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Income Taxes | 12 Months Ended
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Dec. 31, 2018
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes Certain assets and liabilities are reported differently for income tax purposes than they are for financial statement purposes. The tax effect of these differences is recorded as deferred taxes. We calculate deferred taxes using currently enacted income tax rates. APS has recorded regulatory assets and regulatory liabilities related to income taxes on its Balance Sheets in accordance with accounting guidance for regulated operations. The regulatory assets are for certain temporary differences, primarily the allowance for equity funds used during construction, investment tax credit (“ITC”) basis adjustment and tax expense of Medicare subsidy. The regulatory liabilities primarily relate to the change in income tax rates and deferred taxes resulting from ITCs. On December 22, 2017, the Tax Act was enacted. This legislation made significant changes to the federal income tax laws, including a reduction in the corporate tax rate to 21% effective January 1, 2018. As a result of this rate reduction, the Company recognized a $1.14 billion reduction in its net deferred income tax liabilities as of December 31, 2017. In accordance with accounting for regulated companies, the effect of this rate reduction is substantially offset by a net regulatory liability. As of December 31, 2017, to reflect the $1.14 billion reduction in its net deferred income tax liabilities caused by the rate reduction, APS has recorded a net regulatory liability of $1.52 billion and a new $377 million net deferred tax asset. The Company will amortize the net regulatory liability in accordance with applicable federal income tax laws, which require the amortization of a majority of the balance over the remaining regulatory life of the related property. As a result of the modifications made to the annual transmission formula rate during the second quarter, the Company has recorded amortization of FERC jurisdictional net excess deferred tax liabilities, retroactive to January 1, 2018. The Company continues to work with the ACC on a plan to amortize the remaining net excess deferred tax liabilities subject to its jurisdiction. See Note 3 for more details. In August 2018, Treasury proposed regulations that clarify bonus depreciation transition rules under the Tax Act for regulated public utility property placed in service after September 27, 2017 and before January 1, 2018. During the third quarter the Company recorded deferred tax liabilities of approximately $11 million and an increase in its net regulatory liability for excess deferred taxes of approximately $9 million, primarily related to bonus depreciation benefits claimed on the Company’s 2017 tax return as a result of this clarifying guidance. However, the proposed regulations are ambiguous with respect to regulated public utility property placed in service on or after January 1, 2018. On December 20, 2018, the Joint Committee on Taxation (“JCT”) released the general explanation of the Tax Act. The document - commonly referred to as the "Blue Book" - provides a comprehensive technical description of the Tax Act and includes the legislative intent of Congress with respect to the changes made by provisions of the Tax Act. The “Blue Book” provides clarification that the intent of the Tax Act was to exclude from the definition of bonus depreciation qualified property any property placed in service by a regulated public utility after December 31, 2017. In a footnote, the JCT indicated that a technical correction bill may be necessary to reflect this intent. Management recognizes tax positions which it believes are "more likely than not" to be sustained upon examination. In applying this "more likely than not" assessment, the Company is required to consider the technical merits of a position, including legislative intent. As a result, while no legislation has been passed which clarifies the ambiguities related to bonus depreciation for property placed in service on or after January 1, 2018, the Company currently believes the continued availability of bonus depreciation is not "more likely than not" to be sustained upon examination. As a result, the Company has not recognized any current or deferred tax benefits related to bonus depreciation for property placed in service on or after January 1, 2018. For the quarter ending March 31, 2018, the Company early adopted ASU 2018-02, Income Statement-Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income and elected to reclassify the income tax effects of the Tax Act on items within accumulated other comprehensive income to retained earnings. See Note 2 for additional information. In accordance with regulatory requirements, APS ITCs are deferred and are amortized over the life of the related property with such amortization applied as a credit to reduce current income tax expense in the statement of income. Net income associated with the Palo Verde sale leaseback VIEs is not subject to tax (see Note 18). As a result, there is no income tax expense associated with the VIEs recorded on the Pinnacle West Consolidated and APS Consolidated Statements of Income. The following is a tabular reconciliation of the total amounts of unrecognized tax benefits, excluding interest and penalties, at the beginning and end of the year that are included in accrued taxes and unrecognized tax benefits (dollars in thousands):
