Income Taxes

On December 22, 2017, federal tax legislation referred to as the “Tax Cuts and Jobs Act” (the 2017 Tax Reform Act) was enacted. The 2017 Tax Reform Act significantly changed the taxation of business entities and includes a reduction in the corporate federal income tax rate from 35% to a blended 24.5% for fiscal 2018 and 21% for fiscal 2019 and beyond. The changes had a material impact on the financial statements in the year ended September 30, 2018. The Company’s deferred income taxes were remeasured based upon the new tax rates. For the non-rate regulated activities through the year ended September 30, 2018, the change in beginning of the year deferred income taxes of $103.5 million (which includes the potential sequestration of the refunds of the AMT credit carryovers as described below) was recorded as a reduction to income tax expense. For the Company's rate regulated activities, the reduction in deferred income taxes of $336.7 million was recorded as a decrease to Recoverable Future Taxes of $65.7 million and an increase to Taxes Refundable to Customers of $271.0 million. The 2017 Tax Reform Act includes provisions that stipulate how these excess deferred taxes are to be passed back to customers for certain accelerated tax depreciation benefits. Potential refunds of other deferred income taxes will be determined by the federal and state regulatory agencies. For further discussion, refer to Note C — Regulatory Matters.

The 2017 Tax Reform Act also repealed the corporate alternative minimum tax (AMT) and provides that the Company’s existing AMT credit carryovers are refundable, if not utilized to reduce tax, beginning in fiscal 2019. As of September 30, 2018, the Company had $84.2 million of AMT credit carryovers that are expected to be utilized or refunded between fiscal 2019 and fiscal 2022. These amounts are recorded in Deferred Income Taxes and will be reclassified to a receivable when the amounts are expected to be realized in cash. During the year ended September 30, 2018, the Company recorded a $5.0 million estimate for the potential sequestration of AMT credit refunds.

The SEC issued guidance in Staff Accounting Bulletin 118 (SAB 118) which provides for up to a one year period (the measurement period) in which to complete the required analysis and income tax accounting for the 2017 Tax Reform Act. The Company has determined a reasonable estimate for the measurement of the changes in deferred income taxes (noted above), which have been reflected as provisional amounts in the September 30, 2018 financial statements. The final determination of the impact of the income tax effects of these items will require further interpretation of the 2017 Tax Reform Act from yet to be issued U.S. Treasury regulations, state income tax guidance, federal/state regulatory guidance, and possible technical corrections, which, if issued, the Company expects to finalize within SAB 118’s measurement period (quarter ended December 31, 2018). Any subsequent guidance will be accounted for in the period issued.

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



	Year Ended September 30
	2018			2017			2016
	(Thousands)
Current Income Taxes —
Federal	$	2,025		$	32,034		$	(6,658	)
State	8,634			10,673			20,903
Deferred Income Taxes —
Federal	(38,927		)	103,046			(164,818		)
State	20,774			14,929			(81,976		)
	(7,494		)	160,682			(232,549		)
Deferred Investment Tax Credit	(105		)	(173		)	(348		)
Total Income Taxes	$	(7,599	)	$	160,509		$	(232,897	)
Presented as Follows:
Other Income	$	(105	)	$	(173	)	$	(348	)
Income Tax Expense (Benefit)	(7,494		)	160,682			(232,549		)
Total Income Taxes	$	(7,599	)	$	160,509		$	(232,897	)

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



	Year Ended September 30
	2018			2017			2016
	(Thousands)
U.S. Income (Loss) Before Income Taxes	$	383,922		$	443,991		$	(523,855	)
Income Tax Expense (Benefit), Computed at U.S. Federal Statutory Rate(1)	$	94,061		$	155,397		$	(183,349	)
Impact of 2017 Tax Reform Act(2)	(112,598		)	—			—
State Income Taxes (Benefit)(3)	22,203			16,641			(39,697		)
Federal Tax Credits	(6,576		)	(6,679		)	(3,262		)
Miscellaneous	(4,689		)	(4,850		)	(6,589		)
Total Income Taxes	$	(7,599	)	$	160,509		$	(232,897	)


(1)	For fiscal 2018, represents the blended rate of 24.5%. Calculated as 35% for the first quarter of the fiscal year and 21% for the remaining three quarters.


