Note 4 - Income Taxes

The components of federal and state income taxes included in the Consolidated Statements of Income are as follows (in thousands):



	Nine Months Ended
	June 30,
	2013		2012
Current Income Taxes
Federal	$	(518)	$	-
State		3,934		6,878

Deferred Income Taxes
Federal		105,362		85,910
State		35,645		19,038
		144,423		111,826
Deferred Investment Tax Credit		(320)		(436)

Total Income Taxes	$	144,103	$	111,390

Presented as Follows:
Other Income		(320)		(436)
Income Tax Expense		144,423		111,826

Total Income Taxes	$	144,103	$	111,390

Total income taxes as reported differ from the amounts that were computed by applying the federal income tax rate to income before income taxes. The following is a reconciliation of this difference (in thousands):



	Nine Months Ended
	June 30,
	2013		2012

U.S. Income Before Income Taxes	$	356,262	$	282,665

Income Tax Expense, Computed at U.S. Federal
Statutory Rate of 35%	$	124,692	$	98,933

Increase (Reduction) in Taxes Resulting from:
State Income Taxes		25,726		16,845
Miscellaneous		(6,315)		(4,388)

Total Income Taxes	$	144,103	$	111,390

Significant components of the Company’s deferred tax liabilities and assets were as follows (in thousands):



	At June 30, 2013		At September 30, 2012
Deferred Tax Liabilities:
Property, Plant and Equipment	$	1,465,567	$	1,333,574
Pension and Other Post-Retirement Benefit
Costs		244,453		236,431
Other		64,365		43,294
Total Deferred Tax Liabilities		1,774,385		1,613,299

Deferred Tax Assets:
Pension and Other Post-Retirement Benefit
Costs		(276,056)		(276,501)
Tax Loss Carryforwards		(194,138)		(198,744)
Other		(81,612)		(83,052)
Total Deferred Tax Assets		(551,806)		(558,297)
Total Net Deferred Income Taxes	$	1,222,579	$	1,055,002

Presented as Follows:
Net Deferred Tax Liability/(Asset) – Current		(15,148)		(10,755)
Net Deferred Tax Liability – Non-Current		1,237,727		1,065,757
Total Net Deferred Income Taxes	$	1,222,579	$	1,055,002

During the quarter ended June 30, 2013, there was no change in the balance of unrecognized tax benefits. For nine months ended June 30, 2013, the balance of unrecognized tax benefits decreased by $9.3 million, primarily as a result of favorable settlements with taxing authorities (as discussed below), of which $2.1 million reduced the effective tax rate during the second quarter. Approximately $2.0 million of the remaining balance of unrecognized tax benefits would favorably impact the effective tax rate, if recognized. It is reasonably possible that a reduction of $2.0 million of the balance of uncertain tax positions may occur as a result of potential settlements with taxing authorities within the next twelve months.

As a result of certain realization requirements of the authoritative guidance on stock-based compensation, the table of deferred tax liabilities and assets shown above does not include certain deferred tax assets that arose directly from excess tax deductions related to stock-based compensation. Tax benefits of $4.3 million and $0.6 million relating to the excess stock-based compensation deductions were recorded in Paid in Capital during the nine months ended June 30, 2013 and the year ended September 30, 2012, respectively. Cumulative tax benefits of $33.6 million and $32.7 million remain as of June 30, 2013 and September 30, 2012, respectively, and will be recorded in Paid in Capital in future years when such tax benefits are realized.

Regulatory liabilities representing the reduction of previously recorded deferred income taxes associated with rate-regulated activities that are expected to be refundable to customers amounted to $65.1 million and $66.4 million at June 30, 2013 and September 30, 2012, respectively. Also, regulatory assets representing future amounts collectible from customers, corresponding to additional deferred income taxes not previously recorded because of prior ratemaking practices, amounted to $152.1 million and $150.9 million at June 30, 2013 and September 30, 2012, respectively.

The Internal Revenue Service (IRS) is currently conducting examinations of the Company for fiscal 2012 and fiscal 2013 in accordance with the Compliance Assurance Process (CAP). The CAP audit employs a real time review of the Company’s books and tax records by the IRS that is intended to permit issue resolution prior to the filing of the tax return. While the federal statute of limitations remains open for fiscal 2009 and later years, IRS examinations for fiscal 2008 and prior years have been completed and the Company believes such years are effectively settled. During fiscal 2009, consent was received from the IRS National Office approving the Company’s application to change its tax method of accounting for certain capitalized costs relating to its utility property. During the quarter ended March 31, 2013, local IRS examiners issued no-change reports for fiscal 2009, fiscal 2010 and fiscal 2011, but have reserved the right to re-examine these years, pending the anticipated issuance of IRS guidance addressing the issue for natural gas utilities. In addition, the Company negotiated a settlement of the fiscal 2011 Research Tax Credit.

The Company is also subject to various routine state income tax examinations. The Company’s principal subsidiaries operate mainly in four states which have statutes of limitations that generally expire between three to four years from the date of filing of the income tax return.

On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 (the Relief Act). The Relief Act does not have a material effect on the Company’s financial statements.