PINNACLE WEST CAPITAL CORP
10-Qs and 10-Ks
PROXIES
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to
| Commission File | Registrants; State of Incorporation; | IRS Employer | ||
| Number | Addresses; and Telephone Number | Identification No. | ||
| 1-8962 |
PINNACLE WEST CAPITAL CORPORATION
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86-0512431 | ||
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(An Arizona corporation)
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400 North Fifth Street, P.O. Box 53999
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Phoenix, Arizona 85072-3999
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(602) 250-1000
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| 1-4473 |
ARIZONA PUBLIC SERVICE COMPANY
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86-0011170 | ||
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(An Arizona corporation)
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400 North Fifth Street, P.O. Box 53999
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Phoenix, Arizona 85072-3999
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(602) 250-1000
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Securities registered pursuant to
Section 12(b)
of the Act:
| Title Of Each Class | Name Of Each Exchange On Which Registered | |||
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PINNACLE WEST CAPITAL CORPORATION
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Common Stock, No Par Value | New York Stock Exchange | ||
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ARIZONA PUBLIC SERVICE COMPANY
|
None | None |
Securities registered pursuant to
Section 12(g)
of the Act:
ARIZONA PUBLIC SERVICE COMPANY Common Stock, Par Value $2.50 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
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PINNACLE WEST CAPITAL CORPORATION
|
Yes þ | No o | ||||||||||
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ARIZONA PUBLIC SERVICE COMPANY
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Yes þ | No o | ||||||||||
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
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PINNACLE WEST CAPITAL CORPORATION
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Yes o | No þ | ||||||||||
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ARIZONA PUBLIC SERVICE COMPANY
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Yes o | No þ | ||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
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PINNACLE WEST CAPITAL CORPORATION
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Yes þ | No o | ||||||||||
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ARIZONA PUBLIC SERVICE COMPANY
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Yes þ | No o | ||||||||||
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
|
PINNACLE WEST CAPITAL CORPORATION
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Yes o | No o | ||||||||||
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ARIZONA PUBLIC SERVICE COMPANY
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Yes o | No o | ||||||||||
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or in any amendment to this Form 10-K.
þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
PINNACLE WEST CAPITAL CORPORATION
|
Large accelerated filer
þ
|
Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) |
ARIZONA PUBLIC SERVICE COMPANY
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether each registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes
o
No
þ
State the aggregate market value of the voting and non-voting common equity held by non-affiliates,
computed by reference to the price at which the common equity was last sold, or the average bid and
asked price of such common equity, as of the last business day of each registrant’s most recently
completed second fiscal quarter:
|
PINNACLE WEST CAPITAL CORPORATION
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$3,035,693,863 as of June 30, 2009 | |
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ARIZONA PUBLIC SERVICE COMPANY
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$0 as of June 30, 2009 |
The number of shares outstanding of each registrant’s common stock as of February 15, 2010
|
PINNACLE WEST CAPITAL CORPORATION
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101,445,202 shares | |
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ARIZONA PUBLIC SERVICE COMPANY
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Common Stock, $2.50 par value, 71,264,947 shares. Pinnacle West Capital Corporation is the sole holder of Arizona Public Service Company’s Common Stock. |
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Pinnacle West Capital Corporation’s definitive Proxy Statement relating to its Annual
Meeting of Shareholders to be held on May 19, 2010 are incorporated by reference into Part III
hereof.
Arizona Public Service Company meets the conditions set forth in General Instruction I(1)(a)
and (b) of
Form 10-K
and is therefore filing this form with the reduced disclosure format allowed
under that General Instruction.
TABLE OF CONTENTS
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This combined
Form 10-K
is separately filed by Pinnacle West and APS. Each registrant is
filing on its own behalf all of the information contained in this
Form 10-K
that relates to such
registrant and, where required, its subsidiaries. Except as stated in the preceding sentence,
neither registrant is filing any information that does not relate to such registrant, and therefore
makes no representation as to any such information. The information required with respect to each
company is set forth within the applicable items. Item 7 of this report is divided into two
sections — Pinnacle West Consolidated and APS. The Pinnacle West Consolidated section describes
Pinnacle West and its subsidiaries on a consolidated basis, including discussions of Pinnacle
West’s regulated utility and non-utility operations. Item 8 of this report includes Consolidated
Financial Statements of Pinnacle West and Financial Statements of APS. Item 8 also includes Notes
to Pinnacle West’s Consolidated Financial Statements, the majority of which also relates to APS,
and Supplemental Notes, which only relate to APS’ Financial Statements.
i
Table of Contents
GLOSSARY OF NAMES AND TECHNICAL TERMS
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ACC
|
Arizona Corporation Commission | |
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ADEQ
|
Arizona Department of Environmental Quality | |
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AFUDC
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Allowance for Funds Used During Construction | |
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ANPP
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Arizona Nuclear Power Project, also known as Palo Verde | |
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APS
|
Arizona Public Service Company, a subsidiary of the Company | |
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APSES
|
APS Energy Services Company, Inc., a subsidiary of the Company | |
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Base Fuel Rate
|
The portion of APS’ retail base rates attributable to fuel and purchased power costs | |
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Cholla
|
Cholla Power Plant | |
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DOE
|
United States Department of Energy | |
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El Dorado
|
El Dorado Investment Company, a subsidiary of the Company | |
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EPA
|
United States Environmental Protection Agency | |
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FASB
|
Financial Accounting Standards Board | |
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FERC
|
United States Federal Energy Regulatory Commission | |
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Four Corners
|
Four Corners Power Plant | |
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kV
|
Kilovolt, one thousand volts | |
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kWh
|
Kilowatt-hour, one thousand watts per hour | |
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MW
|
Megawatt, one million watts | |
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Native Load
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Retail and wholesale sales supplied under traditional cost-based rate regulation | |
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Navajo Plant
|
Navajo Generating Station | |
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NRC
|
United States Nuclear Regulatory Commission | |
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OCI
|
Other comprehensive income | |
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Palo Verde
|
Palo Verde Nuclear Generating Station | |
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Pinnacle West
|
Pinnacle West Capital Corporation (any use of the words “Company,” “we,” and “our” refer to Pinnacle West) | |
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Pinnacle West Marketing & Trading
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Pinnacle West Marketing & Trading Co., LLC, a subsidiary of the Company | |
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PRP
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Potentially responsible party under Superfund | |
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PSA
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Power supply adjustor approved by the ACC to provide for recovery or refund of variations in actual fuel and purchased power costs compared with the Base Fuel Rate | |
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Salt River Project
|
Salt River Project Agricultural Improvement and Power District | |
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SunCor
|
SunCor Development Company, a subsidiary of the Company | |
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TCA
|
Transmission cost adjustor | |
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VIE
|
Variable-interest entity | |
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West Phoenix
|
West Phoenix Power Plant |
Table of Contents
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements based on current expectations. These
forward-looking statements are often identified by words such as “estimate,” “predict,” “may,”
“believe,” “plan,” “expect,” “require,” “intend,” “assume” and similar words. Because actual
results may differ materially from expectations, we caution you not to place undue reliance on
these statements. A number of factors could cause future results to differ materially from
historical results, or from outcomes currently expected or sought by Pinnacle West or APS. These
factors include:
| • | regulatory and judicial decisions, developments and proceedings; |
| • | our ability to achieve timely and adequate rate recovery of our costs; |
| • | our ability to reduce capital expenditures and other costs while maintaining reliability and customer service levels; |
| • | variations in demand for electricity, including those due to weather, the general economy, customer and sales growth (or decline), and the effects of energy conservation measures; |
| • | power plant performance and outages; |
| • | volatile fuel and purchased power costs; |
| • | fuel and water supply availability; |
| • | new legislation or regulation relating to greenhouse gas emissions, renewable energy mandates and energy efficiency standards; |
| • | our ability to meet renewable energy requirements and recover related costs; |
| • | risks inherent in the operation of nuclear facilities, including spent fuel disposal uncertainty; |
| • | competition in retail and wholesale power markets; |
| • | the duration and severity of the economic decline in Arizona and current credit, financial and real estate market conditions; |
| • | the cost of debt and equity capital and the ability to access capital markets when required; |
| • | restrictions on dividends or other burdensome provisions in our credit agreements and ACC orders; |
| • | our ability, or the ability of our subsidiaries, to meet debt service obligations; |
| • | changes to our credit ratings; |
| • | the investment performance of the assets of our nuclear decommissioning trust, pension, and other postretirement benefit plans and the resulting impact on future funding requirements; |
| • | liquidity of wholesale power markets and the use of derivative contracts in our business; |
| • | potential shortfalls in insurance coverage; |
| • | new accounting requirements or new interpretations of existing requirements; |
| • | transmission and distribution system conditions and operating costs; |
| • | the ability to meet the anticipated future need for additional baseload generation and associated transmission facilities in our region; |
| • | the ability of our counterparties and power plant participants to meet contractual or other obligations; |
| • | technological developments in the electric industry; and |
| • | economic and other conditions affecting the real estate market in SunCor’s market areas. |
These and other factors are discussed in Risk Factors described in Item 1A of this report,
which you should review carefully before placing any reliance on our
financial statements or disclosures. Neither Pinnacle
West nor APS assumes any obligation to update any forward-looking statements, even if our internal
estimates change, except as may be required by applicable law.
2
Table of Contents
PART I
ITEM 1. BUSINESS
Pinnacle West
Pinnacle West is a holding company that conducts business through its subsidiaries. We derive
the majority of our revenues and earnings from our wholly-owned subsidiary, APS. APS is a
vertically-integrated electric utility that provides either retail or wholesale electric service to
most of the State of Arizona, with the major exceptions of about one-half of the Phoenix
metropolitan area, the Tucson metropolitan area and Mohave County in northwestern Arizona.
Operating Revenues (in thousands)
:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
APS
|
$ | 3,149,500 | $ | 3,133,496 | $ | 2,936,277 | ||||||
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Percentage of Pinnacle West Consolidated
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96% | 95% | 89% | |||||||||
Pinnacle West’s other first-tier subsidiaries are SunCor, APSES and El Dorado. Additional
information related to these businesses is provided later in this report.
Our reportable business segments are the regulated electricity segment, which consists of
traditional regulated retail and wholesale electricity businesses (primarily electric service to
Native Load customers) and related activities, and includes electricity generation, transmission
and distribution, and the real estate segment, which consists of real estate development and
investment activities in the western United States.
Due to the continuing distressed conditions in the real estate markets, in 2009 our
real-estate subsidiary, SunCor, undertook a program to dispose of its homebuilding operations,
master-planned communities, land parcels, commercial assets and golf courses in order to eliminate
its outstanding debt. As a part of this plan to sell substantially all of SunCor’s assets, the
real estate segment may no longer be a reporting segment in the future. See Note 17 for financial
information of our business segments.
BUSINESS OF ARIZONA PUBLIC SERVICE COMPANY
APS currently provides electric service to approximately 1.1 million customers. We own or
lease more than 6,280 MW of regulated generation capacity and we hold a mix of both long-term and
short-term power purchase agreements for additional capacity, including a variety of agreements for
the purchase of renewable energy. During 2009, no single purchaser or user of energy accounted for
more than 1.1% of our electric revenues.
3
Table of Contents
The following map shows APS’ retail service territory, including the locations of its
generating facilities and principal transmission lines.
Energy Sources and Resource Planning
To serve its customers, APS obtains power through its various generation stations and through
power purchase agreements. Resource planning is an important function necessary to meet Arizona’s
future energy needs. APS’ sources of energy by fuel type during 2009 were: coal — 36.3%;
nuclear — 25.9%; purchased power — 20.6%; and gas, oil and other — 17.2%.
Generation Facilities
APS has ownership interests in or leases the coal, nuclear, gas, oil and solar generating
facilities described below. For additional information regarding these facilities, see Item 2.
Coal Fueled Generating Facilities
Four Corners
— Four Corners is a 5-unit coal-fired power plant located in the northwestern
corner of New Mexico. APS operates the plant and owns 100% of Four Corners Units 1, 2 and 3 and
15% of Units 4 and 5. APS has a total entitlement from Four Corners of 785 MW. The Four Corners
plant site is leased from the Navajo Nation and is also subject to an easement from the
federal government. See “Plant and Transmission Line Leases and Easements on Indian Lands” in Item
2 for additional information. APS purchases all of Four Corners’ coal requirements from a supplier
with a long-term lease of coal reserves with the Navajo Nation. The Four Corners coal contract
runs through 2016.
4
Table of Contents
Cholla
— Cholla is a 4-unit coal-fired power plant located in northeastern Arizona. APS
operates the plant and owns 100% of Cholla Units 1, 2 and 3. PacifiCorp owns Cholla Unit 4 and APS
operates that unit for PacifiCorp. APS has a total entitlement from Cholla of 647 MW. APS
purchases all of Cholla’s coal requirements from a coal supplier that mines all of the coal under
long-term leases of coal reserves with the federal government and private landholders. The Cholla
coal contract runs through 2024. APS has the ability under the contract to reduce its annual coal
commitment and purchase a portion of Cholla’s coal requirements on the spot market to take
advantage of competitive pricing options and to purchase coal required for increased operating
capacity. APS believes that the current fuel contracts and competitive fuel supply options ensure
the continued operation of Cholla for its useful life. In addition, APS has a long-term coal
transportation contract.
Navajo Generating Station
— The Navajo Plant is a 3-unit coal-fired power plant located in
northern Arizona. Salt River Project operates the plant and APS owns a 14% interest in Navajo
Units 1, 2 and 3. APS has a total entitlement from the Navajo Plant of 315 MW. The Navajo Plant’s
coal requirements are purchased from a supplier with long-term leases from the Navajo Nation and
the Hopi Tribe. The Navajo Plant is under contract with its coal supplier through 2011, with
options to extend through 2019. The Navajo Plant site is leased from the Navajo Nation and is also
subject to an easement from the federal government. See “Plant and Transmission Line Leases and
Easements on Indian Lands” in Item 2 for additional information.
These coal plants face uncertainties related to existing and potential legislation and
regulation that could significantly impact their economics and operations. See “Environmental
Matters” below and “Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Capital Expenditures” in Item 7 for environmental and climate change developments
impacting these coal facilities. See Note 11 for information regarding APS’ coal mine reclamation
obligations.
Nuclear
Palo Verde Nuclear Generating Station —
Palo Verde is a nuclear power plant located about 50
miles west of Phoenix, Arizona. APS operates the plant and owns 29.1% of Palo Verde Units 1 and 3
and about 17% of Unit 2. In addition, APS leases about 12.1% of Unit 2, resulting in a 29.1%
combined interest in that Unit. APS has a total entitlement from Palo Verde of 1,146 MW.
Palo Verde Leases —
In 1986, APS sold about 42% of its share of Palo Verde Unit 2 and certain
common facilities in three separate sale leaseback transactions. APS accounts for these leases as
operating leases. The leases, which have terms of 29.5 years, contain options to renew the leases
or to purchase the property for fair market value at the end of the lease terms. APS must give
notice to the respective lessors between December 31, 2010 and December 31, 2012 if it wishes to
exercise, or not exercise, either of these options. We are analyzing these options. See Notes 9
and 20 for additional information regarding the Palo Verde Unit 2 sale leaseback transactions.
5
Table of Contents
Palo Verde Operating Licenses
—
Operation of each of the three Palo Verde units requires an
operating license from the NRC. The NRC issued full power operating licenses for Unit 1 in June
1985, Unit 2 in April 1986 and Unit 3 in November 1987. The full power operating licenses,
each valid for a period of 40 years, authorize APS, as operating agent for Palo Verde, to operate
the three Palo Verde units at full power. On December 15, 2008, APS applied for renewed operating
licenses for the Palo Verde units for a period of 20 years beyond the expirations of the current
licenses. The current NRC schedule for the applications estimates a final decision in the fall of
2011. APS is making preparations to secure resources necessary to operate the plant for the period
of extended operation.
Palo Verde Fuel Cycle —
The fuel cycle for Palo Verde is comprised of the following stages:
| • | mining and milling of uranium ore to produce uranium concentrates; |
| • | conversion of uranium concentrates to uranium hexafluoride; |
| • | enrichment of uranium hexafluoride; |
| • | fabrication of fuel assemblies; |
| • | utilization of fuel assemblies in reactors; and |
| • | storage and disposal of spent nuclear fuel. |
The Palo Verde participants are continually identifying their future nuclear fuel resource
needs and negotiating arrangements to fill those needs. The Palo Verde participants have
contracted for all of Palo Verde’s requirements for uranium concentrates through 2011. New
contracts are currently being negotiated that would meet the plant’s conversion services needs
through 2011, taking into account available inventory. The participants have also contracted for
all of Palo Verde’s enrichment services through 2013 and all of Palo Verde’s fuel assembly
fabrication services until at least 2015.
Spent Nuclear Fuel and Waste Disposal —
Palo Verde has sufficient capacity at its on-site
independent spent fuel storage installation (“ISFSI”) to store all of the nuclear fuel that will be
irradiated during the initial operating license period, through 2027. Additionally, Palo Verde has
sufficient capacity at its on-site ISFSI to store a portion of the fuel that will be irradiated
during the period of extended operation. If uncertainties regarding the United States government’s
obligation to accept and store used fuel are not favorably resolved, APS will evaluate alternative
storage solutions that may obviate the need to expand the ISFSI to accommodate all of the fuel that
will be irradiated during the period of extended operation. See “Palo Verde Nuclear Generating
Station” in Note 11 for a discussion of spent nuclear fuel and waste disposal.
NRC Inspection —
On February 22, 2007, the NRC issued a “white” finding (low to moderate safety
significance) due to electrical output issues with the Unit 3 emergency diesel generator that
occurred in 2006. Under the NRC’s Action Matrix, this finding, coupled with a previous NRC
“yellow” finding relating to a 2004 matter involving Palo Verde’s safety injection systems,
resulted in Palo Verde Unit 3 being placed in the “multiple/repetitive degraded cornerstone” column
of the NRC’s Action Matrix (“Column 4”), subjecting it to an enhanced NRC inspection regime.
Although only Palo Verde Unit 3 was in NRC’s Column 4, in order to adequately assess the need for
improvements, APS’ management conducted site-wide assessments of equipment and operations.
On March 24, 2009, the NRC informed APS that it was removing Palo Verde Unit 3 from Column 4,
removing Units 1 and 2 from the “one degraded cornerstone” column (“Column 3”) of the NRC’s Action
Matrix, and returning all three units of the plant to “Column
1” routine inspection and oversight by the NRC.
This notification followed the NRC’s completion of its inspections of the corrective actions taken
by Palo Verde to address the performance deficiencies that caused the NRC to place Unit 3 into
Column 4 and Units 1 and 2 into Column 3.
6
Table of Contents
Nuclear Decommissioning Costs
— APS currently relies on an external sinking fund mechanism to
meet the NRC financial assurance requirements for its interests in Palo Verde Units 1, 2 and 3.
The decommissioning costs of Palo Verde Units 1, 2 and 3 are currently included in APS’ ACC
jurisdictional rates. Decommissioning costs are recoverable through a non-bypassable system
benefits charge, which allows APS to maintain its external sinking fund mechanism. See Note 12 for
additional information about APS’ nuclear decommissioning costs.
Palo Verde Liability and Insurance Matters
— See “Palo Verde Nuclear Generating Station —
Nuclear Insurance” in Note 11 for a discussion of the insurance maintained by the Palo Verde
participants, including APS, for Palo Verde.
Natural Gas and Oil Fueled Generating Facilities
APS has six natural gas power plants located throughout Arizona, consisting of Redhawk,
located near the Palo Verde Nuclear Generating Station; Ocotillo, located in Tempe; Sundance,
located in Coolidge; West Phoenix, located in southwest Phoenix; Saguaro, located north of Tucson;
and Yucca, located near Yuma. Several of the units at Saguaro and Yucca run on either gas or oil.
APS has one oil power plant, Douglas, located in the town of Douglas, Arizona. APS owns and
operates each of these plants with the exception of one combustion turbine unit and one steam unit
at Yucca that are operated by APS and owned by the Imperial Irrigation District. APS has a total
entitlement from these plants of 3,389 MW. Gas for these plants is acquired through APS’ hedging
program. APS has long-term gas transportation agreements with three different companies, which
provide APS with fuel delivery through 2024. Fuel oil is acquired under short-term purchases
delivered primarily to West Phoenix, where it is distributed to APS’ other oil power plants by
truck.
Solar Facilities
APS owns and operates more than thirty on-grid and off-grid small solar systems around the
state. Together they have the capacity to produce about 6 MW of renewable energy. This fleet of
solar systems is anchored by a 3 MW facility located at the Prescott Airport and a 1 MW facility
located at APS’ Saguaro power plant.
Purchased Power Contracts
In addition to its own available generating capacity, APS purchases electricity under various
arrangements, including long-term contracts and purchases through short-term markets to supplement
its owned or leased generation and hedge its energy requirements. A substantial portion of APS’
purchased power expense is netted against wholesale sales on the Consolidated Statements of Income.
(See Note 18.) APS continually assesses its need for additional capacity resources to assure
system reliability. APS does not expect to require new conventional generation sources sooner than
2017, due to planned additions of renewable resources and energy efficiency initiatives.
Purchased Power Capacity —
APS’ purchased power capacity under long-term contracts, including
its renewable energy portfolio, is summarized in the tables below. All capacity values are based
on net capacity unless otherwise noted.
7
Table of Contents
CONVENTIONAL AGREEMENTS:
| Type | Dates Available | Capacity (MW) | ||
|
Purchase Agreement (a)
|
Year-round through December 2014 | Up to 90 | ||
|
Purchase Agreement (b)
|
Year-round through June 15, 2010 | 238 | ||
|
Exchange Agreement (c)
|
May 15 to September 15 annually through 2020 | 480 | ||
|
Tolling Agreement
|
June 2007 through May 2017 | 500 | ||
|
Tolling Agreement
|
June 2010 through October 2019 | 560 | ||
|
Day-Ahead Call Option Agreement
|
June 2007 through September 2015 (summer seasons) | 500 | ||
|
Day-Ahead Call
Option Agreement
|
June 2007 through summer 2016 | 150 | ||
|
Demand Response Agreement (d)
|
2010 through 2024 (summer seasons) | 100 |
| (a) | The capacity under this agreement varies by month, with a maximum capacity of 90 MW. | |
| (b) | The amount of electricity available to APS under this agreement is based in large part on customer demand and is adjusted annually. This contract is being replaced with a purchase agreement for approximately 36MW starting June 15, 2010 and ending June 14, 2020. | |
| (c) | This is a seasonal capacity exchange agreement under which APS receives electricity during the summer peak season (from May 15 to September 15) and APS returns a like amount of electricity during the winter season (from October 15 to February 15). | |
| (d) | The capacity under this agreement increases in a phased manner over the first three years to reach the 100 MW level by the summer of 2012. |
RENEWABLE AGREEMENTS:
| Type and Name | Location | Contract End Date | Capacity (MW) | |||
|
Operating Facilities:
|
||||||
|
Wind
|
||||||
|
Aragonne Mesa
|
Santa Rosa, NM | 2026 | 90 | |||
|
High Lonesome
|
Mountainair, NM | 2039 | 100 | |||
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Geothermal
|
||||||
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Salton Sea
|
Imperial County, CA | 2029 | 10 | |||
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Biomass
|
||||||
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White Mountain Power
|
Snowflake, AZ | 2023 | 10 | |||
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Biogas
|
||||||
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Glendale Landfill
|
Glendale, AZ | 2030 | 3 | |||
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Signed Agreements for
Other Facilities:
|
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Solar
|
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|
Solana (a)
|
Gila Bend, AZ | 2043 | 250 | |||
|
Solar 1 (b)
|
Ajo, AZ | 2036 | 5 | |||
|
Solar 2 (b)
|
Buckeye, AZ | 2035 | 6 | |||
|
Solar 3 (b)
|
Prescott, AZ | 2041 | 10 |
| (a) | Represents contracted capacity. | |
| (b) | Details of these agreements have not yet been publicly announced. |
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Current and Future Resources
Current Demand and Reserve Margin
Electric power demand is generally seasonal. In Arizona, demand for power peaks during the
hot summer months. APS’ 2009 peak one-hour demand on its electric system was recorded on July 27,
2009 at 7,218 MW, compared to the 2008 peak of 7,026 MW recorded on August 1, 2008. APS’ operable
generating capacity, together with firm purchases totaling 2,657 MW, including short-term seasonal
purchases and unit contingent purchases, resulted in an actual reserve margin, at the time of the
2009 peak demand, of 15.6%. The power actually available to APS from its resources fluctuates from
time to time due in part to planned and unplanned plant and transmission outages and technical
problems.
Future Resources and Resource Plan
On January 29, 2009, APS submitted a Resource Plan Report to the ACC proposing a diverse
portfolio of generation resources to address the projected 60% increase in customer peak demand by
2025, which equates to approximately 6,500 MW of new capacity resources and accounts for both new
resources needed to meet growing customer loads as well as resources that will be needed to
replace expiring long-term purchases.
On December 15, 2009, the ACC approved a modified resource planning rule that requires APS to
file by April 1
st
of each even year its resource plans for the next fifteen-year period.
The ACC’s modified rule also requires APS to file its first resource plan within 120 days after
the rule becomes effective. APS believes the modified rule will likely become effective by
mid-2010, requiring APS to file a revised resource plan by the Fall of 2010, which will supercede
the January 2009 filing. The modified rule also requires the ACC to issue an order with its
acknowledgment of APS’ resource plan within approximately nine months following its submittal.
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Renewable Energy Standard
In connection with its ongoing resource planning efforts, APS continues to focus on increasing
the percentage of its energy that is produced by renewable resources. In 2006, the ACC adopted the
Arizona Renewable Energy Standard and Tariff (the “Renewable Energy Standard” or “RES”). Under the
Renewable Energy Standard, electric utilities that are regulated by the ACC must supply an
increasing percentage of their retail electric energy sales from eligible renewable resources,
including solar, wind, biomass, biogas and geothermal technologies. The renewable energy
requirement is 2.5% of retail electric sales in 2010 and increases annually until it reaches 15% in
2025. In APS’ recent retail rate case settlement agreement, APS committed to, among other things,
an interim renewable energy target of 10% by year-end 2015, which is double the existing RES target
of 5% for that year. (See Note 3.) A component of the original RES is focused on stimulating
development of distributed energy systems (generally speaking, small-scale renewable technologies
that are located on customers’ properties). Accordingly, under the original RES, an increasing
percentage of that requirement must be supplied from distributed energy resources. This
distributed energy requirement is 20% of the overall RES requirement of 2.5% in 2010 and increases
to 30% of the applicable RES requirement in 2012 and subsequent years. The following table
summarizes these requirement standards and their timing:
| 2010 | 2015 | 2020 | 2025 | |||||||||||||
|
|
||||||||||||||||
|
RES as a % of retail electric sales
|
2.5 | % | 5.0 | % | 10.0 | % | 15.0 | % | ||||||||
|
Percent of RES to be supplied from distributed
energy resources
|
20.0 | % | 30.0 | % | 30.0 | % | 30.0 | % | ||||||||
|
APS’ RES commitment as a % of retail electric
sales per the retail rate case
settlement agreement
|
10.0 | % | ||||||||||||||
APS has a diverse portfolio of renewable resources including wind, geothermal, solar and
biomass, which currently collectively generates over 210 MW of renewable energy for its customers
via owned or contracted renewable generation facilities and an additional installed capacity of 21
MW equivalent of customer-sited distribution energy systems in operation. These current renewable
generation projects are either APS-owned solar facilities, as described under “Generation
Facilities — Solar Facilities” above, are acquired through long-term purchased power agreements, as
described under “Purchased Power Contracts” above, or are partially funded by renewable incentives
we offer to our customers. APS continues to actively consider opportunities to enhance its
renewable energy portfolio, both to ensure its compliance with the Renewable Energy Standard and to
meet the needs of its customer base.
Demand Side Management and Energy Efficiency
Arizona regulators are placing an increased focus on energy efficiency and demand side
management programs to encourage customers to conserve energy, while incentivizing utilities to aid
in these efforts that ultimately reduce the demand for energy. In December 2009, the ACC initiated
Energy Efficiency rulemaking, with a proposed Energy Efficiency Standard of 22% annual energy
savings by 2020. An ambitious standard, such as that proposed, will likely increase participation
by APS customers in these conservation and energy efficiency programs, which in turn will likely
impact Arizona’s future energy resource needs. Energy Efficiency Rules are expected to be formally
adopted in 2010. (See Note 3 for demand side management and energy efficiency obligations
resulting from APS’ recent retail rate case settlement.)
Economic Stimulus Projects
Through the American Recovery and Reinvestment Act of 2009 (“ARRA”), the Federal government is
making a number of programs available for utilities to develop renewable resources, improve
reliability and create jobs from the availability of economic stimulus funding. Certain programs
are also available through the State of Arizona.
In 2009, the DOE announced an ARRA commitment to fund the majority of a carbon dioxide
emission reduction research and development project in the amount of $70.5 million, which will be
located at our Cholla power plant. It also announced a commitment to fund, subject to final
negotiations, a $3.3 million high penetration photovoltaic generation study related to a proposed
APS community power project in Flagstaff, Arizona. These funding amounts are contingent upon
meeting certain project milestones, including DOE-established budget parameters, over the next four
years.
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APS has also been selected by the State of Arizona’s Department of Commerce as a sub-recipient
under the State’s ARRA award for the implementation of various distributed energy and
energy efficiency programs in Arizona. The State is in final negotiations to provide APS with
approximately $3.7 million from the State’s ARRA grant so that APS can implement certain solar
water heater, photovoltaic and/or wind energy related community projects.
APS intends to continue to evaluate additional funding opportunities under the ARRA programs
that may be of benefit to APS’ business, operations or community activities.
Competitive Environment and Regulatory Oversight
Retail
The ACC regulates APS’ retail electric rates and its issuance of securities. The ACC must
also approve any transfer or encumbrance of APS’ property used to provide retail electric service
and approve or receive prior notification of certain transactions between Pinnacle West, APS and
their respective affiliates.
APS is subject to varying degrees of competition from other investor-owned electric and gas
utilities in Arizona (such as Southwest Gas Corporation), as well as cooperatives, municipalities,
electrical districts and similar types of governmental or non-profit organizations. In addition,
some customers, particularly industrial and large commercial customers, may own and operate
generation facilities to meet some or all of their own energy requirements. This practice is
becoming more popular with customers installing or having installed products such as roof top solar
panels to meet or supplement their energy needs.
In 1999, the ACC approved rules for the introduction of retail electric competition in
Arizona. As a result, as of January 1, 2001, all of APS’ retail customers were eligible to choose
alternate energy suppliers. However, there are currently no active retail competitors offering
unbundled energy or other utility services to APS’ customers. In 2000, an Arizona Superior Court
found that the rules were in part unconstitutional and in other respects unlawful, the latter
finding being primarily on procedural grounds, and invalidated all ACC orders authorizing
competitive electric services providers to operate in Arizona. In 2004, the Arizona Court of
Appeals invalidated some, but not all of the rules and upheld the invalidation of the orders
authorizing competitive electric service providers. In 2005, the Arizona Supreme Court declined to
review the Court of Appeals decision.
To date, the ACC has taken no further or substantive action on either the rules or the prior
orders authorizing competitive electric service providers in response to the final Court of Appeals
decision. However, as a result of a new request for authorization to provide competitive retail
electric service by Sempra Energy Solutions, LLC, the ACC directed the ACC staff to investigate
whether such retail competition was in the public interest and what legal impediments remain to
competition in light of the Court of Appeals decision referenced above. The ACC staff’s report on
the results of its investigation is due to be filed with the ACC on April 1, 2010. At present,
only limited electric retail competition exists in Arizona and only with certain entities not
regulated by the ACC.
Currently, there are two matters pending with the ACC that involve a business model where
customers pay solar vendors for the installation and operation of solar facilities based on the
amount of energy produced. The ACC must make a determination whether these entities would be
considered “public service corporations” under the Arizona Constitution, causing them to be
regulated by the ACC. Use of such products by customers within our territory would result in some
level of competition; however, at this time we do not feel this would materially impact our
financial results. APS cannot predict when, and the extent to which, additional electric service providers will
enter or re-enter APS’ service territory.
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Table of Contents
Wholesale
The FERC regulates rates for wholesale power sales and transmission services. (See Note 3 for
information regarding APS’ transmission rates.) During 2009, approximately 4.8% of APS’ electric
operating revenues resulted from such sales and services. APS’ wholesale activity primarily
consists of managing fuel and purchased power risks in connection with the costs of serving retail
customer energy requirements. APS also sells, in the wholesale market, its generation output that
is not needed for APS’ Native Load and, in doing so, competes with other utilities, power marketers
and independent power producers. Additionally, subject to specified parameters, APS markets,
hedges and trades in electricity and fuels.
Environmental Matters
Climate Change
Legislative and Regulatory Initiatives.
In the past several years, the United States Congress
has considered bills that would regulate domestic greenhouse gas emissions. On June 26, 2009, the
House of Representatives approved the American Clean Energy and Security Act of 2009, H.R. 2454.
In addition to establishing clean energy programs, H.R. 2454 would establish a greenhouse gas
emission cap-and-trade system starting in 2012 applicable to about 85% of all emission sources in
the nation. A similar bill (Kerry-Boxer Bill, S. 1733) is pending before the Senate. Both of
these bills would allocate a certain number of allowances to local distribution companies (such as
APS) through 2030.
To the extent APS’ emissions exceed the allowances allocated to it under these proposed bills,
APS would have an “allowance gap.” APS would have to purchase enough allowances from the market to
fill these gaps. The table below illustrates the estimated cost impacts to APS in 2012 to acquire
allowances to fill its allowance gap, and the associated retail rate impacts to customers under
H.R. 2454 and S. 1733. For purposes of this illustration, the table provides three assumed
allowance prices of $20, $50 and $75 per metric ton.
| H.R. 2454 | S. 1733 | |||||||||||||||||
| Allowance Cost | Annual Cost | Annual Cost | ||||||||||||||||
| ($ per metric ton) | ($ in millions) | Rate Impact | ($ in millions) | Rate Impact | ||||||||||||||
| $ | 20 | $ | 68 | 2% | $ | 101 | 3% | |||||||||||
| $ | 50 | $ | 170 | 5% | $ | 252 | 8% | |||||||||||
| $ | 75 | $ | 255 | 8% | $ | 379 | 12% | |||||||||||
The actual economic and operational impact of this or any similar legislation on the Company
depends on a variety of factors, none of which can be fully known until such legislation passes and
the specifics of the resulting program are established. These factors include the terms of the
legislation with regard to allowed emissions; whether the permitted emissions allowances will be
allocated to source operators free of cost or auctioned; the cost to reduce emissions or buy
allowances in the marketplace; and the availability of offsets and mitigating factors to moderate
the costs of compliance. At the present time, we cannot predict what form of legislation, if any,
will ultimately pass.
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The EPA recently determined that greenhouse gas emissions endanger public health and welfare.
This determination was made in response to a 2007 United States Supreme Court ruling that
greenhouse gases fit within the Clean Air Act’s broad definition of “air pollutant” and, as a
result, the EPA has the authority to regulate greenhouse gas emissions of new motor vehicles under
the Clean Air Act. The recent endangerment finding could result in the EPA issuing new regulatory
requirements under the Clean Air Act for new and modified major greenhouse gas emitting sources,
including power plants. On September 30, 2009, the EPA announced a proposed rule under the Clean
Air Act requiring certain new and modified stationary sources, including power plants, to use the
best available control technology to minimize greenhouse gas
emissions. Several groups have filed lawsuits challenging the
EPA’s endangerment finding. At the present time we
cannot predict whether the proposed stationary source rule will be adopted in its current or a
revised form, what other rules or regulations may ultimately result
from the EPA’s finding, whether the parties challenging the
endangerment finding will be successful, and
what impact the proposed rule and potential other rules or regulations will have on APS’
operations.
In anticipation of potential future regulation of greenhouse gases under the Clean Air Act as
described above, on September 22, 2009, the EPA issued a mandatory greenhouse gas reporting rule.
The rule applies to direct greenhouse gas emissions from facilities such as APS’ power plants. We
expect that our incremental costs to comply with this rule will be immaterial since APS already
routinely reports CO
2
and other greenhouse gas emissions from its plants.
In addition to federal legislative initiatives, state specific initiatives may also impact our
business. While Arizona has not yet enacted any state specific legislation regarding greenhouse
gas emissions, the California legislature enacted AB 32 and SB 1368 in 2006 to address greenhouse
gas emissions and New Mexico is currently considering proposed legislation to address these issues.
We are monitoring these and other state legislative developments to understand the
extent to which they may affect our business, including our sales into the impacted states or the
ability of our out-of-state power plant participants to continue their
participation in certain coal-fired power plants.
If any emission reduction legislation or regulations are enacted, we will assess our
compliance alternatives, which may include replacement of existing equipment, installation of
additional pollution control equipment, purchase of allowances, retirement or suspension of
operations at certain coal-fired facilities, or other actions. Although associated capital
expenditures or operating costs resulting from greenhouse gas emission regulations or legislation
could be material, we believe that we would be able to recover the costs of these environmental
compliance initiatives through our rates.
Regional Initiative
.
In 2007, six western states (Arizona, California, New Mexico, Oregon,
Utah and Washington) and two Canadian provinces (British Columbia and Manitoba) entered into an
accord, the Western Climate Initiative (“WCI”), to reduce greenhouse gas emissions from automobiles
and certain industries, including utilities. Montana, Quebec and Ontario have also joined WCI.
WCI participants set a goal of reducing greenhouse gas emissions 15% below 2005 levels by 2020.
After soliciting public comment, in September 2008 WCI issued the design of a cap-and-trade program
for greenhouse gas emissions. Due in part
to the recent activity at the federal level discussed above, the initiative’s momentum and the
movement toward detailed proposed rules has slowed. On February 2,
2010, Arizona’s Governor issued an executive order stating that
Arizona will continue to be a member of WCI to monitor its
advancements in this area, but it will not implement the WCI regional cap-and-trade program. As a
result, while we continue to monitor the progress of WCI, at the
present time we do not believe it will have a material impact on our operations.
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Company Response to Climate Change Initiatives
.
We have undertaken a number of initiatives to
address emission concerns, including renewable energy procurement and development, promotion of
programs and rates that promote energy conservation, renewable energy use and energy efficiency,
and implementation of an active technology innovation effort to evaluate potential emerging new
technologies. APS currently has a diverse portfolio of renewable resources including wind,
geothermal, solar and biomass and we are focused on increasing the percentage of our energy that is
produced by renewable resources.
On May 18, 2009, we submitted a comprehensive Climate Change Management Plan to the ACC to
comply with an ACC order that directed APS to undertake a climate management plan, carbon emission
reduction study and commitment and action plan with public input and ACC review. The Climate
Change Management Plan details scientific, legislative and policy issues, potential physical and
financial risks to APS, greenhouse gas emission inventory, APS technology innovation and greenhouse
gas reduction efforts, and our companies’ strategic approach to climate change management.
In January 2008, APS joined the Climate Registry as a Founding Reporter. Founding Reporters
are companies that voluntarily joined the non-profit organization before May 2008 to measure and
report greenhouse gas emissions in a common, accurate and transparent manner consistent across
industry sectors and borders. APS will not participate in the Climate Registry after 2009 because
we will be reporting substantially the same information under the new EPA reporting rule. Pinnacle
West has also reported, and will continue to report, greenhouse gas emissions in its annual
Corporate Responsibility Report, which is available on our website
(
www.pinnaclewest.com
)
.
In addition to emissions data, the report provides information related to the Company, its approach
to sustainability and its workplace and environmental performance, as well as a copy of our Climate
Change Management Plan discussed above. The information on Pinnacle West’s website, including the
Corporate Responsibility Report, is not incorporated by reference into this report.
Climate Change Lawsuits.
In February 2008, the Native Village of Kivalina and the City of
Kivalina, Alaska filed a lawsuit in federal court in the Northern District of California against
nine oil companies, fourteen power companies (including Pinnacle West), and a coal company,
alleging that the defendants’ emissions of carbon dioxide contribute to global warming and
constitute a public and private nuisance. The plaintiffs also allege that the effects of global
warming will require the relocation of the village and they are seeking an unspecified amount of
monetary damages. In June 2008, the defendants filed motions to dismiss the action, which were
granted. The plaintiffs filed an appeal with the court in November 2009. We believe the action is
without merit and intend to continue to defend against the claims.
Similar nuisance lawsuits are currently pending in the 2nd and 5th Circuits. In the fall of
2009, the U.S. Courts of Appeals for each of these Circuits reversed lower court decisions and
ruled that the plaintiffs in both cases could bring common law nuisance lawsuits against
coal-burning utilities allegedly contributing to global warming. Both cases, as well as the
Kivalina case, raise political and legal considerations, including whether the courts can or should
be making climate change policy
decisions. We are not a party to either of these two lawsuits, but will monitor these developments
and their potential industry impacts.
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EPA Environmental Regulation
Regional Haze Rules.
Over a decade ago, the EPA announced regional haze rules to reduce
visibility impairment in national parks and wilderness areas. The rules require states (or, for
sources located on tribal land, the EPA) to determine what pollution control technologies
constitute the “best available retrofit technology” (“BART”) for certain older major stationary
sources. The EPA subsequently issued the Clean Air Visibility Rule, which provides guidelines on
how to perform a BART analysis.
ADEQ is currently undertaking a rulemaking process to address the Clean Air Visibility Rule
requirements. ADEQ’s rules were due to EPA Region 9 in December 2007, but are expected to be
submitted in 2010. As part of the rulemaking process, ADEQ required APS to perform a BART analysis
for Cholla. APS completed a BART analysis for Cholla and submitted its BART recommendations to
ADEQ on February 4, 2008. The recommendations include the installation of certain pollution
control equipment that APS believes constitutes BART. Once APS receives ADEQ’s final determination
as to what constitutes BART for Cholla, we will have five years to complete the installation of the
equipment and to achieve the emission limits established by ADEQ. However, in order to coordinate
with the plant’s other scheduled activities, APS is currently implementing portions of its
recommended plan for Cholla on a voluntary basis. Costs related to the implementation of these
portions of our recommended plan are included in our environmental expenditure estimates (see
“Management's Discussion and Analysis of Financial Condition and
Results of Operations — Capital Expenditures” in Item 7).
EPA Region 9 requested that APS, as the operating agent for Four Corners, and SRP, as the
operating agent for the Navajo Plant, perform a BART analysis for Four Corners and the Navajo
Plant, respectively. APS and SRP each submitted an analysis to the EPA concluding that certain
combustion control equipment constitutes BART for these plants. Based on the analyses and comments
received through EPA’s rulemaking process, the EPA will determine what it believes constitutes BART
for each plant.
The EPA recently issued an Advanced Notice of Proposed Rulemaking (ANPR) seeking public
comments on what constitutes BART for each plant. The public comment period expired in October,
2009, but the EPA has extended the comment period until March 20, 2010 for the Navajo and Hopi
Tribes. We expect that the EPA will issue proposed and final BART determinations for Four Corners
and the Navajo Plant in 2010. The participant owners of Four Corners and the Navajo Plant will
have five years after the EPA issues its final determination to achieve compliance with their
respective BART requirements. In addition, on February 16, 2010, a
group of environmental organizations filed a petition with the
Departments of Interior and Agriculture requesting those agencies to
certify to the EPA that visibility impairment in sixteen national
park and wilderness areas is reasonably attributable to emissions
from Four Corners. If the agencies certify impairment, the EPA is
required to evaluate and, if necessary, determine BART for Four
Corners.
APS’ recommended plan for Four Corners includes the installation of combustion control
equipment, with an estimated cost to APS, based on preliminary engineering estimates and APS’ Four
Corners ownership interest, of approximately $50 million. If the EPA determines that
post-combustion controls are required, APS’ total costs could be up to approximately $422 million
for Four Corners. SRP’s recommended plan for the Navajo Plant includes the installation of
combustion control equipment, with an estimated cost to APS of approximately $6 million based on
APS’ Navajo ownership interest. If the EPA determines that post-combustion controls are required,
APS’ total costs could be up to approximately $93 million for Navajo. The Four Corners and Navajo
Plant participants’ obligations to comply with the EPA’s final BART determinations, coupled with
the financial impact of
future climate change legislation, other environmental regulations and other business
considerations, could jeopardize the economic viability of these plants or the ability of
individual participants to continue their participation in these plants.
15
Table of Contents
In order to coordinate with each plant’s other scheduled activities, the plants are currently
implementing portions of their recommended plans described above on a voluntary basis. APS’ share
of the costs related to the implementation of these portions of the recommended plans are included
in our environmental expenditure estimates (see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Capital Expenditures” in Item 7).
Mercury and other Hazardous Air Pollutants.
In early 2008, the U.S. Court of Appeals for the
D.C. Circuit vacated the Clean Air Mercury Rule (“CAMR”), which was adopted by the EPA to regulate
mercury emissions from coal fired power plants. As a result, the law in effect prior to the
adoption of the CAMR became the applicable law, and the EPA is now required to adopt final maximum
achievable control technology emissions (“MACT”) standards. Under a proposed consent decree, the
EPA has agreed to issue final MACT standards for mercury and other hazardous air pollutants by
November 2011. If the consent decree is finalized in its current form, APS will have three years
after the EPA issues its final rule to achieve compliance, which would likely require APS to
install additional pollution control equipment.
APS has installed, and continues to install, certain of the equipment necessary to meet the
anticipated standards. The estimated costs expected to be incurred over the next three years for
such equipment are included in our environmental expenditure estimates (see “Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Capital Expenditures” in
Item 7).
Federal Implementation Plan (“FIP”).
In September 1999, the EPA proposed FIPs to set air
quality standards at certain power plants, including Four Corners and the Navajo Plant, which it
later revised in 2006. The FIP for Four Corners was finalized in 2009, and we do not believe
compliance with its required limits will have a material adverse impact on our financial position,
results of operations or cash flows. The proposed FIP for the Navajo Plant is still pending. APS
cannot currently predict the effect of this proposed FIP on its financial position, results of
operations or cash flows, or whether the proposed FIP will be adopted in its current form.
Coal Combustion Waste.
The EPA is expected to issue proposed regulations governing the
handling and disposal of coal combustion byproducts (“CCBs”), such as fly ash and bottom ash. APS
currently disposes of CCBs in ash ponds and dry storage areas at Cholla and Four Corners, and also
sells a portion of its fly ash for beneficial reuse as a constituent in concrete production. The
EPA is evaluating options that include regulation of CCBs under non-hazardous waste standards,
hazardous waste standards, or a combination of both, and a potential phase out of the disposal of
CCBs through the use of ash ponds. A proposed rule is expected during the first quarter of 2010.
We do not know when the EPA will issue a final rule, including required compliance dates. While
APS continues to advocate for the regulation of CCBs as non-hazardous waste, we cannot currently
predict the outcome of the EPA’s actions and whether such actions will have a material adverse
impact on our financial position, results of operations or cash flows.
Section 114 Request
.
On April 6, 2009, APS received a request from the EPA under Section 114
of the Clean Air Act seeking detailed information regarding projects at and operations of Four
Corners. This request is part of an enforcement initiative that the EPA has undertaken under the
Clean Air Act. The EPA has taken the position that many utilities have made certain physical or
operational
changes at their plants that should have triggered additional regulatory requirements under
the New Source Review provisions of the Clean Air Act (“NSR”). Other electric utilities have
received and responded to similar Section 114 requests, and several of them have been the subject
of notices of violation and lawsuits by the EPA. APS has responded to the EPA’s request and is
currently unable to predict the timing or content of EPA’s response, if any, or any resulting
actions.
16
Table of Contents
Superfund
.
The Comprehensive Environmental Response, Compensation and Liability Act
(“Superfund”) establishes liability for the cleanup of hazardous substances found contaminating the
soil, water or air. Those who generated, transported or disposed of hazardous substances at a
contaminated site are among those who are PRPs. PRPs may be strictly, and often are jointly and
severally, liable for clean-up. On September 3, 2003, the EPA advised APS that the EPA considers
APS to be a PRP in the Motorola 52
nd
Street Superfund Site, Operable Unit 3 (OU3) in
Phoenix, Arizona. APS has facilities that are within this Superfund site. APS and Pinnacle West
have agreed with the EPA to perform certain investigative activities of the APS facilities within
OU3. In addition, on September 23, 2009, APS agreed with the EPA and one other PRP to voluntarily
assist with the funding and management of the site-wide groundwater remedial investigation and
feasibility study work plan. APS estimates that its costs related to this investigation and study
will be approximately $1.2 million, which is reserved as a liability on its financial statements.
We anticipate incurring additional expenditures in the future, but because the overall
investigation is not complete and ultimate remediation requirements are not yet finalized, at the
present time we cannot accurately estimate our total expenditures.
By letter dated April 25, 2008, the EPA informed APS that it may be a PRP in the Gila River
Indian Reservation Superfund Site in Maricopa County, Arizona. APS, along with three other electric
utility companies, owns a parcel of property on which a transmission pole and a portion of a
transmission line are located. The property abuts the Gila River Indian Community boundary and, at
one time, may have been part of an airfield where crop dusting took place. Currently, the EPA is
only seeking payment from APS and four other PRPs for past cleanup-related costs involving
contamination from the crop dusting. Based upon the total amount of cleanup costs reported by the
EPA in its letter to APS, we do not expect that the resolution of this matter will have a material
adverse impact on APS’ financial position, results of operations, or cash flows.
Manufactured Gas Plant Sites.
Certain properties which APS now owns or which were previously
owned by it or its corporate predecessors were at one time sites of, or sites associated with,
manufactured gas plants. APS is taking action to voluntarily remediate these sites. APS does not
expect these matters to have a material adverse effect on its financial position, results of
operations, cash flows or liquidity.
Navajo Nation Environmental Issues
Four Corners and the Navajo Plant are located on the Navajo Reservation and are held under
easements granted by the federal government as well as leases from the Navajo Nation. See “Energy
Sources and Planning — Generation — Coal Fueled Generating Facilities” above for additional
information regarding these plants.
In July 1995, the Navajo Nation enacted the Navajo Nation Air Pollution Prevention and Control
Act, the Navajo Nation Safe Drinking Water Act and the Navajo Nation Pesticide Act (collectively,
the “Navajo Acts”). The Navajo Acts purport to give the Navajo Nation Environmental Protection
Agency authority to promulgate regulations covering air quality, drinking water and
pesticide activities, including those activities that occur at Four Corners and the Navajo Plant.
On October 17, 1995, the Four Corners participants and the Navajo Plant participants each filed a
lawsuit in the District Court of the Navajo Nation, Window Rock District, challenging the
applicability of the Navajo Acts as to Four Corners and the Navajo Plant. The Court has stayed
these proceedings pursuant to a request by the parties, and the parties are seeking to negotiate a
settlement.
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In April 2000, the Navajo Tribal Council approved operating permit regulations under the
Navajo Nation Air Pollution Prevention and Control Act. APS believes the Navajo Nation exceeded
its authority when it adopted the operating permit regulations. On July 12, 2000, the Four Corners
participants and the Navajo Plant participants each filed a petition with the Navajo Supreme Court
for review of these regulations. Those proceedings have been stayed, pending the settlement
negotiations mentioned above. APS cannot currently predict the outcome of this matter.
On May 18, 2005, APS, Salt River Project, as the operating agent for the Navajo Plant, and the
Navajo Nation executed a Voluntary Compliance Agreement to resolve their disputes regarding the
Navajo Nation Air Pollution Prevention and Control Act. As a result of this agreement, APS sought,
and the Courts granted, dismissal of the pending litigation in the Navajo Nation Supreme Court and
the Navajo Nation District Court, to the extent the claims relate to the Clean Air Act. The
agreement does not address or resolve any dispute relating to other Navajo Acts. APS cannot
currently predict the outcome of this matter.
Water Supply
Assured supplies of water are important for APS’ generating plants. At the present time, APS
has adequate water to meet its needs. However, conflicting claims to limited amounts of water in
the southwestern United States have resulted in numerous court actions.
Both groundwater and surface water in areas important to APS’ operations have been the subject
of inquiries, claims and legal proceedings, which will require a number of years to resolve. APS
is one of a number of parties in a proceeding, filed March 13, 1975, before the Eleventh Judicial
District Court in New Mexico to adjudicate rights to a stream system from which water for Four
Corners is derived. An agreement reached with the Navajo Nation in 1985, however, provides that if
Four Corners loses a portion of its rights in the adjudication, the Navajo Nation will provide, for
an agreed upon cost, sufficient water from its allocation to offset the loss.
A summons served on APS in early 1986 required all water claimants in the Lower Gila River
Watershed in Arizona to assert any claims to water on or before January 20, 1987, in an action
pending in Maricopa County, Arizona, Superior Court. Palo Verde is located within the geographic
area subject to the summons. APS’ rights and the rights of the other Palo Verde participants to
the use of groundwater and effluent at Palo Verde are potentially at issue in this action. As
operating agent of Palo Verde, APS filed claims that dispute the court’s jurisdiction over the Palo
Verde participants’ groundwater rights and their contractual rights to effluent relating to Palo
Verde. Alternatively, APS seeks confirmation of such rights. Five of APS’ other power plants are
also located within the geographic area subject to the summons. APS’ claims dispute the court’s
jurisdiction over its groundwater rights with respect to these plants. Alternatively, APS seeks
confirmation of such rights. In November 1999, the Arizona Supreme Court issued a decision
confirming that certain groundwater rights may be available to the federal government and Indian
tribes. In addition, in September 2000, the Arizona Supreme Court issued a decision affirming the
lower court’s criteria for resolving groundwater claims. Litigation on both of these issues has
continued in the trial court. In December
2005, APS and other parties filed a petition with the Arizona Supreme Court requesting
interlocutory review of a September 2005 trial court order regarding procedures for determining
whether groundwater pumping is affecting surface water rights. The Court denied the petition in
May 2007, and the trial court is now proceeding with implementation of its 2005 order. No trial
date concerning APS’ water rights claims has been set in this matter.
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APS has also filed claims to water in the Little Colorado River Watershed in Arizona in an
action pending in the Apache County, Arizona, Superior Court, which was originally filed on
September 5, 1985. APS’ groundwater resource utilized at Cholla is within the geographic area
subject to the adjudication and, therefore, is potentially at issue in the case. APS’ claims
dispute the court’s jurisdiction over its groundwater rights. Alternatively, APS seeks
confirmation of such rights. A number of parties are in the process of settlement negotiations
with respect to certain claims in this matter. Other claims have been identified as ready for
litigation in motions filed with the court. No trial date concerning APS’ water rights claims has
been set in this matter.
Although the above matters remain subject to further evaluation, APS does not expect that the
described litigation will have a material adverse impact on its financial position, results of
operations, cash flows or liquidity.
The Four Corners region, in which Four Corners is located, has been experiencing drought
conditions that may affect the water supply for the plants if adequate moisture is not received in
the watershed that supplies the area. APS is continuing to work with area stakeholders to
implement agreements to minimize the effect, if any, on future operations of the plant. The effect
of the drought cannot be fully assessed at this time, and APS cannot predict the ultimate outcome,
if any, of the drought or whether the drought will adversely affect the amount of power available,
or the price thereof, from Four Corners.
BUSINESS OF OTHER SUBSIDIARIES
SunCor
SunCor has been a developer of residential, commercial and industrial real estate projects in
Arizona, Idaho, New Mexico and Utah. Due to the continuing distressed conditions in the real
estate markets, in 2009 SunCor undertook a program to dispose of its homebuilding operations,
master-planned communities, land parcels, commercial assets and golf courses in order to eliminate
its outstanding debt.
At December 31, 2009, SunCor had total assets of about $166 million. At December 31, 2008,
SunCor had total assets of about $547 million. The reduction in SunCor’s assets is primarily due
to 2009 real estate impairment charges of $266 million and 2009 asset sales. SunCor’s remaining
assets consist primarily of land with improvements, commercial buildings, golf courses and other
real estate investments. SunCor’s remaining projects include master-planned communities and
commercial and residential projects. Four of the master-planned communities and the commercial and
residential projects are in Arizona. Other master-planned communities are located in Idaho, New
Mexico and Utah.
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SunCor’s operating revenues were approximately $103 million in 2009, $75 million in 2008, and
$190 million in 2007. SunCor’s net loss attributable to common shareholders was approximately $279
million in 2009, which includes $266 million (pre-tax) in real
estate impairment charges. In 2009, income tax benefits related to
SunCor operations were recorded by Pinnacle West in accordance with
an intercompany tax sharing agreement. SunCor’s net loss attributable to common shareholders in 2008 was $26 million, which included a $53
million (pre-tax) real estate impairment charge. SunCor’s net income was approximately $24 million
in 2007. Certain components of SunCor’s real estate sales activities, which are included in the
real estate segment, are required to be reported as discontinued operations on Pinnacle West’s
Consolidated Statements of Income. (See Notes 22 and 23.)
See “Liquidity — Other Subsidiaries — SunCor” in Item 7 for a discussion of SunCor’s long-term
debt, liquidity and capital requirements, and the SunCor-related risk factor in Item 1A for a
discussion of risks facing SunCor.
APSES
APSES provides energy-related products and services (such as energy master planning, energy
use consultation and facility audits, cogeneration analysis and installation, and project
management) with a focus on energy efficiency and renewable energy to commercial and industrial
retail customers in the western United States. APSES also owns and operates district cooling
systems.
APSES had a net loss of $2 million in 2009, a net loss of $1 million in 2008 and a net loss of
$4 million in 2007. At December 31, 2009, APSES had total assets of $74 million.
El Dorado
El Dorado owns minority interests in several energy-related investments and Arizona
community-based ventures. El Dorado’s short-term goal is to prudently realize the value of its
existing investments. On a long-term basis, Pinnacle West may use El Dorado, when appropriate, for
investments that are strategic to the business of generating, distributing and marketing
electricity.
El Dorado had a net loss of $7 million in 2009, a net loss of $10 million in 2008 and a net
loss of $6 million in 2007. Income taxes related to El Dorado are recorded by Pinnacle West. At
December 31, 2009, El Dorado had total assets of $19 million.
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OTHER INFORMATION
Pinnacle West, APS and Pinnacle West’s other first-tier subsidiaries are all incorporated in
the State of Arizona. Additional information for each of these companies is provided below:
| Approximate | ||||||||||
| Number of | ||||||||||
| Principal Executive Office | Year of | Employees at | ||||||||
| Address | Incorporation | December 31, 2009 | ||||||||
| Pinnacle West |
400 North Fifth Street
|
1985 | 7,200 | (a) | ||||||
|
Phoenix, AZ 85004
|
||||||||||
|
|
||||||||||
| APS |
400 North Fifth Street
|
1920 | 6,800 | (b) | ||||||
|
P.O. Box 53999
Phoenix, AZ 85072-3999 |
||||||||||
|
|
||||||||||
| SunCor |
80 East Rio Salado Parkway
|
1965 | 260 | |||||||
|
Suite 410
Tempe, AZ 85281 |
||||||||||
|
|
||||||||||
| APSES |
60 E. Rio Salado Parkway
|
1998 | 70 | |||||||
|
Suite 1001
Tempe, AZ 85281 |
||||||||||
|
|
||||||||||
| El Dorado |
400 North Fifth Street
|
1983 | — | |||||||
|
Phoenix, AZ 85004
|
||||||||||
| (a) | Includes 6,800 APS employees and 400 people employed by Pinnacle West and its other subsidiaries. | |
| (b) | Includes employees at jointly-owned generating facilities (approximately 3,300 employees) for which APS serves as the generating facility manager. Approximately 2,000 APS employees are union employees. The collective bargaining agreement with union employees in the fossil generation and energy delivery business areas expires in April 2011, and the parties will likely begin negotiating a successor agreement in early 2011. The agreement with union employees serving as Palo Verde security officers expires in 2013. |
WHERE TO FIND MORE INFORMATION
We
use our website
www.pinnaclewest.com
as a channel of distribution for
material Company information. The following filings are available
free of charge on our website as soon as reasonably practicable after they are electronically filed with, or
furnished to, the SEC: Annual Reports on Form 10-K, definitive proxy statements for our annual
shareholder meetings, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all
amendments to those reports. Our board and committee charters, Code of Ethics and other corporate
governance information is also available on the Pinnacle West website. Pinnacle West will post any
amendments to the Code of Ethics and Ethics Policy and Standards of Business Practices, and any
waivers that are required to be disclosed by the rules of either the SEC or the New York Stock Exchange, on its website. The information on
Pinnacle West’s website is not incorporated by reference into this report.
You can request a copy of these documents, excluding exhibits, by contacting Pinnacle West at
the following address: Pinnacle West Capital Corporation, Office of the Secretary, Station 9068,
P.O. Box 53999, Phoenix, Arizona 85072-3999 (telephone 602-250-3252).
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ITEM 1A. RISK FACTORS
In addition to the factors affecting specific business operations identified in connection
with the description of these operations contained elsewhere in this report, set forth below are
risks and uncertainties that could affect our financial results. Unless otherwise indicated or the
context otherwise requires, the following risks and uncertainties apply to Pinnacle West and its
subsidiaries, including APS.
REGULATORY RISKS
Our financial condition depends upon APS’ ability to recover costs in a timely manner from
customers through regulated rates and otherwise execute its business strategy.
APS is subject to comprehensive regulation by several federal, state and local regulatory
agencies that significantly influence its business, liquidity, results of operations and its
ability to fully recover costs from utility customers in a timely manner. The ACC regulates APS’
retail electric rates and the FERC regulates rates for wholesale power sales and transmission
services. While approved electric rates are intended to permit APS to recover its costs of service
and earn a reasonable rate of return, the profitability of APS is affected by the rates it may
charge. Consequently, our financial condition and results of operations are dependent upon the
satisfactory resolution of any APS retail rate proceedings and ancillary matters which may come
before the ACC and the FERC. In connection with its recent rate case settlement agreement, APS
agreed not to request its next general retail rate increase to be effective prior to July 1, 2012.
