Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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Exact Name of Each Registrant as specified in its |
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Commission File |
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charter; State of Incorporation; Address; and |
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IRS Employer |
Number |
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Telephone Number |
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Identification No. |
1-8962 |
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PINNACLE WEST CAPITAL CORPORATION |
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86-0512431 |
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(an Arizona corporation) |
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400 North Fifth Street, P.O. Box 53999 |
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Phoenix, Arizona 85072-3999 |
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(602) 250-1000 |
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1-4473 |
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ARIZONA PUBLIC SERVICE COMPANY |
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86-0011170 |
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(an Arizona corporation) |
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400 North Fifth Street, P.O. Box 53999 |
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Phoenix, Arizona 85072-3999 |
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(602) 250-1000 |
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Indicate by check mark whether each registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
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PINNACLE WEST CAPITAL CORPORATION
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Yes þ
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No o |
ARIZONA PUBLIC SERVICE COMPANY
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Yes þ
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No o |
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
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PINNACLE WEST CAPITAL CORPORATION
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Yes þ
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No o |
ARIZONA PUBLIC SERVICE COMPANY
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Yes o
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No o |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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PINNACLE WEST CAPITAL CORPORATION |
Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
ARIZONA PUBLIC SERVICE COMPANY |
Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
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Smaller reporting company o |
Indicate by check mark whether each registrant is a shell company (as defined in Exchange Act
Rule 12b-2).
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PINNACLE WEST CAPITAL CORPORATION
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Yes o
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No þ |
ARIZONA PUBLIC SERVICE COMPANY
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Yes o
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No þ |
Indicate the number of shares outstanding of each of the issuers classes of common stock as
of the latest practicable date.
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PINNACLE WEST CAPITAL CORPORATION
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Number of shares of common stock, no par
value, outstanding as of October
25, 2010: 108,711,779 |
ARIZONA PUBLIC SERVICE COMPANY
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Number of shares of common stock, $2.50
par value, outstanding as of October 25, 2010: 71,264,947 |
Arizona Public Service Company meets the conditions set forth in General Instruction H(1)(a)
and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format allowed
under that General Instruction.
TABLE OF CONTENTS
This combined Form 10-Q is separately provided by Pinnacle West Capital Corporation
(Pinnacle West) and Arizona Public Service Company (APS). Any use of the words Company,
we, and our refer to Pinnacle West. Each registrant is providing on its own behalf all of the
information contained in this Form 10-Q that relates to such registrant and, where required, its
subsidiaries. Except as stated in the preceding sentence, neither registrant is providing any
information that does not relate to such registrant, and therefore makes no representation as to
any such information. The information required with respect to each company is set forth within
the applicable items. Item 1 of this report includes Condensed Consolidated Financial Statements
of Pinnacle West and Condensed Consolidated Financial Statements of APS. Item 1 also includes
Notes to Pinnacle Wests Condensed Consolidated Financial Statements, the majority of which also
relate to APS, and Supplemental Notes, which only relate to APS Condensed Consolidated Financial
Statements. Item 2 of this report is divided into two sections Pinnacle West Consolidated and
APS. The Pinnacle West Consolidated section describes Pinnacle West and its subsidiaries on a
consolidated basis, including discussions of Pinnacle Wests regulated utility and non-utility
operations.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements based on current expectations, and neither
Pinnacle West nor APS assumes any obligation to update these statements, even if our internal
estimates change, except as required by applicable law. These forward-looking statements are often
identified by words such as estimate, predict, may, believe, plan, expect, require,
intend, assume and similar words. Because actual results may differ materially from
expectations, we caution readers not to place undue reliance on these statements. A number of
factors could cause future results to differ materially from historical results, or from outcomes
currently expected or sought by Pinnacle West or APS. In addition to the Risk Factors described in
Item 1A of the Pinnacle West/APS Annual Report on Form 10-K for the fiscal year ended December 31,
2009 (2009 Form 10-K) and in Item 2 Managements Discussion and Analysis of Financial Condition
and Results of Operations herein, these factors include, but are not limited to:
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regulatory and judicial decisions, developments and proceedings; |
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our ability to achieve timely and adequate rate recovery of our costs; |
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our ability to reduce capital expenditures and other costs while maintaining reliability
and customer service levels; |
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variations in demand for electricity, including those due to weather, the general economy,
customer and sales growth (or decline), and the effects of energy conservation measures; |
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power plant performance and outages; |
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volatile fuel and purchased power costs; |
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fuel and water supply availability; |
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new legislation or regulation, including those relating to greenhouse gas emissions,
renewable energy mandates and energy efficiency standards; |
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our ability to meet renewable energy requirements and recover related costs, including
returns on debt and equity capital; |
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risks inherent in the operation of nuclear facilities, including spent fuel disposal
uncertainty; |
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competition in retail and wholesale power markets; |
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the duration and severity of the economic decline in Arizona and current credit, financial
and real estate market conditions; |
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the cost of debt and equity capital and the ability to access capital markets when
required; |
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restrictions on dividends or other burdensome provisions in our credit agreements and
Arizona Corporation Commission (ACC) orders; |
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our ability, or the ability of our subsidiaries, to meet debt service obligations; |
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changes to our credit ratings; |
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the investment performance of the assets of our nuclear decommissioning trust, pension, and
other postretirement benefit plans and the resulting impact on future funding requirements; |
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the liquidity of wholesale power markets and the use of derivative contracts in our
business; |
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potential shortfalls in insurance coverage; |
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new accounting requirements or new interpretations of existing requirements; |
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generation, transmission and distribution facility and system conditions and operating
costs; |
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the ability to meet the anticipated future need for additional baseload generation and
associated transmission facilities in our region; |
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the willingness or ability of our counterparties and power plant participants to meet
contractual or other obligations; |
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technological developments affecting the electric industry; and |
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economic and other conditions affecting SunCor Development Companys (SunCor) ability to
dispose of its remaining assets and satisfy its debt obligations. |
These and other factors are discussed in Risk Factors described in Item 1A of our 2009 Form 10-K,
which readers should review carefully before placing any reliance on our financial statements or
disclosures.
