PINNACLE WEST CAPITAL CORP, 10-K filed on 2/18/2011
Annual Report
Document and Entity Information
Year Ended
Dec. 31, 2010
Feb. 15, 2011
Jun. 30, 2010
Document and Entity Information [Abstract]
 
 
 
Entity Registrant Name
PINNACLE WEST CAPITAL CORP 
 
 
Entity Central Index Key
0000764622 
 
 
Document Type
10-K 
 
 
Document Period End Date
2010-12-31 
 
 
Amendment Flag
FALSE 
 
 
Document Fiscal Year Focus
2010 
 
 
Document Fiscal Period Focus
FY 
 
 
Current Fiscal Year End Date
12/31 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Public Float
 
 
3,935,855,234 
Entity Common Stock, Shares Outstanding
 
108,780,623 
 
Consolidated Statements of Income (USD $)
In Thousands, except Per Share data
Year Ended
Dec. 31,
2010
2009
2008
OPERATING REVENUES
 
 
 
Regulated electricity segment
$ 3,180,678 
$ 3,149,187 
$ 3,127,383 
Marketing and trading
66,897 
Other revenues
82,967 
26,723 
25,407 
Total
3,263,645 
3,175,910 
3,219,687 
OPERATING EXPENSES
 
 
 
Regulated electricity segment fuel and purchased power
1,046,815 
1,178,620 
1,284,116 
Marketing and trading fuel and purchased power
45,572 
Operations and maintenance
877,406 
831,863 
765,277 
Depreciation and amortization
414,555 
407,463 
391,190 
Taxes other than income taxes
135,334 
123,277 
124,853 
Other expenses
65,651 
24,534 
26,032 
Total
2,539,761 
2,565,757 
2,637,040 
OPERATING INCOME
723,884 
610,153 
582,647 
OTHER INCOME (DEDUCTIONS)
 
 
 
Allowance for equity funds used during construction (Note 1)
22,066 
14,999 
18,636 
Other income (Note 19)
6,368 
5,278 
9,541 
Other expense (Note 19)
(9,764)
(14,269)
(31,576)
Total
18,670 
6,008 
(3,399)
INTEREST EXPENSE
 
 
 
Interest charges
244,174 
237,527 
219,916 
Allowance for borrowed funds used during construction (Note 1)
(16,539)
(10,430)
(14,547)
Total
227,635 
227,097 
205,369 
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
514,919 
389,064 
373,879 
INCOME TAXES (Note 4)
164,321 
136,506 
95,544 
INCOME FROM CONTINUING OPERATIONS
350,598 
252,558 
278,335 
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
 
 
 
Net of income tax expense (benefit) of $12,808, $(107,596) and $(11,648) (Note 22)
19,611 
(179,794)
(18,715)
NET INCOME
370,209 
72,764 
259,620 
Less: Net income attributable to noncontrolling interests (Note 20)
20,156 
4,434 
17,495 
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS
350,053 
68,330 
242,125 
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING - BASIC
106,573 
101,161 
100,691 
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING - DILUTED
107,138 
101,264 
100,965 
EARNINGS PER WEIGHTED - AVERAGE COMMON SHARE OUTSTANDING
 
 
 
Income from continuing operations attributable to common shareholders - basic
3.10 
2.31 
2.59 
Net income attributable to common shareholders - basic
3.28 
0.68 
2.40 
Income from continuing operations attributable to common shareholders - diluted
3.08 
2.30 
2.58 
Net income attributable to common shareholders - diluted
3.27 
0.67 
2.40 
DIVIDENDS DECLARED PER SHARE
2.10 
2.10 
2.10 
AMOUNTS ATTRIBUTABLE TO COMMON SHAREHOLDERS:
 
 
 
Income from continuing operations, net of tax
330,435 
233,349 
260,840 
Discontinued operations, net of tax
19,618 
(165,019)
(18,715)
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS
$ 350,053 
$ 68,330 
$ 242,125 
Consolidated Statements of Income (Parenthetical) (USD $)
In Thousands
Year Ended
Dec. 31,
2010
2009
2008
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
 
 
 
Income tax expense (benefit) on discontinued operations
$ 12,808 
$ (107,596)
$ (11,648)
Consolidated Balance Sheets (USD $)
In Thousands
Year Ended
Dec. 31,
2010
2009
CURRENT ASSETS
 
 
Cash and cash equivalents
$ 110,188 
$ 145,378 
Customer and other receivables
324,207 
301,915 
Accrued unbilled revenues
103,292 
110,971 
Allowance for doubtful accounts
(7,981)
(6,153)
Materials and supplies (at average cost)
181,414 
176,020 
Fossil fuel (at average cost)
21,575 
39,245 
Deferred income taxes (Note 4)
94,602 
53,990 
Income tax receivable (Note 4)
2,483 
26,005 
Assets from risk management activities (Note 18)
73,788 
50,619 
Other current assets
28,362 
30,747 
Total current assets
931,930 
928,737 
INVESTMENTS AND OTHER ASSETS
 
 
Real estate investments - net (Notes 1, 6 and 23)
119,989 
Assets from risk management activities (Note 18)
39,032 
28,855 
Nuclear decommissioning trust (Note 14)
469,886 
414,576 
Other assets
116,216 
110,091 
Total investments and other assets
625,134 
673,511 
PROPERTY, PLANT AND EQUIPMENT (Notes 1, 6, 9 and 10)
 
 
Plant in service and held for future use
13,201,960 
12,848,138 
Accumulated depreciation and amortization
(4,514,204)
(4,340,645)
Net
8,687,756 
8,507,493 
Construction work in progress
459,361 
467,700 
Palo Verde sale leaseback, net of accumulated depreciation of $213,094 and $204,328 (Note 20)
137,956 
146,722 
Intangible assets, net of accumulated amortization of $330,584 and $294,724
184,952 
164,380 
Nuclear fuel, net of accumulated amortization of $85,270 and $64,544
108,794 
118,243 
Total property, plant and equipment
9,578,819 
9,404,538 
DEFERRED DEBITS
 
 
Regulatory assets (Notes 1, 3 and 4)
1,048,656 
813,161 
Income tax receivable (Note 4)
65,103 
65,103 
Other
113,061 
101,274 
Total deferred debits
1,226,820 
979,538 
TOTAL ASSETS
12,362,703 
11,986,324 
CURRENT LIABILITIES
 
 
Accounts payable
236,354 
240,637 
Accrued taxes (Note 4)
104,711 
104,011 
Accrued interest
54,831 
54,596 
Short-term borrowings (Note 5)
16,600 
153,715 
Current maturities of long-term debt (Note 6)
631,879 
303,476 
Customer deposits
68,322 
71,026 
Liabilities from risk management activities (Note 18)
58,976 
55,908 
Other current liabilities
139,063 
125,574 
Total current liabilities
1,310,736 
1,108,943 
LONG-TERM DEBT LESS CURRENT MATURITIES (Note 6)
 
 
Long-term debt less current maturities
2,948,991 
3,370,524 
Palo Verde sale leaseback lessor notes less current maturities (Note 20)
96,803 
126,000 
Total long-term debt less current maturities
3,045,794 
3,496,524 
DEFERRED CREDITS AND OTHER
 
 
Deferred income taxes (Note 4)
1,833,566 
1,496,095 
Deferred fuel and purchased power regulatory liability (Note 3)
58,442 
87,291 
Other regulatory liabilities (Notes 1 and 3)
694,589 
679,072 
Liability for asset retirements (Note 12)
328,571 
301,783 
Liabilities for pension and other postretirement benefits (Note 8)
813,121 
811,338 
Liabilities from risk management activities (Note 18)
65,390 
62,443 
Customer advances
121,645 
136,595 
Coal mine reclamation
117,243 
92,060 
Unrecognized tax benefits (Note 4)
66,349 
142,099 
Other
132,031 
144,077 
Total deferred credits and other
4,230,947 
3,952,853 
COMMITMENTS AND CONTINGENCIES (SEE NOTES)
 
 
EQUITY (Note 7)
 
 
Common stock, no par value; authorized 150,000,000 shares; issued 108,820,067 at end of 2010 and 101,527,937 at end of 2009
2,421,372 
2,153,295 
Treasury stock at cost; 50,410 shares at end of 2010 and 93,239 at end of 2009
(2,239)
(3,812)
Total common stock
2,419,133 
2,149,483 
Retained earnings
1,423,961 
1,298,213 
Accumulated other comprehensive loss:
 
 
Pension and other postretirement benefits (Note 8)
(59,420)
(50,892)
Derivative instruments
(100,347)
(80,695)
Total accumulated other comprehensive loss
(159,767)
(131,587)
Total shareholders' equity
3,683,327 
3,316,109 
Noncontrolling interests (Note 20)
91,899 
111,895 
Total equity
3,775,226 
3,428,004 
TOTAL LIABILITIES AND EQUITY
$ 12,362,703 
$ 11,986,324 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data
Dec. 31, 2010
Dec. 31, 2009
PROPERTY, PLANT AND EQUIPMENT (Notes 1, 6, 9 and 10)
 
 
Accumulated depreciation of Palo Verde sale leaseback
$ 213,094 
$ 204,328 
Accumulated amortization on intangible assets
330,584 
294,724 
Accumulated amortization on nuclear fuel
85,270 
64,544 
EQUITY (Note 7)
 
 
Common stock, par value
$ 0 
$ 0 
Common stock, shares authorized
150,000,000 
150,000,000 
Common stock, shares issued
108,820,067 
101,527,937 
Treasury stock at cost, shares
50,410 
93,239 
Consolidated Statements of Cash Flows (USD $)
In Thousands
Year Ended
Dec. 31,
2010
2009
2008
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net Income
$ 370,209 
$ 72,764 
$ 259,620 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Gain on sale of district cooling business
(41,973)
Depreciation and amortization including nuclear fuel
472,807 
450,864 
431,672 
Deferred fuel and purchased power
93,631 
(51,742)
(80,183)
Deferred fuel and purchased power amortization
(122,481)
147,018 
183,126 
Allowance for equity funds used during construction
(22,066)
(14,999)
(18,636)
Real estate impairment charge
16,731 
280,188 
53,250 
Gain on real estate debt restructuring
(16,755)
Deferred income taxes
260,411 
105,492 
158,024 
Change in mark-to-market valuations
2,688 
(6,939)
9,074 
Changes in current assets and liabilities:
 
 
 
Customer and other receivables
(67,943)
12,292 
73,446 
Accrued unbilled revenues
7,679 
(10,882)
7,388 
Materials, supplies and fossil fuel
12,276 
(12,261)
(25,453)
Other current assets
5,246 
24,647 
56,775 
Accounts payable
9,125 
(27,328)
(69,439)
Accrued taxes and income tax receivable - net
24,222 
(31,792)
(13,149)
Other current liabilities
5,204 
29,274 
(5,130)
Expenditures for real estate investments
(622)
(2,957)
(21,168)
Other changes in real estate assets
4,068 
(4,216)
18,211 
Change in margin and collateral accounts - assets
(9,937)
(12,806)
17,450 
Change in margin and collateral accounts - liabilities
(88,315)
35,654 
(132,416)
Change in long term income tax receivable
(131,984)
Change in unrecognized tax benefits
(73,621)
137,898 
(94,551)
Change in other regulatory liabilities
54,518 
110,642 
(12,129)
Change in other long-term assets
(43,189)
(47,899)
6,104 
Change in other long-term liabilities
(101,456)
16,377 
46,207 
Net cash flow provided by operating activities
750,457 
1,067,305 
848,093 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Capital expenditures
(748,374)
(764,609)
(935,577)
Contributions in aid of construction
32,754 
53,525 
60,292 
Allowance for borrowed funds used during construction
(16,778)
(10,745)
(18,820)
Proceeds from the sale of district cooling business
100,300 
Proceeds from nuclear decommissioning trust sales
560,469 
441,242 
317,619 
Investment in nuclear decommissioning trust
(584,885)
(463,033)
(338,361)
Proceeds from sale of commercial real estate investments
72,038 
43,370 
94,171 
Other
8,576 
(4,667)
5,517 
Net cash flow used for investing activities
(575,900)
(704,917)
(815,159)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Issuance of long-term debt
867,469 
96,934 
Repayment of long-term debt
(106,572)
(456,882)
(202,234)
Short-term borrowings and payments - net
(137,115)
(516,754)
331,741 
Dividends paid on common stock
(216,979)
(205,076)
(204,247)
Common stock equity issuance
255,971 
3,302 
3,687 
Noncontrolling interests
(11,403)
(14,485)
(13,782)
Other
6,351 
171 
3,891 
Net cash flow provided by (used for) financing activities
(209,747)
(322,255)
15,990 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(35,190)
40,133 
48,924 
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
145,378 
105,245 
56,321 
CASH AND CASH EQUIVALENTS AT END OF YEAR
110,188 
145,378 
105,245 
Cash paid during the period for:
 
 
 
Income taxes, net of (refunds)
(23,447)
(52,776)
24,233 
Interest, net of amounts capitalized
$ 221,728 
$ 216,608 
$ 205,546 
Consolidated Statements of Changes in Equity
In Thousands
COMMON STOCK
TREASURY STOCK
RETAINED EARNINGS
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
NONCONTROLLING INTERESTS
COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS
Total
Balance at beginning of year at Dec. 31, 2007
2,135,787 
(2,054)
1,413,741 
(15,863)
128,456 
 
 
Net income attributable to noncontrolling interests
 
 
 
 
17,495 
 
17,495 
Net income attributable to common shareholders
 
 
242,125 
 
 
242,125 
242,125 
Issuance of common stock
10,845 
 
 
 
 
 
 
Purchase of treasury stock
 
(1,387)
 
 
 
 
 
Reissuance of treasury stock used for stock compensation
 
587 
 
 
 
 
 
Common stock dividends
 
 
(211,405)
 
 
 
 
Pension and other postretirement benefits (Note 8):
 
 
 
 
 
 
 
Unrealized actuarial loss, net of tax benefit of $(7,738), $(4,223) and $(7,801)
 
 
 
(11,053)
 
 
 
Amortization to income:
 
 
 
 
 
 
 
Actuarial loss, net of tax benefit of $1,870, $1,705 and $1,578
 
 
 
2,437 
 
 
 
Prior service cost, net of tax benefit of $201, $215 and $222
 
 
 
343 
 
 
 
Transition obligation, net of tax benefit of $59, $39 and $40
 
 
 
62 
 
 
 
Derivative instruments:
 
 
 
 
 
 
 
Net unrealized loss, net of tax benefit of $(61,348), $(61,329) and $(54,490)
 
 
 
(83,093)
 
 
 
Reclassification of net realized (gain) loss to income, net of tax (expense) benefit of $48,453, $72,877 and $(24,776)
 
 
 
