Income Taxes

12 Months Ended

Dec. 31, 2020

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 Consolidated 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.

The Tax Act reduced 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 was substantially offset by a net regulatory liability.

Federal income tax laws require the amortization of a majority of this net regulatory liability 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 of 2018, the Company began amortization of FERC jurisdictional net excess deferred tax liabilities in 2018. On March 13, 2019, the ACC approved the Company’s proposal to amortize non-depreciation related net excess deferred tax liabilities subject to its jurisdiction over a twelve-month period. As a result, the Company began amortization in March 2019. The Company recorded $14 million and $57 million of income tax benefit related to the amortization of these non-depreciation related net excess deferred tax liabilities in 2020 and 2019, respectively. On October 29, 2019, the ACC approved the Company’s proposal to amortize depreciation related net excess deferred tax liabilities subject to its jurisdiction over a 28.5-year period with amortization to retroactively begin as of January 1, 2018. The Company recorded $31 million and $62 million of income tax benefit related to amortization of these depreciation related liabilities in 2020 and 2019, respectively. (See Note 4 for more details.)

In August 2018, U.S. Treasury proposed regulations that clarified 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. However, these proposed regulations were ambiguous with respect to regulated public utility property placed in service on or after January 1, 2018. In September 2019, U.S. Treasury issued final regulations, which replaced the August 2018 proposed regulations. These final regulations did not materially impact any tax position taken by the Company for property placed in service after September 27, 2017 and before January 1, 2018.

In September 2020, U.S. Treasury issued final regulations, which clarify bonus depreciation transition rules under the Tax Act for property placed in service by regulated public utilities after December 31, 2017. The final regulations provide that certain regulated public utility property which was under construction prior to September 28, 2017 and placed in service between January 1, 2018 and December 31, 2020 continues to be eligible for bonus depreciation under the rules and bonus depreciation phase-downs in effect prior to enactment of the Tax Act. These final regulations do not materially impact any tax position taken by the Company for property which was under construction prior to September 28, 2017 and placed in service between January 1, 2018 and December 31, 2020.

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 Statements of Income.

Net income associated with the Palo Verde sale leaseback VIEs is not subject to tax.  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. (See Note 18 for additional details related to the Palo Verde sale leaseback VIEs.)

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
	2020		2019		2018		2020		2019		2018
Total unrecognized tax benefits, January 1	$	43,435	$	40,731	$	41,966	$	43,435	$	40,731	$	41,966
Additions for tax positions of the current year	3,418		3,373		3,436		3,418		3,373		3,436
Additions for tax positions of prior years	1,431		1,843		2,696		1,431		1,843		2,696
Reductions for tax positions of prior years for:
Changes in judgment	(1,965)		(2,078)		(1,764)		(1,965)		(2,078)		(1,764)
Settlements with taxing authorities	—		—		—		—		—		—
Lapses of applicable statute of limitations	(664)		(434)		(5,603)		(664)		(434)		(5,603)
Total unrecognized tax benefits, December 31	$	45,655	$	43,435	$	40,731	$	45,655	$	43,435	$	40,731

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
	2020		2019		2018		2020		2019		2018
Tax positions, that if recognized, would decrease our effective tax rate	$	25,714	$	22,813	$	19,504	$	25,714	$	22,813	$	19,504

As of the balance sheet date, the tax year ended December 31, 2017 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 2016.

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
	2020		2019		2018		2020		2019		2018
Unrecognized tax benefit interest expense/(benefit) recognized	$	266	$	459	$	(780)	$	266	$	459	$	(780)

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
	2020		2019		2018		2020		2019		2018
Unrecognized tax benefit interest accrued	$	1,855	$	1,589	$	1,130	$	1,855	$	1,589	$	1,130

Additionally, as of December 31, 2020, 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,
	2020		2019		2018		2020		2019		2018
Current:
Federal	$	11,869	$	(13,551)	$	18,375	$	57,299	$	(54,697)	$	88,180
State	1,932		3,195		3,342		99		695		1,877
Total current	13,801		(10,356)		21,717		57,398		(54,002)		90,057
Deferred:
Federal	53,398		(14,982)		94,721		15,122		29,321		32,436
State	10,974		9,565		17,464		16,244		15,109		22,321
Total deferred	64,372		(5,417)		112,185		31,366		44,430		54,757
Income tax expense/(benefit)	$	78,173	$	(15,773)	$	133,902	$	88,764	$	(9,572)	$	144,814

The following chart compares pretax income at the 21% statutory federal income tax rate to income tax expense (dollars in thousands):

