APS 2013 Annual Report Download - page 168

Table of Contents
ARIZONA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
The $71 million long-term income tax receivable on APS’s Consolidated Balance Sheets as of December 31, 2012 represented the anticipated refund
related to an APS tax accounting method change approved by the IRS in the third quarter of 2009. On July 9, 2013, IRS guidance was released which
provided clarification regarding the timing and amount of this cash receipt. As a result of this guidance, uncertain tax positions decreased $67 million during
the third quarter. This decrease in uncertain tax positions resulted in a corresponding increase to the total anticipated refund due from the IRS and an offsetting
increase in long-term deferred tax liabilities. Additionally, as a result of this IRS guidance, the $138 million anticipated refund was reclassified to current
income tax receivable.
During the year ended December 31, 2013, the IRS finalized the examination of tax returns for the years ended December 31, 2008 and 2009, and the
$138 million anticipated refund was reduced by approximately $2 million to reflect the outcome of this examination. On December 17, 2013, the Joint
Committee on Taxation approved the anticipated refund. Cash related to this refund was received in the first quarter of 2014.
On September 13, 2013, the U.S. Treasury Department released final income tax regulations on the deduction and capitalization of expenditures
related to tangible property. These final regulations apply to tax years beginning on or after January 1, 2014. Several of the provisions within the regulations
will require a tax accounting method change to be filed with the IRS resulting in a cumulative effect adjustment. To account for the adoption of these
regulations plant-related long-term deferred tax liabilities decreased by $84 million, with the offsetting decrease to current deferred income tax assets. Prior to
the issuance of these regulations, this $84 million would have been repaid over 20 years through lower tax depreciation deductions.
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