2
PART I FINANCIAL INFORMATION
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ITEM 1. |
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FINANCIAL STATEMENTS |
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(dollars and shares in thousands, except per share amounts)
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Three Months Ended |
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September 30, |
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2010 |
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2009 |
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OPERATING REVENUES |
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Regulated electricity segment |
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$ |
1,116,211 |
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$ |
1,083,750 |
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Other revenues |
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22,874 |
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5,286 |
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Total |
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1,139,085 |
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1,089,036 |
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OPERATING EXPENSES |
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Regulated electricity segment fuel and purchased power |
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353,904 |
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381,543 |
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Operations and maintenance |
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221,469 |
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198,030 |
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Depreciation and amortization |
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104,194 |
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103,008 |
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Taxes other than income taxes |
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37,528 |
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34,015 |
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Other expenses |
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18,365 |
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5,033 |
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Total |
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735,460 |
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721,629 |
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OPERATING INCOME |
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403,625 |
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367,407 |
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OTHER INCOME (DEDUCTIONS) |
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Allowance for equity funds used during construction |
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5,524 |
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2,197 |
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Other income (Note 11) |
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4,348 |
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4,386 |
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Other expense (Note 11) |
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(3,855 |
) |
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(1,934 |
) |
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Total |
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6,017 |
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4,649 |
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INTEREST EXPENSE |
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Interest charges |
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60,491 |
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60,299 |
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Allowance for borrowed funds used during construction |
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(6,163 |
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(1,349 |
) |
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Total |
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54,328 |
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58,950 |
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INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |
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355,314 |
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313,106 |
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INCOME TAXES |
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123,486 |
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109,778 |
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INCOME FROM CONTINUING OPERATIONS |
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231,828 |
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203,328 |
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INCOME (LOSS) FROM DISCONTINUED OPERATIONS |
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Net of income tax expense (benefit) of $4,721 and $(7,567) (Note 14) |
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7,211 |
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(12,305 |
) |
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NET INCOME |
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239,039 |
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191,023 |
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Less: Net income attributable to noncontrolling interests (Notes 7 and 16) |
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5,119 |
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4,371 |
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NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS |
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$ |
233,920 |
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$ |
186,652 |
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WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING BASIC |
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108,632 |
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101,223 |
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WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING DILUTED |
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109,094 |
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101,385 |
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EARNINGS PER WEIGHTED-AVERAGE COMMON SHARE OUTSTANDING |
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Income from continuing operations attributable to common shareholders basic |
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$ |
2.09 |
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$ |
1.96 |
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Net income attributable to common shareholders basic |
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2.15 |
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1.84 |
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Income from continuing operations attributable to common shareholders diluted |
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2.08 |
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1.96 |
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Net income attributable to common shareholders diluted |
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2.14 |
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1.84 |
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DIVIDENDS DECLARED PER SHARE |
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$ |
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$ |
0.525 |
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AMOUNTS ATTRIBUTABLE TO COMMON SHAREHOLDERS: |
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Income from continuing operations, net of tax |
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$ |
226,700 |
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$ |
198,375 |
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Discontinued operations, net of tax |
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7,220 |
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(11,723 |
) |
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Net income attributable to common shareholders |
|
$ |
233,920 |
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$ |
186,652 |
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|
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See Notes to Pinnacle Wests Condensed Consolidated Financial Statements.
3
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(dollars and shares in thousands, except per share amounts)
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Nine Months Ended |
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September 30, |
|
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2010 |
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2009 |
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OPERATING REVENUES |
|
|
|
|
|
|
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|
Regulated electricity segment |
|
$ |
2,527,052 |
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$ |
2,498,838 |
|
Other revenues |
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|
52,982 |
|
|
|
16,164 |
|
|
|
|
|
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Total |
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2,580,034 |
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|
2,515,002 |
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OPERATING EXPENSES |
|
|
|
|
|
|
|
|
Regulated electricity segment fuel and purchased power |
|
|
821,244 |
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|
920,630 |
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Operations and maintenance |
|
|
644,415 |
|
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|
610,401 |
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Depreciation and amortization |
|
|
307,864 |
|
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|
304,066 |
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Taxes other than income taxes |
|
|
100,936 |
|
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|
100,788 |
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Other expenses |
|
|
41,009 |
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|
15,862 |
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|
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Total |
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1,915,468 |
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|
1,951,747 |
|
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|
|
|
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OPERATING INCOME |
|
|
664,566 |
|
|
|
563,255 |
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|
|
|
|
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OTHER INCOME (DEDUCTIONS) |
|
|
|
|
|
|
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Allowance for equity funds used during construction |
|
|
16,417 |
|
|
|
11,919 |
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Other income (Note 11) |
|
|
3,828 |
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|
4,102 |
|
Other expense (Note 11) |
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|
(8,650 |
) |
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(8,887 |
) |
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|
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Total |
|
|
11,595 |
|
|
|
7,134 |
|
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|
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INTEREST EXPENSE |
|
|
|
|
|
|
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Interest charges |
|
|
181,937 |
|
|
|
177,447 |
|
Allowance for borrowed funds used during construction |
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|
(12,314 |
) |
|
|
(8,318 |
) |
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|
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|
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Total |
|
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169,623 |
|
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|
169,129 |
|
|
|
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INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |
|
|
506,538 |
|
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|
401,260 |
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INCOME TAXES |
|
|
168,143 |
|
|
|
137,594 |
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS |
|
|
338,395 |
|
|
|
263,666 |
|
INCOME (LOSS) FROM DISCONTINUED OPERATIONS |
|
|
|
|
|
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Net of income tax expense (benefit) of $12,611 and $(97,662) (Note 14) |
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|
19,313 |
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(165,867 |
) |
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NET INCOME |
|
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357,708 |
|
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|
97,799 |
|
Less: Net income (loss) attributable to noncontrolling interests (Notes 7 and 16) |
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|
15,005 |
|
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(690 |
) |
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NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS |
|
$ |
342,703 |
|
|
$ |
98,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING BASIC |
|
|
105,846 |
|
|
|
101,107 |
|
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING DILUTED |
|
|
106,318 |
|
|
|
101,184 |
|
|
|
|
|
|
|
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EARNINGS PER WEIGHTED-AVERAGE COMMON SHARE OUTSTANDING |
|
|
|
|
|
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Income from continuing operations attributable to common shareholders basic |
|
$ |
3.06 |
|
|
$ |
2.47 |
|
Net income attributable to common shareholders basic |
|
|
3.24 |
|
|
|
0.97 |
|
Income from continuing operations attributable to common shareholders diluted |
|
|
3.04 |
|
|
|
2.46 |
|
Net income attributable to common shareholders diluted |
|
|
3.22 |
|
|
|
0.97 |
|
DIVIDENDS DECLARED PER SHARE |
|
$ |
1.575 |
|
|
$ |
1.575 |
|
|
|
|
|
|
|
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AMOUNTS ATTRIBUTABLE TO COMMON SHAREHOLDERS: |
|
|
|
|
|
|
|
|
Income from continuing operations, net of tax |
|
$ |
323,361 |
|
|
$ |
249,412 |
|
Discontinued operations, net of tax |
|
|
19,342 |
|
|
|
(150,923 |
) |
|
|
|
|
|
|
|
Net income attributable to common shareholders |
|
$ |
342,703 |
|
|
$ |
98,489 |
|
|
|
|
|
|
|
|
See Notes to Pinnacle Wests Condensed Consolidated Financial Statements.