(2)	Represents the remeasurement of deferred income taxes as a result of the lower U.S. corporate income tax rate including a $5.0 million estimate for the potential sequestration of AMT credit refunds and the benefit of $9.1 million as a result of the blended tax rate described above.


(3)	The state income taxes (benefit) shown above includes income tax benefits related to state enhanced oil recovery tax credits and adjustments to the estimated state effective tax rates utilized in the calculation of deferred income taxes.

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



	At September 30
	2018			2017
	(Thousands)
Deferred Tax Liabilities:
Property, Plant and Equipment	$	770,794		$	1,141,432
Pension and Other Post-Retirement Benefit Costs	39,541			79,516
Other	49,734			77,046
Total Deferred Tax Liabilities	860,069			1,297,994
Deferred Tax Assets:
Pension and Other Post-Retirement Benefit Costs	(62,969		)	(123,532		)
Tax Loss and Credit Carryforwards	(214,128		)	(200,344		)
Other	(75,286		)	(82,831		)
Total Gross Deferred Tax Assets	(352,383		)	(406,707		)
Valuation Allowance	5,000			—
Total Deferred Tax Assets	(347,383		)	(406,707		)
Total Net Deferred Income Taxes	$	512,686		$	891,287

As explained in Note A — Summary of Significant Accounting Policies under the heading "New Authoritative Accounting and Financial Reporting Guidance," the Company adopted authoritative guidance issued by the FASB simplifying several aspects of the accounting for stock-based compensation effective as of October 1, 2016. Under this guidance, the Company recognizes excess tax benefits as incurred. The Company recognized $31.9 million, that arose directly from excess tax benefits related to stock-based compensation in prior periods, as a cumulative effect adjustment increasing retained earnings at October 1, 2016.

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 $370.6 million and $95.7 million at September 30, 2018 and 2017, respectively. Also, regulatory assets representing future amounts collectible from customers, corresponding to additional deferred income taxes not previously recorded because of ratemaking practices, amounted to $115.5 million and $181.4 million at September 30, 2018 and 2017, respectively.

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



	Year Ended September 30
	2018			2017			2016
	(Thousands)
Balance at Beginning of Year	$	1,251		$	396		$	5,085
Additions for Tax Positions of Prior Years	—			1,251			396
Reductions for Tax Positions of Prior Years	(788		)	(396		)	(1,314		)
Reductions Related to Settlements with Taxing Authorities	(463		)	—			(3,771		)
Balance at End of Year	$	—		$	1,251		$	396

The IRS is currently conducting examinations of the Company for fiscal 2018 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, fiscal 2015 and later years. During fiscal 2009, preliminary 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, subject to the final guidance. The Company is awaiting the 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, 2018, the Company has the following carryforwards available:



Jurisdiction	Tax Attribute	Amount (Thousands)			Expires
Federal Pre-Fiscal 2018	Net Operating Loss	$	191,006	(1)	2029-2037
Federal Post-Fiscal 2017	Net Operating Loss	58,334			Unlimited
Pennsylvania	Net Operating Loss	351,879			2029-2038
California	Net Operating Loss	191,468			2029-2038
Federal	Alternative Minimum Tax Credit	84,185		(2)	Unlimited
California	Alternative Minimum Tax Credit	6,983			Unlimited
Federal	Enhanced Oil Recovery Credit	18,160			2029-2038
California	Enhanced Oil Recovery Credit	7,613			2019-2033
Federal	R&D Tax Credit	5,876			2031-2037
Federal	Charitable Contributions	3,067			2023


(1)	Approximately $1.8 million of the federal Net Operating Loss carryforward is subject to certain annual limitations.


(2)	The $5.0 million estimate recorded for the potential sequestration of AMT credit refunds is not included in this amount.