(39,531)
 
 
 
Net capital activities by noncontrolling interests
 
 
 
 
(20,961)
 
 
Other comprehensive income (loss)
 
 
 
 
 
(130,835)
 
Comprehensive income attributable to common shareholders
 
 
 
 
 
111,290 
 
Other
4,691 
 
(253)
 
 
 
 
Total equity
2,151,323 
(2,854)
1,444,208 
(146,698)
124,990 
 
3,570,969 
Balance at end of year at Dec. 31, 2008
2,151,323 
(2,854)
1,444,208 
(146,698)
124,990 
 
3,570,969 
Net income attributable to noncontrolling interests
 
 
 
 
4,434 
 
4,434 
Net income attributable to common shareholders
 
 
68,330 
 
 
68,330 
68,330 
Issuance of common stock
10,620 
 
 
 
 
 
 
Purchase of treasury stock
 
(2,156)
 
 
 
 
 
Reissuance of treasury stock used for stock compensation
 
1,198 
 
 
 
 
 
Common stock dividends
 
 
(212,386)
 
 
 
 
Pension and other postretirement benefits (Note 8):
 
 
 
 
 
 
 
Unrealized actuarial loss, net of tax benefit of $(7,738), $(4,223) and $(7,801)
 
 
 
(6,350)
 
 
 
Amortization to income:
 
 
 
 
 
 
 
Actuarial loss, net of tax benefit of $1,870, $1,705 and $1,578
 
 
 
2,615 
 
 
 
Prior service cost, net of tax benefit of $201, $215 and $222
 
 
 
329 
 
 
 
Transition obligation, net of tax benefit of $59, $39 and $40
 
 
 
61 
 
 
 
Derivative instruments:
 
 
 
 
 
 
 
Net unrealized loss, net of tax benefit of $(61,348), $(61,329) and $(54,490)
 
 
 
(93,996)
 
 
 
Reclassification of net realized (gain) loss to income, net of tax (expense) benefit of $48,453, $72,877 and $(24,776)
 
 
 
112,452 
 
 
 
Net capital activities by noncontrolling interests
 
 
 
 
(17,529)
 
 
Other comprehensive income (loss)
 
 
 
 
 
15,111 
 
Comprehensive income attributable to common shareholders
 
 
 
 
 
83,441 
 
Other
(8,648)
 
(1,939)
 
 
 
 
Total equity
2,153,295 
(3,812)
1,298,213 
(131,587)
111,895 
 
3,428,004 
Balance at end of year at Dec. 31, 2009
2,153,295 
(3,812)
1,298,213 
(131,587)
111,895 
 
3,428,004 
Net income attributable to noncontrolling interests
 
 
 
 
20,156 
 
20,156 
Net income attributable to common shareholders
 
 
350,053 
 
 
350,053 
350,053 
Issuance of common stock
263,297 
 
 
 
 
 
 
Purchase of treasury stock
 
(82)
 
 
 
 
 
Reissuance of treasury stock used for stock compensation
 
1,655 
 
 
 
 
 
Common stock dividends
 
 
(224,305)
 
 
 
 
Pension and other postretirement benefits (Note 8):
 
 
 
 
 
 
 
Unrealized actuarial loss, net of tax benefit of $(7,738), $(4,223) and $(7,801)
 
 
 
(11,795)
 
 
 
Amortization to income:
 
 
 
 
 
 
 
Actuarial loss, net of tax benefit of $1,870, $1,705 and $1,578
 
 
 
2,868 
 
 
 
Prior service cost, net of tax benefit of $201, $215 and $222
 
 
 
308 
 
 
 
Transition obligation, net of tax benefit of $59, $39 and $40
 
 
 
91 
 
 
 
Derivative instruments:
 
 
 
 
 
 
 
Net unrealized loss, net of tax benefit of $(61,348), $(61,329) and $(54,490)
 
 
 
(93,939)
 
 
 
Reclassification of net realized (gain) loss to income, net of tax (expense) benefit of $48,453, $72,877 and $(24,776)
 
 
 
74,287 
 
 
 
Net capital activities by noncontrolling interests
 
 
 
 
(40,152)
 
 
Other comprehensive income (loss)
 
 
 
 
 
(28,180)
 
Comprehensive income attributable to common shareholders
 
 
 
 
 
321,873 
 
Other
4,780 
 
 
 
 
 
 
Total equity
2,421,372 
(2,239)
1,423,961 
(159,767)
91,899 
 
3,775,226 
Balance at end of year at Dec. 31, 2010
2,421,372 
(2,239)
1,423,961 
(159,767)
91,899 
 
3,775,226 
Consolidated Statements of Changes in Equity (Parenthetical) (ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), USD $)
In Thousands
Year Ended
Dec. 31,
2010
2009
2008
Pension and other postretirement benefits (Note 8):
 
 
 
Unrealized actuarial loss, tax benefit
$ (7,738)
$ (4,223)
$ (7,801)
Amortization to income:
 
 
 
Actuarial loss, tax benefit
1,870 
1,705 
1,578 
Prior service cost, tax benefit
201 
215 
222 
Transition obligation, tax benefit
59 
39 
40 
Derivative instruments:
 
 
 
Net unrealized loss, tax benefit
(61,348)
(61,329)
(54,490)
Reclassification of net realized (gain) loss to income, tax (expense) benefit
$ 48,453 
$ 72,877 
$ (24,776)
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
1. Summary of Significant Accounting Policies
Consolidation and Nature of Operations
Pinnacle West’s Consolidated Financial Statements include the accounts of Pinnacle West and our subsidiaries: APS, SunCor, APSES, El Dorado and Pinnacle West Marketing & Trading. APS’s consolidated financial statements include the accounts of APS and the Palo Verde sale leaseback VIEs. Intercompany accounts and transactions between the consolidated companies have been eliminated.
APS is a vertically-integrated electric utility that provides either retail or wholesale electric service to substantially all of the state of Arizona, with the major exceptions of about one-half of the Phoenix metropolitan area, the Tucson metropolitan area and Mohave County in northwestern Arizona. APS accounts for substantially 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. All activities for SunCor are now reported as discontinued operations (see Note 22). APSES provides energy-related projects to commercial and industrial retail customers in competitive markets in the western United States. In 2008, APSES discontinued its commodity-related energy services (see Note 22). El Dorado is an investment firm. Pinnacle West Marketing & Trading began operations in early 2007. These operations were previously conducted by a division of Pinnacle West through the end of 2006. By the end of 2008, substantially all the contracts were transferred to APS or expired.
In preparing the consolidated financial statements, we have evaluated the events that have occurred after December 31, 2010 through the date the financial statements were issued.
Our consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments except as otherwise disclosed in the notes) that we believe are necessary for the fair presentation of our financial position, results of operations and cash flows for the periods presented. These consolidated financial statements and notes have been prepared consistently with the exception of the reclassification of certain prior year amounts on our Consolidated Statements of Income and Consolidated Balance Sheets in accordance with accounting requirements for reporting discontinued operations (see Note 22), and amended accounting guidance related to VIEs (see Note 2).
Certain line items are presented in more detail on the Consolidated Statements of Cash Flows than was presented in the prior years. Other line items are more condensed than the previous presentation. The prior year amounts were reclassified to conform to the current year presentation. These reclassifications had no impact on total net cash flow provided by operating activities.
The following tables show the impact of the reclassifications of prior years (previously reported) amounts (dollars in thousands):
                                 
                            Amount  
                            reported after  
            Reclassifications             adoption of  
            as a result of the             amended VIE  
            adoption of             accounting  
    As     new VIE     Reclassifications     guidance and  
Statement of Income for the Year   previously     accounting     for discontinued     discontinued  
Ended December 31, 2009   reported     guidance     operations     operations  
Operating Revenues
                               
Real estate segment
  $ 103,152     $     $ (103,152 )   $  
Other revenues
    44,762             (18,039 )     26,723  
Operating Expenses
                               
Real estate segment operations
    102,381             (102,381 )      
Real estate impairment charge
    258,453             (258,453 )      
Operations and maintenance
    875,357       (39,660 )     (3,834 )     831,863  
Depreciation and amortization
    404,331       7,704       (4,572 )     407,463  
Taxes other than income taxes
    123,663             (386 )     123,277  
Other expenses
    32,523             (7,989 )     24,534  
Other
                               
Other income
    5,669             (391 )     5,278  
Interest Expense
                               
Interest charges
    233,859       12,747       (9,079 )     237,527  
Allowance for borrowed funds used during construction
    (10,745 )           315       (10,430 )
Income Taxes
    37,827             98,679       136,506  
Income From Continuing Operations
    67,231       19,209       166,118       252,558  
Loss From Discontinued Operations
    (13,676 )           (166,118 )     (179,794 )
Net Income
    53,555       19,209             72,764  
Net Income (Loss) Attributable To Noncontrolling Interests
    (14,775 )     19,209             4,434  
 
                               
Statement of Income for the Year
Ended December 31, 2008
                               
Operating Revenues
                               
Real estate segment
  $ 74,549     $     $ (74,549 )   $  
Other revenues
    41,729             (16,322 )     25,407  
Operating Expenses
                               
Real estate segment operations
    100,102             (100,102 )      
Real estate impairment charge
    18,108             (18,108 )      
Operations and maintenance
    807,852       (39,660 )     (2,915 )     765,277  
Depreciation and amortization
    390,093       7,704       (6,607 )     391,190  
Taxes other than income taxes
    125,336             (483 )     124,853  
Other expenses
    34,171             (8,139 )     26,032  
Other
                               
Other income
    12,797             (3,256 )     9,541  
Interest Expense
                               
Interest charges
    215,684       14,461       (10,229 )     219,916  
Allowance for borrowed funds used during construction
    (18,820 )           4,273       (14,547 )
Income Taxes
    76,897             18,647       95,544  
Income From Continuing Operations
    231,304       17,495       29,536       278,335  
Income (Loss) From Discontinued Operations
    10,821             (29,536 )     (18,715 )
Net Income
    242,125       17,495             259,620  
Net Income Attributable To Noncontrolling Interests
          17,495             17,495  
                         
            Reclassifications as a     Amounts reported  
            result of the adoption of     after adoption of  
    As previously     the new VIE accounting     amended VIE  
Balance Sheets – December 31, 2009   reported     guidance     accounting guidance  
Property, Plant and Equipment — Palo Verde sale leaseback, net of accumulated depreciation
  $     $ 146,722     $ 146,722  
Deferred Debits — Regulatory assets
    781,714       31,447       813,161  
Current Liabilities — Current maturities of long-term debt
    277,693       25,783       303,476  
Long-Term Debt Less Current Maturities Palo Verde sale leaseback lessor notes
          126,000       126,000  
Deferred Credits and Other — Other
    200,015       (55,938 )     144,077  
Equity — Noncontrolling interests
    29,571       82,324       111,895  
                         
                    Amounts reported  
            Reclassifications as a     after adoption of  
            result of the adoption of     amended VIE  
            the new VIE accounting     accounting  
            guidance and to     guidance and to  
Statement of Cash Flows for the   As previously     conform to current year     conform to current  
Year Ended December 31, 2009   reported     presentation     year presentation  
Cash Flows from Operating Activities
                       
Net income
  $ 53,555     $ 19,209     $ 72,764  
Depreciation and amortization including nuclear fuel
    443,160       7,704       450,864  
Other current assets
    (9,186 )     33,833       24,647  
Home inventory
    33,833       (33,833 )      
Other long-term liabilities
    7,050       9,327       16,377  
Cash Flows from Financing Activities
                       
Repayment of long-term debt
    (435,127 )     (21,755 )     (456,882 )
Noncontrolling interests
          (14,485 )     (14,485 )
Supplemental Disclosure of Cash Flow Information
                       
Cash paid for interest, net of amounts capitalized
    203,860       12,748       216,608  
                         
                    Amounts reported  
            Reclassifications as a     after adoption of  
            result of the adoption of     amended VIE  
            the new VIE accounting     accounting  
            guidance and to     guidance and to  
Statement of Cash Flows for the   As previously     conform to current year     conform to current  
Year Ended December 31, 2008   reported     presentation     year presentation  
Cash Flows from Operating Activities
                       
Net income
  $ 242,125     $ 17,495     $ 259,620  
Depreciation and amortization including nuclear fuel
    423,969       7,703       431,672  
Other current assets
    8,734       48,041       56,775  
Home inventory
    48,041       (48,041 )      
Other long-term liabilities
    36,880       9,327       46,207  
Cash Flows from Financing Activities
                       
Repayment of long-term debt
    (181,491 )     (20,743 )     (202,234 )
Noncontrolling interests
          (13,782 )     (13,782 )
Supplemental Disclosure of Cash Flow Information
                       
