| Leases
|
|
|
|
|
|
|
|
|
|
1. Summary of Significant Accounting Policies
Description of Business and Basis of Presentation
Pinnacle West is a holding company that conducts business through its subsidiaries; APS and El Dorado, and formerly SunCor and APSES. APS, our wholly-owned subsidiary, 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. APS accounts for essentially all of our revenues and earnings, and is expected to continue to do so. SunCor was a developer of residential, commercial and industrial real estate projects in Arizona, New Mexico, Idaho and Utah but in 2009 and 2010, essentially all of these assets were sold. In February 2012, SunCor filed for protection under the United States Bankruptcy Code to complete an orderly liquidation of its business. All activities for SunCor are now reported as discontinued operations (see Note 21). APSES provided energy-related projects to commercial and industrial retail customers in competitive markets in the western United States. APSES was sold in 2011 and is now reported as discontinued operations (see Note 21). El Dorado is an investment firm.
Pinnacle West’s Consolidated Financial Statements include the accounts of Pinnacle West and our subsidiaries: APS and El Dorado, and formerly SunCor and APSES. APS’s consolidated financial statements include the accounts of APS and certain VIEs relating to the Palo Verde sale leaseback. Intercompany accounts and transactions between the consolidated companies have been eliminated.
We consolidate VIEs for which we are the primary beneficiary. We determine whether we are the primary beneficiary of a VIE through a qualitative analysis that identifies which variable interest holder has the controlling financial interest in the VIE. In performing our primary beneficiary analysis we consider all relevant facts and circumstances, including the design and activities of the VIE, the terms of the contracts the VIE has entered into, and which parties participated significantly in the design or redesign of the entity. We continually evaluate our primary beneficiary conclusions to determine if changes have occurred which would impact our primary beneficiary assessments. We have determined that APS is the primary beneficiary of certain VIE lessor trusts relating to the Palo Verde sale leaseback, and therefore APS consolidates these entities (see Note 20).
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.
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.
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 changes in the applicable regulatory environment and recent rate orders applicable to APS or 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.
See Note 3 for additional information.
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.
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 fuel and purchased power costs.
For the period January 1, 2010 through June 30, 2012, electric revenues also include proceeds for line extension payments for new or upgraded service in accordance with the 2009 retail rate case settlement agreement (see Note 3). Effective July 1, 2012, as a result of the 2011 rate case settlement agreement, these amounts are now recorded as contributions in aid of construction and are not included in electric revenues.
Some of our cost recovery mechanisms are alternative revenue programs. For alternative revenue programs that meet specified accounting criteria, we recognize revenues when the specific events permitting billing of the additional revenues have been completed.
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.
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
· 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 on its regulated assets for 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.
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, 2012 were as follows:
· Fossil plant — 16 years;
· Nuclear plant — 27 years;
· Other generation — 26 years;
· Transmission — 39 years;
· Distribution — 35 years; and
· Other — 7 years.
APS applied for twenty-year extensions of its operating licenses for each of the three Palo Verde units in December 2008. On April 21, 2011, the NRC approved the extensions of the Palo Verde licenses. The nuclear plant remaining life takes into consideration an ACC decision which authorizes the new Palo Verde Nuclear plant lives, effective January 1, 2012.
For the years 2010 through 2012, the depreciation rates ranged from a low of 0.45% to a high of 12.08%. The weighted-average rate was 2.71% for 2012, 2.98% for 2011, and 2.98% for 2010.
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. Both the debt and equity components of AFUDC are non-cash amounts within the Consolidated Statement of Income. 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 8.60% for 2012, 10.25% for 2011, and 9.2% for 2010. APS compounds AFUDC semi-annually and ceases to accrue AFUDC when construction work is completed and the property is placed in service.
Materials and Supplies
APS values materials, supplies and fossil fuel inventory using a weighted-average cost method. APS materials, supplies and fossil fuel inventories are carried at the lower of weighted-average cost or market, unless evidence indicates that the weighted-average cost (even if in excess of market) will be recovered.
Fair Value Measurements
We account for derivative instruments, investments held in our nuclear decommissioning trust, certain cash equivalents and plan assets held in our retirement and other benefit plans at fair value on a recurring basis. Due to the short-term nature of net accounts receivable, accounts payable, and short-term borrowings, the carrying values of these instruments approximate fair value. Fair value measurements may also be applied on a nonrecurring basis to other assets and liabilities in certain circumstances such as impairments. We also disclose fair value information for our long-term debt, which is carried at amortized cost (see Note 6).
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 which we can access for the asset or liability in an orderly transaction between willing market participants on the measurement date. Inputs to fair value may 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 observable inputs such as actively-quoted prices for identical instruments when available. When actively quoted prices are not available for the identical instruments we use other observable inputs, such as prices for similar instruments, other corroborative market information, or prices provided by other external sources. For options, long-term contracts and other contracts for which observable price data are not available, we use models and other valuation methods, which may incorporate unobservable inputs 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.
See Note 14 for additional information about fair value measurements.
Derivative Accounting
We are exposed to the impact of market fluctuations in the commodity price and transportation costs of electricity, natural gas, coal, emission allowances and in interest rates. We manage risks associated with market volatility by utilizing various physical and financial instruments including futures, forwards, options and swaps. As part of our overall risk management program, we may use derivative 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 also enter into derivative instruments for economic hedging purposes. Contracts that have the same terms (quantities, delivery points and delivery periods) and for which power does not flow are netted, which reduces both revenues and fuel and purchased power expenses in our Consolidated Statements of Income, but does not impact our financial condition, net income or cash flows.
We account for our derivative contracts in accordance with derivatives and hedging guidance, which requires all derivatives not qualifying for a scope exception to be measured at fair value on the balance sheet as either assets or liabilities. Transactions with counterparties that have master netting arrangements are reported net on the balance sheet. See Note 18 for additional information about our derivative instruments.
Loss Contingencies and Environmental Liabilities
Pinnacle West and APS are involved in certain legal and environmental matters that arise in the normal course of business. Contingent losses and environmental liabilities are recorded when it is determined that it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. When a range of the probable loss exists and no amount within the range is a better estimate than any other amount, Pinnacle West and APS record a loss contingency at the minimum amount in the range. Unless otherwise required by GAAP, legal fees are expensed as incurred.
Retirement Plans and Other Benefits
Pinnacle West sponsors a qualified defined benefit and account balance pension plan for the employees of Pinnacle West and its subsidiaries. We also sponsor another postretirement benefit plan for the employees of Pinnacle West and our subsidiaries that provide medical and life insurance benefits to retired employees. Pension and other postretirement benefit expense are determined by actuarial valuations, based on assumptions that are evaluated annually. See Note 8 for additional information on pension and other postretirement benefits.
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 costs.
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 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).
Cash and Cash Equivalents
We consider all highly liquid investments with a remaining maturity of three months or less at acquisition to be cash equivalents.
The following table summarizes supplemental Pinnacle West cash flow information for each of the last three years (dollars in thousands):
|
|
Years ended December 31, |
| |||||||
|
|
2012 |
|
2011 |
|
2010 |
| |||
|
|
|
|
|
|
|
| |||
Cash paid during the period for: |
|
|
|
|
|
|
| |||
Income taxes, net of (refunds) |
|
$ |
2,543 |
|
$ |
10,324 |
|
$ |
(23,447 |
) |
Interest, net of amounts capitalized |
|
200,923 |
|
217,789 |
|
221,728 |
| |||
Significant non-cash investing and financing activities: |
|
|
|
|
|
|
| |||
Accrued capital expenditures |
|
$ |
26,208 |
|
$ |
27,245 |
|
$ |
19,226 |
|
Dividends declared but not paid |
|
59,789 |
|
— |
|
— |
|
Intangible Assets
We have no goodwill recorded and have separately disclosed other intangible assets, primarily APS’s software, on Pinnacle West’s Consolidated Balance Sheets. The intangible assets are amortized over their finite useful lives. Amortization expense was $50 million in 2012, $47 million in 2011, and $45 million in 2010. Estimated amortization expense on existing intangible assets over the next five years is $45 million in 2013, $37 million in 2014, $28 million in 2015, $20 million in 2016, and $12 million in 2017. At December 31, 2012, the weighted-average remaining amortization period for intangible assets was 6 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 14 and Note 22 for more information on these investments.
|
2. New Accounting Standards
During 2012, we adopted amended guidance intended to converge fair value measurement and disclosure requirements for GAAP and international financial reporting standards (“IFRS”). The amended guidance clarifies how certain fair value measurement principles should be applied and requires enhanced fair value disclosures. The adoption of this new guidance resulted in additional fair value disclosures (see Note 14), but did not impact our financial statement results.
During 2012, we also adopted amended guidance on the presentation of comprehensive income. As a result of the amended guidance, we have changed our format for presenting comprehensive income. Previously, components of comprehensive income were presented within changes in equity. Due to the amended guidance, we now present comprehensive income in a new financial statement titled “Consolidated Statements of Comprehensive Income”. The adoption of this guidance changed our format for presenting comprehensive income, but did not impact our financial statement results.
|
3. Regulatory Matters
Retail Rate Case Filing with the Arizona Corporation Commission
On June 1, 2011, APS filed an application with the ACC for a net retail base rate increase of $95.5 million. APS requested that the increase become effective July 1, 2012. The request would have increased the average retail customer bill approximately 6.6%. On January 6, 2012, APS and other parties to the general retail rate case entered into an agreement (the “Settlement Agreement”) detailing the terms upon which the parties agreed to settle the rate case. On May 15, 2012, the ACC approved the Settlement Agreement without material modifications.
Settlement Agreement
The Settlement Agreement provides for a zero net change in base rates, consisting of: (1) a non-fuel base rate increase of $116.3 million; (2) a fuel-related base rate decrease of $153.1 million (to be implemented by a change in the Base Fuel Rate for fuel and purchased power costs from $0.03757 to $0.03207 per kWh; and (3) the transfer of cost recovery for certain renewable energy projects from the RES surcharge to base rates in an estimated amount of $36.8 million.
APS also agreed not to file its next general rate case before May 31, 2015, and not to request that its next general retail rate increase be effective prior to July 1, 2016. The Settlement Agreement allows APS to request a change to its base rates during the stay-out period in the event of an extraordinary event that, in the ACC’s judgment, requires base rate relief in order to protect the public interest. Nor is APS precluded from seeking rate relief, or any other party to the Settlement Agreement precluded from petitioning the ACC to examine the reasonableness of APS’s rates, in the event of significant regulatory developments that materially impact the financial results expected under the terms of the Settlement Agreement.
Other key provisions of the Settlement Agreement include the following:
· An authorized return on common equity of 10.0%;
· A capital structure comprised of 46.1% debt and 53.9% common equity;
· A test year ended December 31, 2010, adjusted to include plant that is in service as of March 31, 2012;
· Deferral for future recovery or refund of property taxes above or below a specified 2010 test year level caused by changes to the Arizona property tax rate as follows:
· Deferral of 25% in 2012, 50% in 2013 and 75% for 2014 and subsequent years if Arizona property tax rates increase; and
· Deferral of 100% in all years if Arizona property tax rates decrease;
· A procedure to allow APS to request rate adjustments prior to its next general rate case related to APS’s proposed acquisition (should it be consummated) of additional interests in Units 4 and 5 and the related closure of Units 1-3 of Four Corners;
· Implementation of a “Lost Fixed Cost Recovery” rate mechanism to support energy efficiency and distributed renewable generation;
· Modifications to the Environmental Improvement Surcharge (“EIS”) to allow for the recovery of carrying costs for capital expenditures associated with government-mandated environmental controls, subject to an existing cents per kWh cap on cost recovery that could produce up to approximately $5 million in revenues annually;
· Modifications to the PSA, including the elimination of the current 90/10 sharing provision;
· A limitation on the use of the RES surcharge and the DSMAC to recoup capital expenditures not required under the terms of the 2008 rate case settlement agreement discussed below;
· Allowing a negative credit that currently exists in the PSA rate to continue until February 2013, rather than being reset on the anticipated July 1, 2012 rate effective date;
· Modification of the TCA to streamline the process for future transmission-related rate changes; and
· Implementation of various changes to rate schedules, including the adoption of an experimental “buy-through” rate that could allow certain large commercial and industrial customers to select alternative sources of generation to be supplied by APS.
The Settlement Agreement was approved by the ACC on May 15, 2012, with new rates effective on July 1, 2012. This accomplished a goal set by the parties to the 2008 rate case settlement to process 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.
2008 General Retail Rate Case On-Going Impacts
On December 30, 2009, the ACC issued an order approving a settlement agreement entered into by APS and twenty-one other parties in APS’s prior general retail rate case, which was originally filed in March 2008. The settlement agreement contains certain on-going requirements, commitments and authorizations that will survive the 2012 Settlement Agreement, including the following:
· 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 ($253 million of which was infused into APS from proceeds of a Pinnacle West equity issuance in the second quarter of 2010); 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 through 2012 and its use of renewable energy through 2015, 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 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 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 a RES surcharge as part of 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 funding the upcoming year’s RES budget.
On July 1, 2011, APS filed its annual RES implementation plan, covering the 2012-2016 timeframe and requested 2012 RES funding of $129 million to $152 million. On December 14, 2011, the ACC voted to approve APS’s 2012 RES Plan and authorized a total 2012 RES budget of $110 million. Within that budget, the ACC authorized APS to, among other items, own up to an additional 100 MW under its AZ Sun Program, for a total potential program amount of up to 200 MW. The AZ Sun program, originally approved by the ACC in March 2010, contemplates the development of photovoltaic solar plants which APS will own. Under this program to date, APS has executed contracts for the development of 118 MW of new solar generation, representing an investment commitment of approximately $502 million.
On June 29, 2012, APS filed its annual RES implementation plan, covering the 2013-2017 timeframe and requested 2013 RES funding of $97 million to $107 million. In a final order dated January 31, 2013, the ACC approved a budget of $103 million for APS’s 2013 RES plan. That budget includes $4 million for residential distributed energy incentives and $0.1 million for commercial distributed energy up-front incentives, but did not include any funds for commercial distributed energy production-based incentives. The ACC further ordered that a hearing take place to consider: (i) APS’s proposal to establish compliance with distributed energy requirements by tracking and recording distributed energy, rather than acquiring and retiring renewable energy credits; and (ii) removing retail sales to APS’s largest industrial customers when calculating APS’s compliance with the annual RES requirements.
Demand Side Management Adjustor Charge. The ACC Electric Energy Efficiency Standards require APS to submit a Demand Side Management Implementation Plan for review by and approval of the ACC. In 2010, the DSMAC was modified to recover estimated amounts for use on certain demand side management programs over the current year. Previously, the DSMAC allowed for such recovery only on a historical or after-the-fact basis. The surcharge allows for the recovery of energy efficiency program expenses and any earned incentives.
The ACC previously 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 2008 retail rate case 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 was amortized over a three-year period, which ended in 2012.
On June 1, 2011, APS filed its 2012 Demand Side Management Implementation Plan consistent with the ACC’s Electric Energy Efficiency Standards, which became effective January 1, 2011. The 2012 requirement under such standards is for cumulative energy efficiency savings of 3% of APS retail sales for the prior year. This energy savings requirement is slightly higher than the goal established by the 2008 retail rate case settlement agreement (2.75% of total energy resources for the same two-year period). The ACC issued an order on April 4, 2012 approving recovery of approximately $72 million of APS’s energy efficiency and demand side management program costs over a twelve-month period beginning March 1, 2012. This amount does not include $10 million already being recovered in general retail base rates.
On June 1, 2012, APS filed its 2013 Demand Side Management Implementation Plan. In 2013, the standards will require APS to achieve cumulative energy savings equal to 5% of its 2012 retail energy sales. Later in 2012, APS filed a supplement to its plan that included a proposed budget for 2013 of $87.6 million. Although this proposed budget is approximately $5.6 million more than the approved 2012 budget, the expiration of the three-year amortization of 2009 costs and prior year credits would result in a small decrease in the DSMAC. APS expects to receive a decision from the ACC in the second quarter of 2013.
PSA Mechanism and Balance. The PSA 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;
· an adjustment to the PSA rate is made annually each February 1st (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 is reconciled to actual costs experienced for each PSA Year (February 1 through January 31) (see the following bullet point);
· 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; and
· the PSA rate may not be increased or decreased more than $0.004 per kWh in a year without permission of the ACC.
The following table shows the changes in the deferred fuel and purchased power regulatory asset (liability) for 2012 and 2011 (dollars in millions):
|
|
Twelve Months Ended |
| ||||
|
|
2012 |
|
2011 |
| ||
Beginning balance |
|
$ |
28 |
|
$ |
(58 |
) |
Deferred fuel and purchased power costs — current period |
|
(72 |
) |
(69 |
) | ||
Amounts credited to customers |
|
117 |
|
155 |
| ||
Ending balance |
|
$ |
73 |
|
$ |
28 |
|
The PSA rate for the PSA year beginning February 1, 2013 is $0.0013 per kWh as compared to ($0.0042) per kWh for the prior year. This represents a $0.0055 per kWh increase over the 2012 PSA charge. This new rate is comprised of a forward component of ($0.0010) per kWh and a historical component of $0.0023 per kWh. The Settlement Agreement allowed APS to exceed the $0.004 per kWh cap to PSA rate changes in this instance. Any uncollected (overcollected) deferrals during the 2013 PSA year will be included in the calculation of the PSA rate for the PSA year beginning February 1, 2014.
Transmission Rates and Transmission Cost Adjustor. In July 2008, 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 and recover the costs that APS incurs in providing transmission services. A large portion of the rate represents charges for transmission services to serve APS’s retail customers (“Retail Transmission Charges”). In order to recover the Retail Transmission Charges, APS was previously required to file an application with, and obtain approval from, the ACC to reflect changes in Retail Transmission Charges through the TCA. Under the terms of the Settlement Agreement (discussed above), however, an adjustment to rates to recover the Retail Transmission Charges will be made annually each June 1 beginning in 2013 and will go into effect automatically unless suspended by the ACC.
The formula rate is updated each year effective June 1 on the basis of APS’s actual cost of service, as disclosed in APS’s FERC Form 1 report for the previous fiscal year. Items to be updated include actual capital expenditures made as compared with previous projections, transmission revenue credits and other items. The resolution of proposed adjustments can result in significant volatility in the revenues to be collected. APS reviews the proposed formula rate filing amounts with the ACC staff. Any items or adjustments which are not agreed to by APS and the ACC staff can remain in dispute until settled or litigated at FERC. Settlement or litigated resolution of disputed issues could require an extended period of time and could have a significant effect on the Retail Transmission Charge because any adjustment, though applied prospectively, may be calculated to account for previously over-collected amounts.
Effective June 1, 2011, APS’s annual wholesale transmission rates for all users of its transmission system increased by approximately $44 million for the twelve-month period beginning June 1, 2011 in accordance with the FERC-approved formula as a result of higher costs and lower revenues reflected in the formula. Approximately $38 million of this revenue increase relates to Retail Transmission Charges. The ACC approved the related increase of APS’s TCA rate on June 21, 2011 and it became effective on July 1, 2011.
Effective June 1, 2012, APS’s annual wholesale transmission rates for all users of its transmission system increased by approximately $16 million for the twelve-month period beginning June 1, 2012 in accordance with the FERC-approved formula. Because of higher relative system demand by APS’s retail customers, the approximately $16 million increase reflects roughly a $2 million decrease for wholesale customers and an $18 million increase for APS retail customers.
On May 14, 2012, APS filed an application with the ACC to implement the FERC-approved transmission rates for retail customers discussed above. On July 18, 2012, the ACC approved the application authorizing the implementation of the FERC-approved transmission rates for retail customers, which became effective August 2012.
As part of APS’s proposed acquisition of SCE’s interest in Units 4 and 5 of Four Corners, APS and SCE agreed that upon closing of the acquisition (or in 2016 if the closing does not occur), the companies will terminate an existing agreement that provides transmission capacity for SCE to transmit its portion of the output from Four Corners to California. APS expects to file a request with FERC seeking authorization to cancel the existing agreement and defer a $40 million payment to be made by APS associated with the termination and recover the payment through amortization over a 29-year period. APS believes the costs associated with the termination of the existing agreement are recoverable, but cannot predict whether FERC will approve our request; however, if the recovery is disallowed by FERC, APS would record a charge to its results of operations at the time of the disallowance.
Lost Fixed Cost Recovery Mechanism. The LFCR mechanism permits APS to recover on an after-the-fact basis a portion of its fixed costs that would otherwise have been collected by the Company in the kWh sales lost due to APS energy efficiency programs and to distributed generation such as roof-top solar arrays. The fixed costs recoverable by the LFCR mechanism were established in the recent rate case and amount to approximately 3.1 cents per residential kWh lost and 2.3 cents per non-residential kWh lost. The kWh’s lost from energy efficiency are based on a third-party evaluation of the Company’s energy efficiency programs. Distributed generation sales losses are determined from the metered output from the distributed generation units or if metering is unavailable, through accepted estimating techniques.
APS filed its first LFCR adjustment on January 15, 2013 and will file for its LFCR adjustment every January thereafter. On February 12, 2013, the ACC approved an LFCR adjustment of $5.1 million, representing a pro-rated amount for 2012 since the Settlement Agreement went into effect on July 1, 2012.
Regulatory Assets and Liabilities
The detail of regulatory assets is as follows (dollars in millions):
|
|
Remaining |
|
December 31, 2012 |
|
December 31, 2011 |
| ||||||||
|
|
Period |
|
Current |
|
Non-Current |
|
Current |
|
Non-Current |
| ||||
Pension and other postretirement benefits |
|
(a) |
|
$ |
— |
|
$ |
780 |
|
$ |
— |
|
$ |
1,023 |
|
Income taxes — AFUDC equity |
|
2042 |
|
4 |
|
92 |
|
3 |
|
81 |
| ||||
Deferred fuel and purchased power — mark-to-market (Note 18) |
|
2016 |
|
19 |
|
21 |
|
43 |
|
34 |
| ||||
Transmission vegetation management |
|
2016 |
|
9 |
|
23 |
|
9 |
|
32 |
| ||||
Coal reclamation |
|
2026 |
|
8 |
|
24 |
|
2 |
|
35 |
| ||||
Palo Verde VIEs (Note 20) |
|
2046 |
|
— |
|
38 |
|
— |
|
35 |
| ||||
Deferred compensation |
|
2036 |
|
— |
|
34 |
|
— |
|
33 |
| ||||
Deferred fuel and purchased power (b) (c) |
|
2013 |
|
73 |
|
— |
|
28 |
|
— |
| ||||
Tax expense of Medicare subsidy |
|
2024 |
|
2 |
|
17 |
|
2 |
|
18 |
| ||||
Loss on reacquired debt |
|
2034 |
|
2 |
|
18 |
|
1 |
|
19 |
| ||||
Income taxes — investment tax credit basis adjustment |
|
2042 |
|
1 |
|
26 |
|
— |
|
15 |
| ||||
Pension and other postretirement benefits deferral |
|
2015 |
|
8 |
|
13 |
|
— |
|
12 |
| ||||
Other |
|
Various |
|
18 |
|
14 |
|
9 |
|
15 |
| ||||
Total regulatory assets (d) |
|
|
|
$ |
144 |
|
$ |
1,100 |
|
$ |
97 |
|
$ |
1,352 |
|
(a) This asset represents the future recovery of under-funded pension and other postretirement benefits obligation through retail rates. If these costs are disallowed by the ACC, this regulatory asset would be charged to OCI and result in lower future revenues.
(b) See “Cost Recovery Mechanisms” discussion above.
(c) Subject to a carrying charge.
(d) There are no regulatory assets for which the ACC has allowed recovery of costs but not allowed a return by exclusion from rate base. FERC rates are set using a formula rate as described in “Transmission Rates and Transmission Cost Adjustor.”
The detail of regulatory liabilities is as follows (dollars in millions):
|
|
Remaining |
|
December 31, 2012 |
|
December 31, 2011 |
| ||||||||
|
|
Period |
|
Current |
|
Non-Current |
|
Current |
|
Non-Current |
| ||||
Removal costs |
|
(a) |
|
$ |
27 |
|
$ |
321 |
|
$ |
22 |
|
$ |
349 |
|
Asset retirement obligations |
|
(a) |
|
— |
|
256 |
|
— |
|
225 |
| ||||
Renewable energy standard (b) |
|
2013 |
|
43 |
|
— |
|
54 |
|
— |
| ||||
Income taxes — change in rates |
|
2042 |
|
— |
|
66 |
|
— |
|
59 |
| ||||
Spent nuclear fuel |
|
2047 |
|
10 |
|
36 |
|
5 |
|
44 |
| ||||
Deferred gains on utility property |
|
2019 |
|
2 |
|
12 |
|
2 |
|
14 |
| ||||
Income taxes- deferred investment tax credit |
|
2042 |
|
2 |
|
52 |
|
1 |
|
30 |
| ||||
Other |
|
Various |
|
4 |
|
16 |
|
4 |
|
16 |
| ||||
Total regulatory liabilities |
|
|
|
$ |
88 |
|
$ |
759 |
|
$ |
88 |
|
$ |
737 |
|
(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 (see Note 12).
(b) See “Cost Recovery Mechanisms” discussion above.
|
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 currently enacted income tax rates.
APS has recorded regulatory assets and regulatory liabilities related to income taxes on its Balance Sheets in accordance with accounting guidance for regulated operations. The regulatory assets are for certain temporary differences, primarily the allowance for equity funds used during construction and pension and other postretirement benefits. The regulatory liabilities primarily relate to deferred taxes resulting from investment tax credits (“ITC”) and the change in income tax rates.
In accordance with regulatory requirements, APS investment tax credits are deferred and are amortized over the life of the related property with such amortization applied as a credit to reduce current income tax expense in the statement of income.
The $70 million long-term income tax receivable on the Consolidated Balance Sheets represents the anticipated refunds related to an APS tax accounting method change approved by the IRS in the third quarter of 2009. This amount is classified as long-term, as there remains uncertainty regarding the timing of this cash receipt. Further clarification of the timing is expected from the IRS within the next twelve months.
Net income associated with the Palo Verde sale leaseback variable interest entities is not subject to tax (see Note 20). As a result, there is no income tax expense associated with the VIEs recorded on the Consolidated Statements of Income.
During the first quarter of 2010, the Company reached a settlement with the IRS with regard to the examination of tax returns for the years ended December 31, 2005 through 2007. As a result of this settlement, net uncertain tax positions decreased $62 million, including approximately $3 million which decreased our effective tax rate. Additionally, the settlement resulted in the recognition of net interest benefits of approximately $4 million through the effective tax rate.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits, excluding interest and penalties, at the beginning and end of the year that are included in accrued taxes and unrecognized tax benefits (dollars in thousands):
|
|
2012 |
|
2011 |
|
2010 |
| |||
Total unrecognized tax benefits, January 1 |
|
$ |
136,005 |
|
$ |
127,595 |
|
$ |
201,216 |
|
Additions for tax positions of the current year |
|
5,167 |
|
10,915 |
|
7,551 |
| |||
Reductions for tax positions of prior years for: |
|
|
|
|
|
|
| |||
Changes in judgment |
|
(7,729 |
) |
(1,555 |
) |
(11,017 |
) | |||
Settlements with taxing authorities |
|
— |
|
(124 |
) |
(62,199 |
) | |||
Lapses of applicable statute of limitations |
|
(21 |
) |
(826 |
) |
(7,956 |
) | |||
Total unrecognized tax benefits, December 31 |
|
$ |
133,422 |
|
$ |
136,005 |
|
$ |
127,595 |
|
Included in the balances of unrecognized tax benefits at December 31, 2012, 2011 and 2010 were approximately $10 million, $8 million and $7 million, respectively, of tax positions that, if recognized, would decrease our effective tax rate.
As of the balance sheet date, the tax year ended December 31, 2008 and all subsequent tax years remain subject to examination by the IRS. With a few exceptions, we are no longer subject to state income tax examinations by tax authorities for years before 2008.
It is reasonably possible that within the next twelve months the IRS will finalize the examination of tax returns for the years ended December 31, 2008 and 2009. At this time, a reasonable estimate of the range of possible change in the uncertain tax position cannot be made. However, we do not expect the ultimate outcome of this examination to have a material adverse impact on our financial position or results of operations.
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 Statements of Income related to unrecognized tax benefits was a pre-tax expense of $4 million for 2012, a pre-tax expense of $3 million for 2011 and a pre-tax benefit of $2 million for 2010.
The total amount of accrued liabilities for interest recognized in the Consolidated Balance Sheets related to unrecognized tax benefits was $13 million as of December 31, 2012, $9 million as of December 31, 2011 and $6 million as of December 31, 2010. To the extent that matters are settled favorably, this amount could reverse and decrease our effective tax rate. Additionally, as of December 31, 2012, we have recognized $5 million of interest income to be received on the overpayment 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, |
| |||||||
|
|
2012 |
|
2011 |
|
2010 |
| |||
Current: |
|
|
|
|
|
|
| |||
Federal |
|
$ |
(3,493 |
) |
$ |
(310 |
) |
$ |
(108,827 |
) |
State |
|
8,395 |
|
15,140 |
|
25,545 |
| |||
Total current |
|
4,902 |
|
14,830 |
|
(83,282 |
) | |||
Deferred: |
|
|
|
|
|
|
| |||
Federal |
|
200,322 |
|
159,566 |
|
260,236 |
| |||
State |
|
28,280 |
|
16,626 |
|
10,911 |
| |||
Discontinued operations |
|
— |
|
— |
|
(10,736 |
) | |||
Total deferred |
|
228,602 |
|
176,192 |
|
260,411 |
| |||
Total income tax expense |
|
233,504 |
|
191,022 |
|
177,129 |
| |||
Less: income tax expense (benefit) on discontinued operations |
|
(3,813 |
) |
7,418 |
|
16,260 |
| |||
Income tax expense — continuing operations |
|
$ |
237,317 |
|
$ |
183,604 |
|
$ |
160,869 |
|
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, |
| |||||||
|
|
2012 |
|
2011 |
|
2010 |
| |||
|
|
|
|
|
|
|
| |||
Federal income tax expense at 35% statutory rate |
|
$ |
229,709 |
|
$ |
188,733 |
|
$ |
177,002 |
|
Increases (reductions) in tax expense resulting from: State income tax net of federal income tax benefit |
|
23,819 |
|
19,594 |
|
17,485 |
| |||
Credits and favorable adjustments related to prior years resolved in current year |
|
— |
|
— |
|
(17,300 |
) | |||
Medicare Subsidy Part-D |
|
483 |
|
823 |
|
1,311 |
| |||
Allowance for equity funds used during construction (see Note 1) |
|
(6,158 |
) |
(6,881 |
) |
(6,563 |
) | |||
Palo Verde VIE noncontrolling interest (see Note 20) |
|
(11,065 |
) |
(9,636 |
) |
(7,057 |
) | |||
Other |
|
529 |
|
(9,029 |
) |
(4,009 |
) | |||
Income tax expense — continuing operations |
|
$ |
237,317 |
|
$ |
183,604 |
|
$ |
160,869 |
|
The following table shows the net deferred income tax liability recognized on the Consolidated Balance Sheets (dollars in thousands):
|
|
December 31, |
| ||||
|
|
2012 |
|
2011 |
| ||
Current asset |
|
$ |
152,191 |
|
$ |
130,571 |
|
Long-term liability |
|
(2,151,371 |
) |
(1,925,388 |
) | ||
Deferred income taxes — net |
|
$ |
(1,999,180 |
) |
$ |
(1,794,817 |
) |
On February 17, 2011, Arizona enacted legislation (H.B. 2001) that included a four year phase-in of corporate income tax rate reductions beginning in 2014. As a result of these tax rate reductions, Pinnacle West has revised the tax rate applicable to reversing temporary items in Arizona. In accordance with accounting for regulated companies, the benefit of this rate reduction is substantially offset by a regulatory liability. As of December 31, 2012, APS has recorded a regulatory liability of $69 million, with a corresponding decrease in accumulated deferred income tax liabilities, to reflect the impact of this change in tax law.
The American Taxpayer Relief Act of 2012, signed into law on January 2, 2013, includes provisions making qualified property placed into service in 2013 eligible for 50% bonus depreciation for federal income tax purposes. Full recognition of the cash benefit of this provision would delay realization of approximately $79 million in federal general business income tax credit carryforwards which are classified as current assets as of December 31, 2012.