| Pinnacle West Consolidated |  | APS Consolidated
| 2018 |  | 2017 |  | 2016 |  | 2018 |  | 2017 |  | 2016
Total unrecognized tax benefits, January 1 | $ | 41,966 |  |  | $ | 36,075 |  |  | $ | 34,447 |  |  | $ | 41,966 |  |  | $ | 36,075 |  |  | $ | 34,447 |
Additions for tax positions of the current year | 3,436 |  |  | 2,937 |  |  | 2,695 |  |  | 3,436 |  |  | 2,937 |  |  | 2,695 |
Additions for tax positions of prior years | 2,696 |  |  | 4,783 |  |  | 886 |  |  | 2,696 |  |  | 4,783 |  |  | 886 |
Reductions for tax positions of prior years for: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Changes in judgment | (1,764 | ) |  | (1,829 | ) |  | (1,953 | ) |  | (1,764 | ) |  | (1,829 | ) |  | (1,953 | )
Settlements with taxing authorities | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Lapses of applicable statute of limitations | (5,603 | ) |  | — |  |  | — |  |  | (5,603 | ) |  | — |  |  | — |
Total unrecognized tax benefits, December 31 | $ | 40,731 |  |  | $ | 41,966 |  |  | $ | 36,075 |  |  | $ | 40,731 |  |  | $ | 41,966 |  |  | $ | 36,075 |
Included in the balances of unrecognized tax benefits are the following tax positions that, if recognized, would decrease our effective tax rate (dollars in thousands):
| Pinnacle West Consolidated |  | APS Consolidated
| 2018 |  | 2017 |  | 2016 |  | 2018 |  | 2017 |  | 2016
Tax positions, that if recognized, would decrease our effective tax rate | $ | 19,504 |  |  | $ | 16,373 |  |  | $ | 11,313 |  |  | $ | 19,504 |  |  | $ | 16,373 |  |  | $ | 11,313 |
As of the balance sheet date, the tax year ended December 31, 2015 and all subsequent tax years remain subject to examination by the IRS. With a few exceptions, we are no longer subject to state income tax examinations by tax authorities for years before 2014. We reflect interest and penalties, if any, on unrecognized tax benefits in the Pinnacle West Consolidated and APS Consolidated Statements of Income as income tax expense. The amount of interest expense or benefit recognized related to unrecognized tax benefits are as follows (dollars in thousands):
| Pinnacle West Consolidated |  | APS Consolidated
| 2018 |  | 2017 |  | 2016 |  | 2018 |  | 2017 |  | 2016
Unrecognized tax benefit interest expense/(benefit) recognized | $ | (780 | ) |  | $ | 577 |  |  | $ | 529 |  |  | $ | (780 | ) |  | $ | 577 |  |  | $ | 529 |
Following are the total amount of accrued liabilities for interest recognized related to unrecognized benefits that could reverse and decrease our effective tax rate to the extent matters are settled favorably (dollars in thousands):
| Pinnacle West Consolidated |  | APS Consolidated
| 2018 |  | 2017 |  | 2016 |  | 2018 |  | 2017 |  | 2016
Unrecognized tax benefit interest accrued | $ | 1,130 |  |  | $ | 1,910 |  |  | $ | 1,333 |  |  | $ | 1,130 |  |  | $ | 1,910 |  |  | $ | 1,333 |
Additionally, as of December 31, 2018, we have recognized less than $1 million of interest expense to be paid on the underpayment of income taxes for certain adjustments that we have filed, or will file, with the IRS. The components of income tax expense are as follows (dollars in thousands):
| Pinnacle West Consolidated |  | APS Consolidated
| Year Ended December 31, |  | Year Ended December 31,
| 2018 |  | 2017 |  | 2016 |  | 2018 |  | 2017 |  | 2016
Current: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Federal | $ | 18,375 |  |  | $ | 11,624 |  |  | $ | 8,630 |  |  | $ | 88,180 |  |  | $ | 21,512 |  |  | $ | 711 |
State | 3,342 |  |  | 3,052 |  |  | 1,259 |  |  | 1,877 |  |  | 2,778 |  |  | 4,276 |
Total current | 21,717 |  |  | 14,676 |  |  | 9,889 |  |  | 90,057 |  |  | 24,290 |  |  | 4,987 |
Deferred: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Federal | 94,721 |  |  | 223,729 |  |  | 201,743 |  |  | 32,436 |  |  | 221,078 |  |  | 215,178 |
State | 17,464 |  |  | 19,867 |  |  | 24,779 |  |  | 22,321 |  |  | 23,800 |  |  | 25,677 |
Total deferred | 112,185 |  |  | 243,596 |  |  | 226,522 |  |  | 54,757 |  |  | 244,878 |  |  | 240,855 |
Income tax expense | $ | 133,902 |  |  | $ | 258,272 |  |  | $ | 236,411 |  |  | $ | 144,814 |  |  | $ | 269,168 |  |  | $ | 245,842 |