Cash paid for interest, net of amounts capitalized
    191,085       14,461       205,546  
Accounting Records and Use of Estimates
Our accounting records are maintained in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Derivative Accounting
We are exposed to the impact of market fluctuations in the commodity price and transportation costs of electricity and natural gas. We manage risks associated with these market fluctuations by utilizing various instruments that qualify as derivatives, including exchange-traded futures and options and over-the-counter forwards, options and swaps. As part of our overall risk management program, we use such instruments to hedge purchases and sales of electricity and fuels. The changes in market value of such contracts have a high correlation to price changes in the hedged transactions.
We account for our derivative contracts in accordance with derivatives and hedging guidance, which requires that entities recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. See Note 18 for additional information about our derivative accounting policies.
Fair Value Measurements
We determine and disclose the fair value of certain assets and liabilities in accordance with fair value guidance. Fair value is the price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between willing market participants on the measurement date. Inputs to fair value include observable and unobservable data. We maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
We determine fair market value using actively-quoted prices for identical instruments when available. When actively quoted prices are not available for the identical instruments we use prices for similar instruments or other corroborative market information or prices provided by other external sources. For options, long-term contracts and other contracts for which price quotes are not available, we use unobservable inputs, such as models and other valuation methods, to determine fair market value.
The use of models and other valuation methods to determine fair market value often requires subjective and complex judgment. Actual results could differ from the results estimated through application of these methods. Our structured activities are hedged with a portfolio of forward purchases that protects the economic value of the sales transactions. Our practice is to hedge within timeframes established by our executive risk committee.
See Note 14 for additional information about fair value measurements.
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 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.
Utility Plant and Depreciation
Utility plant is the term we use to describe the business property and equipment that supports electric service, consisting primarily of generation, transmission and distribution facilities. We report utility plant at its original cost, which includes:
    material and labor;
    contractor costs;
    capitalized leases;
    construction overhead costs (where applicable); and
    capitalized interest or an allowance for funds used during construction.
We expense the costs of plant outages, major maintenance and routine maintenance as incurred. We charge retired utility plant to accumulated depreciation. Liabilities associated with the retirement of tangible long-lived assets are recognized at fair value as incurred and capitalized as part of the related tangible long-lived assets. Accretion of the liability due to the passage of time is an operating expense and the capitalized cost is depreciated over the useful life of the long-lived asset. See Note 12.
APS records a regulatory liability for the asset retirement obligations related to its regulated assets. This regulatory liability represents the difference between the amount that has been recovered in regulated rates and the amount calculated in accordance with guidance on accounting for asset retirement obligations. APS believes it can recover in regulated rates the costs capitalized in accordance with this accounting guidance.
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, 2010 were as follows:
    Fossil plant — 18 years;
    Nuclear plant — 17 years;
    Other generation — 25 years;
    Transmission — 40 years;
    Distribution — 35 years; and
    Other — 7 years.
For the years 2008 through 2010, the depreciation rates ranged from a low of 1.30% to a high of 10.20%. The weighted-average rate was 2.98% for 2010, 3.06% for 2009 and 3.08% for 2008. We depreciate non-utility property and equipment over the estimated useful lives of the related assets, ranging from 3 to 34 years.
Investments
El Dorado accounts for its investments using either the equity method (if significant influence) or the cost method (if less than 20% ownership).
Our investments in the nuclear decommissioning trust fund are accounted for in accordance with guidance on accounting for certain investments in debt and equity securities. See Note 14 for more information on these investments.
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 9.2% for 2010, 5.9% for 2009 and 7.0% for 2008. APS compounds AFUDC monthly and ceases to accrue AFUDC when construction work is completed and the property is placed in service.
Electric Revenues
We derive electric revenues primarily from sales of electricity to our regulated Native Load customers. Revenues related to the sale of electricity are generally recorded when service is rendered or electricity is delivered to customers. The billing of electricity sales to individual Native Load customers is based on the reading of their meters, which occurs on a systematic basis throughout the month. Unbilled revenues are estimated by applying an average revenue/kWh to the number of estimated kWhs delivered but not billed. Differences historically between the actual and estimated unbilled revenues are immaterial. We exclude sales taxes and franchise fees on electric revenues from both revenue and taxes other than income taxes.
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.
Effective January 1, 2010, 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). This revenue treatment continues through 2012, or until new rates are established in APS’s next general retail rate case, if that is before year end 2012. Certain proceeds received under previous versions of the line extension policy, or for activities not involving an extension or upgrade of service (e.g., service relocations at the request of governmental entities or undergrounding of overhead facilities) will continue to be treated as contributions in aid of construction and will not impact electric revenues.
Allowance for Doubtful Accounts
The allowance for doubtful accounts represents our best estimate of existing accounts receivable that will ultimately be uncollectible. The allowance is calculated by applying estimated write-off factors to various classes of outstanding receivables, including accrued utility revenues. The write-off factors used to estimate uncollectible accounts are based upon consideration of both historical collections experience and management’s best estimate of future collections success given the existing collections environment.
Real Estate Investments
Real estate investments primarily included SunCor’s land, home inventory, commercial property and investments in joint ventures. Land included acquisition costs, infrastructure costs, capitalized interest and property taxes directly associated with the acquisition and development of each project. Home inventory consisted of construction costs, improved lot costs, capitalized interest and property taxes on homes and condos under construction. Homes under construction were classified as “real estate investments” on the Consolidated Balance Sheets; upon completion of construction they transferred to “home inventory” with the expectation that they would be sold in a timely manner.
For the purposes of evaluating impairment, in accordance with the provisions on accounting for the impairment or disposal of long-lived assets, we classified our real estate assets, such as land under development, land held for future development, and commercial property as “held and used.” When events or changes in circumstances indicated that the carrying values of real estate assets considered held and used would not be recoverable, we compared the undiscounted cash flows that we estimated would be generated by each asset to its carrying amount. If the carrying amount exceeded the undiscounted cash flows, we adjusted the asset to fair value and recognized an impairment charge. The adjusted value became the new book value (carrying amount) for held and used assets. Our internal models used inputs that we believe were consistent with those that would be used by market participants.
Real estate home inventory was considered to be held for sale for purposes of evaluating impairment in accordance with the provisions of accounting guidance for impairment or disposal of long-lived assets. Home inventories were reported at the lower of carrying amount or fair value less costs to sell. Fair value less costs to sell was evaluated each period to determine if it had changed. Losses (and gains not to exceed any cumulative loss previously recognized) were reported as adjustments to the carrying amount.
Investments in joint ventures for which SunCor did not have a controlling financial interest were not consolidated, but were accounted for using the equity method of accounting. In addition, see Note 22 and Note 23.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of three months or less at acquisition to be cash equivalents.
Nuclear Fuel
APS amortizes nuclear fuel by using the unit-of-production method. The unit-of-production method is based on actual physical usage. APS divides the cost of the fuel by the estimated number of thermal units it expects to produce with that fuel. APS then multiplies that rate by the number of thermal units produced within the current period. This calculation determines the current period nuclear fuel expense.
APS also charges nuclear fuel expense for the interim storage and permanent disposal of spent nuclear fuel. The DOE is responsible for the permanent disposal of spent nuclear fuel and charges APS $0.001 per kWh of nuclear generation. See Note 11 for information on spent nuclear fuel disposal and Note 14 for information on nuclear decommissioning 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 liability accounts reflect the tax and interest associated with management’s estimate of the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement for all known and measurable tax exposures. See Note 4.
Intangible Assets
We have no goodwill recorded and have separately disclosed other intangible assets, primarily APS’s software, on Pinnacle West’s Consolidated Balance Sheets. The intangible assets are amortized over their finite useful lives. Amortization expense was $45 million in 2010, $35 million in 2009 and $33 million in 2008. Estimated amortization expense on existing intangible assets over the next five years is $40 million in 2011, $36 million in 2012, $29 million in 2013, $23 million in 2014 and $15 million in 2015. At December 31, 2010, the weighted average remaining amortization period for intangible assets was 7 years.
New Accounting Standards
New Accounting Standards
2. New Accounting Standards
Variable Interest Entities
On January 1, 2010 we adopted amended accounting guidance relating to the consolidation of VIEs. This amended guidance significantly changed the consolidation model for VIEs. Under the prior guidance the consolidation model considered risk absorption using a quantitative approach when determining the primary beneficiary. The consolidation model under the new guidance requires a qualitative assessment and focuses on the power to direct activities of the VIE when determining the primary beneficiary. As a result of applying this qualitative assessment, we have determined that APS is the primary beneficiary of certain VIEs relating to the Palo Verde Unit 2 sale leaseback transactions, and is therefore required to consolidate these VIEs. Prior to adopting this new guidance, APS was not considered the primary beneficiary of these VIEs and did not consolidate these entities. We have adopted this guidance using retrospective application and have adjusted prior periods presented to reflect consolidation of the VIEs in those periods (see Note 1). See Note 20 for additional discussion and disclosures.
Future Accounting Changes
The FASB is currently working on several projects with the desire to converge GAAP with IFRS. These projects include accounting for leases, revenue recognition, and financial instruments, among other items. The FASB’s standard-setting process is ongoing and until new standards have been finalized and issued, we cannot determine the impact on our financial statements that may result from any such future changes.
Concurrent with these convergence projects, the SEC is considering mandating IFRS for U.S. companies. At this time, the impacts and timing of potential conversion to IFRS are uncertain and cannot be determined until final conversion requirements are mandated. The potential preparation of our financial statements in accordance with IFRS could have a significant impact on our reported financial statement results.
Regulatory Matters
Regulatory Matters
3. Regulatory Matters
2008 General Retail Rate Case Impacts
On December 30, 2009, the ACC issued an order approving a settlement agreement entered into by APS and twenty-one other parties to its general retail rate case, which was originally filed in March 2008. The settlement agreement included a net retail rate increase of $207.5 million, which represented a base rate increase of $344.7 million less a reclassification of $137.2 million of fuel and purchased power revenues from the then-existing PSA to base rates. The new rates were effective January 1, 2010. The settlement agreement also contained on-going requirements, commitments and authorizations, including the following:
    Revenue accounting treatment for line extension payments received for new or upgraded service from January 1, 2010 through year end 2012 (or until new rates are established in APS’s next general rate case, if that is before the end of 2012);
    An authorized return on common equity of 11%;
    A capital structure comprised of 46.2% debt and 53.8% common equity;
    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 and its use of renewable energy, as well as allow for concurrent recovery of renewable energy expenses and provide for more concurrent recovery of demand-side management costs and incentives.
The parties also agreed to a rate case filing plan in which APS is prohibited from filing its next two general rate cases until on or after June 1, 2011 and June 1, 2013, respectively, unless certain extraordinary events occur. Subject to the foregoing, APS may not request its next general retail rate increase to be effective prior to July 1, 2012. On February 1, 2011, APS filed a 120-day advanced notice of its intent to file its next rate case on June 1, 2011. The parties agreed to use good faith efforts to process these subsequent rate cases within twelve months of sufficiency findings from the ACC staff, which generally occur within 30 days after the filing of a rate case.
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.
During 2009, APS filed its annual RES implementation plan, covering the 2010-2014 timeframe and requesting 2010 RES funding approval. The plan provided for the acquisition of renewable generation in compliance with requirements through 2014, and requested RES funding of $87 million for 2010, which was later approved by the ACC. APS also sought various other determinations in its plan, including approval of the AZ Sun Program and the Community Power Project in Flagstaff, Arizona described below.
On March 3, 2010, the ACC approved the AZ Sun Program, which contemplates the addition of 100 MW of APS-owned solar resources through 2014. Through this program, APS plans to invest up to $500 million in solar photovoltaic projects across Arizona, which APS will acquire through competitive procurement processes. The costs associated with the first 50 MW under this program will be recovered initially through the RES until such time as the costs are recovered in base rates or other mechanisms. The costs of the second 50 MW will be recovered through a mechanism to be determined in APS’s next retail rate case.
On April 1, 2010, the ACC approved the Community Power Project, a pilot program in which APS will own, operate and receive energy from approximately 1.5 MW of solar panels on the rooftops of up to 200 residential and business customers located within a certain test area in Flagstaff, Arizona. The capital carrying costs of the program will be recovered through the RES until such time as these costs are recovered in base rates.
On July 1, 2010, APS filed its annual RES implementation plan, covering the 2011-2015 timeframe and requesting 2011 RES funding of $96 million. The 2011 Plan addressed enhancements to the residential distributed energy incentive program based on high customer participation, among other things. On October 13, 2010, APS filed an adjusted RES implementation plan to reflect the following items, among others: 1) increased clarity relating to customer project in-service dates and related budget revisions; 2) AZ Sun Program updates; and 3) the addition of 10 MW of biomass capacity. On December 10, 2010, the ACC approved the 2011 Plan and associated funding request. In January 2011, the ACC voted to reconsider four aspects of the approved 2011 Plan, including: (a) approval to proceed with a feed-in tariff filing; (b) approval for APS to participate in the ownership of distributed energy facilities in the Schools and Government program; (c) denial of a Rapid Reservation program that allows customers to receive priority in the incentive reservation process in exchange for receipt of a reduced incentive amount; and (d) allocation of the budget among various programs and studies. Hearings were held on January 24, 2011 and January 28, 2011. The ACC amended its original decision that approved the 2011 Plan as follows: the ACC (a) reversed its approval of a feed-in tariff program; (b) restricted APS’s ownership of facilities to only economically challenged, rural schools and only after a school has received a bid from a third-party solar installer; (c) approved the Rapid Reservation program; and (d) maintained the original approved budget with some timing modifications.
Demand-Side Management Adjustor Charge (“DSMAC”). The 2009 retail rate case settlement agreement requires APS to submit an annual Energy Efficiency Implementation Plan for review by and approval of the ACC. On July 15, 2009, APS filed its initial Energy Efficiency Implementation Plan, requesting approval by the ACC of programs and program elements for which APS had estimated a budget in the amount of $50 million for 2010. APS received ACC approval of all of its proposed programs and implemented the new DSMAC on March 1, 2010. A surcharge was added to customer bills in order to recover these estimated amounts for use on certain demand-side management programs. The surcharge allows for the recovery of energy efficiency expenses and any earned incentives.
The ACC approved recovery of all 2009 program costs plus incentives. The change from program cost recovery on a historical basis to recovery on a concurrent basis, as authorized in the settlement agreement, resulted in this one-time need to address two years (2009 and 2010) of cost recovery. As requested by APS, 2009 program cost recovery is to be spread over a three-year period.
On June 1, 2010, APS filed its 2011 Energy Efficiency Implementation Plan. In order to meet the energy efficiency goal for 2011 established by the settlement agreement of annual energy savings of 1.25%, expressed as a percent of total energy resources to meet retail load, APS proposed a total budget for 2011 of $79 million. On February 17, 2011, a total budget for 2011 of $80 million was approved and when added to the amortization of 2009 costs discussed above less the $10 million already being recovered in general rates, the DSMAC would recover approximately $75 million over a twelve month period beginning March 1, 2011. These amounts do not include approximately $1 million for an electric vehicle charging station program submitted to the ACC for approval on September 30, 2010.
PSA Mechanism and Balance. The PSA, which the ACC initially approved in 2005 as a part of APS’s 2003 rate case, and which was modified by the ACC in 2007, provides for the adjustment of retail rates to reflect variations in retail fuel and purchased power costs. The PSA is subject to specified parameters and procedures, including the following:
    APS records deferrals for recovery or refund to the extent actual retail fuel and purchased power costs vary from the Base Fuel Rate;
    under a 90/10 sharing arrangement, APS defers 90% of the difference between retail fuel and purchased power costs (excluding certain costs, such as renewable energy resources and the capacity components of long-term purchased power agreements acquired through competitive procurement) and the Base Fuel Rate; APS absorbs 10% of the retail fuel and purchased power costs above the Base Fuel Rate and retains 10% of the benefit from the retail fuel and purchased power costs that are below the Base Fuel Rate;
    an adjustment to the PSA rate is made annually each February 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 2010 and 2009 (dollars in millions):
                 
    Year Ended  
    December 31,  
    2010     2009  
Beginning balance
  $ (87 )   $ 8  
Deferred fuel and purchased power costs-current period
    (93 )     52  
Amounts recovered through revenues
    122       (147 )
 
           
Ending balance
  $ (58 )   $ (87 )
 
           
The PSA rate for the PSA year beginning February 1, 2011 is ($0.0057) per kWh as compared to ($0.0045) per kWh for the prior year. The regulatory liability at December 31, 2010 reflects lower average prices, primarily for natural gas and gas-based generation. Any uncollected (overcollected) deferrals during the 2011 PSA year will be included in the historical component of the PSA rate for the PSA year beginning February 1, 2012.
Transmission Rates and Transmission Cost Adjustor. In July 2008, the FERC approved an Open Access Transmission Tariff for APS to move from fixed rates to a formula rate-setting methodology in order to more accurately reflect 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 must file an application with, and obtain approval from, the ACC to reflect changes in Retail Transmission Charges through the TCA.
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 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, 2010, APS’s annual wholesale transmission rates for all users of its transmission system were reduced by approximately $12 million in accordance with the FERC-approved formula as a result of lower costs reflected in the formula. Approximately $10 million of this revenue reduction relates to transmission services used for APS’s retail customers. On May 20, 2010, APS filed with the ACC an application for the related reduction of its TCA rate. The ACC approved the TCA reduction on July 27, 2010.
Regulatory Assets and Liabilities
The detail of regulatory assets is as follows (dollars in millions):
                 
    December 31,  
    2010     2009  
Pension and other postretirement benefits (Note 8)
  $ 669     $ 532  
Deferred fuel and purchased power — mark-to-market (Note 18)
    77       41  
Deferred income taxes (Note 4)
    72       59  
Transmission vegetation management
    46       34  
Coal reclamation
    38       16  
Palo Verde VIE (Note 20)
    33       31  
Deferred compensation
    32       31  
Tax expense of Medicare subsidy (Note 8)
    23        
Loss on reacquired debt
    22       23  
Demand side management (a)
    18       18  
Other
    19       28  
 
           
Total regulatory assets (b)
  $ 1,049     $ 813  
 
           
     
(a)   See Cost Recovery Mechanisms discussion above.
 
