APS 2011 Annual Report Download - page 187

ARIZONA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
162
S-1. Income Taxes
APS is included in Pinnacle West’s consolidated tax return. However, when Pinnacle West
allocates income taxes to APS, it is done based upon APS’s taxable income computed on a stand-
alone basis, in accordance with the tax sharing agreement.
Certain assets and liabilities are reported differently for income tax purposes than they are for
financial statements purposes. The tax effect of these differences is recorded as deferred taxes. We
calculate deferred taxes using currently enacted 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 and pension and other postretirement benefits. The regulatory liabilities primarily relate
to deferred taxes resulting from ITCs and the change in income tax rates.
In accordance with regulatory requirements, APS investment tax credits 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.
During the first quarter of 2010, the Company reached a settlement with the IRS with regard
to the examination of tax returns for the years ended December 31, 2005 through 2007. As a result
of this settlement, net uncertain tax positions decreased $62 million, including approximately $3
million which decreased our effective tax rate. Additionally, the settlement resulted in the
recognition of net interest benefits of approximately $4 million through the effective tax rate.
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):
2011 2010 2009
Total unrecognized tax benefits, January 1 $ 126,698 $ 199,887 $ 62,409
Additions for tax positions of the current
year 10,915 7,551 44,094
Additions for tax positions of prior years -- -- 98,269
Reductions for tax positions of prior years
for:
Changes in judgment (1,555) (10,964) --
Settlements with taxing authorities (124) (61,820) (4,089)
Lapses of applicable statute of
limitations (110) (7,956) (796)
Total unrecognized tax benefits,
December 31 $ 135,824 $ 126,698 $ 199,887
Included in the balance of unrecognized tax benefits at December 31, 2011, 2010 and 2009
were approximately $8 million, $6 million and $15 million, respectively, of tax positions that, if
recognized, would decrease our effective tax rate.