	Pinnacle West Consolidated						APS Consolidated
	Year Ended December 31,						Year Ended December 31,
	2020		2019		2018		2020		2019		2018
Federal income tax expense at statutory rate	$	136,127	$	113,828	$	139,533	$	142,020	$	120,790	$	154,260
Increases (reductions) in tax expense resulting from:
State income tax net of federal income tax benefit	19,146		18,599		23,115		20,124		19,267		24,531
State income tax credits net of federal income tax benefit	(8,951)		(8,519)		(6,704)		(7,213)		(6,781)		(5,440)
Nondeductible expenditures associated with ballot initiative	—		—		7,879		—		—		—
Stock compensation	34		(2,252)		(1,804)		183		(1,054)		(780)
Excess deferred income taxes — Tax Cuts and Jobs Act	(50,543)		(124,082)		(6,725)		(50,543)		(124,082)		(4,715)
Allowance for equity funds used during construction (see Note 1)	(2,747)		(2,476)		(7,231)		(2,747)		(2,476)		(7,231)
Palo Verde VIE noncontrolling interest (see Note 18)	(4,094)		(4,094)		(4,094)		(4,094)		(4,094)		(4,094)
Investment tax credit amortization	(7,510)		(6,851)		(6,742)		(7,510)		(6,851)		(6,742)
Other	(3,289)		74		(3,325)		(1,456)		(4,291)		(4,975)
Income tax expense/(benefit)	$	78,173	$	(15,773)	$	133,902	$	88,764	$	(9,572)	$	144,814

     The components of the net deferred income tax liability were as follows (dollars in thousands):

	Pinnacle West Consolidated				APS Consolidated
	December 31,				December 31,
	2020		2019		2020		2019
DEFERRED TAX ASSETS
Risk management activities	$	4,287	$	17,552	$	4,287	$	17,552
Regulatory liabilities:
Excess deferred income taxes — Tax Cuts and Jobs Act	319,091		335,877		319,091		335,877
Asset retirement obligation and removal costs	157,470		143,011		157,470		143,011
Unamortized investment tax credits	50,879		52,236		50,879		52,236
Other postretirement benefits	95,778		43,841		95,778		43,841
Other	43,551		52,382		43,551		52,382
Operating lease liabilities	107,853		15,497		107,414		15,497
Pension liabilities	45,853		73,210		40,168		67,976
Coal reclamation liabilities	42,065		40,837		42,065		40,837
Renewable energy incentives	25,355		28,066		25,355		28,066
Credit and loss carryforwards	26,460		54,795		8,034		10,992
Other	78,113		47,605		78,113		55,451
Total deferred tax assets	996,755		904,909		972,205		863,718
DEFERRED TAX LIABILITIES
Plant-related	(2,489,899)		(2,448,458)		(2,489,899)		(2,448,458)
Risk management activities	(1,174)		(27)		(1,174)		(27)
Pension and other postretirement assets	(123,462)		(21,892)		(122,580)		(21,458)
Other special use funds	(42,927)		(44,507)		(42,927)		(44,507)
Operating lease right-of-use assets	(107,853)		(15,497)		(107,414)		(15,497)
Regulatory assets:
Allowance for equity funds used during construction	(41,038)		(40,023)		(41,038)		(40,023)
Deferred fuel and purchased power	(47,673)		(35,162)		(47,673)		(35,162)
Pension benefits	(116,219)		(163,339)		(116,219)		(163,339)
Retired power plant costs	(35,214)		(42,228)		(35,214)		(42,228)
Other	(106,227)		(82,722)		(106,227)		(82,722)
Other	(20,472)		(3,393)		(5,513)		(3,393)
Total deferred tax liabilities	(3,132,158)		(2,897,248)		(3,115,878)		(2,896,814)
Deferred income taxes — net	$	(2,135,403)	$	(1,992,339)	$	(2,143,673)	$	(2,033,096)

As of December 31, 2020, PNW Consolidated deferred tax assets for credit and loss carryforwards relate to federal general business credits of approximately $35 million, which first begin to expire in 2036 and state credit carryforwards net of federal benefit of $33 million, which first begin to expire in 2023. PNW Consolidated credit and loss carryforwards amount above has been reduced by $42 million of unrecognized tax benefits.

As of December 31, 2020, APS Consolidated deferred tax assets for credit and loss carryforwards relate to state credit carryforwards net of federal benefit of $16 million, which first begin to expire in 2024. APS Consolidated credit and loss carryforwards amount above has been reduced by $8 million of unrecognized tax benefits.