(b)   There are no regulatory assets for which regulators have allowed recovery of costs but not allowed a return by exclusion from rate base.
Included in the balance of regulatory assets at December 31, 2010 and 2009 is a regulatory asset for pension and other postretirement benefits. This regulatory asset represents the future recovery of these costs through retail rates as these amounts are charged to earnings. If these costs are disallowed by the ACC, this regulatory asset would be charged to OCI and result in lower future earnings.
The detail of regulatory liabilities is as follows (dollars in millions):
                 
    December 31,  
    2010     2009  
Removal costs (Note 1) (a)
  $ 379     $ 385  
Asset retirement obligations (Note 12)
    184       156  
Deferred fuel and purchased power (b)(c)
    58       87  
Renewable energy standard (b)
    50       51  
Spent nuclear fuel (Note 11)
    45       34  
Deferred gains on utility property
    18       20  
Tax benefit of Medicare subsidy (Note 8)
          17  
Other
    19       16  
 
           
Total regulatory liabilities
  $ 753     $ 766  
 
           
     
(a)   In accordance with regulatory accounting guidance, APS accrues for removal costs for its regulated assets, even if there is no legal obligation for removal.
 
(b)   See Cost Recovery Mechanisms discussion above.
 
(c)   Subject to a carrying charge.
Income Taxes
Income Taxes
4. Income Taxes
Certain assets and liabilities are reported differently for income tax purposes than they are for financial statements purposes. The tax effect of these differences is recorded as deferred taxes. We calculate deferred taxes using the current income tax rates.
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 relate to deferred taxes resulting primarily from investment tax credits. APS amortizes these amounts as the differences reverse.
Pinnacle West expects to recognize approximately $132 million of cash tax benefits related to SunCor’s strategic asset sales (see Note 23), a majority of which have been realized as of December 31, 2010. Approximately $7 million of these benefits were recorded in 2010 as reductions to income tax expense related to the current impairment charges. The additional $125 million of tax benefits were recorded as reductions to income tax expense related to SunCor impairment charges recorded on or before December 31, 2009.
The $68 million income tax receivables on the Consolidated Balance Sheets represent the anticipated refunds related to an APS tax accounting method change approved by the IRS in the third quarter of 2009 and the current year tax benefits related to the SunCor strategic asset sales that closed in 2010. A majority of this amount is classified as long-term, as cash refunds are not expected to be received in the next twelve months.
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):
                         
    2010     2009     2008  
Total unrecognized tax benefits, January 1
  $ 201,216     $ 63,318     $ 157,869  
Additions for tax positions of the current year
    7,551       44,094       12,923  
Additions for tax positions of prior years
          98,942       32,510  
Reductions for tax positions of prior years for:
                       
Changes in judgment
    (11,017 )           (4,454 )
Settlements with taxing authorities
    (62,199 )     (4,089 )     (35,812 )
Lapses of applicable statute of limitations
    (7,956 )     (1,049 )     (99,718 )
 
                 
Total unrecognized tax benefits, December 31
  $ 127,595     $ 201,216     $ 63,318  
 
                 
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.
Included in the balances of unrecognized tax benefits at December 31, 2010, 2009 and 2008 were approximately $7 million, $16 million and $16 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 1999. We do not anticipate that there will be any significant increases or decreases in our unrecognized tax benefits within the next twelve months.
We reflect interest and penalties, if any, on unrecognized tax benefits in the Consolidated Statements of Income as income tax expense. The amount of interest recognized in the Consolidated Statement of Income related to unrecognized tax benefits was a pre-tax benefit of $2 million for 2010, a pre-tax expense of $2 million for 2009 and a pre-tax benefit of $51 million for 2008.
The total amount of accrued liabilities for interest recognized in the consolidated Balance Sheets related to unrecognized tax benefits was $6 million as of December 31, 2010, $8 million as of December 31, 2009 and $6 million as of December 31, 2008. To the extent that matters are settled favorably, this amount could reverse and decrease our effective tax rate. Additionally, as of December 31, 2010, 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,  
    2010     2009     2008  
Current:
                       
Federal
  $ (108,827 )   $ (38,502 )   $ (85,866 )
State
    25,545       (38,080 )     11,738  
 
                 
Total current
    (83,282 )     (76,582 )     (74,128 )
 
                 
Deferred:
                       
Income from continuing operations
    271,147       105,492       158,024  
Discontinued operations
    (10,736 )            
 
                 
Total deferred
    260,411       105,492       158,024  
 
                 
Total income tax expense
    177,129       28,910       83,896  
Less: income tax expense (benefit) on discontinued operations
    12,808       (107,596 )     (11,648 )
 
                 
Income tax expense — continuing operations
  $ 164,321     $ 136,506     $ 95,544  
 
                 
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,  
    2010     2009     2008  
 
Federal income tax expense at 35% statutory rate
  $ 180,222     $ 136,172     $ 130,858  
Increases (reductions) in tax expense resulting from:
                       
State income tax net of federal income tax benefit
    17,878       14,837       12,640  
Credits and favorable adjustments related to prior years resolved in current year
    (17,300 )           (28,873 )
Medicare Subsidy Part-D (see Note 8)
    1,311       (2,095 )     (1,993 )
Allowance for equity funds used during construction (see Note 1)
    (6,563 )     (4,265 )     (5,755 )
Palo Verde VIE noncontrolling interest (see Note 20)
    (7,057 )     (6,723 )     (6,123 )
Other
    (4,170 )     (1,420 )     (5,210 )
 
                 
Income tax expense — continuing operations
  $ 164,321     $ 136,506     $ 95,544  
 
                 
The following table shows the net deferred income tax liability recognized on the Consolidated Balance Sheets (dollars in thousands):
                 
    December 31,  
    2010     2009  
Current asset
  $ 94,602     $ 53,990  
Long-term liability
    (1,833,566 )     (1,496,095 )
 
           
Deferred income taxes — net
  $ (1,738,964 )   $ (1,442,105 )
 
           
The components of the net deferred income tax liability were as follows (dollars in thousands):
                 
    December 31,  
    2010     2009  
DEFERRED TAX ASSETS
               
Risk management activities
  $ 124,731     $ 87,404  
Regulatory liabilities:
               
Asset retirement obligation and removal costs
    222,448       213,814  
Deferred fuel and purchased power
    23,089       34,463  
Renewable energy standard
    18,749        
Other
    28,360       21,613  
Pension and other postretirement liabilities
    321,182       306,515  
Real estate investments and assets held for sale
    19,855       113,082  
Renewable energy incentives
    37,327        
Credit and loss carryforwards
    42,971       3,423  
Other
    68,684       57,015  
 
           
Total deferred tax assets
    907,396       837,329  
 
           
DEFERRED TAX LIABILITIES
               
Plant-related
    (2,210,976 )     (1,951,262 )
Risk management activities
    (30,125 )     (20,863 )
Regulatory assets:
               
Allowance for equity funds used during construction
    (28,276 )     (23,285 )
Deferred fuel and purchased power — mark-to-market
    (30,276 )     (16,167 )
Pension and other postretirement benefits
    (264,313 )     (210,080 )
Other
    (77,078 )     (57,210 )
Other
    (5,316 )     (567 )
 
           
Total deferred tax liabilities
    (2,646,360 )     (2,279,434 )
 
           
Deferred income taxes — net
  $ (1,738,964 )   $ (1,442,105 )
 
           
A majority of the deferred tax assets for credit and loss carryforwards relate to federal general business credits and federal net operating losses. These federal credits and losses first begin to expire in 2029.
Lines of Credit and Short-Term Borrowing
Lines of Credit and Short-Term Borrowing
5. Lines of Credit and Short-Term Borrowings
Pinnacle West and APS maintain committed revolving credit facilities in order to enhance liquidity and provide credit support for the commercial paper programs. During the first quarter of 2010, Pinnacle West and APS refinanced revolving credit facilities existing at the time that would have otherwise matured in December 2010. Since March 2010, Pinnacle West and APS have accessed the commercial paper markets, which neither company had utilized since the third quarter of 2008 due to negative market conditions.
The table below presents these credit facilities and amounts available and outstanding and other short-term borrowings as of December 31, 2010 (dollars in millions):
                                                     
                Letters                     Weighted        
                of                     Average        
Credit       Amount     Credit     Short-Term     Unused     Interest     Commitment  
Facility   Expiration   Committed     Used     Borrowings     Amount     Rate     Fees  
PNW Revolving Credit Facility
  February 2013   $ 200     $     $     $ 183             0.625 %
 
                                                   
PNW Commercial Paper
  January 2011                 17             0.840 %      
 
                                                   
APS Revolving Credit Facility
  February 2013     500                   500             0.500 %
 
                                                   
APS Revolving Credit Facility
  September 2011     489       20             469             0.100 %
 
                                           
Total
      $ 1,189     $ 20     $ 17     $ 1,152                  
 
                                           
Pinnacle West
On February 12, 2010, Pinnacle West refinanced its $283 million revolving credit facility that would have matured in December 2010, and decreased the size of the facility to $200 million. 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. Pinnacle West will use the facility for general corporate purposes, commercial paper program support of up to $200 million, or for the issuance of letters of credit. Interest rates are based on Pinnacle West’s senior unsecured debt credit ratings.
APS
On February 12, 2010, APS refinanced its $377 million credit facility that would have matured in December 2010, and increased the size of the facility to $500 million. APS may increase the amount of the facility up to a maximum of $700 million upon the satisfaction of certain conditions and with the consent of the lenders. APS will use the facility for general corporate purposes, commercial paper program support and for the issuance of letters of credit. Interest rates are based on APS’s senior unsecured debt credit ratings.
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 may increase the amount of the facility up to a maximum of $700 million upon the satisfaction of certain conditions and with the consent of the lenders. APS will use the facility for general corporate purposes, commercial paper program support and for the issuance of letters of credit. Interest rates are based on APS’s senior unsecured debt credit ratings.
At December 31, 2010, APS had two credit facilities totaling $989 million, consisting of the $500 million and $489 million credit facilities described above. These facilities were available either to support the issuance of up to $250 million in commercial paper, or for bank borrowings, including issuances of letters of credit. See Note 21 for discussion of APS’s letters of credit.
SunCor
SunCor had no short-term borrowings at December 31, 2010 and approximately $5 million at December 31, 2009.
The table below presents the consolidated credit facilities and amounts available and outstanding and other short-term borrowings as of December 31, 2009 (dollars in millions):
                                             
                                Weighted        
Credit       Amount     Short-Term     Unused     Average     Commitment  
Facility   Expiration   Committed     Borrowings     Amount     Interest Rate     Fees  
PNW Revolving Credit Facility
  December 2010   $ 283     $ 149     $ 134       0.982 %     0.15 %
 
                                           
APS Revolving Credit Facility
  December 2010     377             377             0.11 %
 
                                           
APS Revolving Credit Facility
  September 2011     489             489             0.10 %
 
                                           
SunCor Short-term Borrowings
  January 2010           5             LIBOR plus 2.50 %      
 
                                     
Total
      $ 1,149     $ 154     $ 1,000                  
 
                                     
Pinnacle West
At December 31, 2009, the Pinnacle West credit facility was available to support the issuance of up to $250 million in commercial paper or bank borrowings, including issuances of letters of credit, up to $94 million. At December 31, 2009, Pinnacle West had borrowings of approximately $149 million under its credit facility, no letters of credit and no other short-term borrowings.
APS
At December 31, 2009, the APS credit facilities were available either to support the issuance of up to $250 million in commercial paper or to be used for bank borrowings, including issuances of letters of credit, up to $583 million. At December 31, 2009, APS had no borrowings or letters of credit under its revolving credit facilities or other short-term borrowings.
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 October 30, 2007, the ACC issued a financing order in which it approved APS’s request, subject to specified parameters and procedures, to increase (a) APS’s short-term debt authorization from 7% of APS’s capitalization to (i) 7% of APS’s capitalization plus (ii) $500 million (which is required to be used for purchases of natural gas and power) and (b) APS’s long-term debt authorization from approximately $3.2 billion to $4.2 billion in light of the projected growth of APS and its customer base and the resulting projected financing needs. This financing order expires December 31, 2012; however, all debt previously authorized and outstanding on December 31, 2012 will remain authorized and valid obligations of APS.
Long-term Debt and Liquidity Matters
Long-term Debt and Liquidity Matters
6. Long-Term Debt and Liquidity Matters
Substantially 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, 2010 and 2009 (dollars in thousands):
                                 
    Maturity     Interest     December 31,  
    Dates (a)     Rates     2010     2009  
APS
                               
Pollution control bonds — Variable
    2024-2038       (b )   $ 43,580     $ 222,880  
Pollution control bonds — Fixed
    2029-2034       (c )     522,275       342,975  
Pollution control bonds with senior notes
    2029       5.05 %     90,000       90,000  
Unsecured notes
    2011       6.375 %     400,000       400,000  
Unsecured notes
    2012       6.50 %     375,000       375,000  
Unsecured notes
    2014       5.80 %     300,000       300,000  
Unsecured notes
    2015       4.650 %     300,000       300,000  
Unsecured notes
    2016       6.25 %     250,000       250,000  
Unsecured notes
    2019       8.75 %     500,000       500,000  
Unsecured notes
    2033       5.625 %     200,000       200,000  
Unsecured notes
    2035       5.50 %     250,000       250,000  
Unsecured notes
    2036       6.875 %     150,000       150,000  
Secured note
    2014       6.00 %           1,075  
Palo Verde sale leaseback lessor notes
    2015       8.00 %     126,000       151,783  
Unamortized discount
                    (6,183 )     (7,185 )
Capitalized lease obligations
    2011-2012       (d )     2,001       2,837  
 
                           
Subtotal (e)
                    3,502,673       3,529,365  
 
                           
SUNCOR
                               
Notes payable
    2011       (f )           95,535  
Capitalized lease obligations
    2011-2012       (g )           100  
 
                           
Subtotal
                          95,635  
 
                           
PINNACLE WEST
                               
Senior notes
    2011       5.91 %     175,000       175,000  
 
                           
Total long-term debt
                    3,677,673       3,800,000  
Less current maturities:
                               
APS
                    456,879       222,959  
SunCor
                          80,517  
Pinnacle West
                    175,000        
 
                           
Total
                    631,879       303,476  
 
                           
TOTAL LONG-TERM DEBT LESS CURRENT MATURITIES
                  $ 3,045,794     $ 3,496,524  
 
                           
     
(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 0.32% at December 31, 2010 and 0.25% at December 31, 2009.
 