The components of the net deferred income tax liability were as follows (dollars in thousands):
|
|
December 31, |
| ||||
|
|
2012 |
|
2011 |
| ||
DEFERRED TAX ASSETS |
|
|
|
|
| ||
Risk management activities |
|
$ |
72,243 |
|
$ |
117,765 |
|
Regulatory liabilities: |
|
|
|
|
| ||
Asset retirement obligation and removal costs |
|
238,669 |
|
236,739 |
| ||
Renewable energy standard |
|
— |
|
19,722 |
| ||
Unamortized investment tax credits |
|
53,837 |
|
31,460 |
| ||
Other |
|
33,764 |
|
33,155 |
| ||
Pension and other postretirement liabilities |
|
408,764 |
|
501,202 |
| ||
Renewable energy incentives |
|
66,941 |
|
57,901 |
| ||
Credit and loss carryforwards |
|
139,022 |
|
171,915 |
| ||
Other |
|
68,844 |
|
73,759 |
| ||
Total deferred tax assets |
|
1,082,084 |
|
1,243,618 |
| ||
DEFERRED TAX LIABILITIES |
|
|
|
|
| ||
Plant-related |
|
(2,584,166 |
) |
(2,446,908 |
) | ||
Risk management activities |
|
(23,940 |
) |
(30,171 |
) | ||
Regulatory assets: |
|
|
|
|
| ||
Allowance for equity funds used during construction |
|
(37,899 |
) |
(33,347 |
) | ||
Deferred fuel and purchased power |
|
(28,858 |
) |
(10,884 |
) | ||
Deferred fuel and purchased power — mark-to-market |
|
(15,796 |
) |
(30,559 |
) | ||
Pension and other postretirement benefits |
|
(316,757 |
) |
(408,716 |
) | ||
Other |
|
(68,170 |
) |
(73,087 |
) | ||
Other |
|
(5,678 |
) |
(4,763 |
) | ||
Total deferred tax liabilities |
|
(3,081,264 |
) |
(3,038,435 |
) | ||
Deferred income taxes — net |
|
$ |
(1,999,180 |
) |
$ |
(1,794,817 |
) |
As of December 31, 2012, the deferred tax assets for credit and loss carryforwards relate to federal general business credits of $111 million and federal net operating losses of $21 million, both of which first begin to expire in 2031, and other federal and state loss carryforwards of $7 million which first begin to expire in 2017.
|
5. Lines of Credit and Short-Term Borrowings
The table below presents the consolidated credit facilities and the amounts available and outstanding as of December 31, 2012 (dollars in millions):
Credit Facility |
|
Expiration |
|
Amount |
|
Unused |
|
Commitment |
| ||
Pinnacle West Revolving Credit Facility |
|
November 2016 |
|
$ |
200 |
|
$ |
200 |
|
0.225 |
% |
|
|
|
|
|
|
|
|
|
| ||
APS Revolving Credit Facility |
|
November 2016 |
|
500 |
|
408 |
|
0.175 |
% | ||
|
|
|
|
|
|
|
|
|
| ||
APS Revolving Credit Facility |
|
February 2015 |
|
500 |
|
500 |
|
0.20 |
% | ||
Total |
|
|
|
$ |
1,200 |
|
$ |
1,108 |
|
|
|
(a) At December 31, 2012, APS had $92 million of outstanding commercial paper. Accordingly, at such date the total combined amount available under its two $500 million credit facilities was $908 million.
Pinnacle West and APS maintain committed revolving credit facilities in order to enhance liquidity and provide credit support for their commercial paper programs.
Pinnacle West
At December 31, 2012, the Pinnacle West credit facility, which terminates in November 2016, was available to refinance indebtedness of the Company and for other general corporate purposes, including credit support for its $200 million commercial paper program. Pinnacle West has the option to 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. At December 31, 2012, Pinnacle West had no outstanding borrowings under its credit facility, no letters of credit and no commercial paper borrowings.
APS
APS may increase the amount of each facility up to a maximum of $700 million upon the satisfaction of certain conditions and with the consent of the lenders. APS will use these facilities to refinance indebtedness and for other general corporate purposes. Interest rates are based on APS’s senior unsecured debt credit ratings.
The facilities described above are available to support APS’s $250 million commercial paper program, for bank borrowings or for issuances of letters of credit. At December 31, 2012, APS had no outstanding borrowings or letters of credit under its revolving credit facilities. In addition, APS had commercial paper borrowings of $92 million at December 31, 2012.
See “Financial Assurances” in Note 11 for discussion of APS’s separate outstanding letters of credit.
The table below presents the consolidated credit facilities and the amounts available and outstanding as of December 31, 2011 (dollars in millions):
Credit Facility |
|
Expiration |
|
Amount |
|
Unused |
|
Commitment |
| ||
Pinnacle West Revolving Credit Facility |
|
November 2016 |
|
$ |
200 |
|
$ |
200 |
|
0.275 |
% |
|
|
|
|
|
|
|
|
|
| ||
APS Revolving Credit Facility |
|
November 2016 |
|
500 |
|
500 |
|
0.225 |
% | ||
|
|
|
|
|
|
|
|
|
| ||
APS Revolving Credit Facility |
|
February 2015 |
|
500 |
|
500 |
|
0.250 |
% | ||
Total |
|
|
|
$ |
1,200 |
|
$ |
1,200 |
|
|
|
(a) These facilities were also fully available as of December 31, 2011.
Pinnacle West
On November 4, 2011, Pinnacle West refinanced its $200 million revolving credit facility that would have matured in February 2013, with a new $200 million facility. The new revolving credit facility terminates in November 2016. Interest rates are based on Pinnacle West senior unsecured debt credit ratings.
At December 31, 2011, the Pinnacle West credit facility was available to refinance indebtedness of the Company and for other general corporate purposes, including credit support for its $200 million commercial paper program. At December 31, 2011, Pinnacle West had no outstanding borrowings under its credit facility, no letters of credit and no commercial paper borrowings.
APS
On February 14, 2011, APS refinanced its $489 million revolving credit facility that would have matured in September 2011, and increased the size of the facility to $500 million. The new revolving credit facility terminates in February 2015. APS will use the facility to refinance indebtedness and for other general corporate purposes. Interest rates are based on APS’s senior unsecured debt credit ratings.
On November 4, 2011, APS refinanced its $500 million revolving credit facility that would have matured in February 2013, with a new $500 million facility. The new revolving credit facility terminates in November 2016. 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 to refinance indebtedness and for other general corporate purposes. Interest rates are based on APS’s senior unsecured debt credit ratings.
The facilities described above are available to support its $250 million commercial paper program, for bank borrowings or for issuances of letters of credit. At December 31, 2011, APS had no borrowings outstanding under any of its credit facilities and no outstanding commercial paper.
See “Financial Assurances” in Note 11 for discussion of APS’s separate outstanding letters of credit.
Debt Provisions
Although provisions in APS’s 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 February 6, 2013, the ACC issued a financing order in which it, subject to specified parameters and procedures, (a) approved APS’s short-term debt authorization equal to a sum of (i) 7% of APS’s capitalization, and (ii) $500 million (which is required to be used for costs relating to purchases of natural gas and power), (b) approved an increase in APS’s long-term debt authorization from $4.2 billion to $5.1 billion in light of the projected growth of APS and its customer base and the resulting projected financing needs, and (c) authorized APS to enter into derivative financial instruments for the purpose of managing interest rate risk associated with its long- and short-term debt. This financing order is set to expire on December 31, 2017.
|
6. Long-Term Debt and Liquidity Matters
All of Pinnacle West’s and APS’s debt is unsecured. The following table presents the components of long-term debt on the Consolidated Balance Sheets outstanding at December 31, 2012 and 2011 (dollars in thousands):
|
|
Maturity |
|
Interest |
|
December 31, |
| ||||
|
|
Dates (a) |
|
Rates |
|
2012 |
|
2011 |
| ||
APS |
|
|
|
|
|
|
|
|
| ||
Pollution Control Bonds: |
|
|
|
|
|
|
|
|
| ||
Variable |
|
2029-2038 |
|
(b) |
|
$ |
75,580 |
|
$ |
43,580 |
|
Fixed |
|
2024-2034 |
|
1.25%-6.00% |
|
490,275 |
|
522,275 |
| ||
Pollution control bonds with senior notes |
|
|
|
5.05% |
|
— |
|
90,000 |
| ||
Total Pollution Control Bonds |
|
|
|
|
|
565,855 |
|
655,855 |
| ||
Senior unsecured notes |
|
2014-2042 |
|
4.50%-8.75% |
|
2,575,000 |
|
2,625,000 |
| ||
Palo Verde sale leaseback lessor notes |
|
2015 |
|
8.00% |
|
65,547 |
|
96,803 |
| ||
Capitalized lease obligations |
|
|
|
(c) |
|
— |
|
1,029 |
| ||
Unamortized discount |
|
|
|
|
|
(9,486 |
) |
(7,198 |
) | ||
Total APS long-term debt |
|
|
|
|
|
3,196,916 |
|
3,371,489 |
| ||
Less current maturities |
|
|
|
|
|
122,828 |
|
477,435 |
| ||
Total APS long-term debt less current maturities |
|
|
|
|
|
3,074,088 |
|
2,894,054 |
| ||
Pinnacle West |
|
|
|
|
|
|
|
|
| ||
Term loan |
|
2015 |
|
(d) |
|
125,000 |
|
125,000 |
| ||
TOTAL LONG-TERM DEBT LESS CURRENT MATURITIES |
|
|
|
|
|
$ |
3,199,088 |
|
$ |
3,019,054 |
|
(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 0.13%-0.15% at December 31, 2012 and 0.09% at December 31, 2011.
(c) The weighted-average interest rate was 5.27% at December 31, 2011.
(d) The weighted-average interest rate was 1.312% at December 31, 2012 and 1.794% at December 31, 2011.
The following table shows principal payments due on Pinnacle West’s and APS’s total long-term debt (dollars in millions):
Year |
|
Consolidated |
|
Consolidated |
| ||
2013 |
|
$ |
123 |
|
$ |
123 |
|
2014 |
|
540 |
|
540 |
| ||
2015 |
|
470 |
|
345 |
| ||
2016 |
|
358 |
|
358 |
| ||
2017 |
|
— |
|
— |
| ||
Thereafter |
|
1,840 |
|
1,840 |
| ||
Total |
|
$ |
3,331 |
|
$ |
3,206 |
|
Debt Fair Value
Our long-term debt fair value estimates are based on quoted market prices for the same or similar issues, and are classified within level 2 of the fair value hierarchy. 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. The following table represents the estimated fair value of our long-term debt, including current maturities (dollars in millions):
|
|
As of |
|
As of |
| ||||||||
|
|
Carrying |
|
Fair Value |
|
Carrying |
|
Fair Value |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Pinnacle West |
|
$ |
125 |
|
$ |
125 |
|
$ |
125 |
|
$ |
123 |
|
APS |
|
3,197 |
|
3,750 |
|
3,371 |
|
3,803 |
| ||||
Total |
|
$ |
3,322 |
|
$ |
3,875 |
|
$ |
3,496 |
|
$ |
3,926 |
|
Credit Facilities and Debt Issuances
Pinnacle West
On November 29, 2012, Pinnacle West entered into a $125 million term loan that matures November 27, 2015. Pinnacle West used the proceeds of the loan to repay its existing term loan of $125 million. Interest rates are based on Pinnacle West’s senior unsecured debt credit ratings or, if unavailable, its long-term issuer ratings.
APS
On January 13, 2012, APS issued $325 million of 4.50% unsecured senior notes that mature on April 1, 2042. The net proceeds from the sale were used along with other funds to repay at maturity APS’s $375 million aggregate principal amount of 6.50% senior notes on March 1, 2012.
On May 1, 2012, pursuant to the mandatory tender provision, APS purchased all $32 million of the Maricopa County, Arizona Pollution Control Corporation Pollution Control Revenue Refunding Bonds (Arizona Public Service Company Palo Verde Project), 2009 Series B, due 2029. On June 1, 2012 these bonds were remarketed. Currently, the interest rate on these bonds is reset daily by a remarketing agent. The daily rate at December 31, 2012 was 0.13% per annum. Additionally, the bonds are supported by a letter of credit. These bonds are classified as long-term debt on our Consolidated Balance Sheets at December 31, 2012 and were classified as current maturities of long-term debt on our Consolidated Balance Sheets at December 31, 2011.
On June 1, 2012, pursuant to the mandatory tender provision, APS changed the interest rate mode for the approximately $38 million of Navajo County, Arizona Pollution Control Corporation Pollution Control Revenue Refunding Bonds (Arizona Public Service Company Cholla Project), 2009 Series A. The new term rate period for these bonds commenced on June 1, 2012, and ends, subject to a mandatory tender, on May 29, 2014. During this time, the bonds will bear interest at a rate of 1.25% per annum. These bonds are classified as long-term debt on our Consolidated Balance Sheets at December 31, 2012 and were classified as current maturities of long-term debt on our Consolidated Balance Sheets at December 31, 2011.
On November 1, 2012 APS redeemed at par all $90 million of the Maricopa County, Arizona Pollution Control Corporation Pollution Control Revenue Refunding Bonds (Arizona Public Service Company Palo Verde Project) 2002 Series A, due 2029.
See Lines of Credit and Short-Term Borrowings in Note 5 and “Financial Assurances” in Note 11 for discussion of APS’s other letters of credit.
Debt Provisions
Pinnacle West’s and APS’s debt covenants related to their respective bank financing arrangements include maximum debt to capitalization ratios. Pinnacle West and APS comply with this covenant. For both Pinnacle West and APS, this covenant requires that the ratio of consolidated debt to total consolidated capitalization not exceed 65%. At December 31, 2012, the ratio was approximately 46% for Pinnacle West and 45% for APS. 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’s 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 credit agreements contain a pricing grid in which the interest rates we pay for borrowings thereunder 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’s 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 credit facility 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 total shareholder equity divided by the sum of total shareholder equity and long-term debt, including current maturities of long-term debt. At December 31, 2012, APS was in compliance with this common equity ratio requirement. Its total shareholder equity was approximately $4.1 billion, and total capitalization was approximately $7.2 billion. APS would be prohibited from paying dividends if the payment would reduce its total shareholder equity below approximately $2.9 billion, assuming APS’s total capitalization remains the same. Since APS was in compliance with this common equity ratio requirement, this restriction does not materially affect Pinnacle West’s ability to meet its ongoing capital requirements.
|
7. Common Stock and Treasury Stock
Our common stock and treasury stock activity during each of the three years 2012, 2011 and 2010 is as follows (dollars in thousands):
|
|
Common Stock |
|
Treasury Stock |
| ||||||
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
| ||
Balance at December 31, 2009 |
|
101,527,937 |
|
$ |
2,153,295 |
|
(93,239 |
) |
$ |
(3,812 |
) |
|
|
|
|
|
|
|
|
|
| ||
Common stock issuance (a) |
|
7,292,130 |
|
268,077 |
|
— |
|
— |
| ||
Purchase of treasury stock (b) |
|
— |
|
— |
|
(1,994 |
) |
(82 |
) | ||
Reissuance of treasury stock for stock compensation |
|
— |
|
— |
|
44,823 |
|
1,655 |
| ||
Balance at December 31, 2010 |
|
108,820,067 |
|
2,421,372 |
|
(50,410 |
) |
(2,239 |
) | ||
|
|
|
|
|
|
|
|
|
| ||
Common stock issuance |
|
536,907 |
|
22,875 |
|
— |
|
— |
| ||
Purchase of treasury stock (b) |
|
— |
|
— |
|
(88,440 |
) |
(3,720 |
) | ||
Reissuance of treasury stock for stock compensation |
|
— |
|
— |
|
27,689 |
|
1,242 |
| ||
Balance at December 31, 2011 |
|
109,356,974 |
|
2,444,247 |
|
(111,161 |
) |
(4,717 |
) | ||
|
|
|
|
|
|
|
|
|
| ||
Common stock issuance |
|
480,983 |
|
22,676 |
|
— |
|
— |
| ||
Purchase of treasury stock (b) |
|
— |
|
— |
|
(89,629 |
) |
(4,607 |
) | ||
Reissuance of treasury stock for stock compensation |
|
— |
|
— |
|
105,598 |
|
5,113 |
| ||
Balance at December 31, 2012 |
|
109,837,957 |
|
$ |
2,466,923 |
|
(95,192 |
) |
$ |
(4,211 |
) |
(a) In April 2010, Pinnacle West issued 6,900,000 shares of common stock at an offering price of $38.00 per share, resulting in net proceeds of approximately $253 million. Pinnacle West contributed all of the net proceeds from this offering into APS in the form of equity infusions. APS has used these contributions to repay short-term indebtedness, to finance capital expenditures and for other general corporate purposes.
(b) Primarily represents shares of common stock withheld from certain stock awards for tax purposes.
At December 31, 2012, Pinnacle West had 10 million shares of serial preferred stock authorized with no par value, none of which was outstanding, and APS had 15,535,000 shares of various types of preferred stock authorized with $25, $50 and $100 par values, none of which was outstanding.
|
8. Retirement Plans and Other Benefits
Pinnacle West sponsors a qualified defined benefit and account balance pension plan (The Pinnacle West Capital Corporation Retirement 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.
Pinnacle West also sponsors another postretirement benefit plan (Pinnacle West Capital Corporation Group Life and Medical Plan) for the employees of Pinnacle West and its subsidiaries. This plan provides 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 plan, 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.
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. We deferred pension and other postretirement benefit costs of approximately $14 million in 2012 and $11 million in 2011. Pursuant to an ACC regulatory order, we began amortizing the regulatory asset over 3 years beginning in July 2012. We amortized approximately $4 million during 2012.
On March 23, 2010, the President signed into law comprehensive health care reform legislation under the Patient Protection and Affordable Care Act (the “Act”). One feature of the Act is the elimination of the tax deduction for prescription drug costs that are reimbursed as part of the Medicare Part D subsidy. Although this tax increase does not take effect until 2013, we are required to recognize the full accounting impact in our financial statements in the period in which the Act is signed. In accordance with accounting for regulated companies, the loss of this deduction is substantially offset by a regulatory asset that will be recovered through future electric revenues. In the first quarter of 2010, Pinnacle West charged regulatory assets for a total of $42 million, with a corresponding increase in accumulated deferred income tax liabilities, to reflect the impact of this change in tax law.
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, billed to electric plant participants or charged to the regulatory asset) (dollars in thousands):
|
|
Pension |
|
Other Benefits |
| ||||||||||||||
|
|
2012 |
|
2011 |
|
2010 |
|
2012 |
|
2011 |
|
2010 |
| ||||||
Service cost-benefits earned during the period |
|
$ |
63,502 |
|
$ |
57,605 |
|
$ |
59,064 |
|
$ |
27,163 |
|
$ |
21,856 |
|
$ |
19,236 |
|
Interest cost on benefit obligation |
|
119,586 |
|
124,727 |
|
122,724 |
|
46,467 |
|
46,807 |
|
42,428 |
| ||||||
Expected return on plan assets |
|
(140,979 |
) |
(133,678 |
) |
(124,161 |
) |
(45,793 |
) |
(41,536 |
) |
(39,257 |
) | ||||||
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Transition obligation |
|
— |
|
— |
|
— |
|
452 |
|
452 |
|
452 |
| ||||||
Prior service cost (credit) |
|
1,143 |
|
1,400 |
|
1,705 |
|
(179 |
) |
(179 |
) |
(539 |
) | ||||||
Net actuarial loss |
|
44,250 |
|
25,956 |
|
18,833 |
|
20,233 |
|
15,015 |
|
10,317 |
| ||||||
Net periodic benefit cost |
|
$ |
87,502 |
|
$ |
76,010 |
|
$ |
78,165 |
|
$ |
48,343 |
|
$ |
42,415 |
|
$ |
32,637 |
|
Portion of cost charged to expense |
|
$ |
36,333 |
|
$ |
29,312 |
|
$ |
37,933 |
|
$ |
19,321 |
|
$ |
15,208 |
|
$ |
15,839 |
|
The following table shows the plans’ changes in the benefit obligations and funded status for the years 2012 and 2011 (dollars in thousands):
|
|
Pension |
|
Other Benefits |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Change in Benefit Obligation |
|
|
|
|
|
|
|
|
| ||||
Benefit obligation at January 1 |
|
$ |
2,699,126 |
|
$ |
2,345,060 |
|
$ |
1,047,094 |
|
$ |
827,897 |
|
Service cost |
|
63,502 |
|
57,605 |
|
27,163 |
|
21,856 |
| ||||
Interest cost |
|
119,586 |
|
124,727 |
|
46,467 |
|
46,807 |
| ||||
Benefit payments |
|
(113,632 |
) |
(104,257 |
) |
(26,279 |
) |
(24,877 |
) | ||||
Actuarial (gain) loss |
|
82,264 |
|
275,991 |
|
(104,027 |
) |
171,674 |
| ||||
Plan amendments |
|
— |
|
— |
|
— |
|
3,737 |
| ||||
Benefit obligation at December 31 |
|
2,850,846 |
|
2,699,126 |
|
990,418 |
|
1,047,094 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Change in Plan Assets |
|
|
|
|
|
|
|
|
| ||||
Fair value of plan assets at January 1 |
|
1,850,550 |
|
1,775,596 |
|
608,663 |
|
567,410 |
| ||||
Actual return on plan assets |
|
259,363 |
|
162,042 |
|
83,567 |
|
58,367 |
| ||||
Employer contributions |
|
65,000 |
|
— |
|
22,707 |
|
18,769 |
| ||||
Benefit payments |
|
(95,732 |
) |
(87,088 |
) |
(30,716 |
) |
(35,883 |
) | ||||
Fair value of plan assets at December 31 |
|
2,079,181 |
|
1,850,550 |
|
684,221 |
|
608,663 |
| ||||
Funded Status at December 31 |
|
$ |
(771,665 |
) |
$ |
(848,576 |
) |
$ |
(306,197 |
) |
$ |
(438,431 |
) |
The following table shows the projected benefit obligation and the accumulated benefit obligation for pension plans with an accumulated obligation in excess of plan assets as of December 31, 2012 and 2011 (dollars in thousands):
|
|
2012 |
|
2011 |
| ||
Projected benefit obligation |
|
$ |
2,850,846 |
|
$ |
2,699,126 |
|
Accumulated benefit obligation |
|
2,646,306 |
|
2,396,575 |
| ||
Fair value of plan assets |
|
2,079,181 |
|
1,850,550 |
| ||
The following table shows the amounts recognized on the Consolidated Balance Sheets as of December 31, 2012 and 2011 (dollars in thousands):
|
|
Pension |
|
Other Benefits |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Current liability |
|
$ |
(19,107 |
) |
$ |
(18,097 |
) |
$ |
— |
|
$ |
— |
|
Noncurrent liability |
|
(752,558 |
) |
(830,479 |
) |
(306,197 |
) |
(438,431 |
) | ||||
Net amount recognized |
|
$ |
(771,665 |
) |
$ |
(848,576 |
) |
$ |
(306,197 |
) |
$ |
(438,431 |
) |
The following table shows the details related to accumulated other comprehensive loss as of December 31, 2012 and 2011 (dollars in thousands):
|
|
Pension |
|
Other Benefits |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Net actuarial loss |
|
$ |
644,239 |
|
$ |
724,605 |
|
$ |
238,862 |
|
$ |
400,892 |
|
Prior service cost (credit) |
|
3,169 |
|
4,312 |
|
(475 |
) |
(655 |
) | ||||
Transition obligation |
|
— |
|
— |
|
— |
|
452 |
| ||||
APS’s portion recorded as a regulatory asset |
|
(550,471 |
) |
(632,099 |
) |
(230,020 |
) |
(390,521 |
) | ||||
Income tax benefit |
|
(38,303 |
) |
(38,243 |
) |
(2,585 |
) |
(3,296 |
) | ||||
Accumulated other comprehensive loss |
|
$ |
58,634 |
|
$ |
58,575 |
|
$ |
5,782 |
|
$ |
6,872 |
|
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 2012 (dollars in thousands):
|
|
Pension |
|
Other |
| ||
Net actuarial loss |
|
$ |
37,574 |
|
$ |
12,236 |
|
Prior service cost (credit) |
|
1,097 |
|
(179 |
) | ||
Total amounts estimated to be amortized from accumulated other comprehensive loss and regulatory assets in 2013 |
|
$ |
38,671 |
|
$ |
12,057 |
|
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 |
| ||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
|
2010 |
|
Discount rate-pension |
|
4.01 |
% |
4.42 |
% |
4.42 |
% |
5.31 |
% |
5.90 |
% |
Discount rate-other benefits |
|
4.20 |
% |
4.59 |
% |
4.59 |
% |
5.49 |
% |
6.00 |
% |
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 |
|
7.75 |
% |
7.75 |
% |
8.25 |
% |
Initial health care cost trend rate |
|
7.50 |
% |
7.50 |
% |
7.50 |
% |
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 |
|
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 2013, we are assuming a 7.0% 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 above have a significant effect on the amounts reported for the health care plans. In selecting our health care trend rates, 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 |
|
$ |
14 |
|
$ |
(11 |
) |
Effect on service and interest cost components of net periodic other postretirement benefit costs |
|
17 |
|
(13 |
) | ||
Effect on the accumulated other postretirement benefit obligation |
|
172 |
|
(136 |
) | ||
Plan Assets
The Board of Directors has delegated oversight of the pension and other postretirement benefit plans’ assets to an Investment Management Committee (“Committee”). The Committee has adopted investment policy statements (“IPS”) for the pension and the other postretirement benefit plans’ assets. The investment strategies for these plans include external management of plan assets, and prohibition of investments in Pinnacle West securities.
The overall strategy of the pension plan’s IPS is to achieve an adequate level of trust assets relative to the benefit obligations. To achieve this objective, the plan’s investment policy provides for mixes of investments including long-term fixed income assets and return-generating assets. The target allocation between return-generating and long-term fixed income assets is defined in the IPS and is a function of the plan’s funded status. The plan’s funded status is reviewed on at least a monthly basis.
Long-term fixed income assets, also known as liability-hedging assets, are designed to offset changes in the benefit obligations due to changes in interest rates. 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.
Return-generating assets are intended to provide a reasonable long-term rate of investment return with a prudent level of volatility. Return-generating assets are composed of U.S. equities, international equities, and alternative investments. International equities include investments in both developed and emerging markets. Alternative investments primarily include investments in real estate, but may also include private equity and various other strategies. The plan may hold investments in return-generating assets by holding securities in common and collective trusts.
Based on the IPS, and given the pension plan’s funded status at year-end 2012, the long-term fixed income assets and the return generating assets each had a target allocation of 50%. The return-generating assets have additional target allocations, as a percent of total plan assets, of 30% equities in U.S. and other developed markets, 6% equities in emerging markets, and 14% in alternative investments. The pension plan IPS does not provide for a specific mix of long-term fixed income assets, but does expect the average credit quality of such assets to be investment grade. As of December 31, 2012, long-term fixed income assets represented 44% of total pension plan assets, and return-generating assets represented 56% of total pension plan assets.
The asset allocation for other postretirement benefit plan assets is governed by the IPS for those plans, which provides for an asset allocation target mix of at least 25% of fixed income assets and 55% or less of non-fixed income assets. This asset allocation target mix does not vary with the plan’s funded status. As of December 31, 2012, investment in fixed income assets represented 45% of the other postretirement benefit plan total assets, and non-fixed income assets represent 55% of the other postretirement benefit plan’s assets. Fixed income assets are primarily invested in corporate bonds of investment-grade U.S. issuers, and U.S. Treasuries. Non-fixed income assets are primarily invested in large cap U.S. equities in diverse industries, and international equities in both emerging and developed markets.
See Note 14 for a discussion on the fair value hierarchy and how fair value methodologies are applied. The plans invest directly in fixed income and equity securities, in addition to investing indirectly in equity securities and real estate through the use of common and collective trusts. Equity securities held directly by the plans are valued using quoted active market prices from the published exchange on which the equity security trades, and are classified as Level 1. Fixed income securities issued by the U.S. Treasury held directly by the plans are valued using quoted active market prices, and are classified as Level 1. Fixed income securities issued by corporations, municipalities, and other agencies are primarily valued using quoted inactive market prices, or quoted active market prices for similar securities, or by utilizing calculations which incorporate observable inputs such as yield, maturity and credit quality. These instruments are classified as Level 2.
The common and collective trusts, which are similar to mutual funds, are maintained by banks or investment companies and hold certain investments in accordance with a stated set of objectives (such as tracking the performance of the S&P 500 index). The common and collective equity trusts are valued using the concept of net asset value (“NAV”), which is a value derived from the quoted active market prices of the underlying securities. The plans’ common and collective real estate trust is valued using NAV, which is derived from the appraised values of the trust’s underlying real estate assets. As of December 31, 2012 the plans were able to transact in the common and collective trusts at NAV and accordingly classify these investments as Level 2. Because the trust’s shares are offered to a limited group of investors, they are not considered to be traded in an active market.
The plans’ trustee provides valuation of our plan assets by using pricing services that utilize methodologies described to determine fair market value. We have internal control procedures to ensure this information is consistent with fair value accounting guidance. These procedures include assessing valuations using an independent pricing source, verifying that pricing can be supported by actual recent market transactions, assessing hierarchy classifications, comparing investment returns with benchmarks, and obtaining and reviewing independent audit reports on the trustee’s internal operating controls and valuation processes.
The fair value of Pinnacle West’s pension plan and other postretirement benefit plan assets at December 31, 2012, by asset category, are as follows (dollars in thousands):
|
|
Quoted Prices |
|
Significant |
|
Significant |
|
Other (c) |
|
Balance at |
| |||||
Pension Plan: |
|
|
|
|
|
|
|
|
|
|
| |||||
Assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
|
$ |
579 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
579 |
|
Fixed Income Securities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Corporate |
|
— |
|
607,749 |
|
— |
|
— |
|
607,749 |
| |||||
U.S. Treasury |
|
232,161 |
|
— |
|
— |
|
— |
|
232,161 |
| |||||
Other (b) |
|
— |
|
67,992 |
|
— |
|
— |
|
67,992 |
| |||||
Equities: |
|
|
|
|
|
|
|
|
|
|
| |||||
U.S. Companies |
|
531,291 |
|
— |
|
— |
|
— |
|
531,291 |
| |||||
International Companies |
|
43,848 |
|
— |
|
— |
|
— |
|
43,848 |
| |||||
Common and collective trusts: |
|
|
|
|
|
|
|
|
|
|
| |||||
U.S. Equities |
|
— |
|
176,694 |
|
— |
|
— |
|
176,694 |
| |||||
International Equities |
|
— |
|
271,735 |
|
— |
|
— |
|
271,735 |
| |||||
Real estate |
|
— |
|
117,854 |
|
— |
|
— |
|
117,854 |
| |||||
Short-term investments and other |
|
— |
|
26,922 |
|
2,419 |
(a) |
(63 |
) |
29,278 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total Pension Plan |
|
$ |
807,879 |
|
$ |
1,268,946 |
|
$ |
2,419 |
|
$ |
(63 |
) |
$ |
2,079,181 |
|
Other Benefits: |
|
|
|
|
|
|
|
|
|
|
| |||||
Assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
|
$ |
60 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
60 |
|
Fixed Income Securities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Corporate |
|
— |
|
163,306 |
|
— |
|
— |
|
163,306 |
| |||||
U.S. Treasury |
|
112,558 |
|
— |
|
— |
|
— |
|
112,558 |
| |||||
Other (b) |
|
— |
|
33,998 |
|
— |
|
— |
|
33,998 |
| |||||
Equities: |
|
|
|
|
|
|
|
|
|
|
| |||||
U.S. Companies |
|
205,714 |
|
— |
|
— |
|
— |
|
205,714 |
| |||||
International Companies |
|
14,412 |
|
— |
|
— |
|
— |
|
14,412 |
| |||||
Common and collective trusts: |
|
|
|
|
|
|
|
|
|
|
| |||||
U.S. Equities |
|
— |
|
60,038 |
|
— |
|
— |
|
60,038 |
| |||||
International Equities |
|
— |
|
76,969 |
|
— |
|
— |
|
76,969 |
| |||||
Real Estate |
|
— |
|
9,378 |
|
— |
|
— |
|
9,378 |
| |||||
Short-term investments and other |
|
402 |
|
6,340 |
|
— |
|
1,046 |
|
7,788 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total Other Benefits |
|
$ |
333,146 |
|
$ |
350,029 |
|
$ |
— |
|
$ |
1,046 |
|
$ |
684,221 |
|
(a) Represents investments in a partnership that invests in privately held portfolio companies.
(b) This category consists primarily of debt securities issued by municipalities.
(c) Represents plan receivables and payables.
The fair value of Pinnacle West’s pension plan and other postretirement benefit plan assets at December 31, 2011, by asset category, are as follows (dollars in thousands):
|
|
Quoted Prices |
|
Significant |
|
Other (a) |
|
Balance at |
| ||||
Pension Plan: |
|
|
|
|
|
|
|
|
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
|
$ |
1,441 |
|
$ |
— |
|
$ |
— |
|
$ |
1,441 |
|
Fixed Income Securities: |
|
|
|
|
|
|
|
|
| ||||
Corporate |
|
— |
|
584,619 |
|
— |
|
584,619 |
| ||||
U.S. Treasury |
|
207,862 |
|
— |
|
— |
|
207,862 |
| ||||
Other (b) |
|
— |
|
62,906 |
|
— |
|
62,906 |
| ||||
Equities: |
|
|
|
|
|
|
|
|
| ||||
U.S. Companies |
|
436,393 |
|
— |
|
— |
|
436,393 |
| ||||
International Companies |
|
118,263 |
|
— |
|
— |
|
118,263 |
| ||||
Common and collective trusts: |
|
|
|
|
|
|
|
|
| ||||
U.S. Equities |
|
— |
|
139,321 |
|
— |
|
139,321 |
| ||||
International Equities |
|
— |
|
156,407 |
|
— |
|
156,407 |
| ||||
Real estate |
|
— |
|
106,147 |
|
— |
|
106,147 |
| ||||
Short-term investments and other |
|
— |
|
29,913 |
|
7,278 |
|
37,191 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total Pension Plan |
|
$ |
763,959 |
|
$ |
1,079,313 |
|
$ |
7,278 |
|
$ |
1,850,550 |
|
Other Benefits: |
|
|
|
|
|
|
|
|
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
|
$ |
160 |
|
$ |
— |
|
$ |
— |
|
$ |
160 |
|
Fixed Income Securities: |
|
|
|
|
|
|
|
|
| ||||
Corporate |
|
— |
|
148,417 |
|
— |
|
148,417 |
| ||||
U.S. Treasury |
|
103,321 |
|
— |
|
— |
|
103,321 |
| ||||
Other (b) |
|
— |
|
30,105 |
|
— |
|
30,105 |
| ||||
Equities: |
|
|
|
|
|
|
|
|
| ||||
U.S. Companies |
|
179,235 |
|
— |
|
— |
|
179,235 |
| ||||
International Companies |
|
22,486 |
|
— |
|
— |
|
22,486 |
| ||||
Common and collective trusts: |
|
|
|
|
|
|
|
|
| ||||
U.S. Equities |
|
— |
|
52,507 |
|
— |
|
52,507 |
| ||||
International Equities |
|
— |
|
53,504 |
|
— |
|
53,504 |
| ||||
Real Estate |
|
— |
|
8,446 |
|
— |
|
8,446 |
| ||||
Short-term investments and other |
|
— |
|
8,516 |
|
1,966 |
|
10,482 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total Other Benefits |
|
$ |
305,202 |
|
$ |
301,495 |
|
$ |
1,966 |
|
$ |
608,663 |
|
(a) Represents plan receivables and payables.
