Income Taxes

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



	Year Ended September 30
	2014			2013			2012
	(Thousands)
Current Income Taxes —
Federal	$	34,579		$	(632	)	$	(8	)
State	12,620			5,503			6,412
Deferred Income Taxes —
Federal	116,143			130,318			111,176
State	26,272			37,569			32,974
	189,614			172,758			150,554
Deferred Investment Tax Credit	(434		)	(426		)	(581		)
Total Income Taxes	$	189,180		$	172,332		$	149,973
Presented as Follows:
Other Income	$	(434	)	$	(426	)	$	(581	)
Income Tax Expense	189,614			172,758			150,554
Total Income Taxes	$	189,180		$	172,332		$	149,973

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:



	Year Ended September 30
	2014			2013			2012
	(Thousands)
U.S. Income Before Income Taxes	$	488,593		$	432,333		$	370,050
Income Tax Expense, Computed at U.S. Federal Statutory Rate of 35%	$	171,008		$	151,317		$	129,518
Increase (Reduction) in Taxes Resulting from:
State Income Taxes	25,280			27,997			25,601
Miscellaneous	(7,108		)	(6,982		)	(5,146		)
Total Income Taxes	$	189,180		$	172,332		$	149,973

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



	At September 30
	2014			2013
	(Thousands)
Deferred Tax Liabilities:
Property, Plant and Equipment	$	1,614,515		$	1,504,187
Pension and Other Post-Retirement Benefit Costs	113,248			124,021
Other	87,935			75,419
Total Deferred Tax Liabilities	1,815,698			1,703,627
Deferred Tax Assets:
Pension and Other Post-Retirement Benefit Costs	(124,452		)	(130,256		)
Tax Loss and Credit Carryforwards	(171,423		)	(215,262		)
Other	(103,863		)	(90,461		)
Total Deferred Tax Assets	(399,738		)	(435,979		)
Total Net Deferred Income Taxes	$	1,415,960		$	1,267,648
Presented as Follows:
Deferred Tax Liability/(Asset) — Current	$	(40,323	)	$	(79,359	)
Deferred Tax Liability — Non-Current	1,456,283			1,347,007
Total Net Deferred Income Taxes	$	1,415,960		$	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 $4.6 million and $0.7 million relating to the excess stock-based compensation deductions were recorded in Paid in Capital during the years ended September 30, 2014 and September 30, 2013, respectively. Cumulative tax benefits of $34.2 million remain as of September 30, 2014 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 $91.7 million and $85.7 million at September 30, 2014 and 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 $163.5 million and $163.4 million at September 30, 2014 and 2013, respectively. Included in the above are regulatory liabilities and assets relating to the tax accounting method change noted below. The amounts are as follows: regulatory liabilities of $52.6 million as of September 30, 2014 and 2013 and regulatory assets of $85.3 million and $82.5 million as of September 30, 2014 and 2013, respectively.

The following is a reconciliation of the change in unrecognized tax benefits:



	Year Ended September 30
	2014			2013			2012
	(Thousands)
Balance at Beginning of Year	$	2,001		$	11,170		$	7,766
Additions for Tax Positions Related to Current Year	—			700			1,600
Additions for Tax Positions of Prior Years	2,447			164			2,751
Reductions for Tax Positions of Prior Years	(1,301		)	(10,033		)	(947		)
Balance at End of Year	$	3,147		$	2,001		$	11,170

As a result of certain examinations in progress (discussed below), the Company anticipates the balance of unrecognized tax benefits could be reduced during the next 12 months. As of September 30, 2014, the entire balance of unrecognized tax benefits would favorably impact the effective tax rate, if recognized.

The IRS is currently conducting examinations of the Company for fiscal 2014 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. The federal statute of limitations remains open for fiscal 2009 and later years. 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 year ended September 30, 2013, local IRS examiners issued no-change reports for fiscal 2009, fiscal 2010 and fiscal 2011. During the year ended September 30, 2014, local IRS examiners issued a no-change report for fiscal 2012. The IRS has 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.

As of September 30, 2014, the Company has a federal net operating loss (NOL) carryover of $367 million, which expires in varying amounts between 2023 and 2033, and minimum tax credit carryforwards of $36 million, that have no expiration date. Approximately $10 million of the NOL carryforward is subject to certain annual limitations, and $87 million is attributable to excess tax deductions related to stock-based compensation as discussed above. In addition, the Company has state NOL carryovers in Pennsylvania, California and New York of $297 million, $183 million and $103 million, respectively, which begin to expire in varying amounts between 2025 and 2033.

On March 31, 2014, the New York State fiscal year 2014-2015 Executive Budget legislation was signed into law. This legislation included numerous tax provisions, including a reduction of the corporate tax rate from 7.1% to 6.5%, effective for tax years beginning after January 1, 2016. This provision resulted in a tax benefit of approximately $2.8 million, which is reflected in the accompanying financial statements.