(c)   The bonds fixed rate of interest ranged from 2.875% to 6.00% at December 31, 2010. The bonds fixed interest ranged from 5.00% to 6.00% at December 31, 2009. Approximately $343 million are subject to mandatory tender dates. See discussion of the refinancing of pollution control bonds below.
 
(d)   The weighted-average interest rate was 5.29% at December 31, 2010 and 5.50% at December 31, 2009.
 
(e)   APS’s long-term debt less current maturities was $3.046 billion at December 31, 2010 and $3.306 billion at December 31, 2009.
     
(f)   SunCor had no debt outstanding at December 31, 2010 and $57 million outstanding at December 31, 2009 under its secured revolver that matured on January 30, 2010. The weighted average interest rate at December 31, 2009 was 5.00%. SunCor had no debt outstanding at December 31, 2010 and $39 million at December 31, 2009 of other debt under other long-term facilities. At December 31, 2009, the remaining debt was primarily classified as current maturities of long-term debt and consisted of multiple notes with variable interest rates of prime plus 2.00% and LIBOR plus 1.70%, 2.00%, 2.25% and 2.50%.
 
(g)   The weighted-average interest rate was 4.90% December 31, 2009.
Credit Facilities and Debt Issuances
Pinnacle West
In June 2010, Pinnacle West received approximately $100 million related to the sale of APSES’ district cooling business. The net proceeds were used to repay short-term indebtedness.
APS
On July 13, 2010, APS changed the interest rate mode for the approximately $33 million of Coconino County, Arizona Pollution Control Corporation Pollution Control Revenue Bonds (Arizona Public Service Company Navajo Project) 1994 Series A, due 2029. The rate period for the bonds changed from a daily rate mode, supported by a letter of credit, to a three-year term rate mode that will bear interest at a rate of 3.625% per annum for three years. The letter of credit was terminated in connection with this change, and there is no bank or other third-party credit support for the bonds in the term rate mode.
On August 10, 2010, APS changed the letter of credit supporting the approximately $17 million of Coconino County, Arizona Pollution Control Corporation Pollution Control Revenue Bonds (Arizona Public Service Company Project) Series 1998, due 2033. The bonds were in a daily rate mode supported by a prior letter of credit and remain in a daily rate mode, supported by a new three-year letter of credit expiring in August 2013.
On October 12, 2010, APS changed the interest rate mode for the approximately $147 million of City of Farmington, New Mexico Pollution Control Revenue Refunding Bonds (Arizona Public Service Company Four Corners Project) 1994 Series A and 1994 Series B, due 2024 and City of Farmington, New Mexico Pollution Control Revenue Bonds (Arizona Public Service Company Four Corners Project) 1994 Series C, due 2024. The rate period for the 1994 Series A bonds and the 1994 Series B bonds changed from a daily rate mode, supported by letters of credit, to a term rate mode to maturity, subject to optional redemption after year ten, that will bear interest at a rate of 4.70% per annum until maturity in 2024 unless the optional redemption is exercised by APS. The rate period for the 1994 Series C bonds changed from a daily rate mode, supported by a letter of credit, to a three-year term rate mode that will bear interest at a rate of 2.875% per annum until October 2013. The letters of credit supporting each of these three series of bonds were terminated in connection with these changes, and there is no bank or other third-party credit support for any of these bonds.
On January 1, 2010, due to the adoption of amended accounting guidance relating to VIEs, APS began consolidating the Palo Verde Sale Leaseback Trusts. As a result of consolidation of these VIEs, APS has reported the Lessor Trusts’ long-term debt on its Consolidated Balance Sheets. Interest rates on these debt instruments are 8% and are fixed for the remaining life of the debt. As of December 31, 2010, approximately $29 million was classified as current maturities of long-term debt and approximately $97 million was classified as long-term debt relating to these VIEs. These debt instruments mature on December 30, 2015 and have sinking fund features that are serviced by the lease payments. See Note 20 for additional discussion of the VIEs.
SunCor
In 2010, SunCor sold land parcels, commercial assets and master planned home-building communities for approximately $72 million, which approximated the carrying value of these assets, resulting in a net gain of zero. In connection with these sales, SunCor negotiated a restructuring of certain of its credit facilities. The debt restructuring resulted in an after-tax gain of approximately $10 million. At December 31, 2010, SunCor had no debt outstanding.
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 and each anticipates it will continue to meet this and other significant covenant requirements. 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, 2010, the ratio was approximately 49% for Pinnacle West and 46% 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, 2010, APS’s common equity ratio, as defined, was 53%. Its total shareholder equity was approximately $3.8 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. This restriction does not materially affect Pinnacle West’s ability to meet its ongoing capital requirements.
The following table shows principal payments due on Pinnacle West’s and APS’s total long-term debt and capitalized lease requirements (dollars in millions):
                 
    Consolidated     Consolidated  
Year   Pinnacle West     APS  
2011
  $ 632     $ 457  
2012
    477       477  
2013
    140       140  
2014
    502       502  
2015
    313       313  
Thereafter
    1,620       1,620  
 
           
Total
  $ 3,684     $ 3,509  
 
           
Common Stock and Treasury Stock
Common Stock and Treasury Stock
7. Common Stock and Treasury Stock
Our common stock and treasury stock activity during each of the three years 2010, 2009 and 2008 is as follows (dollars in thousands):
                                 
    Common Stock     Treasury Stock  
    Shares     Amount     Shares     Amount  
Balance at December 31, 2007
    100,525,470     $ 2,135,787       (39,505 )   $ (2,054 )
Common stock issuance
    422,966       10,845              
Purchase of treasury stock (a)
                (39,022 )     (1,387 )
Reissuance of treasury stock for stock compensation
                18,700       587  
Other
          4,691              
 
                       
Balance at December 31, 2008
    100,948,436       2,151,323       (59,827 )     (2,854 )
 
                               
Common stock issuance
    579,501       10,620              
Purchase of treasury stock (a)
                (66,173 )     (2,156 )
Reissuance of treasury stock for stock compensation
                32,761       1,198  
Other
          (8,648 )            
 
                       
Balance at December 31, 2009
    101,527,937       2,153,295       (93,239 )     (3,812 )
 
                               
Common stock issuance (b)
    7,292,130       263,297              
Purchase of treasury stock (a)
                (1,994 )     (82 )
Reissuance of treasury stock for stock compensation
                44,823       1,655  
Other
          4,780              
 
                       
Balance at December 31, 2010
    108,820,067     $ 2,421,372       (50,410 )   $ (2,239 )
 
                       
     
(a)   Primarily represents shares of common stock withheld from certain stock awards for tax purposes.
 
(b)   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.
Retirement Plans and Other Benefits
Retirement Plans and Other Benefits
8. Retirement Plans and Other Benefits
Pinnacle West sponsors a qualified defined benefit and account balance pension plan and a non-qualified supplemental excess benefit retirement plan for the employees of Pinnacle West and its subsidiaries. All new employees participate in the account balance plan. Defined benefit plans specify the amount of benefits a plan participant is to receive using information about the participant. The pension plan covers nearly all employees. The supplemental excess benefit retirement plan covers officers of the Company and highly compensated employees designated for participation by the Board of Directors. Our employees do not contribute to the plans. Generally, we calculate the benefits based on age, years of service and pay.
We also sponsor other postretirement benefits for the employees of Pinnacle West and our subsidiaries. We provide medical and life insurance benefits to retired employees. Employees must retire to become eligible for these retirement benefits, which are based on years of service and age. For the medical insurance plans, retirees make contributions to cover a portion of the plan costs. For the life insurance plan, retirees do not make contributions. We retain the right to change or eliminate these benefits.
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.
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 and liabilities 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 or billed to electric plant participants) (dollars in thousands):
                                                 
    Pension     Other Benefits  
    2010     2009     2008     2010     2009     2008  
Service cost-benefits earned during the period
  $ 59,064     $ 54,288     $ 54,576     $ 19,236     $ 18,285     $ 17,793  
Interest cost on benefit obligation
    122,724       118,282       110,207       42,428       39,180       37,897  
Expected return on plan assets
    (124,161 )     (116,535 )     (118,309 )     (39,257 )     (34,428 )     (43,609 )
Amortization of:
                                               
Transition obligation
                      452       3,005       3,005  
Prior service cost (credit)
    1,705       2,080       2,455       (539 )     (125 )     (125 )
Net actuarial loss
    18,833       14,216       11,145       10,317       10,320       2,372  
 
                                   
Net periodic benefit cost
  $ 78,165     $ 72,331     $ 60,074     $ 32,637     $ 36,237     $ 17,333  
 
                                   
Portion of cost charged to expense
  $ 37,933     $ 36,484     $ 28,854     $ 15,839     $ 18,278     $ 8,325  
 
                                   
APS share of cost charged to expense
  $ 36,840     $ 34,850     $ 27,491     $ 15,382     $ 17,459     $ 7,932  
 
                                   
The following table shows the plans’ changes in the benefit obligations and funded status for the years 2010 and 2009 (dollars in thousands):
                                 
    Pension     Other Benefits  
    2010     2009     2010     2009  
Change in Benefit Obligation
                               
Benefit obligation at January 1
  $ 2,074,131     $ 1,884,656     $ 700,535     $ 655,265  
Service cost
    59,064       54,288       19,236       18,285  
Interest cost
    122,724       118,282       42,428       39,180  
Benefit payments
    (93,776 )     (77,577 )     (20,421 )     (18,959 )
Actuarial loss
    183,365       94,482       98,094       6,764  
Plan amendments
    (448 )           (11,975 )      
 
                       
Benefit obligation at December 31
    2,345,060       2,074,131       827,897       700,535  
 
                       
 
                               
Change in Plan Assets
                               
Fair value of plan assets at January 1
    1,461,808       1,430,372       490,455       429,306  
Actual return on plan assets
    190,380       96,511       60,255       61,101  
Employer contributions
    200,000             16,700       15,506  
Benefit payments
    (76,592 )     (65,075 )           (15,458 )
 
                       
Fair value of plan assets at December 31
    1,775,596       1,461,808       567,410       490,455  
 
                       
Funded Status at December 31
  $ (569,464 )   $ (612,323 )   $ (260,487 )   $ (210,080 )
 
                       
The following table shows the projected benefit obligation and the accumulated benefit obligation for the pension plan in excess of plan assets as of December 31, 2010 and 2009 (dollars in thousands):
                 
    2010     2009  
Projected benefit obligation
  $ 2,345,060     $ 2,074,131  
Accumulated benefit obligation
    2,065,091       1,824,661  
Fair value of plan assets
    1,775,596       1,461,808  
The following table shows the amounts recognized on the Consolidated Balance Sheets as of December 31, 2010 and 2009 (dollars in thousands):
                                 
    Pension     Other Benefits  
    2010     2009     2010     2009  
Current liability
  $ (16,830 )   $ (11,065 )   $     $  
Noncurrent liability
    (552,634 )     (601,258 )     (260,487 )     (210,080 )
 
                       
Net amount recognized
  $ (569,464 )   $ (612,323 )   $ (260,487 )   $ (210,080 )
 
                       
The following table shows the details related to accumulated other comprehensive loss as of December 31, 2010 and 2009 (dollars in thousands):
                                 
    Pension     Other Benefits  
    2010     2009     2010     2009  
Net actuarial loss
  $ 502,938     $ 404,619     $ 261,071     $ 194,301  
Prior service cost (credit)
    5,712       7,865       (4,571 )     (794 )
Transition obligation
                903       9,015  
APS’s portion recorded as a regulatory asset
    (419,774 )     (336,728 )     (249,255 )     (195,389 )
Income tax benefit
    (35,106 )     (29,902 )     (2,498 )     (2,095 )
 
                       
Accumulated other comprehensive loss
  $ 53,770     $ 45,854     $ 5,650     $ 5,038  
 
                       
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 2011 (dollars in thousands):
                 
            Other  
    Pension     Benefits  
Net actuarial loss
  $ 25,660     $ 13,736  
Prior service cost (credit)
    1,400       (539 )
Transition obligation
          452  
 
           
Total amounts estimated to be amortized from accumulated other comprehensive income and regulatory assets in 2011
  $ 27,060     $ 13,649  
 
           
The following table shows the weighted-average assumptions used for both the pension and other benefits to determine benefit obligations and net periodic benefit costs:
                                         
    Benefit Obligations     Benefit Costs  
    As of December 31,     For the Years Ended December 31,  
    2010     2009     2010     2009     2008  
Discount rate-pension
    5.31 %     5.90 %     5.90 %     6.11 %     6.25 %
Discount rate-other benefits
    5.49 %     6.00 %     6.00 %     6.13 %     6.31 %
Rate of compensation increase
    4.00 %     4.00 %     4.00 %     4.00 %     4.00 %
Expected long-term return on plan assets
    N/A       N/A       8.25 %     8.25 %     9.00 %
Initial health care cost trend rate
    8.00 %     8.00 %     8.00 %     8.00 %     8.00 %
Ultimate health care cost trend rate
    5.00 %     5.00 %     5.00 %     5.00 %     5.00 %
Number of years to ultimate trend rate
    4       4       4       4       4  
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 2011, we are assuming a 7.75% long-term rate of return on plan assets, which we believe is reasonable given our asset allocation in relation to historical and expected performance.
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. In selecting our health care trend rate, we consider past performance and forecasts of health care costs. A one percentage point change in the assumed initial and ultimate health care cost trend rates would have the following effects (dollars in millions):
                 