(b) This category consists primarily of debt securities issued by municipalities.
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, 2012 (dollars in thousands):
Short-Term Investments and Other |
|
Pension |
| |
Beginning balance at January 1, 2012 |
|
$ |
— |
|
Actual return on assets still held at December 31, 2012 |
|
(668 |
) | |
Purchases, sales, and settlements |
|
3,087 |
| |
Transfers in and/or out of Level 3 |
|
— |
| |
Ending balance at December 31, 2012 |
|
$ |
2,419 |
|
Contributions
We made contributions to our pension plan totaling $65 million in 2012, zero in 2011 and $200 million in 2010. The minimum contributions for the pension plan due in 2013, 2014 and 2015 under the recently enacted Moving Ahead for Progress in the 21st Century Act (MAP-21) are estimated to be zero, $89 million and $112 million, respectively. We expect to make voluntary contributions totaling $140 million to the pension plan in 2013, and contributions up to approximately $175 million in each of 2014 and 2015. With regard to contributions to our other postretirement benefit plans, we made a contribution of approximately $23 million in 2012, $19 million in 2011, and $17 million in 2010. The contributions to our other postretirement benefit plans for 2013, 2014 and 2015 are expected to be approximately $20 million each year. APS and other subsidiaries fund their share of the contributions. APS’s share of the pension plan contribution was $64 million in 2012, zero in 2011, and $195 million in 2010. APS’s share of the contributions to the other postretirement benefit plan was $22 million in 2012, $19 million in 2011, and $16 million in 2010.
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 |
| ||
2013 |
|
$ |
126,091 |
|
$ |
26,934 |
|
2014 |
|
135,602 |
|
29,870 |
| ||
2015 |
|
145,438 |
|
32,929 |
| ||
2016 |
|
155,774 |
|
35,893 |
| ||
2017 |
|
165,535 |
|
38,765 |
| ||
Years 2018-2022 |
|
971,362 |
|
235,170 |
| ||
Electric plant participants contribute to the above amounts in accordance with their respective participation agreements.
Employee Savings Plan Benefits
Pinnacle West sponsors a defined contribution savings plan for eligible employees of Pinnacle West and its subsidiaries. In 2012, costs related to APS’s employees represented 99% 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 $8 million for 2012, $8 million for 2011 and $9 million for 2010.
|
9. Leases
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 $19 million in 2012, $21 million in 2011, and $23 million in 2010. APS’s lease expense was $16 million in 2012, $18 million in 2011, and $19 million in 2010.
Estimated future minimum lease payments for Pinnacle West’s and APS’s operating leases, excluding purchased power agreements, are approximately as follows (dollars in millions):
Year |
|
Pinnacle West |
|
APS |
| ||
2013 |
|
$ |
21 |
|
$ |
18 |
|
2014 |
|
17 |
|
15 |
| ||
2015 |
|
15 |
|
12 |
| ||
2016 |
|
4 |
|
4 |
| ||
2017 |
|
3 |
|
3 |
| ||
Thereafter |
|
41 |
|
40 |
| ||
Total future lease commitments |
|
$ |
101 |
|
$ |
92 |
|
In 1986, APS entered into agreements with three separate lessor trust entities in order to sell and lease back interests in Palo Verde Unit 2 and related common facilities. These lessor trust entities have been deemed variable interest entities for which APS is the primary beneficiary. As the primary beneficiary APS consolidated these lessor trust entities. The above lease disclosures exclude the impacts of these sale leaseback transactions, as lease accounting for these agreements is eliminated upon consolidation. See Note 20 for a discussion of VIEs.
|
10. Jointly-Owned Facilities
APS shares ownership of some of its generating and transmission facilities with other companies. We are responsible for our share of operating costs, as well as providing our own financing. Our share of operating expenses and utility plant costs related to these facilities is accounted for using proportional consolidation. The following table shows APS’s interests in those jointly-owned facilities recorded on the Consolidated Balance Sheets at December 31, 2012 (dollars in thousands):
|
|
Percent |
|
Plant in |
|
Accumulated |
|
Construction |
| |||
Generating facilities: |
|
|
|
|
|
|
|
|
| |||
Palo Verde Units 1 and 3 |
|
29.1 |
% |
$ |
1,717,970 |
|
$ |
1,006,615 |
|
$ |
15,122 |
|
Palo Verde Unit 2 (a) |
|
16.8 |
% |
555,132 |
|
324,063 |
|
4,125 |
| |||
Palo Verde Common |
|
28.0 |
%(b) |
516,950 |
|
223,632 |
|
83,365 |
| |||
Palo Verde Sale Leaseback |
|
|
(a) |
351,050 |
|
222,055 |
|
— |
| |||
Four Corners Units 4 and 5 |
|
15.0 |
% |
167,390 |
|
36,311 |
|
3,040 |
| |||
Four Corners Common |
|
38.4 |
%(b) |
58,810 |
|
17,930 |
|
1,512 |
| |||
Navajo Generating Station Units 1, 2 and 3 |
|
14.0 |
% |
269,792 |
|
141,914 |
|
2,368 |
| |||
Cholla common facilities (c) |
|
63.3 |
% (b) |
146,571 |
|
43,815 |
|
1,680 |
| |||
Transmission facilities: |
|
|
|
|
|
|
|
|
| |||
ANPP 500kV System |
|
33.3 |
%(b) |
82,490 |
|
31,511 |
|
1,607 |
| |||
Navajo Southern System |
|
22.2 |
%(b) |
55,427 |
|
15,815 |
|
561 |
| |||
Palo Verde — Yuma 500kV System |
|
18.3 |
%(b) |
11,761 |
|
4,493 |
|
797 |
| |||
Four Corners Switchyards |
|
37.0 |
%(b) |
20,874 |
|
6,033 |
|
1,466 |
| |||
Phoenix — Mead System |
|
17.1 |
%(b) |
39,772 |
|
11,553 |
|
— |
| |||
Palo Verde — Estrella 500kV System |
|
50.0 |
%(b) |
85,643 |
|
13,309 |
|
4,137 |
| |||
Morgan — Pinnacle Peak System |
|
64.1 |
%(b) |
133,073 |
|
3,751 |
|
331 |
| |||
Round Valley System |
|
50.0 |
%(b) |
488 |
|
261 |
|
— |
| |||
(a) See Note 20.
(b) Weighted-average of interests.
(c) PacifiCorp owns Cholla Unit 4 and APS operates the unit for PacifiCorp. The common facilities at Cholla are jointly-owned.
|
11. Commitments and Contingencies
Palo Verde Nuclear Generating Station
Spent Nuclear Fuel and Waste Disposal
On December 19, 2012, APS, acting on behalf of itself and the participant owners of Palo Verde, filed a breach of contract lawsuit against the DOE in the U.S. Court of Federal Claims. The lawsuit seeks to recover APS’s damages incurred due to DOE’s breach of the Standard Contract for failing to accept Palo Verde spent nuclear fuel and high level waste from January 1, 2007 through June 30, 2011, as it was required to do pursuant to the terms of the Standard Contract and the Nuclear Waste Policy Act.
APS currently estimates it will incur $122 million 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, 2012, APS had a regulatory liability of $46 million that represents amounts recovered in retail rates in excess of amounts spent for on-site interim spent fuel storage.
Nuclear Insurance
Liability for incidents at nuclear power plants is governed by the Price-Anderson Act, which limits the liability of nuclear reactor owners to the amount of insurance available from both private sources and an industry retrospective payment plan. In accordance with the Price-Anderson Act, the Palo Verde participants are insured against public liability for a nuclear incident up to $12.6 billion per occurrence. 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 of liability coverage 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’s interest in the three Palo Verde units, APS’s maximum potential retrospective 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 $18 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 $48 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, sublimits and exclusions.
Fuel and Purchased Power Commitments and Purchase Obligations
APS is party to purchase obligations and various fuel and purchased power contracts with terms expiring between 2013 and 2043 that include required purchase provisions. APS estimates the contract requirements to be approximately $585 million in 2013; $589 million in 2014; $556 million in 2015; $522 million in 2016; $447 million in 2017; and $6.6 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 estimated coal take-or-pay commitments (dollars in millions):
|
|
Years Ended December 31, |
| ||||||||||||||||
|
|
2013 |
|
2014 |
|
2015 |
|
2016 |
|
2017 |
|
Thereafter |
| ||||||
Coal take-or-pay commitments (a) |
|
$ |
90 |
|
$ |
93 |
|
$ |
96 |
|
$ |
63 |
|
$ |
27 |
|
$ |
121 |
|
(a) Total take-or-pay commitments are approximately $490 million. The total net present value of these commitments is approximately $375 million.
APS spends more to meet its actual fuel requirements than the minimum purchase obligations in our coal take-or-pay contracts. The following table summarizes the actual amounts purchased under the coal contracts which include take-or-pay provisions for each of the last three years (dollars in millions):
|
|
Year Ended December 31, |
| |||||||
|
|
2012 |
|
2011 |
|
2010 |
| |||
Total purchases |
|
$ |
196 |
|
$ |
191 |
|
$ |
156 |
|
Renewable Energy Credits
APS has entered into contracts to purchase renewable energy credits to comply with the RES. APS estimates the contract requirements to be approximately $51 million in 2013; $40 million in 2014; $41 million in 2015; $40 million in 2016; $40 million in 2017; and $491 million thereafter. These amounts do not include purchases of renewable energy credits that are bundled with energy. Also, these amounts do not include purchases of renewable energy credits that are associated with purchased power contracts.
Coal Mine Reclamation Obligations
APS must reimburse certain coal providers for amounts incurred for final and contemporaneous coal mine reclamation. We account for contemporaneous reclamation costs as part of the cost of the delivered coal. We utilize site-specific studies of costs expected to be incurred in the future to estimate our final reclamation obligation. These studies utilize various assumptions to estimate the future costs. Based on the most recent reclamation studies, APS has recorded a final coal mine reclamation obligation of approximately $119 million at December 31, 2012 and $118 million at December 31, 2011. Under our current coal supply agreements, we expect to make payments to certain coal providers for the final mine reclamation as follows: $1 million in 2013; $25 million in 2014; $49 million in 2015; $25 million in 2016; $2 million in 2017; and $17 million thereafter. Any amendments to current coal supply agreements may change the timing of the reimbursement.
FERC Market Issues
On July 25, 2001, the FERC 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 and ultimately remanded to the FERC for further consideration. On October 3, 2011, the FERC ordered an evidentiary, trial-type hearing before an administrative law judge to address possible activity that may have influenced prices in the Pacific Northwest spot market during the period from December 25, 2000 through June 20, 2001.
The first phase of the hearing is currently expected to commence in April 2013. However, APS and Pinnacle West have entered into settlement agreements with all claimants with direct claims against us. The last of these settlement agreements was filed with FERC on December 5, 2012 and is currently pending FERC approval. Thus, we do not expect the outcome of the hearing to 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, EPA advised APS that EPA considers APS to be a PRP in the Motorola 52nd Street Superfund Site, OU3 in Phoenix, Arizona. APS has facilities that are within this Superfund site. APS and Pinnacle West have agreed with EPA to perform certain investigative activities of the APS facilities within OU3. In addition, on September 23, 2009, APS agreed with 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 $2 million. 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 expenditures related to this matter cannot be reasonably estimated.
Climate Change Lawsuit
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 under both federal and state law. 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 United States Court of Appeals for the Ninth Circuit in November 2009.
On September 21, 2012, a three-judge panel of the Ninth Circuit affirmed the district court’s dismissal of the Kivalina plaintiffs’ federal common law public nuisance action. The court declined to address any other issue raised by the parties, including the plaintiffs’ state nuisance law claim. On October 4, 2012, the plaintiffs filed a petition for rehearing by the entire Ninth Circuit, but on November 27, 2012, the court denied plaintiffs’ petition. APS continues to believe the action in Kivalina is without merit and will continue to defend against both the federal and state claims.
Southwest Power Outage
On September 8, 2011 at approximately 3:30PM, a 500 kV transmission line running between the Hassayampa and North Gila substations in southwestern Arizona tripped out of service due to a fault that occurred at a switchyard operated by APS. At the time, an APS employee at the North Gila substation was performing a procedure to remove from service a capacitor bank that was believed not to be operating properly. Approximately ten minutes after the transmission line went off-line, generation and transmission resources for the Yuma area were lost, resulting in approximately 69,700 APS customers losing service.
Within the same time period that APS’s Yuma customers lost service, a series of transmission and generation disruptions occurred across the systems of several utilities that resulted in outages affecting portions of southern Arizona, southern California and northern Mexico. A total of approximately 7,900 MW of firm load and 2.7 million customers were reported to have been affected. Service to all affected APS customers was restored by 9:15PM on September 8. Service to customers affected by the wider regional outages was restored by approximately 3:25AM on September 9.
The FERC and the North American Electric Reliability Corporation (“NERC”) conducted a joint inquiry into the outages and, on May 1, 2012, they issued a report (the “Joint Report”) with their analysis and conclusions as to the causes of the events. The report includes recommendations to help industry operators prevent similar outages in the future, including increased data sharing and coordination among the western utilities and entities responsible for bulk electric system reliability coordination. The Joint Report does not address potential reliability violations or an assessment of responsibility of the parties involved. APS continues to analyze business practices and procedures related to the September 8 events.
APS cannot predict the timing, results or potential impacts of enforcement actions that may be brought against APS relating to the September 8 events, or any claims that may be made as a result of the outages. If violations of NERC Reliability Standards are ultimately determined to have occurred, FERC has the legal authority to assert a possible fine of up to $1 million per violation per day that a violation is found to have been in existence.
Clean Air Act Lawsuit
On October 4, 2011, Earthjustice, on behalf of several environmental organizations, filed a lawsuit in the United States District Court for the District of New Mexico against APS and the other Four Corners participants alleging violations of the New Source Review provisions of the Clean Air Act. Subsequent to filing its original Complaint, on January 6, 2012, Earthjustice filed a First Amended Complaint adding claims for violations of the Clean Air Act’s NSPS program. Among other things, the plaintiffs seek to have the court enjoin operations at Four Corners until APS applies for and obtains any required NSR permits and complies with the NSPS. The plaintiffs further request the court to order the payment of civil penalties, including a beneficial mitigation project. On April 2, 2012, APS and the other Four Corners participants filed motions to dismiss, which are pending. We are unable to determine a range of potential losses that are reasonably possible of occurring.
Environmental Matters
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 CCR. These laws and regulations can change from time to time, imposing new obligations on APS resulting in increased capital, operating, and other costs. Associated capital expenditures or operating costs could be material. APS intends to seek recovery of any such environmental compliance costs through our rates, but cannot predict whether it will obtain such recovery. The following proposed and final rules involve material compliance costs to APS.
Regional Haze Rules. APS has received final rulemaking imposing new requirements on Four Corners and Cholla and is currently awaiting a final rulemaking from EPA that could impose new requirements on the Navajo Plant. 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. Based on EPA’s final standards, APS’s share of its total costs for Four Corners (assuming the consummation of its purchase of SCE’s interest in Units 4 and 5 and subsequent shut down of Units 1-3) could be approximately $300 million. APS’s share of costs for upgrades at Navajo, based on EPA’s FIP proposal, could be up to approximately $158 million. APS has filed a Petition for Review of EPA’s rule as it applies to Cholla, which, if not successful, will require installation of controls with a cost to APS of approximately $187 million.
Mercury and Other Hazardous Air Pollutants. In 2011, EPA issued rules establishing maximum achievable control technology standards to regulate emissions of mercury and other hazardous air pollutants from fossil-fired plants. APS estimates that the cost for the remaining equipment necessary to meet these standards is approximately $124 million for Cholla Units 1-3. Estimated costs for Four Corners Units 1-3 are not included in our current environmental expenditure estimates since our estimates assume the consummation of APS’s purchase of SCE’s interest in Four Corners Units 4 and 5 and the subsequent shut down of Units 1-3. SRP, the operating agent for the Navajo Plant, is still evaluating compliance options under the rules.
Other future environmental rules that could involve material compliance costs include those related to cooling water intake structures, coal combustion waste, effluent limitations, ozone national ambient air quality, greenhouse gas emissions and other rules or matters involving the Clean Air Act, Endangered Species Act, the Navajo Nation, and water supplies for our power plants. The financial impact of complying with these and other future environmental rules could jeopardize the economic viability of our coal plants or the willingness or ability of power plant participants to fund any required equipment upgrades or continue their participation in these plants. The economics of continuing to own certain resources, particularly our coal plants, may deteriorate, warranting early retirement of those plants, which may result in asset impairments. APS would seek recovery in rates for the book value of any remaining investments in the plants as well as other costs related to early retirement, but cannot predict whether it would obtain such recovery.
Regional Haze Rules — Cholla
APS believes that EPA’s final rule as it applies to Cholla is unsupported and that EPA had no basis for disapproving Arizona’s SIP and promulgating a FIP that is inconsistent with the state’s considered BART determinations under the regional haze program. Accordingly, on February 1, 2013, APS filed a Petition for Review of the final BART rule in the United States Court of Appeals for the Ninth Circuit. The State of Arizona and three other utilities also filed similar petitions. On February 4, 2013, APS filed a Petition for Reconsideration and Stay of the final BART rule with EPA.
Financial Assurances
APS has entered into various agreements that require letters of credit for financial assurance purposes. At December 31, 2012, approximately $76 million of letters of credit were outstanding to support existing pollution control bonds of a similar amount. The letters of credit are available to fund the payment of principal and interest of such debt obligations. One of these letters of credit expires in 2015 and two expire in 2016. APS has also entered into letters of credit to support certain equity participants in the Palo Verde sale leaseback transactions (see Note 20 for further details on the Palo Verde sale leaseback transactions). These letters of credit will expire December 31, 2015, and totaled approximately $42 million at December 31, 2012. Additionally, APS has issued letters of credit to support collateral obligations under certain risk management arrangements including certain natural gas tolling contracts entered into with third parties. At December 31, 2012, $65 million of such letters of credit were outstanding that will expire in 2013 and 2015.
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.
Pinnacle West has issued parental guarantees and surety bonds for APS which were not material at December 31, 2012.
|
12. Asset Retirement Obligations
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. In the first quarter of 2011, a new decommissioning study with updated cash flow estimates was completed for Palo Verde. This study reflects the twenty-year license extension approved by the NRC on April 21, 2011, which extends the commencement of decommissioning to 2045.
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. The Four Corners coal-fired power plant asset retirement obligation relates to final plant decommissioning, including ash pond closures. In the fourth quarter of 2012, a new study related to ash pond closure was completed which updated the total cost estimates and related cash flow estimates.
Some of APS’s 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 following schedule shows the change in our asset retirement obligations for 2012 and 2011 (dollars in millions):
|
|
2012 |
|
2011 |
| ||
Asset retirement obligations at the beginning of year |
|
$ |
280 |
|
$ |
329 |
|
Changes attributable to: |
|
|
|
|
| ||
Accretion expense |
|
19 |
|
19 |
| ||
Estimated cash flow revisions |
|
58 |
|
(68 |
) | ||
Asset retirement obligations at the end of year |
|
$ |
357 |
|
$ |
280 |
|
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 3.
|
13. Selected Quarterly Financial Data (Unaudited)
Consolidated quarterly financial information for 2012 and 2011 is as follows (dollars in thousands, except per share amounts):
|
|
2012 Quarter Ended |
|
2012 |
| |||||||||||
|
|
March 31, |
|
June 30, |
|
Sept. 30, |
|
Dec. 31, |
|
Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating revenues |
|
$ |
620,631 |
|
$ |
878,576 |
|
$ |
1,109,475 |
|
$ |
693,122 |
|
$ |
3,301,804 |
|
Operations and maintenance |
|
210,663 |
|
216,236 |
|
220,729 |
|
237,141 |
|
884,769 |
| |||||
Operating income |
|
48,007 |
|
254,489 |
|
447,970 |
|
101,289 |
|
851,755 |
| |||||
Income taxes |
|
(4,645 |
) |
76,689 |
|
147,116 |
|
18,157 |
|
237,317 |
| |||||
Income from continuing operations |
|
284 |
|
130,930 |
|
252,874 |
|
34,905 |
|
418,993 |
| |||||
Net income (loss) attributable to common shareholders |
|
(8,257 |
) |
122,345 |
|
244,823 |
|
22,631 |
|
381,542 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Earnings Per Share: |
|
|
|
|
|
|
|
|
|
|
| |||||
Income (loss) from continuing operations attributable to common shareholders — Basic |
|
$ |
(0.07 |
) |
$ |
1.12 |
|
$ |
2.23 |
|
$ |
0.24 |
|
$ |
3.54 |
|
Net income (loss) attributable to common shareholders — Basic |
|
(0.08 |
) |
1.12 |
|
2.23 |
|
0.21 |
|
3.48 |
| |||||
Income (loss) from continuing operations attributable to common shareholders — Diluted |
|
(0.07 |
) |
1.12 |
|
2.21 |
|
0.24 |
|
3.50 |
| |||||
Net income (loss) attributable to common shareholders — Diluted |
|
(0.08 |
) |
1.11 |
|
2.21 |
|
0.20 |
|
3.45 |
|
|
|
2011 Quarter Ended |
|
2011 |
| |||||||||||
|
|
March 31, |
|
June 30, |
|
Sept. 30, |
|
Dec. 31, |
|
Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating revenues |
|
$ |
648,847 |
|
$ |
799,799 |
|
$ |
1,124,841 |
|
$ |
667,892 |
|
$ |
3,241,379 |
|
Operations and maintenance |
|
255,029 |
|
210,590 |
|
210,035 |
|
228,632 |
|
904,286 |
| |||||
Operating income |
|
35,784 |
|
196,992 |
|
435,017 |
|
78,715 |
|
746,508 |
| |||||
Income taxes |
|
(6,005 |
) |
50,818 |
|
131,416 |
|
7,375 |
|
183,604 |
| |||||
Income (loss) from continuing operations |
|
(10,368 |
) |
93,185 |
|
253,273 |
|
19,544 |
|
355,634 |
| |||||
Net income (loss) attributable to common shareholders |
|
(15,135 |
) |
86,685 |
|
255,359 |
|
12,564 |
|
339,473 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Earnings Per Share: |
|
|
|
|
|
|
|
|
|
|
| |||||
Income (loss) from continuing operations attributable to common shareholders — Basic |
|
$ |
(0.15 |
) |
$ |
0.79 |
|
$ |
2.25 |
|
$ |
0.11 |
|
$ |
3.01 |
|
Net income (loss) attributable to common shareholders — Basic |
|
(0.14 |
) |
0.80 |
|
2.34 |
|
0.12 |
|
3.11 |
| |||||
Income (loss) from continuing operations attributable to common shareholders — Diluted |
|
(0.15 |
) |
0.78 |
|
2.24 |
|
0.11 |
|
2.99 |
| |||||
Net income (loss) attributable to common shareholders — Diluted |
|
(0.14 |
) |
0.79 |
|
2.32 |
|
0.11 |
|
3.09 |
|
14. Fair Value Measurements
We classify our assets and liabilities that are carried at fair value within the 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 — Unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date. 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 exchange-traded equities, exchange-traded derivative instruments, cash equivalents, and investments in U.S. Treasury securities.
Level 2 — Utilizes 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 (such as yield curves). This category includes non-exchange traded contracts such as forwards, options, swaps and certain investments in fixed income securities. This category also includes investments in common and collective trusts and commingled funds that are redeemable and valued based on NAV.
Level 3 — Valuation models with significant unobservable inputs that are supported by little or no market activity. Instruments in this category include long-dated derivative transactions where valuations are unobservable due to the length of the transaction, options, and transactions in locations where observable market data does not exist. The valuation models we employ utilize spot prices, forward prices, historical market data and other factors to forecast future prices.
Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Thus, a valuation may be classified in Level 3 even though the valuation may include significant inputs that are readily observable. We maximize the use of observable inputs and minimize the use of unobservable inputs. We rely primarily on the market approach of using prices and other market information for identical and/or comparable assets and liabilities. If market data is not readily available, inputs may reflect our own assumptions about the inputs market participants would use. Our assessment of the inputs and the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities as well as their placement within the fair value hierarchy levels. We assess whether a market is active by obtaining observable broker quotes, reviewing actual market activity, and assessing the volume of transactions. We consider broker quotes observable inputs when the quote is binding on the broker, we can validate the quote with market activity, or we can determine that the inputs the broker used to arrive at the quoted price are observable.
Recurring Fair Value Measurements
We apply recurring fair value measurements to certain cash equivalents, derivative instruments, investments held in our nuclear decommissioning trust and plan assets held in our retirement and other benefit plans. See Note 8 for the fair value discussion of plan assets held in our retirement and other benefit plans.
Cash Equivalents
Cash equivalents represent short-term investments with original maturities of three months or less in exchange traded money market funds that are valued using quoted prices in active markets.
Risk Management Activities — Derivative Instruments
Exchange traded commodity contracts are valued using unadjusted quoted prices. For non-exchange traded commodity contracts, we calculate fair 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. 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 net exposure to counterparties, taking into account netting agreements, expected default experience for the credit rating of the counterparties and the overall diversification of the portfolio. We maintain credit policies that management believes minimize overall credit risk.
Certain non-exchange traded commodity contracts 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. We rely primarily on broker quotes to value these instruments. When our valuations utilize broker quotes, we perform various control procedures to ensure the quote has been developed consistent with fair value accounting guidance. These controls include assessing the quote for reasonableness by comparison against other broker quotes, reviewing historical price relationships, and assessing market activity. When broker quotes are not available, the primary valuation technique used to calculate the fair value is the extrapolation of forward pricing curves using observable market data for more liquid delivery points in the same region and actual transactions at more illiquid delivery points.
Option contracts are primarily valued using a Black-Scholes option valuation model which utilizes both observable and unobservable inputs such as broker quotes, interest rates and price volatilities.
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 the use of option valuation models with significant unobservable inputs.
Our energy risk management committee, consisting of officers and key management personnel, oversees our energy risk management activities to ensure compliance with our stated energy risk management policies. We have a risk control function that is responsible for valuing our derivative commodity instruments in accordance with established policies and procedures. The risk control function reports to the chief financial officer’s organization.
Investments Held in our Nuclear Decommissioning Trust
The nuclear decommissioning trust invests in fixed income securities and equity securities. Equity securities are held indirectly through commingled funds. The commingled funds are valued based on the concept of NAV, which is a value primarily derived from the quoted active market prices of the underlying equity securities. We may transact in these commingled funds on a semi-monthly basis at the NAV, and accordingly classify these investments as Level 2. The commingled funds, which are similar to mutual funds, are maintained by a bank and hold investments in accordance with the stated objective of tracking the performance of the S&P 500 index. Because the commingled fund shares are offered to a limited group of investors, they are not considered to be traded in an active market.
Cash equivalents reported within Level 2 represent investments held in a short-term investment commingled fund, valued using NAV, which invests in U.S. government fixed income securities. We may transact in this commingled fund on a daily basis at the NAV.
Fixed income securities issued by the U.S. Treasury held directly by the nuclear decommissioning trust are valued using quoted active market prices and are classified as Level 1. Fixed income securities issued by corporations, municipalities, and other agencies including mortgage-backed instruments are valued using quoted inactive market prices, quoted active market prices for similar securities, or by utilizing calculations which incorporate observable inputs such as yield curves and spreads relative to such yield curves. These instruments are classified as Level 2. Whenever possible multiple market quotes are obtained which enables a cross-check validation. A primary price source is identified based on asset type, class, or issue of securities.
Our trustee provides valuation of our nuclear decommissioning trust assets by using pricing services that utilize the valuation methodologies described to determine fair market value. We have internal control procedures designed to ensure this information is consistent with fair value accounting guidance. These procedures include assessing valuations using an independent pricing source, verifying that pricing can be supported by actual recent market transactions, assessing hierarchy classifications, comparing investment returns with benchmarks, and obtaining and reviewing independent audit reports on the trustee’s internal operating controls and valuation processes. See Note 22 for additional discussion about our nuclear decommissioning trust.
Fair Value Tables
The following table presents the fair value at December 31, 2012 of our assets and liabilities that are measured at fair value on a recurring basis (dollars in millions):
|
|
Quoted Prices |
|
Significant |
|
Significant |
|
Other |
|
Balance at |
| |||||
Assets |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash equivalents |
|
$ |
16 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
16 |
|
Risk management activities — derivative instruments: |
|
|
|
|
|
|
|
|
|
|
| |||||
Commodity Contracts |
|
— |
|
22 |
|
62 |
|
(22 |
)(b) |
62 |
| |||||
Nuclear decommissioning trust: |
|
|
|
|
|
|
|
|
|
|
| |||||
U.S. commingled equity funds |
|
— |
|
204 |
|
— |
|
— |
|
204 |
| |||||
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
| |||||
U.S. Treasury |
|
104 |
|
— |
|
— |
|
— |
|
104 |
| |||||
Cash and cash equivalent funds |
|
6 |
|
13 |
|
— |
|
(4 |
)(c) |
15 |
| |||||
Corporate debt |
|
— |
|
80 |
|
— |
|
— |
|
80 |
| |||||
Mortgage-backed securities |
|
— |
|
83 |
|
— |
|
— |
|
83 |
| |||||
Municipality bonds |
|
— |
|
74 |
|
— |
|
— |
|
74 |
| |||||
Other |
|
— |
|
11 |
|
— |
|
— |
|
11 |
| |||||
Subtotal nuclear decommissioning trust |
|
110 |
|
465 |
|
— |
|
(4 |
) |
571 |
| |||||
Total |
|
$ |
126 |
|
$ |
487 |
|
$ |
62 |
|
$ |
(26 |
) |
$ |
649 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
| |||||
Risk management activities — derivative instruments: |
|
|
|
|
|
|
|
|
|
|
| |||||
Commodity contracts |
|
$ |
— |
|
$ |
(96 |
) |
$ |
(110 |
) |
$ |
47 |
(b) |
$ |
(159 |
) |
(a) Primarily consists of heat rate options and other long-dated electricity contracts.
(b) Represents counterparty netting, margin and collateral. See Note 18.
(c) Represents nuclear decommissioning trust net pending securities sales and purchases.
The following table presents the fair value at December 31, 2011 of our assets and liabilities that are measured at fair value on a recurring basis (dollars in millions):
|
|
Quoted Prices |
|
Significant |
|
Significant |
|
Other |
|
Balance at |
| |||||
Assets |
|
|
|
|
|
|
|
|
|
|
| |||||
Risk management activities-derivative instruments: |
|
|
|
|
|
|
|
|
|
|
| |||||
Commodity contracts |
|
$ |
— |
|
$ |
70 |
|
$ |
74 |
|
$ |
(64 |
)(b) |
$ |
80 |
|
Nuclear decommissioning trust: |
|
|
|
|
|
|
|
|
|
|
| |||||
U.S. commingled equity funds |
|
— |
|
175 |
|
— |
|
— |
|
175 |
| |||||
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
| |||||
U.S. Treasury |
|
69 |
|
— |
|
— |
|
— |
|
69 |
| |||||
Cash and cash equivalent funds |
|
— |
|
9 |
|
— |
|
(1 |
)(c) |
8 |
| |||||
Corporate debt |
|
— |
|
73 |
|
— |
|
— |
|
73 |
| |||||
Mortgage-backed securities |
|
— |
|
78 |
|
— |
|
— |
|
78 |
| |||||
Municipality bonds |
|
— |
|
90 |
|
— |
|
— |
|
90 |
| |||||
Other |
|
— |
|
21 |
|
— |
|
— |
|
21 |
| |||||
Subtotal nuclear decommissioning trust |
|
69 |
|
446 |
|
— |
|
(1 |
) |
514 |
| |||||
Total |
|
$ |
69 |
|
$ |
516 |
|
$ |
74 |
|
$ |
(65 |
) |
$ |
594 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
| |||||
Risk management activities — derivative instruments: |
|
|
|
|
|
|
|
|
|
|
| |||||
Commodity contracts |
|
$ |
— |
|
$ |
(241 |
) |
$ |
(125 |
) |
$ |
229 |
(b) |
$ |
(137 |
) |
(a) Primarily consists of heat rate options and other long-dated electricity contracts.
(b) Represents counterparty netting, margin and collateral. See Note 18.
(c) Represents nuclear decommissioning trust net pending securities sales and purchases.
Fair Value Measurements Classified as Level 3
The significant unobservable inputs used in the fair value measurement of our energy derivative contracts include broker quotes that cannot be validated as an observable input primarily due to the long term nature of the quote and option model inputs. Significant changes in these inputs in isolation would result in significantly higher or lower fair value measurements. Changes in our derivative contract fair values, including changes relating to unobservable inputs, typically will not impact net income due to regulatory accounting treatment (see Note 3).
Because our forward commodity contracts classified as Level 3 are currently in a net purchase position, we would expect price increases of the underlying commodity to result in increases in the net fair value of the related contracts. Conversely, if the price of the underlying commodity decreases, the net fair value of the related contracts would likely decrease.
