Note D — Income Taxes

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

	Year Ended September 30
	2012	2011	2010
	(Thousands)
Current Income Taxes —
Federal............................................................................................................................................................................	$ (8)	$ (1,390)	$ 2,074
State................................................................................................................................................................................	6,412	1,520	4,991
Deferred Income Taxes —
Federal............................................................................................................................................................................	111,176	130,434	110,515
State................................................................................................................................................................................	32,974	33,817	24,164
	150,554	164,381	141,744
Deferred Investment Tax Credit.........................................................................................................................	(581)	(697)	(697)
Total Income Taxes...................................................................................................................................................	$ 149,973	$ 163,684	$ 141,047
Presented as Follows:
Other Income...............................................................................................................................................................	$ (581)	$ (697)	$ (697)
Income Tax Expense — Continuing Operations..........................................................................................	150,554	164,381	137,227
Discontinued Operations —
Income from Operations........................................................................................................................................	—	—	493
Gain on Disposal........................................................................................................................................................	—	—	4,024
Total Income Taxes...................................................................................................................................................	$ 149,973	$ 163,684	$ 141,047

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
	2012	2011	2010
	(Thousands)
U.S. Income Before Income Taxes.................................................................................................................	$ 370,050	$ 422,086	$ 366,960
Income Tax Expense, Computed at U.S. Federal Statutory Rate of 35%...................................	$ 129,518	$ 147,730	$ 128,436
Increase (Reduction) in Taxes Resulting from:
State Income Taxes................................................................................................................................................	25,601	22,969	18,951
Miscellaneous.............................................................................................................................................................	(5,146)	(7,015)	(6,340)
Total Income Taxes..................................................................................................................................................	$ 149,973	$ 163,684	$ 141,047

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

	At September 30
	2012	2011
	(Thousands)
Deferred Tax Liabilities:
Property, Plant and Equipment...............................................................................................................................................	$ 1,333,574	$ 1,062,255
Pension and Other Post-Retirement Benefit Costs......................................................................................................	236,431	217,302
Other...................................................................................................................................................................................................	43,294	70,389
Total Deferred Tax Liabilities....................................................................................................................................................	1,613,299	1,349,946
Deferred Tax Assets:
Pension and Other Post-Retirement Benefit Costs......................................................................................................	(276,501)	(263,606)
Tax Loss Carryforwards............................................................................................................................................................	(198,744)	(71,516)
Other...................................................................................................................................................................................................	(83,052)	(74,863)
Total Deferred Tax Assets........................................................................................................................................................	(558,297)	(409,985)
Total Net Deferred Income Taxes.........................................................................................................................................	$ 1,055,002	$ 939,961
Presented as Follows:
Deferred Tax Liability/(Asset) — Current..........................................................................................................................	$ (10,755)	$ (15,423)
Deferred Tax Liability — Non-Current.................................................................................................................................	1,065,757	955,384
Total Net Deferred Income Taxes.........................................................................................................................................	$ 1,055,002	$ 939,961

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. Cumulative tax benefits of $32.7 million and $19.1 million for the periods ending September 30, 2012 and September 30, 2011, respectively, relating to the excess stock-based compensation deductions 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 $66.4 million and $65.5 million at September 30, 2012 and 2011, 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 $150.9 million and $144.4 million at September 30, 2012 and 2011, 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 $47.3 million as of September 30, 2012 and 2011, and regulatory assets of $65.9 million and $60.5 million as of September 30, 2012 and 2011, respectively.

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

	Year Ended September 30
	2012	2011	2010
	(Thousands)
Balance at Beginning of Year.........................................................................................................................................	$ 7,766	$ 8,490	$ 8,721
Additions for Tax Positions Related to Current Year...........................................................................................	1,600	80	699
Additions for Tax Positions of Prior Years................................................................................................................	2,751	107	45
Reductions for Tax Positions of Prior Years...........................................................................................................	(947)	(911)	(975)
Balance at End of Year.....................................................................................................................................................	$ 11,170	$ 7,766	$ 8,490

The Company anticipates that during the next 12 months there will be additional Internal Revenue Service (IRS) guidance relative to its tax method of accounting for certain capitalized costs relating to its utility property and the IRS Appeals process will be resolved (see discussion below). This would result in an elimination of approximately $7.3 million of unrecognized tax benefits, which would not have a material impact on the effective tax rate. As of September 30, 2012, approximately $4.9 million of unrecognized tax benefits would favorably impact the effective tax rate, if recognized.

The Company recognizes interest relating to income taxes in Other Interest Expense and penalties relating to income taxes in Other Income. The Company recognized interest expense relating to income taxes of $0.3 million, $0.3 million and $0.3 million for fiscal 2012, 2011 and 2010, respectively. The Company has not accrued any penalties during fiscal 2012, 2011 and 2010.

The IRS is currently conducting examinations of the Company for fiscal 2011 and fiscal 2012 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. Local IRS examiners proposed to disallow most of the tax accounting method change recorded by the Company in fiscal 2009 and fiscal 2010. The Company has filed protests for fiscal 2009 and fiscal 2010 with the IRS Appeals Office disputing the local IRS findings.

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, 2012, the Company has a federal net operating loss (NOL) carryover of $565 million, which expires in varying amounts between 2023 and 2032. Approximately $23 million of this NOL is subject to certain annual limitations, and $84 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 $278 million, $155 million and $138 million, respectively, which begin to expire in varying amounts between 2029 and 2032. No valuation allowance was recorded on the federal or state NOL carryovers because of management’s determination that the amounts will be fully utilized during the carryforward period.