    1% Increase     1% Decrease  
Effect on other postretirement benefits expense, after consideration of amounts capitalized or billed to electric plant participants
  $ 9     $ (8 )
Effect on service and interest cost components of net periodic other postretirement benefit costs
    12       (9 )
Effect on the accumulated other postretirement benefit obligation
    134       (107 )

 

Plan Assets
The Board of Directors has delegated oversight of the plans’ assets to an Investment Management Committee, which has adopted an investment policy. The investment policy’s overall strategy is to achieve an adequate level of trust assets relative to the benefit obligation. To achieve this objective, the plans’ investment policies provide for a mix of investments in long-term fixed income assets and return-generating assets. Long-term fixed income assets are designed to offset changes in benefit obligations due to changes in discount rates and inflation. Return-generating assets are intended to provide a reasonable long-term rate of investment return with a prudent level of volatility. The determination of total allocation between return-generating and long-term fixed income assets is reviewed on at least an annual basis. Other investment strategies include the prohibition of investments in Pinnacle West securities and the external management of the plans’ assets.
Long-term fixed income assets consist primarily of fixed income debt securities issued by the U.S. Treasury, other government agencies, and corporations. Long-term fixed income assets may also include interest rate swaps, U.S. Treasury futures and other instruments. The investment policy does not provide for a specific mix of long-term fixed income assets, but does require the average credit rating of such assets to be considered upper medium grade or above. The 2010 year-end long-term fixed income asset strategy focused on investments in corporate bonds of primarily investment-grade U.S. issuers and long-term treasuries, with total long-term fixed income assets representing 41% of total pension plan assets and 39% of other benefit plans assets.
Return-generating assets in the pension plan and other benefit plans target a mix of approximately 64% U.S. equities, 27% international equities, and 9% alternative investments. The 2010 year-end U.S. equity holdings were invested primarily in large-cap companies in diverse industries. International equities include investments in emerging and developing markets. Return-generating assets also include investments in securities through commingled funds in common and collective trusts. Alternative investments primarily include investments in real estate. The 2010 year-end return-generating assets represented 59% of total pension plan assets and 61% of other benefit plans assets.
See Note 14 for a discussion on the fair value hierarchy and how fair value methodologies are applied. The fair value of Pinnacle West’s pension plan and other postretirement benefit plan assets at December 31, 2010, by asset category, are as follows (dollars in thousands):
                                 
    Quoted Prices                      
    in Active     Significant                
    Markets for     Other                
    Identical     Observable             Balance at  
    Assets     Inputs     Netting and     December 31,  
    (Level 1)     (Level 2)     Other (a)     2010  
Pension Plan:
                               
Assets:
                               
Cash and cash equivalents
  $ 2,375     $     $     $ 2,375  
Debt Securities:
                               
Corporate
          508,946             508,946  
U.S. Treasury
    163,313                   163,313  
Other (b)
          53,358             53,358  
Equities:
                               
U.S. Companies
    462,973                   462,973  
International Companies
    129,094                   129,094  
Other investments
          5,549       8,071       13,620  
Common and collective trusts:
                               
U.S. Equities
          146,705             146,705  
International Equities
          177,114             177,114  
Real estate
          92,454             92,454  
Short-term investments
          25,644             25,644  
 
                       
 
                               
Total Pension Plan
  $ 757,755     $ 1,009,770     $ 8,071     $ 1,775,596  
 
                       
Other Benefits:
                               
Assets:
                               
Cash and cash equivalents
  $ 243     $     $     $ 243  
Debt Securities:
                               
Corporate
          118,660             118,660  
U.S. Treasury
    74,049                   74,049  
Other (b)
          24,456             24,456  
Equities:
                               
U.S. Companies
    179,655                   179,655  
International Companies
    25,121                   25,121  
Other investments
          365       2,034       2,399  
Common and collective trusts:
                               
U.S. Equities
          54,144             54,144  
International Equities
          61,455             61,455  
Real Estate
          7,357             7,357  
Short-term investments
          19,871             19,871  
 
                       
 
                               
Total Other Benefits
  $ 279,068     $ 286,308     $ 2,034     $ 567,410  
 
                       
     
(a)   Represents netting of plan receivables and payables.
 
(b)   This category consists primarily of municipal securities.
The fair value of Pinnacle West’s pension plan and other postretirement benefit plan assets at December 31, 2009, by asset category, are as follows (dollars in thousands):
                                         
    Quoted Prices                            
    in Active     Significant                      
    Markets for     Other     Significant                
    Identical     Observable     Unobservable             Balance at  
    Assets     Inputs     Inputs     Netting and     December 31,  
    (Level 1)     (Level 2)     (Level 3)     Other (a)     2009  
Pension Plan:
                                       
Assets:
                                       
Cash and cash equivalents
  $ 519     $     $     $     $ 519  
Debt Securities:
                                       
Corporate
          590,343                   590,343  
Other (b)
          66,281                   66,281  
Interest rate swaps
          20,512             (20,103 )     409  
Equities:
                                       
U.S. Companies
    341,318                         341,318  
International Companies
    83,492                         83,492  
Other investments
          6,747             10,177       16,924  
Common and collective trusts:
                                       
U.S. Equities
          144,016                   144,016  
International Equities
          132,168                   132,168  
Real estate
                64,212             64,212  
Short-term investments
          22,126                   22,126  
 
                                       
Liabilities:
                                       
Interest rate swaps
          (20,103 )           20,103        
 
                             
Total Pension Plan
  $ 425,329     $ 962,090     $ 64,212     $ 10,177     $ 1,461,808  
 
                             
Other Benefits:
                                       
Assets:
                                       
Cash and cash equivalents
  $ 156     $     $     $     $ 156  
Debt Securities:
                                       
Corporate
          173,895                   173,895  
Other (b)
          20,280                   20,280  
Interest rate swaps
          2,091             (2,049 )     42  
Equities:
                                       
U.S. Companies
    170,293                         170,293  
International Companies
    9,721                         9,721  
Other investments
          383             (785 )     (402 )
Common and collective trusts:
                                       
U.S. Equities
          49,363                   49,363  
International Equities
          52,670                   52,670  
Real Estate
                6,504             6,504  
Short-term investments
          7,933                   7,933  
 
                                       
Liabilities:
                                       
Interest rate swaps
          (2,049 )           2,049        
 
                             
Total Other Benefits
  $ 180,170     $ 304,566     $ 6,504     $ (785 )   $ 490,455  
 
                             
     
(a)   Represents netting under master netting arrangements and plan receivables and payables.
 
(b)   This category consists primarily of municipality issued debt securities, but also includes U.S. Treasuries and asset-backed securities such as collateralized mortgage obligations.
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 years ended December 31, 2010 and December 31, 2009 (dollars in thousands):
                                 
    Year Ended     Year Ended  
    December 31, 2010     December 31, 2009  
            Other             Other  
Common and Collective Trusts — Real Estate   Pension     Benefits     Pension     Benefits  
 
                               
Beginning balance at January 1
  $ 64,212     $ 6,504     $ 88,379     $ 8,951  
Actual return on assets still held (a)
    (204 )     (23 )     (29,590 )     (2,991 )
Purchases, sales, and settlements
    18,003       45       5,423       544  
Transfers in and/or out of Level 3 (b)
    (82,011 )     (6,526 )            
 
                       
Ending balance at December 31
  $     $     $ 64,212     $ 6,504  
 
                       
(a)   The return for December 31, 2010 represents the return on assets held as of March 31, 2010, the beginning of the period in which all the assets were transferred out of Level 3. The return for December 31, 2009 represents the return on assets held as of December 31, 2009, as no transfers occurred into or out of Level 3 during the year.
 
(b)   Transfers into and out of Level 3 are measured at the beginning of the period in which the transfer occurs. Transfers out of Level 3 during 2010 relate to our Real Estate Common and Collective Trust being transferred to a Level 2 investment. During 2009 the Real Estate Common and Collective Trust had special redemption restrictions in place, which limited our ability to transact at the fund’s net asset value. During 2010 these special redemption restrictions were lifted, and we were able to transact in the fund at the net asset value according to the fund’s normal redemption policy.
Contributions
The required minimum contribution to our pension plan is zero in 2011 and approximately $85 million in 2012. In 2010, we made voluntary contributions of $200 million to our pension plan. The contribution to our other postretirement benefit plans in 2010 was approximately $17 million. The contributions to our other postretirement benefit plans for 2011 and 2012 are expected to be approximately $20 million each year. APS and other subsidiaries fund their share of the contributions. APS’s share is approximately 98% of both plans.
Estimated Future Benefit Payments
Benefit payments, which reflect estimated future employee service, for the next five years and the succeeding five years thereafter are estimated to be as follows (dollars in thousands):
                 
Year   Pension     Other Benefits (a)  
2011
  $ 106,556     $ 23,197  
2012
    116,615       25,713  
2013
    129,031       28,619  
2014
    141,815       31,484  
2015
    154,185       34,176  
Years 2016-2020
    972,338       216,736  
     
(a)   The expected future other benefit payments take into account the Medicare Part D subsidy.
Employee Savings Plan Benefits
Pinnacle West sponsors a defined contribution savings plan for eligible employees of Pinnacle West and its subsidiaries. In 2010, costs related to APS’s employees represented 98% of the total cost of this plan. In a defined contribution savings plan, the benefits a participant receives result from regular contributions participants make to their own individual account, the Company’s matching contributions and earnings or losses on their investments. Under this plan, the Company matches a percentage of the participants’ contributions in cash which is then invested in the same investment mix as participants elect to invest their own future contributions. Pinnacle West recorded expenses for this plan of approximately $9 million for 2010, $9 million for 2009 and $8 million for 2008.
Leases
Leases
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 $23 million in 2010, $28 million in 2009 and $28 million in 2008. APS’s lease expense was $19 million in 2010, $19 million in 2009 and $21 million in 2008.
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):
                 
    Pinnacle West        
Year   Consolidated     APS  
2011
  $ 24     $ 20  
2012
    21       17  
2013
    17       14  
2014
    14       11  
2015
    13       10  
Thereafter
    9       7  
 
           
Total future lease commitments
  $ 98     $ 79  
 
           
In 1986, APS entered into agreements with three separate lessor trust entities in order to sell and lease back interests in Palo Verde Nuclear Generating Station (“Palo Verde”) Unit 2 and related common facilities. Prior to January 1, 2010 the arrangements were accounted for as operating leases. On January 1, 2010, due to the adoption of amended accounting guidance related to VIE’s these agreements were deemed variable interests and consolidated. We adopted this accounting change using retrospective application and have adjusted prior periods presented. Consolidation of the lessor trust entities eliminates the lease accounting we previously reported and results in changes in our consolidated assets, debt, equity, and net income. The above disclosures exclude the impacts of these transactions, as lease accounting for these agreements is eliminated upon consolidation. See Note 20 for a discussion of VIEs.
Jointly-Owned Facilities
Jointly-Owned Facilities
10. Jointly-Owned Facilities
APS shares ownership of some of its generating and transmission facilities with other companies. Our share of operations and maintenance expense and utility plant costs related to these facilities is accounted for using proportional consolidation. The following table shows APS’s interests in those jointly-owned facilities recorded on the Consolidated Balance Sheets at December 31, 2010 (dollars in thousands):
                                 
                            Construction  
    Percent     Plant in     Accumulated     Work in  
    Owned     Service     Depreciation     Progress  
Generating facilities:
                               
Palo Verde Units 1 and 3
    29.1 %   $ 2,056,977     $ 1,112,159     $ 58,272  
Palo Verde Unit 2 (a)
    17.0 %     705,996       342,640       28,162  
Palo Verde Sale Leaseback
    (a )     351,050       213,094        
Four Corners Units 4 and 5
    15.0 %     167,076       102,918       1,971  
Four Corners common
    28.3 %     11,585       5,738       531  
Navajo Generating Station Units 1, 2 and 3
    14.0 %     260,590       163,281       11,041  
Cholla common facilities (b)
    63.3 %(c)     140,041       48,815       3,229  
Transmission facilities:
                               
ANPP 500KV System
    34.0 %(c)     85,359       27,211       4,863  
Navajo Southern System
    26.1 %(c)     50,021       14,022       201  
Palo Verde — Yuma 500KV System
    43.5 %(c)     9,408       4,165       1,462  
Four Corners Switchyards
    47.5 %(c)     8,691       2,721       2,810  
Phoenix — Mead System
    17.5 %(c)     39,153       14,670       287  
Palo Verde — Estrella 500KV System
    50.0 %(c)     85,622       7,469       805  
North Valley System
    71.2 %(c)     69,497       293       24,113  
Round Valley System
    50.0 %(c)                 66  
     
(a)   See Notes 9 and 20.
 
(b)   PacifiCorp owns Cholla Unit 4 and APS operates the unit for PacifiCorp. The common facilities at Cholla are jointly-owned.
 