The ACC must also approve APS’ issuance of securities and any transfer of APS property used to
provide retail electric service, and must approve or receive prior notification of certain
transactions between us, APS and our respective affiliates. Decisions made by the ACC and the FERC
could have a material adverse impact on our financial condition, results of operations or cash
flows.
APS’ ability to conduct its business operations and avoid fines and penalties depends upon
compliance with federal, state or local statutes and regulations, and obtaining and maintaining
certain regulatory permits, approvals and certificates.
APS must comply in good faith with all applicable statutes, regulations, rules, tariffs, and
orders of agencies that regulate APS’ business, including the FERC, the NRC, the EPA and state and
local governmental agencies. These agencies regulate many aspects of APS’ utility operations,
including safety and performance, emissions, siting and construction of facilities, customer
service and the rates that APS can charge retail and wholesale customers. Failure to comply can
subject APS to, among other things, fines and penalties. For example, under the Energy Policy Act
of 2005, the FERC can impose penalties (up to one million dollars per day per violation) for
failure to comply with mandatory electric reliability standards. APS underwent its first mandatory
regularly-scheduled triennial audit for compliance with these standards in early 2010 and expects
to receive its results by mid-2010. In addition, APS is required to have numerous permits,
approvals and certificates from these agencies. APS believes the necessary permits, approvals and
certificates have been obtained for its existing operations and that APS’ business is conducted in
accordance with applicable laws in all material respects. However, changes in regulations or the
imposition of new or revised laws or regulations could have an adverse impact on our results of
operations. We are also unable to predict the impact on our business and operating results from
pending or future regulatory activities of any of these agencies
.
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The operation of APS’ nuclear power plant exposes it to substantial regulatory oversight and
potentially significant liabilities and capital expenditures.
The NRC has broad authority under federal law to impose licensing and safety-related
requirements for the operation of nuclear generation facilities. In the event of noncompliance,
the NRC has the authority to impose monetary civil penalties or a progressively increased
inspection regime that could ultimately result in the shut down of a unit, or both, depending upon
the NRC’s assessment of the severity of the situation, until compliance is achieved. APS was
subject to this heightened scrutiny until March 2009, when it exited the NRC’s enhanced inspection
regime. The increased costs resulting from penalties, a heightened level of scrutiny and
implementation of plans to achieve compliance with NRC requirements, may adversely affect APS’
financial condition, results of operations and cash flows.
APS is subject to numerous environmental laws and regulations, and changes in, or liabilities
under, existing or new laws or regulations may increase APS’ cost of operations or impact its
business plans.
APS is subject to numerous environmental laws and regulations affecting many aspects of its
present and future operations, including air emissions, water quality, wastewater discharges, solid
waste, hazardous waste, and coal combustion products, which consist of bottom ash, fly ash and air
pollution control wastes. These laws and regulations can result in increased capital, operating,
and other costs, particularly with regard to enforcement efforts focused on power plant emissions
obligations. These laws and regulations generally require APS to obtain and comply with a wide
variety of environmental licenses, permits, and other approvals. If there is a delay or failure to
obtain any required environmental regulatory approval, or if APS fails to obtain, maintain or
comply with any such approval, operations at affected facilities could be suspended or subject to
additional expenses. In addition, failure to comply with applicable environmental laws and
regulations could result in civil liability or criminal penalties. Both public officials and
private individuals may seek to enforce applicable environmental laws and regulations. APS cannot
predict the outcome (financial or operational) of any related litigation that may arise.
Environmental Clean Up.
APS has been named as a PRP for a Superfund site in Phoenix, Arizona
and it could be named a PRP in the future for other environmental clean up at sites identified by a
regulatory body. APS cannot predict with certainty the amount and timing of all future
expenditures related to environmental matters because of the
difficulty of estimating clean up
costs. There is also uncertainty in quantifying liabilities under environmental laws that impose
joint and several liability on all potentially responsible parties.
Regional Haze.
APS is currently awaiting final rulemaking from the EPA that could impose new
requirements on Four Corners and the Navajo Plant. APS is also awaiting final rulemaking from ADEQ
that could impose new requirements on Cholla. The EPA and ADEQ will require these plants to
install pollution control equipment that constitutes the best available retrofit technology to
lessen the impacts of emissions on visibility surrounding the plants. Depending upon the agencies’
final determinations of what constitutes BART for these plants, the financial impact of installing
the required pollution control equipment could jeopardize the economic viability of the plants or
the ability of individual participants to continue their participation
in these plants.
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Coal Ash.
Recently Congress directed the EPA to propose new federal regulations governing the
disposal of CCBs, which are generated as a result of burning coal and consist of, among other
things, fly ash and bottom ash. APS currently disposes of CCBs in ash ponds and dry storage
areas at Four Corners and Cholla, and also sells a portion of its fly ash for beneficial reuse as a
constituent in concrete products. If the EPA regulates CCBs as a hazardous solid waste or phases
out APS’ ability to dispose of CCBs through the use of ash ponds, APS could incur significant costs
for CCB disposal and may be unable to continue its sale of fly ash for beneficial reuse.
New Source Review.
The EPA has taken the position that many projects electric utilities have
performed are major modifications that trigger NSR requirements under the Clean Air Act. The
utilities generally have taken the position that these projects are routine maintenance and did not
result in emissions increases, and thus are not subject to NSR. APS received and responded to a
request from the EPA regarding projects and operations of Four Corners. If the EPA seeks to impose
NSR requirements at Four Corners or any other APS plant, either through a lawsuit or a Notice of
Violation, significant capital investments could be required to install new pollution control
technologies. The EPA could also seek civil penalties.
Mercury and other Hazardous Air Pollutants.
The EPA is required to adopt maximum achievable
control technology emissions standards for mercury and other hazardous air pollutants by November
2011. Depending on the compliance requirements contained in the final rule, APS may need to make
significant capital investments to install additional pollution control equipment to meet these new
standards.
APS cannot be sure that existing environmental regulations will not be revised or that new
regulations seeking to protect the environment will not be adopted or become applicable to it.
Revised or additional regulations that result in increased compliance costs or additional operating
restrictions, particularly if those costs incurred by APS are not fully recoverable from APS’
customers, could have a material adverse effect on its financial condition, results of operations
or cash flows.
APS faces physical and operational risks related to climate change, and potential financial risks
resulting from climate change litigation and legislative and regulatory efforts to limit greenhouse
gas emissions.
Concern over climate change, deemed by many to be induced by rising levels of greenhouse gases
in the atmosphere, has led to significant legislative and regulatory efforts to limit
CO
2
, which is a major byproduct of the combustion of fossil fuel, and other greenhouse
gas emissions. In addition, lawsuits have been filed against companies that emit greenhouse gases,
including a lawsuit filed by the Native Village of Kivalina and the City of Kivalina, Alaska
against us and several other utilities seeking damages related to climate change, which was
dismissed but has been appealed.
Physical and Operational Risks.
Projections for the Southwest United States from climate
change models include an increase in the number of extreme hot days in the summer, less
precipitation in the form of snow and the earlier runoff of snowmelt, increased wildfire potential,
and the potential for water shortages. Assuming that the primary physical and operational risks to
APS from climate change are increased potential for drought or water shortage, and a mild to
moderate increase in ambient temperatures, APS believes it is taking the appropriate steps at this
time to respond to these risks. Weather extremes such as drought and high temperature variations
are common occurrences in the Southwest’s desert area, and these are risk factors that APS
considers in the normal course of business in the engineering and construction of its electric
system. Large increases in ambient temperature due to climate change could require evaluation of
certain materials used within its system and represents a greater challenge.
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Financial Risks — Potential Legislation and Regulation
. In the past several years, the United
States Congress has considered bills that would regulate domestic greenhouse gas emissions. The
House of Representatives approved a bill that would establish a greenhouse gas emission
cap-and-trade system, and the Senate is currently considering proposed legislation. There is
growing consensus that some form of regulation or legislation is likely to occur in the near future
at the federal level with respect to greenhouse gas emissions.
If the United States Congress, or individual states or groups of states in which APS operates,
ultimately pass legislation regulating the emissions of greenhouse gases, any resulting limitations
on generation facility CO
2
and other greenhouse gas emissions could result in the
creation of substantial additional capital expenditures and operating costs in the form of taxes,
emissions allowances or required equipment upgrades and could have a material adverse impact on all
fossil fuel fired generation facilities (particularly coal-fired facilities, which constitute
approximately 28% of APS’ generation capacity). A cap-and-trade program may also result in
counterparty credit risk and financial liquidity risk since collateral is typically exchanged
between counterparties as a means of mitigating risk in the event of a counterparty default.
At the state level, the California legislature enacted legislation to address greenhouse gas
emissions. This legislation and other state-specific initiatives may affect APS’ business,
including sales into the impacted states or the ability of its out-of-state power plant
participants to continue their participation in certain coal-fired power
plants, including Four Corners following expiration of the current lease term in 2016.
In addition, the EPA recently determined that greenhouse gas emissions endanger public health
and welfare. This determination was made in response to a 2007 United States Supreme Court ruling
that greenhouse gases fit within the Clean Air Act’s broad definition of “air pollutant” and, as a
result, the EPA has the authority to regulate greenhouse gas emissions of new motor vehicles under
the Clean Air Act. The recent endangerment finding could result in the EPA issuing new regulatory
requirements under the Clean Air Act, beyond those related to motor vehicle emissions, which could
impact APS’ power plants and result in substantial additional costs. Excessive costs to comply
with future legislation or regulations could force APS and other similarly-situated electric power
generators to retire or suspend operations at certain coal-fired facilities.
If APS cannot meet or maintain the level of renewable energy required under Arizona’s increasing
Renewable Energy Standards or the higher commitment levels established in the settlement agreement,
APS may be subject to penalties or fines for non-compliance.
The Renewable Energy Standard and Tariff (“RES”) requires APS to supply an increasing
percentage of renewable energy each year, so that the amount of retail electricity sales from
eligible renewable resources is at least 2.5% of total retail sales by 2010. This amount increases
annually to 15% by 2025. In its recent retail rate case settlement agreement, APS agreed to exceed
these standards and committed to an interim renewable energy target of 10% by year end 2015. A
portion of this total renewable energy requirement must be met with an increasing percentage of
distributed energy resources (generally, small scale renewable technologies located on customers’
properties). The distributed energy requirement is 20% of the overall RES requirement of 2.5% in
2010 and increases to 30% of the applicable RES requirement in 2012 and subsequent years. If APS
fails to implement any of its annual ACC-approved renewable resource plans, it may be subject to
penalties imposed by the ACC, including APS’ inability to recover certain costs. Compliance with
the distributed resource requirement is contingent upon customer participation. The development of
any renewable generation
facilities resulting from the RES is subject to many other risks, including risks relating to
financing, permitting, technology, fuel supply, and the construction of sufficient transmission
capacity to support these facilities.
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Deregulation or restructuring of the electric industry may result in increased competition, which
could have a significant adverse impact on APS’ business and its results of operations.
In 1999, the ACC approved rules for the introduction of retail electric competition in
Arizona. Retail competition could have a significant adverse financial impact on APS due to an
impairment of assets, a loss of retail customers, lower profit margins or increased costs of
capital. Although some very limited retail competition existed in APS’ service area in 1999 and
2000, there are currently no active retail competitors offering unbundled energy or other utility
services to APS’ customers. As a result, APS cannot predict if, when, and the extent to which,
additional competitors may re-enter APS’ service territory.
Currently, there are two matters pending with the ACC that involve a business model where
customers pay solar vendors for the installation and operation of solar facilities based on the
amount of energy produced. The ACC must make a determination whether these entities would be
considered “public service corporations” under the Arizona Constitution, causing them to be
regulated by the ACC. Use of such products by customers within APS’ territory would result in some
level of competition.
As a result of changes in federal law and regulatory policy, competition in the wholesale
electricity market has greatly increased due to a greater participation by traditional electricity
suppliers, non-utility generators, independent power producers, and wholesale power marketers and
brokers. This increased competition could affect APS’ load forecasts, plans for power supply and
wholesale energy sales and related revenues. As a result of the changing regulatory environment
and the relatively low barriers to entry, we expect wholesale competition to increase, which could
adversely affect our business.
OPERATIONAL RISKS
APS’ results of operations can be adversely affected by various factors impacting demand for
electricity.
Weather Conditions.
Weather conditions directly influence the demand for electricity and
affect the price of energy commodities. Electric power demand is generally a seasonal business.
In Arizona, demand for power peaks during the hot summer months, with market prices also peaking at
that time. As a result, APS’ overall operating results fluctuate substantially on a seasonal
basis. In addition, APS has historically sold less power, and consequently earned less income,
when weather conditions are milder. As a result, unusually mild weather could diminish APS’
results of operations and harm its financial condition.
Higher temperatures may decrease the snowpack, which might result in lowered soil moisture and
an increased threat of forest fires. Forest fires could threaten APS’ communities and electric
transmission lines. Any damage caused as a result of forest fires could negatively impact APS’
results of operations.
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Effects of Energy Conservation Measures and Distributed Energy.
The ACC has initiated a
rulemaking regarding energy efficiency, which includes a proposed 22% annual energy savings
requirement by 2020. If adopted, this will likely increase participation by APS customers in
energy efficiency and conservation programs and demand-side management efforts, which in turn would
impact the demand for electricity. The proposed rules also include a requirement for the ACC to
review and address financial disincentives, recovery of fixed costs and the recovery of net lost
income/revenue that would result from lower sales due to increased energy efficiency requirements.
The retail rate case settlement agreement establishes energy efficiency goals for APS that begin in
2010, subjecting APS to energy efficiency requirements in advance of the proposed rules described
above.
APS must also meet certain distributed energy requirements. A portion of APS’ total renewable
energy requirement must be met with an increasing percentage of distributed energy resources
(generally, small scale renewable technologies located on customers’ properties). The distributed
energy requirement is 20% of the overall RES requirement of 2.5% in 2010 and increases to 30% of
the applicable RES requirement in 2012 and subsequent years. Customer participation in distributed
energy programs would result in lower demand, since customers would be meeting some or all of their
own energy needs. Reduced demand due to these energy efficiency and distributed energy
requirements, unless offset through regulatory mechanisms, could have a material adverse impact on
APS’ financial condition, results of operations or cash flows.
The operation of power generation facilities involves risks that could result in unscheduled power
outages or reduced output, which could materially affect APS’ results of operations
.
The operation of power generation facilities involves certain risks, including the risk of
breakdown or failure of equipment, fuel interruption, and performance below expected levels of
output or efficiency. Unscheduled outages, including extensions of scheduled outages due to
mechanical failures or other complications, occur from time to time and are an inherent risk of
APS’ business. If APS’ facilities operate below expectations, especially during its peak seasons,
it may lose revenue or incur additional expenses, including increased purchased power expenses.
The lack of access to sufficient supplies of water could have a material adverse impact on APS’
business and results of operations.
Assured supplies of water are important for APS’ generating plants. Water in the southwestern
United States is limited and various parties have made conflicting claims regarding the right to
access and use such limited supply of water. Both groundwater and surface water in areas important
to APS’ generating plants have been the subject of inquiries, claims and legal proceedings. In
addition, the Four Corners region, in which Four Corners is located, has been experiencing drought
conditions that may affect the water supply for the plants if adequate moisture is not received in
the watershed that supplies the area. APS’ inability to access sufficient supplies of water could
have a material adverse impact on our business and results of operations.
The ownership and operation of power generation and transmission facilities on Indian lands could
result in uncertainty related to continued easements and rights-of-way, which could have a
significant impact on our business.
Certain APS power plants, including Four Corners, and portions of the transmission lines that
carry power from these plants are located on Indian lands pursuant to easements or other
rights-of-way
that are effective for specified periods. APS is currently unable to predict the outcome of
discussions with the appropriate Indian tribes with respect to future renewal of these easements
and rights-of-way.
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There are inherent risks in the ownership and operation of nuclear facilities, such as
environmental, health, fuel supply, spent fuel disposal, regulatory and financial risks and the
risk of terrorist attack.
APS has an ownership interest in and operates, on behalf of a group of owners, Palo Verde,
which is the largest nuclear electric generating facility in the United States. Palo Verde is
subject to environmental, health and financial risks such as the ability to obtain adequate
supplies of nuclear fuel; the ability to dispose of spent nuclear fuel; the ability to maintain
adequate reserves for decommissioning; potential liabilities arising out of the operation of these
facilities; the costs of securing the facilities against possible terrorist attacks; and
unscheduled outages due to equipment and other problems. APS maintains nuclear decommissioning
trust funds and external insurance coverage to minimize its financial exposure to some of these
risks; however, it is possible that damages could exceed the amount of insurance coverage. In
addition, APS may be required under federal law to pay up to $103 million (but not more than $15
million per year) of liabilities arising out of a nuclear incident occurring not only at Palo
Verde, but at any other nuclear power plant in the United States. Although we have no reason to
anticipate a serious nuclear incident at Palo Verde, if an incident did occur, it could materially
and adversely affect our results of operations and financial condition. A major incident at a
nuclear facility anywhere in the world could cause the NRC to limit or prohibit the operation or
licensing of any domestic nuclear unit.
The operation of Palo Verde requires licenses that need to be periodically renewed and/or
extended. In December 2008, APS applied for renewed operating licenses for all three Palo Verde
units for 20 years beyond the expirations of the current licenses. APS does not anticipate any
problems renewing these licenses. However, as a result of potential terrorist threats and
increased public scrutiny of utilities, the licensing process could result in increased licensing
or compliance costs that are difficult or impossible to predict.
The use of derivative contracts in the normal course of our business could result in financial
losses that negatively impact our results of operations.
APS’ operations include managing market risks related to commodity prices. APS is exposed to
the impact of market fluctuations in the price and transportation costs of electricity, natural gas
and coal to the extent that unhedged positions exist. We have established procedures to manage
risks associated with these market fluctuations by utilizing various commodity derivatives,
including exchange-traded futures and options and over-the-counter forwards, options, and swaps.
As part of our overall risk management program, we enter into derivative transactions to hedge
purchases and sales of electricity and fuels. The changes in market value of such contracts have a
high correlation to price changes in the hedged commodity. To the extent that commodity markets
are illiquid, we may not be able to execute our risk management strategies, which could result in
greater unhedged positions than we would prefer at a given time and financial losses that
negatively impact our results of operations.
Congress is considering legislation to impose restrictions on the use of over-the-counter
derivatives, including energy derivatives, which could subject APS to governmental regulation
relating to these hedging transactions. If such legislation becomes law, APS could potentially
face higher costs to hedge its risks, fewer potential counterparties
still active in the newly-regulated marketplace and increased liquidity requirements.
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We are exposed to losses in the event of nonperformance or nonpayment by counterparties. We
use a risk management process to assess and monitor the financial exposure of all counterparties.
Despite the fact that the majority of trading counterparties are rated as investment grade by the
rating agencies, there is still a possibility that one or more of these companies could default,
which could result in a material adverse impact on our earnings for a given period.
Changes in technology may adversely affect APS’ business.
Research and development activities are ongoing to improve alternative technologies to produce
power, including fuel cells, micro turbines, clean coal and coal gasification, photovoltaic (solar)
cells and improvements in traditional technologies and equipment, such as more efficient gas
turbines. Advances in these, or other technologies could reduce the cost of power production,
making APS’ generating facilities less competitive. In addition, advances in technology could
reduce the demand for power supply, which could adversely affect APS’ business.
APS is pursuing and implementing advanced technologies, including smart grid transmission and
distribution systems and advanced meters for use in customers’ homes and businesses. Many of the
products and processes resulting from these and other alternative technologies have not yet been
widely used or tested, and their use on large-scale systems is not as advanced and established as
APS’ existing technologies and equipment. Uncertainties and unknowns related to these and other
advancements in technology and equipment could adversely affect APS’ business if national standards
develop that do not embrace the current technologies or if the technologies and equipment fail to
perform as expected.
FINANCIAL RISKS
Financial market disruptions may increase our financing costs or limit our access to the credit
markets, which may adversely affect our liquidity and our ability to implement our financial
strategy.
We rely on access to short-term money markets, longer-term capital markets and the bank
markets as a significant source of liquidity and for capital requirements not satisfied by the cash
flow from our operations. We believe that we will maintain sufficient access to these financial
markets. However, certain market disruptions may increase our cost of borrowing or adversely
affect our ability to access one or more financial markets. Such disruptions could include:
| • | continuation of the current economic downturn; |
| • | terrorist attacks or threatened attacks on our facilities or those of unrelated energy companies; |
| • | mergers among financial institutions and the overall health of the banking industry; or |
| • | the overall health of the utility industry. |
In addition, the credit commitments of our lenders under our bank facilities may not be
satisfied for a variety of reasons, including unexpected periods of financial distress affecting
our lenders, which could materially adversely affect the adequacy of our liquidity sources.
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Changes in economic conditions could result in higher interest rates, which would increase our
interest expense on our debt and reduce funds available to us for our current plans. Additionally,
an increase in our leverage could adversely affect us by:
| • | increasing the cost of future debt financing; |
| • | reducing our credit ratings; |
| • | increasing our vulnerability to adverse economic and industry conditions; and |
| • | requiring us to dedicate a substantial portion of our cash flow from operations to payments on our debt, which would reduce funds available to us for operations, future business opportunities or other purposes. |
A reduction in our credit ratings could materially and adversely affect our business, financial
condition and results of operations.
Our current ratings are set forth in “Pinnacle West Consolidated — Liquidity and Capital
Resources — Credit Ratings” in Item 7. We cannot be sure that any of our current ratings will
remain in effect for any given period of time or that a rating will not be lowered or withdrawn
entirely by a rating agency if, in its judgment, circumstances in the future so warrant. Any
downgrade or withdrawal could adversely affect the market price of Pinnacle West’s and APS’
securities, limit our access to capital and increase our borrowing costs, which would diminish our
financial results. We would be required to pay a higher interest rate in future financings, and
our potential pool of investors and funding sources could decrease. In addition, borrowing costs
under certain of our existing credit facilities depend on our credit ratings. A downgrade would
also require us to provide substantial additional support in the form of letters of credit or cash
or other collateral to various counterparties. If our short-term ratings were to be lowered, it
could completely eliminate any possible future access to the commercial paper market. We note that
the ratings from rating agencies are not recommendations to buy, sell or hold our securities and
that each rating should be evaluated independently of any other rating.
Market performance, changing interest rates and other economic factors could decrease the value of
our benefit plan assets and nuclear decommissioning trust funds and increase our related
obligations, resulting in significant additional funding that could negatively impact our business.
Disruptions in the capital markets may adversely affect the values of fixed income and equity
investments held in our employee benefit plan trusts and nuclear decommissioning trusts. We have
significant obligations in these areas and hold substantial assets in these trusts. A decline in
the market value of these trusts may increase our funding requirements. Additionally, the pension
plan and other postretirement benefit liabilities are impacted by the discount rate, which is the
interest rate used to discount future pension and other postretirement benefit obligations.
Declining interest rates impact the discount rate, and may result in increases in pension and other
postretirement benefit costs, cash contributions, regulatory assets, and charges to other
comprehensive income. Changes in demographics, including increased numbers of retirements or
changes in life expectancy assumptions, may also increase the funding requirements of the
obligations related to the pension and other postretirement benefit plans. A significant portion
of the pension costs and other postretirement benefit costs and all of the nuclear decommissioning
costs are recovered in regulated electricity prices. Our inability to fully recover these costs in
a timely manner or any increased funding obligations could negatively impact our financial
condition, results of operations or cash flows.
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We may be required to adopt International Financial Reporting Standards (“IFRS”). The ultimate
adoption of such standards could negatively impact our business, financial condition or results of
operations.
IFRS is a comprehensive series of accounting standards published by the International
Accounting Standards Board that is being considered by the SEC to replace accounting principles
generally accepted in the United States of America (“GAAP”) for use in preparation of financial
statements. If the SEC requires mandatory adoption of IFRS, we may lose our ability to use
regulatory accounting treatment, and would follow IFRS rather than GAAP for the preparation of our
financial statements beginning in 2014. The implementation and adoption of these new standards and
the inability to use regulatory accounting could negatively impact our business, financial
condition or results of operations.
Our cash flow largely depends on the performance of our subsidiaries.
We conduct our operations primarily through subsidiaries. Substantially all of our
consolidated assets are held by such subsidiaries. Accordingly, our cash flow is dependent upon
the earnings and cash flows of these subsidiaries and their distributions to us. The subsidiaries
are separate and distinct legal entities and have no obligation to make distributions to us.
The debt agreements of some of our subsidiaries may restrict their ability to pay dividends,
make distributions or otherwise transfer funds to us. An ACC financing order requires APS to
maintain a common equity ratio of at least 40% and does not allow APS to pay common dividends if
the payment would reduce its common equity below that threshold. The common equity ratio, as
defined in the ACC order, is common equity divided by the sum of common equity and long-term debt,
including current maturities of long-term debt.
Our ability to meet our debt service obligations could be adversely affected because our debt
securities are structurally subordinated to the debt securities and other obligations of our
subsidiaries.
Because we are structured as a holding company, all existing and future debt and other
liabilities of our subsidiaries will be effectively senior in right of payment to our debt
securities. None of the indentures under which we or our subsidiaries may issue debt securities
limits our ability or the ability of our subsidiaries to incur additional debt in the future. The
assets and cash flows of our subsidiaries will be available, in the first instance, to service
their own debt and other obligations. Our ability to have the benefit of their assets and cash
flows, particularly in the case of any insolvency or financial distress affecting our subsidiaries,
would arise only through our equity ownership interests in our subsidiaries and only after their
creditors have been satisfied.
The market price of our common stock may be volatile.
The market price of our common stock could be subject to significant fluctuations in response
to factors such as the following, some of which are beyond our control:
| • | variations in our quarterly operating results; |
| • | operating results that vary from the expectations of management, securities analysts and investors; |
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| • | changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors; |
| • | developments generally affecting industries in which we operate, particularly the energy distribution and energy generation industries; |
| • | announcements by us or our competitors of significant contracts, acquisitions, joint marketing relationships, joint ventures or capital commitments; |
| • | announcements by third parties of significant claims or proceedings against us; |
| • | favorable or adverse regulatory or legislative developments; |
| • | our dividend policy; |
| • | future sales by the Company of equity or equity-linked securities; and |
| • | general domestic and international economic conditions. |
In addition, the stock market in general has experienced volatility that has often been
unrelated to the operating performance of a particular company. These broad market fluctuations
may adversely affect the market price of our common stock.
Certain provisions of our articles of incorporation and bylaws and of Arizona law make it difficult
for shareholders to change the composition of our board and may discourage takeover attempts.
These provisions, which could preclude our shareholders from receiving a change of control
premium, include the following:
| • | restrictions on our ability to engage in a wide range of “business combination” transactions with an “interested shareholder” (generally, any person who owns 10% or more of our outstanding voting power or any of our affiliates or associates) or any affiliate or associate of an interested shareholder, unless specific conditions are met; |
| • | anti-greenmail provisions of Arizona law and our bylaws that prohibit us from purchasing shares of our voting stock from beneficial owners of more than 5% of our outstanding shares unless specified conditions are satisfied; |
| • | the ability of the Board of Directors to increase the size of the Board and fill vacancies on the Board, whether resulting from such increase, or from death, resignation, disqualification or otherwise; and |
| • | the ability of our Board of Directors to issue additional shares of common stock and shares of preferred stock and to determine the price and, with respect to preferred stock, the other terms, including preferences and voting rights, of those shares without shareholder approval. |
While these provisions have the effect of encouraging persons seeking to acquire control of us
to negotiate with our Board of Directors, they could enable the Board to hinder or frustrate a
transaction that some, or a majority, of our shareholders might believe to be in their best
interests and, in that case, may prevent or discourage attempts to remove and replace incumbent
directors.
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SunCor’s
business and financial results would be adversely affected if it is unable to extend,
modify or renew its credit facilities or repay its debt through sales of its remaining assets.
At December 31, 2009,
SunCor had borrowings of approximately $57 million under its principal loan facility (the "Secured Revolver").
The Secured Revolver matured on January 30, 2010 and SunCor and the agent bank for the Secured Revolver are
discussing an extension of the maturity date to allow time for SunCor to continue discussions
concerning the potential sale of additional properties.
In addition to the Secured Revolver, at December 31, 2009, SunCor had approximately $43 million of
outstanding debt under other credit facilities ($9 million of which has matured since December 31, 2009 and remains outstanding).
If SunCor is unable to obtain an extension or renewal of the
Secured Revolver or its other matured debt, or if it is unable to comply with the mandatory repayment and other provisions of any new or modified
credit agreements, SunCor could be required to immediately repay its outstanding indebtedness under all of its credit facilities as a result of cross-default provisions.
Such an immediate repayment obligation would have a material adverse impact on SunCor's business and financial position and impair its ongoing viability.
SunCor intends to apply the proceeds of its planned asset sales to the repayment of its
outstanding debt. If it is unable to locate suitable buyers and close certain asset sales or obtain sufficient proceeds from these sales to maintain or pay off its
existing debt, it may be unable to satisfy obligations under its credit facilities, resulting in the immediate repayment obligations described above.
SunCor cannot predict the outcome of
negotiations with its lenders or its ability to sell assets for sufficient proceeds to repay its outstanding debt.
SunCor's ability to generate sufficient cash from operations while it pursues lender negotiations and further asset sales is uncertain.
The Company has not guaranteed any
SunCor indebtedness. As a result, we do not believe that SunCor's inability to meet its financial covenants
under the Secured Revolver or its other outstanding credit facilities would have a material adverse impact on
Pinnacle West's cash flows or liquidity. Any resulting SunCor losses would be reflected in Pinnacle West's consolidated financial
statements. If SunCor were required to seek protection under federal bankruptcy laws, Pinnacle West could be exposed to the uncertainties
and complexities inherent for parent companies in such proceedings.
During 2008 and 2009 the real estate market weakened
significantly resulting in lower land and home sales and depressed real estate prices. As a result, in 2008 and 2009 SunCor
recognized certain impairment charges. SunCor may be required to record additional impairments.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Neither Pinnacle West nor APS has received written comments regarding its periodic or current
reports from the SEC staff that were issued 180 days or more preceding the end of its 2009 fiscal
year and that remain unresolved
.
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ITEM 2. PROPERTIES
Generation Facilities
APS’ portfolio of owned and leased generating facilities is provided in the table below:
| Principal | Primary | Owned | ||||||||||||
| No. of | % | Fuels | Dispatch | Capacity | ||||||||||
| Name | Units | Owned (a) | Used | Type | (MW) | |||||||||
|
Nuclear:
|
||||||||||||||
|
Palo Verde (b)
|
3 | 29.1 | % | Uranium | Base Load | 1,146 | ||||||||
|
|
||||||||||||||
|
Total Nuclear
|
1,146 | |||||||||||||
|
|
||||||||||||||
|
|
||||||||||||||
|
Steam:
|
||||||||||||||
|
Four Corners 1, 2, 3
|
3 | Coal | Base Load | 560 | ||||||||||
|
Four Corners 4, 5 (c)
|
2 | 15 | % | Coal | Base Load | 225 | ||||||||
|
Cholla
|
3 | Coal | Base Load | 647 | ||||||||||
|
Navajo (d)
|
3 | 14 | % | Coal | Base Load | 315 | ||||||||
|
Ocotillo
|
2 | Gas | Peaking | 220 | ||||||||||
|
Saguaro
|
2 | Gas/Oil | Peaking | 210 | ||||||||||
|
|
||||||||||||||
|
Total Steam
|
2,177 | |||||||||||||
|
|
||||||||||||||
|
|
||||||||||||||
|
Combined Cycle:
|
||||||||||||||
|
Redhawk
|
2 | Gas | Load Following | 984 | ||||||||||
|
West Phoenix
|
5 | Gas | Load Following | 887 | ||||||||||
|
|
||||||||||||||
|
Total Combined Cycle
|
1,871 | |||||||||||||
|
|
||||||||||||||
|
|
||||||||||||||
|
Combustion Turbine:
|
||||||||||||||
|
Ocotillo
|
2 | Gas | Peaking | 110 | ||||||||||
|
Saguaro 1, 2
|
2 | Gas/Oil | Peaking | 110 | ||||||||||
|
Saguaro 3
|
1 | Gas | Peaking | 79 | ||||||||||
|
Douglas
|
1 | Oil | Peaking | 16 | ||||||||||
|
Sundance
|
10 | Gas | Peaking | 420 | ||||||||||
|
West Phoenix
|
2 | Gas | Peaking | 110 | ||||||||||
|
Yucca 1, 2, 3
|
3 | Gas/Oil | Peaking | 93 | ||||||||||
|
Yucca 4
|
1 | Oil | Peaking | 54 | ||||||||||
|
Yucca 5, 6
|
2 | Gas | Peaking | 96 | ||||||||||
|
|
||||||||||||||
|
Total Combustion Turbine
|
1,088 | |||||||||||||
|
|
||||||||||||||
|
|
||||||||||||||
|
Solar:
|
||||||||||||||
|
Multiple state-wide solar
facilities
|
Solar | Peaking | 6 | |||||||||||
|
|
||||||||||||||
|
Total Solar
|
6 | |||||||||||||
|
|
||||||||||||||
|
Total Capacity
|
6,288 | |||||||||||||
|
|
||||||||||||||
| (a) | 100% unless otherwise noted. | |
| (b) | See “Business of Arizona Public Service Company — Generation — Nuclear” in Item 1 for details regarding leased interests in Palo Verde. The other owners are Salt River Project (17.5%), Southern California Edison (15.8%), El Paso Electric (15.8%), Public Service Company of New Mexico (10.2%), Southern California Public Power Authority (5.9%), and Los Angeles Department of Water & Power (5.7%). |
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| (c) | The other owners are Salt River Project (10%), Public Service Company of New Mexico (13%), Southern California Edison (48%), Tucson Electric Power Company (1%) and El Paso Electric (1%). | |
| (d) | The other owners are Salt River Project (21.7%), Nevada Power Company (11.3%), the United States Government (24.3%), Tucson Electric Power Company (7.5%) and Los Angeles Department of Water & Power (21.2%). |
See “Business of Arizona Public Service Company — Environmental Matters” in Item 1 with
respect to matters having a possible impact on the operation of certain of APS’ generating
facilities.
See “Business of Arizona Public Service Company” in Item 1 for a map detailing the location of
APS’ major power plants and principal transmission lines.
Transmission and Distribution Facilities
Current Facilities
. APS’ transmission facilities consist of approximately 5,946 pole miles of
overhead lines and approximately 49 miles of underground lines, 5,723 miles of which are located in
Arizona. APS’ distribution facilities consist of approximately 11,362 miles of overhead lines and
approximately 17,308 miles of underground primary cable, all of which are located in Arizona. APS
shares ownership of some of its transmission facilities with other companies. The following table
shows APS’ jointly-owned interests in those transmission facilities recorded on the Consolidated
Balance Sheets at December 31, 2009:
| Percent Owned | ||||
| (Weighted Average) | ||||
|
North Valley System
|
65.9 | % | ||
|
Palo Verde — Estrella 500KV System
|
55.5 | % | ||
|
Round Valley System
|
50.0 | % | ||
|
ANPP 500KV System
|
35.8 | % | ||
|
Navajo Southern System
|
31.4 | % | ||
|
Four Corners Switchyards
|
27.5 | % | ||
|
Palo Verde — Yuma 500KV System
|
23.9 | % | ||
|
Phoenix — Mead System
|
17.1 | % | ||
Expansion.
Each year APS prepares and files with the ACC a ten-year transmission plan. In
APS’ 2010 plan, APS projects it will invest approximately
$520 million in new transmission over the next ten years, which
includes 270 miles of new lines. This investment will increase the import capability into
metropolitan Phoenix by approximately 26% and will increase the import capability into the Yuma
area by approximately 38%. One significant project presently under construction is the Morgan -
Pinnacle Peak project, which consists of 26 miles of 500kV and 230kV lines. APS completed two
major substation projects in 2009. The Dugas substation (500/69kV) will provide system voltage
support and capacity for the Verde Valley area and the Sugarloaf substation (500/69kV) will provide
system voltage support and capacity for the Show Low and Snowflake areas, and will also support
renewable energy development in that area.
APS continues to work with regulators to identify transmission projects necessary to support
renewable energy facilities. Two such projects, which are included in APS’ 2010 transmission plan,
are the Delany to Palo Verde line and the North Gila to Palo Verde line, both of which are intended
to support the transmission of renewable energy to Phoenix and California.
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Plant and Transmission Line Leases and Easements on Indian Lands
The Navajo Plant and Four Corners are located on land held under leases from the Navajo Nation
and also under easements from the federal government. The easement and lease for the Navajo Plant
expire in 2019 and the easement and lease for Four Corners expire in 2016. Each of the leases
contains an option to extend for an additional 25-year period from the end of the existing lease
term, for a rental amount tied to the original rent payment adjusted based on an index. The
easements do not contain an express renewal option and it is unclear what conditions to renewal or
extension of the easements may be imposed. The ultimate cost of renewal of the Navajo Plant and
Four Corners leases and easements is uncertain. The coal contracted for use in these plants is
also located on Indian reservations.
Certain portions of the transmission lines that carry power from several of our power plants
are located on Indian lands pursuant to easements or other rights-of-way that are effective for
specified periods. Some of these rights-of-way have expired and our renewal applications have not
yet been acted upon by the appropriate Indian tribes. Other rights expire at various times in the
future and renewal action by the applicable tribe will be required at that time. The majority of
our transmission lines residing on Indian lands are on the Navajo Nation. The Four Corners and
Navajo Plant leases provide Navajo Nation consent to certain of the rights-of-way for transmission
lines related to those plants at a specified rental rate for the original term of the rights-of-way
and for a like payment in any renewal period. In addition, a 1985 amendment to the leases provides
a formula for calculating payments for certain new and renewal rights-of-way. However, some of our
rights-of-way are not covered by the leases, or are granted by other Indian tribes. In recent
negotiations with other utilities or companies for renewal of similar rights-of-way, certain of the
affected Indian tribes have required payments substantially in excess of amounts that we have paid
in the past for such rights-of-way or that are typical for similar permits across non-Indian lands;
however, we are unaware of the underlying agreements and/or specific circumstances surrounding
these renewals. The ultimate cost of renewal of the rights-of-way for our transmission lines is
uncertain. We are monitoring these rights-of-way and easement issues and have initiated
discussions with the Navajo Nation regarding them. We are currently unable to predict the outcome
of this matter.
Real Estate Segment Properties
See “Business of Other Subsidiaries — SunCor ” in Item 1 for information regarding SunCor’s
remaining properties. Substantially all of SunCor’s debt is collateralized by interests in its
real property.
36
Table of Contents
ITEM 3. LEGAL PROCEEDINGS
See “Business of Arizona Public Service Company — Environmental Matters” in Item 1 with regard
to pending or threatened litigation and other disputes.
See Note 3 for the resolution of APS’ general retail rate case and other matters before the
ACC.
See Note 11 with regard to a lawsuit brought by APS on behalf of itself and the other Palo
Verde owners against the DOE, for information relating to the FERC proceedings on California and
Pacific Northwest energy market issues and for information regarding the bankruptcy proceeding
involving the landlord for our corporate headquarters building.
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
VOTE OF SECURITY HOLDERS
Not applicable.
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Table of Contents
EXECUTIVE OFFICERS OF PINNACLE WEST
Pinnacle West’s executive officers are elected no less often than annually and may be removed by
the Board of Directors at any time. The executive officers, their ages at February 19, 2010,
current positions and principal occupations for the past five years are as follows:
| Name | Age | Position | Period | |||
|
|
||||||
| Donald E. Brandt | 55 |
Chairman of the Board and Chief Executive
Officer of Pinnacle West; Chairman of the
Board of APS
|
2009-Present | |||
|
Chief Executive Officer of APS
|
2008-Present | |||||
|
President and Chief Operating Officer of
Pinnacle West
|
2008-2009 | |||||
|
President of APS
|
2006-2009 | |||||
|
Executive Vice President of Pinnacle West;
Chief Financial Officer of APS
|
2003-2008 | |||||
|
Chief Financial Officer of Pinnacle West
|
2002-2008 | |||||
|
Executive Vice President of APS
|
2003-2006 | |||||
|
|
||||||
| Donald G. Robinson | 56 |
President and Chief Operating Officer of APS
|
2009-Present | |||
|
Senior Vice President, Planning and
Administration of APS
|
2007-2009 | |||||
|
Vice President, Planning of APS
|
2003-2007 | |||||
|
|
||||||
| James R. Hatfield | 52 |
Treasurer of Pinnacle West and APS
|
2009-Present | |||
|
Senior Vice President and Chief Financial
Officer of Pinnacle West and APS
|
2008-Present | |||||
|
Senior Vice President and Chief Financial
Officer of OGE Energy Corp.
|
1999-2008 | |||||
|
|
||||||
|
|
||||||
| Denise R. Danner | 54 |
Vice President, Controller and Chief
Accounting Officer of Pinnacle West; Chief Accounting Officer of APS
|
2010-Present | |||
|
Vice President and Controller of APS
|
2009-Present | |||||
|
Senior Vice President, Controller and Chief
Accounting Officer of Allied Waste Industries,
Inc.
|
2007-2008 | |||||
|
Vice President, Controller and Chief
Accounting Officer of Phelps Dodge Corporation
|
2004-2007 | |||||
|
|
||||||
| Randall K. Edington | 56 |
Executive Vice President and Chief Nuclear Officer of APS
|
2007-Present | |||
|
Senior Vice President and Chief Nuclear
Officer of APS
|
2007 | |||||
|
Site Vice President and Chief Nuclear Officer
of Cooper Generating Station with Entergy
Corporation
|
2003-2007 |
38
Table of Contents
| Name | Age | Position | Period | |||
|
|
||||||
| David P. Falck | 56 |
Executive Vice President, General Counsel and
Secretary of Pinnacle West and APS
|
2009-Present | |||
|
Senior Vice President — Law of Public Service
Enterprise Group Inc.
|
2007-2009 | |||||
|
Partner — Pillsbury Winthrop Shaw Pittman LLP
|
1987-2007 | |||||
|
|
||||||
| Mark A. Schiavoni | 54 |
Senior Vice President, Fossil Operations of APS
|
2009-Present | |||
|
Senior Vice President of Exelon Generation and
President of Exelon Power
|
2004-2009 | |||||
|
|
||||||
| Lori S. Sundberg | 46 |
Vice President, Human Resources of APS
|
2007-Present | |||
|
Vice President, Employee Relations, Safety,
Compliance & Embrace of American Express
Company
|
2007 | |||||
|
Vice President, HR Relationship Leader, Global
Corporate Travel Division of American Express
Company
|
2003-2007 | |||||
|
|
||||||
| Steven M. Wheeler | 61 |
Executive Vice President, Customer Service and
Regulation of APS
|
2003-Present |
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Table of Contents
PART II
ITEM 5. MARKET FOR REGISTRANTS’ COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Pinnacle West’s common stock is publicly held and is traded on the New York Stock Exchange.
At the close of business on February 15, 2010, Pinnacle West’s common stock was held of record by
approximately 28,216 shareholders.
QUARTERLY STOCK PRICES AND DIVIDENDS PAID PER SHARE STOCK SYMBOL: PNW
| Dividends | ||||||||||||||||
| 2009 | High | Low | Close | Per Share | ||||||||||||
|
|
||||||||||||||||
|
1st Quarter
|
$ | 35.13 | $ | 22.32 | $ | 26.56 | $ | 0.525 | ||||||||
|
2nd Quarter
|
30.30 | 25.28 | 30.15 | 0.525 | ||||||||||||
|
3rd Quarter
|
33.71 | 28.87 | 32.82 | 0.525 | ||||||||||||
|
4th Quarter
|
37.96 | 31.08 | 36.58 | 0.525 | ||||||||||||
| Dividends | ||||||||||||||||
| 2008 | High | Low | Close | Per Share | ||||||||||||
|
|
||||||||||||||||
|
1st Quarter
|
$ | 42.92 | $ | 34.08 | $ | 35.08 | $ | 0.525 | ||||||||
|
2nd Quarter
|
37.39 | 30.26 | 30.77 | 0.525 | ||||||||||||
|
3rd Quarter
|
37.88 | 30.34 | 34.41 | 0.525 | ||||||||||||
|
4th Quarter
|
35.83 | 26.27 | 32.13 | 0.525 | ||||||||||||
APS’ common stock is wholly-owned by Pinnacle West and is not listed for trading on any stock
exchange. As a result, there is no established public trading market for APS’ common stock.
The chart below sets forth the dividends paid on APS’ common stock for each of the four
quarters for 2009 and 2008.
Common Stock Dividends
(Dollars in Thousands)
(Dollars in Thousands)
| Quarter | 2009 | 2008 | ||
|
1
st
Quarter
|
$42,500 | $42,500 | ||
| 2 nd Quarter | 42,500 | 42,500 | ||
| 3 rd Quarter | 42,500 | 42,500 | ||
| 4 th Quarter | 42,500 | 42,500 |
The sole holder of APS’ common stock, Pinnacle West, is entitled to dividends when and as
declared out of legally available funds. As of December 31, 2009, APS did not have any outstanding
preferred stock.
40
Table of Contents
Issuer Purchases of Equity Securities
The following table contains information about our purchases of our common stock during the
fourth quarter of 2009.
| Total | Total Number of | |||||||||||||||
| Number of | Shares Purchased | Maximum Number of | ||||||||||||||
| Shares | Average | as Part of Publicly | Shares that May Yet Be | |||||||||||||
| Purchased | Price Paid | Announced Plans | Purchased Under the | |||||||||||||
| Period | (1) | per Share | or Programs | Plans or Programs | ||||||||||||
|
October 1 - October 31, 2009
|
— | — | — | — | ||||||||||||
|
November 1 - November 30, 2009
|
35 | $ | 33.46 | — | — | |||||||||||
|
December 1 - December 31, 2009
|
— | — | — | — | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total
|
35 | $ | 33.46 | — | — | |||||||||||
|
|
||||||||||||||||
| (1) | Represents shares of common stock withheld by Pinnacle West to satisfy tax withholding obligations upon the vesting of restricted stock. |
41
Table of Contents
ITEM 6. SELECTED FINANCIAL DATA
PINNACLE WEST CAPITAL CORPORATION — CONSOLIDATED
PINNACLE WEST CAPITAL CORPORATION — CONSOLIDATED
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (dollars in thousands, except per share amounts) | ||||||||||||||||||||
|
OPERATING RESULTS
|
||||||||||||||||||||
|
Operating revenues:
|
||||||||||||||||||||
|
Regulated electricity segment
|
$ | 3,149,187 | $ | 3,127,383 | $ | 2,918,163 | $ | 2,635,036 | $ | 2,237,145 | ||||||||||
|
Real estate segment
|
103,152 | 74,549 | 189,726 | 306,938 | 280,204 | |||||||||||||||
|
Marketing and trading
|
— | 66,897 | 138,247 | 136,748 | 179,895 | |||||||||||||||
|
Other revenues
|
44,762 | 41,729 | 48,018 | 36,172 | 61,221 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total operating revenues
|
$ | 3,297,101 | $ | 3,310,558 | $ | 3,294,154 | $ | 3,114,894 | $ | 2,758,465 | ||||||||||
|
|
||||||||||||||||||||
|
Income from continuing operations (a)
|
$ | 67,231 | $ | 231,304 | $ | 300,436 | $ | 308,972 | $ | 223,933 | ||||||||||
|
Discontinued operations — net of income
taxes (b)
|
(13,676 | ) | 10,821 | 6,707 | 18,283 | (47,666 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Net Income
|
53,555 | 242,125 | 307,143 | 327,255 | 176,267 | |||||||||||||||
|
Less: Net loss attributable to
noncontrolling interests
|
(14,775 | ) | — | — | — | — | ||||||||||||||
|
|
||||||||||||||||||||
|
Net income attributable to common shareholders
|
$ | 68,330 | $ | 242,125 | $ | 307,143 | $ | 327,255 | $ | 176,267 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
COMMON STOCK DATA
|
||||||||||||||||||||
|
Book value per share — year-end
|
$ | 32.69 | $ | 34.16 | $ | 35.15 | $ | 34.48 | $ | 34.58 | ||||||||||
|
Earnings per weighted-average
common share outstanding:
|
||||||||||||||||||||
|
Continuing operations attributable to
common shareholders — basic
|
$ | 0.81 | $ | 2.30 | $ | 3.00 | $ | 3.11 | $ | 2.32 | ||||||||||
|
Net income attributable to common
shareholders — basic
|
$ | 0.68 | $ | 2.40 | $ | 3.06 | $ | 3.29 | $ | 1.83 | ||||||||||
|
Continuing operations attributable to
common shareholders — diluted
|
$ | 0.81 | $ | 2.29 | $ | 2.98 | $ | 3.09 | $ | 2.32 | ||||||||||
|
Net income attributable to common
shareholders — diluted
|
$ | 0.67 | $ | 2.40 | $ | 3.05 | $ | 3.27 | $ | 1.82 | ||||||||||
|
Dividends declared per share
|
$ | 2.10 | $ | 2.10 | $ | 2.10 | $ | 2.025 | $ | 1.925 | ||||||||||
|
Weighted-average common shares
outstanding — basic
|
101,160,659 | 100,690,838 | 100,255,807 | 99,417,008 | 96,483,781 | |||||||||||||||
|
Weighted-average common shares
outstanding — diluted
|
101,263,795 | 100,964,920 | 100,834,871 | 100,010,108 | 96,589,949 | |||||||||||||||
|
|
||||||||||||||||||||
|
BALANCE SHEET DATA
|
||||||||||||||||||||
|
Total assets
|
$ | 11,808,155 | $ | 11,620,093 | $ | 11,162,209 | $ | 10,817,900 | $ | 10,588,485 | ||||||||||
|
|
||||||||||||||||||||
|
Liabilities and equity:
|
||||||||||||||||||||
|
Current liabilities
|
$ | 1,083,160 | $ | 1,505,928 | $ | 1,344,449 | $ | 923,338 | $ | 1,608,863 | ||||||||||
|
Long-term debt less current maturities
|
3,370,524 | 3,031,603 | 3,127,125 | 3,232,633 | 2,608,455 | |||||||||||||||
|
Deferred credits and other
|
4,008,791 | 3,589,194 | 3,159,024 | 3,215,813 | 2,946,203 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total liabilities
|
8,462,475 | 8,126,725 | 7,630,598 | 7,371,784 | 7,163,521 | |||||||||||||||
|
Total equity
|
3,345,680 | 3,493,368 | 3,531,611 | 3,446,116 | 3,424,964 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total liabilities and equity
|
$ | 11,808,155 | $ | 11,620,093 | $ | 11,162,209 | $ | 10,817,900 | $ | 10,588,485 | ||||||||||
|
|
||||||||||||||||||||
| (a) | Includes a $157 million after tax real estate impairment charge in 2009 (see Note 23). Also includes regulatory disallowance of $8 million after tax in 2007 and $84 million after tax in 2005. | |
| (b) | Amounts primarily related to SunCor’s real estate impairment charges (see Note 23), Silverhawk Power Station (“Silverhawk”) and APSES discontinued operations (see Note 22). |
42
Table of Contents
SELECTED FINANCIAL DATA
ARIZONA PUBLIC SERVICE COMPANY
ARIZONA PUBLIC SERVICE COMPANY
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
|
OPERATING RESULTS
|
||||||||||||||||||||
|
Electric operating revenues
|
$ | 3,149,500 | $ | 3,133,496 | $ | 2,936,277 | $ | 2,658,513 | $ | 2,270,793 | ||||||||||
|
Fuel and purchased power costs
|
1,178,620 | 1,289,883 | 1,151,392 | 969,767 | 688,982 | |||||||||||||||
|
Other operating expenses
|
1,533,037 | 1,408,213 | 1,358,890 | 1,290,804 | 1,200,198 | |||||||||||||||
|
|
||||||||||||||||||||
|
Operating income
|
437,843 | 435,400 | 425,995 | 397,942 | 381,613 | |||||||||||||||
|
Other income (deductions)
|
13,893 | 836 | 20,870 | 27,584 | (69,171 | ) | ||||||||||||||
|
Interest deductions — net of
AFUDC
|
200,511 | 173,892 | 162,925 | 155,796 | 141,963 | |||||||||||||||
|
|
||||||||||||||||||||
|
Net income
|
$ | 251,225 | $ | 262,344 | $ | 283,940 | $ | 269,730 | $ | 170,479 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
BALANCE SHEET DATA
|
||||||||||||||||||||
|
Total assets
|
$ | 11,503,402 | $ | 10,963,577 | $ | 10,321,402 | $ | 9,948,766 | $ | 9,143,643 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Liabilities and equity:
|
||||||||||||||||||||
|
Common stock equity
|
$ | 3,445,355 | $ | 3,339,150 | $ | 3,351,441 | $ | 3,207,473 | $ | 2,985,225 | ||||||||||
|
Long-term debt less current
maturities
|
3,180,406 | 2,850,242 | 2,876,881 | 2,877,502 | 2,479,703 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total capitalization
|
6,625,761 | 6,189,392 | 6,228,322 | 6,084,975 | 5,464,928 | |||||||||||||||
|
Current liabilities
|
874,842 | 1,267,768 | 1,055,706 | 806,556 | 1,021,084 | |||||||||||||||
|
Deferred credits and other
|
4,002,799 | 3,506,417 | 3,037,374 | 3,057,235 | 2,657,631 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total liabilities and equity
|
$ | 11,503,402 | $ | 10,963,577 | $ | 10,321,402 | $ | 9,948,766 | $ | 9,143,643 | ||||||||||
|
|
||||||||||||||||||||
43
Table of Contents
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with Pinnacle West’s Consolidated
Financial Statements and APS’ Financial Statements and the related Notes that appear in Item 8 of
this report. For information on the broad factors that may cause our actual future results to
differ from those we currently seek or anticipate, see “Forward-Looking Statements” at the front of
this report and “Risk Factors” in Item 1A.
OVERVIEW
Pinnacle West owns all of the outstanding common stock of APS. APS is a vertically-integrated
electric utility that provides retail and wholesale electric service to most of the state of
Arizona, with the major exceptions of about one-half of the Phoenix metropolitan area, the Tucson
metropolitan area and Mohave County in northwestern Arizona. APS accounts for substantially all of
our revenues and earnings, and is expected to continue to do so.
Areas of Business Focus
Operational Performance and Reliability.
Nuclear.
Palo Verde experienced strong performance during 2009, with its three units
achieving a combined year-end capacity factor of 89%. With a focus on safely and efficiently
generating electricity for the long-term, APS applied for twenty-year renewals of its operating
licenses for each of the three Palo Verde units, and is making preparations to secure necessary
resources to operate the plant during this extended period of time. Palo Verde’s 2009
accomplishments also included the installation of a new reactor vessel head, upgraded equipment and
processes designed to substantially reduce the time required to defuel and refuel the reactor
during refueling outages, and the successful implementation of a comprehensive improvement plan,
which allowed Palo Verde Unit 3 to exit the NRC’s enhanced inspection regime (“Column 4”) earlier
than anticipated, in March of 2009.
Coal and Related Environmental Matters.
APS’ coal plants, Four Corners and Cholla, achieved
net capacity factors of 88% and 77%, respectively, in 2009. APS is focused on developing
legislation and increased regulation concerning greenhouse gas emissions, and the potential impacts
on our coal fleet. Recent concern over climate change and other emission-related issues could have
a significant impact on our capital expenditures and operating costs in the form of taxes,
emissions allowances or required equipment upgrades for these plants. APS is closely monitoring
our long range capital management plans, understanding that the resulting legislation and
regulation could impact the economic viability of certain plants, as well as the willingness or
ability of power plant participants to fund any such equipment upgrades. See “Business of Arizona
Public Service Company — Environmental Matters — Climate Change” in Item 1 and climate
change-related risks described in Item 1A for additional climate change developments and risks
facing APS.
44
Table of Contents
Transmission and Delivery.
In the area of transmission and delivery to its customers, APS
also ranked favorably during 2009, with top quartile performance for average customer outage time.
During 2009, APS undertook several significant transmission projects, including the Morgan to
Pinnacle Peak transmission line scheduled for completion at the end of 2010, and the completion of
two switchyards, one of which will support capacity for renewable energy projects. APS is working
closely with regulators to identify and plan for transmission needs resulting from the current
focus on renewable energy. APS is also working to establish and expand smart grid technology
throughout its service territory designed to provide a variety of benefits both to APS and its
customers. This technology should allow customers to better monitor their energy use and needs,
minimize system outage durations and the number of customers that experience outages, and
facilitate cost savings to APS through improved reliability and the automation of certain
distribution functions, including remote meter reading and remote connects and disconnects.
Renewable
Energy.
APS is committed to increasing the amount of energy produced by renewable
energy resources, which was a significant focus in APS’ recent rate case settlement described
below. APS and the other parties to the rate case worked with the ACC Commissioners to address a
wide range of customer needs and to secure a clean, sustainable energy future for Arizona.
The ACC adopted a renewable energy standard several years ago, recognizing the importance of
renewable energy to our state. In the rate case settlement agreement, APS agreed to exceed these
standards, committing that 10% of APS’ resources will come from renewable energy by the year 2015.
A variety of other provisions in the settlement agreement reinforce APS’ dedication to renewable
energy through initiatives to build a photovoltaic solar plant, install solar rooftop panels on
schools and seek an Arizona wind generation project.
During 2009, APS filed its annual RES implementation plan that included a request for ACC
approval of the “AZ Sun Program.” As proposed in its plan,
APS would invest an estimated $500 million to develop at least 100 MW of photovoltaic solar plants. It currently anticipates that this solar
capacity would be placed into service in the 2011 to 2014 timeframe. The ultimate timing depends
on the outcome of current and future procurement processes. See Note 3 for additional details
regarding this program, including the estimated timing of the ACC’s determination on the matter and
the related cost recovery. APS also issued two requests for proposal (“RFP”) for renewable
resources in early 2010. These RFP’s are part of the process for procuring the additional
renewable resources required under the rate case settlement. The first RFP is for utility-scale
solar photovoltaic projects between 15 and 50 MW. Assuming ACC approval of the AZ Sun Program as
proposed, this RFP will serve as the first procurement step for implementing that program. The
second RFP is for wind projects between 15 and 100 MW to be located within Arizona.
Rate Matters.
APS needs timely recovery through rates of its capital and operating
expenditures to maintain adequate financial health. APS’ retail rates are regulated by the ACC and
its wholesale electric rates (primarily for transmission) are regulated by the FERC. At the end of
2009, the ACC approved a settlement agreement entered into by APS and twenty-one of the
twenty-three other parties to APS’ general retail rate case, with modifications that did not
materially affect the overall economic terms of the agreement. The rate case settlement should
strengthen APS’ financial condition by allowing for rate stability and a greater level of cost
recovery and return on investment. It also authorizes and requires equity infusions into APS of at
least $700 million prior to the end of 2014. The settlement demonstrates cooperation among APS,
the ACC staff, the Residential Utility Consumer Office (RUCO) and other intervenors to the rate
case, and establishes a future rate case filing plan that allows APS the opportunity to help shape
Arizona’s energy future outside of continual rate cases. See Note 3 for a detailed discussion of
the settlement agreement terms and information on APS’ FERC rates.
APS has several recovery mechanisms in place that provide more timely recovery to APS of its
fuel and transmission costs, and costs associated with the promotion and implementation of its
energy
efficiency, demand-side management and renewable energy efforts and customer programs. These
mechanisms are described more fully in Note 3.
45
Table of Contents
Financial Strength and Flexibility.
Despite the volatility and disruption of the credit
markets, Pinnacle West and APS currently have ample borrowing capacity under their respective
credit facilities and have been able to access these facilities, ensuring adequate liquidity for
each company. In early February 2010, APS entered into a $500 million revolving credit facility,
replacing its $377 million revolving credit facility that would have otherwise terminated in
December 2010. At that same time, Pinnacle West entered into a $200 million revolving credit
facility that replaces its $283 million facility that also would have otherwise terminated in
December 2010.
SunCor Real Estate Operations.
As a result of the continuing distressed conditions in the
real estate markets, during 2009 SunCor undertook a program to dispose of its homebuilding
operations, master-planned communities, land parcels, commercial assets and golf courses in order
to eliminate its outstanding debt. This resulted in impairment charges of approximately $266
million, or $161 million after income taxes, for 2009. See “Pinnacle West Consolidated — Liquidity
and Capital Resources — Other Subsidiaries — SunCor” below for a discussion of SunCor’s outstanding
debt and related matters, Note 23 for a further discussion of impairment charges and the
SunCor-related risk factor in Item 1A.
Subsidiaries.
Our other first tier subsidiaries, El Dorado and APSES, are not expected to
have any material impact on our financial results, or to require any material amounts of capital,
over the next three years.
Key Financial Drivers
In addition to the continuing impact of the matters described above, many factors influence
our financial results and our future financial outlook, including those listed below. We closely
monitor these factors to plan for the Company’s current needs, and to adjust our expectations,
financial budgets and forecasts appropriately.
Electric Operating Revenues.
For the years 2007 through 2009, retail electric revenues
comprised approximately 94% of our total electric operating revenues. Our electric operating
revenues are affected by customer growth, variations in weather from period to period, customer
mix, average usage per customer and the impacts of energy efficiency programs, electricity rates
and tariffs, the recovery of PSA deferrals and the operation of other recovery mechanisms.
Off-system sales of excess generation output, purchased power and natural gas are included in
regulated electricity segment revenues and related fuel and purchased power because they are
credited to APS’ retail customers through the PSA. These revenue transactions are affected by the
availability of excess economic generation or other energy resources and wholesale market
conditions, including competition, demand and prices.