Our option contracts classified as Level 3 primarily relate to purchase heat rate options. The significant unobservable inputs for these instruments include electricity prices, gas prices and implied volatilities. If electricity prices and electricity price implied volatilities increase we would expect the fair value of these options to increase, and if these valuation inputs decrease we would expect the fair value of these options to decrease. If natural gas prices and natural gas price implied volatilities increase we would expect the fair value of these options to decrease, and if these inputs decrease we would expect the fair value of the options to increase. The commodity prices and implied volatilities do not always move in corresponding directions. The options’ fair values are impacted by the net changes of these various inputs.
Other unobservable valuation inputs include credit and liquidity reserves which do not have a material impact on our valuations; however, significant changes in these inputs could also result in higher or lower fair value measurements.
The following table provides information regarding our significant unobservable inputs used to value our risk management derivative Level 3 instruments:
|
|
December 31, 2012 |
|
Valuation |
|
Significant |
|
|
|
Weighted- |
| |||||
Commodity Contracts |
|
Assets |
|
Liabilities |
|
Technique |
|
Unobservable Input |
|
Range |
|
Average |
| |||
Electricity: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Forward Contracts (a) |
|
$ |
57 |
|
$ |
82 |
|
Discounted cash flows |
|
Electricity forward price (per MWh) |
|
$23.06 - $64.20 |
|
$ |
43.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Option Contracts |
|
— |
|
27 |
|
Option model |
|
Electricity forward price (per MWh) |
|
$36.66 - $92.19 |
|
$ |
60.97 |
| ||
|
|
|
|
|
|
|
|
Natural gas forward price (per mmbtu) |
|
$4.10 - $4.25 |
|
$ |
4.20 |
| ||
|
|
|
|
|
|
|
|
Implied electricity price volatilities |
|
15% - 66% |
|
39 |
% | |||
|
|
|
|
|
|
|
|
Implied natural gas price volatilities |
|
17% - 36% |
|
23 |
% | |||
Natural Gas: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Forward Contracts (a) |
|
5 |
|
1 |
|
Discounted cash flows |
|
Natural gas forward price (per mmbtu) |
|
$3.25 - $4.44 |
|
$ |
3.93 |
| ||
Total |
|
$ |
62 |
|
$ |
110 |
|
|
|
|
|
|
|
|
|
(a) Includes swaps and physical and financial contracts.
The following table shows the changes in fair value for our risk management activities assets and liabilities that are measured at fair value on a recurring basis using Level 3 inputs for the years ended December 31, 2012 and 2011 (dollars in millions):
|
|
Year Ended |
| ||||
Commodity Contracts |
|
2012 |
|
2011 |
| ||
Net derivative balance at beginning of period |
|
$ |
(51 |
) |
$ |
(38 |
) |
Total net gains (losses) realized/unrealized: |
|
|
|
|
| ||
Included in earnings |
|
2 |
|
2 |
| ||
Included in OCI |
|
(3 |
) |
(5 |
) | ||
Deferred as a regulatory asset or liability |
|
7 |
|
(10 |
) | ||
Settlements |
|
(5 |
) |
11 |
| ||
Transfers into Level 3 from Level 2 |
|
(2 |
) |
(4 |
) | ||
Transfers from Level 3 into Level 2 |
|
4 |
|
(7 |
) | ||
Net derivative balance at end of period |
|
$ |
(48 |
) |
$ |
(51 |
) |
|
|
|
|
|
| ||
Net unrealized gains included in earnings related to instruments still held at end of period |
|
$ |
— |
|
$ |
1 |
|
Amounts included in earnings are recorded in either operating revenues or fuel and purchased power depending on the nature of the underlying contract.
Transfers reflect the fair market value at the beginning of the period and are triggered by a change in the lowest significant input as of the end of the period. We had no significant Level 1 transfers to or from any other hierarchy level. Transfers in or out of Level 3 are typically related to our heat rate options and long-dated energy transactions that extend beyond available quoted periods.
Financial Instruments Not Carried at Fair Value
The carrying value of our net accounts receivable, accounts payable and short-term borrowings approximate fair value. Our short-term borrowings are classified within Level 2 of the fair value hierarchy. For our long-term debt fair values see Note 6.
|
16. Stock-Based Compensation
Pinnacle West grants long-term incentive awards under the 2012 long-term incentive plan (“2012 Plan”) in the form of Stock Grants, Restricted Stock Units and Performance Shares and may grant restricted stock, stock units, dividend equivalents, performance share units, performance cash, incentive and non-qualified stock options, and stock appreciation rights. The 2012 Plan, effective May 16, 2012, provides 4,595,500 common shares to be available for grant to eligible employees and members of the Board of Directors. Awards made in 2012 were issued under the 2012 Plan, prior awards from 2007 to 2011 were issued under the 2007 long-term incentive plan (“2007 Plan”).
Restricted Stock Unit Awards and Stock Grants
Stock grants issued to non-officer members of the Board of Directors (“Directors”) in 2012, 2011 and 2010, provided Directors the option to elect to receive a stock grant, or to defer receipt until a later date and receive restricted stock units in lieu of the stock grant. Directors who elect to defer may elect to receive payment in either stock, or 50% in cash and 50% in stock. The Director may elect to receive payments either as of the last business day of the month following the month in which they separate from service on the Board, or as of a specified date, which must be after December 31 of the year in which the grant was received. The deferred restricted stock units accrue dividend rights equal to the amount of dividends the Director would have received had they directly owned stock equal to the number of vested restricted stock units from the date of grant to the date of payment plus interest compounded quarterly. The dividends and interest are paid, based on the Director’s election, in either stock, or 50% in cash and 50% in stock.
Restricted stock units were granted to officers and key employees in each year since 2007. From 2007 through 2009, 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. In 2010, 2011 and 2012, officers and key employees elected to receive payment in either stock, or 50% cash and 50% stock.
Restricted stock unit awards vest and settle over a four-year period. In addition, officers and key employees accrue dividend rights on the vested restricted stock units, equal to the amount of dividends that they would have received had they directly owned stock equal to the number of vested restricted stock units from the date of grant to the date of payment plus interest compounded quarterly. The dividends and interest for the 2007 through 2009 awards are paid in cash. The dividends and interest for the 2010, 2011 and 2012 awards are paid in the same form as the restricted stock unit payment election. Restricted stock unit awards are accounted for as a liability award, with compensation cost initially calculated on the date of grant using the Company’s closing stock price, and remeasured at each balance sheet date. Compensation expense for retirement eligible participants is recognized immediately.
On December 19, 2012, the Company granted a retention award of 50,617 restricted stock units to the Chairman of the Board, President, and Chief Executive Officer of Pinnacle West. The award will vest and will be paid in shares of common stock on December 31, 2016 provided that he remains employed with the Company until the vesting date. The award can be increased up to an additional 33,745 restricted stock units payable in stock if certain performance requirements are met.
A grant of restricted stock unit awards was made to officers of the company on February 15, 2011, payable solely in shares of common stock upon the officer’s retirement or other separation of employment. This award will vest 50% on February 15, 2013, 25% on February 15, 2014 and 25% on February 15, 2015, provided that the officer remains employed on such date. The officers will also accrue notional dividends equal to the amount of dividends that an officer would have received if the officer had directly owned one share of Pinnacle West common stock for each restricted stock unit held by the officer from the grant date to each dividend payment date. Each additional restricted stock unit will proportionally vest on the same remaining vesting schedule that applies to the original restricted stock unit.
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 2012, 2011 and 2010:
|
|
2012 |
|
2011 |
|
2010 |
| |||
Units granted |
|
202,278 |
|
292,242 |
|
202,341 |
| |||
Grant date fair value (a) |
|
$ |
49.31 |
|
$ |
41.98 |
|
$ |
37.47 |
|
(a) Weighted-average grant date fair value
The following table is a summary of the status of restricted stock units and stock grants, as of December 31, 2012 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:
Nonvested shares |
|
Shares |
|
Weighted-Average |
| |
Nonvested at January 1, 2012 |
|
416,231 |
|
$ |
39.61 |
|
Granted |
|
202,278 |
|
49.31 |
| |
Vested |
|
126,959 |
|
39.76 |
| |
Forfeited |
|
10,797 |
|
42.63 |
| |
Nonvested at December 31, 2012 |
|
480,753 |
|
43.58 |
| |
The amount of cash required to settle the payments on restricted stock units is (dollars in millions):
Year |
|
2012 |
|
2011 |
|
2010 |
| |||
2007 Grant |
|
$ |
— |
|
$ |
1.0 |
|
$ |
0.9 |
|
2008 Grant |
|
1.9 |
|
1.6 |
|
1.5 |
| |||
2009 Grant |
|
1.7 |
|
1.5 |
|
1.4 |
| |||
2010 Grant |
|
0.6 |
|
0.6 |
|
— |
| |||
2011 Grant |
|
0.7 |
|
— |
|
— |
| |||
Performance Share Awards
Performance share awards were granted to officers and key employees under the 2012 Plan in 2012 and under the 2007 Plan from 2008 to 2011. Performance share awards contain two performance element criteria that affect the number of shares received after the end of a three-year performance period if performance criteria conditions are met.
The 2012, 2011 and 2010 performance share grant criteria is based 50% upon the percentile ranking of Pinnacle West’s total shareholder return at the end of the three-year performance period as compared with the total shareholder return of all relevant companies in a specified utility index and the other 50% based upon six non-financial separate performance metrics. The exact number of shares issued will vary from 0% to 200% of the target award. Shares received include dividend rights paid in stock equal to the amount of dividends that they would have received had they directly owned stock equal to the number of vested performance shares from the date of grant to the date of payment plus interest compounded quarterly.
Performance share awards are accounted for as liability awards, with compensation cost initially calculated on the date of grant using the Company’s closing stock price, and remeasured at each balance sheet date. Compensation expense for retirement eligible participants is recognized immediately. Management also evaluates the probability of meeting the performance criteria at each balance sheet date. If the performance criteria are not achieved, no compensation cost is recognized and any previously recognized compensation cost is reversed.
The following table is a summary of the performance shares granted and the weighted-average fair value for the three years ended 2012, 2011 and 2010:
|
|
2012 |
|
2011 |
|
2010 |
| |||
Units granted (a) |
|
185,878 |
|
175,072 |
|
178,722 |
| |||
Grant date fair value (b) |
|
$ |
47.40 |
|
$ |
41.71 |
|
$ |
37.57 |
|
(a) Reflects the target payout level.
(b) Weighted-average grant date fair value.
The following table is a summary of the status of performance shares, as of December 31, 2012 and changes during the year:
Nonvested shares (a) |
|
Shares |
|
Weighted-Average |
| |
Nonvested at January 1, 2012 |
|
347,946 |
|
$ |
39.64 |
|
Granted |
|
185,878 |
|
47.40 |
| |
Increase in performance factor |
|
87,037 |
|
37.57 |
| |
Vested |
|
257,127 |
|
37.57 |
| |
Forfeited |
|
16,044 |
|
42.53 |
| |
Nonvested at December 31, 2012 |
|
347,690 |
|
44.67 |
| |
(a) Nonvested shares are reflected at the target payout level. The increase or decrease in the number of shares from the target level to the estimated actual payout level is included in the increase for performance factor amounts in the year the award vests.
Retention Units
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. Retention unit awards were granted to key employees in 2006 and 2007. Each retention unit award represented 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 vested and settled in equal annual installments over a four-year period. In addition, the employee received 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. As this award was 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 2010 was $1.3 million.
Stock Options
The Company has not granted stock options since 2004. Outstanding stock option grant terms cannot be longer than 10 years and options cannot be repriced during their terms.
The following table summarizes the option activity under prior equity incentive plans for the year ended December 31, 2012:
Options |
|
Shares |
|
Weighted- |
|
Weighted- |
|
Aggregate |
| ||
Outstanding at January 1, 2012 |
|
22,958 |
|
$ |
34.75 |
|
|
|
|
| |
Exercised |
|
15,033 |
|
36.05 |
|
|
|
|
| ||
Forfeited or expired |
|
— |
|
— |
|
|
|
|
| ||
Outstanding at December 31, 2012 |
|
7,925 |
|
32.29 |
|
.21 |
|
$ |
148 |
| |
Exercisable at December 31, 2012 |
|
7,925 |
|
32.29 |
|
.21 |
|
$ |
148 |
| |
Cash received from options exercised under our share-based payment arrangements was $0.5 million for 2012, $1.8 million for 2011, and $4.6 million for 2010. The tax benefit realized for the tax deductions from option exercises of the share-based payment arrangements were immaterial for all years.
The intrinsic value of options exercised was immaterial for all years.
As of December 31, 2012, there was $17 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 2.0 years. The total fair value of shares vested during 2012 was $19 million, 2011 was $14 million, and 2010 was $11 million.
The compensation cost that has been charged against Pinnacle West’s income for share-based compensation plans was $32 million in 2012, $23 million in 2011, and $15 million in 2010. The compensation cost that Pinnacle West has capitalized is immaterial for all years. Pinnacle West’s total income tax benefit recognized in the Consolidated Statements of Income for share-based compensation arrangements was $13 million in 2012, $9 million in 2011, and $6 million in 2010. APS’s share of compensation cost that has been charged against income was $32 million in 2012, $22 million in 2011, and $15 million in 2010.
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 units and performance shares.
|
17. Business Segments
Pinnacle West’s reportable business segment is 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.
Financial data for 2012, 2011 and 2010 is provided as follows (dollars in millions):
|
|
Business Segments for the Year Ended |
| |||||||
|
|
Regulated |
|
All other (a) |
|
Total |
| |||
Operating revenues |
|
$ |
3,294 |
|
$ |
8 |
|
$ |
3,302 |
|
Fuel and purchased power costs |
|
995 |
|
— |
|
995 |
| |||
Other operating expenses |
|
1,047 |
|
4 |
|
1,051 |
| |||
Operating margin |
|
1,252 |
|
4 |
|
1,256 |
| |||
Depreciation and amortization |
|
404 |
|
— |
|
404 |
| |||
Interest expense |
|
200 |
|
— |
|
200 |
| |||
Other expense (income) |
|
(9 |
) |
5 |
|
(4 |
) | |||
Income (loss) from continuing operations before income taxes |
|
657 |
|
(1 |
) |
656 |
| |||
Income taxes |
|
238 |
|
(1 |
) |
237 |
| |||
Income from continuing operations |
|
419 |
|
— |
|
419 |
| |||
Loss from discontinued operations — net of income tax benefit of $(4) million (see Note 21) |
|
— |
|
(6 |
) |
(6 |
) | |||
Net income |
|
419 |
|
(6 |
) |
413 |
| |||
Less: Net income attributable to noncontrolling interests |
|
31 |
|
— |
|
31 |
| |||
Net income attributable to common shareholders |
|
$ |
388 |
|
$ |
(6 |
) |
$ |
382 |
|
Total assets |
|
$ |
13,347 |
|
$ |
33 |
|
$ |
13,380 |
|
Capital expenditures |
|
$ |
836 |
|
$ |
— |
|
$ |
836 |
|
|
|
Business Segments for the Year Ended |
| |||||||
|
|
Regulated |
|
All other (a) |
|
Total |
| |||
Operating revenues |
|
$ |
3,237 |
|
$ |
4 |
|
$ |
3,241 |
|
Fuel and purchased power costs |
|
1,009 |
|
— |
|
1,009 |
| |||
Other operating expenses |
|
1,055 |
|
3 |
|
1,058 |
| |||
Operating margin |
|
1,173 |
|
1 |
|
1,174 |
| |||
Depreciation and amortization |
|
427 |
|
— |
|
427 |
| |||
Interest expense |
|
224 |
|
— |
|
224 |
| |||
Other expense (income) |
|
(19 |
) |
3 |
|
(16 |
) | |||
Income (loss) from continuing operations before income taxes |
|
541 |
|
(2 |
) |
539 |
| |||
Income taxes |
|
184 |
|
(1 |
) |
183 |
| |||
Income (loss) from continuing operations |
|
357 |
|
(1 |
) |
356 |
| |||
Income from discontinued operations — net of income tax expense of $7 million (see Note 21) |
|
— |
|
11 |
|
11 |
| |||
Net income |
|
357 |
|
10 |
|
367 |
| |||
Less: Net income attributable to noncontrolling interests |
|
28 |
|
— |
|
28 |
| |||
Net income attributable to common shareholders |
|
$ |
329 |
|
$ |
10 |
|
$ |
339 |
|
Total assets |
|
$ |
13,068 |
|
$ |
43 |
|
$ |
13,111 |
|
Capital expenditures |
|
$ |
885 |
|
$ |
— |
|
$ |
885 |
|
|
|
Business Segments for the Year Ended |
| |||||||
|
|
Regulated |
|
All other (a) |
|
Total |
| |||
Operating revenues |
|
$ |
3,181 |
|
$ |
8 |
|
$ |
3,189 |
|
Fuel and purchased power costs |
|
1,047 |
|
— |
|
1,047 |
| |||
Other operating expenses |
|
1,009 |
|
4 |
|
1,013 |
| |||
Operating margin |
|
1,125 |
|
4 |
|
1,129 |
| |||
Depreciation and amortization |
|
415 |
|
— |
|
415 |
| |||
Interest expense |
|
226 |
|
2 |
|
228 |
| |||
Other expense (income) |
|
(22 |
) |
2 |
|
(20 |
) | |||
Income from continuing operations before income taxes |
|
506 |
|
— |
|
506 |
| |||
Income taxes |
|
161 |
|
— |
|
161 |
| |||
Income from continuing operations |
|
345 |
|
— |
|
345 |
| |||
Income from discontinued operations — net of income tax expense of $16 million (see Note 21) |
|
— |
|
25 |
|
25 |
| |||
Net income |
|
345 |
|
25 |
|
370 |
| |||
Less: Net income attributable to noncontrolling interests |
|
20 |
|
— |
|
20 |
| |||
Net income attributable to common shareholders |
|
$ |
325 |
|
$ |
25 |
|
$ |
350 |
|
Total assets |
|
$ |
12,285 |
|
$ |
108 |
|
$ |
12,393 |
|
Capital expenditures |
|
$ |
666 |
|
$ |
4 |
|
$ |
670 |
|
(a) All other activities relate to SunCor, APSES and El Dorado. Loss from discontinued operations in 2012 is primarily related to a contribution Pinnacle West expects to make to SunCor’s estate as part of a negotiated resolution to the bankruptcy (see Note 21). Income from discontinued operations for 2011 is primarily related to the sale of our investment in APSES. Income from discontinued operations for 2010 is primarily related to the APSES sale of its district cooling business. None of these segments is a reportable business 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 market volatility by utilizing various physical and financial derivative instruments, including futures, forwards, options and swaps. As part of our overall risk management program, we may use derivative instruments to hedge purchases and sales of electricity and fuels. Derivative instruments that meet certain hedge accounting criteria may be designated as cash flow hedges and are used to limit our exposure to cash flow variability on forecasted transactions. The changes in market value of such instruments have a high correlation to price changes in the hedged transactions. We also enter into derivative instruments for economic hedging purposes. While we believe the economic hedges mitigate exposure to fluctuations in commodity prices, these instruments have not been designated as accounting hedges. Contracts that have the same terms (quantities, delivery points and delivery periods) and for which power does not flow are netted, which reduces both revenues and fuel and purchased power costs in our Consolidated Statements of Income, but does not impact our financial condition, net income or cash flows.
On June 1, 2012, we elected to discontinue cash flow hedge accounting treatment for the significant majority of our contracts that had previously been designated as cash flow hedges. This discontinuation is due to changes in PSA recovery (see Note 3), which now allows for 100% deferral of the unrealized gains and losses relating to these contracts. For those contracts that were de-designated, all changes in fair value after May 31, 2012 are no longer recorded through OCI, but are deferred through the PSA. The amounts previously recorded in accumulated OCI relating to these instruments will remain in accumulated OCI, and will transfer to earnings in the same period or periods during which the hedged transaction affects earnings or sooner if we determine it is probable that the forecasted transaction will not occur. Cash flow hedge accounting treatment will continue for a limited number of contracts that are not subject to PSA recovery.
Our derivative instruments, excluding those qualifying for a scope exception, are recorded on the balance sheet as an asset or liability and are measured at fair value; see Note 14 for a discussion of fair value measurements. Derivative instruments may qualify for the normal purchases and normal sales scope exception if they require physical delivery and the quantities represent those transacted in the normal course of business. Derivative instruments qualifying for the normal purchases and sales scope exception are accounted for under the accrual method of accounting and excluded from our derivative instrument discussion and disclosures 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 of 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 OCI and reclassified into earnings in the same period during which the hedged transaction affects earnings. We recognize in current earnings, subject to the PSA, the gains and losses representing hedge ineffectiveness, and the gains and losses on any hedge components which are excluded from our effectiveness assessment. As cash flow hedge accounting has been discontinued for the significant majority of our contracts, effective June 1, 2012, effectiveness testing is no longer being performed for these contracts.
Prior to the Settlement Agreement, for its regulated operations, APS deferred 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. Due to the Settlement Agreement, for its regulated operations, APS now defers for future rate treatment 100% of the unrealized gains and losses for delivery periods after June 30, 2012 on 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, 2012, we had the following outstanding gross notional volume of derivatives, which represent both purchases and sales (does not reflect net position):
Commodity |
|
Quantity |
| ||
Power |
|
8,045 |
|
gigawatt hours |
|
Gas |
|
139 |
|
Bcfs (a) |
|
(a) “Bcf” is Billion Cubic Feet.
Gains and Losses from Derivative Instruments
The following table provides information about gains and losses from derivative instruments in designated cash flow accounting hedging relationships during the years ended December 31, 2012, 2011 and 2010 (dollars in thousands):
|
|
Financial Statement |
|
Year Ended |
| |||||||
Commodity Contracts |
|
Location |
|
2012 |
|
2011 |
|
2010 |
| |||
|
|
|
|
|
|
|
|
|
| |||
Loss Recognized in OCI on Derivative Instruments (Effective Portion) |
|
Other comprehensive loss — derivative instruments |
|
$ |
(37,663 |
) |
$ |
(94,660 |
) |
$ |
(155,287 |
) |
Loss Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion Realized) (a) |
|
Fuel and purchased power |
|
(99,007 |
) |
(117,189 |
) |
(122,740 |
) | |||
Gain (Loss) Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
|
Fuel and purchased power |
|
117 |
|
(211 |
) |
3,680 |
| |||
(a) During the year ended December 31, 2012, we had $1.8 million of losses reclassified from accumulated other comprehensive income to earnings related to discontinued cash flow hedges. There were no amounts reclassified in the 2011 and 2010 periods related to discontinued cash flow hedges.
During the next twelve months, we estimate that a net loss of $44 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, substantially all of these amounts will be recorded as either a regulatory asset or liability and have no immediate effect on earnings.
The following table provides information about gains and losses from derivative instruments not designated as accounting hedging instruments during the years ended December 31, 2012, 2011 and 2010 (dollars in thousands):
|
|
Financial Statement |
|
Year Ended |
| |||||||
Commodity Contracts |
|
Location |
|
2012 |
|
2011 |
|
2010 |
| |||
|
|
|
|
|
|
|
|
|
| |||
Net Gain (Loss) Recognized in Income |
|
Operating revenues |
|
$ |
103 |
|
$ |
(27 |
) |
$ |
1,436 |
|
|
|
|
|
|
|
|
|
|
| |||
Net Loss Recognized in Income |
|
Fuel and purchased power |
|
(2,747 |
) |
(52,113 |
) |
(107,690 |
) | |||
Total |
|
|
|
$ |
(2,644 |
) |
$ |
(52,140 |
) |
$ |
(106,254 |
) |
Fair Values of Derivative Instruments in the Consolidated Balance Sheets
The following table provides information about the fair value of our risk management activities reported on a gross basis. Transactions with counterparties that have master netting arrangements are reported net on the Consolidated Balance Sheets. 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, 2012 (dollars in thousands):
Commodity Contracts |
|
Designated |
|
Not |
|
Margin and |
|
Collateral |
|
Other (b) |
|
Total |
| ||||||
Current Assets |
|
$ |
— |
|
$ |
42,495 |
|
$ |
61 |
|
$ |
— |
|
$ |
(16,857 |
) |
$ |
25,699 |
|
Investments and Other Assets |
|
— |
|
41,563 |
|
— |
|
— |
|
(5,672 |
) |
35,891 |
| ||||||
Total Assets |
|
— |
|
84,058 |
|
61 |
|
— |
|
(22,529 |
) |
61,590 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Current Liabilities |
|
(1,147 |
) |
(104,177 |
) |
39,249 |
|
(25,463 |
) |
17,797 |
|
(73,741 |
) | ||||||
Deferred Credits and Other |
|
(4,332 |
) |
(96,654 |
) |
10,051 |
|
— |
|
5,671 |
|
(85,264 |
) | ||||||
Total Liabilities |
|
(5,479 |
) |
(200,831 |
) |
49,300 |
|
(25,463 |
) |
23,468 |
|
(159,005 |
) | ||||||
Total |
|
$ |
(5,479 |
) |
$ |
(116,773 |
) |
$ |
49,361 |
|
$ |
(25,463 |
) |
$ |
939 |
|
$ |
(97,415 |
) |
(a) Collateral relates to non-derivative instruments or derivative instruments that qualify for a scope exception.
(b) Other represents derivative instrument netting, option premiums, and other risk management contracts.
The following table provides information about the fair value of our risk management activities reported on a gross basis at December 31, 2011 (dollars in thousands):
Commodity Contracts |
|
Designated |
|
Not |
|
Margin and |
|
Collateral |
|
Other (b) |
|
Total |
| ||||||
Current Assets |
|
$ |
7,287 |
|
$ |
76,162 |
|
$ |
1,630 |
|
$ |
— |
|
$ |
(54,815 |
) |
$ |
30,264 |
|
Investments and Other Assets |
|
3,804 |
|
58,273 |
|
— |
|
— |
|
(12,755 |
) |
49,322 |
| ||||||
Total Assets |
|
11,091 |
|
134,435 |
|
1,630 |
|
— |
|
(67,570 |
) |
79,586 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Current Liabilities |
|
(82,195 |
) |
(124,028 |
) |
107,228 |
|
(11,145 |
) |
56,172 |
|
(53,968 |
) | ||||||
Deferred Credits and Other |
|
(68,137 |
) |
(92,880 |
) |
65,768 |
|
— |
|
12,754 |
|
(82,495 |
) | ||||||
Total Liabilities |
|
(150,332 |
) |
(216,908 |
) |
172,996 |
|
(11,145 |
) |
68,926 |
|
(136,463 |
) | ||||||
Total Derivative Instruments |
|
$ |
(139,241 |
) |
$ |
(82,473 |
) |
$ |
174,626 |
|
$ |
(11,145 |
) |
$ |
1,356 |
|
$ |
(56,877 |
) |
(a) Collateral relates to non-derivative instruments or derivative instruments that qualify for a scope exception.
(b) Other represents derivative instrument netting, option premiums, and other risk management contracts.
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 two counterparties for which our exposure represents approximately 86% of Pinnacle West’s $62 million of risk management assets as of December 31, 2012. This exposure relates to long-term traditional wholesale contracts with counterparties that have 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.
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. 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).
The following table provides information about our derivative instruments that have credit-risk-related contingent features at December 31, 2012 (dollars in millions):
|
|
December 31, |
| |
Aggregate Fair Value of Derivative Instruments in a Net Liability Position |
|
$ |
206 |
|
Cash Collateral Posted |
|
49 |
| |
Additional Cash Collateral in the Event Credit-Risk Related Contingent Features were Fully Triggered (a) |
|
120 |
| |
(a) This amount is after counterparty netting and includes those contracts which qualify for scope exceptions, which are excluded from the derivative details above.
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 $183 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 2012, 2011 and 2010 (dollars in thousands):
|
|
2012 |
|
2011 |
|
2010 |
| |||
Other income: |
|
|
|
|
|
|
| |||
Interest income |
|
$ |
1,239 |
|
$ |
1,850 |
|
$ |
3,255 |
|
Investment gains — net |
|
— |
|
1,165 |
|
2,797 |
| |||
Miscellaneous |
|
367 |
|
96 |
|
335 |
| |||
Total other income |
|
$ |
1,606 |
|
$ |
3,111 |
|
$ |
6,387 |
|
|
|
|
|
|
|
|
| |||
Other expense: |
|
|
|
|
|
|
| |||
Non-operating costs |
|
$ |
(7,777 |
) |
$ |
(7,037 |
) |
$ |
(6,831 |
) |
Investment loss — net |
|
(2,453 |
) |
— |
|
— |
| |||
Miscellaneous |
|
(9,612 |
) |
(3,414 |
) |
(3,090 |
) | |||
Total other expense |
|
$ |
(19,842 |
) |
$ |
(10,451 |
) |
$ |
(9,921 |
) |
|
20. Palo Verde Sale Leaseback Variable Interest Entities
In 1986, APS entered into agreements with three separate VIE lessor trusts in order to sell and lease back interests in Palo Verde Unit 2 and related common facilities. APS will pay approximately $49 million per year for the years 2013 to 2015 related to these leases. The lease agreements include fixed rate renewal periods which give APS the ability to utilize the asset for a significant portion of the asset’s economic life, and therefore provide APS with the power to direct activities of the VIEs that most significantly impact the VIEs’ economic performance. Predominately due to the fixed rate renewal periods, APS has been deemed the primary beneficiary of these VIEs and therefore consolidates the VIEs.
On December 31, 2012, APS notified the lessor trust entities that APS will retain the assets beyond 2015 by either exercising the fixed rate lease renewals or by purchasing the assets. If APS elects to purchase the assets, the purchase price will be based on the fair market value of the assets at the end of 2015. If APS elects to extend the leases, we will be required to make payments beginning in 2016 of approximately $23 million annually. The length of the lease extensions is unknown at this time as it must be determined through an appraisal process. APS must give notice to the lessor trusts by June 30, 2014 notifying them which of these two options (lease renewal or purchasing the assets) it will exercise. The December 31, 2012 notification does not impact APS’s consolidation of the VIEs, as APS continues to be deemed the primary beneficiary of the VIEs.
As a result of consolidation, we eliminate rent expense and recognize depreciation and interest expense, resulting in an increase in net income for 2012, 2011 and 2010 of $32 million, $28 million and $20 million, respectively, entirely attributable to the noncontrolling interests. Income attributable to Pinnacle West shareholders remains the same. Consolidation of these VIEs also results in changes to our Consolidated Statements of Cash Flows, but does not impact net cash flows.
Our Consolidated Balance Sheets at December 31, 2012 and December 31, 2011 include the following amounts relating to the VIEs (in millions):
|
|
December 31, |
|
December 31, |
| ||
Palo Verde sale leaseback property plant and equipment, net of accumulated depreciation |
|
$ |
129 |
|
$ |
133 |
|
Current maturities of long term-debt |
|
27 |
|
31 |
| ||
Palo Verde sale leaseback lessor notes long-term debt excluding current maturities |
|
39 |
|
66 |
| ||
Equity-Noncontrolling interests |
|
129 |
|
108 |
| ||
Assets of the VIEs are restricted and may only be used to settle the VIEs’ debt obligations and for payment to the noncontrolling interest holders. Other than the VIEs’ assets reported on our consolidated financial statements, the creditors of the VIEs have no other recourse to the assets of APS or Pinnacle West, except in certain circumstances such as a default by APS under the lease.
APS is exposed to losses relating to these VIEs upon the occurrence of certain events that APS does not consider 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 make specified payments to the VIEs’ noncontrolling equity participants, assume the VIEs’ debt, 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, 2012, APS would have been required to pay the noncontrolling equity participants approximately $139 million and assume $66 million of debt. Since APS consolidates these VIEs, the debt APS would be required to assume is already reflected in our Consolidated Balance Sheets.
For regulatory ratemaking purposes the leases continue to be treated as operating leases and, as a result, we have recorded a regulatory asset relating to the arrangements.
|
21. Discontinued Operations
SunCor — In February 2012, SunCor filed for protection under the United States Bankruptcy Code to complete an orderly liquidation of its business. We do not expect SunCor’s bankruptcy to have a material impact on Pinnacle West’s financial position, results of operations, or cash flows.
APSES — On August 19, 2011, Pinnacle West sold its investment in APSES. The sale resulted in an after-tax gain from discontinued operations of approximately $10 million. In June 2010, APSES sold its district cooling business. As a result of that sale, we recorded an after-tax gain from discontinued operations of approximately $25 million. Prior period income statement amounts related to these sales and the associated revenues and costs are reflected in discontinued operations.