4
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
ASSETS |
|
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|
|
|
|
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CURRENT ASSETS |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
195,915 |
|
|
$ |
145,378 |
|
Customer and other receivables |
|
|
387,435 |
|
|
|
301,915 |
|
Accrued unbilled revenues |
|
|
180,006 |
|
|
|
110,971 |
|
Allowance for doubtful accounts |
|
|
(7,901 |
) |
|
|
(6,153 |
) |
Materials and supplies (at average cost) |
|
|
174,428 |
|
|
|
176,020 |
|
Fossil fuel (at average cost) |
|
|
21,826 |
|
|
|
39,245 |
|
Deferred income taxes |
|
|
134,012 |
|
|
|
53,990 |
|
Income tax receivable (Note 6) |
|
|
22,840 |
|
|
|
26,005 |
|
Assets from risk management activities (Note 8) |
|
|
68,476 |
|
|
|
50,619 |
|
Assets held for sale (Notes 14 and 16) |
|
|
22,312 |
|
|
|
|
|
Other current assets |
|
|
43,983 |
|
|
|
30,747 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,243,332 |
|
|
|
928,737 |
|
|
|
|
|
|
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|
|
|
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|
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INVESTMENTS AND OTHER ASSETS |
|
|
|
|
|
|
|
|
Real estate investments net (Note 16) |
|
|
|
|
|
|
119,989 |
|
Assets from risk management activities (Note 8) |
|
|
54,968 |
|
|
|
28,855 |
|
Nuclear decommissioning trust (Note 15) |
|
|
453,963 |
|
|
|
414,576 |
|
Other assets |
|
|
112,797 |
|
|
|
110,091 |
|
|
|
|
|
|
|
|
Total investments and other assets |
|
|
621,728 |
|
|
|
673,511 |
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT |
|
|
|
|
|
|
|
|
Plant in service and held for future use |
|
|
12,987,278 |
|
|
|
12,848,138 |
|
Accumulated depreciation and amortization |
|
|
(4,459,579 |
) |
|
|
(4,340,645 |
) |
|
|
|
|
|
|
|
Net |
|
|
8,527,699 |
|
|
|
8,507,493 |
|
Construction work in progress |
|
|
555,137 |
|
|
|
467,700 |
|
Palo Verde sale leaseback, net of accumulated
depreciation (Note 7) |
|
|
140,145 |
|
|
|
146,722 |
|
Intangible assets, net of accumulated amortization |
|
|
178,666 |
|
|
|
164,380 |
|
Nuclear fuel, net of accumulated amortization |
|
|
124,101 |
|
|
|
118,243 |
|
|
|
|
|
|
|
|
Total property, plant and equipment |
|
|
9,525,748 |
|
|
|
9,404,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEFERRED DEBITS |
|
|
|
|
|
|
|
|
Regulatory assets |
|
|
879,056 |
|
|
|
813,161 |
|
Income tax receivable (Note 6) |
|
|
65,103 |
|
|
|
65,103 |
|
Other |
|
|
100,520 |
|
|
|
101,274 |
|
|
|
|
|
|
|
|
Total deferred debits |
|
|
1,044,679 |
|
|
|
979,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
12,435,487 |
|
|
$ |
11,986,324 |
|
|
|
|
|
|
|
|
See Notes to Pinnacle Wests Condensed Consolidated Financial Statements.
5
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
253,565 |
|
|
$ |
240,637 |
|
Accrued taxes |
|
|
157,697 |
|
|
|
104,011 |
|
Accrued interest |
|
|
52,384 |
|
|
|
54,596 |
|
Short-term borrowings |
|
|
|
|
|
|
153,715 |
|
Current maturities of long-term debt (Note 2) |
|
|
238,513 |
|
|
|
303,476 |
|
Customer deposits |
|
|
68,254 |
|
|
|
71,026 |
|
Liabilities from risk management activities (Note 8) |
|
|
55,847 |
|
|
|
55,908 |
|
Other current liabilities |
|
|
141,547 |
|
|
|
125,574 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
967,807 |
|
|
|
1,108,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM DEBT LESS CURRENT MATURITIES |
|
|
|
|
|
|
|
|
Long-term debt less current maturities (Note 2) |
|
|
3,349,927 |
|
|
|
3,370,524 |
|
Palo Verde sale leaseback lessor notes (Notes 2 and 7) |
|
|
113,379 |
|
|
|
126,000 |
|
|
|
|
|
|
|
|
Total long-term debt less current maturities |
|
|
3,463,306 |
|
|
|
3,496,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEFERRED CREDITS AND OTHER |
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
1,868,860 |
|
|
|
1,496,095 |
|
Deferred fuel and purchased power regulatory liability (Note 3) |
|
|
41,385 |
|
|
|
87,291 |
|
Other regulatory liabilities |
|
|
685,908 |
|
|
|
679,072 |
|
Liability for asset retirements |
|
|
323,134 |
|
|
|
301,783 |
|
Liabilities for pension and other postretirement benefits (Note 4) |
|
|
737,644 |
|
|
|
811,338 |
|
Liabilities from risk management activities (Note 8) |
|
|
80,656 |
|
|
|
62,443 |
|
Customer advances |
|
|
127,449 |
|
|
|
136,595 |
|
Coal mine reclamation |
|
|
117,029 |
|
|
|
92,060 |
|
Unrecognized tax benefits (Note 6) |
|
|
66,837 |
|
|
|
142,099 |
|
Other |
|
|
127,243 |
|
|
|
144,077 |
|
|
|
|
|
|
|
|
Total deferred credits and other |
|
|
4,176,145 |
|
|
|
3,952,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (SEE NOTES) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY (Note 9) |
|
|
|
|
|
|
|
|
Common stock, no par value |
|
|
2,418,660 |
|
|
|
2,153,295 |
|
Treasury stock |
|
|
(2,157 |
) |
|
|
(3,812 |
) |
|
|
|
|
|
|
|
Total common stock |
|
|
2,416,503 |
|
|
|
2,149,483 |
|
|
|
|
|
|
|
|
Retained earnings |
|
|
1,473,683 |
|
|
|
1,298,213 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss: |
|
|
|
|
|
|
|
|
Pension and other postretirement benefits |
|
|
(52,626 |
) |
|
|
(50,892 |
) |
Derivative instruments |
|
|
(120,634 |
) |
|
|
(80,695 |
) |
|
|
|
|
|
|
|
Total accumulated other comprehensive loss |
|
|
(173,260 |
) |
|
|
(131,587 |
) |
|
|
|
|
|
|
|
Total shareholders equity |
|
|
3,716,926 |
|
|
|
3,316,109 |
|
Noncontrolling interests (Note 7) |
|
|
111,303 |
|
|
|
111,895 |
|
|
|
|
|
|
|
|
Total equity |
|
|
3,828,229 |
|
|
|
3,428,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND EQUITY |
|
$ |
12,435,487 |
|
|
$ |
11,986,324 |
|
|
|
|
|
|
|
|
See Notes to Pinnacle Wests Condensed Consolidated Financial Statements.
