Note 4 - Income Taxes

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



	Three Months Ended
	December 31,
	2013		2012
Current Income Taxes
Federal	$	19,707	$	-
State		5,625		2,549

Deferred Income Taxes
Federal		23,206		34,903
State		6,887		6,097
		55,425		43,549
Deferred Investment Tax Credit		(109)		(107)

Total Income Taxes	$	55,316	$	43,442

Presented as Follows:
Other Income		(109)		(107)
Income Tax Expense		55,425		43,549

Total Income Taxes	$	55,316	$	43,442

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):



	Three Months Ended
	December 31,
	2013		2012

U.S. Income Before Income Taxes	$	137,568	$	111,386

Income Tax Expense, Computed at U.S. Federal
Statutory Rate of 35%	$	48,149	$	38,985

Increase (Reduction) in Taxes Resulting from:
State Income Taxes		8,133		5,620
Miscellaneous		(966)		(1,163)

Total Income Taxes	$	55,316	$	43,442

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



	At December 31, 2013		At September 30, 2013
Deferred Tax Liabilities:
Property, Plant and Equipment	$	1,517,363	$	1,504,187
Pension and Other Post-Retirement Benefit
Costs		123,294		124,021
Other		72,352		75,419
Total Deferred Tax Liabilities		1,713,009		1,703,627

Deferred Tax Assets:
Pension and Other Post-Retirement Benefit
Costs		(130,217)		(130,256)
Tax Loss Carryforwards		(197,411)		(215,262)
Other		(89,931)		(90,461)
Total Deferred Tax Assets		(417,559)		(435,979)
Total Net Deferred Income Taxes	$	1,295,450	$	1,267,648

Presented as Follows:
Net Deferred Tax Liability/(Asset) – Current		(23,127)		(79,359)
Net Deferred Tax Liability – Non-Current		1,318,577		1,347,007
Total Net Deferred Income Taxes	$	1,295,450	$	1,267,648

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 $3.1 million and $0.7 million relating to the excess stock-based compensation deductions were recorded in Paid in Capital during the quarter ended December 31, 2013 and the year ended September 30, 2013, respectively. Cumulative tax benefits of $36.4 million remain at both December 31, 2013 and September 30, 2013 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 $84.8 million and $85.7 million at December 31, 2013 and September 30, 2013, 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 $162.3 million and $163.4 million at December 31, 2013 and September 30, 2013, respectively.

During the quarter ended December 31, 2013, there was no change in the balance of unrecognized tax benefits. 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.

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.

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.