Customer and Sales Growth.
Customer growth in APS’ service territory for the year ended
December 31, 2009 was 0.6% compared with the prior year. For the three years 2007 through 2009,
APS’ customer growth averaged 1.8% per year. We currently expect customer growth to average about
1% per year for 2010 through 2012 due to economic conditions both nationally and in Arizona.
Retail sales in kilowatt-hours, adjusted to exclude the effects of weather variations, for 2009
declined 2.4% compared to the prior year, reflecting the poor economic conditions in 2009 and the
effects of our energy efficiency programs. For the three years 2007 through 2009, APS’ actual
retail electricity sales in kilowatt-hours, adjusted to exclude the effects of weather variations,
grew at an average annual rate
of 0.3%. We currently estimate that total retail electricity sales in kilowatt-hours will
remain flat on average per year during 2010 through 2012, including the effects of APS’ energy
efficiency programs, but excluding the effects of weather variations. A continuation of the
economic downturn, or the failure of the Arizona economy to rebound in the near future, could
further impact these estimates. The customer and sales growth referred to in this paragraph apply
to Native Load customers.
46
Table of Contents
Actual sales growth, excluding weather-related variations, may differ from our projections as
a result of numerous factors, such as economic conditions, customer growth, usage patterns, impacts
of energy efficiency programs and responses to retail price changes. Our experience indicates that
a reasonable range of variation in our kilowatt-hour sales projection attributable to such economic
factors under normal business conditions can result in increases or decreases in annual net income
of up to $10 million.
Weather.
In forecasting the retail sales growth numbers provided above, we assume normal
weather patterns based on historical data. Historical extreme weather variations have resulted in
annual variations in net income in excess of $20 million. However, our experience indicates that
the more typical variations from normal weather can result in increases or decreases in annual net
income of up to $10 million.
Fuel and Purchased Power Costs.
Fuel and purchased power costs included on our Consolidated
Statements of Income are impacted by our electricity sales volumes, existing contracts for
purchased power and generation fuel, our power plant performance, transmission availability or
constraints, prevailing market prices, new generating plants being placed in service in our market
areas, our hedging program for managing such costs and PSA deferrals and the amortization thereof.
Operations and Maintenance Expenses
.
Operations and maintenance expenses are impacted by
growth, power plant operations, maintenance of utility plant (including generation, transmission,
and distribution facilities), inflation, outages, higher-trending pension and other postretirement
benefit costs, renewable energy and demand side management related expenses (which are offset by
the same amount of regulated electricity segment operating revenues) and other factors. In its
recent retail rate case settlement, APS committed to operational expense reductions from 2010
through 2014 and received approval to defer certain pension and other postretirement benefit cost
increases to be incurred in 2011 and 2012.
Depreciation and Amortization Expenses.
Depreciation and amortization expenses are impacted
by net additions to utility plant and other property (such as new generation, transmission, and
distribution facilities), and changes in depreciation and amortization rates. The “Capital
Expenditures” section below provides information regarding the planned additions to our facilities.
We have also applied to the NRC for renewed operating licenses for each of the Palo Verde units.
If the NRC grants the extension, we estimate that our annual pretax depreciation expense will
decrease by approximately $34 million at the later of the license extension date or January 1,
2012.
Property Taxes.
Taxes other than income taxes consist primarily of property taxes, which are
affected by the value of property in-service and under construction, assessment ratios, and tax
rates. The average property tax rate for APS, which currently owns the majority of our property,
was 7.5% of the assessed value for 2009, 7.8% of the assessed value for 2008 and 8.3% of the
assessed value for 2007. We expect property taxes to increase as we add new utility plant
(including new generation, transmission and distribution facilities described below under “Capital
Additions”) and as we improve our existing facilities.
47
Table of Contents
Income Taxes
.
Income taxes are affected by the amount of pre-tax book income, income tax
rates, and certain non-taxable items, such as the allowance for equity funds used during
construction. In addition, income taxes may also be affected by the settlement of issues with
taxing authorities.
Interest Expense.
Interest expense is affected by the amount of debt outstanding and the
interest rates on that debt (see Note 6.) The primary factors affecting borrowing levels are
expected to be our capital expenditures, long-term debt maturities, and internally generated cash
flow. Capitalized interest offsets a portion of interest expense while capital projects are under
construction. We stop accruing capitalized interest on a project when it is placed in commercial
operation.
PINNACLE WEST CONSOLIDATED — RESULTS OF OPERATIONS
Our results of operations, provided below, are based upon our two reportable business
segments:
| • | our regulated electricity segment, which consists of traditional regulated retail and wholesale electricity businesses (primarily electric service to Native Load customers) and related activities and includes electricity generation, transmission and distribution; and |
| • | our real estate segment, which consists of SunCor’s real estate development and investment activities. |
Operating Results — 2009 Compared with 2008
Our consolidated net income attributable to common shareholders for 2009 was $68 million,
compared with net income of $242 million for the prior year. The decrease in net income was
primarily due to 2009 real estate impairment charges recorded by SunCor, the Company’s real estate
subsidiary.
In addition, regulated electricity segment net income decreased approximately $13 million from
the prior year primarily due to lower retail sales resulting from lower usage per customer; higher
interest charges, net of capitalized financing costs; higher depreciation and amortization
expenses; and the absence of income tax benefits related to prior years recorded in 2008. These
negative factors were partially offset by increased revenues due to the interim rate increase
effective January 1, 2009 and transmission rate increases.
48
Table of Contents
The following table presents net income attributable to common shareholders by business
segment compared with the prior year:
| Increase | ||||||||||||
| (Decrease) | ||||||||||||
| in Net | ||||||||||||
| Income | ||||||||||||
| Year Ended | Attributable | |||||||||||
| December 31, | to Common | |||||||||||
| 2009 | 2008 | Shareholders | ||||||||||
| (dollars in millions) | ||||||||||||
|
Regulated Electricity Segment:
|
||||||||||||
|
|
||||||||||||
|
Operating revenues less fuel and
purchased power expenses
|
$ | 1,970 | $ | 1,843 | $ | 127 | ||||||
|
Operations and maintenance
|
(862 | ) | (796 | ) | (66 | ) | ||||||
|
Depreciation and amortization
|
(400 | ) | (383 | ) | (17 | ) | ||||||
|
Taxes other than income taxes
|
(123 | ) | (125 | ) | 2 | |||||||
|
Other income (expenses), net
|
(1 | ) | (20 | ) | 19 | |||||||
|
Interest charges, net of capitalized
financing costs
|
(199 | ) | (171 | ) | (28 | ) | ||||||
|
Income taxes
|
(142 | ) | (92 | ) | (50 | ) | ||||||
|
|
||||||||||||
|
Regulated electricity segment net
income
|
243 | 256 | (13 | ) | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Real Estate Segment:
|
||||||||||||
|
|
||||||||||||
|
Real estate impairment charges (a)
|
(266 | ) | (53 | ) | (213 | ) | ||||||
|
Other real estate operations
|
(10 | ) | 10 | (20 | ) | |||||||
|
Income taxes
|
109 | 17 | 92 | |||||||||
|
|
||||||||||||
|
Real estate segment net loss
|
(167 | ) | (26 | ) | (141 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
All Other (b)
|
(8 | ) | 12 | (20 | ) | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net Income Attributable to Common
Shareholders
|
$ | 68 | $ | 242 | $ | (174 | ) | |||||
|
|
||||||||||||
| (a) | See Note 23 for additional information on real estate impairment charges. | |
| (b) | Includes activities related to marketing and trading, APSES and El Dorado. Income for 2008 includes income from discontinued operations of $8 million related to the resolution of certain tax issues associated with the sale of Silverhawk in 2005. None of these segments is a reportable segment. |
Regulated electricity segment
This section includes a discussion of major variances in income and expense amounts for the
regulated electricity segment.
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Table of Contents
Operating revenues less fuel and purchased power expenses
Regulated electricity segment operating revenues less fuel and purchased power expenses were
$127 million higher for the year ended 2009 compared with the prior year. The following table
describes the major components of this change:
| Increase (Decrease) | ||||||||||||
| Purchased | ||||||||||||
| Operating | power and fuel | |||||||||||
| revenues | expenses | Net change | ||||||||||
| (dollars in millions) | ||||||||||||
|
Higher renewable energy and demand-side
management surcharges (substantially
offset in operations and maintenance expense)
|
$ | 63 | $ | $ | 63 | |||||||
|
Interim retail rate increases effective
January 1, 2009
|
61 | 61 | ||||||||||
|
Transmission rate increases
|
21 | 21 | ||||||||||
|
Increased mark-to-market valuations of fuel and
purchased power contracts related to
favorable changes in market prices,
net of related PSA deferrals
|
(18 | ) | 18 | |||||||||
|
Effects of weather on retail sales, primarily
due to hotter weather in the third
quarter of 2009
|
12 | 3 | 9 | |||||||||
|
Lower retail sales primarily due to lower
usage per customer, including the effects of
the Company’s energy efficiency programs,
but excluding the effects of weather
|
(58 | ) | (26 | ) | (32 | ) | ||||||
|
Higher fuel and purchased power costs including
the effects of lower off-system sales, net
of related PSA deferrals
|
(30 | ) | (19 | ) | (11 | ) | ||||||
|
Lower retail revenues related to recovery of PSA
deferrals, offset by lower amortization of the
same amount recorded as fuel and purchased
power expense (see Note 3)
|
(36 | ) | (36 | ) | — | |||||||
|
Miscellaneous items, net
|
(11 | ) | (9 | ) | (2 | ) | ||||||
|
|
||||||||||||
|
Total
|
$ | 22 | $ | (105 | ) | $ | 127 | |||||
|
|
||||||||||||
Operations and maintenance
Operations and maintenance expenses increased $66 million for the
year ended 2009 compared with the prior year primarily because of:
| • | An increase of $62 million related to renewable energy and demand-side management programs, which are offset in operating revenues; |
| • | An increase of $29 million in generation costs, including more planned maintenance, partially offset by lower costs at Palo Verde due to cost efficiency measures; and |
| • | A decrease of $25 million associated with cost saving measures and other factors, including the absence of employee severance costs in 2009. |
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Depreciation and amortization
Depreciation and amortization expenses increased $17 million
for the year ended 2009 compared with the prior year primarily because of increases in utility
plant in service. The increases in utility plant in service are the result of various improvements
to APS’ existing fossil and nuclear generating plants and distribution and transmission
infrastructure additions and upgrades.
Interest charges, net of capitalized financing costs
Interest charges, net of capitalized
financing costs increased $28 million for the year ended 2009 compared with the prior year
primarily because of higher debt balances, partially offset by the effects of lower interest rates
(see discussion related to APS’ debt issuances in “Pinnacle West Consolidated — Liquidity and
Capital Resources” below). Interest charges, net of capitalized
financing costs are comprised of the regulated electricity segment portions of
the line items interest expense, capitalized interest and allowance for equity funds used during
construction from the Consolidated Statements of Income.
Other income (expenses), net
Other income (expenses), net improved $19 million for the year
ended 2009 compared with the prior year primarily because of improved investment gains. Other
income (expenses), net is comprised of the regulated electricity
segment portions of the line items other income and other expense from the
Consolidated Statements of Income.
Income taxes
Income taxes were $50 million higher for the year ended 2009 compared with the
prior year primarily because of $30 million of income tax benefits related to prior years recorded
in 2008 and higher pretax income. See Note 4.
Real estate segment
During the first quarter of 2009, we decided to restructure SunCor through the sale of
substantially all of its assets. The real estate segment net loss attributable to common
shareholders was $141 million higher for the year ended 2009 compared with the prior year primarily
because of:
| • | An increase in real estate impairment charges of $213 million (see Note 23 for details of the impairment charges); |
| • | A decrease of $20 million in income from other real estate operations primarily due to 2008 income from a commercial property sale; and |
| • | An increase in income tax benefits of $92 million primarily because of a higher net loss. |
All Other
All other earnings were $20 million lower for the year ended 2009 compared with the prior year
primarily because of planned reductions of marketing and trading activities and the absence of the
2008 resolution of certain tax issues associated with the sale of Silverhawk in 2005.
Operating Results — 2008 Compared with 2007
Our consolidated net income attributable to common shareholders for 2008 was $242 million,
compared with net income of $307 million for the prior year. The decrease in net income was
primarily due to lower results recorded by SunCor, the Company’s real estate subsidiary.
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Table of Contents
In addition, regulated electricity segment net income decreased approximately $18 million from
the prior year primarily due to higher operations and maintenance expenses; lower retail sales due
to the effects of weather; higher depreciation and amortization expenses; and higher interest
charges, net of capitalized financing costs. These negative factors were partially offset by
increased revenues due to the rate increase effective July 1, 2007; transmission rate increases;
and income tax benefits related to prior years recorded in 2008.
The following table presents net income attributable to common shareholders by business
segment compared with the prior year:
| Increase | ||||||||||||
| (Decrease) | ||||||||||||
| in Net | ||||||||||||
| Income | ||||||||||||
| Year Ended | Attributable | |||||||||||
| December 31, | to Common | |||||||||||
| 2008 | 2007 | Shareholders | ||||||||||
| (dollars in millions) | ||||||||||||
|
Regulated Electricity Segment:
|
||||||||||||
|
|
||||||||||||
|
Operating revenues less fuel and
purchased power expenses
|
$ | 1,843 | $ | 1,777 | $ | 66 | ||||||
|
Operations and maintenance
|
(796 | ) | (709 | ) | (87 | ) | ||||||
|
Depreciation and amortization
|
(383 | ) | (365 | ) | (18 | ) | ||||||
|
Taxes other than income taxes
|
(125 | ) | (128 | ) | 3 | |||||||
|
Other income (expenses), net
|
(20 | ) | (6 | ) | (14 | ) | ||||||
|
Interest charges, net of capitalized
financing costs
|
(171 | ) | (156 | ) | (15 | ) | ||||||
|
Income taxes
|
(92 | ) | (139 | ) | 47 | |||||||
|
|
||||||||||||
|
Regulated electricity segment net
income
|
256 | 274 | (18 | ) | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Real Estate Segment:
|
||||||||||||
|
|
||||||||||||
|
Real estate impairment charges (a)
|
(53 | ) | — | (53 | ) | |||||||
|
Other real estate operations
|
10 | 37 | (27 | ) | ||||||||
|
Income taxes
|
17 | (14 | ) | 31 | ||||||||
|
|
||||||||||||
|
Real estate segment net income (loss)
|
(26 | ) | 23 | (49 | ) | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
All Other (b)
|
12 | 10 | 2 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net Income Attributable to Common
Shareholders
|
$ | 242 | $ | 307 | $ | (65 | ) | |||||
|
|
||||||||||||
| (a) | See Note 23 for additional information on real estate impairment charges. | |
| (b) | Includes activities related to marketing and trading, APSES and El Dorado. Income for 2008 includes income from discontinued operations of $8 million related to the resolution of certain tax issues associated with the sale of Silverhawk in 2005. None of these segments is a reportable segment. |
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Regulated electricity segment
This section includes a discussion of major variances in income and expense amounts for the
regulated electricity segment.
Operating revenues less fuel and purchased power expenses
Regulated electricity segment operating revenues less fuel and purchased power expenses were
$66 million higher for the year ended 2008 compared with the prior year. The following table
describes the major components of this change:
| Increase (Decrease) | ||||||||||||
| Purchased | ||||||||||||
| Operating | power and fuel | |||||||||||
| revenues | expenses | Net change | ||||||||||
| (dollars in millions) | ||||||||||||
|
Retail rate increases effective
July 1, 2007
|
$ | 156 | $ | $ | 156 | |||||||
|
Deferred fuel and purchased power costs related
to higher base fuel rate
|
141 | (141 | ) | |||||||||
|
Transmission rate increases
|
31 | 31 | ||||||||||
|
Higher retail sales primarily due to
customer growth partially offset by
lower usage per customer,
but excluding the effects of weather
|
29 | 8 | 21 | |||||||||
|
Higher renewable energy surcharges
(substantially offset in operations and
maintenance expense)
|
14 | 14 | ||||||||||
|
Regulatory disallowance in 2007
|
(14 | ) | 14 | |||||||||
|
Revenues related to long-term traditional
wholesale contracts
|
26 | 14 | 12 | |||||||||
|
Higher fuel and purchased power costs including
the effects of lower off-system sales, net
of related PSA deferrals
|
38 | 41 | (3 | ) | ||||||||
|
Lower mark-to-market valuations of fuel and
purchased power contracts related to
changes in market prices,
net of related PSA deferrals
|
14 | (14 | ) | |||||||||
|
Effects of weather on retail sales
|
(63 | ) | (20 | ) | (43 | ) | ||||||
|
Lower retail revenues related to recovery of PSA
deferrals, offset by lower amortization of the
same amount recorded as fuel and purchased
power expense (see Note 3)
|
(47 | ) | (47 | ) | — | |||||||
|
Miscellaneous items, net
|
25 | 6 | 19 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 209 | $ | 143 | $ | 66 | ||||||
|
|
||||||||||||
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Operations and maintenance
Operations and maintenance expenses increased $87 million for the
year ended 2008 compared with the prior year primarily because of:
| • | An increase of $30 million related to customer service and other costs including distribution system reliability; |
| • | An increase of $18 million in generation costs, including more planned maintenance; |
| • | An increase of $14 million related to renewable energy programs, which are offset in operating revenues; |
| • | An increase of $9 million associated with employee severance costs in 2008; and |
| • | An increase of $16 million due to other miscellaneous factors. |
Depreciation and amortization
Depreciation and amortization expenses increased $18 million
for the year ended 2008 compared with the prior year primarily because of increases in utility
plant in service. The increases in utility plant in service are the result of various improvements
to APS’ existing fossil and nuclear generating plants and distribution and transmission
infrastructure additions and upgrades.
Interest charges, net of capitalized financing costs
Interest charges, net of capitalized
financing costs increased $15 million for the year ended 2008 compared with the prior year
primarily because of higher rates on certain APS pollution control bonds and higher short-term debt
balances. Interest charges, net of capitalized financing costs, are
comprised of the regulated electricity segment portions of the line items
interest expense, capitalized interest and allowance for equity funds used during construction from
the Consolidated Statements of Income.
Other income (expenses), net
Other income (expenses), net reduced earnings by an additional
$14 million for the year ended 2008 compared with the prior year primarily because of losses on
investments and lower interest income. Other income (expenses), net
is comprised of the regulated electricity segment portions of the line items
other income and other expense from the Consolidated Statements of Income.
Income taxes
Income taxes were $47 million lower for the year ended 2008 compared with the
prior year primarily because of $17 million of increased income tax benefits related to prior years
resolved in 2008 and 2007 and lower pre-tax income. See Note 4.
Real estate segment
The real estate segment net income attributable to common shareholders was $49 million lower
for the year ended 2008 compared with the prior year primarily because of:
| • | Real estate impairment charges of $53 million (see Note 23) without comparable charges in the prior year; |
| • | A decrease of $27 million from other real estate operations primarily due to decreased land parcel sales in the 2008 period as a result of the weak real estate market; and | ||
| • | An increase in income tax benefits of $31 million primarily because of the net loss recorded in 2008. |
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PINNACLE WEST CONSOLIDATED —
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
The following table presents net cash provided by (used for) operating, investing and
financing activities for the years ended December 31, 2009, 2008 and 2007 (dollars in millions):
| 2009 | 2008 | 2007 | ||||||||||
|
Net cash flow provided by operating activities
|
$ | 1,031 | $ | 814 | $ | 658 | ||||||
|
Net cash flow used for investing activities
|
(705 | ) | (815 | ) | (873 | ) | ||||||
|
Net cash flow provided by (used for)
financing activities
|
(286 | ) | 51 | 185 | ||||||||
|
|
||||||||||||
|
Net increase (decrease) in cash and cash
equivalents
|
$ | 40 | $ | 50 | $ | (30 | ) | |||||
|
|
||||||||||||
2009 Compared with 2008
The increase of approximately $217 million in net cash provided by operating activities is
primarily due to a reduction of collateral and margin cash required as a result of changes in
commodity prices and a 2009 income tax refund (see Note 4).
The decrease of approximately $110 million in net cash used for investing activities is
primarily due to lower levels of capital expenditures net of contributions (see table and
discussion below), partially offset by lower real estate sales primarily due to a commercial
property sale in 2008.
The increase of approximately $337 million in net cash used for financing activities is
primarily due to repayments of short-term borrowings, partially offset by APS’ issuance of $500
million of unsecured senior notes (see Note 6).
2008 Compared with 2007
The increase of approximately $156 million in net cash provided by operating activities is
primarily due to lower current income taxes; lower real estate investments resulting from the weak
real estate market; and increased retail revenue related to higher Base Fuel Rates, partially
offset by increased collateral and margin cash provided as a result of changes in commodity prices.
The decrease of approximately $58 million in net cash used for investing activities is
primarily due to a real estate commercial property sale in 2008; lower levels of capital
expenditures (see table and discussion below); and increased contributions in aid of construction
related to changes in 2008 in APS’ line extension policy (see Note 3), partially offset by lower
cash proceeds from the net sales and purchases of investment securities.
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Table of Contents
The decrease of approximately $134 million in net cash provided by financing activities is
primarily due to the use of the proceeds from the sale of a real estate commercial property to pay
down long-term debt in 2008, partially offset by higher levels of short-term debt borrowings.
Liquidity
Capital Expenditure Requirements
The following table summarizes the actual capital expenditures for 2007, 2008 and 2009 and
estimated capital expenditures for the next three years:
CAPITAL EXPENDITURES
(dollars in millions)
(dollars in millions)
| Actual | Estimated | |||||||||||||||||||||||
| 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | |||||||||||||||||||
|
APS
|
||||||||||||||||||||||||
|
Generation (a)
|
$ | 353 | $ | 310 | $ | 241 | $ | 408 | $ | 425 | $ | 545 | ||||||||||||
|
Distribution
|
372 | 340 | 246 | 304 | 344 | 368 | ||||||||||||||||||
|
Transmission
|
138 | 163 | 193 | 158 | 169 | 206 | ||||||||||||||||||
|
Other (b)
|
37 | 43 | 52 | 84 | 71 | 48 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Subtotal
|
900 | 856 | 732 | 954 | 1,009 | 1,167 | ||||||||||||||||||
|
Other (c)
|
164 | 48 | 13 | — | — | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 1,064 | $ | 904 | $ | 745 | $ | 954 | $ | 1,009 | $ | 1,167 | ||||||||||||
|
|
||||||||||||||||||||||||
| (a) | Generation includes nuclear fuel expenditures of approximately $60 million to $80 million per year for 2010, 2011 and 2012. | |
| (b) | Primarily information systems and facilities projects. | |
| (c) | Consists primarily of capital expenditures for residential, land development and retail and office building construction reflected in “Real estate investments” and “Capital expenditures” on the Consolidated Statements of Cash Flows. |
Generation capital expenditures are comprised of various improvements to APS’ existing fossil
and nuclear plants. Examples of the types of projects included in this category are additions,
upgrades and capital replacements of various power plant equipment such as turbines, boilers and
environmental equipment. Environmental expenditures for the years 2010, 2011 and 2012 are
approximately $20 million, $80 million and $220 million, respectively. We are also monitoring the
status of certain environmental matters, which, depending on their final outcome, could require
modification to our environmental expenditures. (See “Business of Arizona Public Service Company —
Environmental Matters — EPA Environmental Regulation — Regional Haze Rules and Mercury and other
Hazardous Air Pollutants” in Item 1.)
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Table of Contents
Distribution and transmission capital expenditures are comprised of infrastructure additions
and upgrades, capital replacements, new customer construction and related information systems and
facility costs. Examples of the types of projects included in the forecast include power
lines, substations, line extensions to new residential and commercial developments and upgrades to
customer information systems.
Capital expenditures will be funded with internally generated cash and/or external financings,
which may include issuances of long-term debt and Pinnacle West common stock.
Pinnacle West (Parent Company)
Our primary cash needs are for dividends to our shareholders and principal and interest
payments on our long-term debt. The level of our common stock dividends and future dividend growth
will be dependent on a number of factors including, but not limited to, payout ratio trends, free
cash flow and financial market conditions.
On January 20, 2010, the Pinnacle West Board of Directors declared a quarterly dividend of
$0.525 per share of common stock, payable on March 1, 2010, to shareholders of record on
February 1, 2010.
Our primary sources of cash are dividends from APS, external debt and equity financings. For
the years 2007 through 2009, total distributions from APS were $510 million and total distributions
received from SunCor were $5 million. For 2009, cash distributions from APS were $170 million and
there were no distributions from SunCor.
An existing ACC order requires APS to maintain a common equity ratio of at least 40%. As
defined in the ACC order, the common equity ratio is common equity divided by the sum of common
equity and long-term debt, including current maturities of long-term debt. At December 31, 2009,
APS’ common equity ratio, as defined, was 50%. Its total common equity was approximately $3.4
billion, and total capitalization was approximately $6.8 billion. APS would be prohibited from
paying dividends if the payment would reduce its common equity below approximately $2.7 billion,
assuming APS’ total capitalization remains the same.
The credit and liquidity markets experienced significant stress beginning the third quarter of
2008. Since the fourth quarter of 2008, Pinnacle West and APS have not accessed the commercial
paper market due to negative market conditions. They have both been able to access existing credit
facilities, ensuring adequate liquidity.
At December 31, 2009, Pinnacle West had a $283 million revolving credit facility that was
scheduled to terminate in December 2010. The revolver was available to support the issuance of up
to $250 million in commercial paper or to be used as bank borrowings, including issuances of
letters of credit of up to $94 million. The parent company had $149 million of borrowings
outstanding under its revolving credit facility and no letters of credit at December 31, 2009.
On February 12, 2010, Pinnacle West refinanced its $283 million revolving credit facility that
would have matured in December 2010, and decreased the size of the facility to $200 million. The
new revolving credit facility terminates in February 2013. Pinnacle West may increase the amount
of the facility up to a maximum of $300 million upon the satisfaction of certain conditions and
with the consent of the lenders. Pinnacle West will use the facility for general corporate
purposes, repayment of long-term debt, and for the issuance of letters of credit. Interest rates
are based on Pinnacle West’s senior unsecured debt credit ratings. In addition, because of the
downsized revolving credit facility, the Company is in the process of reducing the size of its
commercial paper program to $200 million from $250 million.
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Table of Contents
Pinnacle West expects to recognize approximately $125 million of cash tax benefits related to
SunCor’s strategic asset sales (see Note 23), which will not be realized until the asset sale
transactions are completed. Approximately $105 million of these benefits were recorded in 2009 as
reductions to income tax expense related to the current impairment charges. The additional $20
million of tax benefits were recorded as reductions to income tax expense related to the SunCor
impairment charge recorded in the fourth quarter of 2008.
The $91 million income tax receivable (current and long-term) on the Consolidated Balance
Sheets represents the anticipated cash refunds related to an APS tax accounting method change
approved by the United States Internal Revenue Service (“IRS”) in the third quarter of 2009 and the
expected tax benefits related to the SunCor strategic asset sales that closed in 2009.
Pinnacle West sponsors a qualified defined benefit and account balance pension plan and a
non-qualified supplemental excess benefit retirement plan for the employees of Pinnacle West and
our subsidiaries. IRS regulations require us to contribute a minimum amount to the qualified plan.
We contribute at least the minimum amount required under IRS regulations, but no more than the
maximum tax-deductible amount. The minimum required funding takes into consideration the value of
plan assets and our pension obligation. The assets in the plan are comprised of fixed-income,
equity and short-term investments. Future year contribution amounts are dependent on plan asset
performance and plan actuarial assumptions. We made no contribution to our pension plan in 2009.
We currently estimate that our pension contributions could average around $100 million for several
years, assuming the discount rate remains at approximately current levels. In January 2010, we
made a voluntary contribution of approximately $50 million to our pension plan and we expect to
make an additional voluntary contribution of $50 million later in 2010. The contribution to our
other postretirement benefit plans in 2010 is estimated to be approximately $15 million. APS and
other subsidiaries fund their share of the contributions. APS’ share is approximately 97% of both
plans.
See Note 3 for information regarding the recent retail rate case settlement, which includes
ACC authorization and requires equity infusions into APS of at least $700 million by December 31,
2014. Pinnacle West intends to issue equity to provide most of the funds for the equity infusions
into APS. Such equity issuances may occur at any time in the period through 2014, in Pinnacle
West’s discretion.
In May 2007, Pinnacle West infused approximately $40 million of equity into APS, consisting of
proceeds of stock issuances in 2006 under Pinnacle West’s Investors Advantage Plan (direct stock
purchase and dividend reinvestment plan) and employee stock plans.
APS
APS’ capital requirements consist primarily of capital expenditures and mandatory redemptions
of long-term debt. APS pays for its capital requirements with cash from operations and, to the
extent necessary, equity infusions from Pinnacle West and external financings. See “Pinnacle West
(Parent Company)” above for a discussion of the common equity ratio that APS must maintain in order
to pay dividends to Pinnacle West.
On February 26, 2009, APS issued $500 million of 8.75% unsecured senior notes that mature on
March 1, 2019. Net proceeds from the sale of the notes were used to repay short-term borrowings
under two committed revolving lines of credit incurred to fund capital expenditures and for general
corporate purposes.
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Table of Contents
During 2009, APS refinanced approximately $343 million of its $656 million pollution control
bonds. As a result of these refinancings, the terms of which are described in detail in Note 6,
APS no longer has any outstanding debt securities in auction rate mode.
On September 11, 2008, APS purchased all of the approximately $27 million of the Coconino
Pollution Control Revenue Bonds, Series 1996A and Series 1999 due December 2031 and April 2034 and
held them as treasury bonds. On September 22, 2009, Coconino issued approximately $27 million of
Coconino Pollution Control Revenue Refunding Bonds, 2009 Series B due April 2038 to redeem the
existing bonds. APS used the funds received from the issuance to repay certain existing
indebtedness under a revolving line of credit drawn upon by APS to fund its purchase of the 1996A
and 1999 Series Bonds in 2008. The 2009 Series B Bonds are payable solely from revenues obtained
from APS pursuant to a loan agreement between APS and Coconino. According to the indenture of the
bonds, the interest rate of the 2009 Series B Bonds could be reset daily, weekly, monthly, or at
other time intervals. The initial rate period selected for the 2009 Series B Bonds is a daily rate
period. At December 31, 2009, the daily interest rate was 0.26%. The daily rates are variable
rates set by a remarketing agent. Concurrently with the issuance of the 2009 Series B Bonds, the
Company entered into a two year letter of credit and reimbursement agreement to provide credit
support for the 2009 Series B Bonds.
At December 31, 2009, APS had two committed revolving credit facilities totaling $866 million,
of which $377 million was scheduled to terminate in December 2010 and $489 million terminates in
September 2011. The revolvers were available either to support the issuance of up to $250 million
in commercial paper or to be used for bank borrowings, including issuances of letters of credit up
to $583 million. At December 31, 2009, APS had no borrowings and no letters of credit under its
revolving lines of credit.
On February 12, 2010, APS refinanced its $377 million revolving credit facility that would
have matured in December 2010, and increased the size of the facility to $500 million. The new
revolving credit facility terminates in February 2013. APS may increase the amount of the facility
up to a maximum of $700 million upon the satisfaction of certain conditions and with the consent of
the lenders. APS will use the facility for general corporate purposes and for the issuance of
letters of credit. Interest rates are based on APS’ senior unsecured debt credit ratings.
Other Financing Matters —
See Note 3 for information regarding the PSA approved by the ACC.
Although APS defers actual retail fuel and purchased power costs on a current basis, APS’
recovery of the deferrals from its ratepayers is subject to annual and, if necessary, periodic PSA
adjustments.
See Note 3 for information regarding the recent retail rate case settlement, which includes
ACC authorization and requires equity infusions into APS of at least $700 million by December 31,
2014.
See Note 18 for information related to the change in our margin accounts.
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Table of Contents
Other Subsidiaries
SunCor
— SunCor's principal loan facility,
the SunCor Secured Revolver, is secured primarily by an interest in land, commercial properties, land contracts and homes under
construction. At December 31, 2009, SunCor had borrowings of approximately $57 million under the Secured Revolver (see Note 6).
The revolver matured on January 30, 2010. SunCor and the agent bank for the Secured Revolver are discussing an extension of the
maturity date to allow time for SunCor to continue discussions concerning the potential sale of additional properties. In addition
to the Secured Revolver, at December 31, 2009, SunCor had approximately $43 million of outstanding debt under other credit facilities
($9 million of which has matured since December 31, 2009 and remains outstanding) (see Notes 5 and 6). SunCor intends to apply the
proceeds of planned asset sales (see Note 23) to the repayment of its outstanding debt.
Real estate impairment charges recorded throughout 2009
(see Note 23) resulted in violations of certain covenants contained in the SunCor Secured Revolver and SunCor's other credit facilities.
The lenders have taken no enforcement action related to the covenant defaults.
If SunCor is unable to obtain an extension or renewal
of the Secured Revolver or its other matured debt, or if it is unable to comply with the mandatory repayment and other provisions of
any new or modified credit agreements, SunCor could be required to immediately repay its outstanding indebtedness under all of its
credit facilities as a result of cross-default provisions. Such an immediate repayment obligation would have a material adverse
impact on SunCor's business and financial position and impair its ongoing viability.
SunCor cannot predict the outcome of negotiations
with its lenders or its ability to sell assets for sufficient proceeds to repay its outstanding debt. SunCor's ability to generate
sufficient cash from operations while it pursues lender negotiations and further asset sales is uncertain.
Neither Pinnacle West nor any of its other subsidiaries
has guaranteed any SunCor indebtedness. A SunCor debt default would not result in a cross-default of any of the debt of Pinnacle
West or any of its other subsidiaries. While there can be no assurances as to the ultimate outcome of this matter, Pinnacle West
does not believe that SunCor's inability to obtain waivers or similar relief from SunCor's lenders would have a material adverse
impact on Pinnacle West's cash flows or liquidity.
As of December 31, 2009, SunCor could not transfer any
cash dividends to Pinnacle West as a result of the covenants mentioned above. The restriction does not materially affect Pinnacle
West's ability to meet its ongoing capital requirements.
El Dorado
— El Dorado expects minimal capital requirements over the next three years and
intends to focus on prudently realizing the value of its existing investments.
APSES
— APSES expects minimal capital expenditures over the next three years.
Debt Provisions
Pinnacle West’s and APS’ debt covenants related to their respective bank financing
arrangements include debt to capitalization ratios. Certain of APS’ bank financing arrangements
also include an interest coverage test. Pinnacle West and APS comply with these covenants and each
anticipates it will continue to meet these and other significant covenant requirements. For both
Pinnacle West and APS, these covenants require that the ratio of consolidated debt to total
consolidated capitalization not exceed 65%. At December 31, 2009, the ratio was approximately 52%
for Pinnacle West and 48% for APS. The provisions regarding interest coverage require minimum cash
coverage of two times the interest requirements for APS. The interest coverage was approximately
4.6 times under APS’ bank financing agreements as of December 31, 2009. Failure to comply with
such covenant levels would result in an event of default which, generally speaking, would require
the immediate repayment of the debt subject to the covenants and could cross-default other debt.
See further discussion of “cross-default” provisions below.
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Neither Pinnacle West’s nor APS’ financing agreements contain “rating triggers” that would
result in an acceleration of the required interest and principal payments in the event of a rating
downgrade. However, our bank financial agreements contain a pricing grid in which the interest
costs we pay are determined by our current credit ratings.
All of Pinnacle West’s loan agreements contain “cross-default” provisions that would result in
defaults and the potential acceleration of payment under these loan agreements if Pinnacle West or
APS were to default under certain other material agreements. All of APS’ bank agreements contain
cross-default provisions that would result in defaults and the potential acceleration of payment
under these bank agreements if APS were to default under certain other material agreements.
Pinnacle West and APS do not have a material adverse change restriction for revolver borrowings.
See Notes 5 and 6 for further discussions of liquidity matters.
Credit Ratings
The ratings of securities of Pinnacle West and APS as of February
17, 2010 are shown below.
The ratings reflect the respective views of the rating agencies, from which an explanation of the
significance of their ratings may be obtained. There is no assurance that these ratings will
continue for any given period of time. The ratings may be revised or withdrawn entirely by the
rating agencies if, in their respective judgments, circumstances so warrant. Any downward revision
or withdrawal may adversely affect the market price of Pinnacle West’s or APS’ securities and serve
to increase the cost of and limit access to capital. It may also require substantial additional
cash or other collateral requirements related to certain derivative instruments, insurance
policies, natural gas transportation, fuel supply, and other energy-related contracts. At this
time, we believe we have sufficient liquidity to cover a downward revision to our credit ratings.
| Moody’s | Standard & Poor’s | Fitch | ||||
|
Pinnacle West
|
||||||
|
Senior unsecured (a)
|
Baa3 (P) | BB+ (prelim) | N/A | |||
|
Commercial paper
|
P-3 | A-3 | F3 | |||
|
Outlook
|
Stable | Stable | Negative | |||
|
|
||||||
|
APS
|
||||||
|
Senior unsecured
|
Baa2 | BBB- | BBB | |||
|
Secured lease
obligation bonds
|
Baa2 | BBB- | BBB | |||
|
Commercial paper
|
P-2 | A-3 | F3 | |||
|
Outlook
|
Stable | Stable | Stable |
| (a) | Pinnacle West has a shelf registration under SEC Rule 415. Pinnacle West currently has no outstanding, rated senior unsecured securities. However, Moody’s assigned a provisional (P) rating and Standard & Poor’s assigned a preliminary (prelim) rating to the senior unsecured securities that can be issued under such shelf registration. |
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Off-Balance Sheet Arrangements
In 1986, APS entered into agreements with three separate VIE lessors in order to sell and
lease back interests in Palo Verde Unit 2. The leases are accounted for as operating leases. We
are not the primary beneficiary of the Palo Verde VIEs and, accordingly, do not consolidate them
(see Note 9).
APS is exposed to losses under the Palo Verde sale leaseback agreements upon the occurrence of
certain events that APS does not consider to be reasonably likely to occur. Under certain
circumstances (for example, the NRC issuing specified violation orders with respect to Palo Verde
or the occurrence of specified nuclear events), APS would be required to assume the debt associated
with the transactions, make specified payments to the equity participants, and take title to the
leased Unit 2 interests, which, if appropriate, may be required to be written down in value. If
such an event had occurred as of December 31, 2009, APS would have been required to assume
approximately $152 million of debt and pay the equity participants approximately $153 million.
SunCor is the primary beneficiary of certain land development arrangements and, accordingly,
consolidates the variable interest entities. The assets and non-controlling interests reflected in
our Consolidated Balance Sheets related to these arrangements were approximately $29 million at
December 31, 2009 and at December 31, 2008.
See Note 2 for a discussion of amended accounting guidance relating to VIEs adopted on January
1, 2010.
Guarantees and Letters of Credit
We have issued parental guarantees and letters of credit and obtained surety bonds on behalf
of our subsidiaries.
Our parental guarantees for APS relate to commodity energy products. In addition, Pinnacle
West has obtained approximately $8 million of surety bonds related to APS’ operations, which
primarily relate to self-insured workers’ compensation. Our credit support instruments enable
APSES to offer energy-related products. Non-performance or non-payment under the original contract
by our subsidiaries would require us to perform under the guarantee or surety bond. No liability
is currently recorded on the Consolidated Balance Sheets related to Pinnacle West’s current
outstanding guarantees on behalf of our subsidiaries. At December 31, 2009, we had no guarantees
that were in default. Our guarantees have no recourse or collateral provisions to allow us to
recover amounts paid under the guarantees. We generally agree to indemnification provisions
related to liabilities arising from or related to certain of our agreements, with limited
exceptions depending on the particular agreement. See Note 21 for additional information regarding
guarantees and letters of credit.
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Table of Contents
Contractual Obligations
The following table summarizes Pinnacle West’s consolidated contractual requirements as of
December 31, 2009 (dollars in millions):
| 2011- | 2013- | |||||||||||||||||||
| 2010 | 2012 | 2014 | Thereafter | Total | ||||||||||||||||
|
Long-term debt payments,
including interest: (a)
|
||||||||||||||||||||
|
APS
|
$ | 397 | $ | 1,233 | $ | 785 | $ | 2,835 | $ | 5,250 | ||||||||||
|
SunCor
|
81 | 14 | 2 | — | 97 | |||||||||||||||
|
Pinnacle West
|
10 | 177 | — | — | 187 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total long-term debt payments,
including interest and capital
lease obligations
|
488 | 1,424 | 787 | 2,835 | 5,534 | |||||||||||||||
|
|
||||||||||||||||||||
|
Short-term debt payments,
including interest (b)
|
154 | — | — | — | 154 | |||||||||||||||
|
Purchased power and fuel
commitments (c)
|
444 | 687 | 947 | 6,397 | 8,475 | |||||||||||||||
|
Operating lease payments (d)
|
77 | 141 | 126 | 73 | 417 | |||||||||||||||
|
Nuclear decommissioning funding
requirements
|
24 | 49 | 49 | 161 | 283 | |||||||||||||||
|
Renewable energy credits (e)
|
48 | 30 | 30 | 142 | 250 | |||||||||||||||
|
Purchase obligations (f)
|
44 | 62 | 14 | 165 | 285 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total contractual commitments
|
$ | 1,279 | $ | 2,393 | $ | 1,953 | $ | 9,773 | $ | 15,398 | ||||||||||
|
|
||||||||||||||||||||
| (a) | The long-term debt matures at various dates through 2038 and bears interest principally at fixed rates. Interest on variable-rate long-term debt is determined by using average rates at December 31, 2009 (see Note 6). | |
| (b) | The short-term debt is primarily related to bank borrowings at Pinnacle West under its revolving line of credit (see Note 5). | |
| (c) | Our purchased power and fuel commitments include purchases of coal, electricity, natural gas, renewable energy and nuclear fuel (see Notes 3 and 11). | |
| (d) | Relates to the Palo Verde sale leaseback and other items (see Note 9). | |
| (e) | Contracts to purchase renewable energy credits in compliance with the Renewable Energy Standard. | |
| (f) | These contractual obligations include commitments for capital expenditures and other obligations. |
This table excludes $209 million in unrecognized tax benefits because the timing of the future
cash outflows is uncertain.
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CRITICAL ACCOUNTING POLICIES
In preparing the financial statements in accordance with GAAP, management must often make
estimates and assumptions that affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosures at the date of the financial statements and during the reporting
period. Some of those judgments can be subjective and complex, and actual results could differ
from those estimates. We consider the following accounting policies to be our most critical
because of the uncertainties, judgments and complexities of the underlying accounting standards and
operations involved.
Regulatory Accounting
Regulatory accounting allows for the actions of regulators, such as the ACC and the FERC, to
be reflected in our financial statements. Their actions may cause us to capitalize costs that
would otherwise be included as an expense in the current period by unregulated companies.
Regulatory assets represent incurred costs that have been deferred because they are probable of
future recovery in customer rates. Regulatory liabilities generally represent expected future
costs that have already been collected from customers. Management continually assesses whether our
regulatory assets are probable of future recovery by considering factors such as applicable
regulatory environment changes and recent rate orders to other regulated entities in the same
jurisdiction. This determination reflects the current political and regulatory climate in the
state and is subject to change in the future. If future recovery of costs ceases to be probable,
the assets would be written off as a charge in current period earnings. We had $782 million of
regulatory assets and $766 million of regulatory liabilities on the Consolidated Balance Sheets at
December 31, 2009.
Included in the balance of regulatory assets at December 31, 2009 is a regulatory asset of
$532 million for pension and other postretirement benefits. This regulatory asset represents the
future recovery of these costs through retail rates as these amounts are charged to earnings. If
these costs are disallowed by the ACC, this regulatory asset would be charged to OCI and result in
lower future earnings.
See Notes 1 and 3 for more information.
Pensions and Other Postretirement Benefit Accounting
Changes in our actuarial assumptions used in calculating our pension and other postretirement
benefit liability and expense can have a significant impact on our earnings and financial position.
The most relevant actuarial assumptions are the discount rate used to measure our liability and
net periodic cost, the expected long-term rate of return on plan assets used to estimate earnings
on invested funds over the long-term, and the assumed healthcare cost trend rates. We review these
assumptions on an annual basis and adjust them as necessary.
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The following chart reflects the sensitivities that a change in certain actuarial assumptions
would have had on the December 31, 2009 reported pension liability on the Consolidated Balance
Sheets and our 2009 reported pension expense, after consideration of amounts capitalized or billed
to electric plant participants, on Pinnacle West’s Consolidated Statements of Income (dollars in
millions):
| Increase (Decrease) | ||||||||
| Impact on | Impact on | |||||||
| Pension | Pension | |||||||
| Actuarial Assumption (a) | Liability | Expense | ||||||
|
Discount rate:
|
||||||||
|
Increase 1%
|
$ | (231 | ) | $ | (7 | ) | ||
|
Decrease 1%
|
260 | 10 | ||||||
|
Expected long-term rate
of return on plan assets:
|
||||||||
|
Increase 1%
|
— | (7 | ) | |||||
|
Decrease 1%
|
— | 7 | ||||||
| (a) | Each fluctuation assumes that the other assumptions of the calculation are held constant while the rates are changed by one percentage point. |
The following chart reflects the sensitivities that a change in certain actuarial assumptions
would have had on the December 31, 2009 reported other postretirement benefit obligation on the
Consolidated Balance Sheets and our 2009 reported other postretirement benefit expense, after
consideration of amounts capitalized or billed to electric plant participants, on Pinnacle West’s
Consolidated Statements of Income (dollars in millions):
| Increase (Decrease) | ||||||||
| Impact on Other | Impact on Other | |||||||
| Postretirement Benefit | Postretirement | |||||||
| Actuarial Assumption (a) | Obligation | Benefit Expense | ||||||
|
Discount rate:
|
||||||||
|
Increase 1%
|
$ | (96 | ) | $ | (5 | ) | ||
|
Decrease 1%
|
111 | 5 | ||||||
|
Health care cost trend
rate (b):
|
||||||||
|
Increase 1%
|
110 | 8 | ||||||
|
Decrease 1%
|
(89 | ) | (7 | ) | ||||
|
Expected long-term rate
of return on plan
assets — pretax:
|
||||||||
|
Increase 1%
|
— | (2 | ) | |||||
|
Decrease 1%
|
— | 2 | ||||||
| (a) | Each fluctuation assumes that the other assumptions of the calculation are held constant while the rates are changed by one percentage point. | |
| (b) | This assumes a 1% change in the initial and ultimate health care cost trend rate. |
See Note 8 for further details about our pension and other postretirement benefit plans.
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Table of Contents
Derivative Accounting
Derivative accounting requires evaluation of rules that are complex and subject to varying
interpretations. Our evaluation of these rules, as they apply to our contracts, determines whether
we use accrual accounting (for contracts designated as normal) or fair value (mark-to-market)
accounting. Mark-to-market accounting requires that changes in the fair value are recognized
periodically in income unless certain hedge criteria are met. For cash flow hedges, the effective
portion of changes in the fair value of the derivative is recognized in common stock equity (as a
component of other comprehensive income (loss)) and the ineffective portion is recognized in
current earnings.
See “Market Risks — Commodity Price Risk” below for quantitative analysis. See “Fair Value
Measurements” below for additional information on valuation. See Note 1 for discussion on
accounting policies and Note 18 for a further discussion on derivative accounting.
Fair Value Measurements
We apply recurring fair value measurements to derivative instruments, nuclear decommissioning
trusts, certain cash equivalents and plan assets held in our retirement and other benefit plans.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. We use inputs, or
assumptions that market participants would use, to determine fair market value, and the
significance of a particular input determines how the instrument is classified in the fair value
hierarchy. We utilize valuation techniques that maximize the use of observable inputs and minimize
the use of unobservable inputs. The determination of fair value sometimes requires subjective and
complex judgment. Our assessment of the inputs and the significance of a particular input to fair
value measurement may affect the valuation of the instruments and their placement within the fair
value hierarchy. Actual results could differ from our estimates of fair value. See Note 14 for
further fair value measurement discussion, Note 1 for discussion on accounting policies and Note 18
for a further discussion on derivative accounting.
Our nuclear decommissioning trusts invest in fixed income securities and equity securities.
The fair values of these securities are based on observable inputs for identical or similar assets.
See Note 12 for further discussion of our nuclear decommissioning trusts.
Real Estate Investment Impairments
We had real estate investments of $120 million and $3 million of home inventory on our
Consolidated Balance Sheets at December 31, 2009. For purposes of evaluating impairment, in
accordance with guidance on the impairment and disposal of long-lived assets, we classify our real
estate assets, such as land under development, land held for future development, and commercial
property, as “held and used.” When events or changes in circumstances indicate that the carrying
value of real estate assets considered held and used may not be recoverable, we compare the
undiscounted cash flows that we estimate will be generated by each asset to its carrying amount.
If the carrying amount exceeds the undiscounted cash flows, we adjust the asset to fair value and
recognize an impairment charge. The adjusted value becomes the new book value (carrying amount)
for held and used assets. We may have real estate assets classified as held and used with fair
values that are lower than their carrying amounts, but are not deemed to be impaired because the
undiscounted cash flows exceed the carrying amounts.
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Real estate home inventory is considered to be held for sale for the purposes of evaluating
impairment. Home inventories are reported at the lower of carrying amount or fair value less cost
to sell. Fair value less cost to sell is evaluated each period to determine if it has changed.
Losses (and gains not to exceed any cumulative loss previously recognized) are reported as
adjustments to the carrying amount.
We determine fair value for our real estate assets primarily based on the future cash flows
that we estimate will be generated by each asset discounted for market risk. Our impairment
assessments and fair value determinations require significant judgment regarding key assumptions
such as future sales prices, future construction and land development costs, future sales timing,
and discount rates. The assumptions are specific to each project and may vary among projects. The
discount rates we used to determine fair values at December 31, 2009 ranged from 11% to 29%. Due
to the judgment and assumptions applied in the estimation process, with regard to impairments, it
is possible that actual results could differ from those estimates. If conditions in the broader
economy or the real estate markets worsen, or as a result of a change in SunCor’s strategy, we may
be required to record additional impairments.
OTHER ACCOUNTING MATTERS
See Note 2 for a discussion of recently adopted accounting standards and new standards to be
adopted in the future.
In June 2009, the FASB issued amended guidance on the consolidation of variable interest
entities. The model for determining which enterprise has a controlling financial interest and is
the primary beneficiary of a VIE has changed significantly under the new guidance. Previously,
variable interest holders had to determine whether they had a controlling financial interest in a
VIE based on a quantitative analysis of the expected gains and/or losses of the entity. The new
guidance requires an enterprise with a variable interest in a VIE to perform a qualitative
assessment in determining whether it has a controlling financial interest in the entity, and if so,
whether it is the primary beneficiary. Furthermore, the amended guidance requires companies to
continually evaluate VIEs for consolidation. This guidance was effective for us on January 1, 2010.
We are continuing to evaluate the impact this new guidance may have on our financial statements.
MARKET AND CREDIT RISKS
Market Risks
Our operations include managing market risks related to changes in interest rates, commodity
prices and investments held by our nuclear decommissioning trust fund.
Interest Rate and Equity Risk
We have exposure to changing interest rates. Changing interest rates will affect interest
paid on variable-rate debt and the market value of fixed income securities held by our nuclear
decommissioning trust fund (see Note 12). The nuclear decommissioning trust fund also has risks
associated with the changing market value of its investments. Nuclear decommissioning costs are
recovered in regulated electricity prices.
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Table of Contents
The tables below present contractual balances of our consolidated long-term and short-term
debt at the expected maturity dates as well as the fair value of those instruments on December 31,
2009 and 2008. The interest rates presented in the tables below represent the weighted-average
interest rates as of December 31, 2009 and 2008 (dollars in thousands):
Pinnacle West — Consolidated
| Variable-Rate | Fixed-Rate | |||||||||||||||||||||||
| Short-Term Debt | Long-Term Debt | Long-Term Debt | ||||||||||||||||||||||
| Interest | Interest | Interest | ||||||||||||||||||||||
| 2009 | Rates | Amount | Rates | Amount | Rates | Amount | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
2010
|
1.09 | % | $ | 153,715 | 1.66 | % | $ | 276,636 | 5.56 | % | $ | 1,057 | ||||||||||||
|
2011
|
— | — | 2.00 | % | 39,967 | 6.23 | % | 576,228 | ||||||||||||||||
|
2012
|
— | — | 5.25 | % | 38 | 6.30 | % | 446,418 | ||||||||||||||||
|
2013
|
— | — | 5.25 | % | 1,774 | 5.75 | % | 32,234 | ||||||||||||||||
|
2014
|
— | — | — | — | 5.79 | % | 477,050 | |||||||||||||||||
|
Years thereafter
|
— | — | — | — | 6.48 | % | 1,804,000 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 153,715 | $ | 318,415 | $ | 3,336,987 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Fair value
|
$ | 153,715 | $ | 318,415 | $ | 3,463,960 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
| Variable-Rate | Fixed-Rate | |||||||||||||||||||||||
| Short-Term Debt | Long-Term Debt | Long-Term Debt | ||||||||||||||||||||||
| Interest | Interest | Interest | ||||||||||||||||||||||
| 2008 | Rates | Amount | Rates | Amount | Rates | Amount | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
2009
|
2.24 | % | $ | 670,469 | 3.88 | % | $ | 173,619 | 4.62 | % | $ | 4,027 | ||||||||||||
|
2010
|
— | — | 3.99 | % | 2,042 | 5.66 | % | 1,137 | ||||||||||||||||
|
2011
|
— | — | 6.22 | % | 2,259 | 6.23 | % | 576,250 | ||||||||||||||||
|
2012
|
— | — | 6.00 | % | 16 | 6.50 | % | 376,338 | ||||||||||||||||
|
2013
|
— | — | 6.00 | % | 1,864 | 6.00 | % | 231 | ||||||||||||||||
|
Years thereafter
|
— | — | 8.30 | % | 539,145 | 5.64 | % | 1,540,229 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 670,469 | $ | 718,945 | $ | 2,498,212 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Fair value
|
$ | 670,469 | $ | 718,945 | $ | 2,107,635 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
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Table of Contents
The tables below present contractual balances of APS’ long-term debt at the expected maturity
dates as well as the fair value of those instruments on December 31, 2009 and 2008. The interest
rates presented in the tables below represent the weighted-average interest rates as of December
31, 2009 and 2008 (dollars in thousands):
APS
| Variable-Rate | Fixed-Rate | |||||||||||||||||||||||
| Short-Term Debt | Long-Term Debt | Long-Term Debt | ||||||||||||||||||||||
| Interest | Interest | Interest | ||||||||||||||||||||||
| 2009 | Rates | Amount | Rates | Amount | Rates | Amount | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
2010
|
— | $ | — | 0.25 | % | $ | 196,170 | 5.60 | % | $ | 1,006 | |||||||||||||
|
2011
|
— | — | 0.26 | % | 26,710 | 6.37 | % | 401,201 | ||||||||||||||||
|
2012
|
— | — | — | — | 6.30 | % | 446,398 | |||||||||||||||||
|
2013
|
— | — | — | — | 5.75 | % | 32,232 | |||||||||||||||||
|
2014
|
— | — | — | — | 5.79 | % | 477,050 | |||||||||||||||||
|
Years thereafter
|
— | — | — | — | 6.48 | % | 1,804,000 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | — | $ | 222,880 | $ | 3,161,887 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Fair value
|
$ | — | $ | 222,880 | $ | 3,283,631 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
| Variable-Rate | Fixed-Rate | |||||||||||||||||||||||
| Short-Term Debt | Long-Term Debt | Long-Term Debt | ||||||||||||||||||||||
| Interest | Interest | Interest | ||||||||||||||||||||||
| 2008 | Rates | Amount | Rates | Amount | Rates | Amount | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
2009
|
2.09 | % | $ | 521,684 | — | $ | — | 5.62 | % | $ | 874 | |||||||||||||
|
2010
|
— | — | — | — | 5.60 | % | 1,012 | |||||||||||||||||
|
2011
|
— | — | — | — | 6.37 | % | 401,208 | |||||||||||||||||
|
2012
|
— | — | — | — | 6.50 | % | 376,325 | |||||||||||||||||
|
2013
|
— | — | — | — | 6.00 | % | 231 | |||||||||||||||||
|
Years thereafter
|
— | — | 8.30 | % | 539,145 | 5.64 | % | 1,540,229 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 521,684 | $ | 539,145 | $ | 2,319,879 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Fair value
|
$ | 521,684 | $ | 539,145 | $ | 1,935,160 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
Commodity Price Risk
We are exposed to the impact of market fluctuations in the commodity price and transportation
costs of electricity and natural gas. Our risk management committee, consisting of officers and
key management personnel, oversees company-wide energy risk management activities to ensure
compliance with our stated energy risk management policies. We manage risks associated with these
market fluctuations by utilizing various commodity instruments that qualify as derivatives,
including exchange-traded futures and options and over-the-counter forwards, options and swaps. As
part of our risk management program, we use such instruments to hedge purchases and sales of
electricity and fuels. The changes in market value of such contracts have a high correlation to
price changes in the hedged commodities.
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Table of Contents
The following table shows the net pretax changes in mark-to-market of our derivative positions
in 2009 and 2008 (dollars in millions):
| 2009 | 2008 | |||||||
|
Mark-to-market of net positions at beginning of year
|
$ | (282 | ) | $ | 40 | |||
|
Recognized in earnings:
|
||||||||
|
Change in mark-to-market losses for future
period deliveries
|
(4 | ) | (4 | ) | ||||
|
Mark-to-market (gains) losses realized including
ineffectiveness during the period
|
11 | (5 | ) | |||||
|
Decrease (increase) in regulatory asset
|
76 | (111 | ) | |||||
|
Recognized in OCI:
|
||||||||
|
Change in mark-to-market losses for future
period deliveries (a)
|
(155 | ) | (138 | ) | ||||
|
Mark-to-market (gains) losses realized during
the
period
|
185 | (64 | ) | |||||
|
Change in valuation techniques
|
— | — | ||||||
|
|
||||||||
|
Mark-to-market of net positions at end of year
|
$ | (169 | ) | $ | (282 | ) | ||
|
|
||||||||
| (a) | The changes in mark-to-market recorded in OCI are due primarily to changes in forward natural gas prices. |
The table below shows the fair value of maturities of our derivative contracts (dollars in
millions) at December 31, 2009 by maturities and by the type of valuation that is performed to
calculate the fair values. See Note 1, “Derivative Accounting” and “Fair Value Measurements,” for
more discussion of our valuation methods.
| Total | ||||||||||||||||||||||||||||
| Years | fair | |||||||||||||||||||||||||||
| Source of Fair Value | 2010 | 2011 | 2012 | 2013 | 2014 | thereafter | value | |||||||||||||||||||||
|
Prices actively quoted
|
$ | (13 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (13 | ) | ||||||||||||
|
Prices provided by
other external sources
|
(76 | ) | (59 | ) | (11 | ) | — | — | — | (146 | ) | |||||||||||||||||
|
Prices based on models
and other valuation
methods
|
(4 | ) | (1 | ) | 3 | (2 | ) | (2 | ) | (4 | ) | (10 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total by maturity
|
$ | (93 | ) | $ | (60 | ) | $ | (8 | ) | $ | (2 | ) | $ | (2 | ) | $ | (4 | ) | $ | (169 | ) | |||||||
|
|
||||||||||||||||||||||||||||
70
Table of Contents
The table below shows the impact that hypothetical price movements of 10% would have on the
market value of our risk management assets and liabilities included on Pinnacle West’s Consolidated
Balance Sheets at December 31, 2009 and 2008 (dollars in millions):
| December 31, 2009 | December 31, 2008 | |||||||||||||||
| Gain (Loss) | Gain (Loss) | |||||||||||||||
| Price Up 10% | Price Down 10% | Price Up 10% | Price Down 10% | |||||||||||||
|
Mark-to-market
changes reported
in:
|
||||||||||||||||
|
Earnings
|
||||||||||||||||
|
Electricity
|
$ | 1 | $ | (1 | ) | $ | 2 | $ | (2 | ) | ||||||
|
Natural gas
|
1 | (1 | ) | 3 | (3 | ) | ||||||||||
|
Regulatory
asset
(liability) or
OCI (a)
|
||||||||||||||||
|
Electricity
|
21 | (21 | ) | 20 | (20 | ) | ||||||||||
|
Natural gas
|
59 | (59 | ) | 64 | (64 | ) | ||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 82 | $ | (82 | ) | $ | 89 | $ | (89 | ) | ||||||
|
|
||||||||||||||||
| (a) | These contracts are hedges of our forecasted purchases of natural gas and electricity. The impact of these hypothetical price movements would substantially offset the impact that these same price movements would have on the physical exposures being hedged. To the extent the amounts are eligible for inclusion in the PSA, the amounts are recorded as either a regulatory asset or liability. |
Credit Risk
We are exposed to losses in the event of non-performance or non-payment by counterparties.
See Note 18 for a discussion of our credit valuation adjustment policy.
ARIZONA PUBLIC SERVICE COMPANY — RESULTS OF OPERATIONS
Regulatory Matters
See Note 3 for information about rate matters affecting APS.
Operating Results — 2009 Compared with 2008
APS’ net income for 2009 was $251 million, compared with net income of $262 million for the
comparable prior-year period.
APS’ net income decreased approximately $11 million from the prior-year period primarily due
to lower retail sales resulting from lower usage per customer; higher interest charges, net of
capitalized financing costs; higher depreciation and amortization expenses; and the absence of
income tax benefits related to prior years recorded in 2008. These negative factors were partially
offset by increased revenues due to the interim rate increase effective January 1, 2009 and
transmission rate increases.