6
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net income |
|
$ |
357,708 |
|
|
$ |
97,799 |
|
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 |
|
|
350,762 |
|
|
|
338,311 |
|
Deferred fuel and purchased power |
|
|
50,020 |
|
|
|
(46,743 |
) |
Deferred fuel and purchased power amortization |
|
|
(95,926 |
) |
|
|
115,214 |
|
Allowance for equity funds used during construction |
|
|
(16,417 |
) |
|
|
(11,919 |
) |
Real estate impairment charges |
|
|
16,731 |
|
|
|
260,450 |
|
Gain on real estate debt restructuring |
|
|
(14,403 |
) |
|
|
|
|
Deferred income taxes |
|
|
281,486 |
|
|
|
154,517 |
|
Change in mark-to-market valuations |
|
|
3,716 |
|
|
|
(5,970 |
) |
Changes in current assets and liabilities: |
|
|
|
|
|
|
|
|
Customer and other receivables |
|
|
(103,973 |
) |
|
|
(79,297 |
) |
Accrued unbilled revenues |
|
|
(69,035 |
) |
|
|
(56,420 |
) |
Materials, supplies and fossil fuel |
|
|
19,011 |
|
|
|
(16,781 |
) |
Other current assets |
|
|
(13,236 |
) |
|
|
26,308 |
|
Accounts payable |
|
|
36,687 |
|
|
|
(35,923 |
) |
Accrued taxes and income tax receivable-net |
|
|
56,851 |
|
|
|
(120,878 |
) |
Other current liabilities |
|
|
10,989 |
|
|
|
8,789 |
|
Expenditures for real estate investments |
|
|
(514 |
) |
|
|
(2,410 |
) |
Gains and other changes in real estate assets |
|
|
1,811 |
|
|
|
(10,527 |
) |
Change in margin and collateral accounts assets |
|
|
(4,336 |
) |
|
|
1,652 |
|
Change in margin and collateral accounts liabilities |
|
|
(143,725 |
) |
|
|
3,564 |
|
Change in unrecognized tax benefits |
|
|
(72,649 |
) |
|
|
92,720 |
|
Change in other regulatory liabilities |
|
|
40,121 |
|
|
|
92,598 |
|
Change in other long-term assets |
|
|
(51,659 |
) |
|
|
(49,577 |
) |
Change in other long-term liabilities |
|
|
(28,547 |
) |
|
|
15,491 |
|
|
|
|
|
|
|
|
Net cash flow provided by operating activities |
|
|
569,500 |
|
|
|
770,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(552,707 |
) |
|
|
(558,495 |
) |
Contributions in aid of construction |
|
|
25,258 |
|
|
|
17,393 |
|
Allowance for borrowed funds used during construction |
|
|
(12,553 |
) |
|
|
(8,568 |
) |
Proceeds from sale of district cooling business |
|
|
100,300 |
|
|
|
|
|
Proceeds from nuclear decommissioning trust sales |
|
|
424,255 |
|
|
|
370,399 |
|
Investment in nuclear decommissioning trust |
|
|
(442,567 |
) |
|
|
(386,743 |
) |
Proceeds from sale of commercial real estate investments |
|
|
71,174 |
|
|
|
30,847 |
|
Other |
|
|
9,621 |
|
|
|
(1,404 |
) |
|
|
|
|
|
|
|
Net cash flow used for investing activities |
|
|
(377,219 |
) |
|
|
(536,571 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Issuance of long-term debt |
|
|
|
|
|
|
867,582 |
|
Repayment of long-term debt |
|
|
(84,529 |
) |
|
|
(421,079 |
) |
Short-term borrowings and payments net |
|
|
(153,715 |
) |
|
|
(528,217 |
) |
Dividends paid on common stock |
|
|
(161,722 |
) |
|
|
(153,740 |
) |
Common stock equity issuance |
|
|
255,156 |
|
|
|
2,623 |
|
Noncontrolling interests |
|
|
(3,286 |
) |
|
|
(3,393 |
) |
Other |
|
|
6,352 |
|
|
|
(2,594 |
) |
|
|
|
|
|
|
|
Net cash flow used for financing activities |
|
|
(141,744 |
) |
|
|
(238,818 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
50,537 |
|
|
|
(4,421 |
) |
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
|
|
145,378 |
|
|
|
105,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
195,915 |
|
|
$ |
100,824 |
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
Cash paid
during the period for: |
|
|
|
|
|
|
|
|
Income taxes, net of (refunds) |
|
$ |
(22,165 |
) |
|
$ |
(34,700 |
) |
Interest, net of amounts capitalized |
|
$ |
167,576 |
|
|
$ |
163,438 |
|
See Notes to Pinnacle Wests Condensed Consolidated Financial Statements.
7
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Consolidation and Nature of Operations
The unaudited condensed consolidated financial statements include the accounts of Pinnacle
West and our subsidiaries: APS, SunCor, APS Energy Services Company, Inc. (APSES), and El Dorado
Investment Company (El Dorado). Intercompany accounts and transactions between the consolidated
companies have been eliminated. The unaudited condensed consolidated financial statements for APS
include the accounts of APS and the Palo Verde sale leaseback variable interest entities (VIEs)
(see Note 7 for further discussion). 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.
Weather conditions cause significant seasonal fluctuations in our revenues; therefore, results
for interim periods do not necessarily represent results expected for the year.
