Income Taxes (Tables)

12 Months Ended

Dec. 31, 2017

Schedule of unrecognized tax benefits roll forward

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
	2017			2016			2015			2017			2016			2015
Total unrecognized tax benefits, January 1	$	36,075		$	34,447		$	44,775		$	36,075		$	34,447		$	44,775
Additions for tax positions of the current year	2,937			2,695			2,175			2,937			2,695			2,175
Additions for tax positions of prior years	4,783			886			—			4,783			886			—
Reductions for tax positions of prior years for:
Changes in judgment	(1,829		)	(1,953		)	(10,244		)	(1,829		)	(1,953		)	(10,244		)
Settlements with taxing authorities	—			—			—			—			—			—
Lapses of applicable statute of limitations	—			—			(2,259		)	—			—			(2,259		)
Total unrecognized tax benefits, December 31	$	41,966		$	36,075		$	34,447		$	41,966		$	36,075		$	34,447

Summary of unrecognized tax benefits

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
	2017		2016		2015		2017		2016		2015
Tax positions, that if recognized, would decrease our effective tax rate	$	16,373	$	11,313	$	9,523	$	16,373	$	11,313	$	9,523

The amount of interest expense or benefit recognized related to unrecognized tax benefits are as follows (dollars in thousands):



	Pinnacle West Consolidated							APS Consolidated
	2017		2016		2015			2017		2016		2015
Unrecognized tax benefit interest expense/(benefit) recognized	$	577	$	529	$	(161	)	$	577	$	529	$	(161	)

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
	2017		2016		2015		2017		2016		2015
Unrecognized tax benefit interest accrued	$	1,910	$	1,333	$	804	$	1,910	$	1,333	$	804

Components of income tax expense

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,
	2017		2016		2015			2017		2016		2015
Current:
Federal	$	11,624	$	8,630	$	(12,335	)	$	21,512	$	711	$	6,485
State	3,052		1,259		4,763			2,778		4,276		7,813
Total current	14,676		9,889		(7,572		)	24,290		4,987		14,298
Deferred:
Federal	223,729		201,743		221,505			221,078		215,178		208,326
State	19,867		24,779		23,787			23,800		25,677		23,217
Total deferred	243,596		226,522		245,292			244,878		240,855		231,543
Income tax expense	$	258,272	$	236,411	$	237,720		$	269,168	$	245,842	$	245,841

Comparison of pretax income from continuing operations at the federal income tax rate to income tax expense - continuing operations

The following chart compares pretax income at the 35% federal income tax rate to income tax expense (dollars in thousands):



	Pinnacle West Consolidated									APS Consolidated
	Year Ended December 31,									Year Ended December 31,
	2017			2016			2015			2017			2016			2015
Federal income tax expense at 35% statutory rate	$	268,177		$	244,278		$	242,869		$	277,540		$	254,617		$	250,267
Increases (reductions) in tax expense resulting from:
State income tax net of federal income tax benefit	14,897			16,311			18,265			17,276			18,750			20,433
Credits and favorable adjustments related to prior years resolved in current year	—			—			(2,169		)	—			—			(1,892		)
Medicare Subsidy Part-D	853			844			837			853			844			837
Stock compensation	(6,659		)	(2,951		)	—			(3,489		)	(1,937		)	—
Excess Deferred Income Taxes - Tax Cuts and Jobs Act	9,348			—			—			9,431			—			—
Allowance for equity funds used during construction (see Note 1)	(12,937		)	(11,724		)	(9,711		)	(12,937		)	(11,724		)	(9,711		)
Palo Verde VIE noncontrolling interest (see Note 18)	(6,823		)	(6,823		)	(6,626		)	(6,823		)	(6,823		)	(6,626		)
Investment tax credit amortization	(6,715		)	(5,887		)	(5,527		)	(6,715		)	(5,887		)	(5,527		)
Other	(1,869		)	2,363			(218		)	(5,968		)	(1,998		)	(1,940		)
Income tax expense	$	258,272		$	236,411		$	237,720		$	269,168		$	245,842		$	245,841

Components of the net deferred income tax liability

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



	Pinnacle West Consolidated						APS Consolidated
	December 31,						December 31,
	2017			2016			2017			2016
DEFERRED TAX ASSETS
Risk management activities	$	25,103		$	26,614		$	25,103		$	26,614
Regulatory liabilities:
Excess Deferred Income Taxes - Tax Cuts and Jobs Act	376,906			—			376,906			—
Asset retirement obligation and removal costs	135,847			200,140			135,847			200,140
Unamortized investment tax credits	54,661			113,195			54,661			113,195
Other postretirement benefits	47,021			60,375			47,021			60,375
Other	37,489			63,311			37,489			63,311
Pension liabilities	83,126			204,436			77,280			194,981
Renewable energy incentives	33,546			56,379			33,546			56,379
Credit and loss carryforwards	53,946			75,944			1,920			1,645
Other	102,432			158,421			108,223			187,453
Total deferred tax assets	950,077			958,815			897,996			904,093
DEFERRED TAX LIABILITIES
Plant-related	(2,220,886		)	(3,297,989		)	(2,220,886		)	(3,297,989		)
Risk management activities	(491		)	(7,594		)	(491		)	(7,594		)
Other postretirement assets	(66,134		)	(63,477		)	(65,733		)	(62,819		)
Regulatory assets:
Allowance for equity funds used during construction	(36,365		)	(61,088		)	(36,365		)	(61,088		)
Deferred fuel and purchased power — mark-to-market	(40,778		)	(21,396		)	(40,778		)	(21,396		)
Pension benefits	(142,848		)	(274,184		)	(142,848		)	(274,184		)
Retired power plant costs (see Note 3)	(53,611		)	(49,166		)	(53,611		)	(49,166		)
Other	(74,423		)	(123,987		)	(74,423		)	(123,987		)
Other	(5,346		)	(5,166		)	(5,346		)	(5,165		)
Total deferred tax liabilities	(2,640,882		)	(3,904,047		)	(2,640,481		)	(3,903,388		)
Deferred income taxes — net	$	(1,690,805	)	$	(2,945,232	)	$	(1,742,485	)	$	(2,999,295	)