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The following table presents net income compared with the prior-year period:
| Increase | ||||||||||||
| Year Ended | (Decrease) | |||||||||||
| December 31, | in Net | |||||||||||
| 2009 | 2008 | Income | ||||||||||
| (dollars in millions) | ||||||||||||
|
|
||||||||||||
|
Operating revenues less fuel and
purchased
power expenses
|
$ | 1,971 | $ | 1,844 | $ | 127 | ||||||
|
Operations and maintenance
|
(853 | ) | (787 | ) | (66 | ) | ||||||
|
Depreciation and amortization
|
(399 | ) | (383 | ) | (16 | ) | ||||||
|
Taxes other than income taxes
|
(122 | ) | (124 | ) | 2 | |||||||
|
Other income (expenses), net
|
(8 | ) | (25 | ) | 17 | |||||||
|
Interest charges, net of capitalized
financing costs
|
(185 | ) | (155 | ) | (30 | ) | ||||||
|
Income taxes
|
(153 | ) | (108 | ) | (45 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net Income
|
$ | 251 | $ | 262 | $ | (11 | ) | |||||
|
|
||||||||||||
72
Table of Contents
Operating revenues less fuel and purchased power expenses
Electric operating revenues less fuel and purchased power expenses were $127 million higher
for 2009 compared with the prior-year period. The following table describes the major components
of this change:
| Increase (Decrease) | ||||||||||||
| Purchased | ||||||||||||
| Operating | power and fuel | |||||||||||
| revenues | expenses | Net change | ||||||||||
| (dollars in millions) | ||||||||||||
|
Higher renewable energy and demand-side
management surcharges (substantially
offset in operations and maintenance expense)
|
$ | 63 | $ | $ | 63 | |||||||
|
Interim retail rate increases effective
January 1, 2009
|
61 | 61 | ||||||||||
|
Transmission rate increases
|
21 | 21 | ||||||||||
|
Increased mark-to-market valuations of fuel and
purchased power contracts related to
favorable changes in market prices,
net of related PSA deferrals
|
(18 | ) | 18 | |||||||||
|
Effects of weather on retail sales, primarily
due to hotter weather in the third
quarter of 2009
|
12 | 3 | 9 | |||||||||
|
Lower retail sales primarily due to lower
usage per customer, including the effects of
the Company’s energy efficiency programs,
but excluding the effects of weather
|
(58 | ) | (26 | ) | (32 | ) | ||||||
|
Higher fuel and purchased power costs including
the effects of lower off-system sales, net
of related PSA deferrals
|
(30 | ) | (19 | ) | (11 | ) | ||||||
|
Lower retail revenues related to recovery of PSA
deferrals, offset by lower amortization of the
same amount recorded as fuel and purchased
power expense (see Note 3)
|
(36 | ) | (36 | ) | — | |||||||
|
Miscellaneous items, net
|
(17 | ) | (15 | ) | (2 | ) | ||||||
|
|
||||||||||||
|
Total
|
$ | 16 | $ | (111 | ) | $ | 127 | |||||
|
|
||||||||||||
Operations and maintenance
Operations and maintenance expenses increased $66 million for 2009
compared with the prior-year period primarily because of:
| • | An increase of $62 million related to renewable energy and demand-side management programs, which are offset in operating revenues; |
| • | An increase of $29 million in generation costs, including more planned maintenance, partially offset by lower costs at Palo Verde due to cost efficiency measures; and |
| • | A decrease of $25 million associated with cost saving measures and other factors, including the absence of employee severance costs in 2009. |
Depreciation and amortization
Depreciation and amortization expenses increased $16 million
for 2009 compared with the prior-year period primarily because of increases in utility plant in
service. The increases in utility plant in service are the result of various improvements to APS’
existing fossil and nuclear generating plants and distribution and transmission infrastructure
additions and upgrades.
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Interest charges, net of capitalized financing costs
Interest charges, net of capitalized
financing costs increased $30 million for 2009 compared with the prior-year period primarily
because of higher debt balances, partially offset by the effects of lower interest rates (see
discussion related to APS’ debt issuances in “Pinnacle West Consolidated — Liquidity and Capital
Resources” above). Interest charges, net of capitalized financing costs are comprised of the line
items interest expense, capitalized interest and allowance for equity funds used during
construction from the APS’ Statements of Income.
Other income (expenses), net
Other income (expenses), net improved $17 million for 2009
compared with the prior-year period primarily because of improved investment gains. Other income
(expenses), net is comprised of the line items other income and other expense from the APS’
Statements of Income.
Income taxes
Income taxes were $45 million higher for 2009 compared with the prior-year
period primarily because of $29 million of income tax benefits related to prior years recorded in
2008 and higher pretax income. See Note S-1.
Operating Results — 2008 Compared with 2007
APS’ net income for the year ended 2008 was $262 million, compared with net income of $284
million for the comparable prior-year period. The decrease in net income was primarily due to
higher operations and maintenance expenses; lower retail sales due to the effects of weather;
higher depreciation and amortization expenses; and higher interest charges, net of capitalized
financing costs. These negative factors were partially offset by increased revenues due to the
rate increase effective July 1, 2007; transmission rate increases; and income tax benefits related
to prior years recorded in 2008.
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The following table presents net income compared with the prior-year period:
| Increase | ||||||||||||
| Year Ended | (Decrease) | |||||||||||
| December 31, | in Net | |||||||||||
| 2008 | 2007 | Income | ||||||||||
| (dollars in millions) | ||||||||||||
|
|
||||||||||||
|
Operating revenues less fuel and
purchased
power expenses
|
$ | 1,844 | $ | 1,785 | $ | 59 | ||||||
|
Operations and maintenance
|
(787 | ) | (710 | ) | (77 | ) | ||||||
|
Depreciation and amortization
|
(383 | ) | (365 | ) | (18 | ) | ||||||
|
Taxes other than income taxes
|
(124 | ) | (128 | ) | 4 | |||||||
|
Other income (expenses), net
|
(25 | ) | (5 | ) | (20 | ) | ||||||
|
Interest charges, net of capitalized
financing costs
|
(155 | ) | (142 | ) | (13 | ) | ||||||
|
Income taxes
|
(108 | ) | (151 | ) | 43 | |||||||
|
|
||||||||||||
|
Net income
|
$ | 262 | $ | 284 | $ | (22 | ) | |||||
|
|
||||||||||||
75
Table of Contents
Operating revenues less fuel and purchased power expenses
Electric operating revenues less fuel and purchased power expenses were $59 million higher for
the year ended 2008 compared with the prior year. The following table describes the major
components of this change:
| Increase (Decrease) | ||||||||||||
| Purchased | ||||||||||||
| Operating | power and fuel | |||||||||||
| revenues | expenses | Net change | ||||||||||
| (dollars in millions) | ||||||||||||
|
Retail rate increases effective
July 1, 2007
|
$ | 156 | $ | $ | 156 | |||||||
|
Deferred fuel and purchased power costs related
to higher base fuel rate
|
141 | (141 | ) | |||||||||
|
Transmission rate increases
|
31 | 31 | ||||||||||
|
Higher retail sales primarily due to
customer growth partially offset by
lower usage per customer,
but excluding the effects of weather
|
29 | 8 | 21 | |||||||||
|
Higher renewable energy surcharge (substantially
offset in operations and maintenance expense)
|
14 | 14 | ||||||||||
|
Regulatory disallowance in 2007
|
(14 | ) | 14 | |||||||||
|
Revenues related to long-term traditional
wholesale contracts
|
26 | 14 | 12 | |||||||||
|
Higher fuel and purchased power costs including
the effects of lower off-system sales, net
of related PSA deferrals
|
38 | 41 | (3 | ) | ||||||||
|
Lower mark-to-market valuations of fuel and
purchased power contracts related to
changes in market prices,
net of related PSA deferrals
|
14 | (14 | ) | |||||||||
|
Effects of weather on retail sales
|
(63 | ) | (20 | ) | (43 | ) | ||||||
|
Lower retail revenues related to recovery of PSA
deferrals, offset by lower amortization of the
same amount recorded as fuel and purchased
power expense (see Note 3)
|
(47 | ) | (47 | ) | — | |||||||
|
Miscellaneous items, net
|
13 | 1 | 12 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 197 | $ | 138 | $ | 59 | ||||||
|
|
||||||||||||
Operations and maintenance
Operations and maintenance expenses increased $77 million for the
year ended 2008 compared with the prior year primarily because of:
| • | An increase of $30 million related to customer service and other costs including distribution system reliability; |
| • | An increase of $18 million in generation costs, including more planned maintenance; |
| • | An increase of $14 million related to renewable energy programs, which are offset in operating revenues; |
| • | An increase of $9 million associated with employee severance costs in 2008; and |
| • | An increase of $6 million due to other miscellaneous factors. |
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Table of Contents
Depreciation and amortization
Depreciation and amortization expenses increased $18 million
for the year ended 2008 compared with the prior year primarily because of increases in utility
plant in service. The increases in utility plant in service are the result of various improvements
to APS’ existing fossil and nuclear generating plants and distribution and transmission
infrastructure additions and upgrades.
Interest charges, net of capitalized financing costs
Interest charges, net of capitalized
financing costs increased $13 million for the year ended 2008 compared with the prior year
primarily because of higher rates on certain APS pollution control bonds and higher short-term debt
balances. Interest charges, net of capitalized financing costs, are comprised of the line items
interest expense, capitalized interest and allowance for equity funds used during construction from
the APS Statements of Income.
Other income (expenses), net
Other income (expenses), net reduced earnings by an additional
$20 million for the year ended 2008 compared with the prior year primarily because of lower
interest income. Other income (expenses), net is comprised of the line items other income and
other expense from the APS Statements of Income.
Income taxes
Income taxes were $43 million lower for the year ended 2008 compared with the
prior year primarily because of $18 million of increased income tax benefits related to prior years
resolved in 2008 and 2007. See Note S-1.
ARIZONA PUBLIC SERVICE COMPANY — LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
The following table presents APS’ net cash provided by (used for) operating, investing and
financing activities for the years ended December 31, 2009, 2008 and 2007 (dollars in millions):
| 2009 | 2008 | 2007 | ||||||||||
|
Net cash flow provided by operating activities
|
$ | 959 | $ | 785 | $ | 766 | ||||||
|
Net cash flow used for investing activities
|
(738 | ) | (879 | ) | (881 | ) | ||||||
|
Net cash flow provided by (used for)
financing activities
|
(172 | ) | 114 | 86 | ||||||||
|
|
||||||||||||
|
Net increase (decrease) in cash and cash
equivalents
|
$ | 49 | $ | 20 | $ | (29 | ) | |||||
|
|
||||||||||||
2009 Compared with 2008
The increase of approximately $174 million in net cash provided by operating activities is
primarily due to a reduction of collateral and margin cash required as a result of changes in
commodity prices.
The decrease of approximately $141 million in net cash used for investing activities is
primarily due to lower levels of capital expenditures net of contributions.
The increase of approximately $286 million in net cash used for financing activities is
primarily due to repayments of short-term borrowings partially offset by APS’ issuance of $500
million of unsecured senior notes (see Note 6).
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2008 Compared with 2007
The increase of approximately $19 million in net cash provided by operating activities is
primarily due to lower current income taxes and increased retail revenue related to higher Base
Fuel Rates, partially offset by increased collateral and margin cash provided as a result of
changes in commodity prices.
The decrease of approximately $2 million in net cash used for investing activities is
primarily due to lower levels of capital expenditures (see table and discussion above) and
increased contributions in aid of construction related to changes in 2008 in our line extension
policy (see Note 3), substantially offset by lower cash proceeds from the net sales and purchases
of investment securities.
The increase of approximately $28 million in net cash provided by financing activities is
primarily due to higher levels of short-term borrowings, partially offset by decreased equity
infusions from Pinnacle West and the repurchase of pollution control bonds (see Note 6).
Liquidity
For a discussion of APS’ capital requirements and liquidity, see “APS” under “Pinnacle West
Consolidated — Liquidity and Capital Resources.”
Contractual Obligations
The following table summarizes contractual requirements for APS as of December 31, 2009
(dollars in millions):
| 2011- | 2013- | There- | ||||||||||||||||||
| 2010 | 2012 | 2014 | after | Total | ||||||||||||||||
|
|
||||||||||||||||||||
|
Long-term debt payments,
including interest (a)
|
$ | 397 | $ | 1,233 | $ | 785 | $ | 2,835 | $ | 5,250 | ||||||||||
|
Purchased power and fuel
commitments (b)
|
444 | 687 | 947 | 6,397 | 8,475 | |||||||||||||||
|
Operating lease payments (c)
|
70 | 131 | 120 | 63 | 384 | |||||||||||||||
|
Nuclear decommissioning
funding requirements
|
24 | 49 | 49 | 161 | 283 | |||||||||||||||
|
Renewable energy credits (d)
|
48 | 30 | 30 | 142 | 250 | |||||||||||||||
|
Purchase obligations (e)
|
44 | 62 | 14 | 165 | 285 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total contractual
commitments
|
$ | 1,027 | $ | 2,192 | $ | 1,945 | $ | 9,763 | $ | 14,927 | ||||||||||
|
|
||||||||||||||||||||
| (a) | The long-term debt matures at various dates through 2038 and bears interest principally at fixed rates. Interest on variable-rate long-term debt is determined by using average rates at December 31, 2009 (see Note 6). | |
| (b) | APS’ purchased power and fuel commitments include purchases of coal, electricity, natural gas, renewable energy and nuclear fuel (see Notes 3 and 11). | |
| (c) | Relates to the Palo Verde sale leaseback and other items (see Note 9). | |
| (d) | Contracts to purchase renewable energy credits in compliance with the Renewable Energy Standard. | |
| (e) | These contractual obligations include commitments for capital expenditures and other obligations. |
This table excludes $208 million in unrecognized tax benefits because the timing of the future
cash outflows is uncertain.
78
Table of Contents
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
DISCLOSURES ABOUT MARKET RISK
See “Market and Credit Risks” in Item 7 above for a discussion of quantitative and qualitative
disclosures about market risk.
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Table of Contents
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENT SCHEDULES
| Page | ||||
|
|
||||
| 81 | ||||
|
|
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| 82 | ||||
|
|
||||
| 84 | ||||
|
|
||||
| 85 | ||||
|
|
||||
| 87 | ||||
|
|
||||
| 88 | ||||
|
|
||||
| 89 | ||||
|
|
||||
| 150 | ||||
|
|
||||
| 151 | ||||
|
|
||||
| 153 | ||||
|
|
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| 154 | ||||
|
|
||||
| 156 | ||||
|
|
||||
| 157 | ||||
|
|
||||
| 159 | ||||
|
|
||||
|
Financial Statement Schedules for 2009, 2008 and 2007
|
||||
|
|
||||
| 164 | ||||
|
|
||||
| 165 | ||||
|
|
||||
| 166 | ||||
|
|
||||
| 167 | ||||
|
|
||||
| 168 | ||||
See Note 13 and S-2 for the selected quarterly financial data (unaudited) required to be presented
in this Item.
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MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
(PINNACLE WEST CAPITAL CORPORATION)
OVER FINANCIAL REPORTING
(PINNACLE WEST CAPITAL CORPORATION)
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f), for Pinnacle West
Capital Corporation. Management conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework in
Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our
evaluation under the framework in
Internal Control — Integrated Framework,
our management
concluded that our internal control over financial reporting was effective as of December 31, 2009.
The effectiveness of our internal control over financial reporting as of December 31, 2009 has
been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated
in their report which is included herein and also relates to the Company’s consolidated financial
statements.
February 19, 2010
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Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Pinnacle West Capital Corporation
Phoenix, Arizona
Pinnacle West Capital Corporation
Phoenix, Arizona
We have audited the accompanying consolidated balance sheets of Pinnacle West Capital Corporation
and subsidiaries (the “Company”) as of December 31, 2009 and 2008 and the related consolidated
statements of income, changes in equity, and cash flows for each of the three years in
the period ended December 31, 2009. Our audits also included the financial statement schedules
listed in the Index at Item 15. We also have audited the Company’s internal control over financial
reporting as of December 31, 2009, based on criteria established in
Internal Control — Integrated
Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. The
Company’s management is responsible for these financial statements and financial statement
schedules, for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility
is to express an opinion on these financial statements and financial statement schedules and an
opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable basis
for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the
supervision of, the company’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the company’s board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles and
that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
82
Table of Contents
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2009 and 2008, and the
results of their operations and their cash flows for each of the three years in the period ended
December 31, 2009, in conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein. Also, in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2009,
based on the criteria established in
Internal Control — Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
/s/ DELOITTE & TOUCHE LLP
Phoenix, Arizona
February 19, 2010
February 19, 2010
83
Table of Contents
PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(dollars and shares in thousands, except per share amounts)
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
OPERATING REVENUES
|
||||||||||||
|
Regulated electricity segment
|
$ | 3,149,187 | $ | 3,127,383 | $ | 2,918,163 | ||||||
|
Real estate segment
|
103,152 | 74,549 | 189,726 | |||||||||
|
Marketing and trading
|
— | 66,897 | 138,247 | |||||||||
|
Other revenues
|
44,762 | 41,729 | 48,018 | |||||||||
|
|
||||||||||||
|
Total
|
3,297,101 | 3,310,558 | 3,294,154 | |||||||||
|
|
||||||||||||
|
OPERATING EXPENSES
|
||||||||||||
|
Regulated electricity segment fuel and purchased power
|
1,178,620 | 1,284,116 | 1,140,923 | |||||||||
|
Real estate segment operations
|
102,381 | 100,102 | 168,911 | |||||||||
|
Real estate impairment charge (Note 23)
|
258,453 | 18,108 | — | |||||||||
|
Marketing and trading fuel and
purchased power
|
— | 45,572 | 100,462 | |||||||||
|
Operations and maintenance
|
875,357 | 807,852 | 728,340 | |||||||||
|
Depreciation and amortization
|
404,331 | 390,093 | 371,877 | |||||||||
|
Taxes other than income taxes
|
123,663 | 125,336 | 128,210 | |||||||||
|
Other expenses
|
32,523 | 34,171 | 38,925 | |||||||||
|
|
||||||||||||
|
Total
|
2,975,328 | 2,805,350 | 2,677,648 | |||||||||
|
|
||||||||||||
|
OPERATING INCOME
|
321,773 | 505,208 | 616,506 | |||||||||
|
|
||||||||||||
|
OTHER
|
||||||||||||
|
Allowance for equity funds used during
construction
|
14,999 | 18,636 | 21,195 | |||||||||
|
Other income (Note 19)
|
5,669 | 12,797 | 25,362 | |||||||||
|
Other expense (Note 19)
|
(14,269 | ) | (31,576 | ) | (25,857 | ) | ||||||
|
|
||||||||||||
|
Total
|
6,399 | (143 | ) | 20,700 | ||||||||
|
|
||||||||||||
|
INTEREST EXPENSE
|
||||||||||||
|
Interest charges
|
233,859 | 215,684 | 207,827 | |||||||||
|
Capitalized interest
|
(10,745 | ) | (18,820 | ) | (23,063 | ) | ||||||
|
|
||||||||||||
|
Total
|
223,114 | 196,864 | 184,764 | |||||||||
|
|
||||||||||||
|
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
|
105,058 | 308,201 | 452,442 | |||||||||
|
INCOME TAXES (Note 4)
|
37,827 | 76,897 | 152,006 | |||||||||
|
|
||||||||||||
|
INCOME FROM CONTINUING OPERATIONS
|
67,231 | 231,304 | 300,436 | |||||||||
|
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
|
||||||||||||
|
Net of income tax expense (benefit) of $(8,917),
$6,999 and $4,486 (Note 22)
|
(13,676 | ) | 10,821 | 6,707 | ||||||||
|
|
||||||||||||
|
NET INCOME
|
53,555 | 242,125 | 307,143 | |||||||||
|
Less: Net loss attributable to noncontrolling interests
|
(14,775 | ) | — | — | ||||||||
|
|
||||||||||||
|
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
$ | 68,330 | $ | 242,125 | $ | 307,143 | ||||||
|
|
||||||||||||
|
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING — BASIC
|
101,161 | 100,691 | 100,256 | |||||||||
|
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING — DILUTED
|
101,264 | 100,965 | 100,835 | |||||||||
|
|
||||||||||||
|
EARNINGS PER WEIGHTED — AVERAGE COMMON SHARE OUTSTANDING
|
||||||||||||
|
Income from continuing operations attributable
to common shareholders —
basic
|
$ | 0.81 | $ | 2.30 | $ | 3.00 | ||||||
|
Net income attributable to common
shareholders — basic
|
0.68 | 2.40 | 3.06 | |||||||||
|
Income from continuing operations attributable
to common shareholders —
diluted
|
0.81 | 2.29 | 2.98 | |||||||||
|
Net income attributable to common shareholders — diluted
|
0.67 | 2.40 | 3.05 | |||||||||
|
DIVIDENDS DECLARED PER SHARE
|
$ | 2.10 | $ | 2.10 | $ | 2.10 | ||||||
|
|
||||||||||||
|
AMOUNTS ATTRIBUTABLE TO COMMON SHAREHOLDERS:
|
||||||||||||
|
Income from continuing operations, net of tax
|
$ | 82,006 | $ | 231,304 | $ | 300,436 | ||||||
|
Discontinued operations, net of tax
|
(13,676 | ) | 10,821 | 6,707 | ||||||||
|
|
||||||||||||
|
Net income attributable to common shareholders
|
$ | 68,330 | $ | 242,125 | $ | 307,143 | ||||||
|
|
||||||||||||
See Notes to Pinnacle West’s Consolidated Financial Statements.
84
Table of Contents
PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
ASSETS
|
||||||||
|
|
||||||||
|
CURRENT ASSETS
|
||||||||
|
Cash and cash equivalents
|
$ | 145,378 | $ | 105,245 | ||||
|
Customer and other receivables
|
301,915 | 292,682 | ||||||
|
Accrued utility revenues
|
110,971 | 100,089 | ||||||
|
Allowance for doubtful accounts
|
(6,153 | ) | (3,383 | ) | ||||
|
Materials and supplies (at average cost)
|
176,020 | 173,252 | ||||||
|
Fossil fuel (at average cost)
|
39,245 | 29,752 | ||||||
|
Deferred income taxes (Note 4)
|
53,990 | 79,729 | ||||||
|
Income tax receivable
|
26,005 | — | ||||||
|
Home inventory (Notes 1 and 23)
|
3,282 | 50,688 | ||||||
|
Assets from risk management activities (Note 18)
|
50,619 | 32,581 | ||||||
|
Other current assets
|
27,465 | 21,847 | ||||||
|
|
||||||||
|
Total current assets
|
928,737 | 882,482 | ||||||
|
|
||||||||
|
|
||||||||
|
INVESTMENTS AND OTHER ASSETS
|
||||||||
|
Real estate investments — net (Notes 1, 6 and 23)
|
119,989 | 415,296 | ||||||
|
Assets from risk management activities (Note 18)
|
28,855 | 33,675 | ||||||
|
Nuclear decommissioning trust (Note 12)
|
414,576 | 343,052 | ||||||
|
Other assets
|
110,091 | 117,935 | ||||||
|
|
||||||||
|
Total investments and other assets
|
673,511 | 909,958 | ||||||
|
|
||||||||
|
|
||||||||
|
PROPERTY, PLANT AND EQUIPMENT (Notes 1, 6,
9 and 10)
|
||||||||
|
Plant in service and held for future use
|
12,848,138 | 12,264,805 | ||||||
|
Less accumulated depreciation and amortization
|
(4,340,645 | ) | (4,141,546 | ) | ||||
|
|
||||||||
|
Net
|
8,507,493 | 8,123,259 | ||||||
|
Construction work in progress
|
467,700 | 572,354 | ||||||
|
Intangible assets, net of accumulated amortization
of $294,724 and $282,196
|
164,380 | 131,722 | ||||||
|
Nuclear fuel, net of accumulated amortization of
$64,544 and $55,343
|
118,243 | 89,323 | ||||||
|
|
||||||||
|
Total property, plant and equipment
|
9,257,816 | 8,916,658 | ||||||
|
|
||||||||
|
|
||||||||
|
DEFERRED DEBITS
|
||||||||
|
Deferred fuel and purchased power regulatory asset
(Notes 1 and 3)
|
— | 7,984 | ||||||
|
Other regulatory assets (Notes 1, 3 and 4)
|
781,714 | 787,506 | ||||||
|
Income tax receivable
|
65,103 | — | ||||||
|
Other deferred debits
|
101,274 | 115,505 | ||||||
|
|
||||||||
|
Total deferred debits
|
948,091 | 910,995 | ||||||
|
|
||||||||
|
|
||||||||
|
TOTAL ASSETS
|
$ | 11,808,155 | $ | 11,620,093 | ||||
|
|
||||||||
See Notes to Pinnacle West’s Consolidated Financial Statements.
85
Table of Contents
PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
LIABILITIES AND EQUITY
|
||||||||
|
|
||||||||
|
CURRENT LIABILITIES
|
||||||||
|
Accounts payable
|
$ | 240,637 | $ | 261,029 | ||||
|
Accrued taxes
|
104,011 | 109,798 | ||||||
|
Accrued interest
|
54,596 | 40,741 | ||||||
|
Short-term borrowings (Note 5)
|
153,715 | 670,469 | ||||||
|
Current maturities of long-term debt (Note 6)
|
277,693 | 177,646 | ||||||
|
Customer deposits
|
71,026 | 78,745 | ||||||
|
Liabilities from risk management activities (Note 18)
|
55,908 | 69,585 | ||||||
|
Other current liabilities
|
125,574 | 97,915 | ||||||
|
|
||||||||
|
Total current liabilities
|
1,083,160 | 1,505,928 | ||||||
|
|
||||||||
|
|
||||||||
|
LONG-TERM DEBT LESS CURRENT MATURITIES (Note 6)
|
3,370,524 | 3,031,603 | ||||||
|
|
||||||||
|
|
||||||||
|
DEFERRED CREDITS AND OTHER
|
||||||||
|
Deferred income taxes (Note 4)
|
1,496,095 | 1,403,318 | ||||||
|
Deferred fuel and purchased power regulatory liability
(Note 3)
|
87,291 | — | ||||||
|
Other regulatory liabilities (Notes 1 and 3)
|
679,072 | 587,586 | ||||||
|
Liability for asset retirements (Note 12)
|
301,783 | 275,970 | ||||||
|
Liabilities for pension and other postretirement
benefits (Note 8)
|
811,338 | 675,788 | ||||||
|
Liabilities from risk management activities (Note 18)
|
62,443 | 126,532 | ||||||
|
Customer advances
|
136,595 | 132,023 | ||||||
|
Coal mine reclamation
|
92,060 | 91,201 | ||||||
|
Unrecognized tax benefits
|
142,099 | 68,904 | ||||||
|
Other
|
200,015 | 227,872 | ||||||
|
|
||||||||
|
Total deferred credits and other
|
4,008,791 | 3,589,194 | ||||||
|
|
||||||||
|
|
||||||||
|
COMMITMENTS AND CONTINGENCIES (SEE NOTES)
|
||||||||
|
|
||||||||
|
EQUITY (Note 7)
|
||||||||
|
Common stock, no par value; authorized
150,000,000 shares; issued 101,527,937 at
end of 2009 and 100,948,436 at end of 2008
|
2,153,295 | 2,151,323 | ||||||
|
Treasury stock at cost; 93,239 shares at end of 2009
and 59,827 at end of 2008
|
(3,812 | ) | (2,854 | ) | ||||
|
|
||||||||
|
Total common stock
|
2,149,483 | 2,148,469 | ||||||
|
|
||||||||
|
Retained earnings
|
1,298,213 | 1,444,208 | ||||||
|
|
||||||||
|
Accumulated other comprehensive loss:
|
||||||||
|
Pension and other postretirement benefits (Note 8)
|
(50,892 | ) | (47,547 | ) | ||||
|
Derivative instruments
|
(80,695 | ) | (99,151 | ) | ||||
|
|
||||||||
|
Total accumulated other comprehensive loss
|
(131,587 | ) | (146,698 | ) | ||||
|
|
||||||||
|
Total Pinnacle West shareholders’ equity
|
3,316,109 | 3,445,979 | ||||||
|
Noncontrolling real estate interests
|
29,571 | 47,389 | ||||||
|
|
||||||||
|
Total equity
|
3,345,680 | 3,493,368 | ||||||
|
|
||||||||
|
|
||||||||
|
TOTAL LIABILITIES AND EQUITY
|
$ | 11,808,155 | $ | 11,620,093 | ||||
|
|
||||||||
See Notes to Pinnacle West’s Consolidated Financial Statements.
86
Table of Contents
PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
|
Net Income
|
$ | 53,555 | $ | 242,125 | $ | 307,143 | ||||||
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||||||
|
Depreciation and amortization including nuclear fuel
|
443,160 | 423,969 | 403,896 | |||||||||
|
Deferred fuel and purchased power
|
(51,742 | ) | (80,183 | ) | (196,136 | ) | ||||||
|
Deferred fuel and purchased power amortization
|
147,018 | 183,126 | 231,106 | |||||||||
|
Deferred fuel and purchased power regulatory disallowance
|
— | — | 14,370 | |||||||||
|
Allowance for equity funds used during construction
|
(14,999 | ) | (18,636 | ) | (21,195 | ) | ||||||
|
Real estate impairment charge
|
280,188 | 53,250 | — | |||||||||
|
Deferred income taxes
|
105,492 | 158,024 | (58,027 | ) | ||||||||
|
Change in mark-to-market valuations
|
(6,939 | ) | 9,074 | 17,579 | ||||||||
|
Changes in current assets and liabilities:
|
||||||||||||
|
Customer and other receivables
|
12,292 | 73,446 | 58,793 | |||||||||
|
Accrued utility revenues
|
(10,882 | ) | 7,388 | 4,057 | ||||||||
|
Materials, supplies and fossil fuel
|
(12,261 | ) | (25,453 | ) | (29,776 | ) | ||||||
|
Other current assets
|
(9,186 | ) | 8,734 | (10,040 | ) | |||||||
|
Accounts payable
|
(27,328 | ) | (69,439 | ) | (42,004 | ) | ||||||
|
Accrued taxes and income tax receivable — net
|
(31,792 | ) | (13,149 | ) | 20,764 | |||||||
|
Home inventory
|
33,833 | 48,041 | (56,883 | ) | ||||||||
|
Other current liabilities
|
29,274 | (5,130 | ) | 22,657 | ||||||||
|
Expenditures for real estate investments
|
(2,957 | ) | (21,168 | ) | (121,316 | ) | ||||||
|
Other changes in real estate assets
|
(4,216 | ) | 18,211 | 82,521 | ||||||||
|
Change in margin and collateral accounts — assets
|
(12,806 | ) | 17,450 | (37,371 | ) | |||||||
|
Change in margin and collateral accounts — liabilities
|
35,654 | (132,416 | ) | 19,284 | ||||||||
|
Change in long term income tax receivable
|
(131,984 | ) | — | — | ||||||||
|
Change in unrecognized tax benefits
|
137,898 | (94,551 | ) | 25,178 | ||||||||
|
Change in other regulatory liabilities
|
110,642 | (12,129 | ) | 7,133 | ||||||||
|
Change in other long-term assets
|
(47,899 | ) | 6,104 | (23,826 | ) | |||||||
|
Change in other long-term liabilities
|
7,050 | 36,880 | 40,029 | |||||||||
|
|
||||||||||||
|
Net cash flow provided by operating activities
|
1,031,065 | 813,568 | 657,936 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||
|
Capital expenditures
|
(764,609 | ) | (935,577 | ) | (960,390 | ) | ||||||
|
Contributions in aid of construction
|
53,525 | 60,292 | 41,809 | |||||||||
|
Capitalized interest
|
(10,745 | ) | (18,820 | ) | (23,063 | ) | ||||||
|
Proceeds from sale of investment securities
|
— | — | 69,225 | |||||||||
|
Purchases of investment securities
|
— | — | (36,525 | ) | ||||||||
|
Proceeds from nuclear decommissioning trust sales
|
441,242 | 317,619 | 259,026 | |||||||||
|
Investment in nuclear decommissioning trust
|
(463,033 | ) | (338,361 | ) | (279,768 | ) | ||||||
|
Proceeds from sale of commercial real estate investments
|
43,370 | 94,171 | 58,139 | |||||||||
|
Other
|
(4,667 | ) | 5,517 | (1,807 | ) | |||||||
|
|
||||||||||||
|
Net cash flow used for investing activities
|
(704,917 | ) | (815,159 | ) | (873,354 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
|
Issuance of long-term debt
|
867,469 | 96,934 | 230,571 | |||||||||
|
Repayment and reacquisition of long-term debt
|
(435,127 | ) | (181,491 | ) | (162,060 | ) | ||||||
|
Short-term borrowings — net
|
(516,754 | ) | 331,741 | 304,911 | ||||||||
|
Dividends paid on common stock
|
(205,076 | ) | (204,247 | ) | (210,473 | ) | ||||||
|
Common stock equity issuance
|
3,302 | 3,687 | 24,089 | |||||||||
|
Other
|
171 | 3,891 | (2,509 | ) | ||||||||
|
|
||||||||||||
|
Net cash flow provided by (used for) financing activities
|
(286,015 | ) | 50,515 | 184,529 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
40,133 | 48,924 | (30,889 | ) | ||||||||
|
|
||||||||||||
|
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR
|
105,245 | 56,321 | 87,210 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
CASH AND CASH EQUIVALENTS AT END OF YEAR
|
$ | 145,378 | $ | 105,245 | $ | 56,321 | ||||||
|
|
||||||||||||
|
Supplemental disclosure of cash flow information
|
||||||||||||
|
Cash paid during the period for:
|
||||||||||||
|
Income taxes, net of (refunds)
|
$ | (52,776 | ) | $ | 24,233 | $ | 204,643 | |||||
|
Interest, net of amounts capitalized
|
$ | 203,860 | $ | 191,085 | $ | 193,533 | ||||||
See Notes to Pinnacle West’s Consolidated Financial Statements.
87
Table of Contents
PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(dollars in thousands)
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
COMMON STOCK (Note 7)
|
||||||||||||
|
Balance at beginning of year
|
$ | 2,151,323 | $ | 2,135,787 | $ | 2,114,550 | ||||||
|
Issuance of common stock
|
10,620 | 10,845 | 24,089 | |||||||||
|
Other
|
(8,648 | ) | 4,691 | (2,852 | ) | |||||||
|
|
||||||||||||
|
Balance at end of year
|
2,153,295 | 2,151,323 | 2,135,787 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
TREASURY STOCK (Note 7)
|
||||||||||||
|
Balance at beginning of year
|
(2,854 | ) | (2,054 | ) | (449 | ) | ||||||
|
Purchase of treasury stock
|
(2,156 | ) | (1,387 | ) | (1,964 | ) | ||||||
|
Reissuance of treasury stock used for stock
compensation
|
1,198 | 587 | 359 | |||||||||
|
|
||||||||||||
|
Balance at end of year
|
(3,812 | ) | (2,854 | ) | (2,054 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
RETAINED EARNINGS
|
||||||||||||
|
Balance at beginning of year
|
1,444,208 | 1,413,741 | 1,319,747 | |||||||||
|
Net income attributable to common shareholders
|
68,330 | 242,125 | 307,143 | |||||||||
|
Common stock dividends
|
(212,386 | ) | (211,405 | ) | (210,473 | ) | ||||||
|
Cumulative effect of change in accounting
for income taxes (Note 4)
|
— | — | (2,676 | ) | ||||||||
|
Other
|
(1,939 | ) | (253 | ) | — | |||||||
|
|
||||||||||||
|
Balance at end of year
|
1,298,213 | 1,444,208 | 1,413,741 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
|
||||||||||||
|
Balance at beginning of year
|
(146,698 | ) | (15,863 | ) | 12,268 | |||||||
|
Pension and other postretirement benefits (Note 8):
|
||||||||||||
|
Unrealized actuarial loss, net of tax benefit of
$(4,223), $(7,801) and $(13,573)
|
(6,350 | ) | (11,053 | ) | (21,976 | ) | ||||||
|
Prior service cost, net of tax benefit of $(495)
|
— | — | (769 | ) | ||||||||
|
Amortization to income:
|
||||||||||||
|
Actuarial loss, net of tax benefit of $1,705,
$1,578 and $1,670
|
2,615 | 2,437 | 2,214 | |||||||||
|
Prior service cost, net of tax benefit of
$215, $222 and $252
|
329 | 343 | 391 | |||||||||
|
Transition obligation, net of tax benefit of
$39, $40 and $43
|
61 | 62 | 67 | |||||||||
|
Derivative instruments:
|
||||||||||||
|
Net unrealized loss, net of tax
benefit of $(61,328), $(54,490) and $(414)
|
(93,996 | ) | (83,093 | ) | (785 | ) | ||||||
|
Reclassification of net realized (gain) loss to income, net
of tax (expense) benefit of $72,876, $(24,786)
and $(4,679)
|
112,452 | (39,531 | ) | (7,273 | ) | |||||||
|
|
||||||||||||
|
Balance at end of year
|
(131,587 | ) | (146,698 | ) | (15,863 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
NONCONTROLLING INTERESTS
|
||||||||||||
|
Balance at beginning of year
|
47,389 | 54,569 | 49,682 | |||||||||
|
Net loss
|
(14,775 | ) | — | — | ||||||||
|
Net capital activities by noncontrolling interests
|
(2,632 | ) | (8,006 | ) | 4,320 | |||||||
|
Other
|
(411 | ) | 826 | 567 | ||||||||
|
|
||||||||||||
|
Balance at end of year
|
29,571 | 47,389 | 54,569 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
TOTAL EQUITY
|
$ | 3,345,680 | $ | 3,493,368 | $ | 3,586,180 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
COMPREHENSIVE INCOME ATTRIBUTABLE TO
COMMON SHAREHOLDERS
|
||||||||||||
|
Net income attributable to common shareholders
|
$ | 68,330 | $ | 242,125 | $ | 307,143 | ||||||
|
Other comprehensive income (loss)
|
15,111 | (130,835 | ) | (28,131 | ) | |||||||
|
|
||||||||||||
|
Comprehensive income attributable to common shareholders
|
$ | 83,441 | $ | 111,290 | $ | 279,012 | ||||||
|
|
||||||||||||
See Notes to Pinnacle West’s Consolidated Financial Statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Consolidation and Nature of Operations
Pinnacle West’s Consolidated Financial Statements include the accounts of Pinnacle West and
our subsidiaries: APS, SunCor, APSES, El Dorado and Pinnacle West Marketing & Trading.
Intercompany accounts and transactions between the consolidated companies have been eliminated.
APS is a vertically-integrated electric utility that provides either retail or wholesale
electric service to substantially all of the state of Arizona, with the major exceptions of about
one-half of the Phoenix metropolitan area, the Tucson metropolitan area and Mohave County in
northwestern Arizona. SunCor is a developer of residential, commercial and industrial real estate
projects in Arizona, New Mexico, Idaho and Utah. APSES provides energy-related projects to
commercial and industrial retail customers in competitive markets in the western United States. In
2008, APSES discontinued its commodity-related energy services (see Note 22). El Dorado is an
investment firm. Pinnacle West Marketing & Trading began operations in early 2007. These
operations were previously conducted by a division of Pinnacle West through the end of 2006. By
the end of 2008, substantially all the contracts were transferred to APS or expired.
In preparing the consolidated financial statements, we have evaluated the events that have
occurred after December 31, 2009 through the date the financial statements were issued on February
19, 2010.
Our consolidated financial statements reflect all adjustments (consisting only of normal
recurring adjustments except as otherwise disclosed in the notes) that we believe are necessary
for the fair presentation of our financial position, results of operations and cash flows for the
periods presented. These consolidated financial statements and notes have been prepared
consistently with the exception of the reclassification of certain prior year amounts on our
Consolidated Statements of Income and Consolidated Balance Sheets in accordance with accounting
requirements for reporting discontinued operations (see Note 22), and amended accounting guidance
on reporting noncontrolling interests in consolidated financial statements (see Note 2). We have
also presented certain line items in more detail in the Consolidated Balance Sheets than was
presented at December 31, 2008. The prior year amounts were reclassified to conform to the current
year presentation. Customer advances, coal mine reclamation and unrecognized tax benefits are
presented as separate line items instead of the previously reported single line item of other
deferred credits.
Certain
line items are presented in more detail on the Consolidated Statements of Cash Flows
than was presented in the prior years. Other line items are more condensed than the previous
presentation. The prior year amounts were reclassified to conform to the current year
presentation. Customer and other receivables and accrued utility revenues are presented as
separate line items instead of the previously reported single line item of customer and other
receivables. Accrued taxes and income tax receivable-net and other current liabilities are
presented as separate line items instead of the previously reported single line item of other
current liabilities. Change in other regulatory liabilities is reported separately from change in
other long-term liabilities. These reclassifications had no impact on total net cash flow provided
by operating activities.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting Records and Use of Estimates
Our accounting records are maintained in accordance with accounting principles generally
accepted in the United States of America (GAAP). The preparation of financial statements in
accordance with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Derivative Accounting
We are exposed to the impact of market fluctuations in the commodity price and transportation
costs of electricity and natural gas. We manage risks associated with these market fluctuations by
utilizing various instruments that qualify as derivatives, including exchange-traded futures and
options and over-the-counter forwards, options and swaps. As part of our overall risk management
program, we use such instruments to hedge purchases and sales of electricity and fuels. The
changes in market value of such contracts have a high correlation to price changes in the hedged
transactions.
We account for our derivative contracts in accordance with derivatives and hedging guidance,
which requires that entities recognize all derivatives as either assets or liabilities on the
balance sheet and measure those instruments at fair value. See Note 18 for additional information
about our derivative accounting policies.
Fair Value Measurements
We determine and
disclose the fair value of certain assets and liabilities in accordance with fair value
guidance. Fair value is the price that would be received for an asset or paid to transfer a
liability (exit price) in the principal or most advantageous market for the asset or liability in
an orderly transaction between willing market participants on the measurement date. Inputs to fair
value include observable and unobservable data. We maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
We determine fair market value using actively-quoted prices for identical instruments when
available. When actively quoted prices are not available for the identical instruments we use
prices for similar instruments or other corroborative market information or prices provided by
other external sources. For options, long-term contracts and other contracts for which price
quotes are not available, we use unobservable inputs, such as models and other valuation methods,
to determine fair market value.
The use of models and other valuation methods to determine fair market value often requires
subjective and complex judgment. Actual results could differ from the results estimated through
application of these methods. Our structured activities are hedged with a portfolio of forward
purchases that protects the economic value of the sales transactions. Our practice is to hedge
within timeframes established by the ERMC.
See Note 14 for additional information about fair value measurements.
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Regulatory Accounting
APS is regulated by the ACC and the FERC. The accompanying financial statements reflect the
rate-making policies of these commissions. As a result, we capitalize certain costs that would be
included as expense in the current period by unregulated companies. Regulatory assets represent
incurred costs that have been deferred because they are probable of future recovery in customer
rates. Regulatory liabilities generally represent expected future costs that have already been
collected from customers.
Management continually assesses whether our regulatory assets are probable of future recovery
by considering factors such as applicable regulatory environment changes and recent rate orders to
other regulated entities in the same jurisdiction. This determination reflects the current
political and regulatory climate in the state and is subject to change in the future. If future
recovery of costs ceases to be probable, the assets would be written off as a charge in current
period earnings.
A component of our regulatory assets and liabilities is the retail fuel and power costs
deferred under the PSA. APS defers for future rate recovery or refund approximately 90% of the
difference between actual retail fuel and purchased power costs and the amount of such costs
currently included in base rates, subject to specified parameters. See Note 3.
Also included in the balance of regulatory assets at December 31, 2009 is a regulatory asset
for pension and other postretirement benefits. This regulatory asset represents the future
recovery of these costs through retail rates as these amounts are charged to earnings. If these
costs are disallowed by the ACC, this regulatory asset would be charged to OCI and result in lower
future earnings.
The detail of regulatory assets is as follows (dollars in millions):
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Pension and other postretirement benefits
|
$ | 532 | $ | 473 | ||||
|
Regulatory asset for deferred income taxes
|
59 | 51 | ||||||
|
Deferred fuel and purchased power — mark-to-market
|
41 | 118 | ||||||
|
Transmission vegetation management
|
34 | 20 | ||||||
|
Deferred compensation
|
31 | 30 | ||||||
|
Loss on reacquired debt
|
23 | 16 | ||||||
|
Demand side management
|
18 | 17 | ||||||
|
Coal reclamation
|
16 | 17 | ||||||
|
Competition rules compliance charge (a)
|
7 | 16 | ||||||
|
Deferred fuel and purchased power (a)
|
— | 8 | ||||||
|
Other
|
21 | 29 | ||||||
|
|
||||||||
|
Total regulatory assets (b)
|
$ | 782 | $ | 795 | ||||
|
|
||||||||
| (a) | Subject to a carrying charge. | |
| (b) | There are no regulatory assets for which regulators have allowed recovery of costs but not allowed a return by exclusion from rate base. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The detail of regulatory liabilities is as follows (dollars in millions):
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Removal costs (a)
|
$ | 385 | $ | 388 | ||||
|
Regulatory liability related to asset retirement
obligations
|
156 | 103 | ||||||
|
Deferred fuel and purchased power (b)
|
87 | — | ||||||
|
Renewable energy standard
|
51 | 22 | ||||||
|
Spent nuclear fuel
|
34 | 22 | ||||||
|
Deferred gains on utility property
|
20 | 20 | ||||||
|
Tax benefit of Medicare subsidy
|
17 | 16 | ||||||
|
Deferred interest income (b)
|
3 | 8 | ||||||
|
Other
|
13 | 9 | ||||||
|
|
||||||||
|
Total regulatory liabilities
|
$ | 766 | $ | 588 | ||||
|
|
||||||||
| (a) | In accordance with regulatory accounting guidance, APS accrues for removal costs for its regulated assets, even if there is no legal obligation for removal. | |
| (b) | Subject to a carrying charge. |
Utility Plant and Depreciation
Utility plant is the term we use to describe the business property and equipment that supports
electric service, consisting primarily of generation, transmission and distribution facilities. We
report utility plant at its original cost, which includes:
| • | material and labor; |
| • | contractor costs; |
| • | capitalized leases; |
| • | construction overhead costs (where applicable); and |
| • | capitalized interest or an allowance for funds used during construction. |
We expense the costs of plant outages, major maintenance and routine maintenance as incurred.
We charge retired utility plant to accumulated depreciation. Liabilities associated with the
retirement of tangible long-lived assets are recognized at fair value as incurred and capitalized
as part of the related tangible long-lived assets. Accretion of the liability due to the passage
of time is an operating expense and the capitalized cost is depreciated over the useful life of the
long-lived asset. See Note 12.
APS records a regulatory liability for the asset retirement obligations related to its
regulated assets. This regulatory liability represents the difference between the amount that has
been recovered in regulated rates and the amount calculated in accordance with guidance on
accounting for asset retirement obligations. APS believes it can recover in regulated rates the
costs capitalized in accordance with this accounting guidance.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We record depreciation on utility plant on a straight-line basis over the remaining useful
life of the related assets. The approximate remaining average useful lives of our utility property
at December 31, 2009 were as follows:
| • | Fossil plant — 18 years; |
| • | Nuclear plant — 17 years; |
| • | Other generation — 29 years; |
| • | Transmission — 44 years; |
| • | Distribution — 32 years; and |
| • | Other — 8 years. |
For the years 2007 through 2009, the depreciation rates ranged from a low of 1.11% to a high
of 12.46%. The weighted-average rate was 3.06% for 2009, 3.08% for 2008 and 3.11% for 2007. We
depreciate non-utility property and equipment over the estimated useful lives of the related
assets, ranging from 3 to 34 years.
Investments
El Dorado accounts for its investments using either the equity method (if significant
influence) or the cost method (if less than 20% ownership).
Our investments in the nuclear decommissioning trust fund are accounted for in accordance with
guidance on accounting for certain investments in debt and equity securities. See Note 12 for more
information on these investments.
Capitalized Interest
Capitalized interest represents the cost of debt funds used to finance non-regulated
construction projects. Plant construction costs, including capitalized interest, are expensed
through depreciation when completed projects are placed into commercial operation. The rate used to
calculate capitalized interest was a composite rate of 4.4% for 2009, 5.2% for 2008 and 5.8% for
2007. Capitalized interest ceases when construction is complete.
Allowance for Funds Used During Construction
AFUDC represents the approximate net composite interest cost of borrowed funds and an allowed
return on the equity funds used for construction of regulated utility plant. APS’ allowance for
borrowed funds is included in capitalized interest on the Consolidated Financial Statements. Plant
construction costs, including AFUDC, are recovered in authorized rates through depreciation when
completed projects are placed into commercial operation.
AFUDC was calculated by using a composite rate of 5.9% for 2009, 7.0% for 2008 and 8.2% for
2007. APS compounds AFUDC monthly and ceases to accrue AFUDC when construction work is completed
and the property is placed in service.
Electric Revenues
We derive electric revenues primarily from sales of electricity to our regulated Native Load
customers. Revenues related to the sale of electricity are generally recorded when service is
rendered or electricity is delivered to customers. The billing of electricity sales to individual
Native Load customers is based on the reading of their meters, which occurs on a systematic basis
throughout the month. Unbilled revenues are estimated by applying an average revenue/kWh to the
number of
estimated kWhs delivered but not billed. Differences historically between the actual and
estimated unbilled revenues are immaterial. We exclude sales taxes and franchise fees on electric
revenues from both revenue and taxes other than income taxes.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenues from our Native Load customers and non-derivative instruments are reported on a gross
basis on Pinnacle West’s Consolidated Statements of Income. In the electricity business, some
contracts to purchase energy are netted against other contracts to sell energy. This is called a
“book-out” and usually occurs for contracts that have the same terms (quantities and delivery
points) and for which power does not flow. We net these book-outs, which reduces both revenues and
purchased power and fuel costs.
Effective January 1, 2010, electric revenues will also include proceeds for line extension
payments for new or upgraded service in accordance with the ACC Settlement Agreement (see Note 3).
This revenue treatment will continue through 2012 or until new rates are established in APS’ next
general retail rate case, if that is before year end 2012. Certain proceeds received under
previous versions of the line extension policy, or for activities not involving an extension or
upgrade of service (e.g., service relocations at the request of governmental entities or
undergrounding of overhead facilities) will continue to be treated as
contributions in aid of construction and will not impact electric revenues.
Allowance for Doubtful Accounts
The allowance for doubtful accounts represents our best estimate of existing accounts
receivable that will ultimately be uncollectible. The allowance is calculated by applying
estimated write-off factors to various classes of outstanding receivables, including accrued
utility revenues. The write-off factors used to estimate uncollectible accounts are based upon
consideration of both historical collections experience and management’s best estimate of future
collections success given the existing collections environment.
Real Estate Revenues
SunCor recognizes revenue from land, home and qualifying commercial operating assets sales in
full, provided (a) the income is determinable, that is, the collectability of the sales price is
reasonably assured or the amount that will not be collectible can be estimated, and (b) the
earnings process is virtually complete, that is, SunCor is not obligated to perform significant
activities after the sale to earn the income. Unless both conditions exist, recognition of all or
part of the income is postponed under the percentage of completion method in accordance with
accounting guidance relating to sales of real estate. SunCor recognizes income only after the
asset title has passed. Commercial property and management revenues are recorded over the term of
the lease or period in which services are provided. In addition, see Note 22.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Real Estate Investments
Real estate investments primarily include SunCor’s land, home inventory, commercial property
and investments in joint ventures. Land includes acquisition costs, infrastructure costs,
capitalized interest and property taxes directly associated with the acquisition and development of
each project. Home inventory consists of construction costs, improved lot costs, capitalized
interest and property taxes on homes and condos under construction. Homes under construction are
classified as “real estate investments” on the Consolidated Balance Sheets; upon completion of
construction they are transferred to “home inventory” with the expectation that they will be sold
in a timely manner.
For the purposes of evaluating impairment, in accordance with the provisions on accounting for
the impairment or disposal of long-lived assets, we classify our real estate assets, including land
under development, land held for future development, and commercial property as “held and used.”
When events or changes in circumstances indicate that the carrying values of real estate assets
considered held and used may not be recoverable, we compare the undiscounted cash flows that we
estimate will be generated by each asset to its carrying amount. If the carrying amount exceeds
the undiscounted cash flows, we adjust the asset to fair value and recognize an impairment charge.
The adjusted value becomes the new book value (carrying amount) for held and used assets. Our
internal models use inputs that we believe are consistent with those that would be used by market
participants.
Real estate home inventory is considered to be held for sale for purposes of evaluating
impairment in accordance with the provisions of accounting for impairment or disposal of long-lived
assets. Home inventories are reported at the lower of carrying amount or fair value less costs to
sell. Fair value less costs to sell is evaluated each period to determine if it has changed.
Losses (and gains not to exceed any cumulative loss previously recognized) are reported as
adjustments to the carrying amount.
Investments in joint ventures for which SunCor does not have a controlling financial interest
are not consolidated, but are accounted for using the equity method of accounting. In addition,
see Note 22 and Note 23.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of three months or less at
acquisition to be cash equivalents.
Nuclear Fuel
APS amortizes nuclear fuel by using the unit-of-production method. The unit-of-production
method is based on actual physical usage. APS divides the cost of the fuel by the estimated number
of thermal units it expects to produce with that fuel. APS then multiplies that rate by the number
of thermal units produced within the current period. This calculation determines the current
period nuclear fuel expense.
APS also charges nuclear fuel expense for the interim storage and permanent disposal of spent
nuclear fuel. The DOE is responsible for the permanent disposal of spent nuclear fuel and charges
APS $0.001 per kWh of nuclear generation. See Note 11 for information on spent nuclear fuel
disposal and Note 12 for information on nuclear decommissioning costs.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
Income taxes are provided using the asset and liability approach prescribed by guidance
relating to accounting for income taxes. We file our federal income tax return on a consolidated
basis and we file our state income tax returns on a consolidated or unitary basis. In accordance
with our intercompany tax sharing agreement, federal and state income taxes are allocated to each
first-tier subsidiary as though each first-tier subsidiary filed a separate income tax return. Any
difference between that method and the consolidated (and unitary) income tax liability is
attributed to the parent company. The income tax liability accounts reflect the tax and interest
associated with management’s estimate of the largest amount of tax benefit that is greater than 50%
likely of being realized upon settlement for all known and measurable tax exposures. See Note 4.
Intangible Assets
We have no goodwill recorded and have separately disclosed other intangible assets, primarily
APS’ software, on Pinnacle West’s Consolidated Balance Sheets. The intangible assets are amortized
over their finite useful lives. Amortization expense was $35 million in 2009, $33 million in 2008
and $37 million in 2007. Estimated amortization expense on existing intangible assets over the
next five years is $33 million in 2010, $27 million in 2011, $23 million in 2012, $18 million in
2013 and $13 million in 2014. At December 31, 2009, the weighted average remaining amortization
period for intangible assets was 7 years.
2. New Accounting Standards
Variable Interest Entities
In June 2009, the FASB issued amended guidance on the consolidation of variable interest
entities. The model for determining which enterprise has a controlling financial interest and is
the primary beneficiary of a VIE has changed significantly under the new guidance. Previously,
variable interest holders had to determine whether they had a controlling financial interest in a
VIE based on a quantitative analysis of the expected gains and/or losses of the entity. The new
guidance requires an enterprise with a variable interest in a VIE to perform a qualitative
assessment in determining whether it has a controlling financial interest in the entity, and if so,
whether it is the primary beneficiary. Furthermore, the amended guidance requires companies to
continually evaluate VIEs for consolidation. This guidance was effective for us on January 1, 2010.
We are continuing to evaluate the impact this new guidance may have
on our financial statements. See Note 20.
Fair Value Measurements and Disclosures
We adopted guidance relating to fair value measurements and disclosures for our non-financial
assets on January 1, 2009. This guidance was adopted for our financial assets on January 1, 2008.
On April 1, 2009, we adopted new fair value accounting provisions on the following topics:
| • | Determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. |
| • | The recognition and presentation of other-than-temporary impairments. |
| • | Interim disclosures about fair value of financial instruments. |
On October 1, 2009, we adopted new fair value accounting provisions on the following topics:
| • | Measuring fair value of liabilities, which provides additional guidance on how fair value measurements of liabilities should be determined. |
| • | Measuring fair value of certain alternative investments. This guidance provides clarification on the measurement and disclosure of investments in entities that calculate net asset value. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The adoption of fair value measurement and disclosure guidance has not had a significant
impact on our financial statement results. See Note 14 for fair value discussions and related
disclosures.
In January 2010 guidance was issued that amends the fair value disclosure requirements. This
guidance adds new fair value disclosures and clarifies existing disclosure requirements. This
amended guidance is effective for us during the first quarter of 2010. The adoption of this new
guidance will not have an impact on our financial statement results.
Derivative Instruments
We adopted amended guidance on disclosures about derivative instruments and hedging activities
on January 1, 2009. See Note 18 for additional information and related disclosures. Since this
guidance provides only disclosure requirements, the adoption of this standard did not impact our
financial statement results.
Noncontrolling Interests
We adopted amended guidance on reporting noncontrolling interests in consolidated financial
statements on January 1, 2009. This guidance provides accounting and reporting standards for
noncontrolling interests in a consolidated subsidiary and clarifies that noncontrolling interests
should be reported as equity on the consolidated financial statements. As a result of adopting
this guidance, we have disclosed on the face of our financial statements the portion of equity and
net income attributable to the noncontrolling interests in consolidated subsidiaries.
Additionally, we reclassified $47 million of noncontrolling interests from other deferred credits
to equity on the December 31, 2008 Consolidated Balance Sheets. Prior year’s net income
attributable to noncontrolling interests was not material to our Consolidated Statements of Income
and was not reclassified. The adoption of this guidance modified our financial statement
presentation, but did not have an impact on our financial statement results.
Employers’
Disclosure about Postretirement Benefit Plan Assets
In December 2008, the FASB issued guidance on employers’ disclosures about postretirement
benefit plan assets. This guidance requires enhanced disclosures about employers’ plan assets of a
defined benefit pension or other postretirement plan including fair value related disclosures. We
adopted this guidance during the fourth quarter of 2009. See Note 8 for the related disclosures.
The adoption of this guidance expanded certain disclosures but did not have an impact on our
financial statement results.
Subsequent Events
In May 2009, the FASB issued guidance which established general standards of accounting for
and disclosure of subsequent events. Subsequent events are events that occur after the balance
sheet date but before financial statements are issued or are available to be issued. We adopted
this guidance
during the second quarter of 2009. The adoption of this guidance expanded certain disclosures
but did not have an impact on our financial statement results.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Regulatory Matters
2008 General Retail Rate Case Decision
On December 30, 2009, the ACC issued an order approving a settlement agreement (“Settlement
Agreement”) entered into by APS and twenty-one other parties to its general retail rate case, which
was originally filed in March 2008. The ACC approved the Settlement Agreement with modifications
and obligations for APS that did not materially affect the overall economic terms of the
settlement.
The Settlement Agreement includes a net retail rate increase of $207.5 million, which
represents a base rate increase of $344.7 million less a reclassification of $137.2 million of fuel
and purchased power revenues from the existing PSA to base rates. The new rates were effective
January 1, 2010.
The parties also agreed to a rate case filing plan in which APS is prohibited from filing its
next two general rate cases until on or after June 1, 2011 and June 1, 2013, respectively, unless
certain extraordinary events occur. Subject to the foregoing, APS may not request its next general
retail rate increase to be effective prior to July 1, 2012. The parties agreed to use good faith
efforts to process these subsequent rate cases within twelve months of sufficiency findings from
the ACC staff, which generally occur within 30 days after the filing of a rate case.
Other key provisions of the Settlement Agreement, effective January 1, 2010, include the
following:
| • | A non-fuel base rate increase in annual pretax revenues of $196.3 million; |
| • | A net increase in annual pretax revenues of $11.2 million for fuel and purchased power costs reflected in base rates that would not otherwise have been recoverable under the PSA; |
| • | A Base Fuel Rate of $0.0376 per kWh (compared to the prior Base Fuel Rate of $0.0325 per kWh); |
| • | Revenue accounting treatment for line extension payments received for new or upgraded service from January 1, 2010 through year end 2012 (or until new rates are established in APS’ next general rate case, if that is before the end of 2012), resulting in present estimates of increased revenues of $23 million, $25 million and $49 million, respectively; |
| • | An authorized return on common equity of 11.0%; |
| • | A capital structure comprised of 46.2% debt and 53.8% common equity; |
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| • | A commitment from APS to reduce average annual operational expenses by at least $30 million from 2010 through 2014; |
| • | Authorization and requirements of equity infusions into APS of at least $700 million during the period beginning June 1, 2009 through December 31, 2014; and |
| • | Various modifications to the existing energy efficiency, demand-side management and renewable energy programs that require APS to, among other things, expand its conservation and demand-side management programs and its use of renewable energy, as well as allow for concurrent recovery of renewable energy expenses and provide for more concurrent recovery of demand-side management costs and incentives. |
Cost Recovery Mechanisms
APS has received supportive regulatory decisions that allow for more timely recovery of
certain costs through the following recovery mechanisms.
Renewable Energy Standard.
In 2006, the ACC approved the Arizona Renewable Energy Standard
and Tariff (“RES”). Under the RES, electric utilities that are regulated by the ACC must supply an
increasing percentage of their retail electric energy sales from eligible renewable resources,
including solar, wind, biomass, biogas and geothermal technologies. In order to achieve these
requirements, the ACC allows APS to include an RES surcharge on customer bills to recover the
approved amounts for use on renewable energy projects. Each year APS is required to file a
five-year implementation plan with the ACC and seek approval for the upcoming year’s RES funding
amount.
