Income Taxes

12 Months Ended

Sep. 30, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

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

	Year Ended September 30
	2022		2021		2020
	(Thousands)
Current Income Taxes —
Federal	$	—	$	(10)	$	(42,548)
State	12,214		8,699		6,974
Deferred Income Taxes —
Federal	137,025		90,970		4,538
State	(32,610)		15,023		49,775
Total Income Taxes	$	116,629	$	114,682	$	18,739

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 alternative minimum tax (AMT) credit refunds, 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.

On July 8, 2022, House Bill 1342 was signed into law in Pennsylvania. The law reduces the corporate income tax rate to 8.99% for fiscal 2024. Starting with fiscal 2025, the rate is reduced by 0.5% annually until it reaches 4.99% for fiscal 2032. Under GAAP, the tax effects of a change in tax law must be recognized in the period in which the law is enacted. GAAP also requires deferred income tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. The Company's deferred income taxes were re-measured based upon the new tax rates. For the Company's non-rate regulated activities, the change in deferred income taxes was $28.4 million as of the enactment date and was recorded as a reduction to income tax expense. For the Company's rate regulated activities, the reduction in deferred income taxes of $37.2 million was recorded as a decrease to Recoverable Future Taxes of $19.8 million and an increase to Taxes Refundable to Customers of $17.4 million.

On August 16, 2022, the "Inflation Reduction Act" (IRA) was signed into law. The IRA, among other things, includes provisions to expand energy incentives and impose a corporate minimum tax. The provisions of the IRA did not have a material impact on the fiscal 2022 financial statements, although some of the provisions may be applicable in future years.

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
	2022		2021		2020
	(Thousands)
U.S. Income (Loss) Before Income Taxes (1)	$	682,650	$	478,327	$	(105,046)
Income Tax Expense (Benefit), Computed at U.S. Federal Statutory Rate of 21%	$	143,357	$	100,449	$	(22,060)
State Valuation Allowance (2)	(24,850)		(5,560)		63,205
State Income Taxes (Benefit) (3)	8,736		24,300		(18,374)
Amortization of Excess Deferred Federal Income Taxes	(5,184)		(5,215)		(4,749)
Plant Flow Through Items	(814)		(1,503)		(2,848)
Stock Compensation	820		2,239		3,867
Federal Tax Credits	(5,701)		(310)		(217)
Miscellaneous	265		282		(85)
Total Income Taxes	$	116,629	$	114,682	$	18,739

(1)Amounts include the impact of deferred investment tax credits reported in Other Income (Deductions) on the Consolidated Statements of Income.

(2)During fiscal 2020, a valuation allowance was recorded against certain state deferred tax assets. During fiscal 2022, the valuation allowance was removed. See discussion below.

(3)The state income tax expense (benefit) shown above includes adjustments to the estimated state effective tax rates utilized in the calculation of deferred income taxes, including the Pennsylvania rate change discussed above.

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

	At September 30
	2022		2021
	(Thousands)
Deferred Tax Liabilities:
Property, Plant and Equipment	$	954,757	$	920,692
Pension and Other Post-Retirement Benefit Costs	30,132		23,240
Other	48,893		35,081
Total Deferred Tax Liabilities	1,033,782		979,013
Deferred Tax Assets:
Unrealized Hedging Losses	(215,187)		(170,155)
Tax Loss and Credit Carryforwards	(50,686)		(120,725)
Pension and Other Post-Retirement Benefit Costs	(37,250)		(53,765)
Other	(32,430)		(31,593)
Total Gross Deferred Tax Assets	(335,553)		(376,238)
Valuation Allowance	—		57,645
Total Deferred Tax Assets	(335,553)		(318,593)
Total Net Deferred Income Taxes	$	698,229	$	660,420

The following is a summary of changes in valuation allowances for deferred tax assets:

	Year Ended September 30
	2022		2021		2020
	(Thousands)
Balance at Beginning of Year	$	57,645	$	63,205	$	—
Additions	—		—		63,205
Deductions	57,645		5,560		—
Balance at End of Year	$	—	$	57,645	$	63,205

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, at each reporting date, 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 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. On June 30, 2022, the Company completed the sale of Seneca's California oil and gas assets to Sentinel Peak Resources California, LLC. As a result of the sale of the California oil and gas assets, the remaining deferred tax assets and valuation allowance of approximately $27.2 million related to the California net operating loss and tax credit carryforwards were written off. The deferred tax assets and valuation allowance were written off as the Company determined that there was a remote possibility for use as the Company no longer has California operations. During the quarter ended September 30, 2022, the valuation allowance was adjusted because of the Pennsylvania corporate income tax rate change remeasurement described above and for current activity for a cumulative adjustment of $5.5 million. In addition, the Company determined there was sufficient positive evidence, despite a prior history of subsidiary tax losses, to conclude that it was more likely than not that the remaining state deferred tax assets would be realized. The conclusion was primarily related to the use of net operating losses in Pennsylvania in the current year due to sustained strong operating results as well as the expectation for future forecasted earnings in Pennsylvania due to increased natural gas prices. The sale of California assets will also result in higher apportionment of income to Pennsylvania on a prospective basis, further supporting realization of existing Pennsylvania net operating loss deferred tax assets. Accordingly, the Company reversed the remaining valuation allowance and recognized an income tax benefit of approximately $24.9 million.

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 $362.1 million and $354.1 million at September 30, 2022 and 2021, 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 $106.2 million and $122.0 million at September 30, 2022 and 2021, respectively.

The Company is in the Bridge Phase of the IRS Compliance Assurance Process (“CAP”) for fiscal 2022. The Bridge Phase is intended for taxpayers with a low risk of non-compliance who are cooperative and transparent with few, if any, material issues that require resolution. The IRS will not accept any disclosures, conduct any reviews, or provide any letters of assurance for the Bridge year. The federal statute of limitations remains open for fiscal 2019 and later years. The Company is also subject to various routine state income tax examinations. The Company’s principal subsidiaries have state 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. The Company has no unrecognized tax benefits as of September 30, 2022, 2021, or 2020.

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, 2022, were as follows:

Jurisdiction	Tax Attribute	Amount (Thousands)		Expires
Pennsylvania	Net Operating Loss	$	378,631	2030-2042
Federal	General Business Credits	20,677		2035-2042