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, 2012, 2011 and 2010 (dollars in millions):
|
|
2012 |
|
2011 |
|
2010 |
| |||
Revenue: |
|
|
|
|
|
|
| |||
SunCor |
|
$ |
— |
|
$ |
1 |
|
$ |
30 |
|
APSES |
|
— |
|
36 |
|
127 |
| |||
Total revenue |
|
$ |
— |
|
$ |
37 |
|
$ |
157 |
|
|
|
|
|
|
|
|
| |||
Income (loss) before taxes: |
|
|
|
|
|
|
| |||
SunCor |
|
$ |
(10 |
) |
$ |
(2 |
) |
$ |
(10 |
) |
APSES |
|
— |
|
21 |
|
51 |
| |||
Total income (loss) before taxes |
|
$ |
(10 |
) |
$ |
19 |
|
$ |
41 |
|
|
|
|
|
|
|
|
| |||
Income (loss) after taxes: |
|
|
|
|
|
|
| |||
SunCor |
|
$ |
(6 |
) |
$ |
(1 |
) |
$ |
(6 |
) |
APSES |
|
— |
|
12 |
|
31 |
| |||
Total income (loss) after taxes |
|
$ |
(6 |
) |
$ |
11 |
|
$ |
25 |
|
|
22. Nuclear Decommissioning Trusts
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 fixed income securities and 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. See Note 14 for a discussion of how fair value is determined and the classification of the nuclear decommissioning trust investments within the fair value hierarchy. 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 deferred realized and unrealized gains and losses (including other-than-temporary impairments on investment securities) in other regulatory liabilities. The following table includes the unrealized gains and losses based on the original cost of the investment and summarizes the fair value of APS’s nuclear decommissioning trust fund assets at December 31, 2012 and December 31, 2011 (dollars in millions):
|
|
Fair Value |
|
Total |
|
Total |
| |||
December 31, 2012 |
|
|
|
|
|
|
| |||
Equity securities |
|
$ |
204 |
|
$ |
67 |
|
$ |
— |
|
Fixed income securities |
|
371 |
|
24 |
|
— |
| |||
Net payables (a) |
|
(4 |
) |
— |
|
— |
| |||
Total |
|
$ |
571 |
|
$ |
91 |
|
$ |
— |
|
|
|
Fair Value |
|
Total |
|
Total |
| |||
December 31, 2011 |
|
|
|
|
|
|
| |||
Equity securities |
|
$ |
175 |
|
$ |
44 |
|
$ |
(1 |
) |
Fixed income securities |
|
340 |
|
23 |
|
(1 |
) | |||
Net payables (a) |
|
(1 |
) |
— |
|
— |
| |||
Total |
|
$ |
514 |
|
$ |
67 |
|
$ |
(2 |
) |
(a) Net payables 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, |
| |||||||
|
|
2012 |
|
2011 |
|
2010 |
| |||
|
|
|
|
|
|
|
| |||
Realized gains |
|
$ |
7 |
|
$ |
8 |
|
$ |
17 |
|
Realized losses |
|
(4 |
) |
(5 |
) |
(4 |
) | |||
Proceeds from the sale of securities (a) |
|
418 |
|
498 |
|
560 |
| |||
(a) Proceeds are reinvested in the trust.
The fair value of fixed income securities, summarized by contractual maturities, at December 31, 2012 is as follows (dollars in millions):
|
|
Fair Value |
| |
Less than one year |
|
$ |
14 |
|
1 year — 5 years |
|
97 |
| |
5 years — 10 years |
|
109 |
| |
Greater than 10 years |
|
151 |
| |
Total |
|
$ |
371 |
|
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, 2012. The effectiveness of our internal control over financial reporting as of December 31, 2012 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.
|
PINNACLE WEST CAPITAL CORPORATION HOLDING COMPANY
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
|
|
Year Ended December 31, |
| |||||||
|
|
2012 |
|
2011 |
|
2010 |
| |||
|
|
|
|
|
|
|
| |||
Operating revenues |
|
$ |
6,133 |
|
$ |
1,034 |
|
$ |
2,810 |
|
Operating expenses |
|
12,125 |
|
8,811 |
|
9,880 |
| |||
|
|
|
|
|
|
|
| |||
Operating loss |
|
(5,992 |
) |
(7,777 |
) |
(7,070 |
) | |||
|
|
|
|
|
|
|
| |||
Other |
|
|
|
|
|
|
| |||
Equity in earnings of subsidiaries |
|
391,528 |
|
335,859 |
|
358,527 |
| |||
Other expense |
|
(2,001 |
) |
(1,481 |
) |
(588 |
) | |||
Total |
|
389,527 |
|
334,378 |
|
357,939 |
| |||
|
|
|
|
|
|
|
| |||
Interest expense |
|
4,868 |
|
8,053 |
|
14,346 |
| |||
|
|
|
|
|
|
|
| |||
Income from continuing operations |
|
378,667 |
|
318,548 |
|
336,523 |
| |||
Income tax benefit |
|
(7,079 |
) |
(8,938 |
) |
(9,596 |
) | |||
|
|
|
|
|
|
|
| |||
Income from continuing operations — net of income taxes |
|
385,746 |
|
327,486 |
|
346,119 |
| |||
Income (loss) from discontinued operations — net of income taxes |
|
(4,204 |
) |
11,987 |
|
3,934 |
| |||
|
|
|
|
|
|
|
| |||
Net income attributable to common shareholders |
|
$ |
381,542 |
|
$ |
339,473 |
|
$ |
350,053 |
|
|
|
|
|
|
|
|
| |||
Other comprehensive income (loss) — attributable to common shareholders |
|
38,155 |
|
7,605 |
|
(28,180 |
) | |||
Total comprehensive income — attributable to common shareholders |
|
$ |
419,697 |
|
$ |
347,078 |
|
$ |
321,873 |
|
See Notes to Pinnacle West’s Consolidated Financial Statements.
PINNACLE WEST CAPITAL CORPORATION HOLDING COMPANY
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(in thousands)
|
|
December 31, |
| ||||
|
|
2012 |
|
2011 |
| ||
ASSETS |
|
|
|
|
| ||
|
|
|
|
|
| ||
Current assets |
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
22,679 |
|
$ |
12,710 |
|
Customer and other receivables |
|
92,906 |
|
62,418 |
| ||
Current deferred income taxes |
|
77,771 |
|
19,068 |
| ||
Income tax receivable |
|
3,350 |
|
1,804 |
| ||
Other current assets |
|
25 |
|
55 |
| ||
Total current assets |
|
196,731 |
|
96,055 |
| ||
|
|
|
|
|
| ||
Investments and other assets |
|
|
|
|
| ||
Investments in subsidiaries |
|
4,223,301 |
|
4,026,289 |
| ||
Deferred income taxes |
|
— |
|
27,220 |
| ||
Other assets |
|
13,833 |
|
16,898 |
| ||
Total investments and other assets |
|
4,237,134 |
|
4,070,407 |
| ||
|
|
|
|
|
| ||
Total Assets |
|
$ |
4,433,865 |
|
$ |
4,166,462 |
|
|
|
|
|
|
| ||
LIABILITIES AND EQUITY |
|
|
|
|
| ||
|
|
|
|
|
| ||
Current liabilities |
|
|
|
|
| ||
Accounts payable |
|
$ |
5,735 |
|
$ |
4,811 |
|
Accrued taxes |
|
8,239 |
|
9,795 |
| ||
Common dividends payable |
|
59,789 |
|
— |
| ||
Other current liabilities |
|
41,000 |
|
28,295 |
| ||
Total current liabilities |
|
114,763 |
|
42,901 |
| ||
|
|
|
|
|
| ||
Long-term debt less current maturities |
|
125,000 |
|
125,000 |
| ||
|
|
|
|
|
| ||
Deferred credits and other |
|
|
|
|
| ||
Deferred income taxes |
|
17,395 |
|
— |
| ||
Pension and other postretirement liabilities |
|
41,199 |
|
32,513 |
| ||
Other |
|
33,219 |
|
35,462 |
| ||
Total deferred credits and other |
|
91,813 |
|
67,975 |
| ||
|
|
|
|
|
| ||
Common stock equity |
|
|
|
|
| ||
Common stock |
|
2,462,712 |
|
2,439,530 |
| ||
Accumulated other comprehensive loss |
|
(114,008 |
) |
(152,163 |
) | ||
Retained earnings |
|
1,624,102 |
|
1,534,483 |
| ||
Total Pinnacle West Shareholders’ equity |
|
3,972,806 |
|
3,821,850 |
| ||
Noncontrolling interests |
|
129,483 |
|
108,736 |
| ||
Total Equity |
|
4,102,289 |
|
3,930,586 |
| ||
Total Liabilities and Equity |
|
$ |
4,433,865 |
|
$ |
4,166,462 |
|
See Notes to Pinnacle West’s Consolidated Financial Statements.
PINNACLE WEST CAPITAL CORPORATION HOLDING COMPANY
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
Year Ended December 31, |
| |||||||
|
|
2012 |
|
2011 |
|
2010 |
| |||
|
|
|
|
|
|
|
| |||
Cash flows from operating activities |
|
|
|
|
|
|
| |||
Net income |
|
$ |
381,542 |
|
$ |
339,473 |
|
$ |
350,053 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
| |||
Equity in earnings of subsidiaries — net |
|
(391,528 |
) |
(335,859 |
) |
(358,527 |
) | |||
Depreciation and amortization |
|
94 |
|
97 |
|
143 |
| |||
Gain on sale of energy-related business |
|
— |
|
(10,404 |
) |
— |
| |||
Deferred income taxes |
|
(15,135 |
) |
7,387 |
|
40,342 |
| |||
Customer and other receivables |
|
28,763 |
|
(24,201 |
) |
(18,175 |
) | |||
Accounts payable |
|
879 |
|
(2,677 |
) |
7,468 |
| |||
Accrued taxes and income tax receivables — net |
|
(3,103 |
) |
7,512 |
|
59,640 |
| |||
Dividends received from subsidiaries |
|
222,200 |
|
228,900 |
|
207,000 |
| |||
Other |
|
(4,589 |
) |
19,270 |
|
423 |
| |||
Net cash flow provided by operating activities |
|
219,123 |
|
229,498 |
|
288,367 |
| |||
|
|
|
|
|
|
|
| |||
Cash flows from investing activities |
|
|
|
|
|
|
| |||
Investments in subsidiaries |
|
— |
|
— |
|
(183,544 |
) | |||
Repayments of loans from subsidiaries |
|
996 |
|
61,143 |
|
98,406 |
| |||
Proceeds from sale of energy-related products and services business |
|
— |
|
45,111 |
|
— |
| |||
Advances of loans to subsidiaries |
|
(1,200 |
) |
(64,970 |
) |
(119,293 |
) | |||
Proceeds from sale of life insurance policies |
|
— |
|
9,357 |
|
— |
| |||
Net cash flow provided by (used for) investing activities |
|
(204 |
) |
50,641 |
|
(204,431 |
) | |||
|
|
|
|
|
|
|
| |||
Cash flows from financing activities |
|
|
|
|
|
|
| |||
Issuance of long-term debt |
|
125,000 |
|
175,000 |
|
— |
| |||
Short-term borrowings and payments — net |
|
— |
|
(16,600 |
) |
(132,487 |
) | |||
Dividends paid on common stock |
|
(225,075 |
) |
(221,728 |
) |
(216,979 |
) | |||
Repayment of long-term debt |
|
(125,000 |
) |
(225,000 |
) |
— |
| |||
Common stock equity issuance |
|
15,955 |
|
15,841 |
|
255,971 |
| |||
Other |
|
170 |
|
(2,667 |
) |
— |
| |||
Net cash flow used for financing activities |
|
(208,950 |
) |
(275,154 |
) |
(93,495 |
) | |||
|
|
|
|
|
|
|
| |||
Net increase (decrease) in cash and cash equivalents |
|
9,969 |
|
4,985 |
|
(9,559 |
) | |||
|
|
|
|
|
|
|
| |||
Cash and cash equivalents at beginning of year |
|
12,710 |
|
7,725 |
|
17,284 |
| |||
|
|
|
|
|
|
|
| |||
Cash and cash equivalents at end of year |
|
$ |
22,679 |
|
$ |
12,710 |
|
$ |
7,725 |
|
See Notes to Pinnacle West’s Consolidated Financial Statements.
|
PINNACLE WEST CAPITAL CORPORATION
SCHEDULE II — RESERVE FOR UNCOLLECTIBLES
(dollars in thousands)
Column A |
|
Column B |
|
Column C |
|
Column D |
|
Column E |
| |||||||
|
|
|
|
Additions |
|
|
|
|
| |||||||
Description |
|
Balance at |
|
Charged to |
|
Charged |
|
Deductions |
|
Balance |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Reserve for uncollectibles: |
|
|
|
|
|
|
|
|
|
|
| |||||
2012 |
|
$ |
3,748 |
|
$ |
5,290 |
|
$ |
— |
|
$ |
5,698 |
|
$ |
3,340 |
|
2011 |
|
4,709 |
|
5,672 |
|
— |
|
6,633 |
|
3,748 |
| |||||
2010 |
|
4,573 |
|
6,905 |
|
— |
|
6,769 |
|
4,709 |
| |||||
ARIZONA PUBLIC SERVICE COMPANY
SCHEDULE II — RESERVE FOR UNCOLLECTIBLES
(dollars in thousands)
Column A |
|
Column B |
|
Column C |
|
Column D |
|
Column E |
| |||||||
|
|
|
|
Additions |
|
|
|
|
| |||||||
Description |
|
Balance at |
|
Charged to |
|
Charged |
|
Deductions |
|
Balance |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Reserve for uncollectibles: |
|
|
|
|
|
|
|
|
|
|
| |||||
2012 |
|
$ |
3,748 |
|
$ |
5,290 |
|
$ |
— |
|
$ |
5,698 |
|
$ |
3,340 |
|
2011 |
|
4,376 |
|
5,751 |
|
— |
|
6,379 |
|
3,748 |
| |||||
2010 |
|
4,483 |
|
6,756 |
|
— |
|
6,863 |
|
4,376 |
| |||||
|
Description of Business and Basis of Presentation
Pinnacle West is a holding company that conducts business through its subsidiaries; APS and El Dorado, and formerly SunCor and APSES. APS, our wholly-owned subsidiary, 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. APS accounts for essentially all of our revenues and earnings, and is expected to continue to do so. SunCor was a developer of residential, commercial and industrial real estate projects in Arizona, New Mexico, Idaho and Utah but in 2009 and 2010, essentially all of these assets were sold. In February 2012, SunCor filed for protection under the United States Bankruptcy Code to complete an orderly liquidation of its business. All activities for SunCor are now reported as discontinued operations (see Note 21). APSES provided energy-related projects to commercial and industrial retail customers in competitive markets in the western United States. APSES was sold in 2011 and is now reported as discontinued operations (see Note 21). El Dorado is an investment firm.
Pinnacle West’s Consolidated Financial Statements include the accounts of Pinnacle West and our subsidiaries: APS and El Dorado, and formerly SunCor and APSES. APS’s consolidated financial statements include the accounts of APS and certain VIEs relating to the Palo Verde sale leaseback. Intercompany accounts and transactions between the consolidated companies have been eliminated.
We consolidate VIEs for which we are the primary beneficiary. We determine whether we are the primary beneficiary of a VIE through a qualitative analysis that identifies which variable interest holder has the controlling financial interest in the VIE. In performing our primary beneficiary analysis we consider all relevant facts and circumstances, including the design and activities of the VIE, the terms of the contracts the VIE has entered into, and which parties participated significantly in the design or redesign of the entity. We continually evaluate our primary beneficiary conclusions to determine if changes have occurred which would impact our primary beneficiary assessments. We have determined that APS is the primary beneficiary of certain VIE lessor trusts relating to the Palo Verde sale leaseback, and therefore APS consolidates these entities (see Note 20).
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.
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.
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 changes in the applicable regulatory environment and recent rate orders applicable to APS or 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.
See Note 3 for additional information.
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.
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 fuel and purchased power costs.
For the period January 1, 2010 through June 30, 2012, electric revenues also include proceeds for line extension payments for new or upgraded service in accordance with the 2009 retail rate case settlement agreement (see Note 3). Effective July 1, 2012, as a result of the 2011 rate case settlement agreement, these amounts are now recorded as contributions in aid of construction and are not included in electric revenues.
Some of our cost recovery mechanisms are alternative revenue programs. For alternative revenue programs that meet specified accounting criteria, we recognize revenues when the specific events permitting billing of the additional revenues have been completed.
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.
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
· 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 on its regulated assets for 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.
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, 2012 were as follows:
· Fossil plant — 16 years;
· Nuclear plant — 27 years;
· Other generation — 26 years;
· Transmission — 39 years;
· Distribution — 35 years; and
· Other — 7 years.
APS applied for twenty-year extensions of its operating licenses for each of the three Palo Verde units in December 2008. On April 21, 2011, the NRC approved the extensions of the Palo Verde licenses. The nuclear plant remaining life takes into consideration an ACC decision which authorizes the new Palo Verde Nuclear plant lives, effective January 1, 2012.
For the years 2010 through 2012, the depreciation rates ranged from a low of 0.45% to a high of 12.08%. The weighted-average rate was 2.71% for 2012, 2.98% for 2011, and 2.98% for 2010.
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. Both the debt and equity components of AFUDC are non-cash amounts within the Consolidated Statement of Income. 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 8.60% for 2012, 10.25% for 2011, and 9.2% for 2010. APS compounds AFUDC semi-annually and ceases to accrue AFUDC when construction work is completed and the property is placed in service.
Materials and Supplies
APS values materials, supplies and fossil fuel inventory using a weighted-average cost method. APS materials, supplies and fossil fuel inventories are carried at the lower of weighted-average cost or market, unless evidence indicates that the weighted-average cost (even if in excess of market) will be recovered.
Fair Value Measurements
We account for derivative instruments, investments held in our nuclear decommissioning trust, certain cash equivalents and plan assets held in our retirement and other benefit plans at fair value on a recurring basis. Due to the short-term nature of net accounts receivable, accounts payable, and short-term borrowings, the carrying values of these instruments approximate fair value. Fair value measurements may also be applied on a nonrecurring basis to other assets and liabilities in certain circumstances such as impairments. We also disclose fair value information for our long-term debt, which is carried at amortized cost (see Note 6).
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 which we can access for the asset or liability in an orderly transaction between willing market participants on the measurement date. Inputs to fair value may 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 observable inputs such as actively-quoted prices for identical instruments when available. When actively quoted prices are not available for the identical instruments we use other observable inputs, such as prices for similar instruments, other corroborative market information, or prices provided by other external sources. For options, long-term contracts and other contracts for which observable price data are not available, we use models and other valuation methods, which may incorporate unobservable inputs 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.
See Note 14 for additional information about fair value measurements.
Derivative Accounting
We are exposed to the impact of market fluctuations in the commodity price and transportation costs of electricity, natural gas, coal, emission allowances and in interest rates. We manage risks associated with market volatility by utilizing various physical and financial instruments including futures, forwards, options and swaps. As part of our overall risk management program, we may use derivative 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 also enter into derivative instruments for economic hedging purposes. Contracts that have the same terms (quantities, delivery points and delivery periods) and for which power does not flow are netted, which reduces both revenues and fuel and purchased power expenses in our Consolidated Statements of Income, but does not impact our financial condition, net income or cash flows.
We account for our derivative contracts in accordance with derivatives and hedging guidance, which requires all derivatives not qualifying for a scope exception to be measured at fair value on the balance sheet as either assets or liabilities. Transactions with counterparties that have master netting arrangements are reported net on the balance sheet. See Note 18 for additional information about our derivative instruments.
Loss Contingencies and Environmental Liabilities
Pinnacle West and APS are involved in certain legal and environmental matters that arise in the normal course of business. Contingent losses and environmental liabilities are recorded when it is determined that it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. When a range of the probable loss exists and no amount within the range is a better estimate than any other amount, Pinnacle West and APS record a loss contingency at the minimum amount in the range. Unless otherwise required by GAAP, legal fees are expensed as incurred.
Retirement Plans and Other Benefits
Pinnacle West sponsors a qualified defined benefit and account balance pension plan for the employees of Pinnacle West and its subsidiaries. We also sponsor another postretirement benefit plan for the employees of Pinnacle West and our subsidiaries that provide medical and life insurance benefits to retired employees. Pension and other postretirement benefit expense are determined by actuarial valuations, based on assumptions that are evaluated annually. See Note 8 for additional information on pension and other postretirement benefits.
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 costs.
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 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).
Cash and Cash Equivalents
We consider all highly liquid investments with a remaining maturity of three months or less at acquisition to be cash equivalents.
The following table summarizes supplemental Pinnacle West cash flow information for each of the last three years (dollars in thousands):
|
|
Years ended December 31, |
| |||||||
|
|
2012 |
|
2011 |
|
2010 |
| |||
|
|
|
|
|
|
|
| |||
Cash paid during the period for: |
|
|
|
|
|
|
| |||
Income taxes, net of (refunds) |
|
$ |
2,543 |
|
$ |
10,324 |
|
$ |
(23,447 |
) |
Interest, net of amounts capitalized |
|
200,923 |
|
217,789 |
|
221,728 |
| |||
Significant non-cash investing and financing activities: |
|
|
|
|
|
|
| |||
Accrued capital expenditures |
|
$ |
26,208 |
|
$ |
27,245 |
|
$ |
19,226 |
|
Dividends declared but not paid |
|
59,789 |
|
— |
|
— |
|
Intangible Assets
We have no goodwill recorded and have separately disclosed other intangible assets, primarily APS’s software, on Pinnacle West’s Consolidated Balance Sheets. The intangible assets are amortized over their finite useful lives. Amortization expense was $50 million in 2012, $47 million in 2011, and $45 million in 2010. Estimated amortization expense on existing intangible assets over the next five years is $45 million in 2013, $37 million in 2014, $28 million in 2015, $20 million in 2016, and $12 million in 2017. At December 31, 2012, the weighted-average remaining amortization period for intangible assets was 6 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 14 and Note 22 for more information on these investments.
|
The following table summarizes supplemental Pinnacle West cash flow information for each of the last three years (dollars in thousands):
|
|
Years ended December 31, |
| |||||||
|
|
2012 |
|
2011 |
|
2010 |
| |||
|
|
|
|
|
|
|
| |||
Cash paid during the period for: |
|
|
|
|
|
|
| |||
Income taxes, net of (refunds) |
|
$ |
2,543 |
|
$ |
10,324 |
|
$ |
(23,447 |
) |
Interest, net of amounts capitalized |
|
200,923 |
|
217,789 |
|
221,728 |
| |||
Significant non-cash investing and financing activities: |
|
|
|
|
|
|
| |||
Accrued capital expenditures |
|
$ |
26,208 |
|
$ |
27,245 |
|
$ |
19,226 |
|
Dividends declared but not paid |
|
59,789 |
|
— |
|
— |
|
|
The following table shows the changes in the deferred fuel and purchased power regulatory asset (liability) for 2012 and 2011 (dollars in millions):
|
|
Twelve Months Ended |
| ||||
|
|
2012 |
|
2011 |
| ||
Beginning balance |
|
$ |
28 |
|
$ |
(58 |
) |
Deferred fuel and purchased power costs — current period |
|
(72 |
) |
(69 |
) | ||
Amounts credited to customers |
|
117 |
|
155 |
| ||
Ending balance |
|
$ |
73 |
|
$ |
28 |
|
The detail of regulatory assets is as follows (dollars in millions):
|
|
Remaining |
|
December 31, 2012 |
|
December 31, 2011 |
| ||||||||
|
|
Period |
|
Current |
|
Non-Current |
|
Current |
|
Non-Current |
| ||||
Pension and other postretirement benefits |
|
(a) |
|
$ |
— |
|
$ |
780 |
|
$ |
— |
|
$ |
1,023 |
|
Income taxes — AFUDC equity |
|
2042 |
|
4 |
|
92 |
|
3 |
|
81 |
| ||||
Deferred fuel and purchased power — mark-to-market (Note 18) |
|
2016 |
|
19 |
|
21 |
|
43 |
|
34 |
| ||||
Transmission vegetation management |
|
2016 |
|
9 |
|
23 |
|
9 |
|
32 |
| ||||
Coal reclamation |
|
2026 |
|
8 |
|
24 |
|
2 |
|
35 |
| ||||
Palo Verde VIEs (Note 20) |
|
2046 |
|
— |
|
38 |
|
— |
|
35 |
| ||||
Deferred compensation |
|
2036 |
|
— |
|
34 |
|
— |
|
33 |
| ||||
Deferred fuel and purchased power (b) (c) |
|
2013 |
|
73 |
|
— |
|
28 |
|
— |
| ||||
Tax expense of Medicare subsidy |
|
2024 |
|
2 |
|
17 |
|
2 |
|
18 |
| ||||
Loss on reacquired debt |
|
2034 |
|
2 |
|
18 |
|
1 |
|
19 |
| ||||
Income taxes — investment tax credit basis adjustment |
|
2042 |
|
1 |
|
26 |
|
— |
|
15 |
| ||||
Pension and other postretirement benefits deferral |
|
2015 |
|
8 |
|
13 |
|
— |
|
12 |
| ||||
Other |
|
Various |
|
18 |
|
14 |
|
9 |
|
15 |
| ||||
Total regulatory assets (d) |
|
|
|
$ |
144 |
|
$ |
1,100 |
|
$ |
97 |
|
$ |
1,352 |
|
(a) This asset represents the future recovery of under-funded pension and other postretirement benefits obligation through retail rates. If these costs are disallowed by the ACC, this regulatory asset would be charged to OCI and result in lower future revenues.
(b) See “Cost Recovery Mechanisms” discussion above.
(c) Subject to a carrying charge.
(d) There are no regulatory assets for which the ACC has allowed recovery of costs but not allowed a return by exclusion from rate base. FERC rates are set using a formula rate as described in “Transmission Rates and Transmission Cost Adjustor.”
The detail of regulatory liabilities is as follows (dollars in millions):
|
|
Remaining |
|
December 31, 2012 |
|
December 31, 2011 |
| ||||||||
|
|
Period |
|
Current |
|
Non-Current |
|
Current |
|
Non-Current |
| ||||
Removal costs |
|
(a) |
|
$ |
27 |
|
$ |
321 |
|
$ |
22 |
|
$ |
349 |
|
Asset retirement obligations |
|
(a) |
|
— |
|
256 |
|
— |
|
225 |
| ||||
Renewable energy standard (b) |
|
2013 |
|
43 |
|
— |
|
54 |
|
— |
| ||||
Income taxes — change in rates |
|
2042 |
|
— |
|
66 |
|
— |
|
59 |
| ||||
Spent nuclear fuel |
|
2047 |
|
10 |
|
36 |
|
5 |
|
44 |
| ||||
Deferred gains on utility property |
|
2019 |
|
2 |
|
12 |
|
2 |
|
14 |
| ||||
Income taxes- deferred investment tax credit |
|
2042 |
|
2 |
|
52 |
|
1 |
|
30 |
| ||||
Other |
|
Various |
|
4 |
|
16 |
|
4 |
|
16 |
| ||||
Total regulatory liabilities |
|
|
|
$ |
88 |
|
$ |
759 |
|
$ |
88 |
|
$ |
737 |
|
(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 (see Note 12).
(b) See “Cost Recovery Mechanisms” discussion above.
|
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits, excluding interest and penalties, at the beginning and end of the year that are included in accrued taxes and unrecognized tax benefits (dollars in thousands):
|
|
2012 |
|
2011 |
|
2010 |
| |||
Total unrecognized tax benefits, January 1 |
|
$ |
136,005 |
|
$ |
127,595 |
|
$ |
201,216 |
|
Additions for tax positions of the current year |
|
5,167 |
|
10,915 |
|
7,551 |
| |||
Reductions for tax positions of prior years for: |
|
|
|
|
|
|
| |||
Changes in judgment |
|
(7,729 |
) |
(1,555 |
) |
(11,017 |
) | |||
Settlements with taxing authorities |
|
— |
|
(124 |
) |
(62,199 |
) | |||
Lapses of applicable statute of limitations |
|
(21 |
) |
(826 |
) |
(7,956 |
) | |||
Total unrecognized tax benefits, December 31 |
|
$ |
133,422 |
|
$ |
136,005 |
|
$ |
127,595 |
|
The components of income tax expense are as follows (dollars in thousands):
|
|
Year Ended December 31, |
| |||||||
|
|
2012 |
|
2011 |
|
2010 |
| |||
Current: |
|
|
|
|
|
|
| |||
Federal |
|
$ |
(3,493 |
) |
$ |
(310 |
) |
$ |
(108,827 |
) |
State |
|
8,395 |
|
15,140 |
|
25,545 |
| |||
Total current |
|
4,902 |
|
14,830 |
|
(83,282 |
) | |||
Deferred: |
|
|
|
|
|
|
| |||
Federal |
|
200,322 |
|
159,566 |
|
260,236 |
| |||
State |
|
28,280 |
|
16,626 |
|
10,911 |
| |||
Discontinued operations |
|
— |
|
— |
|
(10,736 |
) | |||
Total deferred |
|
228,602 |
|
176,192 |
|
260,411 |
| |||
Total income tax expense |
|
233,504 |
|
191,022 |
|
177,129 |
| |||
Less: income tax expense (benefit) on discontinued operations |
|
(3,813 |
) |
7,418 |
|
16,260 |
| |||
Income tax expense — continuing operations |
|
$ |
237,317 |
|
$ |
183,604 |
|
$ |
160,869 |
|
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, |
| |||||||
|
|
2012 |
|
2011 |
|
2010 |
| |||
|
|
|
|
|
|
|
| |||
Federal income tax expense at 35% statutory rate |
|
$ |
229,709 |
|
$ |
188,733 |
|
$ |
177,002 |
|
Increases (reductions) in tax expense resulting from: State income tax net of federal income tax benefit |
|
23,819 |
|
19,594 |
|
17,485 |
| |||
Credits and favorable adjustments related to prior years resolved in current year |
|
— |
|
— |
|
(17,300 |
) | |||
Medicare Subsidy Part-D |
|
483 |
|
823 |
|
1,311 |
| |||
Allowance for equity funds used during construction (see Note 1) |
|
(6,158 |
) |
(6,881 |
) |
(6,563 |
) | |||
Palo Verde VIE noncontrolling interest (see Note 20) |
|
(11,065 |
) |
(9,636 |
) |
(7,057 |
) | |||
Other |
|
529 |
|
(9,029 |
) |
(4,009 |
) | |||
Income tax expense — continuing operations |
|
$ |
237,317 |
|
$ |
183,604 |
|
$ |
160,869 |
|
The following table shows the net deferred income tax liability recognized on the Consolidated Balance Sheets (dollars in thousands):
|
|
December 31, |
| ||||
|
|
2012 |
|
2011 |
| ||
Current asset |
|
$ |
152,191 |
|
$ |
130,571 |
|
Long-term liability |
|
(2,151,371 |
) |
(1,925,388 |
) | ||
Deferred income taxes — net |
|
$ |
(1,999,180 |
) |
$ |
(1,794,817 |
) |
The components of the net deferred income tax liability were as follows (dollars in thousands):
|
|
December 31, |
| ||||
|
|
2012 |
|
2011 |
| ||
DEFERRED TAX ASSETS |
|
|
|
|
| ||
Risk management activities |
|
$ |
72,243 |
|
$ |
117,765 |
|
Regulatory liabilities: |
|
|
|
|
| ||
Asset retirement obligation and removal costs |
|
238,669 |
|
236,739 |
| ||
Renewable energy standard |
|
— |
|
19,722 |
| ||
Unamortized investment tax credits |
|
53,837 |
|
31,460 |
| ||
Other |
|
33,764 |
|
33,155 |
| ||
Pension and other postretirement liabilities |
|
408,764 |
|
501,202 |
| ||
Renewable energy incentives |
|
66,941 |
|
57,901 |
| ||
Credit and loss carryforwards |
|
139,022 |
|
171,915 |
| ||
Other |
|
68,844 |
|
73,759 |
| ||
Total deferred tax assets |
|
1,082,084 |
|
1,243,618 |
| ||
DEFERRED TAX LIABILITIES |
|
|
|
|
| ||
Plant-related |
|
(2,584,166 |
) |
(2,446,908 |
) | ||
Risk management activities |
|
(23,940 |
) |
(30,171 |
) | ||
Regulatory assets: |
|
|
|
|
| ||
Allowance for equity funds used during construction |
|
(37,899 |
) |
(33,347 |
) | ||
Deferred fuel and purchased power |
|
(28,858 |
) |
(10,884 |
) | ||
Deferred fuel and purchased power — mark-to-market |
|
(15,796 |
) |
(30,559 |
) | ||
Pension and other postretirement benefits |
|
(316,757 |
) |
(408,716 |
) | ||
Other |
|
(68,170 |
) |
(73,087 |
) | ||
Other |
|
(5,678 |
) |
(4,763 |
) | ||
Total deferred tax liabilities |
|
(3,081,264 |
) |
(3,038,435 |
) | ||
Deferred income taxes — net |
|
$ |
(1,999,180 |
) |
$ |
(1,794,817 |
) |
|
The table below presents the consolidated credit facilities and the amounts available and outstanding as of December 31, 2012 (dollars in millions):
Credit Facility |
|
Expiration |
|
Amount |
|
Unused |
|
Commitment |
| ||
Pinnacle West Revolving Credit Facility |
|
November 2016 |
|
$ |
200 |
|
$ |
200 |
|
0.225 |
% |
|
|
|
|
|
|
|
|
|
| ||
APS Revolving Credit Facility |
|
November 2016 |
|
500 |
|
408 |
|
0.175 |
% | ||
|
|
|
|
|
|
|
|
|
| ||
APS Revolving Credit Facility |
|
February 2015 |
|
500 |
|
500 |
|
0.20 |
% | ||
Total |
|
|
|
$ |
1,200 |
|
$ |
1,108 |
|
|
|
(a) At December 31, 2012, APS had $92 million of outstanding commercial paper. Accordingly, at such date the total combined amount available under its two $500 million credit facilities was $908 million.