In preparing the condensed consolidated
financial statements, we have evaluated the
events that have occurred after December 31,
2009 through the date the financial statements
were issued. Our condensed 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. The December 31, 2009 condensed
consolidated balance sheet data was derived from
audited financial statements, but does not
include disclosures required by GAAP for audited
annual statements. This quarterly report should
be reviewed in conjunction with the audited
financial statements included in the 2009 Form
10-K. These condensed consolidated financial
statements and notes have been prepared
consistently with the 2009 Form 10-K with the
exception of certain line items that are
presented in more detail on the Condensed
Consolidated Statements of Cash Flows than were
presented in the prior year. The prior year
amounts were reclassified to conform to the
current year presentation. Change in margin and
collateral accounts assets is presented as a
separate line item instead of as a single line
item of change in other long-term assets as
previously reported. Change in margin and
collateral accounts liabilities is presented
as a separate line item instead of as a single
line item of change in other long-term
liabilities as previously reported. There has
also been a reclassification of certain
prior-year amounts on our Condensed Consolidated
Statements of Income, Condensed Consolidated
Balance Sheets and Condensed Consolidated
Statements of Cash Flows in accordance with
accounting requirements for reporting
discontinued operations (see Note 14) and
amended accounting guidance on consolidation of
VIEs (see Note 7). The following tables show
the impacts of the reclassifications to prior
year (previously reported) amounts (dollars in
thousands):
8
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
previously |
|
|
accounting |
|
|
for discontinued |
|
|
discontinued |
|
Three Months Ended September 30, 2009 |
|
reported |
|
|
guidance |
|
|
operations |
|
|
operations |
|
Operating Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate segment |
|
$ |
47,602 |
|
|
$ |
|
|
|
$ |
(47,602 |
) |
|
$ |
|
|
Other revenues |
|
|
10,853 |
|
|
|
|
|
|
|
(5,567 |
) |
|
|
5,286 |
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate segment operations |
|
|
25,074 |
|
|
|
|
|
|
|
(25,074 |
) |
|
|
|
|
Real estate impairment charge |
|
|
37,051 |
|
|
|
|
|
|
|
(37,051 |
) |
|
|
|
|
Operations and maintenance |
|
|
208,769 |
|
|
|
(9,916 |
) |
|
|
(823 |
) |
|
|
198,030 |
|
Depreciation and amortization |
|
|
102,246 |
|
|
|
1,927 |
|
|
|
(1,165 |
) |
|
|
103,008 |
|
Taxes other than income taxes |
|
|
34,111 |
|
|
|
|
|
|
|
(96 |
) |
|
|
34,015 |
|
Other expenses |
|
|
8,014 |
|
|
|
|
|
|
|
(2,981 |
) |
|
|
5,033 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
|
4,650 |
|
|
|
|
|
|
|
(264 |
) |
|
|
4,386 |
|
Interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest charges |
|
|
60,161 |
|
|
|
3,036 |
|
|
|
(2,898 |
) |
|
|
60,299 |
|
Allowance for borrowed funds used during
construction |
|
|
(1,423 |
) |
|
|
|
|
|
|
74 |
|
|
|
(1,349 |
) |
Income Taxes |
|
|
103,507 |
|
|
|
|
|
|
|
6,271 |
|
|
|
109,778 |
|
Income From Continuing Operations |
|
|
188,065 |
|
|
|
4,953 |
|
|
|
10,310 |
|
|
|
203,328 |
|
Loss From Discontinued Operations |
|
|
(1,995 |
) |
|
|
|
|
|
|
(10,310 |
) |
|
|
(12,305 |
) |
Net Income |
|
|
186,070 |
|
|
|
4,953 |
|
|
|
|
|
|
|
191,023 |
|
Net Income (Loss) Attributable To Noncontrolling
Interests |
|
|
(582 |
) |
|
|
4,953 |
|
|
|
|
|
|
|
4,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Income for the
Nine Months Ended September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate segment |
|
$ |
75,122 |
|
|
$ |
|
|
|
$ |
(75,122 |
) |
|
$ |
|
|
Other revenues |
|
|
30,084 |
|
|
|
|
|
|
|
(13,920 |
) |
|
|
16,164 |
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate segment operations |
|
|
71,413 |
|
|
|
|
|
|
|
(71,413 |
) |
|
|
|
|
Real estate impairment charge |
|
|
241,469 |
|
|
|
|
|
|
|
(241,469 |
) |
|
|
|
|
Operations and maintenance |
|
|
642,545 |
|
|
|
(29,745 |
) |
|
|
(2,399 |
) |
|
|
610,401 |
|
Depreciation and amortization |
|
|
302,166 |
|
|
|
5,778 |
|
|
|
(3,878 |
) |
|
|
304,066 |
|
Taxes other than income taxes |
|
|
101,126 |
|
|
|
|
|
|
|
(338 |
) |
|
|
100,788 |
|
Other expenses |
|
|
22,214 |
|
|
|
|
|
|
|
(6,352 |
) |
|
|
15,862 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
|
4,820 |
|
|
|
|
|
|
|
(718 |
) |
|
|
4,102 |
|
Interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest charges |
|
|
174,720 |
|
|
|
9,713 |
|
|
|
(6,986 |
) |
|
|
177,447 |
|
Allowance for borrowed funds used during
construction |
|
|
(8,568 |
) |
|
|
|
|
|
|
250 |
|
|
|
(8,318 |
) |
Income Taxes |
|
|
48,082 |
|
|
|
|
|
|
|
89,512 |
|
|
|
137,594 |
|
Income From Continuing Operations |
|
|
96,099 |
|
|
|
14,254 |
|
|
|
153,313 |
|
|
|
263,666 |
|
Loss From Discontinued Operations |
|
|
(12,554 |
) |
|
|
|
|
|
|
(153,313 |
) |
|
|
(165,867 |
) |
Net Income |
|
|
83,545 |
|
|
|
14,254 |
|
|
|
|
|
|
|
97,799 |
|
Net Loss Attributable To Noncontrolling Interests |
|
|
(14,944 |
) |
|
|
14,254 |
|
|
|
|
|
|
|
(690 |
) |
9
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
guidance and to conform |
|
|
and to conform to |
|
Statement of Cash Flows for the |
|
As previously |
|
|
to current year |
|
|
current year |
|
Nine Months Ended September 30, 2009 |
|
reported |
|
|
presentation |
|
|
presentation |
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
83,545 |
|
|
$ |
14,254 |
|
|
$ |
97,799 |
|
Depreciation and amortization including nuclear
fuel |
|
|
332,532 |
|
|
|
5,779 |
|
|
|
338,311 |
|
Other current liabilities |
|
|
25,808 |
|
|
|
(17,019 |
) |
|
|
8,789 |
|
Change in margin and collateral accounts-assets |
|
|
|
|
|
|
1,652 |
|
|
|
1,652 |
|
Change in margin and collateral
accounts-liabilities |
|
|
|
|
|
|
3,564 |
|
|
|
3,564 |
|
Other long-term assets |
|
|
(47,925 |
) |
|
|
(1,652 |
) |
|
|
(49,577 |
) |
Other long-term liabilities |
|
|
12,071 |
|
|
|
3,420 |
|
|
|
15,491 |
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Repayment and acquisition of long-term debt |
|
|
(414,474 |
) |
|
|
(6,605 |
) |
|
|
(421,079 |
) |
Noncontrolling interests |
|
|
|
|
|
|
(3,393 |
) |
|
|
(3,393 |
) |
Supplemental Disclosure of Cash Flow Information |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for Interest, Net of Amounts Capitalized |
|
|
153,725 |
|
|
|
9,713 |
|
|
|
163,438 |
|
10
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. Long-term Debt and Liquidity Matters
The following table shows principal payments due on Pinnacle Wests and APS total long-term
debt and capitalized lease requirements as of September 30, 2010 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
Consolidated |
|
Year |
|