During 2009, APS filed its annual RES implementation plan, covering the 2010-2014 timeframe
and requesting 2010 RES funding approval. The plan provides for the acquisition of renewable
generation in compliance with requirements through 2014, and requests RES funding of $86.7 million
for 2010. APS also seeks various other determinations in its plan, including approval of the AZ
Sun program, which provides for 100 MW of utility-owned solar resources through 2014 and recovery
of associated costs through the RES adjustor until such costs can be recovered through APS’ base
rates or alternative mechanisms. At its December open meeting, the ACC approved APS’ 2010 RES
funding request, and deferred action on other portions of APS’ plan including the AZ Sun matter.
On February 10, 2010, the ACC staff issued a recommendation that the ACC approve APS’ request on
the AZ Sun matter. It is expected that the ACC will make a determination on this matter in March
2010.
Demand-Side Management Adjustor Charge.
The Settlement Agreement requires APS to submit an
annual Energy Efficiency Implementation Plan for review by and approval of the ACC. On July 15,
2009, APS filed its initial Energy Efficiency Implementation Plan, requesting approval by the ACC
of programs and program elements for which APS has estimated a budget in the amount of $49.9
million for 2010. In order to recover these estimated amounts for use on certain demand-side
management programs, a surcharge would be added to customer bills similar to that described above
under the RES. The surcharge will offset energy efficiency expenses and allow for the recovery of
any earned incentives. APS received ACC approval of all but one of its proposed programs and
expects to receive a determination from the ACC on the remaining program in the near future.
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The ACC approved recovery of the 2010 Energy Efficiency budget less some $1.0 million, which
reflected a recalculation of the incentive payment due to APS under the Energy Efficiency
Implementation Plan and not a reduction in allowed program costs. The ACC also approved recovery
of all 2009 program costs plus incentives. The change from program cost recovery on a historical
basis to recovery on a concurrent basis, as authorized in the Settlement Agreement, resulted in this
one-time need to address two years (2009 and 2010) of cost recovery. As requested by APS, 2009
program cost recovery is to be spread over a three-year period.
PSA Mechanism and Balance.
The PSA, which the ACC initially approved in 2005 as a part of
APS’ 2003 rate case, and which was modified by the ACC in 2007, provides for the adjustment of
retail rates to reflect variations in retail fuel and purchased power costs. The PSA is subject to
specified parameters and procedures, including the following:
| • | APS records deferrals for recovery or refund to the extent actual retail fuel and purchased power costs vary from the Base Fuel Rate; |
| • | under a 90/10 sharing arrangement, APS defers 90% of the difference between retail fuel and purchased power costs (excluding certain costs, such as renewable energy resources and the capacity components of long-term purchase power agreements acquired through competitive procurement) and the Base Fuel Rate; APS absorbs 10% of the retail fuel and purchased power costs above the Base Fuel Rate and retains 10% of the benefit from the retail fuel and purchased power costs that are below the Base Fuel Rate; |
| • | an adjustment to the PSA rate is made annually each February 1 st (unless otherwise approved by the ACC) and goes into effect automatically unless suspended by the ACC; |
| • | the PSA uses a forward-looking estimate of fuel and purchased power costs to set the annual PSA rate, which will be reconciled to actual costs experienced for each PSA Year (February 1 through January 31) (see the following bullet point); and |
| • | the PSA rate includes (a) a “Forward Component,” under which APS recovers or refunds differences between expected fuel and purchased power costs for the upcoming calendar year and those embedded in the Base Fuel Rate; (b) a “Historical Component,” under which differences between actual fuel and purchased power costs and those recovered through the combination of the Base Fuel Rate and the Forward Component are recovered during the next PSA Year; and (c) a “Transition Component,” under which APS may seek mid-year PSA changes due to large variances between actual fuel and purchased power costs and the combination of the Base Fuel Rate and the Forward Component. |
100
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the changes in the deferred fuel and purchased power regulatory
asset (liability) for 2009 and 2008 (dollars in millions):
| Year Ended | ||||||||
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Beginning balance
|
$ | 8 | $ | 111 | ||||
|
Deferred fuel and purchased power costs-current period
|
52 | 78 | ||||||
|
Interest on deferred fuel and purchased power
|
— | 2 | ||||||
|
Amounts recovered through revenues
|
(147 | ) | (183 | ) | ||||
|
|
||||||||
|
Ending balance
|
$ | (87 | ) | $ | 8 | |||
|
|
||||||||
The PSA rate for the PSA Year that began February 1, 2010 was set at ($0.0045) per kWh. The
$87 million regulatory liability at December 31, 2009 reflected lower average prices and the
seasonal nature of fuel and purchased power costs. These overcollected fuel cost deferrals during
the 2009 PSA Year were refunded through the historical component of the PSA rate for the PSA Year
beginning February 1, 2010. Since this 2010 PSA adjustment was a reduction of the PSA rate, the
ACC accelerated the 2010 adjustment from February 1
st
to January 1
st
to
coincide with the increase in retail rates resulting from the ACC’s decision in the general retail
rate case, causing a minimal net impact on residential bills. This accelerated 2010 adjustment
will remain in effect until February 1, 2011.
The PSA rate for the PSA Year that began February 1, 2009 was $0.0053 per kWh. The PSA rate
may not be increased or decreased more than $0.004 per kWh in a year without permission of the ACC.
Transmission Rates and Transmission Cost Adjustor
.
In July 2008, the FERC approved an Open
Access Transmission Tariff for APS to move from fixed rates to a formula rate-setting methodology
in order to more accurately reflect the costs that APS incurs in providing transmission services.
The formula rate is updated each year effective June 1 on the basis of APS’ actual cost of service,
as disclosed in APS’ FERC Form 1 report for the previous fiscal year, and projected capital
expenditures. A large portion of the rate represents charges for transmission services to serve
APS’ retail customers (“Retail Transmission Charges”). In order to recover the Retail Transmission
Charges, APS must file an application with, and obtain approval from, the ACC under the TCA
mechanism, by which changes in Retail Transmission Charges can be reflected in APS’ retail rates.
In 2009, APS was authorized to implement an increase in its annual transmission revenues based
on calculations filed with the FERC using data for its 2008 fiscal year. Increases in APS’ annual
transmission revenues of $22.8 million became effective June 1, 2009. Of this amount, $21 million
represents an increase in Retail Transmission Charges, which was approved by the ACC on July 29,
2009 and allows APS to reflect the related increased Retail Transmission Charges in its retail
rates through the TCA effective August 1, 2009.
4. Income Taxes
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 the current income tax rates.
101
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APS has recorded a regulatory asset and a regulatory liability related to income taxes on its
Balance Sheets in accordance with accounting guidance for regulated operations. The regulatory
asset is for certain temporary differences, primarily the allowance for equity funds used during
construction. The regulatory liability relates to deferred taxes resulting primarily from pension
and other postretirement benefits. APS amortizes these amounts as the differences reverse.
Pinnacle West expects to recognize approximately $125 million of cash tax benefits related to
SunCor’s strategic asset sales (see Note 23) which will not be realized until the asset sale
transactions are completed. Approximately $105 million of these benefits were recorded in 2009 as
reductions to income tax expense related to the current impairment charges. The additional $20
million of tax benefits were recorded as reductions to income tax expense related to the SunCor
impairment charge recorded in the fourth quarter of 2008.
The $91 million income tax receivables on the Consolidated Balance Sheets represent the
anticipated refunds related to an APS tax accounting method change approved by the IRS in the third
quarter of 2009 and the current year tax benefits related to the SunCor strategic asset sales that
closed in 2009.
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 period that are included in
accrued taxes and unrecognized tax benefits on the Consolidated Balance Sheets (dollars in
thousands):
| 2009 | 2008 | |||||||
|
Total unrecognized tax benefits, January 1
|
$ | 63,318 | $ | 157,869 | ||||
|
Additions for tax positions of the current year
|
44,094 | 12,923 | ||||||
|
Additions for tax positions of prior years
|
98,942 | 32,510 | ||||||
|
Reductions for tax positions of prior years for:
|
||||||||
|
Changes in judgment
|
— | (4,454 | ) | |||||
|
Settlements with taxing authorities
|
(4,089 | ) | (35,812 | ) | ||||
|
Lapses of applicable statute of limitations
|
(1,049 | ) | (99,718 | ) | ||||
|
|
||||||||
|
Total unrecognized tax benefits, December 31
|
$ | 201,216 | $ | 63,318 | ||||
|
|
||||||||
Included in both balances of unrecognized tax benefits at December 31, 2009 and 2008 were
approximately $16 million of tax positions that, if recognized, would decrease our effective tax
rate.
As of the balance sheet date, the tax year ended December 31, 2005 and all subsequent tax
years remain subject to examination by the IRS. With few exceptions, we are no longer subject to
state income tax examinations by tax authorities for years before 1999.
Within the next 12 months, it is reasonably possible that the Company will reach a settlement
with the IRS with regard to the examination of tax returns for years ended December 31, 2005
through 2007. As a result of these anticipated settlements, and the expiration of certain statutes
of limitations, the Company believes that it is reasonably possible that unrecognized tax benefits
could be reduced by an amount up to $70 million.
We reflect interest and penalties, if any, on unrecognized tax benefits in the Consolidated
Statements of Income as income tax expense. The amount of interest recognized in the consolidated
statement of income related to unrecognized tax benefits was a pre-tax expense of $2 million
for 2009 and pre-tax benefit of $51 million for 2008.
102
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The total amount of accrued liabilities for interest recognized in the consolidated balance
sheets related to unrecognized tax benefits was $8 million as of December 31, 2009 and $6 million
as of December 31, 2008. To the extent that matters are settled favorably, this amount could
reverse and decrease our effective tax rate. Additionally, as of December 31, 2009, we have
recognized $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):
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | (38,502 | ) | $ | (85,866 | ) | $ | 182,181 | ||||
|
State
|
(38,080 | ) | 11,738 | 30,801 | ||||||||
|
|
||||||||||||
|
Total current
|
(76,582 | ) | (74,128 | ) | 212,982 | |||||||
|
|
||||||||||||
|
Deferred:
|
||||||||||||
|
Income from continuing operations
|
105,492 | 158,024 | (56,147 | ) | ||||||||
|
Discontinued operations
|
— | — | (343 | ) | ||||||||
|
|
||||||||||||
|
Total deferred
|
105,492 | 158,024 | (56,490 | ) | ||||||||
|
|
||||||||||||
|
Total income tax expense
|
28,910 | 83,896 | 156,492 | |||||||||
|
Less: income tax expense (benefit) on
discontinued operations
|
(8,917 | ) | 6,999 | 4,486 | ||||||||
|
|
||||||||||||
|
Income tax expense — continuing
operations
|
$ | 37,827 | $ | 76,897 | $ | 152,006 | ||||||
|
|
||||||||||||
103
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following chart compares pretax income from continuing operations at the 35% federal
income tax rate to income tax expense — continuing operations (dollars in thousands):
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
Federal income tax expense at 35%
statutory rate
|
$ | 36,770 | $ | 107,870 | $ | 158,355 | ||||||
|
Increases (reductions) in tax expense
resulting from:
|
||||||||||||
|
State income tax net of federal income
tax benefit
|
3,662 | 10,857 | 17,078 | |||||||||
|
Credits and favorable adjustments
related to prior years resolved in
current year
|
— | (28,873 | ) | (13,205 | ) | |||||||
|
Medicare Subsidy Part-D
|
(2,095 | ) | (1,993 | ) | (3,236 | ) | ||||||
|
Allowance for equity funds used during
construction (see Note 1)
|
(4,264 | ) | (5,755 | ) | (6,899 | ) | ||||||
|
Other
|
3,754 | (5,209 | ) | (87 | ) | |||||||
|
|
||||||||||||
|
Income tax expense — continuing operations
|
$ | 37,827 | $ | 76,897 | $ | 152,006 | ||||||
|
|
||||||||||||
The following table shows the net deferred income tax liability recognized on the Consolidated
Balance Sheets (dollars in thousands):
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Current asset
|
$ | 53,990 | $ | 79,729 | ||||
|
Long-term liability
|
(1,496,095 | ) | (1,403,318 | ) | ||||
|
|
||||||||
|
Accumulated deferred income taxes — net
|
$ | (1,442,105 | ) | $ | (1,323,589 | ) | ||
|
|
||||||||
104
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the net deferred income tax liability were as follows (dollars in
thousands):
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
DEFERRED TAX ASSETS
|
||||||||
|
Risk management activities
|
$ | 87,404 | $ | 132,383 | ||||
|
Regulatory liabilities:
|
||||||||
|
Asset retirement obligation
|
213,814 | 194,326 | ||||||
|
Deferred fuel and purchased power
|
34,463 | — | ||||||
|
Other
|
21,613 | 13,986 | ||||||
|
Pension and other postretirement liabilities
|
306,515 | 281,053 | ||||||
|
Deferred gain on Palo Verde Unit 2 sale
leaseback
|
11,836 | 12,665 | ||||||
|
Real estate investments and assets held for
sale
|
113,082 | 23,469 | ||||||
|
Other
|
48,602 | 78,210 | ||||||
|
|
||||||||
|
Total deferred tax assets
|
837,329 | 736,092 | ||||||
|
|
||||||||
|
DEFERRED TAX LIABILITIES
|
||||||||
|
Plant-related
|
(1,951,262 | ) | (1,709,872 | ) | ||||
|
Risk management activities
|
(20,863 | ) | (20,732 | ) | ||||
|
Regulatory assets:
|
||||||||
|
Allowance for equity funds used during
construction
|
(23,285 | ) | (20,174 | ) | ||||
|
Deferred fuel and purchased power —
mark-to-market
|
(16,167 | ) | (46,593 | ) | ||||
|
Pension and other postretirement benefits
|
(210,080 | ) | (186,916 | ) | ||||
|
Other
|
(57,210 | ) | (58,519 | ) | ||||
|
Other
|
(567 | ) | (16,875 | ) | ||||
|
|
||||||||
|
Total deferred tax liabilities
|
(2,279,434 | ) | (2,059,681 | ) | ||||
|
|
||||||||
|
Accumulated deferred income taxes — net
|
$ | (1,442,105 | ) | $ | (1,323,589 | ) | ||
|
|
||||||||
105
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Lines of Credit and Short-Term Borrowing
Pinnacle West and APS maintain credit facilities in order to enhance liquidity and provide
credit support. The credit and liquidity markets experienced significant stress beginning in the
third quarter of 2008. Since the fourth quarter of 2008, Pinnacle West and APS have not accessed
the commercial paper market due to negative market conditions. They have both been able to access
existing credit facilities, ensuring adequate liquidity. The table below presents the consolidated
lines of credit available and outstanding as of December 31, 2009 (dollars in millions):
| Weighted | ||||||||||||||||||||||
| Amount | Unused | Average | ||||||||||||||||||||
| Credit Facility | Expiration | Committed | Borrowed | Amount | Interest Rate | Commitment Fees | ||||||||||||||||
|
PNW Revolving Credit Line
|
December 2010 | $ | 283 | $ | 149 | $ | 134 | 0.982% | 0.15 | % | ||||||||||||
|
APS Revolving Credit Line
|
December 2010 | 377 | — | 377 | — | 0.11 | % | |||||||||||||||
|
APS Revolving Credit Line
|
September 2011 | 489 | — | 489 | — | 0.10 | % | |||||||||||||||
|
Other SunCor
Short-term Borrowings |
January 2010 | — | 5 | — |
LIBOR plus
2.50% |
— | ||||||||||||||||
|
|
||||||||||||||||||||||
|
Total
|
$ | 1,149 | $ | 154 | $ | 1,000 | ||||||||||||||||
|
|
||||||||||||||||||||||
The PNW revolver is available to support the issuance of up to $250 million in commercial
paper or bank borrowings, including issuances of letters of credit up to $94 million.
The APS revolvers are available either to support the issuance of up to $250 million in
commercial paper or to be used for bank borrowings, including issuances of letters of credit up to
$583 million. See Note 21 for discussion of APS’ letters of credit. At December 31, 2009, APS had
no borrowings and no letters of credit under its revolving lines of credit.
The table below presents the consolidated lines of credit available and outstanding as of
December 31, 2008 (dollars in millions):
| Weighted | ||||||||||||||||||||||
| Amount | Unused | Average | ||||||||||||||||||||
| Credit Facility | Expiration | Committed | Borrowed | Amount | Interest Rate | Commitment Fees | ||||||||||||||||
|
PNW Revolving Credit Line
|
December 2010 | $ | 300 | $ | 144 | $ | 156 | 2.713% | 0.15 | % | ||||||||||||
|
APS Revolving Credit Line
|
December 2010 | 400 | 38 | 362 | 1.00% | 0.11 | % | |||||||||||||||
|
APS Revolving Credit Line
|
September 2011 | 500 | 484 | 16 | 2.18% | 0.10 | % | |||||||||||||||
|
Other SunCor
Short-term Borrowings |
January 2010 | — | 4 | — |
LIBOR plus
2.50% |
— | ||||||||||||||||
|
|
||||||||||||||||||||||
|
Total
|
$ | 1,200 | $ | 670 | $ | 534 | ||||||||||||||||
|
|
||||||||||||||||||||||
Pinnacle West had a committed line of credit with various banks totaling $300 million at
December 31, 2008. Credit commitments totaling approximately $17 million from Lehman Brothers were
no longer available. The remaining $283 million was available to support the issuance of up to
$250 million in commercial paper or bank borrowings, including issuances of letters of credit up to
$94 million of which $7 million was outstanding.
APS had committed lines of credit totaling $900 million at December 31, 2008. Credit
commitments totaling approximately $34 million from Lehman Brothers were no longer available. The
remaining capacity of $866 million under the APS revolvers was available either to support the
issuance of up to $250 million in commercial paper or to be used for bank borrowings, including
issuances of letters of credit up to $583 million.
106
Table of Contents
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 12, 2010, Pinnacle West refinanced its $283 million revolving credit facility that
would have matured in December 2010, and decreased the size of the facility to $200 million. The
new revolving credit facility terminates in February 2013. Pinnacle West may increase the amount
of the facility up to a maximum of $300 million upon the satisfaction of certain conditions and
with the consent of the lenders. Pinnacle West will use the facility for general corporate
purposes, repayment of long-term debt, and for the issuance of letters of credit. Interest rates
are based on Pinnacle West’s senior unsecured debt credit ratings. In addition, because of the
downsized revolving credit facility, the Company is in the process of reducing the size of its
commercial paper program to $200 million from $250 million.
On February 12, 2010, APS refinanced its $377 million revolving credit facility that would
have matured in December 2010, and increased the size of the facility to $500 million. The new
revolving credit facility terminates in February 2013. APS may increase the amount of the facility
up to a maximum of $700 million upon the satisfaction of certain conditions and with the consent of
the lenders. APS will use the facility for general corporate purposes and for the issuance of
letters of credit. Interest rates are based on APS’ senior unsecured debt credit ratings.
Although provisions in APS’ articles of incorporation and ACC financing orders establish
maximum amounts of preferred stock and debt that APS may issue, APS does not expect any of these
provisions to limit its ability to meet its capital requirements. On October 30, 2007, the ACC
issued a financing order in which it approved APS’ request, subject to specified parameters and
procedures, to increase (a) APS’ short-term debt authorization from 7% of APS’ capitalization to
(i) 7% of APS’ capitalization plus (ii) $500 million (which is required to be used for purchases of
natural gas and power) and (b) APS’ long-term debt authorization from approximately $3.2 billion to
$4.2 billion in light of the projected growth of APS and its customer base and the resulting
projected financing needs. This financing order expires December 31, 2012; however, all debt
previously authorized and outstanding on December 31, 2012 will remain authorized and valid
obligations of APS.
See discussion about SunCor’s Secured Revolver in Note 6.
Other Short-term Borrowings
Neither Pinnacle West nor APS had commercial paper borrowings or other short-term debt at
December 31, 2009 or December 31, 2008. SunCor had other short-term notes of approximately $5
million at December 31, 2009 and December 31, 2008 with variable interest rates based on LIBOR plus
2.5%.
107
Table of Contents
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Long-Term Debt and Liquidity Matters
Substantially all of APS’ debt is unsecured. SunCor’s short and long-term debt is
collateralized by interests in certain real property and Pinnacle West’s debt is unsecured. The
following table presents the components of long-term debt on the Consolidated Balance Sheets
outstanding at December 31, 2009 and 2008 (dollars in thousands):
| Maturity | Interest | December 31, | ||||||||||||
| Dates (a) | Rates | 2009 | 2008 | |||||||||||
|
APS
|
||||||||||||||
|
|
||||||||||||||
|
Pollution control bonds — Variable
|
2024-2038 | (b) | $ | 222,880 | $ | 539,145 | ||||||||
|
Pollution control bonds — Fixed
|
2029-2034 | (c) | 342,975 | — | ||||||||||
|
Pollution control bonds with senior
notes
|
2029 | 5.05 | % | 90,000 | 90,000 | |||||||||
|
Unsecured notes
|
2011 | 6.375 | % | 400,000 | 400,000 | |||||||||
|
Unsecured notes
|
2012 | 6.50 | % | 375,000 | 375,000 | |||||||||
|
Unsecured notes
|
2014 | 5.80 | % | 300,000 | 300,000 | |||||||||
|
Unsecured notes
|
2015 | 4.650 | % | 300,000 | 300,000 | |||||||||
|
Unsecured notes
|
2016 | 6.25 | % | 250,000 | 250,000 | |||||||||
|
Unsecured notes (d)
|
2019 | 8.75 | % | 500,000 | — | |||||||||
|
Unsecured notes
|
2033 | 5.625 | % | 200,000 | 200,000 | |||||||||
|
Unsecured notes
|
2035 | 5.50 | % | 250,000 | 250,000 | |||||||||
|
Unsecured notes
|
2036 | 6.875 | % | 150,000 | 150,000 | |||||||||
|
Secured note
|
2014 | 6.00 | % | 1,075 | 1,258 | |||||||||
|
Unamortized discount and premium
|
(7,185 | ) | (7,908 | ) | ||||||||||
|
Capitalized lease obligations
|
2010-2012 | (e) | 2,837 | 3,621 | ||||||||||
|
|
||||||||||||||
|
Subtotal (f)
|
3,377,582 | 2,851,116 | ||||||||||||
|
|
||||||||||||||
|
SUNCOR
|
||||||||||||||
|
Notes payable
|
2010-2013 | (g) | 95,535 | 182,804 | ||||||||||
|
Capitalized lease obligations
|
2010-2012 | (h) | 100 | 329 | ||||||||||
|
|
||||||||||||||
|
Subtotal
|
95,635 | 183,133 | ||||||||||||
|
|
||||||||||||||
|
PINNACLE WEST
|
||||||||||||||
|
Senior notes
|
2011 | 5.91 | % | 175,000 | 175,000 | |||||||||
|
|
||||||||||||||
|
Total long-term debt
|
3,648,217 | 3,209,249 | ||||||||||||
|
Less current maturities:
|
||||||||||||||
|
APS
|
197,176 | 874 | ||||||||||||
|
SunCor
|
80,517 | 176,772 | ||||||||||||
|
Pinnacle West
|
— | — | ||||||||||||
|
|
||||||||||||||
|
Total
|
277,693 | 177,646 | ||||||||||||
|
|
||||||||||||||
|
TOTAL LONG-TERM DEBT LESS
CURRENT
MATURITIES
|
$ | 3,370,524 | $ | 3,031,603 | ||||||||||
|
|
||||||||||||||
| (a) | This schedule does not reflect the timing of redemptions that may occur prior to maturities. | |
| (b) | The weighted-average rate for the variable rate pollution control bonds was 0.25% at December 31, 2009 and 8.30% at December 31, 2008. The 2008 weighted average rate included rates associated with debt securities in auction rate mode. See discussion of the refinancing of pollution control bonds below. | |
| (c) | The bonds’ fixed rate of interest range from 5.00% to 6.00% and are subject to mandatory tender dates. Refer to the discussion below on Pollution Control Bonds. | |
| (d) | On February 26, 2009, APS issued $500 million of 8.75% unsecured senior notes that mature on March 1, 2019. | |
| (e) | The weighted-average interest rate was 5.50% at December 31, 2009 and 5.51% at December 31, 2008. |
108
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| (f) | APS’ long-term debt less current maturities was $3.180 billion at December 31, 2009 and $2.850 billion at December 31, 2008. APS’ current maturities of long-term debt was $197 million at December 31, 2009 and $1 million at December 31, 2008. | |
| (g) | SunCor had $57 million outstanding at December 31, 2009 and $120 million at December 31, 2008 under its secured revolver that matured on January 30, 2010. The weighted-average interest rates were 5.00% at December 31, 2009 and 4.19% at December 31, 2008. At December 31, 2009 and December 31, 2008 approximately $39 million and $63 million of other debt remained outstanding under other long-term credit facilities. The remaining debt which is primarily classified as current maturities of long-term debt consisted of multiple notes with variable interest rates of prime plus 2.0% and LIBOR plus 1.70%, 2.0%, 2.25% and 2.50% at December 31, 2009. At December 31, 2008, the remaining debt consisted of multiple notes with variable interest rates of prime plus 1.75% and 2.00% and LIBOR plus 1.70%, 2.00%, 2.25%, 2.50% and a fixed rate note of 4.25%. See below for further discussion of SunCor debt. | |
| (h) | The weighted-average interest rate was 4.9% at December 31, 2009 and 6.2% at December 31, 2008. |
Debt Issuances
Unsecured Senior Notes
On February 26, 2009, APS issued $500 million of 8.75% unsecured senior notes that mature on
March 1, 2019. Net proceeds from the sale of the notes were used to repay short-term borrowings
under two committed revolving lines of credit incurred to fund capital expenditures and for general
corporate purposes.
Pollution Control Bonds
During 2009, APS refinanced approximately $343 million of its $656 million pollution control
bonds. As a result of these refinancings, which are described in the following table, APS no
longer has any outstanding debt securities in auction rate mode. Each series of bonds, described
below, is payable solely from revenues obtained from APS pursuant to a loan agreement between APS
and the respective pollution control corporation. The interest rates on these bonds are fixed
through the applicable interest reset dates as presented in the table below. At the interest reset
dates, we will be required to purchase the bonds and will have the opportunity to remarket
the bonds in daily, weekly, monthly or other interest rate modes at that time. These bonds are classified as
long-term debt on our Consolidated Balance Sheets at December 31, 2009.
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| Navajo County, AZ | Coconino County, AZ | Maricopa County, AZ | ||||
| Pollution Control | Pollution Control | Pollution Control | ||||
| Issuer | Corporation (1) | Corporation (2) | Corporation (3) | |||
|
|
||||||
|
Issuance Date
|
May 28, 2009 | May 28, 2009 | June 26, 2009 | |||
|
|
||||||
|
Due Date
|
June 1, 2034 | June 1, 2034 | May 1, 2029 | |||
|
|
||||||
|
Bond series details
|
Series A – 5.00% | Series A – 5.50% | Series A – 6.00% | |||
|
(series, fixed
|
$38 million | $13 million | $36 million | |||
|
interest rate,
|
June 1, 2012 | June 1, 2014 | May 1, 2014 | |||
|
amount, reset date)
|
||||||
|
|
||||||
|
|
Series B – 5.50% | Series B – 5.50% | ||||
|
|
$32 million | $32 million | ||||
|
|
June 1, 2014 | May 1, 2012 | ||||
|
|
||||||
|
|
Series C – 5.50% | Series C – 5.75% | ||||
|
|
$32 million | $32 million | ||||
|
|
June 1, 2014 | May 1, 2013 | ||||
|
|
||||||
|
|
Series D – 5.75% | Series D – 6.00% | ||||
|
|
$32 million | $32 million | ||||
|
|
June 1, 2016 | May 1, 2014 | ||||
|
|
||||||
|
|
Series E – 5.75%, | Series E – 6.00% | ||||
|
|
$32 million | $32 million | ||||
|
|
June 1, 2016 | May 1, 2014 | ||||
|
|
||||||
|
Total
|
$166 million | $13 million | $164 million |
| (1) | Issued to redeem all of approximately $166 million of the Navajo County, Arizona Pollution Control Corporation Pollution Control Revenue Refunding Bonds 2004 Series A-E, due 2034. | |
| (2) | Issued to redeem all of approximately $13 million of the Coconino County, Arizona Pollution Control Corporation Pollution Control Revenue Refunding Bonds 2004 Series A, due 2034. | |
| (3) | Issued to redeem all of approximately $164 million of the Maricopa County, Arizona Pollution Control Corporation Pollution Control Revenue Refunding Bonds 2005 Series A-E, due 2029. |
On September 11, 2008, APS purchased all of the approximately $27 million of the Coconino
County, Arizona Pollution Control Corporation (“Coconino”) Pollution Control Revenue Bonds, Series
1996A and Series 1999 due December 2031 and April 2034 and held them as treasury bonds. On
September 22, 2009, Coconino issued approximately $27 million of Coconino Pollution Control Revenue
Refunding Bonds, 2009 Series B due April 2038 to redeem the existing bonds. APS used the funds
received from the issuance to repay certain existing indebtedness under a revolving line of credit
drawn upon by APS to fund its purchase of the 1996A and 1999 Series Bonds in 2008. The 2009 Series
B Bonds are payable solely from revenues obtained from APS pursuant to a loan agreement
between APS and Coconino. According to the indenture of the bonds, the interest rate of the 2009
Series B Bonds could be reset daily, weekly, monthly, or at other time intervals. The initial rate
period selected for the 2009 Series B Bonds is a daily rate period. At December 31, 2009, the daily
interest rate was 0.26%. The daily rates are variable rates set by a remarketing agent.
Concurrently with the issuance of the 2009 Series B Bonds, the Company entered into a two year
letter of credit and reimbursement agreement to provide credit support for the 2009 Series B Bonds.
These bonds are classified as long-term debt on our Consolidated Balance Sheets at December 31,
2009.
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Approximately $196 million of pollution control bonds were classified as current maturities of
long-term debt at December 31, 2009. Currently, interest rates on these bonds are set daily by a
remarketing agent. Additionally, the bonds are backed by letters of credit that expire in 2010, at
which time the letters of credit will have to be replaced, renewed or extended, or the bonds will
have to be remarketed in a different interest rate mode. The bond holders will have to surrender
the bonds back to APS if APS decides to remarket them in a different interest rate mode.
The interest rate on the remaining $90 million of pollution control bonds with senior notes
is fixed for life, and the bonds are also backed by insurance. The bonds are classified as
long-term debt on our Consolidated Balance Sheets at December 31, 2009.
Debt Provisions
Pinnacle West’s and APS’ debt covenants related to their respective bank financing
arrangements include debt to capitalization ratios. Certain of APS’ bank financing arrangements
also include an interest coverage test. Pinnacle West and APS comply with these covenants and each
anticipates it will continue to meet these and other significant covenant requirements. For both
Pinnacle West and APS, these covenants require that the ratio of consolidated debt to total
consolidated capitalization not exceed 65%. At December 31, 2009, the ratio was approximately 52%
for Pinnacle West and 48% for APS. The provisions regarding interest coverage require minimum cash
coverage of two times the interest requirements for APS. The interest coverage was approximately
4.6 times under APS’ bank financing agreements as of December 31, 2009. Failure to comply with such
covenant levels would result in an event of default which, generally speaking, would require the
immediate repayment of the debt subject to the covenants and could cross-default other debt. See
further discussion of “cross-default” provisions below.
Neither Pinnacle West’s nor APS’ financing agreements contain “rating triggers” that would
result in an acceleration of the required interest and principal payments in the event of a rating
downgrade. However, our bank financing agreements contain a pricing grid in which the interest
costs we pay are determined by our current credit ratings.
All of Pinnacle West’s loan agreements contain “cross-default” provisions that would result in
defaults and the potential acceleration of payment under these loan agreements if Pinnacle West or
APS were to default under certain other material agreements. All of APS’ bank agreements contain
cross default provisions that would result in defaults and the potential acceleration of payment
under these bank agreements if APS were to default under certain other material agreements.
Pinnacle West and APS do not have a material adverse change restriction for revolver borrowings.
An existing ACC order requires APS to maintain a common equity ratio of at least 40%. As
defined in the ACC order, the common equity ratio is common equity divided by the sum of common
equity and long-term debt, including current maturities of long-term debt. At December 31, 2009,
APS common equity ratio, as defined, was 50%. Its total common equity was approximately $3.4
billion, and total capitalization was approximately $6.8 billion. APS would be prohibited from
paying dividends if the payment would reduce its common equity below approximately $2.7 billion,
assuming APS’ total capitalization remains the same. This restriction does not materially affect
Pinnacle West’s ability to meet its ongoing capital requirements.
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SunCor
— SunCor's principal loan facility,
the SunCor Secured Revolver, is secured primarily by an interest in land, commercial properties, land contracts and homes under construction.
At December 31, 2009, SunCor had borrowings of approximately $57 million under the Secured Revolver. The revolver matured on January 30, 2010.
SunCor and the agent bank for the Secured Revolver are discussing an extension of the maturity date to allow time for SunCor to continue
discussions concerning the potential sale of additional properties. In addition to the Secured Revolver, at December 31, 2009, SunCor had
approximately $43 million of outstanding debt under other credit facilities ($9 million of which has matured since December 31, 2009 and remains
outstanding). SunCor intends to apply the proceeds of planned asset sales (see Note 23) to the
repayment of its outstanding debt.
Real estate impairment charges recorded throughout 2009
(see Note 23) resulted in violations of certain covenants contained in the SunCor Secured
Revolver and SunCor's other credit facilities. The lenders have taken no enforcement action
related to the covenant defaults.
If SunCor is unable to
obtain an extension or renewal of the Secured Revolver or its other matured debt, or if it is
unable to comply with the mandatory repayment and other provisions of any new or modified credit
agreements, SunCor could be required to immediately repay its outstanding indebtedness under all
of its credit facilities as a result of cross-default provisions. Such an immediate repayment
obligation would have a material adverse impact on SunCor's business and financial position and
impair its ongoing viability.
SunCor cannot predict
the outcome of negotiations with its lenders or its ability to sell assets for sufficient proceeds
to repay its outstanding debt. SunCor's ability to generate sufficient cash from operations while
it pursues lender negotiations and further asset sales is uncertain.
Neither Pinnacle West
nor any of its other subsidiaries has guaranteed any SunCor indebtedness. A SunCor debt default
would not result in a cross-default of any of the debt of Pinnacle West or any of its other
subsidiaries. While there can be no assurances as to the ultimate outcome of this matter,
Pinnacle West does not believe that SunCor's inability to obtain waivers or similar relief from
SunCor's lenders would have a material adverse impact on Pinnacle West's cash flows or liquidity.
As of December 31,
2009, SunCor could not transfer any cash dividends to Pinnacle West as a result of the covenants
mentioned above. The restriction does not materially affect Pinnacle West's ability to meet its
ongoing capital requirements.
The following table shows principal payments due on Pinnacle West’s and APS’ total long-term
debt and capitalized lease requirements (dollars in millions):
| Pinnacle West- | ||||||||
| Year | Consolidated | APS | ||||||
|
2010
|
$ | 278 | $ | 197 | ||||
|
2011
|
616 | 428 | ||||||
|
2012
|
446 | 446 | ||||||
|
2013
|
33 | 32 | ||||||
|
2014
|
477 | 477 | ||||||
|
Thereafter
|
1,805 | 1,805 | ||||||
|
|
||||||||
|
Total
|
$ | 3,655 | $ | 3,385 | ||||
|
|
||||||||
112
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Common Stock and Treasury Stock
Our common stock and treasury stock activity during each of the three years 2009, 2008 and
2007 is as follows (dollars in thousands):
| Common Stock | Treasury Stock | |||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||
|
Balance at December 31, 2006
|
99,961,066 | $ | 2,114,550 | (2,419 | ) | $ | (449 | ) | ||||||||
|
Common stock issuance
|
564,404 | 24,089 | — | — | ||||||||||||
|
Purchase of treasury stock (a)
|
— | — | (47,218 | ) | (1,964 | ) | ||||||||||
|
Reissuance of treasury stock
for stock compensation
|
— | — | 10,132 | 359 | ||||||||||||
|
Other
|
— | (2,852 | ) | — | — | |||||||||||
|
|
||||||||||||||||
|
Balance at December 31, 2007
|
100,525,470 | 2,135,787 | (39,505 | ) | (2,054 | ) | ||||||||||
|
|
||||||||||||||||
|
Common stock issuance
|
422,966 | 10,845 | — | — | ||||||||||||
|
Purchase of treasury stock (a)
|
— | — | (39,022 | ) | (1,387 | ) | ||||||||||
|
Reissuance of treasury stock
for stock compensation
|
— | — | 18,700 | 587 | ||||||||||||
|
Other
|
— | 4,691 | — | — | ||||||||||||
|
|
||||||||||||||||
|
Balance at December 31, 2008
|
100,948,436 | 2,151,323 | (59,827 | ) | (2,854 | ) | ||||||||||
|
|
||||||||||||||||
|
Common stock issuance
|
579,501 | 10,620 | — | — | ||||||||||||
|
Purchase of treasury stock (a)
|
— | — | (66,173 | ) | (2,156 | ) | ||||||||||
|
Reissuance of treasury stock
for stock compensation
|
— | — | 32,761 | 1,198 | ||||||||||||
|
Other
|
— | (8,648 | ) | — | — | |||||||||||
|
|
||||||||||||||||
|
Balance at December 31, 2009
|
101,527,937 | $ | 2,153,295 | (93,239 | ) | $ | (3,812 | ) | ||||||||
|
|
||||||||||||||||
| (a) | Represents shares of common stock withheld from certain stock awards for tax purposes. |
8. Retirement Plans and Other Benefits
Pinnacle West sponsors a qualified defined benefit and account balance pension plan and a
non-qualified supplemental excess benefit retirement plan for the employees of Pinnacle West and
its subsidiaries. All new employees participate in the account balance plan. Defined benefit
plans specify the amount of benefits a plan participant is to receive using information about the
participant. The pension plan covers nearly all employees. The supplemental excess benefit
retirement plan covers officers of the Company and highly compensated employees designated for
participation by the Board of Directors. Our employees do not contribute to the plans. Generally,
we calculate the benefits based on age, years of service and pay.
We also sponsor other postretirement benefits for the employees of Pinnacle West and our
subsidiaries. We provide medical and life insurance benefits to retired employees. Employees must
retire to become eligible for these retirement benefits, which are based on years of service and
age. For the medical insurance plans, retirees make contributions to cover a portion of the plan
costs. For the life insurance plan, retirees do not make contributions. We retain the right to
change or eliminate these benefits.
113
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pinnacle West uses a December 31 measurement date each year for its pension and other
postretirement benefit plans. The market-related value of our plan assets is their fair value at
the measurement date. See Note 14 for discussion of how fair values are determined. Due to
subjective and complex judgments, which may be required in determining fair values, actual results could
differ from the results estimated through the application of these methods.
A significant portion of the changes in the actuarial gains and losses of our pension and
postretirement plans is attributable to APS and therefore is recoverable in rates. Accordingly,
these changes are recorded as a regulatory asset. In its 2009 retail rate case settlement, APS
received approval to defer a portion of pension and other postretirement benefit cost increases
incurred in 2011 and 2012.
The following table provides details of the plans’ net periodic benefit costs and the portion
of these costs charged to expense (including administrative costs and excluding amounts capitalized
as overhead construction or billed to electric plant participants) (dollars in thousands):
| Pension | Other Benefits | |||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||
|
Service cost-benefits
earned during the
period
|
$ | 54,288 | $ | 54,576 | $ | 51,803 | $ | 18,285 | $ | 17,793 | $ | 18,491 | ||||||||||||
|
Interest cost on
benefit obligation
|
118,282 | 110,207 | 100,736 | 39,180 | 37,897 | 35,284 | ||||||||||||||||||
|
Expected return on
plan assets
|
(116,535 | ) | (118,309 | ) | (107,165 | ) | (34,428 | ) | (43,609 | ) | (42,177 | ) | ||||||||||||
|
Amortization of:
|
||||||||||||||||||||||||
|
Transition obligation
|
— | — | — | 3,005 | 3,005 | 3,005 | ||||||||||||||||||
|
Prior service cost
(credit)
|
2,080 | 2,455 | 2,957 | (125 | ) | (125 | ) | (125 | ) | |||||||||||||||
|
Net actuarial loss
|
14,216 | 11,145 | 16,331 | 10,320 | 2,372 | 3,929 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net periodic benefit
cost
|
$ | 72,331 | $ | 60,074 | $ | 64,662 | $ | 36,237 | $ | 17,333 | $ | 18,407 | ||||||||||||
|
|
||||||||||||||||||||||||
|
Portion of cost
charged to expense
|
$ | 36,484 | $ | 28,854 | $ | 28,063 | $ | 18,278 | $ | 8,325 | $ | 7,989 | ||||||||||||
|
|
||||||||||||||||||||||||
|
APS share of cost
charged to expense
|
$ | 34,850 | $ | 27,491 | $ | 26,548 | $ | 17,459 | $ | 7,932 | $ | 7,557 | ||||||||||||
|
|
||||||||||||||||||||||||
114
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the plans’ changes in the benefit obligations and funded status for
the years 2009 and 2008 (dollars in thousands):
| Pension | Other Benefits | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
|
Change in Benefit Obligation
|
||||||||||||||||
|
Benefit obligation at January 1
|
$ | 1,884,656 | $ | 1,720,844 | $ | 655,265 | $ | 605,125 | ||||||||
|
Service cost
|
54,288 | 54,576 | 18,285 | 17,793 | ||||||||||||
|
Interest cost
|
118,282 | 110,207 | 39,180 | 37,897 | ||||||||||||
|
Benefit payments
|
(77,577 | ) | (62,058 | ) | (18,959 | ) | (17,566 | ) | ||||||||
|
Actuarial loss
|
94,482 | 61,087 | 6,764 | 12,016 | ||||||||||||
|
|
||||||||||||||||
|
Benefit obligation at December 31
|
2,074,131 | 1,884,656 | 700,535 | 655,265 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Change in Plan Assets
|
||||||||||||||||
|
Fair value of plan assets at
January 1
|
1,430,372 | 1,318,939 | 429,306 | 499,764 | ||||||||||||
|
Actual return on plan assets
|
96,511 | 132,449 | 61,101 | (64,364 | ) | |||||||||||
|
Employer contributions
|
— | 35,000 | 15,506 | 10,972 | ||||||||||||
|
Benefit payments
|
(65,075 | ) | (56,016 | ) | (15,458 | ) | (17,066 | ) | ||||||||
|
|
||||||||||||||||
|
Fair value of plan assets at
December 31
|
1,461,808 | 1,430,372 | 490,455 | 429,306 | ||||||||||||
|
|
||||||||||||||||
|
Funded Status at December 31
|
$ | (612,323 | ) | $ | (454,284 | ) | $ | (210,080 | ) | $ | (225,959 | ) | ||||
|
|
||||||||||||||||
The following table shows the projected benefit obligation and the accumulated benefit
obligation for the pension plan in excess of plan assets as of December 31, 2009 and 2008 (dollars
in thousands):
| 2009 | 2008 | |||||||
|
Projected benefit obligation
|
$ | 2,074,131 | $ | 1,884,656 | ||||
|
Accumulated benefit obligation
|
1,824,661 | 1,631,909 | ||||||
|
Fair value of plan assets
|
1,461,808 | 1,430,372 | ||||||
The following table shows the amounts recognized on the Consolidated Balance Sheets as of
December 31, 2009 and 2008 (dollars in thousands):
| Pension | Other Benefits | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
|
Current asset
|
$ | — | $ | — | $ | — | $ | 1,221 | ||||||||
|
Current liability
|
(11,065 | ) | (5,676 | ) | — | — | ||||||||||
|
Noncurrent liability
|
(601,258 | ) | (448,608 | ) | (210,080 | ) | (227,180 | ) | ||||||||
|
|
||||||||||||||||
|
Net amount recognized
|
$ | (612,323 | ) | $ | (454,284 | ) | $ | (210,080 | ) | $ | (225,959 | ) | ||||
|
|
||||||||||||||||
115
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the details related to accumulated other comprehensive loss as of
December 31, 2009 and 2008 (dollars in thousands):
| Pension | Other Benefits | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
|
Net actuarial loss
|
$ | 404,619 | $ | 304,335 | $ | 194,301 | $ | 224,624 | ||||||||
|
Prior service cost (credit)
|
7,865 | 9,946 | (794 | ) | (920 | ) | ||||||||||
|
Transition obligation
|
— | — | 9,015 | 12,019 | ||||||||||||
|
APS’ portion recorded as a regulatory
asset
|
(336,728 | ) | (245,235 | ) | (195,389 | ) | (227,490 | ) | ||||||||
|
Income tax benefit
|
(29,902 | ) | (27,239 | ) | (2,095 | ) | (2,493 | ) | ||||||||
|
|
||||||||||||||||
|
Accumulated other comprehensive loss
|
$ | 45,854 | $ | 41,807 | $ | 5,038 | $ | 5,740 | ||||||||
|
|
||||||||||||||||
The following table shows the estimated amounts that will be amortized from accumulated other
comprehensive loss and regulatory assets into net periodic benefit cost in 2010 (dollars in
thousands):
| Other | ||||||||
| Pension | Benefits | |||||||
|
Net actuarial loss
|
$ | 18,557 | $ | 9,398 | ||||
|
Prior service cost (credit)
|
1,840 | (125 | ) | |||||
|
Transition obligation
|
— | 3,004 | ||||||
|
|
||||||||
|
Total amounts estimated to be
amortized from accumulated
other comprehensive income and
regulatory assets in 2010
|
$ | 20,397 | $ | 12,277 | ||||
|
|
||||||||
The following table shows the weighted-average assumptions used for both the pension and other
benefits to determine benefit obligations and net periodic benefit costs:
| Benefit Obligations | Benefit Costs | |||||||||||||||||||
| As of December 31, | For the Years Ended December 31, | |||||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | 2007 | ||||||||||||||||
|
Discount rate-pension
|
5.90 | % | 6.11 | % | 6.11 | % | 6.25 | % | 5.90 | % | ||||||||||
|
Discount rate-other benefits
|
6.00 | % | 6.13 | % | 6.13 | % | 6.31 | % | 5.93 | % | ||||||||||
|
Rate of compensation
increase
|
4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % | ||||||||||
|
Expected long-term return
on plan assets
|
N/A | N/A | 8.25 | % | 9.00 | % | 9.00 | % | ||||||||||||
|
Initial health care cost trend
rate
|
8.00 | % | 8.00 | % | 8.00 | % | 8.00 | % | 8.00 | % | ||||||||||
|
Ultimate health care cost
trend rate
|
5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | ||||||||||
|
Number of years to ultimate
trend rate
|
4 | 4 | 4 | 4 | 4 | |||||||||||||||
116
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In selecting the pretax expected long-term rate of return on plan assets we consider past
performance and economic forecasts for the types of investments held by the plan. For the year
2010, we are assuming an 8.25% long-term rate of return on plan assets, which we believe is
reasonable given our asset allocation in relation to historical and expected performance.
Assumed health care cost trend rates have a significant effect on the amounts reported for the
health care plans. In selecting our health care trend rate, we consider past performance and
forecasts of health care costs. A one percentage point change in the assumed initial and ultimate
health care cost trend rates would have the following effects (dollars in millions):
| 1% Increase | 1% Decrease | |||||||
|
Effect on other postretirement
benefits expense, after
consideration of amounts
capitalized or billed to
electric plant participants
|
$ | 8 | $ | (7 | ) | |||
|
Effect on service and interest
cost components of net periodic
other postretirement benefit
costs
|
11 | (9 | ) | |||||
|
Effect on the accumulated other
postretirement benefit
obligation
|
110 | (89 | ) | |||||
Plan Assets
The Board of Directors has delegated oversight of the Plans’ assets to an Investment
Management Committee, which has adopted an investment policy. The investment policy’s overall
strategy is to achieve an adequate level of trust assets relative to the benefit obligation. To
achieve this objective, the Plans’ investment policies provide for a mix of investments in
long-term fixed income assets and return-generating assets. Long-term fixed income assets are
designed to offset changes in benefit obligations due to changes in discount rates and inflation.
Return-generating assets are intended to provide a reasonable long-term rate of investment return
with a prudent level of volatility. The determination of total allocation between
return-generating and long-term fixed income assets is reviewed on at least an annual basis. Other
investment strategies include the prohibition of investments in Pinnacle West securities and the
external management of the Plans’ assets.
Long-term fixed income assets consist primarily of fixed income debt securities issued by the
U.S. Treasury, other government agencies, and corporations. Long-term fixed income assets may also
include interest rate swaps, U.S. Treasury futures and other instruments. The investment policy
does not provide for a specific mix of long-term fixed income assets, but does require the average
credit rating of such assets to be considered upper medium grade or above. The 2009 year-end
long-term fixed income asset strategy focused on investments in corporate bonds of primarily
investment-grade U.S. issuers, with total long-term fixed income assets representing 45% of total
pension plan assets and 40% of other benefit plans assets.
Return-generating assets in the pension plan and other benefit plans target a mix of
approximately 64% U.S. equities, 27% international equities, and 9% alternative investments. The
2009 year-end U.S. equity holdings were invested primarily in large-cap companies in diverse
industries. International equities include investments in emerging and developing markets.
Return-generating assets also include investments in securities through commingled funds in common
and collective trusts. Alternative investments primarily include investments in real estate. The
2009 year-end return-generating assets represented 55% of total pension plan assets and 60% of other
benefit plans assets.
117
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
See Note 14 for a discussion on the fair value hierarchy and how fair value methodologies are
applied. The fair value of Pinnacle West’s pension plan and other postretirement benefit plan
assets at December 31, 2009, by asset category, are as follows (dollars in thousands):
| Quoted | ||||||||||||||||||||
| Prices | ||||||||||||||||||||
| in Active | Significant | |||||||||||||||||||
| Markets for | Other | Significant | ||||||||||||||||||
| Identical | Observable | Unobservable | Balance at | |||||||||||||||||
| Assets | Inputs | Inputs | Netting and | December 31, | ||||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Other (a) | 2009 | ||||||||||||||||
|
Pension Plan:
|
||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 519 | $ | — | $ | — | $ | — | $ | 519 | ||||||||||
|
Corporate debt securities
|
— | 590,343 | — | — | 590,343 | |||||||||||||||
|
Other debt securities (b)
|
— | 66,281 | — | — | 66,281 | |||||||||||||||
|
Interest rate swaps
|
— | 20,512 | — | (20,103 | ) | 409 | ||||||||||||||
|
Equities — U.S. Companies
|
341,318 | — | — | — | 341,318 | |||||||||||||||
|
Equities — International Companies
|
83,492 | — | — | — | 83,492 | |||||||||||||||
|
Other investments
|
— | 6,747 | — | 10,177 | 16,924 | |||||||||||||||
|
Common and collective trusts:
|
||||||||||||||||||||
|
U.S. Equities
|
— | 144,016 | — | — | 144,016 | |||||||||||||||
|
International Equities
|
— | 132,168 | — | — | 132,168 | |||||||||||||||
|
Real estate
|
— | — | 64,212 | — | 64,212 | |||||||||||||||
|
Short-term investments
|
— | 22,126 | — | — | 22,126 | |||||||||||||||
|
|
||||||||||||||||||||
|
Liabilities:
|
||||||||||||||||||||
|
Interest rate swaps
|
— | (20,103 | ) | — | 20,103 | — | ||||||||||||||
|
|
||||||||||||||||||||
|
Total Pension Plan
|
$ | 425,329 | $ | 962,090 | $ | 64,212 | $ | 10,177 | $ | 1,461,808 | ||||||||||
|
|
||||||||||||||||||||
|
Other Benefits:
|
||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 156 | $ | — | $ | — | $ | — | $ | 156 | ||||||||||
|
Corporate debt securities
|
— | 173,895 | — | — | 173,895 | |||||||||||||||
|
Other debt securities (b)
|
— | 20,280 | — | — | 20,280 | |||||||||||||||
|
Interest rate swaps
|
— | 2,091 | — | (2,049 | ) | 42 | ||||||||||||||
|
Equities — U.S. Companies
|
170,293 | — | — | — | 170,293 | |||||||||||||||
|
Equities — International Companies
|
9,721 | — | — | — | 9,721 | |||||||||||||||
|
Other investments
|
— | 383 | — | (785 | ) | (402 | ) | |||||||||||||
|
Common and collective trusts:
|
||||||||||||||||||||
|
U.S. Equities
|
— | 49,363 | — | — | 49,363 | |||||||||||||||
|
International Equities
|
— | 52,670 | — | — | 52,670 | |||||||||||||||
|
Real Estate
|
— | — | 6,504 | — | 6,504 | |||||||||||||||
|
Short-term investments
|
— | 7,933 | — | — | 7,933 | |||||||||||||||
|
|
||||||||||||||||||||
|
Liabilities:
|
||||||||||||||||||||
|
Interest rate swaps
|
— | (2,049 | ) | — | 2,049 | — | ||||||||||||||
|
|
||||||||||||||||||||
|
Total Other Benefits
|
$ | 180,170 | $ | 304,566 | $ | 6,504 | $ | (785 | ) | $ | 490,455 | |||||||||
|
|
||||||||||||||||||||
| (a) | Represents netting under master netting arrangements and Plan receivables and payables. | |
| (b) | This category consists primarily of municipality issued debt securities, but also includes U.S. Treasuries and asset-backed securities such as collaterized mortgage obligations. |
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The following table shows the changes in fair value for assets that are measured at fair value
on a recurring basis using significant unobservable inputs (Level 3) for the year ended December
31, 2009 (dollars in thousands):
| Other | ||||||||
| Common and Collective Trusts - Real Estate | Pension | Benefits | ||||||
|
|
||||||||
|
Beginning balance at January 1, 2009
|
$ | 88,379 | $ | 8,951 | ||||
|
Actual return on assets still held at
December 31, 2009
|
(29,590 | ) | (2,991 | ) | ||||
|
Actual return on assets sold during the period
|
58 | 6 | ||||||
|
Purchases, sales, and settlements
|
5,365 | 538 | ||||||
|
Transfers in and/or out of Level 3
|
— | — | ||||||
|
|
||||||||
|
Ending balance at December 31, 2009
|
$ | 64,212 | $ | 6,504 | ||||
|
|
||||||||
Contributions
The required minimum contribution to our pension plan is zero in 2010 and approximately $100
million in 2011. In January 2010, we made a voluntary contribution of approximately $50 million to
our pension plan and we expect to make an additional voluntary contribution of $50 million later in
2010. The contribution to our other postretirement benefit plans in 2010 is estimated to be
approximately $15 million. APS and other subsidiaries fund their share of the contributions. APS’
share is approximately 97% of both plans.
Estimated Future Benefit Payments
Benefit payments, which reflect estimated future employee service, for the next five years and
the succeeding five years thereafter are estimated to be as follows (dollars in thousands):
| Year | Pension | Other Benefits (a) | ||||||
|
2010
|
$ | 85,354 | $ | 21,471 | ||||
|
2011
|
92,897 | 23,840 | ||||||
|
2012
|
104,313 | 26,271 | ||||||
|
2013
|
114,891 | 29,135 | ||||||
|
2014
|
122,120 | 31,977 | ||||||
|
Years 2015-2019
|
778,392 | 203,957 | ||||||
| (a) | The expected future other benefit payments take into account the Medicare Part D subsidy. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee Savings Plan Benefits
Pinnacle West sponsors a defined contribution savings plan for eligible employees of Pinnacle
West and its subsidiaries. In 2009, costs related to APS’ employees represented 97% of the total
cost of this plan. In a defined contribution savings plan, the benefits a participant receives
result from regular contributions participants make to their own individual account, the Company’s
matching contributions and earnings or losses on their investments. Under this plan, the Company
matches a percentage of the participants’ contributions in cash which is then invested in the same
investment mix as participants elect to invest their own future contributions. Pinnacle West
recorded expenses for this plan of approximately $9 million for 2009, $8 million for 2008 and $7
million for 2007.
9. Leases
In 1986, APS sold about 42% of its share of Palo Verde Unit 2 and certain common facilities in
three separate sale leaseback transactions. APS accounts for these leases as operating leases.
The gain resulting from the transaction of approximately $140 million was deferred and is being
amortized to operations and maintenance expense over 29.5 years, the original term of the leases.
There are options to renew the leases or to purchase the property for fair market value at the end
of the lease terms. APS must give notice to the respective lessors between December 31, 2010 and
December 31, 2012 if it wishes to exercise, or not exercise, either of these options. We are
analyzing these options. Rent expense is calculated on a straight-line basis. See Note 20 for a
discussion of VIEs, including the VIE’s involved in the Palo Verde sale leaseback transactions.
In addition, we lease certain vehicles, land, buildings, equipment and miscellaneous other
items through operating rental agreements with varying terms, provisions and expiration dates.
Total lease expense recognized in the Consolidated Statements of Income was $73 million in
2009, $74 million in 2008 and $73 million in 2007. APS’ lease expense was $64 million in 2009, $67
million in 2008 and $66 million in 2007.
The amounts to be paid for the Palo Verde Unit 2 leases are approximately $49 million per year
for the years 2010 to 2015.
Estimated future minimum lease payments for Pinnacle West’s and APS’ operating leases,
excluding purchase power agreements, are approximately as follows (dollars in millions):
| Pinnacle West | ||||||||
| Year | Consolidated | APS | ||||||
|
2010
|
$ | 77 | $ | 70 | ||||
|
2011
|
73 | 67 | ||||||
|
2012
|
68 | 64 | ||||||
|
2013
|
64 | 61 | ||||||
|
2014
|
62 | 59 | ||||||
|
Thereafter
|
73 | 63 | ||||||
|
|
||||||||
|
Total future lease commitments
|
$ | 417 | $ | 384 | ||||
|
|
||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Jointly-Owned Facilities
APS shares ownership of some of its generating and transmission facilities with other
companies. Our share of operations and maintenance expense and utility plant costs related to
these facilities is accounted for using proportional consolidation. The following table shows APS’
interests in those jointly-owned facilities recorded on the Consolidated Balance Sheets at December
31, 2009 (dollars in thousands):
| Construction | ||||||||||||||||
| Percent | Plant in | Accumulated | Work in | |||||||||||||
| Owned | Service | Depreciation | Progress | |||||||||||||
|
Generating facilities:
|
||||||||||||||||
|
Palo Verde Units 1 and 3
|
29.1 | % | $ | 2,013,822 | $ | 1,080,219 | $ | 61,469 | ||||||||
|
Palo Verde Unit 2 (see Note 9)
|
17.0 | % | 700,228 | 319,016 | 20,666 | |||||||||||
|
Four Corners Units 4 and 5
|
15.0 | % | 167,684 | 106,306 | 7,572 | |||||||||||
|
Navajo Generating Station
Units 1, 2 and 3
|
14.0 | % | 260,248 | 156,400 | 7,855 | |||||||||||
|
Cholla common facilities (a)
|
63.2 | %(b) | 138,301 | 45,878 | 1,655 | |||||||||||
|
Transmission facilities:
|
||||||||||||||||
|
ANPP 500KV System
|
35.8 | %(b) | 85,321 | 25,927 | 2,531 | |||||||||||
|
Navajo Southern System
|
31.4 | %(b) | 47,337 | 13,373 | 269 | |||||||||||
|
Palo Verde — Yuma 500KV
System
|
23.9 | %(b) | 9,408 | 4,027 | 518 | |||||||||||
|
Four Corners Switchyards
|
27.5 | %(b) | 4,361 | 1,405 | — | |||||||||||
|
Phoenix — Mead System
|
17.1 | %(b) | 39,015 | 6,463 | 220 | |||||||||||
|
Palo Verde — Estrella 500KV
System
|
55.5 | %(b) | 78,078 | 6,168 | — | |||||||||||
|
North Valley System
|
65.0 | %(b) | — | — | 80,663 | |||||||||||
|
Round Valley System
|
50.0 | %(b) | — | — | 14 | |||||||||||
| (a) | PacifiCorp owns Cholla Unit 4 and APS operates the unit for PacifiCorp. The common facilities at Cholla are jointly-owned. | |
| (b) | Weighted average of interests. |
11. Commitments and Contingencies
Palo Verde Nuclear Generating Station
Spent Nuclear Fuel and Waste Disposal
Nuclear power plant operators are required to enter into spent fuel disposal contracts
with the DOE, and the DOE is required to accept and dispose of all spent nuclear fuel and other
high-level radioactive wastes generated by domestic power reactors. Although the Nuclear Waste
Policy Act required the DOE to develop a permanent repository for the storage and disposal of spent
nuclear fuel by 1998, the DOE has announced that the repository cannot be completed before at least
2017. In November 1997, the United States Court of Appeals for the District of Columbia Circuit
(D.C. Circuit) issued a decision preventing the DOE from excusing its own delay, but refused to
order the DOE to begin accepting spent nuclear fuel. Based on
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
this decision and the DOE’s delay, a
number of utilities, including APS (on behalf of itself and the other Palo Verde owners), filed damages actions against
the DOE in the Court of Federal Claims. APS is currently pursuing that damages claim. In August
2008, the United States Court of Appeals for the Federal Circuit issued decisions in three damages
actions brought by other nuclear utilities that resulted in APS revising its damages claim prior to
trial. The trial in the APS matter began on January 28, 2009, and closing arguments were heard in
late May 2009. The court has not indicated when it will reach its decision in the matter. In
January 2010, on appeal of another utility’s damages case in which the DOE successfully raised the
unavoidable delays defense, the Court of Appeals for the Federal Circuit reversed the lower court’s
decision and concluded that the Court of Federal Claims, the court handling the APS matter, is
bound by the November 1997 D.C. Circuit decision that prevents the DOE from excusing its delay in
performance.