The table below presents the consolidated credit facilities and the amounts available and outstanding as of December 31, 2011 (dollars in millions):
Credit Facility |
|
Expiration |
|
Amount |
|
Unused |
|
Commitment |
| ||
Pinnacle West Revolving Credit Facility |
|
November 2016 |
|
$ |
200 |
|
$ |
200 |
|
0.275 |
% |
|
|
|
|
|
|
|
|
|
| ||
APS Revolving Credit Facility |
|
November 2016 |
|
500 |
|
500 |
|
0.225 |
% | ||
|
|
|
|
|
|
|
|
|
| ||
APS Revolving Credit Facility |
|
February 2015 |
|
500 |
|
500 |
|
0.250 |
% | ||
Total |
|
|
|
$ |
1,200 |
|
$ |
1,200 |
|
|
|
(a) These facilities were also fully available as of December 31, 2011.
|
All of Pinnacle West’s and APS’s debt is unsecured. The following table presents the components of long-term debt on the Consolidated Balance Sheets outstanding at December 31, 2012 and 2011 (dollars in thousands):
|
|
Maturity |
|
Interest |
|
December 31, |
| ||||
|
|
Dates (a) |
|
Rates |
|
2012 |
|
2011 |
| ||
APS |
|
|
|
|
|
|
|
|
| ||
Pollution Control Bonds: |
|
|
|
|
|
|
|
|
| ||
Variable |
|
2029-2038 |
|
(b) |
|
$ |
75,580 |
|
$ |
43,580 |
|
Fixed |
|
2024-2034 |
|
1.25%-6.00% |
|
490,275 |
|
522,275 |
| ||
Pollution control bonds with senior notes |
|
|
|
5.05% |
|
— |
|
90,000 |
| ||
Total Pollution Control Bonds |
|
|
|
|
|
565,855 |
|
655,855 |
| ||
Senior unsecured notes |
|
2014-2042 |
|
4.50%-8.75% |
|
2,575,000 |
|
2,625,000 |
| ||
Palo Verde sale leaseback lessor notes |
|
2015 |
|
8.00% |
|
65,547 |
|
96,803 |
| ||
Capitalized lease obligations |
|
|
|
(c) |
|
— |
|
1,029 |
| ||
Unamortized discount |
|
|
|
|
|
(9,486 |
) |
(7,198 |
) | ||
Total APS long-term debt |
|
|
|
|
|
3,196,916 |
|
3,371,489 |
| ||
Less current maturities |
|
|
|
|
|
122,828 |
|
477,435 |
| ||
Total APS long-term debt less current maturities |
|
|
|
|
|
3,074,088 |
|
2,894,054 |
| ||
Pinnacle West |
|
|
|
|
|
|
|
|
| ||
Term loan |
|
2015 |
|
(d) |
|
125,000 |
|
125,000 |
| ||
TOTAL LONG-TERM DEBT LESS CURRENT MATURITIES |
|
|
|
|
|
$ |
3,199,088 |
|
$ |
3,019,054 |
|
(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 0.13%-0.15% at December 31, 2012 and 0.09% at December 31, 2011.
(c) The weighted-average interest rate was 5.27% at December 31, 2011.
(d) The weighted-average interest rate was 1.312% at December 31, 2012 and 1.794% at December 31, 2011.
The following table shows principal payments due on Pinnacle West’s and APS’s total long-term debt (dollars in millions):
Year |
|
Consolidated |
|
Consolidated |
| ||
2013 |
|
$ |
123 |
|
$ |
123 |
|
2014 |
|
540 |
|
540 |
| ||
2015 |
|
470 |
|
345 |
| ||
2016 |
|
358 |
|
358 |
| ||
2017 |
|
— |
|
— |
| ||
Thereafter |
|
1,840 |
|
1,840 |
| ||
Total |
|
$ |
3,331 |
|
$ |
3,206 |
|
The following table represents the estimated fair value of our long-term debt, including current maturities (dollars in millions):
|
|
As of |
|
As of |
| ||||||||
|
|
Carrying |
|
Fair Value |
|
Carrying |
|
Fair Value |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Pinnacle West |
|
$ |
125 |
|
$ |
125 |
|
$ |
125 |
|
$ |
123 |
|
APS |
|
3,197 |
|
3,750 |
|
3,371 |
|
3,803 |
| ||||
Total |
|
$ |
3,322 |
|
$ |
3,875 |
|
$ |
3,496 |
|
$ |
3,926 |
|
|
Our common stock and treasury stock activity during each of the three years 2012, 2011 and 2010 is as follows (dollars in thousands):
|
|
Common Stock |
|
Treasury Stock |
| ||||||
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
| ||
Balance at December 31, 2009 |
|
101,527,937 |
|
$ |
2,153,295 |
|
(93,239 |
) |
$ |
(3,812 |
) |
|
|
|
|
|
|
|
|
|
| ||
Common stock issuance (a) |
|
7,292,130 |
|
268,077 |
|
— |
|
— |
| ||
Purchase of treasury stock (b) |
|
— |
|
— |
|
(1,994 |
) |
(82 |
) | ||
Reissuance of treasury stock for stock compensation |
|
— |
|
— |
|
44,823 |
|
1,655 |
| ||
Balance at December 31, 2010 |
|
108,820,067 |
|
2,421,372 |
|
(50,410 |
) |
(2,239 |
) | ||
|
|
|
|
|
|
|
|
|
| ||
Common stock issuance |
|
536,907 |
|
22,875 |
|
— |
|
— |
| ||
Purchase of treasury stock (b) |
|
— |
|
— |
|
(88,440 |
) |
(3,720 |
) | ||
Reissuance of treasury stock for stock compensation |
|
— |
|
— |
|
27,689 |
|
1,242 |
| ||
Balance at December 31, 2011 |
|
109,356,974 |
|
2,444,247 |
|
(111,161 |
) |
(4,717 |
) | ||
|
|
|
|
|
|
|
|
|
| ||
Common stock issuance |
|
480,983 |
|
22,676 |
|
— |
|
— |
| ||
Purchase of treasury stock (b) |
|
— |
|
— |
|
(89,629 |
) |
(4,607 |
) | ||
Reissuance of treasury stock for stock compensation |
|
— |
|
— |
|
105,598 |
|
5,113 |
| ||
Balance at December 31, 2012 |
|
109,837,957 |
|
$ |
2,466,923 |
|
(95,192 |
) |
$ |
(4,211 |
) |
(a) In April 2010, Pinnacle West issued 6,900,000 shares of common stock at an offering price of $38.00 per share, resulting in net proceeds of approximately $253 million. Pinnacle West contributed all of the net proceeds from this offering into APS in the form of equity infusions. APS has used these contributions to repay short-term indebtedness, to finance capital expenditures and for other general corporate purposes.
(b) Primarily represents shares of common stock withheld from certain stock awards for tax purposes.
|
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, billed to electric plant participants or charged to the regulatory asset) (dollars in thousands):
|
|
Pension |
|
Other Benefits |
| ||||||||||||||
|
|
2012 |
|
2011 |
|
2010 |
|
2012 |
|
2011 |
|
2010 |
| ||||||
Service cost-benefits earned during the period |
|
$ |
63,502 |
|
$ |
57,605 |
|
$ |
59,064 |
|
$ |
27,163 |
|
$ |
21,856 |
|
$ |
19,236 |
|
Interest cost on benefit obligation |
|
119,586 |
|
124,727 |
|
122,724 |
|
46,467 |
|
46,807 |
|
42,428 |
| ||||||
Expected return on plan assets |
|
(140,979 |
) |
(133,678 |
) |
(124,161 |
) |
(45,793 |
) |
(41,536 |
) |
(39,257 |
) | ||||||
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Transition obligation |
|
— |
|
— |
|
— |
|
452 |
|
452 |
|
452 |
| ||||||
Prior service cost (credit) |
|
1,143 |
|
1,400 |
|
1,705 |
|
(179 |
) |
(179 |
) |
(539 |
) | ||||||
Net actuarial loss |
|
44,250 |
|
25,956 |
|
18,833 |
|
20,233 |
|
15,015 |
|
10,317 |
| ||||||
Net periodic benefit cost |
|
$ |
87,502 |
|
$ |
76,010 |
|
$ |
78,165 |
|
$ |
48,343 |
|
$ |
42,415 |
|
$ |
32,637 |
|
Portion of cost charged to expense |
|
$ |
36,333 |
|
$ |
29,312 |
|
$ |
37,933 |
|
$ |
19,321 |
|
$ |
15,208 |
|
$ |
15,839 |
|
The following table shows the plans’ changes in the benefit obligations and funded status for the years 2012 and 2011 (dollars in thousands):
|
|
Pension |
|
Other Benefits |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Change in Benefit Obligation |
|
|
|
|
|
|
|
|
| ||||
Benefit obligation at January 1 |
|
$ |
2,699,126 |
|
$ |
2,345,060 |
|
$ |
1,047,094 |
|
$ |
827,897 |
|
Service cost |
|
63,502 |
|
57,605 |
|
27,163 |
|
21,856 |
| ||||
Interest cost |
|
119,586 |
|
124,727 |
|
46,467 |
|
46,807 |
| ||||
Benefit payments |
|
(113,632 |
) |
(104,257 |
) |
(26,279 |
) |
(24,877 |
) | ||||
Actuarial (gain) loss |
|
82,264 |
|
275,991 |
|
(104,027 |
) |
171,674 |
| ||||
Plan amendments |
|
— |
|
— |
|
— |
|
3,737 |
| ||||
Benefit obligation at December 31 |
|
2,850,846 |
|
2,699,126 |
|
990,418 |
|
1,047,094 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Change in Plan Assets |
|
|
|
|
|
|
|
|
| ||||
Fair value of plan assets at January 1 |
|
1,850,550 |
|
1,775,596 |
|
608,663 |
|
567,410 |
| ||||
Actual return on plan assets |
|
259,363 |
|
162,042 |
|
83,567 |
|
58,367 |
| ||||
Employer contributions |
|
65,000 |
|
— |
|
22,707 |
|
18,769 |
| ||||
Benefit payments |
|
(95,732 |
) |
(87,088 |
) |
(30,716 |
) |
(35,883 |
) | ||||
Fair value of plan assets at December 31 |
|
2,079,181 |
|
1,850,550 |
|
684,221 |
|
608,663 |
| ||||
Funded Status at December 31 |
|
$ |
(771,665 |
) |
$ |
(848,576 |
) |
$ |
(306,197 |
) |
$ |
(438,431 |
) |
The following table shows the projected benefit obligation and the accumulated benefit obligation for pension plans with an accumulated obligation in excess of plan assets as of December 31, 2012 and 2011 (dollars in thousands):
|
|
2012 |
|
2011 |
| ||
Projected benefit obligation |
|
$ |
2,850,846 |
|
$ |
2,699,126 |
|
Accumulated benefit obligation |
|
2,646,306 |
|
2,396,575 |
| ||
Fair value of plan assets |
|
2,079,181 |
|
1,850,550 |
| ||
The following table shows the amounts recognized on the Consolidated Balance Sheets as of December 31, 2012 and 2011 (dollars in thousands):
|
|
Pension |
|
Other Benefits |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Current liability |
|
$ |
(19,107 |
) |
$ |
(18,097 |
) |
$ |
— |
|
$ |
— |
|
Noncurrent liability |
|
(752,558 |
) |
(830,479 |
) |
(306,197 |
) |
(438,431 |
) | ||||
Net amount recognized |
|
$ |
(771,665 |
) |
$ |
(848,576 |
) |
$ |
(306,197 |
) |
$ |
(438,431 |
) |
The following table shows the details related to accumulated other comprehensive loss as of December 31, 2012 and 2011 (dollars in thousands):
|
|
Pension |
|
Other Benefits |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Net actuarial loss |
|
$ |
644,239 |
|
$ |
724,605 |
|
$ |
238,862 |
|
$ |
400,892 |
|
Prior service cost (credit) |
|
3,169 |
|
4,312 |
|
(475 |
) |
(655 |
) | ||||
Transition obligation |
|
— |
|
— |
|
— |
|
452 |
| ||||
APS’s portion recorded as a regulatory asset |
|
(550,471 |
) |
(632,099 |
) |
(230,020 |
) |
(390,521 |
) | ||||
Income tax benefit |
|
(38,303 |
) |
(38,243 |
) |
(2,585 |
) |
(3,296 |
) | ||||
Accumulated other comprehensive loss |
|
$ |
58,634 |
|
$ |
58,575 |
|
$ |
5,782 |
|
$ |
6,872 |
|
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 2012 (dollars in thousands):
|
|
Pension |
|
Other |
| ||
Net actuarial loss |
|
$ |
37,574 |
|
$ |
12,236 |
|
Prior service cost (credit) |
|
1,097 |
|
(179 |
) | ||
Total amounts estimated to be amortized from accumulated other comprehensive loss and regulatory assets in 2013 |
|
$ |
38,671 |
|
$ |
12,057 |
|
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 |
| ||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
|
2010 |
|
Discount rate-pension |
|
4.01 |
% |
4.42 |
% |
4.42 |
% |
5.31 |
% |
5.90 |
% |
Discount rate-other benefits |
|
4.20 |
% |
4.59 |
% |
4.59 |
% |
5.49 |
% |
6.00 |
% |
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 |
|
7.75 |
% |
7.75 |
% |
8.25 |
% |
Initial health care cost trend rate |
|
7.50 |
% |
7.50 |
% |
7.50 |
% |
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 |
|
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 |
|
$ |
14 |
|
$ |
(11 |
) |
Effect on service and interest cost components of net periodic other postretirement benefit costs |
|
17 |
|
(13 |
) | ||
Effect on the accumulated other postretirement benefit obligation |
|
172 |
|
(136 |
) | ||
The fair value of Pinnacle West’s pension plan and other postretirement benefit plan assets at December 31, 2012, by asset category, are as follows (dollars in thousands):
|
|
Quoted Prices |
|
Significant |
|
Significant |
|
Other (c) |
|
Balance at |
| |||||
Pension Plan: |
|
|
|
|
|
|
|
|
|
|
| |||||
Assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
|
$ |
579 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
579 |
|
Fixed Income Securities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Corporate |
|
— |
|
607,749 |
|
— |
|
— |
|
607,749 |
| |||||
U.S. Treasury |
|
232,161 |
|
— |
|
— |
|
— |
|
232,161 |
| |||||
Other (b) |
|
— |
|
67,992 |
|
— |
|
— |
|
67,992 |
| |||||
Equities: |
|
|
|
|
|
|
|
|
|
|
| |||||
U.S. Companies |
|
531,291 |
|
— |
|
— |
|
— |
|
531,291 |
| |||||
International Companies |
|
43,848 |
|
— |
|
— |
|
— |
|
43,848 |
| |||||
Common and collective trusts: |
|
|
|
|
|
|
|
|
|
|
| |||||
U.S. Equities |
|
— |
|
176,694 |
|
— |
|
— |
|
176,694 |
| |||||
International Equities |
|
— |
|
271,735 |
|
— |
|
— |
|
271,735 |
| |||||
Real estate |
|
— |
|
117,854 |
|
— |
|
— |
|
117,854 |
| |||||
Short-term investments and other |
|
— |
|
26,922 |
|
2,419 |
(a) |
(63 |
) |
29,278 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total Pension Plan |
|
$ |
807,879 |
|
$ |
1,268,946 |
|
$ |
2,419 |
|
$ |
(63 |
) |
$ |
2,079,181 |
|
Other Benefits: |
|
|
|
|
|
|
|
|
|
|
| |||||
Assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
|
$ |
60 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
60 |
|
Fixed Income Securities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Corporate |
|
— |
|
163,306 |
|
— |
|
— |
|
163,306 |
| |||||
U.S. Treasury |
|
112,558 |
|
— |
|
— |
|
— |
|
112,558 |
| |||||
Other (b) |
|
— |
|
33,998 |
|
— |
|
— |
|
33,998 |
| |||||
Equities: |
|
|
|
|
|
|
|
|
|
|
| |||||
U.S. Companies |
|
205,714 |
|
— |
|
— |
|
— |
|
205,714 |
| |||||
International Companies |
|
14,412 |
|
— |
|
— |
|
— |
|
14,412 |
| |||||
Common and collective trusts: |
|
|
|
|
|
|
|
|
|
|
| |||||
U.S. Equities |
|
— |
|
60,038 |
|
— |
|
— |
|
60,038 |
| |||||
International Equities |
|
— |
|
76,969 |
|
— |
|
— |
|
76,969 |
| |||||
Real Estate |
|
— |
|
9,378 |
|
— |
|
— |
|
9,378 |
| |||||
Short-term investments and other |
|
402 |
|
6,340 |
|
— |
|
1,046 |
|
7,788 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total Other Benefits |
|
$ |
333,146 |
|
$ |
350,029 |
|
$ |
— |
|
$ |
1,046 |
|
$ |
684,221 |
|
(a) Represents investments in a partnership that invests in privately held portfolio companies.
(b) This category consists primarily of debt securities issued by municipalities.
(c) Represents plan receivables and payables.
The fair value of Pinnacle West’s pension plan and other postretirement benefit plan assets at December 31, 2011, by asset category, are as follows (dollars in thousands):
|
|
Quoted Prices |
|
Significant |
|
Other (a) |
|
Balance at |
| ||||
Pension Plan: |
|
|
|
|
|
|
|
|
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
|
$ |
1,441 |
|
$ |
— |
|
$ |
— |
|
$ |
1,441 |
|
Fixed Income Securities: |
|
|
|
|
|
|
|
|
| ||||
Corporate |
|
— |
|
584,619 |
|
— |
|
584,619 |
| ||||
U.S. Treasury |
|
207,862 |
|
— |
|
— |
|
207,862 |
| ||||
Other (b) |
|
— |
|
62,906 |
|
— |
|
62,906 |
| ||||
Equities: |
|
|
|
|
|
|
|
|
| ||||
U.S. Companies |
|
436,393 |
|
— |
|
— |
|
436,393 |
| ||||
International Companies |
|
118,263 |
|
— |
|
— |
|
118,263 |
| ||||
Common and collective trusts: |
|
|
|
|
|
|
|
|
| ||||
U.S. Equities |
|
— |
|
139,321 |
|
— |
|
139,321 |
| ||||
International Equities |
|
— |
|
156,407 |
|
— |
|
156,407 |
| ||||
Real estate |
|
— |
|
106,147 |
|
— |
|
106,147 |
| ||||
Short-term investments and other |
|
— |
|
29,913 |
|
7,278 |
|
37,191 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total Pension Plan |
|
$ |
763,959 |
|
$ |
1,079,313 |
|
$ |
7,278 |
|
$ |
1,850,550 |
|
Other Benefits: |
|
|
|
|
|
|
|
|
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
|
$ |
160 |
|
$ |
— |
|
$ |
— |
|
$ |
160 |
|
Fixed Income Securities: |
|
|
|
|
|
|
|
|
| ||||
Corporate |
|
— |
|
148,417 |
|
— |
|
148,417 |
| ||||
U.S. Treasury |
|
103,321 |
|
— |
|
— |
|
103,321 |
| ||||
Other (b) |
|
— |
|
30,105 |
|
— |
|
30,105 |
| ||||
Equities: |
|
|
|
|
|
|
|
|
| ||||
U.S. Companies |
|
179,235 |
|
— |
|
— |
|
179,235 |
| ||||
International Companies |
|
22,486 |
|
— |
|
— |
|
22,486 |
| ||||
Common and collective trusts: |
|
|
|
|
|
|
|
|
| ||||
U.S. Equities |
|
— |
|
52,507 |
|
— |
|
52,507 |
| ||||
International Equities |
|
— |
|
53,504 |
|
— |
|
53,504 |
| ||||
Real Estate |
|
— |
|
8,446 |
|
— |
|
8,446 |
| ||||
Short-term investments and other |
|
— |
|
8,516 |
|
1,966 |
|
10,482 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total Other Benefits |
|
$ |
305,202 |
|
$ |
301,495 |
|
$ |
1,966 |
|
$ |
608,663 |
|
(a) Represents plan receivables and payables.
(b) This category consists primarily of debt securities issued by municipalities.
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, 2012 (dollars in thousands):
Short-Term Investments and Other |
|
Pension |
| |
Beginning balance at January 1, 2012 |
|
$ |
— |
|
Actual return on assets still held at December 31, 2012 |
|
(668 |
) | |
Purchases, sales, and settlements |
|
3,087 |
| |
Transfers in and/or out of Level 3 |
|
— |
| |
Ending balance at December 31, 2012 |
|
$ |
2,419 |
|
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 |
| ||
2013 |
|
$ |
126,091 |
|
$ |
26,934 |
|
2014 |
|
135,602 |
|
29,870 |
| ||
2015 |
|
145,438 |
|
32,929 |
| ||
2016 |
|
155,774 |
|
35,893 |
| ||
2017 |
|
165,535 |
|
38,765 |
| ||
Years 2018-2022 |
|
971,362 |
|
235,170 |
| ||
|
Estimated future minimum lease payments for Pinnacle West’s and APS’s operating leases, excluding purchased power agreements, are approximately as follows (dollars in millions):
Year |
|
Pinnacle West |
|
APS |
| ||
2013 |
|
$ |
21 |
|
$ |
18 |
|
2014 |
|
17 |
|
15 |
| ||
2015 |
|
15 |
|
12 |
| ||
2016 |
|
4 |
|
4 |
| ||
2017 |
|
3 |
|
3 |
| ||
Thereafter |
|
41 |
|
40 |
| ||
Total future lease commitments |
|
$ |
101 |
|
$ |
92 |
|
|
The following table shows APS’s interests in those jointly-owned facilities recorded on the Consolidated Balance Sheets at December 31, 2012 (dollars in thousands):
|
|
Percent |
|
Plant in |
|
Accumulated |
|
Construction |
| |||
Generating facilities: |
|
|
|
|
|
|
|
|
| |||
Palo Verde Units 1 and 3 |
|
29.1 |
% |
$ |
1,717,970 |
|
$ |
1,006,615 |
|
$ |
15,122 |
|
Palo Verde Unit 2 (a) |
|
16.8 |
% |
555,132 |
|
324,063 |
|
4,125 |
| |||
Palo Verde Common |
|
28.0 |
%(b) |
516,950 |
|
223,632 |
|
83,365 |
| |||
Palo Verde Sale Leaseback |
|
|
(a) |
351,050 |
|
222,055 |
|
— |
| |||
Four Corners Units 4 and 5 |
|
15.0 |
% |
167,390 |
|
36,311 |
|
3,040 |
| |||
Four Corners Common |
|
38.4 |
%(b) |
58,810 |
|
17,930 |
|
1,512 |
| |||
Navajo Generating Station Units 1, 2 and 3 |
|
14.0 |
% |
269,792 |
|
141,914 |
|
2,368 |
| |||
Cholla common facilities (c) |
|
63.3 |
% (b) |
146,571 |
|
43,815 |
|
1,680 |
| |||
Transmission facilities: |
|
|
|
|
|
|
|
|
| |||
ANPP 500kV System |
|
33.3 |
%(b) |
82,490 |
|
31,511 |
|
1,607 |
| |||
Navajo Southern System |
|
22.2 |
%(b) |
55,427 |
|
15,815 |
|
561 |
| |||
Palo Verde — Yuma 500kV System |
|
18.3 |
%(b) |
11,761 |
|
4,493 |
|
797 |
| |||
Four Corners Switchyards |
|
37.0 |
%(b) |
20,874 |
|
6,033 |
|
1,466 |
| |||
Phoenix — Mead System |
|
17.1 |
%(b) |
39,772 |
|
11,553 |
|
— |
| |||
Palo Verde — Estrella 500kV System |
|
50.0 |
%(b) |
85,643 |
|
13,309 |
|
4,137 |
| |||
Morgan — Pinnacle Peak System |
|
64.1 |
%(b) |
133,073 |
|
3,751 |
|
331 |
| |||
Round Valley System |
|
50.0 |
%(b) |
488 |
|
261 |
|
— |
| |||
(a) See Note 20.
(b) Weighted-average of interests.
(c) PacifiCorp owns Cholla Unit 4 and APS operates the unit for PacifiCorp. The common facilities at Cholla are jointly-owned.
|
The following table summarizes our estimated coal take-or-pay commitments (dollars in millions):
|
|
Years Ended December 31, |
| ||||||||||||||||
|
|
2013 |
|
2014 |
|
2015 |
|
2016 |
|
2017 |
|
Thereafter |
| ||||||
Coal take-or-pay commitments (a) |
|
$ |
90 |
|
$ |
93 |
|
$ |
96 |
|
$ |
63 |
|
$ |
27 |
|
$ |
121 |
|
(a) Total take-or-pay commitments are approximately $490 million. The total net present value of these commitments is approximately $375 million.
The following table summarizes the actual amounts purchased under the coal contracts which include take-or-pay provisions for each of the last three years (dollars in millions):
|
|
Year Ended December 31, |
| |||||||
|
|
2012 |
|
2011 |
|
2010 |
| |||
Total purchases |
|
$ |
196 |
|
$ |
191 |
|
$ |
156 |
|
|
The following schedule shows the change in our asset retirement obligations for 2012 and 2011 (dollars in millions):
|
|
2012 |
|
2011 |
| ||
Asset retirement obligations at the beginning of year |
|
$ |
280 |
|
$ |
329 |
|
Changes attributable to: |
|
|
|
|
| ||
Accretion expense |
|
19 |
|
19 |
| ||
Estimated cash flow revisions |
|
58 |
|
(68 |
) | ||
Asset retirement obligations at the end of year |
|
$ |
357 |
|
$ |
280 |
|
|
Consolidated quarterly financial information for 2012 and 2011 is as follows (dollars in thousands, except per share amounts):
|
|
2012 Quarter Ended |
|
2012 |
| |||||||||||
|
|
March 31, |
|
June 30, |
|
Sept. 30, |
|
Dec. 31, |
|
Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating revenues |
|
$ |
620,631 |
|
$ |
878,576 |
|
$ |
1,109,475 |
|
$ |
693,122 |
|
$ |
3,301,804 |
|
Operations and maintenance |
|
210,663 |
|
216,236 |
|
220,729 |
|
237,141 |
|
884,769 |
| |||||
Operating income |
|
48,007 |
|
254,489 |
|
447,970 |
|
101,289 |
|
851,755 |
| |||||
Income taxes |
|
(4,645 |
) |
76,689 |
|
147,116 |
|
18,157 |
|
237,317 |
| |||||
Income from continuing operations |
|
284 |
|
130,930 |
|
252,874 |
|
34,905 |
|
418,993 |
| |||||
Net income (loss) attributable to common shareholders |
|
(8,257 |
) |
122,345 |
|
244,823 |
|
22,631 |
|
381,542 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Earnings Per Share: |
|
|
|
|
|
|
|
|
|
|
| |||||
Income (loss) from continuing operations attributable to common shareholders — Basic |
|
$ |
(0.07 |
) |
$ |
1.12 |
|
$ |
2.23 |
|
$ |
0.24 |
|
$ |
3.54 |
|
Net income (loss) attributable to common shareholders — Basic |
|
(0.08 |
) |
1.12 |
|
2.23 |
|
0.21 |
|
3.48 |
| |||||
Income (loss) from continuing operations attributable to common shareholders — Diluted |
|
(0.07 |
) |
1.12 |
|
2.21 |
|
0.24 |
|
3.50 |
| |||||
Net income (loss) attributable to common shareholders — Diluted |
|
(0.08 |
) |
1.11 |
|
2.21 |
|
0.20 |
|
3.45 |
|
|
|
2011 Quarter Ended |
|
2011 |
| |||||||||||
|
|
March 31, |
|
June 30, |
|
Sept. 30, |
|
Dec. 31, |
|
Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating revenues |
|
$ |
648,847 |
|
$ |
799,799 |
|
$ |
1,124,841 |
|
$ |
667,892 |
|
$ |
3,241,379 |
|
Operations and maintenance |
|
255,029 |
|
210,590 |
|
210,035 |
|
228,632 |
|
904,286 |
| |||||
Operating income |
|
35,784 |
|
196,992 |
|
435,017 |
|
78,715 |
|
746,508 |
| |||||
Income taxes |
|
(6,005 |
) |
50,818 |
|
131,416 |
|
7,375 |
|
183,604 |
| |||||
Income (loss) from continuing operations |
|
(10,368 |
) |
93,185 |
|
253,273 |
|
19,544 |
|
355,634 |
| |||||
Net income (loss) attributable to common shareholders |
|
(15,135 |
) |
86,685 |
|
255,359 |
|
12,564 |
|
339,473 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Earnings Per Share: |
|
|
|
|
|
|
|
|
|
|
| |||||
Income (loss) from continuing operations attributable to common shareholders — Basic |
|
$ |
(0.15 |
) |
$ |
0.79 |
|
$ |
2.25 |
|
$ |
0.11 |
|
$ |
3.01 |
|
Net income (loss) attributable to common shareholders — Basic |
|
(0.14 |
) |
0.80 |
|
2.34 |
|
0.12 |
|
3.11 |
| |||||
Income (loss) from continuing operations attributable to common shareholders — Diluted |
|
(0.15 |
) |
0.78 |
|
2.24 |
|
0.11 |
|
2.99 |
| |||||
Net income (loss) attributable to common shareholders — Diluted |
|
(0.14 |
) |
0.79 |
|
2.32 |
|
0.11 |
|
3.09 |
|
|
The following table presents the fair value at December 31, 2012 of our assets and liabilities that are measured at fair value on a recurring basis (dollars in millions):
|
|
Quoted Prices |
|
Significant |
|
Significant |
|
Other |
|
Balance at |
| |||||
Assets |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash equivalents |
|
$ |
16 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
16 |
|
Risk management activities — derivative instruments: |
|
|
|
|
|
|
|
|
|
|
| |||||
Commodity Contracts |
|
— |
|
22 |
|
62 |
|
(22 |
)(b) |
62 |
| |||||
Nuclear decommissioning trust: |
|
|
|
|
|
|
|
|
|
|
| |||||
U.S. commingled equity funds |
|
— |
|
204 |
|
— |
|
— |
|
204 |
| |||||
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
| |||||
U.S. Treasury |
|
104 |
|
— |
|
— |
|
— |
|
104 |
| |||||
Cash and cash equivalent funds |
|
6 |
|
13 |
|
— |
|
(4 |
)(c) |
15 |
| |||||
Corporate debt |
|
— |
|
80 |
|
— |
|
— |
|
80 |
| |||||
Mortgage-backed securities |
|
— |
|
83 |
|
— |
|
— |
|
83 |
| |||||
Municipality bonds |
|
— |
|
74 |
|
— |
|
— |
|
74 |
| |||||
Other |
|
— |
|
11 |
|
— |
|
— |
|
11 |
| |||||
Subtotal nuclear decommissioning trust |
|
110 |
|
465 |
|
— |
|
(4 |
) |
571 |
| |||||
Total |
|
$ |
126 |
|
$ |
487 |
|
$ |
62 |
|
$ |
(26 |
) |
$ |
649 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
| |||||
Risk management activities — derivative instruments: |
|
|
|
|
|
|
|
|
|
|
| |||||
Commodity contracts |
|
$ |
— |
|
$ |
(96 |
) |
$ |
(110 |
) |
$ |
47 |
(b) |
$ |
(159 |
) |
(a) Primarily consists of heat rate options and other long-dated electricity contracts.
(b) Represents counterparty netting, margin and collateral. See Note 18.
(c) Represents nuclear decommissioning trust net pending securities sales and purchases.
The following table presents the fair value at December 31, 2011 of our assets and liabilities that are measured at fair value on a recurring basis (dollars in millions):
|
|
Quoted Prices |
|
Significant |
|
Significant |
|
Other |
|
Balance at |
| |||||
Assets |
|
|
|
|
|
|
|
|
|
|
| |||||
Risk management activities-derivative instruments: |
|
|
|
|
|
|
|
|
|
|
| |||||
Commodity contracts |
|
$ |
— |
|
$ |
70 |
|
$ |
74 |
|
$ |
(64 |
)(b) |
$ |
80 |
|
Nuclear decommissioning trust: |
|
|
|
|
|
|
|
|
|
|
| |||||
U.S. commingled equity funds |
|
— |
|
175 |
|
— |
|
— |
|
175 |
| |||||
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
| |||||
U.S. Treasury |
|
69 |
|
— |
|
— |
|
— |
|
69 |
| |||||
Cash and cash equivalent funds |
|
— |
|
9 |
|
— |
|
(1 |
)(c) |
8 |
| |||||
Corporate debt |
|
— |
|
73 |
|
— |
|
— |
|
73 |
| |||||
Mortgage-backed securities |
|
— |
|
78 |
|
— |
|
— |
|
78 |
| |||||
Municipality bonds |
|
— |
|
90 |
|
— |
|
— |
|
90 |
| |||||
Other |
|
— |
|
21 |
|
— |
|
— |
|
21 |
| |||||
Subtotal nuclear decommissioning trust |
|
69 |
|
446 |
|
— |
|
(1 |
) |
514 |
| |||||
Total |
|
$ |
69 |
|
$ |
516 |
|
$ |
74 |
|
$ |
(65 |
) |
$ |
594 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
| |||||
Risk management activities — derivative instruments: |
|
|
|
|
|
|
|
|
|
|
| |||||
Commodity contracts |
|
$ |
— |
|
$ |
(241 |
) |
$ |
(125 |
) |
$ |
229 |
(b) |
$ |
(137 |
) |
(a) Primarily consists of heat rate options and other long-dated electricity contracts.
(b) Represents counterparty netting, margin and collateral. See Note 18.
(c) Represents nuclear decommissioning trust net pending securities sales and purchases.
The following table provides information regarding our significant unobservable inputs used to value our risk management derivative Level 3 instruments:
|
|
December 31, 2012 |
|
Valuation |
|
Significant |
|
|
|
Weighted- |
| |||||
Commodity Contracts |
|
Assets |
|
Liabilities |
|
Technique |
|
Unobservable Input |
|
Range |
|
Average |
| |||
Electricity: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Forward Contracts (a) |
|
$ |
57 |
|
$ |
82 |
|
Discounted cash flows |
|
Electricity forward price (per MWh) |
|
$23.06 - $64.20 |
|
$ |
43.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Option Contracts |
|
— |
|
27 |
|
Option model |
|
Electricity forward price (per MWh) |
|
$36.66 - $92.19 |
|
$ |
60.97 |
| ||
|
|
|
|
|
|
|
|
Natural gas forward price (per mmbtu) |
|
$4.10 - $4.25 |
|
$ |
4.20 |
| ||
|
|
|
|
|
|
|
|
Implied electricity price volatilities |
|
15% - 66% |
|
39 |
% | |||
|
|
|
|
|
|
|
|
Implied natural gas price volatilities |
|
17% - 36% |
|
23 |
% | |||
Natural Gas: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Forward Contracts (a) |
|
5 |
|
1 |
|
Discounted cash flows |
|
Natural gas forward price (per mmbtu) |
|
$3.25 - $4.44 |
|
$ |
3.93 |
| ||
Total |
|
$ |
62 |
|
$ |
110 |
|
|
|
|
|
|
|
|
|
(a) Includes swaps and physical and financial contracts.