Pinnacle West |
|
|
APS |
|
2010 |
|
$ |
23 |
|
|
$ |
17 |
|
2011 |
|
|
632 |
|
|
|
457 |
|
2012 |
|
|
478 |
|
|
|
478 |
|
2013 |
|
|
140 |
|
|
|
140 |
|
2014 |
|
|
503 |
|
|
|
503 |
|
Thereafter |
|
|
1,932 |
|
|
|
1,932 |
|
|
|
|
|
|
|
|
Total |
|
$ |
3,708 |
|
|
$ |
3,527 |
|
|
|
|
|
|
|
|
Credit Facilities, Debt and Equity Issuances
Pinnacle West and APS maintain committed revolving credit facilities in order to enhance
liquidity and provide credit support for their commercial paper programs. During the first quarter
of 2010, Pinnacle West and APS refinanced existing revolving credit facilities 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.
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. The
new facility matures in February 2013. 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 support and for the issuance of letters of credit. Interest rates are based on
Pinnacle Wests senior unsecured debt credit ratings. As a result of the downsized credit
facility, the Company also reduced the size of its commercial paper program to $200 million from
$250 million.
At September 30, 2010, the $200 million credit facility was available to support the issuance
of up to $200 million in commercial paper or for bank borrowings, including issuances of letters of
credit up to $100 million. At September 30, 2010, Pinnacle West had no outstanding borrowings
under this credit facility, no commercial paper borrowings and no outstanding letters of credit.
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.
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.
11
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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. The new credit
facility terminates in February 2013. APS has the option to 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 support
and for the issuance of letters of credit. Interest rates are based on APS senior unsecured debt
credit ratings.
At September 30, 2010, APS had two credit facilities totaling $989 million, including the $500
million credit facility described above and a $489 million facility that terminates in September
2011. These facilities are available either to support the issuance of up to $250 million in
commercial paper or for bank borrowings, including issuances of letters of credit up to $739
million. At September 30, 2010, APS had no borrowings outstanding under any of its credit
facilities and no outstanding commercial paper. A $20 million letter of credit was issued under
APS $489 million credit facility in the second quarter of 2010.
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 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
with an 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 Lessor Trusts (see Note 7) and, as a result of consolidation of
these VIEs, APS has reported the Lessor Trusts long-term debt on its Condensed Consolidated
Balance Sheets. Interest rates on these debt instruments are 8% and are fixed for the remaining
life of the debt. As of September 30, 2010, approximately $30 million was classified as current
maturities of long-term debt and $113 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 7 for additional discussion of the VIEs.
12
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SunCor
In July 2010, SunCor sold land parcels, commercial assets and a master planned
home-building community for approximately $70 million, which approximated the carrying value of
these assets, resulting in a net gain of zero. In connection with this sale, SunCor negotiated a
restructuring of certain of its credit facilities, including its principal loan facility. The debt
restructuring resulted in an after-tax gain of approximately $9 million, which was recognized in
the third quarter of 2010.
At September 30, 2010, SunCor had approximately $22 million of assets on its balance sheet
classified as assets held for sale. These assets consisted of $18 million of consolidated VIEs
(see Note 7), master planned home-building communities and golf courses. Because it is expected
that SunCor will dispose of these assets within the next 12 months, they are classified as assets
held for sale on the balance sheet.
At September 30, 2010, SunCor had $6 million in debt outstanding, a portion of which is in
default. Neither Pinnacle West nor any of its other subsidiaries has guaranteed any SunCor
indebtedness. A SunCor debt default would not result in a cross-default of any of the debt of
Pinnacle West or any of its other subsidiaries. While there can be no assurances as to the
ultimate outcome of this matter, Pinnacle West does not believe that SunCors inability to repay
remaining debt outstanding would have a material adverse impact on Pinnacle Wests cash flows or
liquidity.
As of September 30, 2010, SunCor could not transfer any cash dividends to Pinnacle West. This
restriction does not affect Pinnacle Wests ability to meet its ongoing capital requirements.
Debt Provisions
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
September 30, 2010, APS 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 total capitalization remains the same. This restriction
does not materially affect Pinnacle Wests ability to meet its ongoing capital requirements.
3. Regulatory Matters
2008 General Retail Rate Case Impacts
On December 30, 2009, the ACC issued an order approving a settlement agreement (Settlement
Agreement) entered into by APS and twenty-one other parties to its general retail rate case, which
was originally filed in March 2008. The Settlement Agreement contains 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 next general rate case, if that is before the end of 2012), which
resulted in projected estimates of increased revenues of $23 million, $25 million and
$49 million, respectively (as of September 30, 2010, estimates for the 2010 year are
expected to be $17 $21 million); |
|
|
|
An authorized return on common equity of 11%; |
13
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
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 (see Note 2)); 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. APS currently expects it will file its
next rate case in June 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 Arizona Renewable Energy Standard
and Tariff (RES). Under the RES, electric utilities that are regulated by the ACC must supply an
increasing percentage of their retail electric energy sales from eligible renewable resources,
including solar, wind, biomass, biogas and geothermal technologies. In order to achieve these
requirements, the ACC allows APS to include a RES surcharge on customer bills to recover the
approved amounts for use on renewable energy projects. Each year APS is required to file a
five-year implementation plan with the ACC and seek approval for the upcoming years RES funding
amount.
