Note 3 – Income Taxes

Income tax expense differs from the amount computed by applying the statutory rate on book income subject to tax for the following reasons:

	(Thousands of Dollars)
	Years Ended December 31,
	2014			2013			2012
Income Tax at Statutory Rate	$	9,786		$	8,638		$	7,420
Tax Effect of:
Utility Plant Related		(572	)		(527	)		(442	)
State Income Taxes – Net		711			546			420
Employee Benefits		(6	)		(46	)		(23	)
Other		18			10			8
Total Income Tax Expense	$	9,937		$	8,621		$	7,383

Income tax expense is comprised of the following:

	(Thousands of Dollars)
	Years Ended December 31,
	2014			2013			2012
Current:
Federal	$	5,920		$	5,018		$	2,994
State		887			688			430
Deferred:
Federal		3,018			2,855			3,832
State		191			139			206
Investment Tax Credits		(79	)		(79	)		(79	)
Total Income Tax Expense	$	9,937		$	8,621		$	7,383

The statutory review periods for income tax returns for the years prior to 2011 have been closed. In the event that there is interest and penalties associated with income tax adjustments in future examinations, these amounts will be reported under interest expense and other expense, respectively. There are no unrecognized tax benefits resulting from prior period tax positions. The Company is not aware of any uncertain tax positions that could result in a future tax liability.

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial purposes and the amounts used for income tax purposes. The components of the net deferred tax liability are as follows:

	(Thousands of Dollars)
	December 31,
	2014				2013
Utility Plant Related	$	43,996		$	41,912
Customer Advances		(3,570	)		(3,598	)
Employee Benefits		7,223			1,121
Investment Tax Credits (ITC)		910			989
Other		(343	)		(325	)
Total Deferred Tax Liability and ITC	$	48,216		$	40,099

Adoption of Tangible Property Treasury Regulations

The Internal Revenue Service (IRS) has issued final regulations pertaining to the deductibility of costs that qualify as repairs on tangible property. The regulations, which are required to be adopted for the tax year beginning January 1, 2014, redefine the characteristics previously used by the Company to determine tax deductibility of expenditures associated with tangible property. Under the regulations, the IRS has provided guidelines for certain industries, but not for regulated public water utilities. Consequently, the Company has undertaken a comprehensive study to support the integration of the new regulations into its tax policies prospectively, and to determine the level of deductibility for income tax purposes, if any, for expenditures incurred on projects completed in prior years where such expenditures were capitalized, but may now be considered currently deductible as repairs under the new regulations. Initial information obtained from the study, while preliminary and therefore inconclusive at this time, indicates there may be up to $6.8 million of refundable taxes previously paid to the IRS. Absent specific IRS guidelines, the Company is in the process of reviewing and assessing the results of the preliminary study. However, it is probable that any net tax benefits that may result from adopting, partially or in full, the findings from the study and results in a change in the accounting method for these type of expenditures will be considered in determining the revenue requirement used to set base rates for the Company in a future regulatory proceeding, after formal adoption by the Company of the tangible property regulations. The Company will adopt the regulations by filing a change in accounting method request with its 2014 Federal income tax return due no later than September 15, 2015. Consequently, due to the uncertainty regarding the amount of any net tax benefit, as well as the regulatory treatment probability described above, adoption of the new regulations will not have a significant impact on the Company's financial statements or effective tax rate.