The following table shows the changes in fair value for our risk management activities assets and liabilities that are measured at fair value on a recurring basis using Level 3 inputs for the years ended December 31, 2012 and 2011 (dollars in millions):
|
|
Year Ended |
| ||||
Commodity Contracts |
|
2012 |
|
2011 |
| ||
Net derivative balance at beginning of period |
|
$ |
(51 |
) |
$ |
(38 |
) |
Total net gains (losses) realized/unrealized: |
|
|
|
|
| ||
Included in earnings |
|
2 |
|
2 |
| ||
Included in OCI |
|
(3 |
) |
(5 |
) | ||
Deferred as a regulatory asset or liability |
|
7 |
|
(10 |
) | ||
Settlements |
|
(5 |
) |
11 |
| ||
Transfers into Level 3 from Level 2 |
|
(2 |
) |
(4 |
) | ||
Transfers from Level 3 into Level 2 |
|
4 |
|
(7 |
) | ||
Net derivative balance at end of period |
|
$ |
(48 |
) |
$ |
(51 |
) |
|
|
|
|
|
| ||
Net unrealized gains included in earnings related to instruments still held at end of period |
|
$ |
— |
|
$ |
1 |
|
|
|
|
2012 |
|
2011 |
|
2010 |
| |||
Units granted |
|
202,278 |
|
292,242 |
|
202,341 |
| |||
Grant date fair value (a) |
|
$ |
49.31 |
|
$ |
41.98 |
|
$ |
37.47 |
|
(a) Weighted-average grant date fair value
The following table is a summary of the status of restricted stock units and stock grants, as of December 31, 2012 and changes during the year.
Nonvested shares |
|
Shares |
|
Weighted-Average |
| |
Nonvested at January 1, 2012 |
|
416,231 |
|
$ |
39.61 |
|
Granted |
|
202,278 |
|
49.31 |
| |
Vested |
|
126,959 |
|
39.76 |
| |
Forfeited |
|
10,797 |
|
42.63 |
| |
Nonvested at December 31, 2012 |
|
480,753 |
|
43.58 |
| |
The amount of cash required to settle the payments on restricted stock units is (dollars in millions):
Year |
|
2012 |
|
2011 |
|
2010 |
| |||
2007 Grant |
|
$ |
— |
|
$ |
1.0 |
|
$ |
0.9 |
|
2008 Grant |
|
1.9 |
|
1.6 |
|
1.5 |
| |||
2009 Grant |
|
1.7 |
|
1.5 |
|
1.4 |
| |||
2010 Grant |
|
0.6 |
|
0.6 |
|
— |
| |||
2011 Grant |
|
0.7 |
|
— |
|
— |
| |||
|
|
2012 |
|
2011 |
|
2010 |
| |||
Units granted (a) |
|
185,878 |
|
175,072 |
|
178,722 |
| |||
Grant date fair value (b) |
|
$ |
47.40 |
|
$ |
41.71 |
|
$ |
37.57 |
|
(a) Reflects the target payout level.
(b) Weighted-average grant date fair value.
The following table is a summary of the status of performance shares, as of December 31, 2012 and changes during the year:
Nonvested shares (a) |
|
Shares |
|
Weighted-Average |
| |
Nonvested at January 1, 2012 |
|
347,946 |
|
$ |
39.64 |
|
Granted |
|
185,878 |
|
47.40 |
| |
Increase in performance factor |
|
87,037 |
|
37.57 |
| |
Vested |
|
257,127 |
|
37.57 |
| |
Forfeited |
|
16,044 |
|
42.53 |
| |
Nonvested at December 31, 2012 |
|
347,690 |
|
44.67 |
| |
(a) Nonvested shares are reflected at the target payout level. The increase or decrease in the number of shares from the target level to the estimated actual payout level is included in the increase for performance factor amounts in the year the award vests.
The following table summarizes the option activity under prior equity incentive plans for the year ended December 31, 2012:
Options |
|
Shares |
|
Weighted- |
|
Weighted- |
|
Aggregate |
| ||
Outstanding at January 1, 2012 |
|
22,958 |
|
$ |
34.75 |
|
|
|
|
| |
Exercised |
|
15,033 |
|
36.05 |
|
|
|
|
| ||
Forfeited or expired |
|
— |
|
— |
|
|
|
|
| ||
Outstanding at December 31, 2012 |
|
7,925 |
|
32.29 |
|
.21 |
|
$ |
148 |
| |
Exercisable at December 31, 2012 |
|
7,925 |
|
32.29 |
|
.21 |
|
$ |
148 |
| |
|
Financial data for 2012, 2011 and 2010 is provided as follows (dollars in millions):
|
|
Business Segments for the Year Ended |
| |||||||
|
|
Regulated |
|
All other (a) |
|
Total |
| |||
Operating revenues |
|
$ |
3,294 |
|
$ |
8 |
|
$ |
3,302 |
|
Fuel and purchased power costs |
|
995 |
|
— |
|
995 |
| |||
Other operating expenses |
|
1,047 |
|
4 |
|
1,051 |
| |||
Operating margin |
|
1,252 |
|
4 |
|
1,256 |
| |||
Depreciation and amortization |
|
404 |
|
— |
|
404 |
| |||
Interest expense |
|
200 |
|
— |
|
200 |
| |||
Other expense (income) |
|
(9 |
) |
5 |
|
(4 |
) | |||
Income (loss) from continuing operations before income taxes |
|
657 |
|
(1 |
) |
656 |
| |||
Income taxes |
|
238 |
|
(1 |
) |
237 |
| |||
Income from continuing operations |
|
419 |
|
— |
|
419 |
| |||
Loss from discontinued operations — net of income tax benefit of $(4) million (see Note 21) |
|
— |
|
(6 |
) |
(6 |
) | |||
Net income |
|
419 |
|
(6 |
) |
413 |
| |||
Less: Net income attributable to noncontrolling interests |
|
31 |
|
— |
|
31 |
| |||
Net income attributable to common shareholders |
|
$ |
388 |
|
$ |
(6 |
) |
$ |
382 |
|
Total assets |
|
$ |
13,347 |
|
$ |
33 |
|
$ |
13,380 |
|
Capital expenditures |
|
$ |
836 |
|
$ |
— |
|
$ |
836 |
|
|
|
Business Segments for the Year Ended |
| |||||||
|
|
Regulated |
|
All other (a) |
|
Total |
| |||
Operating revenues |
|
$ |
3,237 |
|
$ |
4 |
|
$ |
3,241 |
|
Fuel and purchased power costs |
|
1,009 |
|
— |
|
1,009 |
| |||
Other operating expenses |
|
1,055 |
|
3 |
|
1,058 |
| |||
Operating margin |
|
1,173 |
|
1 |
|
1,174 |
| |||
Depreciation and amortization |
|
427 |
|
— |
|
427 |
| |||
Interest expense |
|
224 |
|
— |
|
224 |
| |||
Other expense (income) |
|
(19 |
) |
3 |
|
(16 |
) | |||
Income (loss) from continuing operations before income taxes |
|
541 |
|
(2 |
) |
539 |
| |||
Income taxes |
|
184 |
|
(1 |
) |
183 |
| |||
Income (loss) from continuing operations |
|
357 |
|
(1 |
) |
356 |
| |||
Income from discontinued operations — net of income tax expense of $7 million (see Note 21) |
|
— |
|
11 |
|
11 |
| |||
Net income |
|
357 |
|
10 |
|
367 |
| |||
Less: Net income attributable to noncontrolling interests |
|
28 |
|
— |
|
28 |
| |||
Net income attributable to common shareholders |
|
$ |
329 |
|
$ |
10 |
|
$ |
339 |
|
Total assets |
|
$ |
13,068 |
|
$ |
43 |
|
$ |
13,111 |
|
Capital expenditures |
|
$ |
885 |
|
$ |
— |
|
$ |
885 |
|
|
|
Business Segments for the Year Ended |
| |||||||
|
|
Regulated |
|
All other (a) |
|
Total |
| |||
Operating revenues |
|
$ |
3,181 |
|
$ |
8 |
|
$ |
3,189 |
|
Fuel and purchased power costs |
|
1,047 |
|
— |
|
1,047 |
| |||
Other operating expenses |
|
1,009 |
|
4 |
|
1,013 |
| |||
Operating margin |
|
1,125 |
|
4 |
|
1,129 |
| |||
Depreciation and amortization |
|
415 |
|
— |
|
415 |
| |||
Interest expense |
|
226 |
|
2 |
|
228 |
| |||
Other expense (income) |
|
(22 |
) |
2 |
|
(20 |
) | |||
Income from continuing operations before income taxes |
|
506 |
|
— |
|
506 |
| |||
Income taxes |
|
161 |
|
— |
|
161 |
| |||
Income from continuing operations |
|
345 |
|
— |
|
345 |
| |||
Income from discontinued operations — net of income tax expense of $16 million (see Note 21) |
|
— |
|
25 |
|
25 |
| |||
Net income |
|
345 |
|
25 |
|
370 |
| |||
Less: Net income attributable to noncontrolling interests |
|
20 |
|
— |
|
20 |
| |||
Net income attributable to common shareholders |
|
$ |
325 |
|
$ |
25 |
|
$ |
350 |
|
Total assets |
|
$ |
12,285 |
|
$ |
108 |
|
$ |
12,393 |
|
Capital expenditures |
|
$ |
666 |
|
$ |
4 |
|
$ |
670 |
|
(a) All other activities relate to SunCor, APSES and El Dorado. Loss from discontinued operations in 2012 is primarily related to a contribution Pinnacle West expects to make to SunCor’s estate as part of a negotiated resolution to the bankruptcy (see Note 21). Income from discontinued operations for 2011 is primarily related to the sale of our investment in APSES. Income from discontinued operations for 2010 is primarily related to the APSES sale of its district cooling business. None of these segments is a reportable business segment.
|
As of December 31, 2012, we had the following outstanding gross notional volume of derivatives, which represent both purchases and sales (does not reflect net position):
Commodity |
|
Quantity |
| ||
Power |
|
8,045 |
|
gigawatt hours |
|
Gas |
|
139 |
|
Bcfs (a) |
|
(a) “Bcf” is Billion Cubic Feet.
The following table provides information about gains and losses from derivative instruments in designated cash flow accounting hedging relationships during the years ended December 31, 2012, 2011 and 2010 (dollars in thousands):
|
|
Financial Statement |
|
Year Ended |
| |||||||
Commodity Contracts |
|
Location |
|
2012 |
|
2011 |
|
2010 |
| |||
|
|
|
|
|
|
|
|
|
| |||
Loss Recognized in OCI on Derivative Instruments (Effective Portion) |
|
Other comprehensive loss — derivative instruments |
|
$ |
(37,663 |
) |
$ |
(94,660 |
) |
$ |
(155,287 |
) |
Loss Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion Realized) (a) |
|
Fuel and purchased power |
|
(99,007 |
) |
(117,189 |
) |
(122,740 |
) | |||
Gain (Loss) Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
|
Fuel and purchased power |
|
117 |
|
(211 |
) |
3,680 |
| |||
(a) During the year ended December 31, 2012, we had $1.8 million of losses reclassified from accumulated other comprehensive income to earnings related to discontinued cash flow hedges. There were no amounts reclassified in the 2011 and 2010 periods related to discontinued cash flow hedges.
The following table provides information about gains and losses from derivative instruments not designated as accounting hedging instruments during the years ended December 31, 2012, 2011 and 2010 (dollars in thousands):
|
|
Financial Statement |
|
Year Ended |
| |||||||
Commodity Contracts |
|
Location |
|
2012 |
|
2011 |
|
2010 |
| |||
|
|
|
|
|
|
|
|
|
| |||
Net Gain (Loss) Recognized in Income |
|
Operating revenues |
|
$ |
103 |
|
$ |
(27 |
) |
$ |
1,436 |
|
|
|
|
|
|
|
|
|
|
| |||
Net Loss Recognized in Income |
|
Fuel and purchased power |
|
(2,747 |
) |
(52,113 |
) |
(107,690 |
) | |||
Total |
|
|
|
$ |
(2,644 |
) |
$ |
(52,140 |
) |
$ |
(106,254 |
) |
Amounts are as of December 31, 2012 (dollars in thousands):
Commodity Contracts |
|
Designated |
|
Not |
|
Margin and |
|
Collateral |
|
Other (b) |
|
Total |
| ||||||
Current Assets |
|
$ |
— |
|
$ |
42,495 |
|
$ |
61 |
|
$ |
— |
|
$ |
(16,857 |
) |
$ |
25,699 |
|
Investments and Other Assets |
|
— |
|
41,563 |
|
— |
|
— |
|
(5,672 |
) |
35,891 |
| ||||||
Total Assets |
|
— |
|
84,058 |
|
61 |
|
— |
|
(22,529 |
) |
61,590 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Current Liabilities |
|
(1,147 |
) |
(104,177 |
) |
39,249 |
|
(25,463 |
) |
17,797 |
|
(73,741 |
) | ||||||
Deferred Credits and Other |
|
(4,332 |
) |
(96,654 |
) |
10,051 |
|
— |
|
5,671 |
|
(85,264 |
) | ||||||
Total Liabilities |
|
(5,479 |
) |
(200,831 |
) |
49,300 |
|
(25,463 |
) |
23,468 |
|
(159,005 |
) | ||||||
Total |
|
$ |
(5,479 |
) |
$ |
(116,773 |
) |
$ |
49,361 |
|
$ |
(25,463 |
) |
$ |
939 |
|
$ |
(97,415 |
) |
(a) Collateral relates to non-derivative instruments or derivative instruments that qualify for a scope exception.
(b) Other represents derivative instrument netting, option premiums, and other risk management contracts.
The following table provides information about the fair value of our risk management activities reported on a gross basis at December 31, 2011 (dollars in thousands):
Commodity Contracts |
|
Designated |
|
Not |
|
Margin and |
|
Collateral |
|
Other (b) |
|
Total |
| ||||||
Current Assets |
|
$ |
7,287 |
|
$ |
76,162 |
|
$ |
1,630 |
|
$ |
— |
|
$ |
(54,815 |
) |
$ |
30,264 |
|
Investments and Other Assets |
|
3,804 |
|
58,273 |
|
— |
|
— |
|
(12,755 |
) |
49,322 |
| ||||||
Total Assets |
|
11,091 |
|
134,435 |
|
1,630 |
|
— |
|
(67,570 |
) |
79,586 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Current Liabilities |
|
(82,195 |
) |
(124,028 |
) |
107,228 |
|
(11,145 |
) |
56,172 |
|
(53,968 |
) | ||||||
Deferred Credits and Other |
|
(68,137 |
) |
(92,880 |
) |
65,768 |
|
— |
|
12,754 |
|
(82,495 |
) | ||||||
Total Liabilities |
|
(150,332 |
) |
(216,908 |
) |
172,996 |
|
(11,145 |
) |
68,926 |
|
(136,463 |
) | ||||||
Total Derivative Instruments |
|
$ |
(139,241 |
) |
$ |
(82,473 |
) |
$ |
174,626 |
|
$ |
(11,145 |
) |
$ |
1,356 |
|
$ |
(56,877 |
) |
(a) Collateral relates to non-derivative instruments or derivative instruments that qualify for a scope exception.
(b) Other represents derivative instrument netting, option premiums, and other risk management contracts.
The following table provides information about our derivative instruments that have credit-risk-related contingent features at December 31, 2012 (dollars in millions):
|
|
December 31, |
| |
Aggregate Fair Value of Derivative Instruments in a Net Liability Position |
|
$ |
206 |
|
Cash Collateral Posted |
|
49 |
| |
Additional Cash Collateral in the Event Credit-Risk Related Contingent Features were Fully Triggered (a) |
|
120 |
| |
(a) This amount is after counterparty netting and includes those contracts which qualify for scope exceptions, which are excluded from the derivative details above.
|
The following table provides detail of other income and other expense for 2012, 2011 and 2010 (dollars in thousands):
|
|
2012 |
|
2011 |
|
2010 |
| |||
Other income: |
|
|
|
|
|
|
| |||
Interest income |
|
$ |
1,239 |
|
$ |
1,850 |
|
$ |
3,255 |
|
Investment gains — net |
|
— |
|
1,165 |
|
2,797 |
| |||
Miscellaneous |
|
367 |
|
96 |
|
335 |
| |||
Total other income |
|
$ |
1,606 |
|
$ |
3,111 |
|
$ |
6,387 |
|
|
|
|
|
|
|
|
| |||
Other expense: |
|
|
|
|
|
|
| |||
Non-operating costs |
|
$ |
(7,777 |
) |
$ |
(7,037 |
) |
$ |
(6,831 |
) |
Investment loss — net |
|
(2,453 |
) |
— |
|
— |
| |||
Miscellaneous |
|
(9,612 |
) |
(3,414 |
) |
(3,090 |
) | |||
Total other expense |
|
$ |
(19,842 |
) |
$ |
(10,451 |
) |
$ |
(9,921 |
) |
|
Our Consolidated Balance Sheets at December 31, 2012 and December 31, 2011 include the following amounts relating to the VIEs (in millions):
|
|
December 31, |
|
December 31, |
| ||
Palo Verde sale leaseback property plant and equipment, net of accumulated depreciation |
|
$ |
129 |
|
$ |
133 |
|
Current maturities of long term-debt |
|
27 |
|
31 |
| ||
Palo Verde sale leaseback lessor notes long-term debt excluding current maturities |
|
39 |
|
66 |
| ||
Equity-Noncontrolling interests |
|
129 |
|
108 |
| ||
|
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, 2012, 2011 and 2010 (dollars in millions):
|
|
2012 |
|
2011 |
|
2010 |
| |||
Revenue: |
|
|
|
|
|
|
| |||
SunCor |
|
$ |
— |
|
$ |
1 |
|
$ |
30 |
|
APSES |
|
— |
|
36 |
|
127 |
| |||
Total revenue |
|
$ |
— |
|
$ |
37 |
|
$ |
157 |
|
|
|
|
|
|
|
|
| |||
Income (loss) before taxes: |
|
|
|
|
|
|
| |||
SunCor |
|
$ |
(10 |
) |
$ |
(2 |
) |
$ |
(10 |
) |
APSES |
|
— |
|
21 |
|
51 |
| |||
Total income (loss) before taxes |
|
$ |
(10 |
) |
$ |
19 |
|
$ |
41 |
|
|
|
|
|
|
|
|
| |||
Income (loss) after taxes: |
|
|
|
|
|
|
| |||
SunCor |
|
$ |
(6 |
) |
$ |
(1 |
) |
$ |
(6 |
) |
APSES |
|
— |
|
12 |
|
31 |
| |||
Total income (loss) after taxes |
|
$ |
(6 |
) |
$ |
11 |
|
$ |
25 |
|
|
The following table includes the unrealized gains and losses based on the original cost of the investment and summarizes the fair value of APS’s nuclear decommissioning trust fund assets at December 31, 2012 and December 31, 2011 (dollars in millions):
|
|
Fair Value |
|
Total |
|
Total |
| |||
December 31, 2012 |
|
|
|
|
|
|
| |||
Equity securities |
|
$ |
204 |
|
$ |
67 |
|
$ |
— |
|
Fixed income securities |
|
371 |
|
24 |
|
— |
| |||
Net payables (a) |
|
(4 |
) |
— |
|
— |
| |||
Total |
|
$ |
571 |
|
$ |
91 |
|
$ |
— |
|
|
|
Fair Value |
|
Total |
|
Total |
| |||
December 31, 2011 |
|
|
|
|
|
|
| |||
Equity securities |
|
$ |
175 |
|
$ |
44 |
|
$ |
(1 |
) |
Fixed income securities |
|
340 |
|
23 |
|
(1 |
) | |||
Net payables (a) |
|
(1 |
) |
— |
|
— |
| |||
Total |
|
$ |
514 |
|
$ |
67 |
|
$ |
(2 |
) |
(a) Net payables relate to pending securities sales and purchases.
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, |
| |||||||
|
|
2012 |
|
2011 |
|
2010 |
| |||
|
|
|
|
|
|
|
| |||
Realized gains |
|
$ |
7 |
|
$ |
8 |
|
$ |
17 |
|
Realized losses |
|
(4 |
) |
(5 |
) |
(4 |
) | |||
Proceeds from the sale of securities (a) |
|
418 |
|
498 |
|
560 |
| |||
(a) Proceeds are reinvested in the trust.
The fair value of fixed income securities, summarized by contractual maturities, at December 31, 2012 is as follows (dollars in millions):
|
|
Fair Value |
| |
Less than one year |
|
$ |
14 |
|
1 year — 5 years |
|
97 |
| |
5 years — 10 years |
|
109 |
| |
Greater than 10 years |
|
151 |
| |
Total |
|
$ |
371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 currently enacted income tax rates.
APS has recorded regulatory assets and regulatory liabilities related to income taxes on its Balance Sheets in accordance with accounting guidance for regulated operations. The regulatory assets are for certain temporary differences, primarily the allowance for equity funds used during construction and pension and other postretirement benefits. The regulatory liabilities primarily relate to deferred taxes resulting from investment tax credits (“ITC”) and the change in income tax rates.
In accordance with regulatory requirements, APS investment tax credits are deferred and are amortized over the life of the related property with such amortization applied as a credit to reduce current income tax expense in the statement of income.
The $70 million long-term income tax receivable on the Consolidated Balance Sheets represents the anticipated refunds related to an APS tax accounting method change approved by the IRS in the third quarter of 2009. This amount is classified as long-term, as there remains uncertainty regarding the timing of this cash receipt. Further clarification of the timing is expected from the IRS within the next twelve months.
Net income associated with the Palo Verde sale leaseback variable interest entities is not subject to tax (see Note 20). As a result, there is no income tax expense associated with the VIEs recorded on the Consolidated Statements of Income.
During the first quarter of 2010, the Company reached a settlement with the IRS with regard to the examination of tax returns for the years ended December 31, 2005 through 2007. As a result of this settlement, net uncertain tax positions decreased $62 million, including approximately $3 million which decreased our effective tax rate. Additionally, the settlement resulted in the recognition of net interest benefits of approximately $4 million through the effective tax rate.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits, excluding interest and penalties, at the beginning and end of the year that are included in accrued taxes and unrecognized tax benefits (dollars in thousands):
|
|
2012 |
|
2011 |
|
2010 |
| |||
Total unrecognized tax benefits, January 1 |
|
$ |
136,005 |
|
$ |
127,595 |
|
$ |
201,216 |
|
Additions for tax positions of the current year |
|
5,167 |
|
10,915 |
|
7,551 |
| |||
Reductions for tax positions of prior years for: |
|
|
|
|
|
|
| |||
Changes in judgment |
|
(7,729 |
) |
(1,555 |
) |
(11,017 |
) | |||
Settlements with taxing authorities |
|
— |
|
(124 |
) |
(62,199 |
) | |||
Lapses of applicable statute of limitations |
|
(21 |
) |
(826 |
) |
(7,956 |
) | |||
Total unrecognized tax benefits, December 31 |
|
$ |
133,422 |
|
$ |
136,005 |
|
$ |
127,595 |
|
Included in the balances of unrecognized tax benefits at December 31, 2012, 2011 and 2010 were approximately $10 million, $8 million and $7 million, respectively, of tax positions that, if recognized, would decrease our effective tax rate.
As of the balance sheet date, the tax year ended December 31, 2008 and all subsequent tax years remain subject to examination by the IRS. With a few exceptions, we are no longer subject to state income tax examinations by tax authorities for years before 2008.
It is reasonably possible that within the next twelve months the IRS will finalize the examination of tax returns for the years ended December 31, 2008 and 2009. At this time, a reasonable estimate of the range of possible change in the uncertain tax position cannot be made. However, we do not expect the ultimate outcome of this examination to have a material adverse impact on our financial position or results of operations.
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 Statements of Income related to unrecognized tax benefits was a pre-tax expense of $4 million for 2012, a pre-tax expense of $3 million for 2011 and a pre-tax benefit of $2 million for 2010.
The total amount of accrued liabilities for interest recognized in the Consolidated Balance Sheets related to unrecognized tax benefits was $13 million as of December 31, 2012, $9 million as of December 31, 2011 and $6 million as of December 31, 2010. To the extent that matters are settled favorably, this amount could reverse and decrease our effective tax rate. Additionally, as of December 31, 2012, we have recognized $5 million of interest income to be received on the overpayment 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, |
| |||||||
|
|
2012 |
|
2011 |
|
2010 |
| |||
Current: |
|
|
|
|
|
|
| |||
Federal |
|
$ |
(3,493 |
) |
$ |
(310 |
) |
$ |
(108,827 |
) |
State |
|
8,395 |
|
15,140 |
|
25,545 |
| |||
Total current |
|
4,902 |
|
14,830 |
|
(83,282 |
) | |||
Deferred: |
|
|
|
|
|
|
| |||
Federal |
|
200,322 |
|
159,566 |
|
260,236 |
| |||
State |
|
28,280 |
|
16,626 |
|
10,911 |
| |||
Discontinued operations |
|
— |
|
— |
|
(10,736 |
) | |||
Total deferred |
|
228,602 |
|
176,192 |
|
260,411 |
| |||
Total income tax expense |
|
233,504 |
|
191,022 |
|
177,129 |
| |||
Less: income tax expense (benefit) on discontinued operations |
|
(3,813 |
) |
7,418 |
|
16,260 |
| |||
Income tax expense — continuing operations |
|
$ |
237,317 |
|
$ |
183,604 |
|
$ |
160,869 |
|
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, |
| |||||||
|
|
2012 |
|
2011 |
|
2010 |
| |||
|
|
|
|
|
|
|
| |||
Federal income tax expense at 35% statutory rate |
|
$ |
229,709 |
|
$ |
188,733 |
|
$ |
177,002 |
|
Increases (reductions) in tax expense resulting from: State income tax net of federal income tax benefit |
|
23,819 |
|
19,594 |
|
17,485 |
| |||
Credits and favorable adjustments related to prior years resolved in current year |
|
— |
|
— |
|
(17,300 |
) | |||
Medicare Subsidy Part-D |
|
483 |
|
823 |
|
1,311 |
| |||
Allowance for equity funds used during construction (see Note 1) |
|
(6,158 |
) |
(6,881 |
) |
(6,563 |
) | |||
Palo Verde VIE noncontrolling interest (see Note 20) |
|
(11,065 |
) |
(9,636 |
) |
(7,057 |
) | |||
Other |
|
529 |
|
(9,029 |
) |
(4,009 |
) | |||
Income tax expense — continuing operations |
|
$ |
237,317 |
|
$ |
183,604 |
|
$ |
160,869 |
|
The following table shows the net deferred income tax liability recognized on the Consolidated Balance Sheets (dollars in thousands):
|
|
December 31, |
| ||||
|
|
2012 |
|
2011 |
| ||
Current asset |
|
$ |
152,191 |
|
$ |
130,571 |
|
Long-term liability |
|
(2,151,371 |
) |
(1,925,388 |
) | ||
Deferred income taxes — net |
|
$ |
(1,999,180 |
) |
$ |
(1,794,817 |
) |
On February 17, 2011, Arizona enacted legislation (H.B. 2001) that included a four year phase-in of corporate income tax rate reductions beginning in 2014. As a result of these tax rate reductions, Pinnacle West has revised the tax rate applicable to reversing temporary items in Arizona. In accordance with accounting for regulated companies, the benefit of this rate reduction is substantially offset by a regulatory liability. As of December 31, 2012, APS has recorded a regulatory liability of $69 million, with a corresponding decrease in accumulated deferred income tax liabilities, to reflect the impact of this change in tax law.
The American Taxpayer Relief Act of 2012, signed into law on January 2, 2013, includes provisions making qualified property placed into service in 2013 eligible for 50% bonus depreciation for federal income tax purposes. Full recognition of the cash benefit of this provision would delay realization of approximately $79 million in federal general business income tax credit carryforwards which are classified as current assets as of December 31, 2012.
The components of the net deferred income tax liability were as follows (dollars in thousands):
|
|
December 31, |
| ||||
|
|
2012 |
|
2011 |
| ||
DEFERRED TAX ASSETS |
|
|
|
|
| ||
Risk management activities |
|
$ |
72,243 |
|
$ |
117,765 |
|
Regulatory liabilities: |
|
|
|
|
| ||
Asset retirement obligation and removal costs |
|
238,669 |
|
236,739 |
| ||
Renewable energy standard |
|
— |
|
19,722 |
| ||
Unamortized investment tax credits |
|
53,837 |
|
31,460 |
| ||
Other |
|
33,764 |
|
33,155 |
| ||
Pension and other postretirement liabilities |
|
408,764 |
|
501,202 |
| ||
Renewable energy incentives |
|
66,941 |
|
57,901 |
| ||
Credit and loss carryforwards |
|
139,022 |
|
171,915 |
| ||
Other |
|
68,844 |
|
73,759 |
| ||
Total deferred tax assets |
|
1,082,084 |
|
1,243,618 |
| ||
DEFERRED TAX LIABILITIES |
|
|
|
|
| ||
Plant-related |
|
(2,584,166 |
) |
(2,446,908 |
) | ||
Risk management activities |
|
(23,940 |
) |
(30,171 |
) | ||
Regulatory assets: |
|
|
|
|
| ||
Allowance for equity funds used during construction |
|
(37,899 |
) |
(33,347 |
) | ||
Deferred fuel and purchased power |
|
(28,858 |
) |
(10,884 |
) | ||
Deferred fuel and purchased power — mark-to-market |
|
(15,796 |
) |
(30,559 |
) | ||
Pension and other postretirement benefits |
|
(316,757 |
) |
(408,716 |
) | ||
Other |
|
(68,170 |
) |
(73,087 |
) | ||
Other |
|
(5,678 |
) |
(4,763 |
) | ||
Total deferred tax liabilities |
|
(3,081,264 |
) |
(3,038,435 |
) | ||
Deferred income taxes — net |
|
$ |
(1,999,180 |
) |
$ |
(1,794,817 |
) |
As of December 31, 2012, the deferred tax assets for credit and loss carryforwards relate to federal general business credits of $111 million and federal net operating losses of $21 million, both of which first begin to expire in 2031, and other federal and state loss carryforwards of $7 million which first begin to expire in 2017.
S-1. Income Taxes
APS is included in Pinnacle West’s consolidated tax return. However, when Pinnacle West allocates income taxes to APS, it is done based upon APS’s taxable income computed on a stand-alone basis, in accordance with the tax sharing agreement.
Certain assets and liabilities are reported differently for income tax purposes than they are for financial statements purposes. The tax effect of these differences is recorded as deferred taxes. We calculate deferred taxes using currently enacted tax rates.
APS has recorded regulatory assets and regulatory liabilities related to income taxes on its Balance Sheets in accordance with accounting guidance for regulated operations. The regulatory assets are for certain temporary differences, primarily the allowance for equity funds used during construction and pension and other postretirement benefits. The regulatory liabilities primarily relate to deferred taxes resulting from ITCs and the change in income tax rates.
In accordance with regulatory requirements, APS investment tax credits are deferred and are amortized over the life of the related property, with such amortization applied as a credit to reduce current income tax expense in the statement of income.
The $71 million long-term income tax receivable on APS’s Consolidated Balance Sheets represents the anticipated refunds related to an APS tax accounting method change approved by the IRS in the third quarter of 2009. This amount is classified as long-term, as there remains uncertainty regarding the timing of this cash receipt. Further clarification of the timing is expected from the IRS within the next twelve months.
Net income associated with the Palo Verde sale leaseback variable interest entities is not subject to tax (see Note 20). As a result, there is no income tax expense associated with the VIEs recorded on APS’s Consolidated Statements of Income.
During the first quarter of 2010, the Company reached a settlement with the IRS with regard to the examination of tax returns for the years ended December 31, 2005 through 2007. As a result of this settlement, net uncertain tax positions decreased $62 million, including approximately $3 million which decreased our effective tax rate. Additionally, the settlement resulted in the recognition of net interest benefits of approximately $4 million through the effective tax rate.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits, excluding interest and penalties, at the beginning and end of the year that are included in accrued taxes and unrecognized tax benefits (dollars in thousands):
|
|
2012 |
|
2011 |
|
2010 |
| |||
Total unrecognized tax benefits, January 1 |
|
$ |
135,824 |
|
$ |
126,698 |
|
$ |
199,887 |
|
Additions for tax positions of the current year |
|
5,167 |
|
10,915 |
|
7,551 |
| |||
Reductions for tax positions of prior years for: |
|
|
|
|
|
|
| |||
Changes in judgment |
|
(7,729 |
) |
(1,555 |
) |
(10,964 |
) | |||
Settlements with taxing authorities |
|
— |
|
(124 |
) |
(61,820 |
) | |||
Lapses of applicable statute of limitations |
|
(21 |
) |
(110 |
) |
(7,956 |
) | |||
Total unrecognized tax benefits, December 31 |
|
$ |
133,241 |
|
$ |
135,824 |
|
$ |
126,698 |
|
Included in the balance of unrecognized tax benefits at December 31, 2012, 2011 and 2010 were approximately $10 million, $8 million and $6 million, respectively, of tax positions that, if recognized, would decrease our effective tax rate.
As of the balance sheet date, the tax year ended December 31, 2008 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 2008.
It is reasonably possible that within the next twelve months the IRS will finalize the examination of tax returns for the years ended December 31, 2008 and 2009. At this time, a reasonable estimate of the range of possible change in the uncertain tax position cannot be made. However, we do not expect the ultimate outcome of this examination to have a material adverse impact on our financial position or results of operations.