APS currently estimates it will incur $132 million (in 2009 dollars) over the current life of
Palo Verde for its share of the costs related to the on-site interim storage of spent nuclear fuel.
At December 31, 2009, APS had a regulatory liability of $34 million that represents amounts
recovered in retail rates in excess of amounts spent for on-site interim spent fuel storage.
Nuclear Insurance
The Palo Verde participants are insured against public liability for a nuclear incident up to
$12.6 billion per occurrence. As required by the Price Anderson Nuclear Industries Indemnity Act,
Palo Verde maintains the maximum available nuclear liability insurance in the amount of $375
million, which is provided by commercial insurance carriers. The remaining balance of $12.2
billion is provided through a mandatory industry wide retrospective assessment program. If losses
at any nuclear power plant covered by the program exceed the accumulated funds, APS could be
assessed retrospective premium adjustments. The maximum assessment per reactor under the program
for each nuclear incident is approximately $118 million, subject to an annual limit of $18 million
per incident, to be periodically adjusted for inflation. Based on APS’ interest in the three Palo
Verde units, APS’ maximum potential assessment per incident for all three units is approximately
$103 million, with an annual payment limitation of approximately $15 million.
The Palo Verde participants maintain “all risk” (including nuclear hazards) insurance for
property damage to, and decontamination of, property at Palo Verde in the aggregate amount of $2.75
billion, a substantial portion of which must first be applied to stabilization and decontamination.
APS has also secured insurance against portions of any increased cost of generation or purchased
power and business interruption resulting from a sudden and unforeseen accidental outage of any of
the three units. The property damage, decontamination, and replacement power coverages are
provided by Nuclear Electric Insurance Limited (“NEIL”). APS is subject to retrospective
assessments under all NEIL policies if NEIL’s losses in any policy year exceed accumulated funds.
The maximum amount APS could incur under the current NEIL policies totals approximately $19 million
for each retrospective assessment declared by NEIL’s Board of Directors due to losses. In
addition, NEIL policies contain rating triggers that would result in APS providing approximately
$52 million of collateral assurance within 20 business days of a rating downgrade to non-investment
grade. The insurance coverage discussed in this and the previous paragraph is subject to certain
policy conditions and exclusions.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fuel and Purchased Power Commitments
Pinnacle West and APS are parties to various fuel and purchased power contracts with terms
expiring between 2010 and 2042 that include required purchase provisions. Pinnacle West and APS
estimate the contract requirements to be approximately $444 million in 2010; $336 million in 2011;
$351 million in 2012; $457 million in 2013; $490 million in 2014; and $6.4 billion thereafter.
However, these amounts may vary significantly pursuant to certain provisions in such contracts that
permit us to decrease required purchases under certain circumstances.
Of the various fuel and purchased power contracts mentioned above, some of those contracts
have take-or-pay provisions. The contracts APS has for its coal supply include take-or-pay
provisions. The current take-or-pay coal contracts have terms that expire in 2024.
The following table summarizes our actual and estimated take-or-pay commitments (dollars in
millions):
| Actual | Estimated (a) | |||||||||||||||||||||||||||||||||||
| 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | ||||||||||||||||||||||||||||
|
Coal take-or-pay
commitments
|
$ | 70 | $ | 81 | $ | 93 | $ | 74 | $ | 79 | $ | 82 | $ | 84 | $ | 86 | $ | 316 | ||||||||||||||||||
| (a) | Total take-or-pay commitments are approximately $721 million. The total net present value of these commitments is approximately $501 million. |
Renewable Energy Credits
APS has entered into contracts to purchase renewable energy credits to comply with
the Renewable Energy Standard. APS estimates the contract requirements to be approximately $48
million in 2010; $15 million in 2011; $15 million in 2012; $15 million in 2013; $15 million in
2014; and $142 million thereafter.
Coal Mine Reclamation Obligations
APS must reimburse certain coal providers for amounts incurred for coal mine reclamation.
APS’ coal mine reclamation obligation was approximately $92 million at December 31, 2009 and $91
million at December 31, 2008.
California Energy Market Issues and Refunds in the Pacific Northwest
In July 2001, the FERC ordered an expedited fact-finding hearing to calculate refunds for spot
market transactions in California during a specified time frame. APS was a seller and a purchaser
in the California markets at issue and, to the extent that refunds are ordered, APS should be a
recipient as well as a payor of such amounts. In addition, on March 19, 2002, the State of
California filed a complaint with the FERC alleging that wholesale sellers of power and energy,
including APS, failed to properly file rate information at the FERC in connection with sales to
California from 2000 to March 2002 under market-based rates. Since 2004, the Ninth Circuit and the
FERC have issued various decisions and orders involving the aforementioned issues, including
decisions related to: entities subject to FERC jurisdiction and, therefore, potentially owing
refunds; applicable refund
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
methodologies; the temporal scope and types of transactions that are
properly subject to the refund orders; and the appropriate standard of review at the FERC on wholesale power contracts in the
refund proceedings. A settlement, resolving APS’ issues with certain California parties for the
current refund period, was approved by the FERC in an order issued on June 30, 2008. The
resolution of the claims related to the parties involved in this settlement had no material adverse
impact on our financial position, results of operations or cash flows. We currently believe the
refund claims at the FERC related to the parties not involved in this settlement will have no
material adverse impact on our financial position, results of operations or cash flows.
On July 25, 2001, the FERC also ordered an evidentiary proceeding to discuss and evaluate
possible refunds for wholesale sales in the Pacific Northwest. The FERC affirmed the
administrative law judge’s conclusion that the prices in the Pacific Northwest were not
unreasonable or unjust and refunds should not be ordered in this proceeding. This decision was
appealed to the U.S. Court of Appeals for the Ninth Circuit. On August 24, 2007, the Ninth Circuit
issued an opinion that remanded the proceeding to the FERC for further consideration. Although the
FERC has not yet determined whether any refunds will ultimately be required, we do not expect that
the resolution of these issues will have a material adverse impact on our financial position,
results of operations or cash flows.
Superfund
Superfund establishes liability for the cleanup of hazardous substances found contaminating
the soil, water or air. Those who generated, transported or disposed of hazardous substances at a
contaminated site are among those who are PRPs. PRPs may be strictly, and often are jointly and
severally, liable for clean-up. On September 3, 2003, the EPA advised APS that the EPA considers
APS to be a PRP in the Motorola 52
nd
Street Superfund Site, Operable Unit 3 (OU3) in
Phoenix, Arizona. APS has facilities that are within this Superfund site. APS and Pinnacle West
have agreed with the EPA to perform certain investigative activities of the APS facilities within
OU3. In addition, on September 23, 2009, APS agreed with the EPA and one other PRP to voluntarily
assist with the funding and management of the site-wide groundwater remedial investigation and
feasibility study work plan. We estimate that our costs related to this investigation and study
will be approximately $1.2 million, which is reserved as a liability on our financial statements.
We anticipate incurring additional expenditures in the future, but because the overall
investigation is not complete and ultimate remediation requirements are not yet finalized, at the
present time we cannot accurately estimate our total expenditures.
Landlord Bankruptcy
On April 16, 2009, the landlord for our corporate headquarters building announced that it is
seeking relief under Chapter 11 of the United States Bankruptcy Code. We currently have several
assets on our books related to our landlord, the most significant of which is an asset related to
levelized rent payments for the building of approximately $66 million. This amount will continue
to increase to approximately $94 million as a result of the lease terms until 2015, when this
amount will begin to decrease over the remaining life of the lease. We are monitoring this matter
and, while there can be no assurances as to the ultimate outcome of the matter due to the
complexity of the bankruptcy proceedings, we currently do not expect that it will have a material
adverse effect on our financial position, results of operations, or cash flows.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Asset Retirement Obligations and Nuclear Decommissioning Trust
APS has asset retirement obligations for its Palo Verde nuclear facilities and certain other
generation, transmission and distribution assets. The Palo Verde asset retirement obligation
primarily relates to final plant decommissioning. This obligation is based on the NRC’s
requirements for disposal of radiated property or plant and agreements APS reached with the ACC for
final decommissioning of the plant. The non-nuclear generation asset retirement obligations
primarily relate to requirements for removing portions of those plants at the end of the plant life
or lease term.
Some of APS’ transmission and distribution assets have asset retirement obligations because
they are subject to right of way and easement agreements that require final removal. These
agreements have a history of uninterrupted renewal that APS expects to continue. As a result, APS
cannot reasonably estimate the fair value of the asset retirement obligation related to such
distribution and transmission assets.
Additionally, APS has aquifer protection permits for some of its generation sites that require
the closure of certain facilities at those sites. The generation sites are strategically located
to serve APS Native Load customers. The asset retirement obligations associated with our
non-regulated assets are immaterial.
The following schedule shows the change in our asset retirement obligations for 2009 and 2008
(dollars in millions):
| 2009 | 2008 | |||||||
|
Asset retirement obligations at the
beginning of year
|
$ | 276 | $ | 282 | ||||
|
Changes attributable to:
|
||||||||
|
Liabilities settled
|
(1 | ) | (2 | ) | ||||
|
Accretion expense
|
20 | 19 | ||||||
|
Estimated cash flow revisions
|
7 | (23 | ) | |||||
|
|
||||||||
|
Asset retirement obligations at the
end of year
|
$ | 302 | $ | 276 | ||||
|
|
||||||||
In accordance with regulatory accounting, APS accrues removal costs for its regulated utility
assets, even if there is no legal obligation for removal. See detail of regulatory liabilities in
Note 1.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
To fund the costs APS expects to incur to decommission Palo Verde, APS established external
decommissioning trusts in accordance with NRC regulations. Third-party investment managers are
authorized to buy and sell securities per their stated investment guidelines. The trust funds are
invested in a tax efficient manner in fixed income securities and domestic equity securities. APS
classifies investments in decommissioning trust funds as available for sale. As a result, we
record the decommissioning trust funds at their fair value on our Consolidated Balance Sheets.
Because of the ability of APS to recover decommissioning costs in rates and in accordance with the
regulatory treatment for decommissioning trust funds, we have recorded the offsetting amount of
gains or losses on investment securities in other regulatory liabilities or assets
.
The following table summarizes the fair value of APS’ nuclear decommissioning trust fund
assets at December 31, 2009 and December 31, 2008 (dollars in millions):
| Total | Total | |||||||||||
| Unrealized | Unrealized | |||||||||||
| Fair Value | Gains | Losses | ||||||||||
|
2009
|
||||||||||||
|
Equity securities
|
$ | 167 | $ | 37 | $ | (6 | ) | |||||
|
Fixed income securities
|
247 | 11 | (1 | ) | ||||||||
|
Net receivables (a)
|
1 | — | — | |||||||||
|
|
||||||||||||
|
Total
|
$ | 415 | $ | 48 | $ | (7 | ) | |||||
|
|
||||||||||||
| (a) | Net receivables relate to pending securities sales and purchases. |
| Total | Total | |||||||||||
| Unrealized | Unrealized | |||||||||||
| Fair Value | Gains | Losses | ||||||||||
|
2008
|
||||||||||||
|
Equity securities
|
$ | 113 | $ | 18 | $ | (18 | ) | |||||
|
Fixed income securities
|
228 | 10 | (5 | ) | ||||||||
|
Net receivables (a)
|
2 | — | — | |||||||||
|
|
||||||||||||
|
Total
|
$ | 343 | $ | 28 | $ | (23 | ) | |||||
|
|
||||||||||||
| (a) | Net receivables relate to pending securities sales and purchases. |
The costs of securities sold are determined on the basis of specific identification. The
following table sets forth approximate gains and losses and proceeds from the sale of securities by
the nuclear decommissioning trust funds (dollars in millions):
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
Realized gains
|
$ | 10 | $ | 7 | $ | 3 | ||||||
|
Realized losses
|
(7 | ) | (8 | ) | (4 | ) | ||||||
|
Proceeds from the sale of
securities (a)
|
441 | 318 | 259 | |||||||||
| (a) | Proceeds are reinvested in the trust. |
The fair value of fixed income securities, summarized by contractual maturities, at December
31, 2009 is as follows (dollars in millions):
| Fair Value | ||||
|
Less than one year
|
$ | 14 | ||
|
1 year - 5 years
|
68 | |||
|
5 years - 10 years
|
64 | |||
|
Greater than 10 years
|
101 | |||
|
|
||||
|
Total
|
$ | 247 | ||
|
|
||||
126
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
See Note 14 for a discussion of Fair Value Measurements.
13. Selected Quarterly Financial Data (Unaudited)
Consolidated quarterly financial information for 2009 and 2008 is as follows (dollars in
thousands, except per share amounts):
| 2009 Quarter Ended | 2009 | |||||||||||||||||||
| March 31, | June 30, | September 30, | December 31, | Total | ||||||||||||||||
|
|
||||||||||||||||||||
|
As originally reported:
|
||||||||||||||||||||
|
Operating revenues
|
$ | 629,393 | $ | 840,055 | $ | 1,143,077 | ||||||||||||||
|
Operations and maintenance
|
207,531 | 226,245 | 208,769 | |||||||||||||||||
|
Operating income (loss)
|
(207,629 | ) | 157,103 | 344,511 | ||||||||||||||||
|
Income taxes
|
(96,174 | ) | 37,600 | 103,061 | ||||||||||||||||
|
Income (loss) from
continuing operations
|
(167,796 | ) | 70,993 | 187,380 | ||||||||||||||||
|
Net income (loss)
attributable to common
shareholders
|
(156,510 | ) | 68,347 | 186,652 | ||||||||||||||||
|
|
||||||||||||||||||||
|
SunCor reclassifications
(see Note 22):
|
||||||||||||||||||||
|
Operating revenues
|
$ | (3,526 | ) | $ | (4,083 | ) | $ | (872 | ) | |||||||||||
|
Operations and maintenance
|
— | — | — | |||||||||||||||||
|
Operating income (loss)
|
2,706 | 4,904 | 886 | |||||||||||||||||
|
Income taxes
|
1,170 | 1,979 | 446 | |||||||||||||||||
|
Income (loss) from
continuing operations
|
1,803 | 3,034 | 685 | |||||||||||||||||
|
Net income (loss)
attributable to common
shareholders
|
— | — | — | |||||||||||||||||
|
|
||||||||||||||||||||
|
After SunCor
reclassifications:
|
||||||||||||||||||||
|
Operating revenues
|
$ | 625,867 | $ | 835,972 | $ | 1,142,205 | $ | 693,057 | $ | 3,297,101 | ||||||||||
|
Operations and maintenance
|
207,531 | 226,245 | 208,769 | 232,812 | 875,357 | |||||||||||||||
|
Operating income (loss)
|
(204,923 | ) | 162,007 | 345,397 | 19,292 | 321,773 | ||||||||||||||
|
Income taxes
|
(95,004 | ) | 39,579 | 103,507 | (10,255 | ) | 37,827 | |||||||||||||
|
Income (loss) from
continuing operations
|
(165,993 | ) | 74,027 | 188,065 | (28,868 | ) | 67,231 | |||||||||||||
|
Net income (loss)
attributable to common
shareholders
|
(156,510 | ) | 68,347 | 186,652 | (30,159 | ) | 68,330 | |||||||||||||
127
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 2008 Quarter Ended | 2008 | |||||||||||||||||||
| March 31, | June 30, | September 30, | December 31, | Total | ||||||||||||||||
|
As originally reported:
|
||||||||||||||||||||
|
Operating revenues
|
$ | 688,256 | $ | 884,513 | $ | 1,070,088 | $ | 686,415 | $ | 3,329,272 | ||||||||||
|
Operations and maintenance
|
193,023 | 193,700 | 211,332 | 209,797 | 807,852 | |||||||||||||||
|
Operating income (loss)
|
36,228 | 176,128 | 275,892 | (17,526 | ) | 470,722 | ||||||||||||||
|
Income taxes
|
(1,541 | ) | 16,025 | 76,592 | (28,373 | ) | 62,703 | |||||||||||||
|
Income (loss) from continuing operations
|
(6,187 | ) | 112,807 | 151,468 | (48,706 | ) | 209,382 | |||||||||||||
|
Net income (loss) attributable to
common shareholders
|
(4,473 | ) | 133,862 | 151,586 | (38,850 | ) | 242,125 | |||||||||||||
|
|
||||||||||||||||||||
|
SunCor reclassifications (see Note 22):
|
||||||||||||||||||||
|
Operating revenues
|
$ | (5,546 | ) | $ | (3,859 | ) | $ | (1,289 | ) | $ | (8,020 | ) | $ | (18,714 | ) | |||||
|
Operations and maintenance
|
— | — | — | — | — | |||||||||||||||
|
Operating income (loss)
|
(918 | ) | (173 | ) | 685 | 34,892 | 34,486 | |||||||||||||
|
Income taxes
|
(234 | ) | 116 | 428 | 13,884 | 14,194 | ||||||||||||||
|
Income (loss) from continuing operations
|
(361 | ) | 179 | 659 | 21,445 | 21,922 | ||||||||||||||
|
Net income (loss) attributable to
common shareholders
|
— | — | — | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
After SunCor reclassifications:
|
||||||||||||||||||||
|
Operating revenues
|
$ | 682,710 | $ | 880,654 | $ | 1,068,799 | $ | 678,395 | $ | 3,310,558 | ||||||||||
|
Operations and maintenance
|
193,023 | 193,700 | 211,332 | 209,797 | 807,852 | |||||||||||||||
|
Operating income
|
35,310 | 175,955 | 276,577 | 17,366 | 505,208 | |||||||||||||||
|
Income taxes
|
(1,775 | ) | 16,141 | 77,020 | (14,489 | ) | 76,897 | |||||||||||||
|
Income (loss) from continuing operations
|
(6,548 | ) | 112,986 | 152,127 | (27,261 | ) | 231,304 | |||||||||||||
|
Net income (loss) attributable to
common shareholders
|
(4,473 | ) | 133,862 | 151,586 | (38,850 | ) | 242,125 | |||||||||||||
Earnings per share:
| 2009 Quarter Ended | ||||||||||||||||
| March 31, | June 30, | September 30, | December 31, | |||||||||||||
|
As originally reported — Basic earnings per
share:
|
||||||||||||||||
|
Income (loss) from continuing operations
|
$ | (1.52 | ) | $ | 0.70 | $ | 1.86 | |||||||||
|
Net income (loss) attributable to
common shareholders
|
(1.55 | ) | 0.68 | 1.84 | ||||||||||||
|
|
||||||||||||||||
|
After SunCor reclassifications — Basic
earnings per share:
|
||||||||||||||||
|
Income (loss) from continuing operations
|
$ | (1.50 | ) | $ | 0.73 | $ | 1.86 | $ | (0.29 | ) | ||||||
|
Net income (loss) attributable to
common shareholders
|
(1.55 | ) | 0.68 | 1.84 | (0.30 | ) | ||||||||||
|
|
||||||||||||||||
|
As originally reported — Diluted earnings
per share:
|
||||||||||||||||
|
Income (loss) from continuing operations
|
$ | (1.52 | ) | $ | 0.70 | $ | 1.85 | |||||||||
|
Net income (loss) attributable to
common shareholders
|
(1.55 | ) | 0.68 | 1.84 | ||||||||||||
|
|
||||||||||||||||
|
After SunCor reclassifications — Diluted
earnings per share:
|
||||||||||||||||
|
Income (loss) from continuing operations
|
$ | (1.50 | ) | $ | 0.74 | $ | 1.86 | $ | (0.29 | ) | ||||||
|
Net income (loss) attributable to
common shareholders
|
(1.55 | ) | 0.68 | 1.84 | (0.30 | ) | ||||||||||
128
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 2008 Quarter Ended | ||||||||||||||||
| March 31, | June 30, | September 30, | December 31, | |||||||||||||
|
As originally reported — Basic earnings per
share:
|
||||||||||||||||
|
Income (loss) from continuing operations
|
$ | (0.06 | ) | $ | 1.12 | $ | 1.50 | $ | (0.48 | ) | ||||||
|
Net income (loss) attributable to
common shareholders
|
(0.04 | ) | 1.33 | 1.50 | (0.39 | ) | ||||||||||
|
|
||||||||||||||||
|
After SunCor reclassifications — Basic
earnings per share:
|
||||||||||||||||
|
Income (loss) from continuing operations
|
$ | (0.07 | ) | $ | 1.12 | $ | 1.50 | $ | (0.27 | ) | ||||||
|
Net income (loss) attributable to
common shareholders
|
(0.04 | ) | 1.33 | 1.50 | (0.39 | ) | ||||||||||
|
|
||||||||||||||||
|
As originally reported — Diluted earnings
per share:
|
||||||||||||||||
|
Income (loss) from continuing operations
|
$ | (0.06 | ) | $ | 1.12 | $ | 1.50 | $ | (0.48 | ) | ||||||
|
Net income (loss) attributable to
common shareholders
|
(0.04 | ) | 1.33 | 1.50 | (0.39 | ) | ||||||||||
|
|
||||||||||||||||
|
After SunCor reclassifications — Diluted
earnings per share:
|
||||||||||||||||
|
Income (loss) from continuing operations
|
$ | (0.07 | ) | $ | 1.12 | $ | 1.50 | $ | (0.27 | ) | ||||||
|
Net income (loss) attributable to
common shareholders
|
(0.04 | ) | 1.33 | 1.50 | (0.39 | ) | ||||||||||
14. Fair Value Measurements
We disclose the fair value of certain assets and liabilities according to a fair value
hierarchy. This hierarchy ranks the quality and reliability of the inputs used to determine fair
values, which are then classified and disclosed in one of three categories. The three levels of
the fair value hierarchy are:
Level 1 — Quoted prices in active markets for identical assets or liabilities. Active
markets are those in which transactions for the asset or liability occur in sufficient
frequency and volume to provide information on an ongoing basis. This category includes
derivative instruments that are exchange-traded such as futures, cash equivalents invested
in exchange-traded money market funds, exchange-traded equities, and nuclear decommissioning
trust investments in Treasury securities.
Level 2 — Quoted prices in active markets for similar assets or liabilities; quoted prices
in markets that are not active; and model-derived valuations whose inputs are observable.
Derivative instruments in this category include nonexchange-traded contracts such as
forwards, options, and swaps. This category also includes investments, in common and
commingled funds that are redeemable and valued based on the funds’ net asset values. We
consider broker quotes observable inputs when the quote is binding on the broker, we can
validate the quote with market transactions, or we can determine that the inputs the broker
used to arrive at the quoted price are observable.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Level 3 — Model-derived valuations with unobservable inputs that are supported by little or
no market activity. Instruments in this category include long-dated derivative transactions
where models are required due to the length of the transaction, options, transactions in
locations where observable market data does not exist, and common and collective trusts with
significant restrictions on our ability to transact in the fund. The valuation models we
employ utilize spot prices, forward prices, historical market data and other factors to
forecast future prices. The primary valuation technique we use to calculate the fair value
of contracts where price quotes are not available is based on the extrapolation of forward
pricing curves using observable market data for more liquid delivery points in the same
region and actual transactions at the more illiquid delivery points.
Assets and liabilities are classified in their entirety based on the lowest level of input
that is significant to the fair value measurement. We maximize the use of observable inputs and
minimize the use of unobservable inputs. If market data is not readily available, inputs may
reflect our own assumptions about the inputs market participants would use. Our assessment of the
significance of a particular input to the fair value measurement requires judgment, and may affect
the valuation of fair value assets and liabilities and their placement within the fair value
hierarchy levels. Thus, a valuation may be classified in Level 3 even though the valuation may
include significant inputs that are readily observable. We assess whether a market is active by
obtaining observable broker quotes, reviewing actual market transactions, and assessing the volume
of transactions.
For non-exchange traded contracts, we calculate fair market value based on the average of the
bid and offer price, discounted to reflect net present value. We maintain certain valuation
adjustments for a number of risks associated with the valuation of future commitments. These
include valuation adjustments for liquidity and credit risks based on the financial condition of
counterparties. The liquidity valuation adjustment represents the cost that would be incurred if
all unmatched positions were closed-out or hedged.
The credit valuation adjustment represents estimated credit losses on our overall exposure to
counterparties, taking into account netting arrangements, expected default experience for the
credit rating of the counterparties and the overall diversification of the portfolio.
Counterparties in the portfolio consist principally of major energy companies, municipalities,
local distribution companies and financial institutions. We maintain credit policies that
management believes minimize overall credit risk. Determination of the credit quality of
counterparties is based upon a number of factors, including credit ratings, financial condition,
project economics and collateral requirements. When applicable, we employ standardized agreements
that allow for the netting of positive and negative exposures associated with a single
counterparty.
We apply recurring fair value measurements to derivative instruments, nuclear decommissioning
trusts, certain cash equivalents and plan assets held in our retirement and other benefit plans
(see Note 8). We may be required to record other assets at fair value on a nonrecurring basis.
These nonrecurring fair value measurements typically involve write-downs of individual assets due
to impairment.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Some of our derivative instrument transactions are valued based on unobservable inputs due to
the long-term nature of contracts or the unique location of the transactions. Our long-dated
energy transactions consist of observable valuations for the near term portion and unobservable
valuations for the long-term portions of the transaction. When the unobservable portion is
significant to the overall valuation of the transaction, the entire transaction is classified as
Level 3. Our classification of instruments as Level 3 is primarily reflective of the long-term
nature of our energy transactions, and is not reflective of material inactive markets.
The nuclear decommissioning trust invests in fixed income securities directly and equity
securities indirectly through commingled funds. The commingled equity funds are valued based on
the fund’s net asset value (“NAV”) and are classified within Level 2. We may transact in the fund
on a semi-monthly basis. Our trustee provides valuation of our nuclear decommissioning trust
assets by using pricing services to determine fair market value. We assess these valuations and
verify that pricing can be supported by actual recent market transactions. The trust fund
investments have been established to satisfy APS’ nuclear decommissioning obligations (see Note
12).
The following table presents the fair value at December 31, 2009 of our assets and liabilities
that are measured at fair value on a recurring basis (dollars in millions):
| Quoted Prices | Significant | |||||||||||||||||||
| in Active | Other | Significant | ||||||||||||||||||
| Markets for | Observable | Unobservable | Counterparty | Balance at | ||||||||||||||||
| Identical Assets | Inputs | Inputs | Netting & | December 31, | ||||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Other (a) | 2009 | ||||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Cash equivalents
|
$ | 97 | $ | — | $ | — | $ | — | $ | 97 | ||||||||||
|
Risk management activities
|
1 | 100 | 42 | (64 | ) | 79 | ||||||||||||||
|
Nuclear decommissioning trust:
|
||||||||||||||||||||
|
U.S. Treasury debt securities
|
55 | — | — | — | 55 | |||||||||||||||
|
Commingled U.S. equity funds
|
— | 167 | — | — | 167 | |||||||||||||||
|
Corporate debt securities
|
— | 62 | — | — | 62 | |||||||||||||||
|
Mortgage-backed securities
|
— | 60 | — | — | 60 | |||||||||||||||
|
Municipality debt securities
|
— | 49 | — | — | 49 | |||||||||||||||
|
Other
|
— | 21 | — | 1 | 22 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | 153 | $ | 459 | $ | 42 | $ | (63 | ) | $ | 591 | |||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||
|
Risk management activities
|
$ | (14 | ) | $ | (246 | ) | $ | (52 | ) | $ | 194 | $ | (118 | ) | ||||||
|
|
||||||||||||||||||||
| (a) | Primarily represents netting under master netting arrangements, including margin and collateral. See Note 18. |
131
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the fair value at December 31, 2008 of our assets and liabilities
that are measured at fair value on a recurring basis (dollars in millions):
| Quoted Prices | Significant | |||||||||||||||||||
| in Active | Other | Significant | ||||||||||||||||||
| Markets for | Observable | Unobservable | Counterparty | Balance at | ||||||||||||||||
| Identical Assets | Inputs | Inputs | Netting & | December 31, | ||||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Other (a) | 2008 | ||||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Cash equivalents
|
$ | 75 | $ | — | $ | — | $ | — | $ | 75 | ||||||||||
|
Risk management activities
|
31 | 76 | 51 | (92 | ) | 66 | ||||||||||||||
|
Nuclear decommissioning trust:
|
||||||||||||||||||||
|
U.S. Treasury debt securities
|
33 | — | — | — | 33 | |||||||||||||||
|
Commingled U.S. equity funds
|
— | 113 | — | — | 113 | |||||||||||||||
|
Corporate debt securities
|
— | 33 | — | — | 33 | |||||||||||||||
|
Mortgage-backed securities
|
— | 73 | — | — | 73 | |||||||||||||||
|
Municipality debt securities
|
— | 67 | — | — | 67 | |||||||||||||||
|
Other
|
— | 22 | — | 2 | 24 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | 139 | $ | 384 | $ | 51 | $ | (90 | ) | $ | 484 | |||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||
|
Risk management activities
|
$ | (85 | ) | $ | (297 | ) | $ | (58 | ) | $ | 244 | $ | (196 | ) | ||||||
|
|
||||||||||||||||||||
| (a) | Primarily represents netting under master netting arrangements, including margin and collateral. See Note 18. |
132
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the changes in fair value for assets and liabilities that are
measured at fair value on a recurring basis using Level 3 inputs for the years ended December 31,
2009 and 2008 (dollars in millions):
| Year Ended | ||||||||
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Net risk management activities at beginning of period
|
$ | (7 | ) | $ | 8 | |||
|
Total net gains (losses) realized/unrealized:
|
||||||||
|
Included in earnings (a)
|
3 | 15 | ||||||
|
Included in OCI
|
(2 | ) | (1 | ) | ||||
|
Deferred as a regulatory asset or liability
|
19 | (39 | ) | |||||
|
Purchases, issuances, and settlements
|
(2 | ) | — | |||||
|
Level 3 transfers (b)
|
(21 | ) | 10 | |||||
|
|
||||||||
|
Net risk management activities at end of period
|
$ | (10 | ) | $ | (7 | ) | ||
|
|
||||||||
|
|
||||||||
|
Net unrealized losses included in earnings related
to instruments still held at end of period
|
$ | 3 | $ | 44 | ||||
| (a) | Earnings are recorded in regulated electricity segment revenue or regulated electricity segment fuel and purchased power. | |
| (b) | Transfers in or out of Level 3 reflect the fair market value at the beginning of the period. Transfers are generally triggered by a change in the lowest significant input and are typically related to our long-dated energy transactions that extend beyond available quoted periods. |
The following table represents the carrying amount and estimated fair value of our debt which
is not carried at fair value on the balance sheet. The carrying value of our cash, net accounts
receivable, accounts payable and short-term borrowings approximate fair value. Certain of our debt
instruments contain third-party credit enhancements and, in accordance with GAAP, we do not
consider the effect of these credit enhancements when determining fair value. Our debt fair value
estimates are based on quoted market prices of the same or similar issues (dollars in millions):
| As of | As of | |||||||||||||||
| December 31, 2009 | December 31, 2008 | |||||||||||||||
| Carrying | Carrying | |||||||||||||||
| Amount | Fair Value | Amount | Fair Value | |||||||||||||
|
|
||||||||||||||||
|
Pinnacle West
|
$ | 175 | $ | 180 | $ | 175 | $ | 169 | ||||||||
|
APS
|
3,378 | 3,499 | 2,851 | 2,466 | ||||||||||||
|
SunCor
|
95 | 95 | 183 | 183 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 3,648 | $ | 3,774 | $ | 3,209 | $ | 2,818 | ||||||||
|
|
||||||||||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We adopted guidance on fair value measurements and disclosures, for our nonfinancial assets
and liabilities on January 1, 2009, and it did not have a material impact on our financial
statements. We apply nonrecurring fair value measurements to certain real estate assets. These
adjustments to fair value are the result of write-downs of individual assets due to impairment.
Certain of our real estate assets have been impaired due to the distressed real estate market. We
determine fair value for our real estate assets primarily based on the future cash flows that we
estimate will be generated by each asset discounted for market risk. These fair value
determinations require significant judgment regarding key assumptions. Due to these unobservable
inputs, the valuation of real estate assets are considered Level 3 measurements.
As of December 31, 2009, the fair value of our impaired real estate assets that are measured
at fair value on a nonrecurring basis was $46 million, all of which was valued using significant
unobservable inputs (Level 3). Total impairment charges included in net income for the year ended
December 31, 2009 were approximately $280 million (including net loss attributable to
noncontrolling interests of $14 million before income taxes). Total impairment charges for the
year ended December 31, 2008 were approximately $53 million. See Note 23 for additional
information.
15. Earnings Per Share
The following table presents earnings per weighted-average common share outstanding for the
years ended December 31, 2009, 2008 and 2007:
| 2009 | 2008 | 2007 | ||||||||||
|
Basic earnings per share:
|
||||||||||||
|
Income from continuing operations attributable to common shareholders
|
$ | 0.81 | $ | 2.30 | $ | 3.00 | ||||||
|
Income (loss) from discontinued operations
|
(0.13 | ) | 0.10 | 0.06 | ||||||||
|
|
||||||||||||
|
Earnings per share — basic
|
$ | 0.68 | $ | 2.40 | $ | 3.06 | ||||||
|
|
||||||||||||
|
Diluted earnings per share:
|
||||||||||||
|
Income from continuing operations attributable to common shareholders
|
$ | 0.81 | $ | 2.29 | $ | 2.98 | ||||||
|
Income (loss) from discontinued operations
|
(0.14 | ) | 0.11 | 0.07 | ||||||||
|
|
||||||||||||
|
Earnings per share — diluted
|
$ | 0.67 | $ | 2.40 | $ | 3.05 | ||||||
|
|
||||||||||||
Dilutive stock options and performance shares (which are contingently issuable)
increased average common shares outstanding by approximately 103,000 shares in 2009, 274,000 shares
in 2008 and 579,000 shares in 2007. Total average common shares outstanding for the purposes of
calculating diluted earnings per share were 101,263,795 shares in 2009, 100,964,920 shares in 2008
and 100,834,871 shares in 2007.
Options to purchase 572,301 shares of common stock at December 31, 2009
were not included in the computation of diluted earnings per share because the options’ exercise
prices were greater than the average market price of the common shares. Options to purchase shares
of common stock that were not included in the computation of diluted earnings per share were
687,375 at December 31, 2008 and 114,213 at December 31, 2007.
134
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Stock-Based Compensation
We have a 2007 long-term incentive plan (“2007 Plan”) that allows the Company to grant
restricted stock, restricted stock units, performance shares, stock grants, incentive and stock
options, stock appreciation rights, performance share units, performance cash awards, dividend
equivalents and stock to eligible individuals.
Restricted Stock Unit Awards and Stock Grants
Stock grants were issued to non-officer members of the Board of Directors in 2009, 2008 and
2007 under the 2007 Plan and were paid in fully transferable shares of stock. Restricted stock unit awards were
granted to officers and key employees in 2009, 2008 and 2007 under the 2007 Plan. Officers and key
employees elected to receive payment in either cash or in fully transferable shares of stock, in
exchange for each restricted stock unit on pre-established valuation
dates. Each restricted stock unit payable in cash represents the
right to receive a cash payment equal to the fair market value of one share of Pinnacle West’s
common stock. Restricted stock unit awards vest and
settle in annual installments over a four-year period. In addition, officers and key
employees will receive a cash payment equal to the amount of dividends that they would have
received if they had owned the stock to which the restricted stock units relate from the date of
grant to the date of payment plus interest. For any employee that was eligible to retire before
the settlement date, the employee’s restricted stock unit awards vest by retirement date and the
compensation expense is recognized by retirement eligibility. As the restricted stock unit award
is accounted for as a liability award, compensation costs, initially measured based on the
Company’s stock price on the grant date, are remeasured at each balance sheet date, using Pinnacle
West’s closing stock price.
Restricted stock unit awards were granted to a selected set of key employees of Pinnacle West
on October 21, 2008, February 18, 2009, March 18, 2009, April 13, 2009 and July 29, 2009 under the 2007 Plan. The
award of the restricted stock unit awards follows the same vesting schedule as the 2007 and 2008
restricted stock unit awards.
The following table is a summary of granted restricted stock units and stock grants and the
weighted average fair value for the three years ended 2009, 2008 and 2007:
| 2009 | 2008 | 2007 | ||||||||||
|
Units granted
|
261,006 | 224,658 | 136,917 | |||||||||
|
Grant date
fair value (a)
|
$ | 30.25 | $ | 36.26 | $ | 46.51 | ||||||
| (a) | weighted average fair value |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table is a summary of the status of restricted stock units and stock grants, as
of December 31, 2009 and changes during the year. This table represents only the stock portion of
restricted stock units, per the election on payment discussed in the paragraph above:
| Weighted-Average | ||||||||
| Nonvested shares | Shares | Grant-Date Fair Value | ||||||
|
Nonvested at January 1, 2009
|
80,345 | $ | 38.11 | |||||
|
Granted
|
108,450 | 30.79 | ||||||
|
Vested
|
40,684 | 35.06 | ||||||
|
Forfeited
|
2,772 | 34.52 | ||||||
|
|
||||||||
|
Nonvested at December 31, 2009
|
145,339 | 33.57 | ||||||
|
|
||||||||
The amount of cash required to settle the payment for the 2007 grant on February 20, 2009 and
February 20, 2008 was $0.8 million and $1.0 million respectively. The amount of cash required to
settle the payment for the 2008 grant on February 20, 2009 was $1.3 million.
Performance Share Awards
Performance share awards were granted to officers and key employees in 2009 and 2008 under the
2007 Plan. Performance share awards for 2008 contain performance criteria that affect the number
of shares ultimately received. Generally, each recipient of performance shares is entitled to
receive shares of common stock after the end of a three-year performance period. The number of
shares each recipient ultimately receives, if any, is based upon the percentile ranking of Pinnacle
West’s earnings per share growth rate at the end of the three-year period as compared with the
earnings per share growth rate of all relevant companies in a specified utilities index.
Performance share awards for 2009 also contain performance criteria that affect the number of
shares that ultimately vest, 50% of the award is based on the same percentile ranking as the 2008
award and the other 50% of the award is based on six separate performance metrics. For any
employee that was eligible to retire before the settlement date, the employee’s performance share
awards vest by retirement date and the compensation expense is recognized by retirement
eligibility. As the performance share award is accounted for as a liability award, compensation
costs, initially measured based on the Company’s stock price on the grant date, are remeasured at
each balance sheet date, using Pinnacle West’s closing stock price. Management also evaluates the
probability of meeting the performance criteria at each balance sheet date and related compensation
cost is amortized over the performance period on a straight-line basis. If the goals are not
achieved, no compensation cost is recognized and any previously recognized compensation cost is
reversed.
Performance shares were granted to officers and key employees of Pinnacle West on October 21,
2008, February 18, 2009, March 18, 2009, April 13, 2009 and July 29, 2009 under the 2007 Plan.
This award of performance shares follows the same vesting schedule as the prior performance shares
awarded.
The following table is a summary of the Performance shares granted and the weighted average
fair value for the three years ended 2009, 2008 and 2007:
| 2009 | 2008 | 2007 | ||||||||||
|
Units granted
|
240,624 | 226,242 | 134,917 | |||||||||
|
Grant date fair value (a)
|
$ | 30.19 | $ | 36.24 | $ | 48.42 | ||||||
| (a) | weighted average grant date fair value |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table is a summary of the status of performance shares, as of December 31, 2009
and changes during the year:
| Weighted-Average | ||||||||
| Nonvested shares | Shares | Grant-Date Fair Value | ||||||
|
Nonvested at January 1, 2009
|
210,548 | $ | 40.69 | |||||
|
Granted
|
240,624 | 30.12 | ||||||
|
Vested
|
— | — | ||||||
|
Forfeited
|
92,229 | 46.96 | ||||||
|
|
||||||||
|
Nonvested at December 31, 2009
|
358,943 | 32.34 | ||||||
|
|
||||||||
Retention Units
Retention unit awards were granted to key employees in 2006 and 2007. Each retention unit
award represents the right to receive a cash payment equal to the fair market value of one share of
Pinnacle West’s common stock, determined on pre-established valuation dates. Each retention unit
award vests and settles in equal annual installments over a four-year period. In addition, the
employee will receive a cash payment equal to the amount of dividends that the employee would have
received if the employee had owned the stock from the date of grant to the date of payment plus
interest. The retention unit awards have fully vested and settled on January 4, 2010; for any
employee that was eligible to retire before that date, the employee’s retention units vested by
retirement date and the compensation expense was recognized by retirement eligibility. As this
award is accounted for as a liability award, compensation costs, initially measured based on the
Company’s stock price on the grant date, were remeasured at each balance sheet date, using Pinnacle
West’s closing stock price.
The amount of cash to settle the payment on the first business day of 2009 was $1.1 million,
2008 was $1.3 million and 2007 was $1.6 million.
Incentive Shares
On January 21, 2009, the Human Resources Committee approved under the 2007 Plan payment of
2008 incentive awards to officers in the form of a Pinnacle West common stock grant. A total of 138,756
shares were issued for this stock grant with a grant date fair value of $32.58 per share. The
stock grant was included in stock compensation expense in 2008.
Stock Options
We have issued stock options in the past, but have not granted stock options since 2004. The
term of outstanding options cannot be longer than 10 years and options cannot be repriced during
their terms.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the option activity under our equity incentive plans for the
year ended December 31, 2009:
| Weighted- | ||||||||||||||||
| Average | Aggregate | |||||||||||||||
| Shares | Weighted- | Remaining | Intrinsic | |||||||||||||
| (in | Average | Contractual | Value (dollars | |||||||||||||
| Options | thousands) | Exercise Price | Term (Years) | in thousands) | ||||||||||||
|
Outstanding at
January 1, 2009
|
696 | $ | 39.81 | |||||||||||||
|
Exercised
|
86 | 32.29 | ||||||||||||||
|
Forfeited or expired
|
177 | 40.07 | ||||||||||||||
|
|
||||||||||||||||
|
Outstanding at
December 31, 2009
|
433 | 41.20 | 1.8 | $ | 115 | |||||||||||
|
|
||||||||||||||||
|
Exercisable at
December 31, 2009
|
433 | 41.20 | 1.8 | $ | 115 | |||||||||||
|
|
||||||||||||||||
Cash received from options exercised under our share-based payment arrangements was $3 million
for 2009, zero for 2008 and $8 million for 2007. The tax benefit realized for the tax deductions
from option exercises of the share-based payment arrangements were immaterial for 2009, zero for
2008 and $1 million for 2007.
The intrinsic value of options exercised was immaterial for 2009, zero for 2008 and $2 million
for 2007.
As of December 31, 2009, there was $12 million of total unrecognized compensation cost related
to nonvested share-based compensation arrangements granted under the plans. That cost is expected
to be recognized over a weighted-average period of 2.2 years. The total fair value of shares
vested during 2009 was $10 million, 2008 was $5 million and $6 million for 2007.
We have reserved 8 million shares of common stock for issuance under the 2007 Plan. Under the
2007 Plan, any shares of stock that are potentially deliverable under the 2002 long term incentive
plan will be added to the number of shares available for grant under the 2007 Plan if the award is
cancelled, forfeited, or terminated such that those shares are returned to the Company.
The compensation cost that has been charged against Pinnacle West’s income for share-based
compensation plans was $5 million in 2009, $8 million in 2008 and $6 million in 2007. The
compensation cost that Pinnacle West has capitalized was immaterial in 2009, 2008 and 2007.
Pinnacle West’s total income tax benefit recognized in the Consolidated Statements of Income for
share-based compensation arrangements was $2 million in 2009, $3 million in 2008 and $2 million in
2007. APS’ share of compensation cost that has been charged against income was $4 million in 2009,
$7 million in 2008 and $6 million in 2007.
Pinnacle West’s current policy is to issue new shares to satisfy share requirements for stock
compensation plans and it does not expect to repurchase any shares except to satisfy tax
withholding obligations upon the vesting of restricted stock during 2010.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Business Segments
Pinnacle West’s two reportable business segments are:
| • | our regulated electricity segment, which consists of traditional regulated retail and wholesale electricity businesses (primarily electricity service to Native Load customers) and related activities and includes electricity generation, transmission and distribution; and |
| • | our real estate segment, which consists of SunCor’s real estate development and investment activities. |
Financial data for 2009, 2008 and 2007 is provided as follows (dollars in millions):
| Business Segments for the Year Ended December 31, 2009 | ||||||||||||||||
| Regulated | ||||||||||||||||
| Electricity | Real Estate | |||||||||||||||
| Segment | Segment (a) | All other (b) | Total | |||||||||||||
|
Operating revenues
|
$ | 3,149 | $ | 103 | $ | 45 | $ | 3,297 | ||||||||
|
Purchased power and fuel costs
|
1,179 | — | — | 1,179 | ||||||||||||
|
Other operating expenses
|
987 | 361 | 44 | 1,392 | ||||||||||||
|
|
||||||||||||||||
|
Operating margin
|
983 | (258 | ) | 1 | 726 | |||||||||||
|
Depreciation and amortization
|
400 | 2 | 2 | 404 | ||||||||||||
|
Interest expense
|
214 | 8 | 1 | 223 | ||||||||||||
|
Other expense (income)
|
(16 | ) | — | 10 | (6 | ) | ||||||||||
|
|
||||||||||||||||
|
Income (loss) from continuing
operations before income taxes
|
385 | (268 | ) | (12 | ) | 105 | ||||||||||
|
Income taxes
|
142 | (100 | ) | (4 | ) | 38 | ||||||||||
|
|
||||||||||||||||
|
Income (loss) from continuing
operations
|
243 | (168 | ) | (8 | ) | 67 | ||||||||||
|
Loss from discontinued
operations — net of income
tax benefit of $9 million
(see Note 22)
|
— | (14 | ) | — | (14 | ) | ||||||||||
|
|
||||||||||||||||
|
Net income (loss)
|
243 | (182 | ) | (8 | ) | 53 | ||||||||||
|
Less: Net loss attributable to
noncontrolling interests
|
— | (15 | ) | — | (15 | ) | ||||||||||
|
|
||||||||||||||||
|
Net income (loss) attributable to
common shareholders
|
$ | 243 | $ | (167 | ) | $ | (8 | ) | $ | 68 | ||||||
|
|
||||||||||||||||
|
Total assets
|
$ | 11,513 | $ | 161 | $ | 134 | $ | 11,808 | ||||||||
|
|
||||||||||||||||
|
Capital expenditures
|
$ | 732 | $ | 7 | $ | 6 | $ | 745 | ||||||||
|
|
||||||||||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| Business Segments for the Year Ended December 31, 2008 | ||||||||||||||||
| Regulated | ||||||||||||||||
| Electricity | Real Estate | |||||||||||||||
| Segment | Segment (a) | All other (b) | Total | |||||||||||||
|
Operating revenues
|
$ | 3,127 | $ | 74 | $ | 109 | $ | 3,310 | ||||||||
|
Purchased power and fuel costs
|
1,284 | — | 46 | 1,330 | ||||||||||||
|
Other operating expenses
|
927 | 118 | 40 | 1,085 | ||||||||||||
|
|
||||||||||||||||
|
Operating margin
|
916 | (44 | ) | 23 | 895 | |||||||||||
|
Depreciation and amortization
|
383 | 5 | 2 | 390 | ||||||||||||
|
Interest expense
|
189 | 6 | 2 | 197 | ||||||||||||
|
Other expense (income)
|
(4 | ) | (4 | ) | 8 | — | ||||||||||
|
|
||||||||||||||||
|
Income (loss) from continuing
operations before income taxes
|
348 | (51 | ) | 11 | 308 | |||||||||||
|
Income taxes
|
92 | (19 | ) | 4 | 77 | |||||||||||
|
|
||||||||||||||||
|
Income (loss) from continuing
operations
|
256 | (32 | ) | 7 | 231 | |||||||||||
|
Income from discontinued
operations — net of income
tax expense of $7 million
(see Note 22)
|
— | 6 | 5 | 11 | ||||||||||||
|
|
||||||||||||||||
|
Net income (loss) attributable to
common shareholders
|
$ | 256 | $ | (26 | ) | $ | 12 | $ | 242 | |||||||
|
|
||||||||||||||||
|
Total assets
|
$ | 10,951 | $ | 523 | $ | 146 | $ | 11,620 | ||||||||
|
|
||||||||||||||||
|
Capital expenditures
|
$ | 856 | $ | 41 | $ | 7 | $ | 904 | ||||||||
|
|
||||||||||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| Business Segments for the Year Ended December 31, 2007 | ||||||||||||||||
| Regulated | ||||||||||||||||
| Electricity | Real Estate | |||||||||||||||
| Segment | Segment (a) | All other (b) | Total | |||||||||||||
|
Operating revenues
|
$ | 2,918 | $ | 189 | $ | 187 | $ | 3,294 | ||||||||
|
Purchased power and fuel costs
|
1,141 | — | 100 | 1,241 | ||||||||||||
|
Other operating expenses
|
836 | 169 | 60 | 1,065 | ||||||||||||
|
|
||||||||||||||||
|
Operating margin
|
941 | 20 | 27 | 988 | ||||||||||||
|
Depreciation and amortization
|
366 | 4 | 2 | 372 | ||||||||||||
|
Interest expense
|
180 | 4 | 1 | 185 | ||||||||||||
|
Other expense (income)
|
(18 | ) | (11 | ) | 8 | (21 | ) | |||||||||
|
|
||||||||||||||||
|
Income from continuing
operations before income taxes
|
413 | 23 | 16 | 452 | ||||||||||||
|
Income taxes
|
139 | 8 | 5 | 152 | ||||||||||||
|
|
||||||||||||||||
|
Income from continuing operations
|
274 | 15 | 11 | 300 | ||||||||||||
|
Income (loss) from discontinued
operations — net of income
tax expense of $5 million
(see Note 22)
|
— | 8 | (1 | ) | 7 | |||||||||||
|
|
||||||||||||||||
|
Net income (loss) attributable to
common shareholders
|
$ | 274 | $ | 23 | $ | 10 | $ | 307 | ||||||||
|
|
||||||||||||||||
|
Capital expenditures
|
$ | 900 | $ | 161 | $ | 3 | $ | 1,064 | ||||||||
|
|
||||||||||||||||
| (a) | Due to the current and anticipated continuing distressed conditions in the real estate and credit markets, in 2009 our real estate subsidiary, SunCor, began disposing of its homebuilding operations, master-planned communities, land parcels, commercial assets and golf courses in order to reduce its outstanding debt (see Note 23). As a part of this plan to sell substantially all of SunCor’s assets, the real estate segment may no longer be a reporting segment in the future. | |
| (b) | All other activities relate to APSES, Silverhawk and El Dorado. Income from discontinued operations for 2008 is primarily related to the resolution of certain tax issues associated with the sale of Silverhawk in 2005. None of these segments is a reportable segment. |
18. Derivative Accounting
We are exposed to the impact of market fluctuations in the commodity price and transportation
costs of electricity, natural gas, coal, emissions allowances and in interest rates. We manage
risks associated with these market fluctuations by utilizing various derivative instruments,
including futures, forwards, options and swaps. As part of our overall risk management program, we
may use such instruments to hedge purchases and sales of electricity, fuels, and emissions
allowances and credits. Derivative instruments that are designated as cash flow hedges are used to
limit our exposure to cash flow variability on forecasted transactions. The changes in market
value of such contracts have a high correlation to price changes in the hedged transactions. We may
also invest in derivative instruments for trading purposes; however, for the year ended December
31, 2009, there was no material trading activity.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our derivative instruments are accounted for at fair value; see Note 14 for a discussion of
fair value measurements. Derivative instruments for the physical delivery of purchase and sale
quantities transacted in the normal course of business qualify for the normal purchase and sales
scope exception and are accounted for under the accrual method of accounting. Due to the scope
exception, these derivative instruments are excluded from our derivative instrument discussion and
disclosures below.
We enter into derivative instruments for economic hedging purposes. While we believe the
economic hedges mitigate exposure to fluctuations in commodity prices, some of these instruments
may not meet the specific hedge accounting requirements and are not designated as accounting
hedges. Economic hedges not designated as accounting hedges are recorded at fair value on our
balance sheet with changes in fair value recognized in the statement of income as incurred. These
instruments are included in the “non-designated hedges” discussion and disclosure below.
Hedge effectiveness is the degree to which the derivative instrument contract and the hedged
item are correlated and is measured based on the relative changes in fair value between the
derivative instrument contract and the hedged item over time. We assess hedge effectiveness both
at inception and on a continuing basis. These assessments exclude the time value of certain
options. For accounting hedges that are deemed an effective hedge, the effective portion of the
gain or loss on the derivative instrument is reported as a component of accumulated other
comprehensive income (“AOCI”) and reclassified into earnings in the same period during which the
hedged transaction affects earnings. We recognize in current earnings the gains and losses
representing hedge ineffectiveness, and the gains and losses on any hedge components which are
excluded from our effectiveness assessment. As of December 31, 2009, we hedged the majority of
certain exposures to the price variability of commodities for a maximum of 39 months.
In the electricity business, some contracts to purchase energy are netted against other
contracts to sell energy. This is called “book-out” and usually occurs in contracts that have the
same terms (quantities and delivery points) and for which power does not flow. We net these
book-outs, which reduces both revenues and fuel and purchased power costs in our Consolidated
Statements of Income, but this does not impact our financial condition, net income or cash flows.
For its regulated operations, APS defers for future rate treatment approximately 90% of
unrealized gains and losses on certain derivatives pursuant to the PSA mechanism that would
otherwise be recognized in income. Realized gains and losses on derivatives are deferred in
accordance with the PSA to the extent the amounts are above or below the Base Fuel Rate (see Note
3). Gains and losses from derivatives in the following tables represent the amounts reflected in
income before the effect of PSA deferrals.
As of December 31, 2009, we had the following outstanding gross notional amount of
derivatives, which represent both purchases and sales (does not reflect net position):
| Commodity | Quantity | |||||
|
Power
|
16,467,388 | megawatt hours | ||||
|
Gas
|
161,999,632 | MMBTU (a) | ||||
| (a) | “MMBTU” is one million British thermal units |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Derivative Instruments in Designated Accounting Hedging Relationships
The following table provides information about gains and losses from derivative instruments in
designated accounting hedging relationships and their impact on our Consolidated Statements of
Income during the year ended December 31, 2009 (dollars in thousands):
| Financial Statement | Year Ended | |||||
| Commodity Contracts | Location | December 31, 2009 | ||||
|
|
||||||
|
Amount of Loss
Recognized in AOCI on Derivative
Instruments (Effective Portion)
|
Accumulated other comprehensive loss-derivative instruments | $ | (155,325 | ) | ||
|
Amount of Loss Reclassified from AOCI into Income (Effective Portion Realized)
|
Regulated electricity segment fuel and purchased power | (185,329 | ) | |||
|
Amount of Loss Recognized
in Income from Derivative
Instruments (Ineffective Portion and Amount Excluded from Effectiveness Testing) (a)
|
Regulated electricity segment fuel and purchased power | (19,902 | ) | |||
| (a) | During the year ended December 31, 2009, $192 thousand was reclassified from AOCI to earnings related to discontinued cash flow hedges. |
During the next twelve months, we estimate that a net loss of $68 million before income taxes
will be reclassified from accumulated other comprehensive income as an offset to the effect of
market price changes for the related hedged transactions. In accordance with the PSA, certain of
these amounts will be recorded as either a regulatory asset or liability and have no effect on
earnings.
Derivative Instruments Not Designated as Accounting Hedges
The following table provides information about gains and losses from derivative instruments
not designated as accounting hedging instruments and their impact on our Consolidated Statements of
Income during the year ended December 31, 2009 (dollars in thousands):
| Financial Statement | Year Ended | |||||
| Commodity Contracts | Location | December 31, 2009 | ||||
|
|
||||||
|
Amount of Net Gain
Recognized in Income
from Derivative Instruments
|
Regulated electricity segment revenue | $ | 2,484 | |||
|
|
||||||
|
Amount of Net Loss Recognized in Income from Derivative Instruments
|
Regulated electricity segment fuel and purchased power expense | (16,740 | ) | |||
|
|
||||||
|
Total
|
$ | (14,256 | ) | |||
|
|
||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Values of Derivative Instruments in the Consolidated Balance Sheets
The following table provides information about the fair value of our derivative instruments,
margin account and cash collateral reported on a gross basis. Transactions with counterparties
that have master netting arrangements are reported net on the balance sheet. These amounts are
located in the assets and liabilities from risk management activities lines of our Consolidated
Balance Sheets. Amounts are as of December 31, 2009 (dollars in thousands):
| Investments | Current | Deferred Credits | Total Assets | |||||||||||||||||
| Commodity Contracts | Current Assets | and Other Assets | Liabilities | and Other | (Liabilities) | |||||||||||||||
|
Derivatives designated
as accounting hedging
instruments:
|
||||||||||||||||||||
|
Assets
|
$ | 329 | $ | — | $ | 3,242 | $ | 75 | $ | 3,646 | ||||||||||
|
Liabilities
|
(3,436 | ) | (256 | ) | (72,899 | ) | (77,953 | ) | (154,544 | ) | ||||||||||
|
|
||||||||||||||||||||
|
Total hedging
instruments
|
(3,107 | ) | (256 | ) | (69,657 | ) | (77,878 | ) | (150,898 | ) | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Derivatives not
designated as accounting
hedging instruments:
|
||||||||||||||||||||
|
Assets
|
31,220 | 29,807 | 34,645 | 44,631 | 140,303 | |||||||||||||||
|
Liabilities
|
(4,123 | ) | (696 | ) | (81,722 | ) | (71,408 | ) | (157,949 | ) | ||||||||||
|
|
||||||||||||||||||||
|
Total non-hedging
instruments
|
27,097 | 29,111 | (47,077 | ) | (26,777 | ) | (17,646 | ) | ||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Total derivatives
|
23,990 | 28,855 | (116,734 | ) | (104,655 | ) | (168,544 | ) | ||||||||||||
|
|
||||||||||||||||||||
|
Margin account
|
8,643 | — | 12,464 | 104 | 21,211 | |||||||||||||||
|
Collateral provided to
counterparties
|
17,986 | — | 49,412 | 42,108 | 109,506 | |||||||||||||||
|
Collateral provided
from counterparties
|
— | — | (1,050 | ) | — | (1,050 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Balance Sheet Total
|
$ | 50,619 | $ | 28,855 | $ | (55,908 | ) | $ | (62,443 | ) | $ | (38,877 | ) | |||||||
|
|
||||||||||||||||||||
Credit Risk and Credit Related Contingent Features
We are exposed to losses in the event of nonperformance or nonpayment by counterparties. We
have risk management contracts with many counterparties, including one counterparty for which our
exposure represents approximately 31% of Pinnacle West’s $79 million of risk management assets as
of December 31, 2009. This exposure relates to a long-term traditional wholesale contract with a
counterparty that has very high credit quality. Our risk management process assesses and monitors
the financial exposure of all counterparties. Despite the fact that the great majority of trading
counterparties’ debt is rated as investment grade by the credit rating agencies, there is still a
possibility that one or more of these companies could default, resulting in a material impact on
consolidated earnings for a given period. Counterparties in the portfolio consist principally of
financial institutions, major energy companies, municipalities and local distribution companies.
We maintain credit policies that we believe minimize overall credit risk to within acceptable
limits. Determination of the credit quality of our counterparties is based upon a number of
factors, including credit ratings and our evaluation of their financial condition. To manage
credit risk, we employ collateral requirements and standardized agreements that allow for the
netting of positive and negative exposures associated with a single counterparty. Valuation
adjustments are established representing our estimated credit losses on our overall exposure to
counterparties.
144
Table of Contents
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certain of our derivative instrument contracts contain credit-risk-related contingent
features including, among other things, investment grade credit rating provisions, credit-related
cross default provisions, and adequate assurance provisions. Adequate assurance provisions allow a
counterparty with reasonable grounds for uncertainty to demand additional collateral based on
subjective events and/or conditions. The aggregate fair value of all derivative instruments with
credit-risk-related contingent features that were in a liability position on December 31, 2009 was
$283 million, for which we had posted collateral of $92 million in the normal course of business.
For those derivative instruments in a net liability position, with investment grade credit
contingencies, the counterparties could demand additional collateral if our debt credit rating were
to fall below investment grade (below BBB- for Standard & Poor’s or Fitch or Baa3 for Moody’s),
which would be a violation of the credit rating provisions. If the investment grade contingent
features underlying these agreements had been triggered on December 31, 2009, after off-setting
asset positions under master netting arrangements we would have been required to post approximately
an additional $100 million of collateral to our counterparties; this amount includes those
contracts which qualify for scope exceptions, which are excluded from the derivative details in the
above footnote. We also have energy related non-derivative instrument contracts with investment
grade credit-related contingent features which could also require us to post additional collateral
of approximately $200 million if our debt credit ratings were to fall below investment grade.
19. Other Income and Other Expense
The following table provides detail of other income and other expense for 2009, 2008 and 2007
(dollars in thousands):
| 2009 | 2008 | 2007 | ||||||||||
|
Other income:
|
||||||||||||
|
Interest income
|
$ | 1,660 | $ | 7,601 | $ | 11,656 | ||||||
|
SunCor other income
|
362 | 3,218 | 11,370 | |||||||||
|
Investment gains — net
|
2,516 | — | — | |||||||||
|
Miscellaneous
|
1,131 | 1,978 | 2,336 | |||||||||
|
|
||||||||||||
|
Total other income
|
$ | 5,669 | $ | 12,797 | $ | 25,362 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Other expense:
|
||||||||||||
|
Non-operating costs (a)
|
$ | (6,593 | ) | $ | (13,030 | ) | $ | (13,993 | ) | |||
|
Investment losses — net
|
— | (17,702 | ) | (2,341 | ) | |||||||
|
Miscellaneous
|
(7,676 | ) | (844 | ) | (9,523 | ) | ||||||
|
|
||||||||||||
|
Total other expense
|
$ | (14,269 | ) | $ | (31,576 | ) | $ | (25,857 | ) | |||
|
|
||||||||||||
| (a) | Includes equity earnings from a real estate joint venture that is a pass-through entity for tax purposes. |
145
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. Variable-Interest Entities
See Note 2 for a discussion of the amended accounting guidance relating to VIEs adopted on
January 1, 2010. Our December 31, 2009 financial statements and the following disclosure do not
reflect the adoption of this new guidance.