(c)   Weighted average of interests.
Commitments and Contingencies
Commitments and Contingencies
11. Commitments and Contingencies
Palo Verde Nuclear Generating Station
Spent Nuclear Fuel and Waste Disposal
APS currently estimates it will incur $132 million (in 2010 dollars) over the current life of Palo Verde for its share of the costs related to the on-site interim storage of spent nuclear fuel. At December 31, 2010, APS had a regulatory liability of $45 million that represents amounts recovered in retail rates in excess of amounts spent for on-site interim spent fuel storage.
Nuclear Insurance
The Palo Verde participants are insured against public liability for a nuclear incident up to $12.6 billion per occurrence. As required by the Price Anderson Nuclear Industries Indemnity Act, Palo Verde maintains the maximum available nuclear liability insurance in the amount of $375 million, which is provided by commercial insurance carriers. The remaining balance of $12.2 billion is provided through a mandatory industry wide retrospective assessment program. If losses at any nuclear power plant covered by the program exceed the accumulated funds, APS could be assessed retrospective premium adjustments. The maximum assessment per reactor under the program for each nuclear incident is approximately $118 million, subject to an annual limit of $18 million per incident, to be periodically adjusted for inflation. Based on APS’s interest in the three Palo Verde units, APS’s maximum potential assessment per incident for all three units is approximately $103 million, with an annual payment limitation of approximately $15 million.
The Palo Verde participants maintain “all risk” (including nuclear hazards) insurance for property damage to, and decontamination of, property at Palo Verde in the aggregate amount of $2.75 billion, a substantial portion of which must first be applied to stabilization and decontamination. APS has also secured insurance against portions of any increased cost of generation or purchased power and business interruption resulting from a sudden and unforeseen accidental outage of any of the three units. The property damage, decontamination, and replacement power coverages are provided by Nuclear Electric Insurance Limited (“NEIL”). APS is subject to retrospective assessments under all NEIL policies if NEIL’s losses in any policy year exceed accumulated funds. The maximum amount APS could incur under the current NEIL policies totals approximately $16 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 $44 million of collateral assurance within 20 business days of a rating downgrade to non-investment grade. The insurance coverage discussed in this and the previous paragraph is subject to certain policy conditions and exclusions.
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 2011 and 2042 that include required purchase provisions. APS estimates the contract requirements to be approximately $594 million in 2011; $529 million in 2012; $419 million in 2013; $544 million in 2014; $526 million in 2015; and $7.2 billion thereafter. However, these amounts may vary significantly pursuant to certain provisions in such contracts that permit us to decrease required purchases under certain circumstances.
Of the various fuel and purchased power contracts mentioned above, some of those contracts have take-or-pay provisions. The contracts APS has for its coal supply include take-or-pay provisions. The current take-or-pay coal contracts have terms that expire in 2024.
The following table summarizes our actual and estimated take-or-pay commitments (dollars in millions):
                                                                         
    Actual     Estimated (a)  
    2008     2009     2010     2011     2012     2013     2014     2015     Thereafter  
Coal take-or-pay commitments
  $ 81     $ 93     $ 66     $ 76     $ 78     $ 80     $ 82     $ 85     $ 204  
(a)  
Total take-or-pay commitments are approximately $605 million. The total net present value of these commitments is approximately $435 million.
Renewable Energy Credits
APS has entered into contracts to purchase renewable energy credits to comply with the Renewable Energy Standard. APS estimates the contract requirements to be approximately $57 million in 2011; $20 million in 2012; $20 million in 2013; $20 million in 2014; $20 million in 2015; and $196 million thereafter.
Coal Mine Reclamation Obligations
APS must reimburse certain coal providers for amounts incurred for coal mine reclamation. APS’s coal mine reclamation obligation was approximately $117 million at December 31, 2010 and $92 million at December 31, 2009.
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. On August 24, 2007, the Ninth Circuit issued an opinion that remanded the proceeding to the FERC for further consideration. Although the FERC has not yet determined whether any refunds will ultimately be required, we do not expect that the resolution of these issues will have a material adverse impact on our financial position, results of operations or cash flows.
Superfund
Superfund establishes liability for the cleanup of hazardous substances found contaminating the soil, water or air. Those who generated, transported or disposed of hazardous substances at a contaminated site are among those who are PRPs. PRPs may be strictly, and often are jointly and severally, liable for clean-up. On September 3, 2003, the EPA advised APS that the EPA considers APS to be a PRP in the Motorola 52nd Street Superfund Site, Operable Unit 3 (OU3) in Phoenix, Arizona. APS has facilities that are within this Superfund site. APS and Pinnacle West have agreed with the EPA to perform certain investigative activities of the APS facilities within OU3. In addition, on September 23, 2009, APS agreed with the EPA and one other PRP to voluntarily assist with the funding and management of the site-wide groundwater remedial investigation and feasibility study work plan. We estimate that our costs related to this investigation and study will be approximately $1 million, which is reserved as a liability on our financial statements. We anticipate incurring additional expenditures in the future, but because the overall investigation is not complete and ultimate remediation requirements are not yet finalized, at the present time we cannot accurately estimate our total expenditures.
Landlord Bankruptcy
On April 16, 2009, the landlord for our corporate headquarters building announced that it is seeking relief under Chapter 11 of the United States Bankruptcy Code. We currently have several assets on our books related to our landlord, the most significant of which is an asset related to levelized rent payments for the building of approximately $71 million. This amount will continue to increase to approximately $93 million as a result of the lease terms until 2015, when this amount will begin to decrease over the remaining life of the lease. In November 2010, our landlord exited bankruptcy and our leases were assumed and reinstated. This matter is now closed.
Asset Retirement Obligations
Asset Retirement Obligations
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. The non-nuclear generation asset retirement obligations primarily relate to requirements for removing portions of those plants at the end of the plant life or lease term.
Some of APS’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 asset retirement obligations associated with our non-regulated assets are immaterial.
The following schedule shows the change in our asset retirement obligations for 2010 and 2009 (dollars in millions):
                 
    2010     2009  
Asset retirement obligations at the beginning of year
  $ 302     $ 276  
Changes attributable to:
               
Liabilities settled
          (1 )
Accretion expense
    22       20  
Estimated cash flow revisions
    5       7  
 
           
Asset retirement obligations at the end of year
  $ 329     $ 302  
 
           
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.
Selected Quarterly Financial Data (Unaudited)
Selected Quarterly Financial Data (Unaudited)
13. Selected Quarterly Financial Data (Unaudited)
Consolidated quarterly financial information for 2010 and 2009 is as follows (dollars in thousands, except per share amounts):
                                         
    2010 Quarter Ended     2010  
    March 31, (a)     June 30,     September 30,     December 31,     Total  
 
                                       
Operating revenues
  $ 620,355     $ 820,594     $ 1,139,085     $ 683,611     $ 3,263,645  
Operations and maintenance
    207,842       215,104       221,469       232,991       877,406  
Operating income
    57,668       203,273       403,625       59,318       723,884  
Income taxes
    (7,172 )     51,829       123,486       (3,822 )     164,321  
Income from continuing operations
    11,983       94,584       231,828       12,203       350,598  
Net income (loss) attributable to common shareholders
    (6,014 )     114,797       233,920       7,350       350,053  
 
                                       
Basic earnings per share:
                                       
Income from continuing operations attributable to common shareholders
  $ 0.07     $ 0.84     $ 2.09     $ 0.07     $ 3.10  
Net income (loss) attributable to common shareholders
    (0.06 )     1.07       2.15       0.07       3.28  
 
                                       
Diluted earnings per share:
                                       
Income from continuing operations attributable to common shareholders
  $ 0.07     $ 0.83     $ 2.08     $ 0.06     $ 3.08  
Net income (loss) attributable to common shareholders
    (0.06 )     1.07       2.14       0.07       3.27  
(a)  
The March 31, 2010 results were adjusted for the effect of reclassifications for discontinued operations. The adjustments resulted in a reduction in operating revenues of $13,236, a reduction in operations and maintenance of $2,149, an increase in operating income of $20,034, an increase in income taxes of $8,308, and an increase in income from continuing operations of $12,755. The adjustments also resulted in an increase in income from continuing operations basic and diluted earnings per share of $0.13.
                                         
    2009 Quarter Ended     2009  
    March 31,     June 30,     September 30,     December 31,     Total  
 
                                       
As originally reported in the 2009 10-K:
                                       
Operating revenues
  $ 625,867     $ 835,972     $ 1,142,205     $ 693,057     $ 3,297,101  
Operations and maintenance
    207,531       226,245       208,769       232,812       875,357  
Operating income (loss)
    (204,923 )     162,007       345,397       19,292       321,773  
Income taxes
    (95,004 )     39,579       103,507       (10,255 )     37,827  
Income (loss) from continuing operations
    (165,993 )     74,027       188,065       (28,868 )     67,231  
Net income (loss) attributable to common shareholders
    (156,510 )     68,347       186,652       (30,159 )     68,330  
 
                                       
Palo Verde VIE reclassifications (see Note 20):
                                       
Operations and maintenance
  $ (9,915 )   $ (9,914 )   $ (9,916 )   $ (9,915 )   $ (39,660 )
Operating income
    7,989       7,989       7,989       7,989       31,956  
Income from continuing operations
    4,650       4,651       4,953       4,955       19,209  
 
                                       
Discontinued operations reclassifications (see Note 22):
                                       
Operating revenues
  $ (18,489 )   $ (17,384 )   $ (53,169 )   $ (32,149 )   $ (121,191 )
Operations and maintenance
    (790 )     (786 )     (823 )     (1,435 )     (3,834 )
Operating income
    220,888       1,898       14,021       19,617       256,424  
Income taxes
    81,820       1,421       6,271       9,167       98,679  
Income from continuing operations
    140,651       2,352       10,310       12,805       166,118  
 
                                       
After reclassifications:
                                       
Operating revenues
  $ 607,378     $ 818,588     $ 1,089,036     $ 660,908     $ 3,175,910  
Operations and maintenance
    196,826       215,545       198,030       221,462       831,863  
Operating income
    23,954       171,894       367,407       46,898       610,153  
Income taxes
    (13,184 )     41,000       109,778       (1,088 )     136,506  
Income (loss) from continuing operations
    (20,692 )     81,030       203,328       (11,108 )     252,558  
Net income (loss) attributable to common shareholders
    (156,510 )     68,347       186,652       (30,159 )     68,330  
                                         
    2009 Quarter Ended     2009  
    March 31,     June 30,     September 30,     December 31,     Total  
 
                                       
As originally reported in the 2009 10-K — Basic earnings per share:
                                       
Income (loss) from continuing operations attributable to common shareholders
  $ (1.50 )   $ 0.73     $ 1.86     $ (0.29 )   $ 0.81  
Net income (loss) attributable to common shareholders
    (1.55 )     0.68       1.84       (0.30 )     0.68  
 
                                       
After reclassifications — Basic earnings per share:
                                       
Income (loss) from continuing operations attributable to common shareholders
  $ (0.25 )   $ 0.76     $ 1.96     $ (0.16 )   $ 2.31  
Net income (loss) attributable to common shareholders
    (1.55 )     0.68       1.84       (0.30 )     0.68  
 
                                       
As originally reported in the 2009 10-K— Diluted earnings per share:
                                       
Income (loss) from continuing operations attributable to common shareholders
  $ (1.50 )   $ 0.74     $ 1.86     $ (0.29 )   $ 0.81  
Net income (loss) attributable to common shareholders
    (1.55 )     0.68       1.84       (0.30 )     0.67  
 
                                       
After reclassifications — Diluted earnings per share:
                                       
Income (loss) from continuing operations attributable to common shareholders
  $ (0.25 )   $ 0.75     $ 1.96     $ (0.16 )   $ 2.30  
Net income (loss) attributable to common shareholders
    (1.55 )     0.68       1.84       (0.30 )     0.67  
Fair Value Measurements
Fair Value Measurements
14. Fair Value Measurements
We disclose the fair value of certain assets and liabilities according to a fair value hierarchy. This hierarchy ranks the quality and reliability of the inputs used to determine fair values, which are then classified and disclosed in one of three categories. The three levels of the fair value hierarchy are:
Level 1 — Quoted prices in active markets for identical assets or liabilities. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide information on an ongoing basis. This category includes derivative instruments that are exchange-traded such as futures, cash equivalents invested in exchange-traded money market funds, exchange-traded equities, and nuclear decommissioning trust investments in Treasury securities.
Level 2 — Quoted prices in active markets for similar assets or liabilities; quoted prices in markets that are not active; and model-derived valuations whose inputs are observable. This category includes nonexchange-traded contracts such as forwards, options, and swaps. This category also includes investments, in common and commingled funds that are redeemable and valued based on the funds’ net asset values.
Level 3 — Model-derived valuations with significant unobservable inputs that are supported by little or no market activity. Instruments in this category include long-dated derivative transactions where models are required due to the length of the transaction, options, transactions in locations where observable market data does not exist, and common and collective trusts with significant restrictions on our ability to transact in the fund. The valuation models we employ utilize spot prices, forward prices, historical market data and other factors to forecast future prices. The primary valuation technique we use to calculate the fair value of contracts where price quotes are not available is based on the extrapolation of forward pricing curves using observable market data for more liquid delivery points in the same region and actual transactions at the more illiquid delivery points.
Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. We maximize the use of observable inputs and minimize the use of unobservable inputs. If market data is not readily available, inputs may reflect our own assumptions about the inputs market participants would use. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. Thus, a valuation may be classified in Level 3 even though the valuation may include significant inputs that are readily observable. We assess whether a market is active by obtaining observable broker quotes, reviewing actual market transactions, and assessing the volume of transactions. We consider broker quotes observable inputs when the quote is binding on the broker, we can validate the quote with market transactions, or we can determine that the inputs the broker used to arrive at the quoted price are observable.
Recurring Fair Value Measurements
We apply recurring fair value measurements to derivative instruments, nuclear decommissioning trusts, certain cash equivalents and plan assets held in our retirement and other benefit plans (see Note 8).
Cash Equivalents
Cash equivalents represent short-term investments in exchange-traded money market funds that are valued using quoted prices in active markets.
Risk Management Activities
Exchange-traded contracts are valued using quoted prices in active markets. For non-exchange traded contracts, we calculate fair market value based on the average of the bid and offer price, discounted to reflect net present value. We maintain certain valuation adjustments for a number of risks associated with the valuation of future commitments. These include valuation adjustments for liquidity and credit risks based on the financial condition of counterparties. The liquidity valuation adjustment represents the cost that would be incurred if all unmatched positions were closed-out or hedged.
The credit valuation adjustment represents estimated credit losses on our overall exposure to counterparties, taking into account netting arrangements, expected default experience for the credit rating of the counterparties and the overall diversification of the portfolio. Counterparties in the portfolio consist principally of major energy companies, municipalities, local distribution companies and financial institutions. We maintain credit policies that management believes minimize overall credit risk. Determination of the credit quality of counterparties is based upon a number of factors, including credit ratings, financial condition, project economics and collateral requirements. When applicable, we employ standardized agreements that allow for the netting of positive and negative exposures associated with a single counterparty.
Some of our derivative instrument transactions are valued based on unobservable inputs due to the long-term nature of contracts or the unique location of the transactions. Our long-dated energy transactions consist of observable valuations for the near term portion and unobservable valuations for the long-term portions of the transaction. When the unobservable portion is significant to the overall valuation of the transaction, the entire transaction is classified as Level 3. Our classification of instruments as Level 3 is primarily reflective of the long-term nature of our energy transactions, and is not reflective of material inactive markets.
Nuclear Decommissioning Trust
The nuclear decommissioning trust invests in fixed income securities directly and equity securities indirectly through commingled funds. The commingled equity funds are valued based on the fund’s net asset value (“NAV”) and are classified within Level 2. We may transact in the fund on a semi-monthly basis. Our trustee provides valuation of our nuclear decommissioning trust assets by using pricing services to determine fair market value. We assess these valuations and verify that pricing can be supported by actual recent market transactions. The trust fund investments have been established to satisfy APS’s nuclear decommissioning obligations.
Fair Value Tables
The following table presents the fair value at December 31, 2010 of our assets and liabilities that are measured at fair value on a recurring basis (dollars in millions):
                                         
    Quoted Prices     Significant                    
    in Active     Other     Significant              
    Markets for     Observable     Unobservable     Counterparty     Balance at  
    Identical Assets     Inputs     Inputs (a)     Netting &     December 31,  
    (Level 1)     (Level 2)     (Level 3)     Other (b)     2010  
Assets
                                       
Cash equivalents
  $ 35     $     $     $     $ 35  
Risk management activities:
                                       
Commodity contracts
          80       61       (28 )     113  
Nuclear decommissioning trust:
                                       
Equity securities:
                                       
U.S. commingled funds
          168                   168  
Fixed income securities:
                                       
U.S. Treasury
    50                         50  
Cash and cash equivalent funds
          22                   22  
Corporate
          60                   60  
Mortgage-backed
          81                   81  
Municipality
          79                   79  
Other
          20             (10 )     10  
 
                             
Total
  $ 85     $ 510     $ 61     $ (38 )   $ 618  
 
                             
 
                                       
Liabilities
                                       
Risk management activities:
                                       
Commodity contracts
  $ (1 )   $ (280 )   $ (99 )   $ 256     $ (124 )
 
                             
(a)  
Primarily consists of long-dated electricity contracts.
 