We reflect interest and penalties, if any, on unrecognized tax benefits in the Statements of Income as income tax expense. The amount of interest recognized in the Statements of Income related to unrecognized tax benefits was a pre-tax expense of $4 million for 2012, a pre-tax expense of $3 million for 2011 and a pre-tax benefit of $2 million for 2010.
The total amount of accrued liabilities for interest recognized in the Balance Sheets related to unrecognized tax benefits was $13 million as of December 31, 2012, $9 million as of December 31, 2011 and $6 million as of December 31, 2010. To the extent that matters are settled favorably, this amount could reverse and decrease our effective tax rate. Additionally, as of December 31, 2012, we have recognized $5 million of interest income to be received on the overpayment of income taxes for certain adjustments that we have filed, or will file, with the IRS.
The components of APS’s income tax expense are as follows (dollars in thousands):
|
|
Year Ended December 31, |
| |||||||
|
|
2012 |
|
2011 |
|
2010 |
| |||
Current: |
|
|
|
|
|
|
| |||
Federal |
|
$ |
(11,650 |
) |
$ |
4,633 |
|
$ |
(71,036 |
) |
State |
|
12,308 |
|
19,104 |
|
17,406 |
| |||
Total current |
|
658 |
|
23,737 |
|
(53,630 |
) | |||
Deferred: |
|
|
|
|
|
|
| |||
Federal |
|
216,367 |
|
154,632 |
|
207,334 |
| |||
State |
|
27,371 |
|
14,173 |
|
16,761 |
| |||
Total deferred |
|
243,738 |
|
168,805 |
|
224,095 |
| |||
Total income tax expense |
|
$ |
244,396 |
|
$ |
192,542 |
|
$ |
170,465 |
|
On the APS Statements of Income, federal and state income taxes are allocated between operating income and other income.
The following chart compares APS’s pretax income at the 35% federal income tax rate to income tax expense (dollars in thousands):
|
|
Year Ended December 31, |
| |||||||
|
|
2012 |
|
2011 |
|
2010 |
| |||
|
|
|
|
|
|
|
| |||
Federal income tax expense at 35% statutory rate |
|
$ |
235,027 |
|
$ |
194,710 |
|
$ |
184,202 |
|
Increases (reductions) in tax expense resulting from: |
|
|
|
|
|
|
| |||
State income tax net of federal income tax benefit |
|
25,379 |
|
21,139 |
|
19,186 |
| |||
Credits and favorable adjustments related to prior years resolved in current year |
|
— |
|
— |
|
(17,300 |
) | |||
Medicare Subsidy Part-D |
|
483 |
|
823 |
|
889 |
| |||
Allowance for equity funds used during construction (see Note 1) |
|
(6,158 |
) |
(6,880 |
) |
(6,563 |
) | |||
Palo Verde VIE noncontrolling interest (see Note 20) |
|
(11,065 |
) |
(9,633 |
) |
(7,057 |
) | |||
Other |
|
730 |
|
(7,617 |
) |
(2,892 |
) | |||
Income tax expense |
|
$ |
244,396 |
|
$ |
192,542 |
|
$ |
170,465 |
|
The following table shows the net deferred income tax liability recognized on the APS Balance Sheets (dollars in thousands):
|
|
December 31, |
| ||||
|
|
2012 |
|
2011 |
| ||
Current asset |
|
$ |
74,420 |
|
$ |
111,503 |
|
Long-term liability |
|
(2,133,976 |
) |
(1,952,608 |
) | ||
Deferred income taxes — net |
|
$ |
(2,059,556 |
) |
$ |
(1,841,105 |
) |
On February 17, 2011, Arizona enacted legislation (H.B. 2001) that included a four year phase-in of corporate income tax rate reductions beginning in 2014. As a result of these tax rate reductions, Pinnacle West has revised the tax rate applicable to reversing temporary items in Arizona. In accordance with accounting for regulated companies, the benefit of this rate reduction is substantially offset by a regulatory liability. As of December 31, 2012, APS has recorded a regulatory liability of $69 million, with a corresponding decrease in accumulated deferred income tax liabilities, to reflect the impact of this change in tax law.
The American Taxpayer Relief Act of 2012, signed into law on January 2, 2013, includes provisions making qualified property placed into service in 2013 eligible for 50% bonus depreciation for federal income tax purposes. Full recognition of the cash benefit of this provision would delay realization of approximately $4 million in federal general business income tax credit carryforwards which are classified as current assets as of December 31, 2012.
The components of the net deferred income tax liability were as follows (dollars in thousands):
|
|
December 31, |
| ||||
|
|
2012 |
|
2011 |
| ||
DEFERRED TAX ASSETS |
|
|
|
|
| ||
Regulatory liabilities: |
|
|
|
|
| ||
Asset retirement obligation and removal costs |
|
$ |
238,669 |
|
$ |
236,739 |
|
Renewable energy standard |
|
— |
|
19,722 |
| ||
Unamortized investment tax credits |
|
53,837 |
|
31,460 |
| ||
Other |
|
33,764 |
|
33,155 |
| ||
Risk management activities |
|
72,243 |
|
117,765 |
| ||
Pension and other postretirement liabilities |
|
392,486 |
|
494,744 |
| ||
Renewable energy incentives |
|
66,941 |
|
57,901 |
| ||
Credit and loss carryforwards |
|
52,441 |
|
106,668 |
| ||
Other |
|
111,327 |
|
99,176 |
| ||
Total deferred tax assets |
|
1,021,708 |
|
1,197,330 |
| ||
DEFERRED TAX LIABILITIES |
|
|
|
|
| ||
Plant-related |
|
(2,584,166 |
) |
(2,446,908 |
) | ||
Risk management activities |
|
(23,940 |
) |
(30,171 |
) | ||
Regulatory assets: |
|
|
|
|
| ||
Allowance for equity funds used during construction |
|
(37,899 |
) |
(33,347 |
) | ||
Deferred fuel and purchased power |
|
(28,858 |
) |
(10,884 |
) | ||
Deferred fuel and purchased power — mark-to-market |
|
(15,796 |
) |
(30,559 |
) | ||
Pension and other postretirement benefits |
|
(316,757 |
) |
(408,716 |
) | ||
Other |
|
(68,170 |
) |
(73,087 |
) | ||
Other |
|
(5,678 |
) |
(4,763 |
) | ||
Total deferred tax liabilities |
|
(3,081,264 |
) |
(3,038,435 |
) | ||
Deferred income taxes — net |
|
$ |
(2,059,556 |
) |
$ |
(1,841,105 |
) |
As of December 31, 2012, the deferred tax assets for credit and loss carryforwards relate to federal general business credits ($50 million) which first begin to expire in 2031 and other federal and state loss carryforwards ($2 million) which first begin to expire in 2017.
|
13. Selected Quarterly Financial Data (Unaudited)
Consolidated quarterly financial information for 2012 and 2011 is as follows (dollars in thousands, except per share amounts):
|
|
2012 Quarter Ended |
|
2012 |
| |||||||||||
|
|
March 31, |
|
June 30, |
|
Sept. 30, |
|
Dec. 31, |
|
Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating revenues |
|
$ |
620,631 |
|
$ |
878,576 |
|
$ |
1,109,475 |
|
$ |
693,122 |
|
$ |
3,301,804 |
|
Operations and maintenance |
|
210,663 |
|
216,236 |
|
220,729 |
|
237,141 |
|
884,769 |
| |||||
Operating income |
|
48,007 |
|
254,489 |
|
447,970 |
|
101,289 |
|
851,755 |
| |||||
Income taxes |
|
(4,645 |
) |
76,689 |
|
147,116 |
|
18,157 |
|
237,317 |
| |||||
Income from continuing operations |
|
284 |
|
130,930 |
|
252,874 |
|
34,905 |
|
418,993 |
| |||||
Net income (loss) attributable to common shareholders |
|
(8,257 |
) |
122,345 |
|
244,823 |
|
22,631 |
|
381,542 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Earnings Per Share: |
|
|
|
|
|
|
|
|
|
|
| |||||
Income (loss) from continuing operations attributable to common shareholders — Basic |
|
$ |
(0.07 |
) |
$ |
1.12 |
|
$ |
2.23 |
|
$ |
0.24 |
|
$ |
3.54 |
|
Net income (loss) attributable to common shareholders — Basic |
|
(0.08 |
) |
1.12 |
|
2.23 |
|
0.21 |
|
3.48 |
| |||||
Income (loss) from continuing operations attributable to common shareholders — Diluted |
|
(0.07 |
) |
1.12 |
|
2.21 |
|
0.24 |
|
3.50 |
| |||||
Net income (loss) attributable to common shareholders — Diluted |
|
(0.08 |
) |
1.11 |
|
2.21 |
|
0.20 |
|
3.45 |
|
|
|
2011 Quarter Ended |
|
2011 |
| |||||||||||
|
|
March 31, |
|
June 30, |
|
Sept. 30, |
|
Dec. 31, |
|
Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating revenues |
|
$ |
648,847 |
|
$ |
799,799 |
|
$ |
1,124,841 |
|
$ |
667,892 |
|
$ |
3,241,379 |
|
Operations and maintenance |
|
255,029 |
|
210,590 |
|
210,035 |
|
228,632 |
|
904,286 |
| |||||
Operating income |
|
35,784 |
|
196,992 |
|
435,017 |
|
78,715 |
|
746,508 |
| |||||
Income taxes |
|
(6,005 |
) |
50,818 |
|
131,416 |
|
7,375 |
|
183,604 |
| |||||
Income (loss) from continuing operations |
|
(10,368 |
) |
93,185 |
|
253,273 |
|
19,544 |
|
355,634 |
| |||||
Net income (loss) attributable to common shareholders |
|
(15,135 |
) |
86,685 |
|
255,359 |
|
12,564 |
|
339,473 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Earnings Per Share: |
|
|
|
|
|
|
|
|
|
|
| |||||
Income (loss) from continuing operations attributable to common shareholders — Basic |
|
$ |
(0.15 |
) |
$ |
0.79 |
|
$ |
2.25 |
|
$ |
0.11 |
|
$ |
3.01 |
|
Net income (loss) attributable to common shareholders — Basic |
|
(0.14 |
) |
0.80 |
|
2.34 |
|
0.12 |
|
3.11 |
| |||||
Income (loss) from continuing operations attributable to common shareholders — Diluted |
|
(0.15 |
) |
0.78 |
|
2.24 |
|
0.11 |
|
2.99 |
| |||||
Net income (loss) attributable to common shareholders — Diluted |
|
(0.14 |
) |
0.79 |
|
2.32 |
|
0.11 |
|
3.09 |
S-2. Selected Quarterly Financial Data (Unaudited)
Quarterly financial information for 2012 and 2011 is as follows (dollars in thousands):
|
|
2012 Quarter Ended, |
|
2012 |
| |||||||||||
|
|
March 31, |
|
June 30, |
|
September 30, |
|
December 31, |
|
Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating revenues |
|
$ |
620,248 |
|
$ |
877,587 |
|
$ |
1,108,623 |
|
$ |
687,031 |
|
$ |
3,293,489 |
|
Operations and maintenance |
|
208,447 |
|
213,746 |
|
218,403 |
|
233,320 |
|
873,916 |
| |||||
Operating income |
|
53,995 |
|
176,821 |
|
296,945 |
|
77,768 |
|
605,529 |
| |||||
Net income (loss) attributable to common shareholder |
|
(4,105 |
) |
124,928 |
|
247,831 |
|
26,843 |
|
395,497 |
| |||||
|
|
2011 Quarter Ended, |
|
2011 |
| |||||||||||
|
|
March 31, |
|
June 30, |
|
September 30, |
|
December 31, |
|
Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating revenues |
|
$ |
647,994 |
|
$ |
798,686 |
|
$ |
1,124,057 |
|
$ |
666,504 |
|
$ |
3,237,241 |
|
Operations and maintenance |
|
252,607 |
|
208,597 |
|
207,967 |
|
226,746 |
|
895,917 |
| |||||
Operating income |
|
45,574 |
|
145,400 |
|
292,783 |
|
70,626 |
|
554,383 |
| |||||
Net income (loss) attributable to common shareholder |
|
(12,081 |
) |
87,705 |
|
246,333 |
|
14,292 |
|
336,249 |
|
19. Other Income and Other Expense
The following table provides detail of other income and other expense for 2012, 2011 and 2010 (dollars in thousands):
|
|
2012 |
|
2011 |
|
2010 |
| |||
Other income: |
|
|
|
|
|
|
| |||
Interest income |
|
$ |
1,239 |
|
$ |
1,850 |
|
$ |
3,255 |
|
Investment gains — net |
|
— |
|
1,165 |
|
2,797 |
| |||
Miscellaneous |
|
367 |
|
96 |
|
335 |
| |||
Total other income |
|
$ |
1,606 |
|
$ |
3,111 |
|
$ |
6,387 |
|
|
|
|
|
|
|
|
| |||
Other expense: |
|
|
|
|
|
|
| |||
Non-operating costs |
|
$ |
(7,777 |
) |
$ |
(7,037 |
) |
$ |
(6,831 |
) |
Investment loss — net |
|
(2,453 |
) |
— |
|
— |
| |||
Miscellaneous |
|
(9,612 |
) |
(3,414 |
) |
(3,090 |
) | |||
Total other expense |
|
$ |
(19,842 |
) |
$ |
(10,451 |
) |
$ |
(9,921 |
) |
S-3. Other Income and Other Expense
The following table provides detail of APS’s other income and other expense for 2012, 2011 and 2010 (dollars in thousands):
|
|
2012 |
|
2011 |
|
2010 |
| |||
Other income: |
|
|
|
|
|
|
| |||
Interest income |
|
$ |
310 |
|
$ |
406 |
|
$ |
668 |
|
Investment gains — net |
|
— |
|
1,418 |
|
2,334 |
| |||
Miscellaneous |
|
2,558 |
|
3,247 |
|
5,954 |
| |||
Total other income |
|
$ |
2,868 |
|
$ |
5,071 |
|
$ |
8,956 |
|
|
|
|
|
|
|
|
| |||
Other expense: |
|
|
|
|
|
|
| |||
Non-operating costs (a) |
|
$ |
(8,706 |
) |
$ |
(8,810 |
) |
$ |
(9,855 |
) |
Asset dispositions |
|
(1,511 |
) |
(1,352 |
) |
(612 |
) | |||
Miscellaneous |
|
(10,933 |
) |
(5,166 |
) |
(5,392 |
) | |||
Total other expense |
|
$ |
(21,150 |
) |
$ |
(15,328 |
) |
$ |
(15,859 |
) |
(a) As defined by the FERC, includes below-the-line non-operating utility income and expense (items excluded from utility rate recovery).
|
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits, excluding interest and penalties, at the beginning and end of the year that are included in accrued taxes and unrecognized tax benefits (dollars in thousands):
|
|
2012 |
|
2011 |
|
2010 |
| |||
Total unrecognized tax benefits, January 1 |
|
$ |
136,005 |
|
$ |
127,595 |
|
$ |
201,216 |
|
Additions for tax positions of the current year |
|
5,167 |
|
10,915 |
|
7,551 |
| |||
Reductions for tax positions of prior years for: |
|
|
|
|
|
|
| |||
Changes in judgment |
|
(7,729 |
) |
(1,555 |
) |
(11,017 |
) | |||
Settlements with taxing authorities |
|
— |
|
(124 |
) |
(62,199 |
) | |||
Lapses of applicable statute of limitations |
|
(21 |
) |
(826 |
) |
(7,956 |
) | |||
Total unrecognized tax benefits, December 31 |
|
$ |
133,422 |
|
$ |
136,005 |
|
$ |
127,595 |
|
The components of income tax expense are as follows (dollars in thousands):
|
|
Year Ended December 31, |
| |||||||
|
|
2012 |
|
2011 |
|
2010 |
| |||
Current: |
|
|
|
|
|
|
| |||
Federal |
|
$ |
(3,493 |
) |
$ |
(310 |
) |
$ |
(108,827 |
) |
State |
|
8,395 |
|
15,140 |
|
25,545 |
| |||
Total current |
|
4,902 |
|
14,830 |
|
(83,282 |
) | |||
Deferred: |
|
|
|
|
|
|
| |||
Federal |
|
200,322 |
|
159,566 |
|
260,236 |
| |||
State |
|
28,280 |
|
16,626 |
|
10,911 |
| |||
Discontinued operations |
|
— |
|
— |
|
(10,736 |
) | |||
Total deferred |
|
228,602 |
|
176,192 |
|
260,411 |
| |||
Total income tax expense |
|
233,504 |
|
191,022 |
|
177,129 |
| |||
Less: income tax expense (benefit) on discontinued operations |
|
(3,813 |
) |
7,418 |
|
16,260 |
| |||
Income tax expense — continuing operations |
|
$ |
237,317 |
|
$ |
183,604 |
|
$ |
160,869 |
|
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, |
| |||||||
|
|
2012 |
|
2011 |
|
2010 |
| |||
|
|
|
|
|
|
|
| |||
Federal income tax expense at 35% statutory rate |
|
$ |
229,709 |
|
$ |
188,733 |
|
$ |
177,002 |
|
Increases (reductions) in tax expense resulting from: State income tax net of federal income tax benefit |
|
23,819 |
|
19,594 |
|
17,485 |
| |||
Credits and favorable adjustments related to prior years resolved in current year |
|
— |
|
— |
|
(17,300 |
) | |||
Medicare Subsidy Part-D |
|
483 |
|
823 |
|
1,311 |
| |||
Allowance for equity funds used during construction (see Note 1) |
|
(6,158 |
) |
(6,881 |
) |
(6,563 |
) | |||
Palo Verde VIE noncontrolling interest (see Note 20) |
|
(11,065 |
) |
(9,636 |
) |
(7,057 |
) | |||
Other |
|
529 |
|
(9,029 |
) |
(4,009 |
) | |||
Income tax expense — continuing operations |
|
$ |
237,317 |
|
$ |
183,604 |
|
$ |
160,869 |
|
The following table shows the net deferred income tax liability recognized on the Consolidated Balance Sheets (dollars in thousands):
|
|
December 31, |
| ||||
|
|
2012 |
|
2011 |
| ||
Current asset |
|
$ |
152,191 |
|
$ |
130,571 |
|
Long-term liability |
|
(2,151,371 |
) |
(1,925,388 |
) | ||
Deferred income taxes — net |
|
$ |
(1,999,180 |
) |
$ |
(1,794,817 |
) |
The components of the net deferred income tax liability were as follows (dollars in thousands):
|
|
December 31, |
| ||||
|
|
2012 |
|
2011 |
| ||
DEFERRED TAX ASSETS |
|
|
|
|
| ||
Risk management activities |
|
$ |
72,243 |
|
$ |
117,765 |
|
Regulatory liabilities: |
|
|
|
|
| ||
Asset retirement obligation and removal costs |
|
238,669 |
|
236,739 |
| ||
Renewable energy standard |
|
— |
|
19,722 |
| ||
Unamortized investment tax credits |
|
53,837 |
|
31,460 |
| ||
Other |
|
33,764 |
|
33,155 |
| ||
Pension and other postretirement liabilities |
|
408,764 |
|
501,202 |
| ||
Renewable energy incentives |
|
66,941 |
|
57,901 |
| ||
Credit and loss carryforwards |
|
139,022 |
|
171,915 |
| ||
Other |
|
68,844 |
|
73,759 |
| ||
Total deferred tax assets |
|
1,082,084 |
|
1,243,618 |
| ||
DEFERRED TAX LIABILITIES |
|
|
|
|
| ||
Plant-related |
|
(2,584,166 |
) |
(2,446,908 |
) | ||
Risk management activities |
|
(23,940 |
) |
(30,171 |
) | ||
Regulatory assets: |
|
|
|
|
| ||
Allowance for equity funds used during construction |
|
(37,899 |
) |
(33,347 |
) | ||
Deferred fuel and purchased power |
|
(28,858 |
) |
(10,884 |
) | ||
Deferred fuel and purchased power — mark-to-market |
|
(15,796 |
) |
(30,559 |
) | ||
Pension and other postretirement benefits |
|
(316,757 |
) |
(408,716 |
) | ||
Other |
|
(68,170 |
) |
(73,087 |
) | ||
Other |
|
(5,678 |
) |
(4,763 |
) | ||
Total deferred tax liabilities |
|
(3,081,264 |
) |
(3,038,435 |
) | ||
Deferred income taxes — net |
|
$ |
(1,999,180 |
) |
$ |
(1,794,817 |
) |
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits, excluding interest and penalties, at the beginning and end of the year that are included in accrued taxes and unrecognized tax benefits (dollars in thousands):
|
|
2012 |
|
2011 |
|
2010 |
| |||
Total unrecognized tax benefits, January 1 |
|
$ |
135,824 |
|
$ |
126,698 |
|
$ |
199,887 |
|
Additions for tax positions of the current year |
|
5,167 |
|
10,915 |
|
7,551 |
| |||
Reductions for tax positions of prior years for: |
|
|
|
|
|
|
| |||
Changes in judgment |
|
(7,729 |
) |
(1,555 |
) |
(10,964 |
) | |||
Settlements with taxing authorities |
|
— |
|
(124 |
) |
(61,820 |
) | |||
Lapses of applicable statute of limitations |
|
(21 |
) |
(110 |
) |
(7,956 |
) | |||
Total unrecognized tax benefits, December 31 |
|
$ |
133,241 |
|
$ |
135,824 |
|
$ |
126,698 |
|
The components of APS’s income tax expense are as follows (dollars in thousands):
|
|
Year Ended December 31, |
| |||||||
|
|
2012 |
|
2011 |
|
2010 |
| |||
Current: |
|
|
|
|
|
|
| |||
Federal |
|
$ |
(11,650 |
) |
$ |
4,633 |
|
$ |
(71,036 |
) |
State |
|
12,308 |
|
19,104 |
|
17,406 |
| |||
Total current |
|
658 |
|
23,737 |
|
(53,630 |
) | |||
Deferred: |
|
|
|
|
|
|
| |||
Federal |
|
216,367 |
|
154,632 |
|
207,334 |
| |||
State |
|
27,371 |
|
14,173 |
|
16,761 |
| |||
Total deferred |
|
243,738 |
|
168,805 |
|
224,095 |
| |||
Total income tax expense |
|
$ |
244,396 |
|
$ |
192,542 |
|
$ |
170,465 |
|
The following chart compares APS’s pretax income at the 35% federal income tax rate to income tax expense (dollars in thousands):
|
|
Year Ended December 31, |
| |||||||
|
|
2012 |
|
2011 |
|
2010 |
| |||
|
|
|
|
|
|
|
| |||
Federal income tax expense at 35% statutory rate |
|
$ |
235,027 |
|
$ |
194,710 |
|
$ |
184,202 |
|
Increases (reductions) in tax expense resulting from: |
|
|
|
|
|
|
| |||
State income tax net of federal income tax benefit |
|
25,379 |
|
21,139 |
|
19,186 |
| |||
Credits and favorable adjustments related to prior years resolved in current year |
|
— |
|
— |
|
(17,300 |
) | |||
Medicare Subsidy Part-D |
|
483 |
|
823 |
|
889 |
| |||
Allowance for equity funds used during construction (see Note 1) |
|
(6,158 |
) |
(6,880 |
) |
(6,563 |
) | |||
Palo Verde VIE noncontrolling interest (see Note 20) |
|
(11,065 |
) |
(9,633 |
) |
(7,057 |
) | |||
Other |
|
730 |
|
(7,617 |
) |
(2,892 |
) | |||
Income tax expense |
|
$ |
244,396 |
|
$ |
192,542 |
|
$ |
170,465 |
|
The following table shows the net deferred income tax liability recognized on the APS Balance Sheets (dollars in thousands):
|
|
December 31, |
| ||||
|
|
2012 |
|
2011 |
| ||
Current asset |
|
$ |
74,420 |
|
$ |
111,503 |
|
Long-term liability |
|
(2,133,976 |
) |
(1,952,608 |
) | ||
Deferred income taxes — net |
|
$ |
(2,059,556 |
) |
$ |
(1,841,105 |
) |
The components of the net deferred income tax liability were as follows (dollars in thousands):
|
|
December 31, |
| ||||
|
|
2012 |
|
2011 |
| ||
DEFERRED TAX ASSETS |
|
|
|
|
| ||
Regulatory liabilities: |
|
|
|
|
| ||
Asset retirement obligation and removal costs |
|
$ |
238,669 |
|
$ |
236,739 |
|
Renewable energy standard |
|
— |
|
19,722 |
| ||
Unamortized investment tax credits |
|
53,837 |
|
31,460 |
| ||
Other |
|
33,764 |
|
33,155 |
| ||
Risk management activities |
|
72,243 |
|
117,765 |
| ||
Pension and other postretirement liabilities |
|
392,486 |
|
494,744 |
| ||
Renewable energy incentives |
|
66,941 |
|
57,901 |
| ||
Credit and loss carryforwards |
|
52,441 |
|
106,668 |
| ||
Other |
|
111,327 |
|
99,176 |
| ||
Total deferred tax assets |
|
1,021,708 |
|
1,197,330 |
| ||
DEFERRED TAX LIABILITIES |
|
|
|
|
| ||
Plant-related |
|
(2,584,166 |
) |
(2,446,908 |
) | ||
Risk management activities |
|
(23,940 |
) |
(30,171 |
) | ||
Regulatory assets: |
|
|
|
|
| ||
Allowance for equity funds used during construction |
|
(37,899 |
) |
(33,347 |
) | ||
Deferred fuel and purchased power |
|
(28,858 |
) |
(10,884 |
) | ||
Deferred fuel and purchased power — mark-to-market |
|
(15,796 |
) |
(30,559 |
) | ||
Pension and other postretirement benefits |
|
(316,757 |
) |
(408,716 |
) | ||
Other |
|
(68,170 |
) |
(73,087 |
) | ||
Other |
|
(5,678 |
) |
(4,763 |
) | ||
Total deferred tax liabilities |
|
(3,081,264 |
) |
(3,038,435 |
) | ||
Deferred income taxes — net |
|
$ |
(2,059,556 |
) |
$ |
(1,841,105 |
) |
|
Consolidated quarterly financial information for 2012 and 2011 is as follows (dollars in thousands, except per share amounts):
|
|
2012 Quarter Ended |
|
2012 |
| |||||||||||
|
|
March 31, |
|
June 30, |
|
Sept. 30, |
|
Dec. 31, |
|
Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating revenues |
|
$ |
620,631 |
|
$ |
878,576 |
|
$ |
1,109,475 |
|
$ |
693,122 |
|
$ |
3,301,804 |
|
Operations and maintenance |
|
210,663 |
|
216,236 |
|
220,729 |
|
237,141 |
|
884,769 |
| |||||
Operating income |
|
48,007 |
|
254,489 |
|
447,970 |
|
101,289 |
|
851,755 |
| |||||
Income taxes |
|
(4,645 |
) |
76,689 |
|
147,116 |
|
18,157 |
|
237,317 |
| |||||
Income from continuing operations |
|
284 |
|
130,930 |
|
252,874 |
|
34,905 |
|
418,993 |
| |||||
Net income (loss) attributable to common shareholders |
|
(8,257 |
) |
122,345 |
|
244,823 |
|
22,631 |
|
381,542 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Earnings Per Share: |
|
|
|
|
|
|
|
|
|
|
| |||||
Income (loss) from continuing operations attributable to common shareholders — Basic |
|
$ |
(0.07 |
) |
$ |
1.12 |
|
$ |
2.23 |
|
$ |
0.24 |
|
$ |
3.54 |
|
Net income (loss) attributable to common shareholders — Basic |
|
(0.08 |
) |
1.12 |
|
2.23 |
|
0.21 |
|
3.48 |
| |||||
Income (loss) from continuing operations attributable to common shareholders — Diluted |
|
(0.07 |
) |
1.12 |
|
2.21 |
|
0.24 |
|
3.50 |
| |||||
Net income (loss) attributable to common shareholders — Diluted |
|
(0.08 |
) |
1.11 |
|
2.21 |
|
0.20 |
|
3.45 |
|
|
|
2011 Quarter Ended |
|
2011 |
| |||||||||||
|
|
March 31, |
|
June 30, |
|
Sept. 30, |
|
Dec. 31, |
|
Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating revenues |
|
$ |
648,847 |
|
$ |
799,799 |
|
$ |
1,124,841 |
|
$ |
667,892 |
|
$ |
3,241,379 |
|
Operations and maintenance |
|
255,029 |
|
210,590 |
|
210,035 |
|
228,632 |
|
904,286 |
| |||||
Operating income |
|
35,784 |
|
196,992 |
|
435,017 |
|
78,715 |
|
746,508 |
| |||||
Income taxes |
|
(6,005 |
) |
50,818 |
|
131,416 |
|
7,375 |
|
183,604 |
| |||||
Income (loss) from continuing operations |
|
(10,368 |
) |
93,185 |
|
253,273 |
|
19,544 |
|
355,634 |
| |||||
Net income (loss) attributable to common shareholders |
|
(15,135 |
) |
86,685 |
|
255,359 |
|
12,564 |
|
339,473 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Earnings Per Share: |
|
|
|
|
|
|
|
|
|
|
| |||||
Income (loss) from continuing operations attributable to common shareholders — Basic |
|
$ |
(0.15 |
) |
$ |
0.79 |
|
$ |
2.25 |
|
$ |
0.11 |
|
$ |
3.01 |
|
Net income (loss) attributable to common shareholders — Basic |
|
(0.14 |
) |
0.80 |
|
2.34 |
|
0.12 |
|
3.11 |
| |||||
Income (loss) from continuing operations attributable to common shareholders — Diluted |
|
(0.15 |
) |
0.78 |
|
2.24 |
|
0.11 |
|
2.99 |
| |||||
Net income (loss) attributable to common shareholders — Diluted |
|
(0.14 |
) |
0.79 |
|
2.32 |
|
0.11 |
|
3.09 |
|
Quarterly financial information for 2012 and 2011 is as follows (dollars in thousands):
|
|
2012 Quarter Ended, |
|
2012 |
| |||||||||||
|
|
March 31, |
|
June 30, |
|
September 30, |
|
December 31, |
|
Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating revenues |
|
$ |
620,248 |
|
$ |
877,587 |
|
$ |
1,108,623 |
|
$ |
687,031 |
|
$ |
3,293,489 |
|
Operations and maintenance |
|
208,447 |
|
213,746 |
|
218,403 |
|
233,320 |
|
873,916 |
| |||||
Operating income |
|
53,995 |
|
176,821 |
|
296,945 |
|
77,768 |
|
605,529 |
| |||||
Net income (loss) attributable to common shareholder |
|
(4,105 |
) |
124,928 |
|
247,831 |
|
26,843 |
|
395,497 |
| |||||
|
|
2011 Quarter Ended, |
|
2011 |
| |||||||||||
|
|
March 31, |
|
June 30, |
|
September 30, |
|
December 31, |
|
Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating revenues |
|
$ |
647,994 |
|
$ |
798,686 |
|
$ |
1,124,057 |
|
$ |
666,504 |
|
$ |
3,237,241 |
|
Operations and maintenance |
|
252,607 |
|
208,597 |
|
207,967 |
|
226,746 |
|
895,917 |
| |||||
Operating income |
|
45,574 |
|
145,400 |
|
292,783 |
|
70,626 |
|
554,383 |
| |||||
Net income (loss) attributable to common shareholder |
|
(12,081 |
) |
87,705 |
|
246,333 |
|
14,292 |
|
336,249 |
| |||||
|
The following table provides detail of other income and other expense for 2012, 2011 and 2010 (dollars in thousands):
|
|
2012 |
|
2011 |
|
2010 |
| |||
Other income: |
|
|
|
|
|
|
| |||
Interest income |
|
$ |
1,239 |
|
$ |
1,850 |
|
$ |
3,255 |
|
Investment gains — net |
|
— |
|
1,165 |
|
2,797 |
| |||
Miscellaneous |
|
367 |
|
96 |
|
335 |
| |||
Total other income |
|
$ |
1,606 |
|
$ |
3,111 |
|
$ |
6,387 |
|
|
|
|
|
|
|
|
| |||
Other expense: |
|
|
|
|
|
|
| |||
Non-operating costs |
|
$ |
(7,777 |
) |
$ |
(7,037 |
) |
$ |
(6,831 |
) |
Investment loss — net |
|
(2,453 |
) |
— |
|
— |
| |||
Miscellaneous |
|
(9,612 |
) |
(3,414 |
) |
(3,090 |
) | |||
Total other expense |
|
$ |
(19,842 |
) |
$ |
(10,451 |
) |
$ |
(9,921 |
) |
The following table provides detail of APS’s other income and other expense for 2012, 2011 and 2010 (dollars in thousands):
|
|
2012 |
|
2011 |
|
2010 |
| |||
Other income: |
|
|
|
|
|
|
| |||
Interest income |
|
$ |
310 |
|
$ |
406 |
|
$ |
668 |
|
Investment gains — net |
|
— |
|
1,418 |
|
2,334 |
| |||
Miscellaneous |
|
2,558 |
|
3,247 |
|
5,954 |
| |||
Total other income |
|
$ |
2,868 |
|
$ |
5,071 |
|
$ |
8,956 |
|
|
|
|
|
|
|
|
| |||
Other expense: |
|
|
|
|
|
|
| |||
Non-operating costs (a) |
|
$ |
(8,706 |
) |
$ |
(8,810 |
) |
$ |
(9,855 |
) |
Asset dispositions |
|
(1,511 |
) |
(1,352 |
) |
(612 |
) | |||
Miscellaneous |
|
(10,933 |
) |
(5,166 |
) |
(5,392 |
) | |||
Total other expense |
|
$ |
(21,150 |
) |
$ |
(15,328 |
) |
$ |
(15,859 |
) |
(a) As defined by the FERC, includes below-the-line non-operating utility income and expense (items excluded from utility rate recovery).
|
|
|
|
|
|