In 1986, APS entered into agreements with three separate VIE lessors in order to sell and
lease back interests in Palo Verde Unit 2. The leases are accounted for as operating leases. We
are not the primary beneficiary of the Palo Verde VIEs and, accordingly, do not consolidate them
(see Note 9).
APS is exposed to losses under the Palo Verde sale leaseback agreements upon the occurrence of
certain events that APS does not consider to be reasonably likely to occur. Under certain
circumstances (for example, the NRC issuing specified violation orders with respect to Palo Verde
or the occurrence of specified nuclear events), APS would be required to assume the debt associated
with the transactions, make specified payments to the equity participants, and take title to the
leased Unit 2 interests, which, if appropriate, may be required to be written down in value. If
such an event had occurred as of December 31, 2009, APS would have been required to assume
approximately $152 million of debt and pay the equity participants approximately $153 million.
We have certain long-term purchase power agreements where we purchase substantially all of an
entity’s output from a specified facility for a specified period. We have evaluated these
arrangements under the variable interest accounting guidance and have determined that these
agreements do not represent variable interests. If these agreements had been deemed variable
interests in these entities, we would not be considered the primary beneficiary of these entities
and therefore would not consolidate the entities.
SunCor is the primary beneficiary of certain land development arrangements and, accordingly,
consolidates the variable interest entities. The assets and non-controlling interests reflected in
our Consolidated Balance Sheets related to these arrangements were approximately $29 million at
December 31, 2009 and December 31, 2008.
21. Guarantees
We have issued parental guarantees and letters of credit and obtained surety bonds on behalf
of our subsidiaries.
Our parental guarantees for APS relate to commodity energy products. In addition, Pinnacle
West has obtained approximately $8 million of surety bonds related to APS’ operations, which
primarily relate to self-insured workers’ compensation. Our credit support instruments enable
APSES to offer energy-related products. Non-performance or non-payment under the original contract
by our subsidiaries would require us to perform under the guarantee or surety bond. No liability
is currently recorded on the Consolidated Balance Sheets related to Pinnacle West’s current
outstanding guarantees on behalf of our subsidiaries. At December 31, 2009, we had no guarantees
that were in default. Our guarantees have no recourse or collateral provisions to allow us to
recover amounts paid under the guarantees. The amounts and approximate terms of our guarantees and
surety bonds for each subsidiary at December 31, 2009 are as follows (dollars in millions):
| Guarantees | Surety Bonds | |||||||||||||||
| Term | Term | |||||||||||||||
| Amount | (in years) | Amount | (in years) | |||||||||||||
|
APSES
|
$ | 14 | 1 | $ | 19 | 1 | ||||||||||
|
APS
|
3 | 1 | 8 | 1 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 17 | $ | 27 | ||||||||||||
|
|
||||||||||||||||
146
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APS has entered into various agreements that require letters of credit for financial assurance
purposes. At December 31, 2009, approximately $227 million of letters of credit were outstanding
to support existing pollution control bonds of approximately $224 million. The letters of credit
are available to fund the payment of principal and interest of such debt obligations and expire in
2010. APS has also entered into approximately $70 million of letters of credit to support certain
equity lessors in the Palo Verde sale leaseback transactions (see Notes 9 and 20 for further
details on the Palo Verde sale leaseback transactions). These letters of credit expire in 2010.
APS intends to provide from either existing or new facilities for the extension, renewal or
substitution of the letters of credit to the extent required.
We enter into agreements that include indemnification provisions relating to liabilities
arising from or related to certain of our agreements; most significantly, APS has agreed to
indemnify the equity participants and other parties in the Palo Verde sale leaseback transactions
with respect to certain tax matters. Generally, a maximum obligation is not explicitly stated in
the indemnification provisions and, therefore, the overall maximum amount of the obligation under
such indemnification provisions cannot be reasonably estimated. Based on historical experience and
evaluation of the specific indemnities, we do not believe that any material loss related to such
indemnification provisions is likely.
22. Discontinued Operations
SunCor
(real estate segment)
—
In 2007, 2008 and 2009, SunCor sold properties that are
required to be reported as discontinued operations on Pinnacle West’s Consolidated Statements of
Income. Prior year income statement amounts related to these properties were reclassified from
operations to discontinued operations. The asset sales resulted in no gain for 2009, a $24 million
after tax gain in 2008 and a $10 million after tax gain in 2007. In addition, see Note 23 — Real
Estate Impairment Charge.
Silverhawk
— Includes activities related to the resolution of certain tax issues in 2008
associated with the sale of Silverhawk in 2005.
APSES
(other)
—
Includes activities related to the APSES discontinued commodity-related energy
services in 2008, and the associated revenues and costs that were reclassified to discontinued
operations in 2008 and 2007.
147
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides revenue, income (loss) before income taxes and income (loss)
after taxes classified as discontinued operations in Pinnacle West’s Consolidated Statements of
Income for the years ended December 31, 2009, 2008 and 2007 (dollars in millions):
| 2009 | 2008 | 2007 | ||||||||||
|
Revenue:
|
||||||||||||
|
SunCor — commercial operations
|
$ | 13 | $ | 57 | $ | 29 | ||||||
|
Other (primarily APSES) (a)
|
— | 67 | 204 | |||||||||
|
|
||||||||||||
|
Total revenue
|
$ | 13 | $ | 124 | $ | 233 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Income (loss) before taxes:
|
||||||||||||
|
SunCor — commercial operations
|
$ | (23 | ) | $ | 8 | $ | 12 | |||||
|
Silverhawk
|
— | 13 | — | |||||||||
|
Other (primarily APSES)
|
— | (3 | ) | (1 | ) | |||||||
|
|
||||||||||||
|
Total income before taxes
|
$ | (23 | ) | $ | 18 | $ | 11 | |||||
|
|
||||||||||||
|
|
||||||||||||
|
Income (loss) after taxes:
|
||||||||||||
|
SunCor — commercial operations
|
$ | (14 | ) | $ | 6 | $ | 8 | |||||
|
Silverhawk
|
— | 8 | — | |||||||||
|
Other (primarily APSES)
|
— | (3 | ) | (1 | ) | |||||||
|
|
||||||||||||
|
Total income
after taxes (b)
|
$ | (14 | ) | $ | 11 | $ | 7 | |||||
|
|
||||||||||||
| (a) | APSES discontinued its commodity-related energy services in 2008 and the associated revenues and costs were reclassified to discontinued operations in 2008 and 2007. | |
| (b) | Includes a tax benefit recognized by the parent company in accordance with an intercompany tax sharing agreement of $9 million for the year ended December 31, 2009. |
148
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
23. Real Estate Impairment Charge
During the first quarter of 2009, SunCor undertook and completed a review of its assets and
strategies within its various markets as a result of the then current and anticipated continuing
distressed conditions in real estate and credit markets. Based on the results of the review, on
March 27, 2009, SunCor’s Board of Directors authorized a series of strategic transactions to
dispose of SunCor’s homebuilding operations, master-planned communities, land parcels, commercial
assets and golf courses in order to reduce SunCor’s outstanding debt. During 2009 we recorded
impairment charges of approximately $266 million pre-tax and $161 million after income taxes. Of
the total $266 million impairment charge for 2009, approximately $244 million related to held and
used assets as of December 31, 2009, and $22 million is included in discontinued operations and is
related to assets sold during 2009. We believe that most of the assets to be sold, which are
classified as “Real Estate Investments — Net” on the Consolidated Balance Sheets, do not meet the
held for sale and discontinued operations criteria as of December 31, 2009 because of the
uncertainties related to the current market conditions and obtaining necessary approvals, we cannot
assert that a sale of these properties within the upcoming year is probable. We recorded pre-tax
impairment charges in 2008 of approximately $53 million or $32 million after income taxes. The
detail of the impairment charge is as follows (dollars in millions, and before income taxes):
| 2009 | 2008 | |||||||
|
Homebuilding and master-planned communities
|
$ | 161 | $ | 18 | ||||
|
Land parcels and commercial assets
|
82 | — | ||||||
|
Golf courses
|
15 | — | ||||||
|
|
||||||||
|
Subtotal
|
258 | 18 | ||||||
|
Discontinued operations
|
22 | 35 | ||||||
|
Less noncontrolling interests
|
(14 | ) | — | |||||
|
|
||||||||
|
Total
|
$ | 266 | $ | 53 | ||||
|
|
||||||||
We estimate the fair value of our real estate assets primarily based on either the future cash
flows that we estimate will be generated by each asset discounted at a rate we believe market
participants would use, on independent appraisals, or other market information, including
comparison to comparable properties. Our impairment assessments and fair value determinations
require significant judgment regarding key assumptions such as future sales prices, future
construction and land development costs, future sales timing, and discount rates. The assumptions
are specific to each project and may vary among projects. The weighted average discount rates we
used to estimate fair values during 2009 ranged from 11% to 29%. Due to the judgment and
assumptions applied in the estimation process, with regard to impairments, it is possible that
actual results could differ from those estimates.
SunCor also recorded in 2009 $8 million of pretax severance and other charges relating to
these actions. Pinnacle West does not expect that any of the impairment charges will result in
future cash expenditures, other than immaterial disposition costs.
See Notes 5 and 6 for a discussion of SunCor’s debt and liquidity matters, and the impact of
impairment charges on the SunCor Secured Revolver.
149
Table of Contents
MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
(ARIZONA PUBLIC SERVICE COMPANY)
OVER FINANCIAL REPORTING
(ARIZONA PUBLIC SERVICE COMPANY)
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f), for Arizona Public
Service Company. Management conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in
Internal Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation
under the framework in
Internal Control — Integrated Framework,
our management concluded that our
internal control over financial reporting was effective as of December 31, 2009. The effectiveness
of our internal control over financial reporting as of December 31, 2009 has been audited by
Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report
which is included herein and also relates to the Company’s financial statements.
February
19, 2010
150
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of
Arizona Public Service Company
Phoenix, Arizona
Arizona Public Service Company
Phoenix, Arizona
We have audited the accompanying balance sheets of Arizona Public Service Company (the “Company”)
as of December 31, 2009 and 2008, and the related statements of income, changes in common stock
equity, and cash flows for each of the three years in the period ended December 31, 2009. Our
audits also included the financial statement schedule listed in the Index at Item 15. We also have
audited the Company’s internal control over financial reporting as of December 31, 2009, based on
criteria established in
Internal Control — Integrated Framework
issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for
these financial statements and financial statement schedule, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Management’s Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on these financial statements and
financial statement schedule and an opinion on the Company’s internal control over financial
reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable basis
for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the
supervision of, the company’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the company’s board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles and
that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
151
Table of Contents
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of the Company as of December 31, 2009 and 2008and the results of
its operations and its cash flows for each of the three years in the period ended December 31,
2009, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material respects, the information
set forth therein. Also, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2009, based on the criteria
established in
Internal Control — Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
/s/ DELOITTE & TOUCHE LLP
Phoenix, Arizona
February 19, 2010
Phoenix, Arizona
February 19, 2010
152
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ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF INCOME
(dollars in thousands)
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
ELECTRIC OPERATING REVENUES
|
$ | 3,149,500 | $ | 3,133,496 | $ | 2,936,277 | ||||||
|
|
||||||||||||
|
OPERATING EXPENSES
|
||||||||||||
|
Fuel and purchased power
|
1,178,620 | 1,289,883 | 1,151,392 | |||||||||
|
Operations and maintenance
|
852,563 | 787,270 | 710,077 | |||||||||
|
Depreciation and amortization
|
399,455 | 383,098 | 365,430 | |||||||||
|
Income taxes (Notes 4 and S-1)
|
158,661 | 113,799 | 155,735 | |||||||||
|
Other taxes
|
122,358 | 124,046 | 127,648 | |||||||||
|
|
||||||||||||
|
Total
|
2,711,657 | 2,698,096 | 2,510,282 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
OPERATING INCOME
|
437,843 | 435,400 | 425,995 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
OTHER INCOME (DEDUCTIONS)
|
||||||||||||
|
Income taxes (Notes 4 and S-1)
|
6,087 | 6,538 | 4,578 | |||||||||
|
Allowance for equity funds
used during
construction
|
14,999 | 18,636 | 21,195 | |||||||||
|
Other income (Note S-3)
|
10,808 | 6,231 | 16,727 | |||||||||
|
Other expense (Note S-3)
|
(18,001 | ) | (30,569 | ) | (21,630 | ) | ||||||
|
|
||||||||||||
|
Total
|
13,893 | 836 | 20,870 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
INTEREST DEDUCTIONS
|
||||||||||||
|
Interest on long-term debt
|
199,907 | 170,071 | 161,030 | |||||||||
|
Interest on short-term
borrowings
|
6,315 | 13,432 | 9,564 | |||||||||
|
Debt discount,
premium and expense
|
4,675 | 4,702 | 4,639 | |||||||||
|
Allowance for borrowed
funds used
during construction
|
(10,386 | ) | (14,313 | ) | (12,308 | ) | ||||||
|
|
||||||||||||
|
Total
|
200,511 | 173,892 | 162,925 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
NET INCOME
|
$ | 251,225 | $ | 262,344 | $ | 283,940 | ||||||
|
|
||||||||||||
See Notes to Pinnacle West’s Consolidated Financial Statements and Supplemental Notes to Arizona
Public Service Company’s Financial Statements.
153
Table of Contents
ARIZONA PUBLIC SERVICE COMPANY
BALANCE SHEETS
(dollars in thousands)
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
ASSETS
|
||||||||
|
|
||||||||
|
UTILITY PLANT (Notes 1, 6, 9 and 10)
|
||||||||
|
Electric plant in service and held for future use
|
$ | 12,781,256 | $ | 12,198,010 | ||||
|
Less accumulated depreciation and amortization
|
4,326,908 | 4,129,958 | ||||||
|
|
||||||||
|
Net
|
8,454,348 | 8,068,052 | ||||||
|
|
||||||||
|
Construction work in progress
|
460,748 | 571,977 | ||||||
|
Intangible assets, net of accumulated amortization of
$293,450 and $280,633
|
164,183 | 131,243 | ||||||
|
Nuclear fuel, net of accumulated amortization of
$64,544 and $55,343
|
118,243 | 89,323 | ||||||
|
|
||||||||
|
Total utility plant
|
9,197,522 | 8,860,595 | ||||||
|
|
||||||||
|
|
||||||||
|
INVESTMENTS AND OTHER ASSETS
|
||||||||
|
Nuclear decommissioning trust (Note 12)
|
414,576 | 343,052 | ||||||
|
Assets from risk management activities (Note 18)
|
28,855 | 33,675 | ||||||
|
Other assets
|
68,839 | 60,604 | ||||||
|
|
||||||||
|
Total investments and other assets
|
512,270 | 437,331 | ||||||
|
|
||||||||
|
|
||||||||
|
CURRENT ASSETS
|
||||||||
|
Cash and cash equivalents
|
120,798 | 71,544 | ||||||
|
Customer and other receivables
|
280,226 | 262,177 | ||||||
|
Accrued utility revenues
|
110,971 | 100,089 | ||||||
|
Allowance for doubtful accounts
|
(6,063 | ) | (3,155 | ) | ||||
|
Materials and supplies (at average cost)
|
176,020 | 173,252 | ||||||
|
Fossil fuel (at average cost)
|
39,245 | 29,752 | ||||||
|
Assets from risk management activities (Note 18)
|
50,619 | 32,181 | ||||||
|
Deferred income taxes (Notes 4 and S-1)
|
53,990 | 79,694 | ||||||
|
Other
|
25,724 | 19,866 | ||||||
|
|
||||||||
|
Total current assets
|
851,530 | 765,400 | ||||||
|
|
||||||||
|
|
||||||||
|
DEFERRED DEBITS
|
||||||||
|
Deferred fuel and purchased power regulatory asset
(Notes 1 and 3)
|
— | 7,984 | ||||||
|
Other regulatory assets (Notes 1, 3, 4 and S-1)
|
781,714 | 787,506 | ||||||
|
Income tax receivable
|
65,498 | — | ||||||
|
Unamortized debt issue costs
|
20,959 | 22,026 | ||||||
|
Other
|
73,909 | 82,735 | ||||||
|
|
||||||||
|
|
||||||||
|
Total deferred debits
|
942,080 | 900,251 | ||||||
|
|
||||||||
|
|
||||||||
|
TOTAL ASSETS
|
$ | 11,503,402 | $ | 10,963,577 | ||||
|
|
||||||||
See Notes to Pinnacle West’s Consolidated Financial Statements and Supplemental Notes to Arizona
Public Service Company’s Financial Statements.
154
Table of Contents
ARIZONA PUBLIC SERVICE COMPANY
BALANCE SHEETS
(dollars in thousands)
BALANCE SHEETS
(dollars in thousands)
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
LIABILITIES AND EQUITY
|
||||||||
|
|
||||||||
|
CAPITALIZATION
|
||||||||
|
Common stock
|
$ | 178,162 | $ | 178,162 | ||||
|
Additional paid-in capital
|
2,126,863 | 2,117,789 | ||||||
|
Retained earnings
|
1,250,126 | 1,168,901 | ||||||
|
Accumulated other comprehensive income (loss):
|
||||||||
|
Pension and other postretirement benefits (Note 8)
|
(29,114 | ) | (26,960 | ) | ||||
|
Derivative instruments
|
(80,682 | ) | (98,742 | ) | ||||
|
|
||||||||
|
Common stock equity
|
3,445,355 | 3,339,150 | ||||||
|
Long-term debt less current maturities (Note 6)
|
3,180,406 | 2,850,242 | ||||||
|
|
||||||||
|
Total capitalization
|
6,625,761 | 6,189,392 | ||||||
|
|
||||||||
|
|
||||||||
|
CURRENT LIABILITIES
|
||||||||
|
Short-term borrowings
|
— | 521,684 | ||||||
|
Current maturities of long-term debt (Note 6)
|
197,176 | 874 | ||||||
|
Accounts payable
|
213,833 | 233,529 | ||||||
|
Accrued taxes
|
158,051 | 219,129 | ||||||
|
Accrued interest
|
54,099 | 39,860 | ||||||
|
Customer deposits
|
70,780 | 77,452 | ||||||
|
Liabilities from risk management activities (Note 18)
|
55,908 | 69,585 | ||||||
|
Other
|
124,995 | 105,655 | ||||||
|
|
||||||||
|
Total current liabilities
|
874,842 | 1,267,768 | ||||||
|
|
||||||||
|
|
||||||||
|
DEFERRED CREDITS AND OTHER
|
||||||||
|
Deferred income taxes (Notes 4 and S-1)
|
1,582,945 | 1,401,412 | ||||||
|
Deferred fuel and purchased power regulatory liability
(Notes 1 and 3)
|
87,291 | — | ||||||
|
Other regulatory liabilities (Notes 1, 3, 4, and S-1)
|
679,072 | 587,586 | ||||||
|
Liability for asset retirements (Note 12)
|
301,783 | 275,970 | ||||||
|
Liabilities for pension and other postretirement
benefits (Note 8)
|
766,378 | 635,327 | ||||||
|
Customer advances for construction
|
136,595 | 132,023 | ||||||
|
Liabilities from risk management activities (Note 18)
|
62,443 | 126,532 | ||||||
|
Coal mine reclamation
|
92,060 | 91,201 | ||||||
|
Unrecognized tax benefits
|
140,638 | 67,846 | ||||||
|
Other
|
153,594 | 188,520 | ||||||
|
|
||||||||
|
Total deferred credits and other
|
4,002,799 | 3,506,417 | ||||||
|
|
||||||||
|
|
||||||||
|
COMMITMENTS AND CONTINGENCIES (SEE NOTES)
|
||||||||
|
|
||||||||
|
TOTAL LIABILITIES AND EQUITY
|
$ | 11,503,402 | $ | 10,963,577 | ||||
|
|
||||||||
See Notes to Pinnacle West’s Consolidated Financial Statements and Supplemental Notes to
Arizona Public Service Company’s Financial Statements.
155
Table of Contents
ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF CASH FLOWS
(dollars in thousands)
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
|
Net income
|
$ | 251,225 | $ | 262,344 | $ | 283,940 | ||||||
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
||||||||||||
|
Depreciation and amortization including nuclear fuel
|
438,284 | 416,709 | 395,890 | |||||||||
|
Deferred fuel and purchased power
|
(51,742 | ) | (80,183 | ) | (196,136 | ) | ||||||
|
Deferred fuel and purchased power amortization
|
147,018 | 183,126 | 231,106 | |||||||||
|
Deferred fuel and purchased power regulatory
disallowance
|
— | — | 14,370 | |||||||||
|
Allowance for equity funds used during
construction
|
(14,999 | ) | (18,636 | ) | (21,195 | ) | ||||||
|
Deferred income taxes
|
192,914 | 145,157 | (44,478 | ) | ||||||||
|
Change in mark-to-market valuations
|
(6,939 | ) | 7,792 | (6,758 | ) | |||||||
|
Changes in current assets and liabilities:
|
||||||||||||
|
Customer and other receivables
|
2,603 | 40,782 | 19,825 | |||||||||
|
Accrued utility revenues
|
(10,882 | ) | 6,784 | 4,057 | ||||||||
|
Materials, supplies and fossil fuel
|
(12,261 | ) | (25,453 | ) | (29,776 | ) | ||||||
|
Other current assets
|
(9,427 | ) | 128 | (8,056 | ) | |||||||
|
Accounts payable
|
(22,129 | ) | (5,915 | ) | (2,797 | ) | ||||||
|
Accrued taxes
|
(61,078 | ) | (12,377 | ) | 13,802 | |||||||
|
Other current liabilities
|
26,907 | 20,527 | 20,231 | |||||||||
|
Change in margin and collateral accounts — assets
|
(13,206 | ) | 17,850 | 11,252 | ||||||||
|
Change in margin and collateral accounts — liabilities
|
35,654 | (132,416 | ) | 27,624 | ||||||||
|
Change in regulatory liabilities
|
110,642 | (12,129 | ) | 7,541 | ||||||||
|
Change in long-term income tax receivable
|
(132,379 | ) | — | — | ||||||||
|
Change in unrecognized tax benefits
|
137,478 | (92,064 | ) | 27,773 | ||||||||
|
Change in other long-term assets
|
(53,734 | ) | 14,340 | (23,577 | ) | |||||||
|
Change in other long-term liabilities
|
4,770 | 48,894 | 41,177 | |||||||||
|
|
||||||||||||
|
Net cash flow provided by operating activities
|
958,719 | 785,260 | 765,815 | |||||||||
|
|
||||||||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||
|
Capital expenditures
|
(754,301 | ) | (910,189 | ) | (924,166 | ) | ||||||
|
Contributions in aid of construction
|
53,525 | 60,292 | 41,809 | |||||||||
|
Capitalized interest
|
(10,386 | ) | (14,313 | ) | (12,308 | ) | ||||||
|
Proceeds from sale of investment securities
|
— | — | 69,225 | |||||||||
|
Purchases of investment securities
|
— | — | (36,525 | ) | ||||||||
|
Proceeds from nuclear decommissioning trust sales
|
441,242 | 317,619 | 259,026 | |||||||||
|
Investment in nuclear decommissioning trust
|
(463,033 | ) | (338,361 | ) | (279,768 | ) | ||||||
|
Other
|
(4,667 | ) | 5,517 | 1,211 | ||||||||
|
|
||||||||||||
|
Net cash flow used for investing activities
|
(737,620 | ) | (879,435 | ) | (881,496 | ) | ||||||
|
|
||||||||||||
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
|
Issuance of long-term debt
|
863,780 | — | — | |||||||||
|
Short-term borrowings — net
|
(521,684 | ) | 303,684 | 218,000 | ||||||||
|
Equity infusion
|
— | 7,601 | 39,548 | |||||||||
|
Dividends paid on common stock
|
(170,000 | ) | (170,000 | ) | (170,000 | ) | ||||||
|
Repayment and reacquisition of long-term debt
|
(343,941 | ) | (27,717 | ) | (1,586 | ) | ||||||
|
|
||||||||||||
|
Net cash flow provided by (used for) financing
activities
|
(171,845 | ) | 113,568 | 85,962 | ||||||||
|
|
||||||||||||
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
49,254 | 19,393 | (29,719 | ) | ||||||||
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
|
71,544 | 52,151 | 81,870 | |||||||||
|
|
||||||||||||
|
CASH AND CASH EQUIVALENTS AT END OF YEAR
|
$ | 120,798 | $ | 71,544 | $ | 52,151 | ||||||
|
|
||||||||||||
|
Supplemental disclosure of cash flow information:
|
||||||||||||
|
Cash paid during the year for:
|
||||||||||||
|
Income taxes, net of refunds
|
$ | 13,555 | $ | 56,728 | $ | 186,183 | ||||||
|
Interest, net of amounts capitalized
|
$ | 181,597 | $ | 167,592 | $ | 165,279 | ||||||
See Notes to Pinnacle West’s Consolidated Financial Statements and Supplemental Notes to Arizona
Public Service Company’s Financial Statements.
156
Table of Contents
ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
(dollars in thousands)
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
COMMON STOCK
|
$ | 178,162 | $ | 178,162 | $ | 178,162 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
ADDITIONAL PAID-IN CAPITAL
|
||||||||||||
|
Balance at beginning of year
|
2,117,789 | 2,105,466 | 2,065,918 | |||||||||
|
Equity Infusion
|
— | 7,601 | 39,548 | |||||||||
|
Other
|
9,074 | 4,722 | — | |||||||||
|
|
||||||||||||
|
Balance at end of year
|
2,126,863 | 2,117,789 | 2,105,466 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
RETAINED EARNINGS
|
||||||||||||
|
Balance at beginning of year
|
1,168,901 | 1,076,557 | 960,405 | |||||||||
|
Net income
|
251,225 | 262,344 | 283,940 | |||||||||
|
Common stock dividends
|
(170,000 | ) | (170,000 | ) | (170,000 | ) | ||||||
|
Cumulative effect of change in accounting
for income taxes (Note S-1)
|
— | — | 2,212 | |||||||||
|
|
||||||||||||
|
Balance at end of year
|
1,250,126 | 1,168,901 | 1,076,557 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
|
||||||||||||
|
Balance at beginning of year
|
(125,702 | ) | (8,744 | ) | 2,988 | |||||||
|
Pension and other postretirement benefits (Note 8):
|
||||||||||||
|
Unrealized actuarial loss, net of tax benefit of
$(2,938), $(5,075) and $(15,126)
|
(4,571 | ) | (7,597 | ) | (23,304 | ) | ||||||
|
Prior service cost, net of tax benefit of $(463)
|
— | — | (713 | ) | ||||||||
|
Amortization to income:
|
||||||||||||
|
Actuarial loss, net of tax benefit of $1,387,
$1,393 and $1,238
|
2,126 | 2,130 | 1,908 | |||||||||
|
Prior service cost, net of tax benefit of
$190, $189 and $212
|
291 | 289 | 327 | |||||||||
|
Derivative instruments:
|
||||||||||||
|
Net unrealized gain (loss), net of tax expense
(benefit) of $(61,317), $(56,149) and $1,369
|
(94,008 | ) | (85,670 | ) | 2,040 | |||||||
|
Reclassification of net realized (gains) losses to
income, net of tax (expense) benefit of
$73,261, $(16,890) and $5,164
|
112,068 | (26,110 | ) | 8,010 | ||||||||
|
|
||||||||||||
|
Balance at end of year
|
(109,796 | ) | (125,702 | ) | (8,744 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
TOTAL COMMON STOCK EQUITY
|
$ | 3,445,355 | $ | 3,339,150 | $ | 3,351,441 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
COMPREHENSIVE INCOME
|
||||||||||||
|
Net income
|
$ | 251,225 | $ | 262,344 | $ | 283,940 | ||||||
|
Other comprehensive income (loss)
|
15,906 | (116,958 | ) | (11,732 | ) | |||||||
|
|
||||||||||||
|
Total comprehensive income
|
$ | 267,131 | $ | 145,386 | $ | 272,208 | ||||||
|
|
||||||||||||
See Notes to Pinnacle West’s Consolidated Financial Statements and Supplemental Notes to
Arizona Public Service Company’s Financial Statements.
157
Table of Contents
Certain notes to Arizona Public Service Company’s financial statements are combined
with the notes to Pinnacle West Capital Corporation’s consolidated financial statements. Listed
below are the consolidated notes to Pinnacle West Capital Corporation’s consolidated financial
statements, the majority of which also relate to Arizona Public Service Company’s financial
statements. In addition, listed below are the supplemental notes which are required disclosures
for Arizona Public Service Company and should be read in conjunction with Pinnacle West Capital
Corporation’s Consolidated Notes.
| APS’ | ||||
| Consolidated | Supplemental | |||
| Footnote | Footnote | |||
| Reference | Reference | |||
|
Summary of Significant Accounting Policies
|
Note 1 | — | ||
|
New Accounting Standards
|
Note 2 | — | ||
|
Regulatory Matters
|
Note 3 | — | ||
|
Income Taxes
|
Note 4 | Note S-1 | ||
|
Lines of Credit and Short-Term Borrowings
|
Note 5 | — | ||
|
Long-Term Debt and Liquidity Matters
|
Note 6 | — | ||
|
Common Stock and Treasury Stock
|
Note 7 | — | ||
|
Retirement Plans and Other Benefits
|
Note 8 | — | ||
|
Leases
|
Note 9 | — | ||
|
Jointly-Owned Facilities
|
Note 10 | — | ||
|
Commitments and Contingencies
|
Note 11 | — | ||
|
Asset Retirement Obligations
|
Note 12 | — | ||
|
Selected Quarterly Financial Data (Unaudited)
|
Note 13 | Note S-2 | ||
|
Fair Value Measurements
|
Note 14 | — | ||
|
Earnings Per Share
|
Note 15 | — | ||
|
Stock-Based Compensation
|
Note 16 | — | ||
|
Business Segments
|
Note 17 | — | ||
|
Derivative Accounting
|
Note 18 | — | ||
|
Other Income and Other Expense
|
Note 19 | Note S-3 | ||
|
Variable Interest Entities
|
Note 20 | — | ||
|
Guarantees
|
Note 21 | — | ||
|
Discontinued Operations
|
Note 22 | — | ||
|
Real Estate Impairment Charge
|
Note 23 | — |
158
Table of Contents
ARIZONA PUBLIC SERVICE COMPANY
NOTES TO 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’ 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 the current income tax rates.
APS has recorded a regulatory asset and a regulatory liability related to income taxes on its
Balance Sheets in accordance with accounting guidance for regulated operations. The regulatory
asset is for certain temporary differences, primarily the allowance for equity funds used during
construction. The regulatory liability relates to deferred taxes resulting primarily from pension
and other postretirement benefits. APS amortizes these amounts as the differences reverse.
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 period that are included in
accrued taxes and unrecognized tax benefits on the Balance Sheets (dollars in thousands):
| 2009 | 2008 | |||||||
|
Total unrecognized tax benefits, January 1
|
$ | 62,409 | $ | 154,473 | ||||
|
Additions for tax positions of the current year
|
44,094 | 12,893 | ||||||
|
Additions for tax positions of prior years
|
98,269 | 32,481 | ||||||
|
Reductions for tax positions of prior years for:
|
||||||||
|
Changes in judgment
|
— | (4,547 | ) | |||||
|
Settlements with taxing authorities
|
(4,089 | ) | (35,812 | ) | ||||
|
Lapses of applicable statute of limitations
|
(796 | ) | (97,079 | ) | ||||
|
|
||||||||
|
Total unrecognized tax benefits, December 31
|
$ | 199,887 | $ | 62,409 | ||||
|
|
||||||||
Included in both balances of unrecognized tax benefits at December 31, 2009 and 2008 were
approximately $15 million of tax positions that, if recognized, would decrease our effective tax
rate.
As of the balance sheet date, the tax year ended December 31, 2005 and all subsequent tax
years remain subject to examination by the IRS. With few exceptions, we are no longer subject to
state income tax examinations by tax authorities for years before 1999.
Within the next 12 months, it is reasonably possible that the Company will reach a settlement
with the IRS with regard to the examination of tax returns for years ended December 31,
2005 through 2007. As a result of these anticipated settlements, and the expiration of certain
statutes of limitations, the Company believes that it is reasonably possible that unrecognized tax
benefits could be reduced by an amount up to $70 million.
We reflect interest and penalties, if any, on unrecognized tax benefits in the statement of
income as income tax expense. The amount of interest recognized in the Statement of Income related
to unrecognized tax benefits was a pre-tax expense of $2 million for 2009 and a pre-tax benefit of
$51 million for 2008.
159
Table of Contents
ARIZONA PUBLIC SERVICE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS
The total amount of accrued liabilities for interest recognized in the Balance Sheets related
to unrecognized tax benefits was $8 million as of December 31, 2009 and $5 million as of December
31, 2008. To the extent that matters are settled favorably, this amount could reverse and decrease
our effective tax rate. Additionally, as of December 31, 2009, we have recognized $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 APS’ income tax expense are as follows (dollars in thousands):
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | (8,667 | ) | $ | (54,719 | ) | $ | 168,607 | ||||
|
State
|
(31,673 | ) | 16,823 | 27,028 | ||||||||
|
|
||||||||||||
|
Total current
|
(40,340 | ) | (37,896 | ) | 195,635 | |||||||
|
Deferred
|
192,914 | 145,157 | (44,478 | ) | ||||||||
|
|
||||||||||||
|
Total income tax expense
|
$ | 152,574 | $ | 107,261 | $ | 151,157 | ||||||
|
|
||||||||||||
On the APS Statements of Income, federal and state income taxes are allocated between
operating income and other income.
160
Table of Contents
ARIZONA PUBLIC SERVICE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS
The following chart compares APS’ pretax income at the 35% federal income tax rate to income
tax expense (dollars in thousands):
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
Federal income tax expense at 35%
statutory rate
|
$ | 141,330 | $ | 129,362 | $ | 152,284 | ||||||
|
Increases (reductions) in tax
expense resulting from:
|
||||||||||||
|
State income tax net of
federal income tax benefit
|
16,691 | 14,956 | 17,540 | |||||||||
|
Credits and favorable
adjustments related to prior
years resolved in current
year
|
— | (28,873 | ) | (11,432 | ) | |||||||
|
Medicare Subsidy Part-D
|
(2,025 | ) | (1,921 | ) | (3,100 | ) | ||||||
|
Allowance for equity funds
used during construction
(see Note 1)
|
(4,265 | ) | (5,755 | ) | (6,900 | ) | ||||||
|
Other
|
843 | (508 | ) | 2,765 | ||||||||
|
|
||||||||||||
|
Income tax expense
|
$ | 152,574 | $ | 107,261 | $ | 151,157 | ||||||
|
|
||||||||||||
The following table shows the net deferred income tax liability recognized on the APS Balance
Sheets (dollars in thousands):
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Current asset
|
$ | 53,990 | $ | 79,694 | ||||
|
Long-term liability
|
(1,582,945 | ) | (1,401,412 | ) | ||||
|
|
||||||||
|
Accumulated deferred income taxes — net
|
$ | (1,528,955 | ) | $ | (1,321,718 | ) | ||
|
|
||||||||
161
Table of Contents
ARIZONA PUBLIC SERVICE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS
The components of the net deferred income tax liability were as follows (dollars in
thousands):
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
DEFERRED TAX ASSETS
|
||||||||
|
Regulatory liabilities:
|
||||||||
|
Asset retirement obligation
|
$ | 213,814 | $ | 194,326 | ||||
|
Deferred fuel and purchased power
|
34,463 | — | ||||||
|
Other
|
21,613 | 13,986 | ||||||
|
Risk management activities
|
87,404 | 132,383 | ||||||
|
Pension and other postretirement liabilities
|
288,769 | 265,156 | ||||||
|
Deferred gain on Palo Verde Unit 2
sale-leaseback
|
11,836 | 12,665 | ||||||
|
Other
|
92,580 | 119,447 | ||||||
|
|
||||||||
|
Total deferred tax assets
|
750,479 | 737,963 | ||||||
|
|
||||||||
|
DEFERRED TAX LIABILITIES
|
||||||||
|
Plant-related
|
(1,951,262 | ) | (1,709,872 | ) | ||||
|
Risk management activities
|
(20,863 | ) | (20,732 | ) | ||||
|
Regulatory assets:
|
||||||||
|
Allowance for equity funds used
during construction
|
(23,285 | ) | (20,174 | ) | ||||
|
Deferred fuel and purchased power —
mark-to-market
|
(16,167 | ) | (46,593 | ) | ||||
|
Pension and other postretirement
benefits
|
(210,080 | ) | (186,916 | ) | ||||
|
Other
|
(57,210 | ) | (58,519 | ) | ||||
|
Other
|
(567 | ) | (16,875 | ) | ||||
|
|
||||||||
|
Total deferred tax liabilities
|
(2,279,434 | ) | (2,059,681 | ) | ||||
|
|
||||||||
|
Accumulated deferred income taxes — net
|
$ | (1,528,955 | ) | $ | (1,321,718 | ) | ||
|
|
||||||||
162
Table of Contents
ARIZONA PUBLIC SERVICE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS
S-2. Selected Quarterly Financial Data (Unaudited)
Quarterly financial information for 2009 and 2008 is as follows (dollars in thousands):
| 2009 Quarter Ended, | 2009 | |||||||||||||||||||
| March 31, | June 30, | September 30, | December 31, | Total | ||||||||||||||||
|
|
||||||||||||||||||||
|
Operating revenues
|
$ | 602,660 | $ | 812,587 | $ | 1,083,825 | $ | 650,428 | $ | 3,149,500 | ||||||||||
|
Operations and maintenance
|
201,100 | 221,128 | 203,446 | 226,889 | 852,563 | |||||||||||||||
|
Operating income
|
29,125 | 122,385 | 245,104 | 41,229 | 437,843 | |||||||||||||||
|
Net income
|
(15,479 | ) | 78,544 | 197,065 | (8,905 | ) | 251,225 | |||||||||||||
| 2008 Quarter Ended, | 2008 | |||||||||||||||||||
| March 31, | June 30, | September 30, | December 31, | Total | ||||||||||||||||
|
|
||||||||||||||||||||
|
Operating revenues
|
$ | 625,576 | $ | 831,083 | $ | 1,042,084 | $ | 634,753 | $ | 3,133,496 | ||||||||||
|
Operations and maintenance
|
188,135 | 187,819 | 206,526 | 204,790 | 787,270 | |||||||||||||||
|
Operating income
|
33,628 | 163,860 | 202,655 | 35,257 | 435,400 | |||||||||||||||
|
Net income
|
(6,364 | ) | 125,382 | 159,754 | (16,428 | ) | 262,344 | |||||||||||||
S-3. Other Income and Other Expense
The following table provides detail of APS’ other income and other expense for 2009, 2008 and
2007 (dollars in thousands):
| 2009 | 2008 | 2007 | ||||||||||
|
Other income:
|
||||||||||||
|
Interest income
|
$ | 502 | $ | 3,863 | $ | 10,961 | ||||||
|
SO2 emission allowance sales
and other (a)
|
1,439 | 392 | 1,001 | |||||||||
|
Investment gains — net
|
6,673 | — | 2,429 | |||||||||
|
Miscellaneous
|
2,194 | 1,976 | 2,336 | |||||||||
|
|
||||||||||||
|
Total other income
|
$ | 10,808 | $ | 6,231 | $ | 16,727 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Other expense:
|
||||||||||||
|
Non-operating costs (a)
|
$ | (7,368 | ) | $ | (10,538 | ) | $ | (12,712 | ) | |||
|
Asset dispositions
|
(656 | ) | (5,779 | ) | (1,981 | ) | ||||||
|
Investment losses — net
|
— | (9,438 | ) | — | ||||||||
|
Miscellaneous
|
(9,977 | ) | (4,814 | ) | (6,937 | ) | ||||||
|
|
||||||||||||
|
Total other expense
|
$ | (18,001 | ) | $ | (30,569 | ) | $ | (21,630 | ) | |||
|
|
||||||||||||
| (a) | As defined by the FERC, includes below-the-line non-operating utility income and expense (items excluded from utility rate recovery). |
163
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PINNACLE WEST CAPITAL CORPORATION HOLDING COMPANY
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF INCOME
(in thousands)
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007(a) | ||||||||||
|
|
||||||||||||
|
Operating revenues
|
$ | 1,156 | $ | 52 | $ | 6,708 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Operating expenses
|
||||||||||||
|
Fuel and purchased power
|
— | (19,970 | ) | (35,541 | ) | |||||||
|
Other operating expenses
|
11,004 | 9,016 | 5,659 | |||||||||
|
|
||||||||||||
|
Total
|
11,004 | (10,954 | ) | (29,882 | ) | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Operating income
|
(9,848 | ) | 11,006 | 36,590 | ||||||||
|
|
||||||||||||
|
Other
|
||||||||||||
|
Equity in earnings of subsidiaries
|
(37,214 | ) | 226,893 | 287,078 | ||||||||
|
Other income
|
2,776 | 1,248 | 225 | |||||||||
|
|
||||||||||||
|
Total
|
(34,438 | ) | 228,141 | 287,303 | ||||||||
|
|
||||||||||||
|
Interest expense
|
14,129 | 17,550 | 17,190 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Income from continuing operations
|
(58,415 | ) | 221,597 | 306,703 | ||||||||
|
|
||||||||||||
|
Income tax benefit (b)
|
(117,792 | ) | (12,374 | ) | (440 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Income from continuing operations — net of
income taxes
|
59,377 | 233,971 | 307,143 | |||||||||
|
Income from discontinued operations —
net of income taxes
|
8,953 | 8,154 | — | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net income
|
$ | 68,330 | $ | 242,125 | $ | 307,143 | ||||||
|
|
||||||||||||
| (a) | Pinnacle West Marketing & Trading began operations in early 2007. These operations were conducted by a division of Pinnacle West through the end of 2006. By the end of 2008, substantially all the contracts were transferred to APS or expired. | |
| (b) | In 2009, this is primarily the income tax benefit related to SunCor’s real estate impairment charges. |
164
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PINNACLE WEST CAPITAL CORPORATION HOLDING COMPANY
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(in thousands)
| Balance at December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Assets
|
||||||||
|
|
||||||||
|
Current assets
|
||||||||
|
Cash and cash equivalents
|
$ | 17,284 | $ | 6,262 | ||||
|
Customer and other receivables
|
77,570 | 65,576 | ||||||
|
Income tax receivable
|
64,317 | — | ||||||
|
Other current assets
|
49 | 367 | ||||||
|
|
||||||||
|
Total current assets
|
159,220 | 72,205 | ||||||
|
|
||||||||
|
|
||||||||
|
Investments and other assets
|
||||||||
|
Investments in subsidiaries
|
3,490,148 | 3,709,099 | ||||||
|
Deferred income taxes
|
89,842 | — | ||||||
|
Other assets
|
22,520 | 20,029 | ||||||
|
|
||||||||
|
Total investments and other assets
|
3,602,510 | 3,729,128 | ||||||
|
|
||||||||
|
|
||||||||
|
Total Assets
|
$ | 3,761,730 | $ | 3,801,333 | ||||
|
|
||||||||
|
|
||||||||
|
Liabilities and Common Stock Equity
|
||||||||
|
|
||||||||
|
Current liabilities
|
||||||||
|
Accounts payable
|
$ | 10,923 | $ | 6,310 | ||||
|
Accrued taxes
|
5,157 | (96,188 | ) | |||||
|
Short-term borrowings
|
149,086 | 144,000 | ||||||
|
Other current liabilities
|
9,950 | 8,027 | ||||||
|
|
||||||||
|
Total current liabilities
|
175,116 | 62,149 | ||||||
|
|
||||||||
|
|
||||||||
|
Long-term debt less current maturities
|
175,000 | 175,000 | ||||||
|
|
||||||||
|
Deferred credits and other
|
||||||||
|
Deferred income taxes
|
— | 18,027 | ||||||
|
Pension and other postretirement liabilities
|
29,343 | 27,300 | ||||||
|
Other
|
36,591 | 25,489 | ||||||
|
|
||||||||
|
Total deferred credits and other
|
65,934 | 70,816 | ||||||
|
|
||||||||
|
|
||||||||
|
Common stock equity
|
||||||||
|
Common stock
|
2,149,483 | 2,148,469 | ||||||
|
Accumulated other comprehensive loss
|
(131,587 | ) | (146,698 | ) | ||||
|
Retained earnings
|
1,298,213 | 1,444,208 | ||||||
|
|
||||||||
|
Total Pinnacle West Shareholders’ equity
|
3,316,109 | 3,445,979 | ||||||
|
Noncontrolling real estate interests
|
29,571 | 47,389 | ||||||
|
|
||||||||
|
Total Equity
|
3,345,680 | 3,493,368 | ||||||
|
|
||||||||
|
Total Liabilities and Common Stock Equity
|
$ | 3,761,730 | $ | 3,801,333 | ||||
|
|
||||||||
165
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PINNACLE WEST CAPITAL CORPORATION HOLDING COMPANY
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 (a) | ||||||||||
|
|
||||||||||||
|
Cash flows from operating activities
|
||||||||||||
|
Net Income
|
$ | 68,330 | $ | 242,125 | $ | 307,143 | ||||||
|
Adjustments to reconcile net income to net
cash provided by operating activities:
|
||||||||||||
|
Equity in earnings of subsidiaries — net
|
37,214 | (226,893 | ) | (287,078 | ) | |||||||
|
Depreciation and amortization
|
127 | 210 | 320 | |||||||||
|
Deferred income taxes
|
(106,536 | ) | 31,954 | (24,192 | ) | |||||||
|
Change in mark-to-market valuations
|
— | (19,975 | ) | 53,228 | ||||||||
|
Customer and other receivables
|
(2,303 | ) | 38,938 | 112,543 | ||||||||
|
Accounts payable
|
466 | (14,134 | ) | (57,978 | ) | |||||||
|
Accrued taxes and income tax receivables — net
|
44,625 | (5,230 | ) | 25,127 | ||||||||
|
Change in margin and collateral accounts — net
|
— | — | (11,602 | ) | ||||||||
|
Dividends received from subsidiaries
|
170,000 | 170,000 | 180,000 | |||||||||
|
Other net
|
(2,379 | ) | (7,914 | ) | (104,968 | ) | ||||||
|
|
||||||||||||
|
Net cash flow provided by operating activities
|
209,544 | 209,081 | 192,543 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash flows from investing activities
|
||||||||||||
|
Investments in subsidiaries
|
(4,967 | ) | (18,765 | ) | (83,993 | ) | ||||||
|
Repayments of loans from subsidiaries
|
25,240 | 10,194 | 14,996 | |||||||||
|
Advances of loans to subsidiaries
|
(21,587 | ) | (22,554 | ) | (19,796 | ) | ||||||
|
|
||||||||||||
|
Net cash flow used for investing activities
|
(1,314 | ) | (31,125 | ) | (88,793 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash flows from financing activities
|
||||||||||||
|
Short-term borrowings and payments — net
|
4,566 | 28,729 | 87,371 | |||||||||
|
Dividends paid on common stock
|
(205,076 | ) | (204,247 | ) | (210,473 | ) | ||||||
|
Repayment of long-term debt
|
— | — | (115 | ) | ||||||||
|
Common stock equity issuance
|
3,302 | 3,687 | 19,593 | |||||||||
|
|
||||||||||||
|
Net cash flow used for financing activities
|
(197,208 | ) | (171,831 | ) | (103,624 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net increase in cash and cash equivalents
|
11,022 | 6,125 | 126 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash and cash equivalents at beginning of year
|
6,262 | 137 | 11 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash and cash equivalents at end of year
|
$ | 17,284 | $ | 6,262 | $ | 137 | ||||||
|
|
||||||||||||
| (a) | Pinnacle West Marketing & Trading began operations in early 2007. These operations were conducted by a division of Pinnacle West through the end of 2006. By the end of 2008, substantially all the contracts were transferred to APS or expired. |
166
Table of Contents
PINNACLE WEST CAPITAL CORPORATION
SCHEDULE II — RESERVE FOR UNCOLLECTIBLES
(dollars in thousands)
| Column A | Column B | Column C | Column D | Column E | ||||||||||||||||
| Additions | ||||||||||||||||||||
| Balance at | Charged to | Charged | Balance | |||||||||||||||||
| beginning | cost and | to other | at end of | |||||||||||||||||
| Description | of period | expenses | accounts | Deductions | period | |||||||||||||||
|
|
||||||||||||||||||||
|
Reserve for uncollectibles:
|
||||||||||||||||||||
|
2009
|
$ | 3,383 | $ | 7,617 | $ | — | $ | 4,847 | $ | 6,153 | ||||||||||
|
2008
|
4,782 | 6,177 | — | 7,576 | 3,383 | |||||||||||||||
|
2007
|
5,597 | 4,130 | — | 4,945 | 4,782 | |||||||||||||||
167
Table of Contents
ARIZONA PUBLIC SERVICE COMPANY
SCHEDULE II — RESERVE FOR UNCOLLECTIBLES
(dollars in thousands)
| Column A | Column B | Column C | Column D | Column E | ||||||||||||||||
| Additions | ||||||||||||||||||||
| Balance at | Charged to | Charged | Balance | |||||||||||||||||
| beginning | cost and | to other | at end of | |||||||||||||||||
| Description | of period | expenses | accounts | Deductions | period | |||||||||||||||
|
|
||||||||||||||||||||
|
Reserve for uncollectibles:
|
||||||||||||||||||||
|
2009
|
$ | 3,155 | $ | 7,062 | $ | — | $ | 4,154 | $ | 6,063 | ||||||||||
|
2008
|
4,265 | 5,924 | — | 7,034 | 3,155 | |||||||||||||||
|
2007
|
4,223 | 5,059 | — | 5,017 | 4,265 | |||||||||||||||
168
Table of Contents
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
The term “disclosure controls and procedures” means controls and other procedures of a company
that are designed to ensure that information required to be disclosed by a company in the reports
that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) (15 U.S.C.
78a
et seq
.) is recorded, processed, summarized and reported, within the time periods specified in
the SEC’s rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be disclosed by a company
in the reports that it files or submits under the Exchange Act is accumulated and communicated to a
company’s management, including its principal executive and principal financial officers, or
persons performing similar functions, as appropriate to allow timely decisions regarding required
disclosure.
Pinnacle West’s management, with the participation of Pinnacle West’s Chief Executive Officer
and Chief Financial Officer, have evaluated the effectiveness of Pinnacle West’s disclosure
controls and procedures as of December 31, 2009. Based on that evaluation, Pinnacle West’s Chief
Executive Officer and Chief Financial Officer have concluded that, as of that date, Pinnacle West’s
disclosure controls and procedures were effective.
APS’ management, with the participation of APS’ Chief Executive Officer and Chief Financial
Officer, have evaluated the effectiveness of APS’ disclosure controls and procedures as of December
31, 2009. Based on that evaluation, APS’ Chief Executive Officer and Chief Financial Officer have
concluded that, as of that date, APS’ disclosure controls and procedures were effective.
(b) Management’s Annual Reports on Internal Control Over Financial Reporting
Reference is made to “Management’s Report on Internal Control Over Financial Reporting
(Pinnacle West Capital Corporation)” on page 81 of this report and “Management’s Report on
Internal Control Over Financial Reporting (Arizona Public Service
Company)” on page 150 of this
report.
(c) Attestation Reports of the Registered Public Accounting Firm
Reference
is made to “Report of Independent Registered Public Accounting
Firm” on page 82 of this report and “Report of Independent Registered Public
Accounting Firm” on page 151 of this
report on the internal control over financial reporting of Pinnacle West and APS, respectively.
(d) Changes In Internal Control Over Financial Reporting
The term “internal control over financial reporting” (defined in SEC Rule 13a-15(f)) refers to
the process of a company that is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in
accordance with GAAP.
169
Table of Contents
No change in Pinnacle West’s or APS’ internal control over financial reporting occurred during
the fiscal quarter ended December 31, 2009 that materially affected, or is reasonably likely to
materially affect, Pinnacle West’s or APS’ internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS
AND CORPORATE GOVERNANCE OF PINNACLE WEST
AND CORPORATE GOVERNANCE OF PINNACLE WEST
Reference is hereby made to “Information About Our Board and Corporate Governance,”
“Proposal 1 — Election of Directors” and to “Section 16(a) Beneficial Ownership Reporting
Compliance” in the Pinnacle West Proxy Statement relating to the Annual Meeting of Shareholders to
be held on May 19, 2010 (the “2010 Proxy Statement”) and to the “Executive
Officers of Pinnacle West” section in Part I of this report.
Pinnacle West has adopted a Code of Ethics for Financial Executives that applies to financial
executives including Pinnacle West’s Chief Executive Officer, Chief Financial Officer, Chief
Accounting Officer, Controller, Treasurer, and persons holding substantially equivalent positions
at Pinnacle West’s subsidiaries. The Code of Ethics for Financial Executives is posted on Pinnacle
West’s website at
www.pinnaclewest.com
. Pinnacle West intends to satisfy the requirements under
Item 5.05 of Form 8-K regarding disclosure of amendments to, or waivers from, provisions of the
Code of Ethics for Financial Executives by posting such information on Pinnacle West’s website.
ITEM 11. EXECUTIVE COMPENSATION
Reference
is hereby made to “Director Compensation,” “Report of
the Human Resources Committee,” “Executive
Compensation,” “Overall Compensation Program” and
“HR Committee Interlocks and Insider Participation” in the 2010
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Reference is hereby made to “Shares of Pinnacle West Stock Owned by Management and Large
Shareholders” in the 2010 Proxy Statement.
170
Table of Contents
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information as of December 31, 2009 with respect to our
compensation plans and individual compensation arrangements under which our equity securities are
authorized for issuance.
EQUITY COMPENSATION PLAN INFORMATION
| Number of securities | ||||||||||||
| remaining available | ||||||||||||
| for future issuance | ||||||||||||
| Number of securities | Weighted-average | under equity | ||||||||||
| to be issued upon | exercise price of | compensation plans | ||||||||||
| exercise of | outstanding | (excluding securities | ||||||||||
| outstanding options, | options, warrants | reflected in column | ||||||||||
| warrants and rights | and rights | (a)) | ||||||||||
| Plan Category | (a) 1 | (b) 2 | (c) 3 | |||||||||
|
Equity compensation
plans approved by
security holders
|
1,613,227 | $ | 41.20 | 6,436,058 | ||||||||
|
Equity compensation
plans not approved
by security holders
|
— | — | — | |||||||||
|
|
||||||||||||
|
Total
|
1,613,227 | $ | 41.20 | 6,436,058 | ||||||||
|
|
||||||||||||
| 1 | This amount includes shares subject to outstanding options as well as shares subject to outstanding performance share awards and restricted stock unit awards at the maximum amount of shares issuable under such awards. However, payout of the performance share awards is contingent on the Company reaching certain levels of performance during a three-year performance period. If the performance criteria for these awards are not fully satisfied, the award recipient will receive less than the maximum number of shares available under these grants and may receive nothing from these grants. |
| 2 | The weighted average exercise price in this column does not take performance share awards or restricted stock unit awards into account, as those awards have no exercise price. |
| 3 | Awards can take the form of options, stock appreciation rights, restricted stock, performance shares, performance share units, performance cash, stock grants, dividend equivalents, and restricted stock units. |
Equity Compensation Plans Approved By Security Holders
Amounts in column (a) in the table above include shares subject to awards outstanding under
three equity compensation plans that were approved by our shareholders: (a) the Pinnacle West
Capital Corporation 1994 Long-Term Incentive Plan, under which no new stock awards may be granted;
(b) the Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan (the “2002 Plan”), under
which no new stock awards may be granted; and (c) the Pinnacle West Capital
Corporation 2007 Long-Term Incentive Plan (the “2007 Plan”), which was approved by our shareholders
at our 2007 annual meeting of shareholders. Although we cannot issue additional awards under the
2002 Plan, shares subject to outstanding awards under the 2002 Plan that expire or are cancelled or
terminated will be available for issuance under the 2007 Plan. See Note 16 of the Notes to
Consolidated Financial Statements for additional information regarding these plans.
171
Table of Contents
Equity Compensation Plans Not Approved By Security Holders
The Company does not have any equity compensation plans under which shares can still be issued
that have not been approved by shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
DIRECTOR INDEPENDENCE
Reference is hereby made to “Information About Our Board and Corporate Governance” and
“Related Party Transactions” in the 2010 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT
FEES AND SERVICES
FEES AND SERVICES
Pinnacle West
Reference
is hereby made to “Proposal 3 — Ratification of the
Selection of Deloitte & Touche LLP as Independent Accountants of the
Company — Audit Fees and — Pre-Approval Policies” in the 2010 Proxy Statement.
APS
The following fees were paid to APS’ independent registered public accountants, Deloitte &
Touche LLP, for the last two fiscal years:
| Type of Service | 2008 | 2009 | ||||||
|
Audit Fees (1)
|
$ | 1,935,056 | $ | 1,698,325 | ||||
|
Audit-Related Fees (2)
|
233,025 | 380,695 | ||||||
|
Tax Fees (3)
|
8,400 | — | ||||||
| (1) | The aggregate fees billed for services rendered for the audit of annual financial statements and for review of financial statements included in Reports on Form 10-Q. | |
| (2) | The aggregate fees billed for assurance services that are reasonably related to the performance of the audit or review of the financial statements that are not included in Audit Fees reported above, which primarily consist of fees for an International Financial Reporting Standards Assessment for work performed in 2009 and employee benefit plan audits for work performed in 2008 and 2009. | |
| (3) | The aggregate fees billed primarily for tax compliance and tax planning. |
Pinnacle West’s Audit Committee pre-approves each audit service and non-audit service to be
provided by APS’ registered public accounting firm. The Audit Committee has delegated to the
Chairman of the Audit Committee the authority to pre-approve audit and non-audit services to be
performed by the independent public accountants if the services are not expected to cost more than
$50,000. The Chairman must report any pre-approval decisions to the Audit Committee at its next
scheduled meeting. All of the services performed by Deloitte & Touche LLP for APS were
pre-approved by the Audit Committee.
172
Table of Contents
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements and Financial Statement Schedules
See the Index to Financial Statements and Financial Statement Schedule in Part II, Item 8.
Exhibits Filed
The documents listed below are being filed or have previously been filed on behalf of Pinnacle
West or APS and are incorporated herein by reference from the documents indicated and made a part
hereof. Exhibits not identified as previously filed are filed herewith.
