Income Taxes

12 Months Ended

Sep. 30, 2020

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 21% for fiscal 2019 and beyond. Since the Company is a fiscal year taxpayer, the Company was subject to a blended rate of 24.5% for fiscal 2018. 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 or surcharges of other deferred income taxes will be determined by the federal and state regulatory agencies.

The 2017 Tax Reform Act also repealed the corporate alternative minimum tax (AMT) and provides that the Company’s existing AMT credit carryovers are refundable, if not utilized to reduce tax,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 $85.0 million of AMT credit carryovers. The Company received the first installment for $42.5 million of AMT credit refunds related to fiscal 2019 in January 2020. On

March 27, 2020, the “Coronavirus Aid, Relief and Economic Security (CARES) Act” was signed into law. The CARES Act, among other things, includes provisions relating to AMT credit refunds discussed above, refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, and modifications to the net interest deduction limitation. The Company filed for the acceleration of the remaining AMT credit refunds (under CARES) of $42.5 million, which were received in June 2020.

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


	Year Ended September 30
	2020		2019		2018
	(Thousands)
Current Income Taxes —
Federal	$	(42,548)	$	(41,645)	$	2,025
State	6,974		4,601		8,634
Deferred Income Taxes —
Federal	4,538		98,514		(38,927)
State	49,775		23,751		20,774
	18,739		85,221		(7,494)
Deferred Investment Tax Credit	(13)		(91)		(105)
Total Income Taxes	$	18,726	$	85,130	$	(7,599)
Presented as Follows:
Other (Income) Deductions	$	(13)	$	(91)	$	(105)
Income Tax Expense (Benefit)	18,739		85,221		(7,494)
Total Income Taxes	$	18,726	$	85,130	$	(7,599)

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
	2020		2019		2018
	(Thousands)
U.S. Income (Loss) Before Income Taxes	$	(105,046)	$	389,420	$	383,922
Income Tax Expense, Computed at U.S. Federal Statutory Rate(1)	$	(22,060)	$	81,778	$	94,061
State Valuation Allowance(2)	63,205		—		—
State Income Tax (3)	(18,374)		22,397		22,203

Amortization of Excess Deferred Federal Income Taxes(4)	(4,749)		(3,185)		(1,336)
Plant Flow Through Items	(2,848)		(1,544)		(872)
Stock Compensation	3,867		(1,491)		(321)
Federal Tax Credits	(217)		(7,361)		(6,576)
Impact of 2017 Tax Reform Act(5)	—		(5,000)		(112,598)
Miscellaneous	(98)		(464)		(2,160)
Total Income Taxes	$	18,726	$	85,130	$	(7,599)

(1)For fiscal 2020 and 2019, the statutory rate of 21% was utilized. For fiscal 2018, a blended rate of 24.5% was utilized, calculated as 35% for the first quarter of the fiscal year and 21% for the remaining three quarters.

(2)During fiscal 2020, a valuation allowance was recorded against certain state deferred tax assets, as discussed below.

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

(4)Represents amortization of net excess deferred federal income taxes under the 2017 Tax Reform Act.

(5)The $5.0 million benefit in fiscal 2019 represents the reversal of the estimated sequestration of AMT credit refunds. The amount for fiscal 2018 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.

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


	At September 30
	2020		2019
	(Thousands)
Deferred Tax Liabilities:
Property, Plant and Equipment	$	874,607	$	861,278
Pension and Other Post-Retirement Benefit Costs	54,066		55,795
Other	23,377		54,486
Total Deferred Tax Liabilities	952,050		971,559
Deferred Tax Assets:
Tax Loss and Credit Carryforwards	(179,363)		(175,542)
Pension and Other Post-Retirement Benefit Costs	(95,599)		(87,280)
Other	(44,239)		(55,355)
Total Gross Deferred Tax Assets	(319,201)		(318,177)
Valuation Allowance	63,205		—
Total Deferred Tax Assets	(255,996)		(318,177)
Total Net Deferred Income Taxes	$	696,054	$	653,382

A valuation allowance for deferred tax assets, including net operating losses and tax credits, is recognized when it is more likely than not that some or all of the benefit from the deferred tax assets will not be realized. The Company continually assesses the realizability of its deferred tax assets, including factors such as future taxable income, reversal of existing temporary differences, and tax planning strategies. The Company considers both positive and negative evidence related to the likelihood of the realization of the deferred tax assets. As of March 31, 2020, the Company recorded a valuation allowance against certain state deferred tax assets in the amount of $56.8 million based on its conclusion, considering all available objective evidence and the Company’s history of subsidiary state tax losses, that it was more likely than not that the deferred tax assets would not be realized. The valuation allowance increased to $63.2 million as of September 30, 2020 as a result of certain current year state net operating loss and tax credit activity. Changes in judgment regarding future realization of these deferred tax assets may result in a reversal of all or a portion of the valuation allowance. The Company will continue to re-assess this position each quarter.

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 $357.5 million and $366.5 million at September 30, 2020 and 2019, 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 $118.3 million and $115.2 million at September 30, 2020 and 2019, respectively.

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


	Year Ended September 30
	2020		2019		2018
	(Thousands)
Balance at Beginning of Year	$	—	$	—	$	1,251

Additions for Tax Positions of Prior Years	—		—		—
Reductions for Tax Positions of Prior Years	—		—		(788)
Reductions Related to Settlements with Taxing Authorities	—		—		(463)
Balance at End of Year	$	—	$	—	$	—

The IRS is currently conducting an examination of the Company for fiscal 2020 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 2017 and later years. 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. Net operating losses being carried forward from prior years remain subject to examination on a future return until they are utilized, upon which time the statute of limitation begins.

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 final guidance. The Company is awaiting the issuance of IRS guidance addressing the issue for natural gas utilities.

Tax carryforwards available, prior to valuation allowance, at September 30, 2020, were as follows:


Jurisdiction	Tax Attribute	Amount (Thousands)		Expires
Federal Pre-Fiscal 2019	Net Operating Loss	$	205,918	2032-2038
Federal Post-Fiscal 2018	Net Operating Loss	185,779		Unlimited
Pennsylvania	Net Operating Loss	428,672		2031-2041
California	Net Operating Loss	224,159		2031-2041


Federal	Enhanced Oil Recovery Credit	26,790		2029-2039
California	Enhanced Oil Recovery Credit	8,502		2037-2039
California	Alternative Minimum Tax Credit	8,864		Unlimited
Federal	R&D Tax Credit	6,550		2031-2040
Federal	Charitable Contributions	1,559		2025

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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