferred income tax liability	(43,405	)	(42,130	)

The components of the income tax provision are comprised of the following for the years ended June 30:



($000)	2016	2015	2014

Current
Federal	1,817	1,950	4,532
State	366	493	842
Total	2,183	2,443	5,374
Deferred	1,194	1,449	(515	)
Income tax expense	3,377	3,892	4,859

Reconciliation of the statutory federal income tax rate to the effective income tax rate is shown in the table below:



(%)	2016		2015		2014

Statutory federal income tax rate	34.0		34.0		34.0
State income taxes, net of federal benefit	4.0		4.0		4.0
Amortization of investment tax credits	(0.1	)	(0.1	)	(0.1	)
Other differences, net	—		(0.4	)	(0.9	)
Effective income tax rate	37.9		37.5		37.0

We recognize the income tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The liability for unrecognized tax benefits expected to be recognized within the next twelve months has partially offset our prepaid income taxes and been presented in prepayments on the Consolidated Balance Sheets. The liability for unrecognized tax benefits not expected to be recognized within the next twelve months has been presented in other long-term liabilities on the Consolidated Balance Sheets. Interest and penalties on tax uncertainties are classified in income tax expense in the Consolidated Statements of Income.

As of June 30, 2016 and 2015, we did not have any unrecognized tax positions, which, if recognized, would impact the effective tax rate.

The following is a reconciliation of our unrecognized tax benefits:



($000)	2016		2015

Balance, beginning of year	5		64
Gross decreases - tax positions in prior period	(5	)	(59	)
Balance, end of year	—		5

We file income tax returns in federal and Kentucky jurisdictions. Tax years previous to June 30, 2013 and June 30, 2012 are no longer subject to examination for federal and Kentucky income taxes, respectively.