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
3.1
|
Pinnacle West | Articles of Incorporation, restated as of May 21, 2008 | 3.1 to Pinnacle West/APS June 30, 2008 Form 10-Q Report, File Nos. 1-8962 and 1-4473 | 8-7-08 | ||||
|
|
||||||||
|
3.2
|
Pinnacle West | Pinnacle West Capital Corporation Bylaws, amended as of January 21, 2009 | 3.2 to Pinnacle West/APS December 31, 2008 Form 10-K Report, File Nos. 1-8962 and 1-4473 | 2-20-09 | ||||
|
|
||||||||
|
3.3
|
APS | Articles of Incorporation, restated as of May 25, 1988 | 4.2 to APS’ Form 18 Registration Nos. 33-33910 and 33-55248 by means of September 24, 1993 Form 8-K Report, File No. 1-4473 | 9-29-93 | ||||
|
|
||||||||
|
3.4
|
APS | Arizona Public Service Company Bylaws, amended as of December 16, 2008 | 3.4 to Pinnacle West/APS December 31, 2008 Form 10-K, File No. 1-4473 | 2-20-09 | ||||
|
|
||||||||
|
4.1
|
Pinnacle West | Specimen Certificate of Pinnacle West Capital Corporation Common Stock, no par value | 4.12 to Pinnacle West April 29, 2005 Form 8-K Report, File No. 1-8962 | 5-2-05 |
173
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
4.2
|
Pinnacle West
APS |
Indenture dated as of January 1, 1995 among APS and The Bank of New York Mellon, as Trustee | 4.6 to APS’ Registration Statement Nos. 33-61228 and 33-55473 by means of January 1, 1995 Form 8-K Report, File No. 1-4473 | 1-11-95 | ||||
|
|
||||||||
|
4.2a
|
Pinnacle West
APS |
First Supplemental Indenture dated as of January 1, 1995 | 4.4 to APS’ Registration Statement Nos. 33-61228 and 33-55473 by means of January 1, 1995 Form 8-K Report, File No. 1-4473 | 1-11-95 | ||||
|
|
||||||||
|
4.3
|
Pinnacle West
APS |
Indenture dated as of November 15, 1996 between APS and The Bank of New York, as Trustee | 4.5 to APS’ Registration Statements Nos. 33-61228, 33-55473, 33-64455 and 333- 15379 by means of November 19, 1996 Form 8-K Report, File No. 1-4473 | 11-22-96 | ||||
|
|
||||||||
|
4.3a
|
Pinnacle West
APS |
First Supplemental Indenture dated as of November 15, 1996 | 4.6 to APS’ Registration Statements Nos. 33-61228, 33-55473, 33-64455 and 333-15379 by means of November 19, 1996 Form 8-K Report, File No. 1-4473 | 11-22-96 | ||||
|
|
||||||||
|
4.3b
|
Pinnacle West
APS |
Second Supplemental Indenture dated as of April 1, 1997 | 4.10 to APS’ Registration Statement Nos. 33-55473, 33-64455 and 333-15379 by means of April 7, 1997 Form 8-K Report, File No. 1-4473 | 4-9-97 | ||||
|
|
||||||||
|
4.3c
|
Pinnacle West
APS |
Third Supplemental Indenture dated as of November 1, 2002 | 10.2 to Pinnacle West’s March 31, 2003 Form 10-Q Report, File No. 1-8962 | 5-15-03 |
174
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
4.4
|
Pinnacle West | Indenture dated as of December 1, 2000 between the Company and The Bank of New York, as Trustee, relating to Senior Unsecured Debt Securities | 4.1 to Pinnacle West’s Registration Statement No. 333-52476 | 12-21-00 | ||||
|
|
||||||||
|
4.5
|
Pinnacle West | Indenture dated as of December 1, 2000 between the Company and The Bank of New York, as Trustee, relating to Subordinated Unsecured Debt Securities | 4.2 to Pinnacle West’s Registration Statement No. 333-52476 | 12-21-00 | ||||
|
|
||||||||
|
4.6
|
Pinnacle West
APS |
Indenture dated as of January 15, 1998 between APS and The Bank of New York Mellon Trust Company N.A. (successor to JPMorgan Chase Bank, N.A., formerly known as The Chase Manhattan Bank), as Trustee | 4.10 to APS’ Registration Statement Nos. 333-15379 and 333-27551 by means of January 13, 1998 Form 8-K Report, File No. 1-4473 | 1-16-98 | ||||
|
|
||||||||
|
4.6a
|
Pinnacle West
APS |
Fifth Supplemental Indenture dated as of October 1, 2001 | 4.1 to APS’ September 30, 2001 Form 10-Q, File No. 1-4473 | 11-6-01 | ||||
|
|
||||||||
|
4.6b
|
Pinnacle West
APS |
Sixth Supplemental Indenture dated as of March 1, 2002 | 4.1 to APS’ Registration Statement Nos. 333-63994 and 333-83398 by means of February 26, 2002 Form 8-K Report, File No. 1-4473 | 2-28-02 | ||||
|
|
||||||||
|
4.6c
|
Pinnacle West
APS |
Seventh Supplemental Indenture dated as of May 1, 2003 | 4.1 to APS’ Registration Statement No. 333-90824 by means of May 7, 2003 Form 8-K Report, File No. 1-4473 | 5-9-03 |
175
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
4.6d
|
Pinnacle West
APS |
Eighth Supplemental Indenture dated as of June 15, 2004 | 4.1 to APS’ Registration Statement No. 333-106772 by means of June 24, 2004 Form 8-K Report, File No. 1-4473 | 6-28-04 | ||||
|
|
||||||||
|
4.6e
|
Pinnacle West
APS |
Ninth Supplemental Indenture dated as of August 15, 2005 | 4.1 to APS’ Registration Statements Nos. 333-106772 and 333-121512 by means of August 17, 2005 Form 8-K Report, File No. 1-4473 | 8-22-05 | ||||
|
|
||||||||
|
4.6f
|
APS | Tenth Supplemental Indenture dated as of August 1, 2006 | 4.1 to APS’ July 31, 2006 Form 8-K Report, File No. 1-4473 | 8-3-06 | ||||
|
|
||||||||
|
4.6g
|
Pinnacle West
APS |
Eleventh Supplemental Indenture dated as of February 26, 2009 | 4.1 to APS’ February 23, 2009 Form 8-K Report, File Nos. 1-8962 and 1-4473 | 2-25-09 | ||||
|
|
||||||||
|
4.7
|
Pinnacle West | Amended and Restated Rights Agreement, dated as of March 26, 1999, between Pinnacle West Capital Corporation and BankBoston, N.A., as Rights Agent, including (i) as Exhibit A thereto the form of Amended Certificate of Designation of Series A Participating Preferred Stock of Pinnacle West Capital Corporation, (ii) as Exhibit B thereto the form of Rights Certificate and (iii) as Exhibit C thereto the Summary of Right to Purchase Preferred Shares | 4.1 to Pinnacle West’s March 22, 1999 Form 8-K Report, File No. 1-8962 | 4-19-99 |
176
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
4.7a
|
Pinnacle West | Amendment to Rights Agreement, effective as of January 1, 2002 | 4.1 to Pinnacle West’s March 31, 2002 Form 10-Q Report, File No. 1-8962 | 5-15-02 | ||||
|
|
||||||||
|
4.8
|
Pinnacle West | Second Amended and Restated Investor’s Advantage Plan dated as of June 23, 2004 | 4.4 to Pinnacle West’s June 23, 2004 Form 8-K Report, File No. 1-8962 | 8-9-04 | ||||
|
|
||||||||
|
4.8a
|
Pinnacle West | Third Amended and Restated Investors Advantage Plan dated as of November 25, 2008 | 4.1 to Pinnacle West’s Form 18 Registration Statement No. 333-155641 | 11-25-08 | ||||
|
|
||||||||
|
4.9
|
Pinnacle West | Agreement, dated March 29, 1988, relating to the filing of instruments defining the rights of holders of long-term debt not in excess of 10% of the Company’s total assets | 4.1 to Pinnacle West’s 1987 Form 10-K Report, File No. 1-8962 | 3-30-88 | ||||
|
|
||||||||
|
4.9a
|
Pinnacle West
APS |
Agreement, dated March 21, 1994, relating to the filing of instruments defining the rights of holders of APS long-term debt not in excess of 10% of APS’ total assets | 4.1 to APS’ 1993 Form 10-K Report, File No. 1-4473 | 3-30-94 | ||||
|
|
||||||||
|
10.1.1
|
Pinnacle West
APS |
Two separate Decommissioning Trust Agreements (relating to PVNGS Units 1 and 3, respectively), each dated July 1, 1991, between APS and Mellon Bank, N.A., as Decommissioning Trustee | 10.2 to APS’ September 30, 1991 Form 10-Q Report, File No. 1-4473 | 11-14-91 |
177
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
10.1.1a
|
Pinnacle West
APS |
Amendment No. 1 to Decommissioning Trust Agreement (PVNGS Unit 1), dated as of December 1, 1994 | 10.1 to APS’ 1994 Form 10- K Report, File No. 1-4473 | 3-30-95 | ||||
|
|
||||||||
|
10.1.1b
|
Pinnacle West
APS |
Amendment No. 1 to Decommissioning Trust Agreement (PVNGS Unit 3), dated as of December 1, 1994 | 10.2 to APS’ 1994 Form 10-K Report, File No. 1-4473 | 3-30-95 | ||||
|
|
||||||||
|
10.1.1c
|
Pinnacle West
APS |
Amendment No. 2 to APS Decommissioning Trust Agreement (PVNGS Unit 1) dated as of July 1, 1991 | 10.4 to APS’ 1996 Form 10-K Report, File No. 1-4473 | 3-28-97 | ||||
|
|
||||||||
|
10.1.1d
|
Pinnacle West
APS |
Amendment No. 2 to APS Decommissioning Trust Agreement (PVNGS Unit 3) dated as of July 1, 1991 | 10.6 to APS’ 1996 Form 10-K Report, File No. 1-4473 | 3-28-97 | ||||
|
|
||||||||
|
10.1.1e
|
Pinnacle West
APS |
Amendment No. 3 to the Decommissioning Trust Agreement (PVNGS Unit 1), dated as of March 18, 2002 | 10.2 to Pinnacle West’s March 31, 2002 Form 10-Q Report, File No. 1-8962 | 5-15-02 | ||||
|
|
||||||||
|
10.1.1f
|
Pinnacle West
APS |
Amendment No. 3 to the Decommissioning Trust Agreement (PVNGS Unit 3), dated as of March 18, 2002 | 10.4 to Pinnacle West’s March 2002 Form 10-Q Report, File No. 1-8962 | 5-15-02 | ||||
|
|
||||||||
|
10.1.1g
|
Pinnacle West
APS |
Amendment No. 4 to the Decommissioning Trust Agreement (PVNGS Unit 1), dated as of December 19, 2003 | 10.3 to Pinnacle West’s 2003 Form 10-K Report, File No. 1-8962 | 3-15-04 |
178
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
10.1.1h
|
Pinnacle West
APS |
Amendment No. 4 to the Decommissioning Trust Agreement (PVNGS Unit 3), dated as of December 19, 2003 | 10.5 to Pinnacle West’s 2003 Form 10-K Report, File No. 1-8962 | 3-15-04 | ||||
|
|
||||||||
|
10.1.1i
|
Pinnacle West
APS |
Amendment No. 5 to the Decommissioning Trust Agreement (PVNGS Unit 1), dated as of May 1, 2007 | 10.1 to Pinnacle West/APS March 31, 2007 Form 10-Q Report, File Nos. 1-8962 and 1-4473 | 5-9-07 | ||||
|
|
||||||||
|
10.1.1j
|
Pinnacle West
APS |
Amendment No. 5 to the Decommissioning Trust Agreement (PVNGS Unit 3), dated as of May 1, 2007 | 10.2 to Pinnacle West/APS March 31, 2007 Form 10-Q Report, File Nos. 1-8962 and 104473 | 5-9-07 | ||||
|
|
||||||||
|
10.1.2
|
Pinnacle West
APS |
Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2) dated as of January 31, 1992, among APS, Mellon Bank, N.A., as Decommissioning Trustee, and State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee under two separate Trust Agreements, each with a separate Equity Participant, and as Lessor under two separate Facility Leases, each relating to an undivided interest in PVNGS Unit 2 | 10.1 to Pinnacle West’s 1991 Form 10-K Report, File No. 1-8962 | 3-26-92 |
179
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
10.1.2a
|
Pinnacle West
APS |
First Amendment to Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2), dated as of November 1, 1992 | 10.2 to APS’ 1992 Form 10-K Report, File No. 1-4473 | 3-30-93 | ||||
|
|
||||||||
|
10.1.2b
|
Pinnacle West
APS |
Amendment No. 2 to Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2), dated as of November 1, 1994 | 10.3 to APS’ 1994 Form 10-K Report, File No. 1-4473 | 3-30-95 | ||||
|
|
||||||||
|
10.1.2c
|
Pinnacle West
APS |
Amendment No. 3 to Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2), dated as of June 20, 1996 | 10.1 to APS’ June 30, 1996 Form 10-Q Report, File No. 1-4473 | 8-9-96 | ||||
|
|
||||||||
|
10.1.2d
|
Pinnacle West
APS |
Amendment No. 4 to Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2) dated as of December 16, 1996 | APS 10.5 to APS’ 1996 Form 10-K Report, File No. 1-4473 | 3-28-97 | ||||
|
|
||||||||
|
10.1.2e
|
Pinnacle West
APS |
Amendment No. 5 to the Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2), dated as of June 30, 2000 | 10.1 to Pinnacle West’s March 31, 2002 Form 10-Q Report, File No. 1-8962 | 5-15-02 | ||||
|
|
||||||||
|
10.1.2f
|
Pinnacle West
APS |
Amendment No. 6 to the Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2), dated as of March 18, 2002 | 10.3 to Pinnacle West’s March 31, 2002 Form 10-Q Report, File No. 1-8962 | 5-15-02 |
180
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
10.1.2g
|
Pinnacle West
APS |
Amendment No. 7 to the Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2), dated as of December 19, 2003 | 10.4 to Pinnacle West’s 2003 Form 10-K Report, File No. 1-8962 | 3-15-04 | ||||
|
|
||||||||
|
10.1.2h
|
Pinnacle West
APS |
Amendment No. 8 to the Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2), dated as of April 1, 2007 | 10.1.2h to Pinnacle West’s 2007 Form 10-K Report, File No. 1-8962 | 2-27-08 | ||||
|
|
||||||||
|
10.2.1
b
|
Pinnacle West
APS |
Arizona Public Service Company Deferred Compensation Plan, as restated, effective January 1, 1984, and the second and third amendments thereto, dated December 22, 1986, and December 23, 1987 respectively | 10.4 to APS’ 1988 Form 10-K Report, File No. 1-4473 | 3-8-89 | ||||
|
|
||||||||
|
10.2.1a
b
|
Pinnacle West
APS |
Third Amendment to the Arizona Public Service Company Deferred Compensation Plan, effective as of January 1, 1993 | 10.3A to APS’ 1993 Form 10-K Report, File No. 1-4473 | 3-30-94 | ||||
|
|
||||||||
|
10.2.1b
b
|
Pinnacle West
APS |
Fourth Amendment to the Arizona Public Service Company Deferred Compensation Plan effective as of May 1, 1993 | 10.2 to APS’ September 30, 1994 Form 10-Q Report, File No. 1-4473 | 11-10-94 |
181
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
10.2.1c
b
|
Pinnacle West
APS |
Fifth Amendment to the Arizona Public Service Company Deferred Compensation Plan effective January 1, 1997 | 10.3A to APS’ 1996 Form 10-K Report, File No. 1-4473 | 3-28-97 | ||||
|
|
||||||||
|
10.2.1d
b
|
Pinnacle West
APS |
Sixth Amendment to the Arizona Public Service Company Deferred Compensation Plan effective January 1, 2001 | 10.8A to Pinnacle West’s 2000 Form 10-K Report, File No. 1-8962 | 3-14-01 | ||||
|
|
||||||||
|
10.2.2
b
|
Pinnacle West
APS |
Directors’ Deferred Compensation Plan, as restated, effective January 1, 1986 | 10.1 to APS’ June 30, 1986 Form 10-Q Report, File No. 1-4473 | 8-13-86 | ||||
|
|
||||||||
|
10.2.2a
b
|
Pinnacle West
APS |
Second Amendment to the Arizona Public Service Company Directors’ Deferred Compensation Plan, effective as of January 1, 1993 | 10.2A to APS’ 1993 Form 10-K Report, File No. 1-4473 | 3-30-94 | ||||
|
|
||||||||
|
10.2.2b
b
|
Pinnacle West
APS |
Third Amendment to the Arizona Public Service Company Directors’ Deferred Compensation Plan, effective as of May 1, 1993 | 10.1 to APS’ September 30, 1994 Form 10-Q Report, File No. 1-4473 | 11-10-94 | ||||
|
|
||||||||
|
10.2.2c
b
|
Pinnacle West
APS |
Fourth Amendment to the Arizona Public Service Company Directors Deferred Compensation Plan, effective as of January 1, 1999 | 10.8A to Pinnacle West’s 1999 Form 10-K Report, File No. 1-8962 | 3-30-00 |
182
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
10.2.3
b
|
Pinnacle West
APS |
Trust for the Pinnacle West Capital Corporation, Arizona Public Service Company and SunCor Development Company Deferred Compensation Plans dated August 1, 1996 | 10.14A to Pinnacle West’s 1999 Form 10-K Report, File No. 1-8962 | 3-30-00 | ||||
|
|
||||||||
|
10.2.3a
b
|
Pinnacle West
APS |
First Amendment dated December 7, 1999 to the Trust for the Pinnacle West Capital Corporation, Arizona Public Service Company and SunCor Development Company Deferred Compensation Plans | 10.15A to Pinnacle West’s 1999 Form 10-K Report, File No. 1-8962 | 3-30-00 | ||||
|
|
||||||||
|
10.2.4
b
|
Pinnacle West
APS |
Pinnacle West Capital Corporation, Arizona Public Service Company, SunCor Development Company and El Dorado Investment Company Deferred Compensation Plan as amended and restated effective January 1, 1996 | 10.10A to APS’ 1995 Form 10-K Report, File No. 1-4473 | 3-29-96 | ||||
|
|
||||||||
|
10.2.4a
b
|
Pinnacle West
APS |
First Amendment effective as of January 1, 1999, to the Pinnacle West Capital Corporation, Arizona Public Service Company, SunCor Development Company and El Dorado Investment Company Deferred Compensation Plan | 10.7A to Pinnacle West’s 1999 Form 10-K Report, File No. 1-8962 | 3-30-00 |
183
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
10.2.4b
b
|
Pinnacle West
APS |
Second Amendment effective January 1, 2000 to the Pinnacle West Capital Corporation, Arizona Public Service Company, SunCor Development Company and El Dorado Investment Company Deferred Compensation Plan | 10.10A to Pinnacle West’s 1999 Form 10-K Report, File No. 1-8962 | 3-30-00 | ||||
|
|
||||||||
|
10.2.4c
b
|
Pinnacle West
APS |
Third Amendment to the Pinnacle West Capital Corporation, Arizona Public Service Company, SunCor Development Company and El Dorado Investment Company Deferred Compensation Plan, effective as of January 1, 2002 | 10.3 to Pinnacle West’s March 31, 2003 Form 10-Q Report, File No. 1-8962 | 5-15-03 | ||||
|
|
||||||||
|
10.2.4d
b
|
Pinnacle West
APS |
Fourth Amendment to the Pinnacle West Capital Corporation, Arizona Public Service Company, SunCor Development Company and El Dorado Investment Company Deferred Compensation Plan, effective January 1, 2003 | 10.64 to Pinnacle West/APS 2005 Form 10-K Report, File Nos. 1-8962 and 1-4473 | 3-13-06 | ||||
|
|
||||||||
|
10.2.5
b
|
Pinnacle West
APS |
Schedules of William J. Post and Jack E. Davis to Arizona Public Service Company Deferred Compensation Plan, as amended | 10.3A to Pinnacle West 2002 Form 10-K Report, File No. 1-8962 | 3-31-03 |
184
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
10.2.6
b
|
Pinnacle West
APS |
Deferred Compensation Plan of 2005 for Employees of Pinnacle West Capital Corporation and Affiliates | 10.2.6 to Pinnacle West/APS 2008 Form 10-K Report, File Nos. 1-8962 and 1-4473 | 2-20-09 | ||||
|
|
||||||||
|
10.2.6a
b
|
Pinnacle West
APS |
First Amendment to the Deferred Compensation Plan of 2005 for Employees of Pinnacle West Capital Corporation and Affiliates | ||||||
|
|
||||||||
|
10.3.1
b
|
Pinnacle West
APS |
Pinnacle West Capital Corporation Supplement Excess Benefit Retirement Plan, amended and restated as of January 1, 2003 | 10.7A to Pinnacle West’s 2003 Form 10-K Report, File No. 1-8962 | 3-15-04 | ||||
|
|
||||||||
|
10.3.1a
b
|
Pinnacle West
APS |
Pinnacle West Capital Corporation Supplemental Excess Benefit Retirement Plan, as amended and restated, dated December 18, 2003 | 10.48b to Pinnacle West/APS 2005 Form 10-K Report, File Nos. 1-8962 and 1-4473 | 3-13-06 | ||||
|
|
||||||||
|
10.3.2
b
|
Pinnacle West
APS |
Pinnacle West Capital Corporation Supplemental Excess Benefit Retirement Plan of 2005 | 10.3.2 to Pinnacle West/APS 2008 Form 10-K Report, File Nos. 1-8962 and 1-4473 | 2-20-09 | ||||
|
|
||||||||
|
10.4.1
b
|
Pinnacle West
APS |
Letter Agreement dated December 21, 1993, between APS and William L. Stewart | 10.6A to APS’ 1994 Form 10-K Report, File No. 1-4473 | 3-30-95 | ||||
|
|
||||||||
|
10.4.2
b
|
Pinnacle West
APS |
Letter Agreement dated August 16, 1996 between APS and William L. Stewart | 10.8 to APS’ 1996 Form 10-K Report, File No. 1-4473 | 3-28-97 |
185
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
10.4.3
b
|
Pinnacle West
APS |
Letter Agreement dated October 3, 1997 between APS and William L. Stewart | 10.2 to APS’ September 30, 1997 Form 10-Q Report, File No. 1-4473 | 11-12-97 | ||||
|
|
||||||||
|
10.4.4
b
|
Pinnacle West
APS |
Letter Agreement dated December 13, 1999 between APS and William L. Stewart | 10.9A to Pinnacle West’s 1999 Form 10-K Report, File No. 1-8962 | 3-30-00 | ||||
|
|
||||||||
|
10.4.4a
b
|
Pinnacle West
APS |
Amendment to Letter Agreement, effective as of January 1, 2002, between APS and William L. Stewart | 10.1 to Pinnacle West’s June 30, 2002 Form 10-Q Report, File No. 1-8962 | 8-13-02 | ||||
|
|
||||||||
|
10.4.5
b
|
Pinnacle West
APS |
Letter Agreement dated June 28, 2001 between Pinnacle West Capital Corporation and Steve Wheeler | 10.4A to Pinnacle West’s 2002 Form 10-K Report, File No. 1-8962 | 3-31-03 | ||||
|
|
||||||||
|
10.4.6
b
|
APS | Letter Agreement dated December 20, 2006 between APS and Randall K. Edington | 10.78 to Pinnacle West/APS 2006 Form 10-K Report, File Nos. 1-8962 and 1-4473 | 2-28-07 | ||||
|
|
||||||||
|
10.4.7
b
|
APS | Letter Agreement dated July 22, 2008 between APS and Randall K. Edington | 10.3 to Pinnacle West/APS June 30, 2008 Form 10-Q Report, File No. 1-4473 | 8-07-08 | ||||
|
|
||||||||
|
10.4.8
b
|
Pinnacle West
APS |
Letter Agreement dated June 17, 2008 between Pinnacle West/APS and James R. Hatfield | 10.1 to Pinnacle West/APS June 30, 2008 Form 10-Q Report, File Nos. 1-8962 and 1-4473 | 8-07-08 | ||||
|
|
||||||||
|
10.4.9
b
|
APS | Description of 2008 Palo Verde Specific Compensation Opportunity for Randall K. Edington | 10.7 to Pinnacle West/APS June 30, 2008 Form 10-Q Report, File No. 1-4473 | 8-07-08 |
186
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
10.4.10
b
|
APS | Supplemental Agreement dated December 26, 2008 between APS and Randall K. Edington | 10.4.10 to Pinnacle West/APS 2008 Form 10-K Report, File No. 1-4473 | 2-20-09 | ||||
|
|
||||||||
|
10.4.11
b
|
APS | Description of 2009 Palo Verde Specific Compensation Opportunity for Randall K. Edington | 10.2 to Pinnacle West/APS March 31, 2009 Form 10-Q Report, File No. 1-4473 | 5-5-09 | ||||
|
|
||||||||
|
10.4.12
b
|
Pinnacle West
APS |
Career Recognition Award Agreement dated April 14, 2009 between Pinnacle West Capital Corporation and William J. Post | 10.1 to Pinnacle West/APS March 31, 2009 Form 10-Q Report, File Nos. 1-8962 and 1-4473 | 5-5-09 | ||||
|
|
||||||||
|
10.4.13
b
|
APS | Description of 2010 Palo Verde Specific Compensation Opportunity for Randall K. Edington | ||||||
|
|
||||||||
|
10.5.1
bd
|
Pinnacle West
APS |
Key Executive Employment and Severance Agreement between Pinnacle West and certain executive officers of Pinnacle West and its subsidiaries | 10.77 to Pinnacle West/APS 2005 Form 10-K Report, File Nos. 1-8962 and 1-4473 | 3-13-06 | ||||
|
|
||||||||
|
10.5.1a
bd
|
Pinnacle West
APS |
Form of Amended and Restated Key Executive Employment and Severance Agreement between Pinnacle West and certain officers of Pinnacle West and its subsidiaries | 10.4 to Pinnacle West/APS September 30, 2007 Form 10-Q Report, File Nos. 1-8962 and 1-4473 | 11-5-07 |
187
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
10.5.2
bd
|
Pinnacle West
APS |
Form of Key Executive Employment and Severance Agreement between Pinnacle West and certain officers of Pinnacle West and its subsidiaries | 10.3 to Pinnacle West/APS September 30, 2007 Form 10-Q Report, File Nos. 1-8962 and 1-4473 | 11-5-07 | ||||
|
|
||||||||
|
10.5.3
bd
|
Pinnacle West
APS |
Form of Key Executive Employment and Severance Agreement between Pinnacle West and certain officers of Pinnacle West and its subsidiaries | ||||||
|
|
||||||||
|
10.6.1
b
|
Pinnacle West
APS |
Pinnacle West Capital Corporation 1994 Long- Term Incentive Plan, effective as of March 23, 1994 | Appendix A to the Proxy Statement for the Plan Report for Pinnacle West’s 1994 Annual Meeting of Shareholders, File No. 1-8962 | 4-15-94 | ||||
|
|
||||||||
|
10.6.1a
b
|
Pinnacle West
APS |
First Amendment dated December 7, 1999 to the Pinnacle West Capital Corporation 1994 Long-Term Incentive Plan | 10.12A to Pinnacle West’s 1999 Form 10-K Report, File No. 1-8962 | 3-30-00 | ||||
|
|
||||||||
|
10.6.2
b
|
Pinnacle West
APS |
Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan | 10.5A to Pinnacle West’s 2002 Form 10-K Report | 3-31-03 | ||||
|
|
||||||||
|
10.6.2a
bd
|
Pinnacle West
APS |
Performance Share Agreement under the Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan | 10.1 to Pinnacle West/APS December 9, 2005 Form 8-K Report, File Nos. 1-8962 and 1-4473 | 12-15-05 |
188
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
10.6.2b
bd
|
Pinnacle West
APS |
Performance Share Agreement under the Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan | 10.1 to Pinnacle West/APS December 31, 2005 Form 8-K Report, File Nos. 1-8962 and 1-4473 | 2-1-06 | ||||
|
|
||||||||
|
10.6.2c
d
|
Pinnacle West
APS |
Performance Accelerated Stock Option Agreement under Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan | 10.98 to Pinnacle West/APS 2004 Form 10-K Report, File Nos. 1-8962 and 1-4473 | 3-16-05 | ||||
|
|
||||||||
|
10.6.2d
bd
|
Pinnacle West
APS |
Stock Ownership Incentive Agreement under Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan | 10.99 to Pinnacle West/APS 2004 Form 10-K Report, File Nos. 1-8962 and 1-4473 | 3-16-05 | ||||
|
|
||||||||
|
10.6.2e
bd
|
Pinnacle West
APS |
Performance Share Agreement under the Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan | 10.91 to Pinnacle West/APS 2005 Form 10-K Report, File Nos. 1-8962 and 1-4473 | 3-13-06 | ||||
|
|
||||||||
|
10.6.2f
bd
|
Pinnacle West
APS |
Performance Share Agreement under the Pinnacle West Capital Corporation 2007 Long-Term Incentive Plan | 10.3 to Pinnacle West/APS March 31, 2009 Form 10-Q Report, File Nos. 1-8962 and 1-4473 | 5-5-09 | ||||
|
|
||||||||
|
10.6.3
b
|
Pinnacle West | Pinnacle West Capital Corporation 2000 Director Equity Plan | 99.1 to Pinnacle West’s Registration Statement on Form S-8 (No. 333-40796), File No. 1-8962) | 7-3-00 | ||||
|
|
||||||||
|
10.6.4
b
|
Pinnacle West | Pinnacle West Capital Corporation 2007 Long-Term Incentive Plan | Appendix B to the Proxy Statement for Pinnacle West’s 2007 Annual Meeting of Shareholders, File No. 1-8962 | 4-20-07 |
189
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
10.6.4a
b
|
Pinnacle West | First Amendment to the Pinnacle West Capital Corporation 2007 Long-Term Incentive Plan | 10.2 to Pinnacle West/APS April 18, 2007 Form 8-K Report, File No. 1-8962 | 4-20-07 | ||||
|
|
||||||||
|
10.6.4b
b
|
Pinnacle West | Description of Annual Stock Grants to Non-Employee Directors | 10.1 to Pinnacle West/APS September 30, 2007 Form 10-Q Report, File No. 1-8962 | 11-5-07 | ||||
|
|
||||||||
|
10.6.4c
b
|
Pinnacle West | Description of Stock Grant to W. Douglas Parker | 10.2 to Pinnacle West/APS September 30, 2007 Form 10-Q Report, File No. 1-8962 | 11-5-07 | ||||
|
|
||||||||
|
10.6.4d
b
|
Pinnacle West | Description of Annual Stock Grants to Non-Employee Directors | 10.2 to Pinnacle West/APS June 30, 2008 Form 10-Q Report, File No. 1-8962 | 8-07-08 | ||||
|
|
||||||||
|
10.6.5
bd
|
Pinnacle West
APS |
Summary of 2010 CEO Variable Incentive Plan and Officer Variable Incentive Plan | ||||||
|
|
||||||||
|
10.7.1
|
Pinnacle West
APS |
Indenture of Lease with Navajo Tribe of Indians, Four Corners Plant | 5.01 to APS’ Form S-7 Registration Statement, File No. 2-59644 | 9-1-77 | ||||
|
|
||||||||
|
10.7.1a
|
Pinnacle West
APS |
Supplemental and Additional Indenture of Lease, including amendments and supplements to original lease with Navajo Tribe of Indians, Four Corners Plant | 5.02 to APS’ Form S-7 Registration Statement, File No. 2-59644 | 9-1-77 | ||||
|
|
||||||||
|
10.7.1b
|
Pinnacle West
APS |
Amendment and Supplement No. 1 to Supplemental and Additional Indenture of Lease Four Corners, dated April 25, 1985 | 10.36 to Pinnacle West’s Registration Statement on Form 8-B Report, File No. 1-8962 | 7-25-85 |
190
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
10.7.2
|
Pinnacle West
APS |
Application and Grant of multi-party rights-of-way and easements, Four Corners Plant Site | 5.04 to APS’ Form S-7 Registration Statement, File No. 2-59644 | 9-1-77 | ||||
|
|
||||||||
|
10.7.2a
|
Pinnacle West
APS |
Application and Amendment No. 1 to Grant of multi-party rights-of-way and easements, Four Corners Power Plant Site dated April 25, 1985 | 10.37 to Pinnacle West’s Registration Statement on Form 8-B, File No. 1-8962 | 7-25-85 | ||||
|
|
||||||||
|
10.7.3
|
Pinnacle West
APS |
Application and Grant of Arizona Public Service Company rights- of-way and easements, Four Corners Plant Site | 5.05 to APS’ Form S-7 Registration Statement, File No. 2-59644 | 9-1-77 | ||||
|
|
||||||||
|
10.7.3a
|
Pinnacle West
APS |
Application and Amendment No. 1 to Grant of Arizona Public Service Company rights-of-way and easements, Four Corners Power Plant Site dated April 25, 1985 | 10.38 to Pinnacle West’s Registration Statement on Form 8-B, File No. 1-8962 | 7-25-85 | ||||
|
|
||||||||
|
10.7.4
|
Pinnacle West
APS |
Four Corners Project Co-Tenancy Agreement Amendment No. 6 | 10.7 to Pinnacle West’s 2000 Form 10-K Report, File No. 1-8962 | 3-14-01 | ||||
|
|
||||||||
|
10.8.1
|
Pinnacle West
APS |
Indenture of Lease, Navajo Units 1, 2, and 3 | 5(g) to APS’ Form S-7 Registration Statement, File No. 2-36505 | 3-23-70 | ||||
|
|
||||||||
|
10.8.2
|
Pinnacle West
APS |
Application of Grant of rights-of-way and easements, Navajo Plant | 5(h) to APS Form S-7 Registration Statement, File No. 2-36505 | 3-23-70 |
191
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
10.8.3
|
Pinnacle West
APS |
Water Service Contract Assignment with the United States Department of Interior, Bureau of Reclamation, Navajo Plant | 5(l) to APS’ Form S-7 Registration Statement, File No. 2-394442 | 3-16-71 | ||||
|
|
||||||||
|
10.8.4
|
Pinnacle West
APS |
Navajo Project Co-Tenancy Agreement dated as of March 23, 1976, and Supplement No. 1 thereto dated as of October 18, 1976, Amendment No. 1 dated as of July 5, 1988, and Amendment No. 2 dated as of June 14, 1996; Amendment No. 3 dated as of February 11, 1997; Amendment No. 4 dated as of January 21, 1997; Amendment No. 5 dated as of January 23, 1998; Amendment No. 6 dated as of July 31, 1998 | 10.107 to Pinnacle West/APS 2005 Form 10-K Report, File Nos. 1-8962 and 1-4473 | 3-13-06 | ||||
|
|
||||||||
|
10.8.5
|
Pinnacle West
APS |
Navajo Project Participation Agreement dated as of September 30, 1969, and Amendment and Supplement No. 1 dated as of January 16, 1970, and Coordinating Committee Agreement No. 1 dated as of September 30, 1971 | 10.108 to Pinnacle West/APS 2005 Form 10-K Report, File Nos. 1-8962 and 1-4473 | 3-13-06 |
192
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
10.9.1
|
Pinnacle West
APS |
Arizona Nuclear Power Project Participation Agreement, dated August 23, 1973, among APS Salt River Project Agricultural Improvement and Power District, Southern California Edison Company, Public Service Company of New Mexico, El Paso Electric Company, Southern California Public Power Authority, and Department of Water and Power of the City of Los Angeles, and amendments 1-12 thereto | 10. 1 to APS’ 1988 Form 10-K Report, File No. 1-4473 | 3-8-89 | ||||
|
|
||||||||
|
10.9.1a
|
Pinnacle West
APS |
Amendment No. 13, dated as of April 22, 1991, to Arizona Nuclear Power Project Participation Agreement, dated August 23, 1973, among APS, Salt River Project Agricultural Improvement and Power District, Southern California Edison Company, Public Service Company of New Mexico, El Paso Electric Company, Southern California Public Power Authority, and Department of Water and Power of the City of Los Angeles | 10.1 to APS’ March 31, 1991 Form 10-Q Report, File No. 1-4473 | 5-15-91 |
193
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
10.9.1b
|
Pinnacle West
APS |
Amendment No. 14 to Arizona Nuclear Power Project Participation Agreement, dated August 23, 1973, among APS, Salt River Project Agricultural Improvement and Power District, Southern California Edison Company, Public Service Company of New Mexico, El Paso Electric Company, Southern California Public Power Authority, and Department of Water and Power of the City of Los Angeles | 99.1 to Pinnacle West’s June 30, 2000 Form 10-Q Report, File No. 1-8962 | 8-14-00 | ||||
|
|
||||||||
|
10.10.1
|
Pinnacle West
APS |
Asset Purchase and Power Exchange Agreement dated September 21, 1990 between APS and PacifiCorp, as amended as of October 11, 1990 and as of July 18, 1991 | 10.1 to APS’ June 30, 1991 Form 10-Q Report, File No. 1-4473 | 8-8-91 | ||||
|
|
||||||||
|
10.10.2
|
Pinnacle West
APS |
Long-Term Power Transaction Agreement dated September 21, 1990 between APS and PacifiCorp, as amended as of October 11, 1990, and as of July 8, 1991 | 10.2 to APS’ June 30, 1991 Form 10-Q Report, File No. 1-4473 | 8-8-91 |
194
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
10.10.2a
|
Pinnacle West
APS |
Amendment No. 1 dated April 5, 1995 to the Long-Term Power Transaction Agreement and Asset Purchase and Power Exchange Agreement between PacifiCorp and APS | 10.3 to APS’ 1995 Form 10-K Report, File No. 1-4473 | 3-29-96 | ||||
|
|
||||||||
|
10.10.3
|
Pinnacle West
APS |
Restated Transmission Agreement between PacifiCorp and APS dated April 5, 1995 | 10.4 to APS’ 1995 Form 10-K Report, File No. 1-4473 | 3-29-96 | ||||
|
|
||||||||
|
10.10.4
|
Pinnacle West
APS |
Contract among PacifiCorp, APS and United States Department of Energy Western Area Power Administration, Salt Lake Area Integrated Projects for Firm Transmission Service dated May 5, 1995 | 10.5 to APS’ 1995 Form 10-K Report, File No. 1-4473 | 3-29-96 | ||||
|
|
||||||||
|
10.10.5
|
Pinnacle West
APS |
Reciprocal Transmission Service Agreement between APS and PacifiCorp dated as of March 2, 1994 | 10.6 to APS’ 1995 Form 10-K Report, File No. 1-4473 | 3-29-96 | ||||
|
|
||||||||
|
10.11.1
|
Pinnacle West
APS |
Amended and Restated Reimbursement Agreement among APS, the Banks party thereto, and JPMorgan Chase Bank, as Administrative Agent and Issuing Bank, dated as of July 22, 2002 | 10.100 to Pinnacle West/APS 2004 Form 10-K Report, File Nos. 1-8962 and 1-4473 | 3-16-05 |
195
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
10.11.2
|
Pinnacle West
APS |
Three-Year Credit Agreement dated as of May 21, 2004 between APS as Borrower, and the banks, financial institutions and other institutional lenders and initial issuing banks listed on the signature pages thereof | 10.101 to Pinnacle West/APS 2004 Form 10-K Report, File Nos. 1-8962 and 1-4473 | 3-16-05 | ||||
|
|
||||||||
|
10.11.3
|
Pinnacle West
APS |
Three-Year Credit Agreement dated as of February 12, 2010 between APS, as Borrower, Wells Fargo Bank, National Association, as Agent, and the lenders and other parties thereto | ||||||
|
|
||||||||
|
10.11.4
|
Pinnacle West | $200,000,000 Senior Notes Uncommitted Master Shelf Agreement dated as of February 28, 2006 | 10.96 to Pinnacle West 2005 Form 10-K Report, File No. 1-8962 | 3-13-06 | ||||
|
|
||||||||
|
10.11.5
|
Pinnacle West | Three-Year Credit Agreement dated as of February 12, 2010 among Pinnacle West Capital Corporation, as Borrower, Bank of America, N.A, as Agent, and the lenders and other parties thereto |
196
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
10.11.5a
|
Pinnacle West | First Amendment to Amended and Restated Credit Agreement, dated as of May 15, 2006, supplementing and amending the Amended and Restated Credit Agreement, dated as of December 9, 2005, among Pinnacle West Capital Corporation, as Borrower, JPMorgan Chase Bank, N.A. as Agent and the other parties thereto | 10.1 to Pinnacle West’s June 30, 2006 Form 10-Q Report, File No. 1-8962 | 8-8-06 | ||||
|
|
||||||||
|
10.11.6
|
Pinnacle West
APS |
Credit Agreement dated as of October 19, 2004 among Pinnacle West, other lenders, and JPMorgan Chase Bank, as Administrative Agent | 10.1 to Pinnacle West’s September 30, 2004 Form 10-Q Report, File No. 1-8962 | 11-8-04 | ||||
|
|
||||||||
|
10.11.7
|
APS | $500,000,000 Five-Year Credit Agreement dated as of September 28, 2006 among Arizona Public Service Company as Borrower, Bank of America, N.A. as Administrative Agent and Issuing Bank, The Bank of New York as Syndication Agent and Issuing Bank and the other parties thereto | 10.1 to APS’ September 2006 Form 10-Q Report, File No. 1-4473 | 11-8-06 |
197
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
10.11.8
|
Pinnacle West
APS |
Amended and Restated Reimbursement Agreement among Arizona Public Service Company, The Banks party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent and Issuing Bank, and Barclays Bank PLC, as Syndication Agent, dated as of May 19, 2005 | 99.6 to PinnacleWest/APS June 30, 2005 Form 10-Q Report, File Nos. 1-8962 and 1-4473 | 8-9-05 | ||||
|
|
||||||||
|
10.12.1
c
|
Pinnacle West
APS |
Facility Lease, dated as of August 1, 1986, between U.S. Bank National Association, successor to State Street Bank and Trust Company, as successor to The First National Bank of Boston, in its capacity as Owner Trustee, as Lessor, and APS, as Lessee | 4.3 to APS’ Form 18 Registration Statement, File No. 33-9480 | 10-24-86 | ||||
|
|
||||||||
|
10.12.1a
c
|
Pinnacle West
APS |
Amendment No. 1, dated as of November 1, 1986, to Facility Lease, dated as of August 1, 1986, between U.S. Bank National Association, successor to State Street Bank and Trust Company, as successor to The First National Bank of Boston, in its capacity as Owner Trustee, as Lessor, and APS, as Lessee | 10.5 to APS’ September 30, 1986 Form 10-Q Report by means of Amendment No. 1 on December 3, 1986 Form 8, File No. 1-4473 | 12-4-86 |
198
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
10.12.1b
c
|
Pinnacle West
APS |
Amendment No. 2 dated as of June 1, 1987 to Facility Lease dated as of August 1, 1986 between U.S. Bank National Association, successor to State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Lessor, and APS, as Lessee | 10.3 to APS’ 1988 Form 10-K Report, File No. 1-4473 | 3-8-89 | ||||
|
|
||||||||
|
10.12.1c
c
|
Pinnacle West
APS |
Amendment No. 3, dated as of March 17, 1993, to Facility Lease, dated as of August 1, 1986, between U.S. Bank National Association, successor to State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Lessor, and APS, as Lessee | 10.3 to APS’ 1992 Form 10-K Report, File No. 1-4473 | 3-30-93 | ||||
|
|
||||||||
|
10.12.2
|
Pinnacle West
APS |
Facility Lease, dated as of December 15, 1986, between U.S. Bank National Association, successor to State Street Bank and Trust Company, as successor to The First National Bank of Boston, in its capacity as Owner Trustee, as Lessor, and APS, as Lessee | 10.1 to APS’ November 18, 1986 Form 8-K Report, File No. 1-4473 | 1-20-87 |
199
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
10.12.2a
|
Pinnacle West
APS |
Amendment No. 1, dated as of August 1, 1987, to Facility Lease, dated as of December 15, 1986, between U.S. Bank National Association, successor to State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Lessor, and APS, as Lessee | 4.13 to APS’ Form 18 Registration Statement No. 33-9480 by means of August 1, 1987 Form 8-K Report, File No. 1-4473 | 8-24-87 | ||||
|
|
||||||||
|
10.12.2b
|
Pinnacle West
APS |
Amendment No. 2, dated as of March 17, 1993, to Facility Lease, dated as of December 15, 1986, between U.S. Bank National Association, successor to State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Lessor, and APS, as Lessee | 10.4 to APS’ 1992 Form 10-K Report, File No. 1-4473 | 3-30-93 | ||||
|
|
||||||||
|
10.13.1
|
Pinnacle West
APS |
Agreement No. 13904 (Option and Purchase of Effluent) with Cities of Phoenix, Glendale, Mesa, Scottsdale, Tempe, Town of Youngtown, and Salt River Project Agricultural Improvement and Power District, dated April 23, 1973 | 10.3 to APS’ 1991 Form 10-K Report, File No. 1-4473 | 3-19-92 |
200
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
10.13.2
|
Pinnacle West
APS |
Agreement between Pinnacle West Energy Corporation and Arizona Public Service Company for Transportation and Treatment of Effluent by and between Pinnacle West Energy Corporation and APS dated as of the 10 th day of April, 2001 | 10.102 to Pinnacle West/APS 2004 Form 10-K Report, File Nos. 1-8962 and 1-4473 | 3-16-05 | ||||
|
|
||||||||
|
10.13.3
|
Pinnacle West
APS |
Agreement for the Transfer and Use of Wastewater and Effluent by and between APS, SRP and PWE dated June 1, 2001 | 10.103 to Pinnacle West/APS 2004 Form 10-K Report, File Nos. 1-8962 and 1-4473 | 3-16-05 | ||||
|
|
||||||||
|
10.13.4
|
Pinnacle West
APS |
Agreement for the Sale and Purchase of Wastewater Effluent dated November 13, 2000, by and between the City of Tolleson, Arizona, APS and SRP | 10.104 to Pinnacle West/APS 2004 Form 10-K Report, File Nos. 1-8962 and 1-4473 | 3-16-05 | ||||
|
|
||||||||
|
10.13.5
|
Pinnacle West
APS |
Operating Agreement for the Co-Ownership of Wastewater Effluent dated November 16, 2000 by and between APS and SRP | 10.105 to Pinnacle West/APS 2004 Form 10-K Report, File Nos. 1-8962 and 1-4473 | 3-16-05 |
201
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
10.13.6
|
Pinnacle West
APS |
Agreement for the Sale and Purchase of Wastewater Effluent with City of Tolleson and Salt River Agricultural Improvement and Power District, dated June 12, 1981, including Amendment No. 1 dated as of November 12, 1981 and Amendment No. 2 dated as of June 4, 1986 | 10.4 to APS’ 1991 Form 10-K Report, File 1-4473 | 3-19-92 | ||||
|
|
||||||||
|
10.14.1
|
Pinnacle West
APS |
Contract, dated July 21, 1984, with DOE providing for the disposal of nuclear fuel and/or high-level radioactive waste, ANPP | 10.31 to Pinnacle West’s Form S-14 Registration Statement, File No. 2-96386 | 3-13-85 | ||||
|
|
||||||||
|
10.15.1
|
Pinnacle West
APS |
Territorial Agreement between APS and Salt River Project | 10.1 to APS’ March 31, 1998 Form 10-Q Report, File No. 1-4473 | 5-15-98 | ||||
|
|
||||||||
|
10.15.2
|
Pinnacle West
APS |
Power Coordination Agreement between APS and Salt River Project | 10.2 to APS’ March 31, 1998 Form 10-Q Report, File No. 1-4473 | 5-15-98 | ||||
|
|
||||||||
|
10.15.3
|
Pinnacle West
APS |
Memorandum of Agreement between APS and Salt River Project | 10.3 to APS’ March 31, 1998 Form 10-Q Report, File No. 1-4473 | 5-15-98 | ||||
|
|
||||||||
|
10.15.3a
|
Pinnacle West
APS |
Addendum to Memorandum of Agreement between APS and Salt River Project dated as of May 19, 1998 | 10.2 to APS’ May 19, 1998 Form 8-K Report, File No. 1-4473 | 6-26-98 | ||||
|
|
||||||||
|
12.1
|
Pinnacle West | Ratio of Earnings to Fixed Charges |
202
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
12.2
|
APS | Ratio of Earnings to Fixed Charges | ||||||
|
|
||||||||
|
12.3
|
Pinnacle West | Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements | ||||||
|
|
||||||||
|
21.1
|
Pinnacle West | Subsidiaries of Pinnacle West | ||||||
|
|
||||||||
|
23.1
|
Pinnacle West | Consent of Deloitte & Touche LLP | ||||||
|
|
||||||||
|
23.2
|
APS | Consent of Deloitte & Touche LLP | ||||||
|
|
||||||||
|
31.1
|
Pinnacle West | Certificate of Donald E. Brandt, Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended | ||||||
|
|
||||||||
|
31.2
|
Pinnacle West | Certificate of James R. Hatfield, Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended | ||||||
|
|
||||||||
|
31.3
|
APS | Certificate of Donald E. Brandt, Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended |
203
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
31.4
|
APS | Certificate of James R. Hatfield, Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended | ||||||
|
|
||||||||
|
32.1
|
Pinnacle West | Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1850, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||||||
|
|
||||||||
|
32.2
|
APS | Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1850, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||||||
|
|
||||||||
|
99.1
|
Pinnacle West
APS |
Collateral Trust Indenture among PVNGS II Funding Corp., Inc., APS and Chemical Bank, as Trustee | 4.2 to APS’ 1992 Form 10-K Report, File No. 1-4473 | 3-30-93 | ||||
|
|
||||||||
|
99.1a
|
Pinnacle West
APS |
Supplemental Indenture to Collateral Trust Indenture among PVNGS II Funding Corp., Inc., APS and Chemical Bank, as Trustee | 4.3 to APS’ 1992 Form 10-K Report, File No. 1-4473 | 3-30-93 |
204
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
99.2
c
|
Pinnacle West
APS |
Participation Agreement, dated as of August 1, 1986, among PVNGS Funding Corp., Inc., Bank of America National Trust and Savings Association, State Street Bank and Trust Company, as successor to The First National Bank of Boston, in its individual capacity and as Owner Trustee, Chemical Bank, in its individual capacity and as Indenture Trustee, APS, and the Equity Participant named therein | 28.1 to APS’ September 30, 1992 Form 10-Q Report, File No. 1-4473 | 11-9-92 | ||||
|
|
||||||||
|
99.2a
c
|
Pinnacle West
APS |
Amendment No. 1 dated as of November 1, 1986, to Participation Agreement, dated as of August 1, 1986, among PVNGS Funding Corp., Inc., Bank of America National Trust and Savings Association, State Street Bank and Trust Company, as successor to The First National Bank of Boston, in its individual capacity and as Owner Trustee, Chemical Bank, in its individual capacity and as Indenture Trustee, APS, and the Equity Participant named therein | 10.8 to APS’ September 30, 1986 Form 10-Q Report by means of Amendment No. 1, on December 3, 1986 Form 8, File No. 1-4473 | 12-4-86 |
205
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
99.2b
c
|
Pinnacle West
APS |
Amendment No. 2, dated as of March 17, 1993, to Participation Agreement, dated as of August 1, 1986, among PVNGS Funding Corp., Inc., PVNGS II Funding Corp., Inc., State Street Bank and Trust Company, as successor to The First National Bank of Boston, in its individual capacity and as Owner Trustee, Chemical Bank, in its individual capacity and as Indenture Trustee, APS, and the Equity Participant named therein | 28.4 to APS’ 1992 Form 10-K Report, File No. 1-4473 | 3-30-93 | ||||
|
|
||||||||
|
99.3
c
|
Pinnacle West
APS |
Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease, dated as of August 1, 1986, between State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee, and Chemical Bank, as Indenture Trustee | 4.5 to APS’ Form 18 Registration Statement, File No. 33-9480 | 10-24-86 |
206
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
99.3a
c
|
Pinnacle West
APS |
Supplemental Indenture No. 1, dated as of November 1, 1986 to Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease, dated as of August 1, 1986, between State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee, and Chemical Bank, as Indenture Trustee | 10.6 to APS’ September 30, 1986 Form 10-Q Report by means of Amendment No. 1 on December 3, 1986 Form 8, File No. 1-4473 | 12-4-86 | ||||
|
|
||||||||
|
99.3b
c
|
Pinnacle West
APS |
Supplemental Indenture No. 2 to Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease, dated as of August 1, 1986, between State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee, and Chemical Bank, as Lease Indenture Trustee | 4.4 to APS’ 1992 Form 10-K Report, File No. 1-4473 | 3-30-93 | ||||
|
|
||||||||
|
99.4
c
|
Pinnacle West
APS |
Assignment, Assumption and Further Agreement, dated as of August 1, 1986, between APS and State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee | 28.3 to APS’ Form 18 Registration Statement, File No. 33-9480 | 10-24-86 |
207
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
99.4a
c
|
Pinnacle West
APS |
Amendment No. 1, dated as of November 1, 1986, to Assignment, Assumption and Further Agreement, dated as of August 1, 1986, between APS and State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee | 10.10 to APS’ September 30, 1986 Form 10-Q Report by means of Amendment No. l on December 3, 1986 Form 8, File No. 1-4473 | 12-4-86 | ||||
|
|
||||||||
|
99.4b
c
|
Pinnacle West
APS |
Amendment No. 2, dated as of March 17, 1993, to Assignment, Assumption and Further Agreement, dated as of August 1, 1986, between APS and State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee | 28.6 to APS’ 1992 Form 10-K Report, File No. 1-4473 | 3-30-93 | ||||
|
|
||||||||
|
99.5
|
Pinnacle West
APS |
Participation Agreement, dated as of December 15, 1986, among PVNGS Funding Report Corp., Inc., State Street Bank and Trust Company, as successor to The First National Bank of Boston, in its individual capacity and as Owner Trustee, Chemical Bank, in its individual capacity and as Indenture Trustee under a Trust Indenture, APS, and the Owner Participant named therein | 28.2 to APS’ September 30, 1992 Form 10-Q Report, File No. 1-4473 | 11-9-92 |
208
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
99.5a
|
Pinnacle West
APS |
Amendment No. 1, dated as of August 1, 1987, to Participation Agreement, dated as of December 15, 1986, among PVNGS Funding Corp., Inc. as Funding Corporation, State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee, Chemical Bank, as Indenture Trustee, APS, and the Owner Participant named therein | 28.20 to APS’ Form 18 Registration Statement No. 33-9480 by means of a November 6, 1986 Form 8-K Report, File No. 1-4473 | 8-10-87 | ||||
|
|
||||||||
|
99.5b
|
Pinnacle West
APS |
Amendment No. 2, dated as of March 17, 1993, to Participation Agreement, dated as of December 15, 1986, among PVNGS Funding Corp., Inc., PVNGS II Funding Corp., Inc., State Street Bank and Trust Company, as successor to The First National Bank of Boston, in its individual capacity and as Owner Trustee, Chemical Bank, in its individual capacity and as Indenture Trustee, APS, and the Owner Participant named therein | 28.5 to APS’ 1992 Form 10-K Report, File No. 1-4473 | 3-30-93 |
209
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
99.6
|
Pinnacle West
APS |
Trust Indenture, Mortgage Security Agreement and Assignment of Facility Lease, dated as of December 15, 1986, between State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee, and Chemical Bank, as Indenture Trustee | 10.2 to APS’ November 18, 1986 Form 10-K Report, File No. 1-4473 | 1-20-87 | ||||
|
|
||||||||
|
99.6a
|
Pinnacle West
APS |
Supplemental Indenture No. 1, dated as of August 1, 1987, to Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease, dated as of December 15, 1986, between State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee, and Chemical Bank, as Indenture Trustee | 4.13 to APS’ Form 18 Registration Statement No. 33-9480 by means of August 1, 1987 Form 8-K Report, File No. 1-4473 | 8-24-87 |
210
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
99.6b
|
Pinnacle West
APS |
Supplemental Indenture No. 2 to Trust Indenture Mortgage, Security Agreement and Assignment of Facility Lease, dated as of December 15, 1986, between State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee, and Chemical Bank, as Lease Indenture Trustee | 4.5 to APS’ 1992 Form 10-K Report, File No. 1-4473 | 3-30-93 | ||||
|
|
||||||||
|
99.7
|
Pinnacle West
APS |
Assignment, Assumption and Further Agreement, dated as of December 15, 1986, between APS and State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee | 10.5 to APS’ November 18, 1986 Form 8-K Report, File No. 1-4473 | 1-20-87 | ||||
|
|
||||||||
|
99.7a
|
Pinnacle West
APS |
Amendment No. 1, dated as of March 17, 1993, to Assignment, Assumption and Further Agreement, dated as of December 15, 1986, between APS and State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee | 28.7 to APS’ 1992 Form 10-K Report, File No. 1-4473 | 3-30-93 | ||||
|
|
||||||||
|
99.8
c
|
Pinnacle West
APS |
Indemnity Agreement dated as of March 17, 1993 by APS | 28.3 to APS’ 1992 Form 10-K Report, File No. 1-4473 | 3-30-93 |
211
Table of Contents
| Exhibit | Date | |||||||
| No. | Registrant(s) | Description | Previously Filed as Exhibit: a | Filed | ||||
|
|
||||||||
|
99.9
|
Pinnacle West
APS |
Extension Letter, dated as of August 13, 1987, from the signatories of the Participation Agreement to Chemical Bank | 28.20 to APS’ Form 18 Registration Statement No. 33-9480 by means of a November 6, 1986 Form 8-K Report, File No. 1-4473 | 8-10-87 | ||||
|
|
||||||||
|
99.10
|
Pinnacle West
APS |
Arizona Corporation Commission Order, Decision No. 61969, dated September 29, 1999, including the Retail Electric Competition Rules | 10.2 to APS’ September 30, 1999 Form 10-Q Report, File No. 1-4473 | 11-15-99 | ||||
|
|
||||||||
|
99.11
|
Pinnacle West | Purchase Agreement by and among Pinnacle West Energy Corporation and GenWest, L.L.C. and Nevada Power Company, dated June 21, 2005 | 99.5 to Pinnacle West/APS June 30, 2005 Form 10-Q Report, File Nos. 1-8962 and 1-4473 | 8-9-05 |
| a | Reports filed under File No. 1-4473 and 1-8962 were filed in the office of the Securities and Exchange Commission located in Washington, D.C. | |
| b | Management contract or compensatory plan or arrangement to be filed as an exhibit pursuant to Item 15(b) of Form 10-K. | |
| c | An additional document, substantially identical in all material respects to this Exhibit, has been entered into, relating to an additional Equity Participant. Although such additional document may differ in other respects (such as dollar amounts, percentages, tax indemnity matters, and dates of execution), there are no material details in which such document differs from this Exhibit. | |
| d | Additional agreements, substantially identical in all material respects to this Exhibit have been entered into with additional persons. Although such additional documents may differ in other respects (such as dollar amounts and dates of execution), there are no material details in which such agreements differ from this Exhibit. |
212
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
PINNACLE WEST CAPITAL
CORPORATION
(Registrant) |
||||
| Date: February 19, 2010 | /s/ Donald E. Brandt | |||
| (Donald E. Brandt, | ||||
|
Chairman of the Board of Directors, President and
Chief Executive Officer) |
||||
Power of Attorney
We, the undersigned directors and executive officers of Pinnacle West Capital Corporation,
hereby severally appoint James R. Hatfield and David P. Falck, and each of them, our true and
lawful attorneys with full power to them and each of them to sign for us, and in our names in the
capacities indicated below, any and all amendments to this Annual Report on Form 10-K filed with
the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
| Signature | Title | Date | ||
|
|
||||
|
/s/ Donald E. Brandt
Chairman of the Board of Directors, President and Chief Executive Officer) |
Principal Executive Officer and Director | February 19, 2010 | ||
|
|
||||
|
/s/ James R. Hatfield
Senior Vice President and Chief Financial Officer) |
Principal Financial Officer | February 19, 2010 | ||
|
|
||||
|
/s/ Barbara M. Gomez
Vice President, Controller and Chief Accounting Officer, position at December 31, 2009) |
Principal Accounting Officer
(position at December 31, 2009) |
February 19, 2010 |
213
Table of Contents
| Signature | Title | Date | ||
|
|
||||
|
/s/ Edward N. Basha, Jr.
|
Director | February 19, 2010 | ||
|
|
||||
|
/s/ Susan Clark-Johnson
|
Director | February 19, 2010 | ||
|
|
||||
|
/s/ Denis A. Cortese
|
Director | February 19, 2010 | ||
|
|
||||
|
/s/ Michael L. Gallagher
|
Director | February 19, 2010 | ||
|
|
||||
|
/s/ Pamela Grant
|
Director | February 19, 2010 | ||
|
|
||||
|
/s/ Roy A. Herberger, Jr.
|
Director | February 19, 2010 | ||
|
|
||||
|
/s/ William S. Jamieson
|
Director | February 19, 2010 | ||
|
|
||||
|
/s/ Humberto S. Lopez
|
Director | February 19, 2010 | ||
|
|
||||
|
/s/ Kathryn L. Munro
|
Director | February 19, 2010 | ||
|
|
||||
|
/s/ Bruce J. Nordstrom
|
Director | February 19, 2010 | ||
|
|
||||
|
/s/ W. Douglas Parker
|
Director | February 19, 2010 | ||
|
|
||||
|
/s/ William J. Post
|
Director | February 19, 2010 | ||
|
|
||||
|
/s/ William L. Stewart
|
Director | February 19, 2010 |
214
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
ARIZONA PUBLIC SERVICE COMPANY
(Registrant) |
||||
| Date: February 19, 2010 | /s/ Donald E. Brandt | |||
| (Donald E. Brandt, | ||||
|
Chairman of the Board of Directors and
Chief Executive Officer) |
||||
Power of Attorney
We, the undersigned directors and executive officers of Arizona Public Service Company, hereby
severally appoint James R. Hatfield and David P. Falck, and each of them, our true and lawful
attorneys with full power to them and each of them to sign for us, and in our names in the
capacities indicated below, any and all amendments to this Annual Report on Form 10-K filed with
the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
| Signature | Title | Date | ||
|
|
||||
|
/s/ Donald E. Brandt
Chairman of the Board of Directors and Chief Executive Officer) |
Principal Executive Officer and Director | February 19, 2010 | ||
|
|
||||
|
/s/ James R. Hatfield
Senior Vice President and Chief Financial Officer) |
Principal Financial Officer and Principal Accounting Officer | February 19, 2010 |
215
Table of Contents
| Signature | Title | Date | ||
|
|
||||
|
/s/ Edward N. Basha, Jr.
|
Director | February 19, 2010 | ||
|
|
||||
|
/s/ Susan Clark-Johnson
|
Director | February 19, 2010 | ||
|
|
||||
|
/s/ Denis A. Cortese
|
Director | February 19, 2010 | ||
|
|
||||
|
/s/ Michael L. Gallagher
|
Director | February 19, 2010 | ||
|
|
||||
|
/s/ Pamela Grant
|
Director | February 19, 2010 | ||
|
|
||||
|
/s/ Roy A. Herberger, Jr.
|
Director | February 19, 2010 | ||
|
|
||||
|
/s/ William S. Jamieson
|
Director | February 19, 2010 | ||
|
|
||||
|
/s/ Humberto S. Lopez
|
Director | February 19, 2010 | ||
|
|
||||
|
/s/ Kathryn L. Munro
|
Director | February 19, 2010 | ||
|
|
||||
|
/s/ Bruce J. Nordstrom
|
Director | February 19, 2010 | ||
|
|
||||
|
/s/ W. Douglas Parker
|
Director | February 19, 2010 | ||
|
|
||||
|
/s/ William J. Post
|
Director | February 19, 2010 | ||
|
|
||||
|
/s/ William L. Stewart
|
Director | February 19, 2010 |
216
TABLE OF CONTENTS
Part IprintItem 1. BusinessprintItem 1A. Risk FactorsprintItem 1B. Unresolved Staff CommentsprintItem 2. PropertiesprintItem 3. Legal ProceedingsprintItem 4. Submission Of Matters To A Vote Of Security HoldersprintPart IIprintItem 5. Market For Registrants Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesprintItem 6. Selected Financial Data Pinnacle West Capital Corporation ConsolidatedprintItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 7A. Quantitative and Qualitative Disclosures About Market RiskprintItem 8. Financial Statements and Supplementary DataprintItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureprintItem 9A. Controls and ProceduresprintItem 9B. Other InformationprintPart IIIprintItem 10. Directors, Executive Officers and Corporate Governance Of Pinnacle WestprintItem 11. Executive CompensationprintItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersprintItem 13. Certain Relationships and Related Transactions, and Director IndependenceprintItem 14. Principal Accountant Fees and ServicesprintPart IVprintItem 15. Exhibits and Financial Statement Schedulesprint