The following chart compares pretax income at the statutory federal income tax rate of 21% in 2018 and 35% in 2017 and 2016 to income tax expense (dollars in thousands):
| Pinnacle West Consolidated |  | APS Consolidated
| Year Ended December 31, |  | Year Ended December 31,
| 2018 |  | 2017 |  | 2016 |  | 2018 |  | 2017 |  | 2016
Federal income tax expense at statutory rate | $ | 139,533 |  |  | $ | 268,177 |  |  | $ | 244,278 |  |  | $ | 154,260 |  |  | $ | 277,540 |  |  | $ | 254,617 |
Increases (reductions) in tax expense resulting from: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
State income tax net of federal income tax benefit | 16,411 |  |  | 14,897 |  |  | 16,311 |  |  | 19,091 |  |  | 17,276 |  |  | 18,750 |
Nondeductible expenditures associated with ballot initiative | 7,879 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Stock compensation | (1,804 | ) |  | (6,659 | ) |  | (2,951 | ) |  | (780 | ) |  | (3,489 | ) |  | (1,937 | )
Excess deferred income taxes - Tax Cuts and Jobs Act | (6,725 | ) |  | 9,348 |  |  | — |  |  | (4,715 | ) |  | 9,431 |  |  | — |
Allowance for equity funds used during construction (see Note 1) | (7,231 | ) |  | (12,937 | ) |  | (11,724 | ) |  | (7,231 | ) |  | (12,937 | ) |  | (11,724 | )
Palo Verde VIE noncontrolling interest (see Note 18) | (4,094 | ) |  | (6,823 | ) |  | (6,823 | ) |  | (4,094 | ) |  | (6,823 | ) |  | (6,823 | )
Investment tax credit amortization | (6,742 | ) |  | (6,715 | ) |  | (5,887 | ) |  | (6,742 | ) |  | (6,715 | ) |  | (5,887 | )
Other | (3,325 | ) |  | (1,016 | ) |  | 3,207 |  |  | (4,975 | ) |  | (5,115 | ) |  | (1,154 | )
Income tax expense | $ | 133,902 |  |  | $ | 258,272 |  |  | $ | 236,411 |  |  | $ | 144,814 |  |  | $ | 269,168 |  |  | $ | 245,842 |
The components of the net deferred income tax liability were as follows (dollars in thousands):
| Pinnacle West Consolidated |  | APS Consolidated
| December 31, |  | December 31,
| 2018 |  | 2017 |  | 2018 |  | 2017
DEFERRED TAX ASSETS |  |  |  |  |  |  |  |  |
Risk management activities | $ | 15,785 |  |  | $ | 25,103 |  |  | $ | 15,785 |  |  | $ | 25,103 |
Regulatory liabilities: |  |  |  |  |  |  |  |  |  |
Excess deferred income taxes - Tax Cuts and Jobs Act | 376,869 |  |  | 376,906 |  |  | 376,869 |  |  | 376,906 |
Asset retirement obligation and removal costs | 117,201 |  |  | 135,847 |  |  | 117,201 |  |  | 135,847 |
Unamortized investment tax credits | 53,284 |  |  | 54,661 |  |  | 53,284 |  |  | 54,661 |
Other postretirement benefits | 40,532 |  |  | 47,021 |  |  | 40,532 |  |  | 47,021 |
Other | 40,380 |  |  | 37,489 |  |  | 40,380 |  |  | 37,489 |
Pension liabilities | 112,019 |  |  | 83,126 |  |  | 107,009 |  |  | 77,280 |
Coal reclamation liabilities | 47,508 |  |  | 45,802 |  |  | 47,508 |  |  | 45,802 |
Renewable energy incentives | 30,779 |  |  | 33,546 |  |  | 30,779 |  |  | 33,546 |
Credit and loss carryforwards | 1,755 |  |  | 53,946 |  |  | — |  |  | 1,920 |
Other | 58,820 |  |  | 56,630 |  |  | 59,919 |  |  | 62,421 |
Total deferred tax assets | 894,932 |  |  | 950,077 |  |  | 889,266 |  |  | 897,996 |
DEFERRED TAX LIABILITIES |  |  |  |  |  |  |  |  |  |
Plant-related | (2,277,724 | ) |  | (2,220,886 | ) |  | (2,277,724 | ) |  | (2,220,886 | )
Risk management activities | (237 | ) |  | (491 | ) |  | (237 | ) |  | (491 | )
Other postretirement assets and other special use funds | (57,697 | ) |  | (66,134 | ) |  | (57,274 | ) |  | (65,733 | )
Regulatory assets: |  |  |  |  |  |  |  |  |  |
Allowance for equity funds used during construction | (39,086 | ) |  | (36,365 | ) |  | (39,086 | ) |  | (36,365 | )
Deferred fuel and purchased power | (23,086 | ) |  | (40,778 | ) |  | (23,086 | ) |  | (40,778 | )
Pension benefits | (181,504 | ) |  | (142,848 | ) |  | (181,504 | ) |  | (142,848 | )
Retired power plant costs (see Note 3) | (48,348 | ) |  | (53,611 | ) |  | (48,348 | ) |  | (53,611 | )
Other | (72,096 | ) |  | (74,423 | ) |  | (72,096 | ) |  | (74,423 | )
Other | (2,575 | ) |  | (5,346 | ) |  | (2,575 | ) |  | (5,346 | )
Total deferred tax liabilities | (2,702,353 | ) |  | (2,640,882 | ) |  | (2,701,930 | ) |  | (2,640,481 | )
Deferred income taxes — net | $ | (1,807,421 | ) |  | $ | (1,690,805 | ) |  | $ | (1,812,664 | ) |  | $ | (1,742,485 | )
As of December 31, 2018, the deferred tax assets for credit and loss carryforwards relate primarily to federal general business credits of approximately $14 million, which first begin to expire in 2036, and state credit carryforwards net of federal benefit of $7 million, which first begin to expire in 2023. The credit and loss carryforwards amount above has been reduced by $19 million of unrecognized tax benefits.

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- 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. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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