During 2009, APS filed its annual RES implementation plan, covering the 2010-2014 timeframe
and requesting 2010 RES funding approval. The plan provided for the acquisition of renewable
generation in compliance with requirements through 2014, and requested RES funding of $86.7 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.
14
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On March 3, 2010, the ACC approved the AZ Sun Program, which contemplates the addition of 100
megawatts (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. The costs of the second 50 MW will be recovered through a mechanism to be determined
in APS next retail rate case. As of September 30, 2010, APS had signed two contracts to develop
33 MW of photovoltaic power for approximately $150 million under the AZ Sun Program.
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. Costs of the
program will be recovered through the RES until such time as the 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 $96.4 million. The 2011 Plan addressed enhancements to the residential distributed energy
incentive program based on high customer participation and additional programs offered
in response to ACC workshops on feed in tariffs, which provide opportunities for
streamlined development of certain renewable projects. 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) addition of 10 MW of biomass capacity. In addition, APS lowered its 2011 RES
funding request to $92.5 million primarily as a result of an improved understanding of the timing
of incentives payable for commercial projects. APS expects the ACC to vote on the 2011 Plan in the
fourth quarter of 2010.
Demand-Side Management Adjustor Charge (DSMAC). The Settlement Agreement requires
APS to submit an annual Energy Efficiency Implementation Plan for review by and approval of the
ACC. On July 15, 2009, APS filed its initial Energy Efficiency Implementation Plan, requesting
approval by the ACC of programs and program elements for which APS had estimated a budget in the
amount of $49.9 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 $79.2 million. If this plan is approved by the ACC as
proposed, 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 $74.8 million over
a twelve month period beginning March 1, 2011. These amounts do not include $1.3 million for
an electric vehicle charging station program submitted to the ACC for approval on September 30,
2010.
15
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PSA Mechanism and Balance. The power supply adjustor (PSA) provides for the
adjustment of retail rates to reflect variations in retail fuel and purchased power costs from the
Base Fuel Rate, which is currently $0.0376 per kilowatt-hour (kWh). The following table shows
the changes in the deferred fuel and purchased power regulatory asset (liability) for the
nine-month periods ended September 30, 2010 and 2009 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
Beginning balance |
|
$ |
(87 |
) |
|
$ |
8 |
|
Deferred fuel and purchased power costs-current period |
|
|
(50 |
) |
|
|
47 |
|
Amounts refunded (recovered) |
|
|
96 |
|
|
|
(115 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
(41 |
) |
|
$ |
(60 |
) |
|
|
|
|
|
|
|
The PSA rate for the current PSA year is ($0.0045) per kWh. Since the 2010 PSA adjustment was
a reduction of the PSA rate, the ACC accelerated the 2010 adjustment from the standard PSA year
start date of February 1st to January 1st to coincide with the increase in
retail rates resulting from the ACCs decision in the general retail rate case, causing a minimal
net impact on residential bills. This accelerated 2010 adjustment will remain in effect until
February 1, 2011. The regulatory liability at September 30, 2010 reflects lower average prices and
the seasonal nature of fuel and purchased power costs. Any uncollected (overcollected) deferrals
during the 2010 PSA year will be included in the historical component of the PSA rate for the PSA
year beginning February 1, 2011.
The PSA rate for the PSA year that began February 1, 2009 was $0.0053 per kWh. The PSA rate
may not be increased or decreased more than $0.004 per kWh in a year without permission of the ACC.
Transmission Rates and Transmission Cost Adjustor. In July 2008, the United States Federal
Energy Regulatory Commission (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 retail customers (Retail Transmission
Charges). In order to recover the Retail Transmission Charges, APS must file an application with,
and obtain approval from, the ACC under the transmission cost adjustor (TCA) mechanism, by which
changes in Retail Transmission Charges can be reflected in APS retail rates.
The formula rate is updated each year effective June 1 on the basis of APS actual cost of
service, as disclosed in APS FERC Form 1 report for the previous fiscal year. 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.
16
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Effective June 1, 2010, APS 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 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.
Decoupling. On October 18, 2010, the Chairman of
the ACC issued a draft decoupling policy statement. Decoupling refers
to a ratemaking design which reduces or removes the linkage between
sales and utility revenues and/or profits, reducing utility
disincentives to the adoption of programs that benefit customers by
saving energy. Mechanically, decoupling compares actual versus
authorized revenues or revenue per customer over a period and either
credits or collects any differences from customers in a subsequent
period.
The draft policy is supportive of decoupling using a revenue-per-customer methodology, which is the mechanism APS and a
number of other parties support because it recognizes increased costs associated with additional customers. The draft policy
would allow a utility to file a decoupling plan in its next general
rate case. Subsequent steps by
the ACC prior to approving any policy statement will likely depend on
the nature and extent of the comments received from various stakeholders.
4. Retirement Plans and Other Benefits
Pinnacle West sponsors a qualified defined benefit and account balance pension plan, a
non-qualified supplemental excess benefit retirement plan, and other postretirement benefit plans
for the employees of Pinnacle West and our subsidiaries. Pinnacle West uses a December 31
measurement date for its pension and other postretirement benefit plans. The market-related value
of our plan assets is their fair value at the measurement date.
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.