(b)  
Risk management activities represent netting under master netting arrangements, including margin and collateral. See Note 18. Nuclear decommissioning trust represents net pending securities sales and purchases.
The following table presents the fair value at December 31, 2009 of our assets and liabilities that are measured at fair value on a recurring basis (dollars in millions):
                                         
    Quoted Prices     Significant                    
    in Active     Other     Significant              
    Markets for     Observable     Unobservable     Counterparty     Balance at  
    Identical Assets     Inputs     Inputs (a)     Netting &     December 31,  
    (Level 1)     (Level 2)     (Level 3)     Other (b)     2009  
Assets
                                       
Cash equivalents
  $ 97     $     $     $     $ 97  
Risk management activities:
                                       
Commodity contracts
    1       100       42       (64 )     79  
Nuclear decommissioning trust:
                                       
Equity securities:
                                       
U.S. commingled funds
          167                   167  
Fixed income securities:
                                       
U.S. Treasury
    55                         55  
Corporate
          62                   62  
Mortgage-backed
          60                   60  
Municipality
          49                   49  
Other
          21             1       22  
 
                             
Total
  $ 153     $ 459     $ 42     $ (63 )   $ 591  
 
                             
 
                                       
Liabilities
                                       
Risk management activities:
                                       
Commodity contracts
  $ (14 )   $ (246 )   $ (52 )   $ 194     $ (118 )
 
                             
(a)  
Primarily consists of long-dated electricity contracts.
 
(b)  
Primarily represents netting under master netting arrangements, including margin and collateral. See Note 18.
The following table shows the changes in fair value for assets and liabilities that are measured at fair value on a recurring basis using Level 3 inputs for the years ended December 31, 2010 and 2009 (dollars in millions):
                 
    Year Ended  
    December 31,  
    2010     2009  
Net risk management activities at beginning of period
  $ (10 )   $ (7 )
Total net gains (losses) realized/unrealized:
               
Included in earnings
    (1 )     3  
Included in OCI
    (14 )     (2 )
Deferred as a regulatory asset or liability
    (38 )     19  
Settlements
    19       (2 )
Transfers into Level 3 from Level 2
    5       (25 )
Transfers from Level 3 into Level 2
    1       4  
 
           
Net risk management activities at end of period
  $ (38 )   $ (10 )
 
           
 
               
Net unrealized gains (losses) included in earnings related to instruments still held at end of period
  $ (1 )   $ 3  
Amounts included in earnings are recorded in either regulated electricity segment revenue or regulated electricity segment 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 long-dated energy transactions that extend beyond available quoted periods.
Nonrecurring Fair Value Measurements
We may be required to record other assets at fair value on a nonrecurring basis. These nonrecurring fair value measurements typically involve write-downs of individual assets due to impairment.
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 long-term debt fair value estimates are based on quoted market prices of the same or similar issues. 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 carrying amount and estimated fair value of our long-term debt, including current maturities (dollars in millions):
                                 
    As of     As of  
    December 31, 2010     December 31, 2009  
    Carrying             Carrying        
    Amount     Fair Value     Amount     Fair Value  
 
                               
Pinnacle West
  $ 175     $ 176     $ 175     $ 180  
APS
    3,503       3,737       3,530       3,674  
SunCor
                95       96  
 
                       
Total
  $ 3,678     $ 3,913     $ 3,800     $ 3,950  
 
                       
Nuclear Decommissioning Trust
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 domestic equity securities. APS classifies investments in decommissioning trust funds as available for sale. As a result, we record the decommissioning trust funds at their fair value on our Consolidated Balance Sheets. Because of the ability of APS to recover decommissioning costs in rates and in accordance with the regulatory treatment for decommissioning trust funds, we have recorded the offsetting amount of gains or losses on investment securities in other regulatory liabilities or assets. The following table summarizes the fair value of APS’s nuclear decommissioning trust fund assets at December 31, 2010 and December 31, 2009 (dollars in millions):
                         
            Total     Total  
            Unrealized     Unrealized  
    Fair Value     Gains     Losses  
2010
                       
Equity securities
  $ 168     $ 43     $ (1 )
Fixed income securities
    312       12       (2 )
Net payables (a)
    (10 )            
 
                 
Total
  $ 470     $ 55     $ (3 )
 
                 
(a)  
Net payables relate to pending securities sales and purchases.
                         
            Total     Total  
            Unrealized     Unrealized  
    Fair Value     Gains     Losses  
2009
                       
Equity securities
  $ 167     $ 37     $ (6 )
Fixed income securities
    247       11       (1 )
Net receivables (a)
    1              
 
                 
Total
  $ 415     $ 48     $ (7 )
 
                 
(a)  
Net receivables relate to pending securities sales and purchases.
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,  
    2010     2009     2008  
 
                       
Realized gains
  $ 17     $ 10     $ 7  
Realized losses
    (4 )     (7 )     (8 )
Proceeds from the sale of securities (a)
    560       441       318  
(a)  
Proceeds are reinvested in the trust.
The fair value of fixed income securities, summarized by contractual maturities, at December 31, 2010 is as follows (dollars in millions):
         
    Fair Value  
Less than one year
  $ 25  
1 year - 5 years
    58  
5 years - 10 years
    102  
Greater than 10 years
    127  
 
     
Total
  $ 312  
 
     
Earnings Per Share
Earnings Per Share
15. Earnings Per Share
The following table presents earnings per weighted-average common share outstanding for the years ended December 31, 2010, 2009 and 2008:
                         
    2010     2009     2008  
Basic earnings per share:
                       
Income from continuing operations attributable to common shareholders
  $ 3.10     $ 2.31     $ 2.59  
Income (loss) from discontinued operations
    0.18       (1.63 )     (0.19 )
 
                 
Earnings per share — basic
  $ 3.28     $ 0.68     $ 2.40  
 
                 
Diluted earnings per share:
                       
Income from continuing operations attributable to common shareholders
  $ 3.08     $ 2.30     $ 2.58  
Income (loss) from discontinued operations
    0.19       (1.63 )     (0.18 )
 
                 
Earnings per share — diluted
  $ 3.27     $ 0.67     $ 2.40  
 
                 
Dilutive stock options and performance shares (which are contingently issuable) increased average common shares outstanding by approximately 565,000 shares in 2010, 103,000 shares in 2009 and 274,000 shares in 2008. Total average common shares outstanding for the purposes of calculating diluted earnings per share were 107,137,785 shares in 2010, 101,263,795 shares in 2009 and 100,964,920 shares in 2008.
Options to purchase 192,542 shares of common stock during 2010 were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares. Options to purchase shares of common stock that were not included in the computation of diluted earnings per share were 572,301 during 2009 and 687,375 during 2008.
Stock-Based Compensation
Stock-Based Compensation
16. Stock-Based Compensation
We have a 2007 long-term incentive plan (“2007 Plan”) that allows the Company to grant restricted stock, restricted stock units, performance shares, stock grants, incentive and stock options, stock appreciation rights, performance share units, performance cash awards, dividend equivalents and stock to eligible individuals.
Restricted Stock Unit Awards and Stock Grants
Stock grants were issued to non-officer members of the Board of Directors in 2009 and 2008 under the 2007 Plan and were paid in fully transferable shares of stock. In 2010, non-officer members of the Board of Directors were given the option to elect to receive a stock grant, or to defer receipt and receive restricted stock units in lieu of the stock grant. The 2010 stock grants and deferred restricted stock units were issued under the 2007 Plan. The election to receive a stock grant or to defer, and the related elections were made on or before December 31, 2009. Participants had to elect to receive their deferred grant as of the last business day of the month following the month in which they separate service from the Board of Directors, or as of a date specified by them in 2011 or later. The deferral has the election to receive payment in either 50% cash and 50% fully transferable shares of stock, or 100% in fully transferable shares of stock, in exchange for each restricted stock unit. Each restricted stock unit payable in cash represents the right to receive a cash payment equal to the fair market value of one share of Pinnacle West’s common stock. The deferral will also include dividend equivalent payments in either 50% cash and 50% fully-transferable shares of stock or in 100% fully-transferable shares of stock per the participant’s election equal to the amount of dividends that they would have received if the participant had owned the stock to which the restricted stock units relate from the date of grant to the date of payment plus interest.
Restricted stock unit awards were granted to officers and key employees in 2010, 2009 and 2008 under the 2007 Plan. For 2009 and 2008 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. For the 2010 award the election for the awards is either 50% cash and 50% fully transferable shares of stock, or 100% in fully transferable shares of stock, in exchange for each restricted stock unit. Each restricted stock unit payable in cash represents the right to receive a cash payment equal to the fair market value of one share of Pinnacle West’s common stock.
Restricted stock unit awards vest and settle in annual installments over a four-year period. In addition, officers and key employees will receive a cash payment equal to the amount of dividends that they would have received if they had owned the stock to which the restricted stock units relate from the date of grant to the date of payment plus interest. For the 2010 award the officers and key employees will receive either a 50% cash payment and 50% fully transferrable shares of stock, or 100% in fully transferable shares of stock equal to the amount of dividends that they would have received if they had owned the stock to which the restricted stock units relate from the date of grant to the date of payment plus interest. The dividend equivalents payout election has to be the same as the election for the payout of restricted stock units. For any employee that was eligible to retire before the settlement date, the employee’s restricted stock unit awards vest by retirement date and the compensation expense is recognized by retirement eligibility. As the restricted stock unit award is accounted for as a liability award, compensation costs, initially measured based on the Company’s stock price on the grant date, are remeasured at each balance sheet date, using Pinnacle West’s closing stock price.
Restricted stock unit awards were granted to a selected set of key employees of Pinnacle West on October 21, 2008, February 18, 2009, March 18, 2009, April 13, 2009, July 29, 2009, January 19, 2010, February 22, 2010, April 1, 2010 and November 2, 2010 under the 2007 Plan. The award of the restricted stock units follows the same vesting schedule as the 2007, 2008, 2009 and 2010 restricted stock unit awards.
The following table is a summary of granted restricted stock units and stock grants and the weighted average fair value for the three years ended 2010, 2009 and 2008:
                         
    2010     2009     2008  
Units granted
    202,341       261,006       224,658  
Grant date fair value (a)
  $ 37.47     $ 30.25     $ 36.26  
(a)  
weighted average fair value
The following table is a summary of the status of restricted stock units and stock grants, as of December 31, 2010 and changes during the year. This table represents only the stock portion of restricted stock units, per the election on payment discussed in the paragraph above:
                 
            Weighted-Average  
Nonvested shares   Shares     Grant-Date Fair Value  
Nonvested at January 1, 2010
    145,339     $ 33.57  
Granted
    146,391       37.46  
Vested
    59,409       35.16  
Forfeited
    8,640       34.18  
 
             
Nonvested at December 31, 2010
    223,681       35.69  
 
             
The amount of cash required to settle the payment for the 2007 grant on February 20, 2010, February 20, 2009 and February 20, 2008 was $0.9 million, $0.8 million and $1.0 million respectively. The amount of cash required to settle the payment for the 2008 grant on February 20, 2010 and February 20, 2009 was $1.5 million and $1.3 million respectively. The amount of cash required to settle the payment for the 2009 grant on February 20, 2010 was $1.4 million.
Performance Share Awards
Performance share awards were granted to officers and key employees in 2010, 2009 and 2008 under the 2007 Plan. Performance share awards for 2008 contain performance criteria that affect the number of shares ultimately received. Generally, each recipient of performance shares is entitled to receive shares of common stock after the end of a three-year performance period. The number of shares each recipient ultimately receives, if any, is based upon the percentile ranking of Pinnacle West’s earnings per share growth rate at the end of the three-year period as compared with the earnings per share growth rate of all relevant companies in a specified utilities index.
Performance share awards for 2009 also contain performance criteria that affect the number of shares that ultimately vest; 50% of the award is based on the same percentile ranking as the 2008 award and the other 50% of the award is based on six non-financial separate performance metrics.
Performance share awards for 2010 also contain performance criteria that affects the number of shares that ultimately vest; 50% of the award is based 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 utilities index and the other 50% of the award is based on six non-financial separate performance metrics.
For any employee that was eligible to retire before the settlement date, the employee’s performance share awards vest by retirement date and the compensation expense is recognized by retirement eligibility. Performance share awards are accounted for as liability awards, as employees are not required to withhold at the minimum statutory required rate. Compensation costs, initially measured based on the Company’s stock price on the grant date, are remeasured at each balance sheet date, using Pinnacle West’s closing stock price. Management also evaluates the probability of meeting the performance criteria at each balance sheet date. If the goals are not achieved, no compensation cost is recognized and any previously recognized compensation cost is reversed.
Performance shares were granted to officers and key employees of Pinnacle West on October 21, 2008, February 18, 2009, March 18, 2009, April 13, 2009, July 29, 2009, January 19, 2010, February 22, 2010, April 1, 2010 and November 2, 2010 under the 2007 Plan.
The following table is a summary of the Performance shares granted and the weighted average fair value for the three years ended 2010, 2009 and 2008:
                         
    2010     2009     2008  
Units granted
    178,722       240,624       226,242  
Grant date fair value (a)
  $ 37.57     $ 30.19     $ 36.24  
(a)  
weighted average grant date fair value

 

The following table is a summary of the status of performance shares, as of December 31, 2010 and changes during the year:
                 
            Weighted-Average  
Nonvested shares   Shares     Grant-Date Fair Value  
Nonvested at January 1, 2010
    358,943     $ 32.34  
Granted
    178,722       37.57  
Vested
    127,673       36.29  
Forfeited
    14,680       33.20  
 
             
Nonvested at December 31, 2010
    395,312       33.44  
 
             
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, 2009 was $1.1 million, and 2008 was $1.3 million.
Incentive Shares
On January 21, 2009, the Human Resources Committee approved under the 2007 Plan payment of 2008 incentive awards to officers in the form of a Pinnacle West common stock grant. A total of 138,756 shares were issued for this stock grant with a grant date fair value of $32.58 per share. The stock grant was included in stock compensation expense in 2008.
Stock Options
We have issued stock options in the past, but have not granted stock options since 2004. The term of outstanding options cannot be longer than 10 years and options cannot be repriced during their terms.