17
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
Other Benefits |
|
|
|
Three Months |
|
|
Nine Months |
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Service cost benefits earned
during the period |
|
$ |
14 |
|
|
$ |
13 |
|
|
$ |
42 |
|
|
$ |
40 |
|
|
$ |
4 |
|
|
$ |
4 |
|
|
$ |
14 |
|
|
$ |
14 |
|
Interest cost on benefit obligation |
|
|
31 |
|
|
|
29 |
|
|
|
92 |
|
|
|
88 |
|
|
|
11 |
|
|
|
10 |
|
|
|
32 |
|
|
|
29 |
|
Expected return on plan assets |
|
|
(31 |
) |
|
|
(29 |
) |
|
|
(93 |
) |
|
|
(87 |
) |
|
|
(9 |
) |
|
|
(9 |
) |
|
|
(29 |
) |
|
|
(26 |
) |
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
2 |
|
Prior service cost |
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss |
|
|
5 |
|
|
|
4 |
|
|
|
15 |
|
|
|
11 |
|
|
|
2 |
|
|
|
3 |
|
|
|
7 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
19 |
|
|
$ |
18 |
|
|
$ |
57 |
|
|
$ |
54 |
|
|
$ |
8 |
|
|
$ |
9 |
|
|
$ |
24 |
|
|
$ |
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of cost charged to expense |
|
$ |
10 |
|
|
$ |
9 |
|
|
$ |
29 |
|
|
$ |
26 |
|
|
$ |
4 |
|
|
$ |
4 |
|
|
$ |
12 |
|
|
$ |
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
APS share of cost charged to expense |
|
$ |
9 |
|
|
$ |
8 |
|
|
$ |
28 |
|
|
$ |
25 |
|
|
$ |
4 |
|
|
$ |
4 |
|
|
$ |
12 |
|
|
$ |
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions
The required minimum contribution to our pension plan is zero in 2010. During the first
quarter of 2010, we made a voluntary contribution of $100 million to our pension plan. The
contribution to our other postretirement benefit plans in 2010 is estimated to be approximately $15
million. APS and other subsidiaries fund their share of the contributions. APS share is
approximately 98% of both plans.
5. Business Segments
Pinnacle Wests two reportable business segments are:
|
|
|
our regulated electricity segment, which consists of traditional regulated retail
and wholesale electricity businesses (primarily retail and wholesale sales supplied to
traditional cost-based rate regulation (Native Load) customers) and related
activities and includes electricity generation, transmission and distribution; and |
|
|
|
our real estate segment, which consists of SunCors real estate development and
investment activities. |
In July 2010, SunCor sold land parcels, commercial assets and a master planned home-building
community. It is expected that SunCor will dispose of its remaining assets within the next 12
months. As a result, they are classified as assets held for sale on the balance sheet at September
30, 2010 and all of SunCors operations are reflected in discontinued operations. While
segment reporting is not required for discontinued operations, Pinnacle West continues to provide
the information below, due to the significant impacts of real estate impairments in 2009. See Note
14 Discontinued Operations.
18
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Financial data for the three and nine months ended September 30, 2010 and 2009 and at
September 30, 2010 and December 31, 2009 is provided as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated electricity segment |
|
$ |
1,116 |
|
|
$ |
1,084 |
|
|
$ |
2,527 |
|
|
$ |
2,499 |
|
All other (a) |
|
|
23 |
|
|
|
5 |
|
|
|
53 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,139 |
|
|
$ |
1,089 |
|
|
$ |
2,580 |
|
|
$ |
2,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to
common shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated electricity segment |
|
$ |
225 |
|
|
$ |
200 |
|
|
$ |
320 |
|
|
$ |
257 |
|
Real estate segment |
|
|
8 |
|
|
|
(12 |
) |
|
|
(6 |
) |
|
|
(153 |
) |
All other (a) |
|
|
1 |
|
|
|
(1 |
) |
|
|
29 |
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
234 |
|
|
$ |
187 |
|
|
$ |
343 |
|
|
$ |
98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
|
Assets: |
|
|
|
|
|
|
|
|
Regulated electricity segment |
|
$ |
12,324 |
|
|
$ |
11,691 |
|
Real estate segment |
|
|
41 |
|
|
|
161 |
|
All other (a) |
|
|
70 |
|
|
|
134 |
|
|
|
|
|
|
|
|
Total |
|
$ |
12,435 |
|
|
$ |
11,986 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes activities related to APSES and El Dorado. None of the activities of
either of these companies constitutes a reportable segment. All other also includes
the sale of APSES district cooling business, which resulted in an after-tax gain of
$25 million for the nine months ended September 30, 2010. See Note 14 Discontinued
Operations. |
6. Income Taxes
Pinnacle West expects to receive approximately $132 million of cash tax benefits related to
SunCors strategic asset sales (see Note 16), which will not be fully realized until all of the
asset sales are completed. Approximately $7 million of these benefits were recorded in the nine
months ended September 30, 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 $88 million income tax receivables on the Condensed Consolidated Balance Sheets represent
the anticipated refunds related to an APS tax accounting method change approved by the Internal
Revenue Service (IRS) in the third quarter of 2009 and the current year tax benefits related to
the SunCor strategic asset sales that closed in 2010.
19
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 $3.5
million which decreased our effective tax rate. Additionally, the settlement resulted in the
recognition of net interest benefits of approximately $3 million through the effective tax rate.
As of September 30, 2010, 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.
7. Variable Interest Entities
On January 1, 2010 we adopted amended accounting guidance relating to 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, 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. Further discussion follows regarding the impact of the consolidation.
APS VIEs
In 1986, APS entered into agreements with three separate VIE lessor trusts in order to sell
and lease back interests in Palo Verde Nuclear Generating Station (Palo Verde) Unit 2 and related
common facilities. The VIE lessor trusts are single-asset leasing entities. APS will pay
approximately $49 million per year for the years 2010 to 2015 related to these leases. The leases
do not contain fixed price purchase options or residual value guarantees. However, the lease
agreements include fixed rate renewal periods which may have a significant impact on the VIEs
economic performance. We have concluded that these fixed rate renewal periods may give APS the
ability to utilize the asset for a significant portion of the assets economic life, and therefore
provide APS with the power to direct activities of the VIEs that most significantly impact the
VIEs economic performance. In addition to the fixed rate renewal periods, our primary beneficiary
analysis also considered that APS is the operating agent for Palo Verde, is obligated to
decommission the leased assets and has fair value purchase options.
Under the previous quantitative VIE consolidation model, APS was not considered the primary
beneficiary of the lessor trusts, as APS did not absorb the majority of the entities expected
losses or did not receive a majority of the residual returns. The arrangements were previously
accounted for as operating leases.
20
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Consolidation of these VIEs eliminates the lease accounting we previously reported and results
in changes in our consolidated assets, debt, equity, and net income. Assets of the VIEs are
restricted and may only be used to settle the VIEs debt obligations and for payment to the
noncontrolling interest holders. The creditors of the VIEs have no recourse to the assets of APS
or Pinnacle West. As a result of consolidation we have eliminated rent expense, and have
recognized depreciation and interest expense, resulting in an increase in net income for the three
and nine months ended September 30, 2010 of $5 million and of $15 million, respectively, entirely
attributable to the noncontrolling interests. Income attributable to Pinnacle West shareholders
remains the same. Consolidation of these VIEs also results in changes to our Condensed
Consolidated Statements of Cash Flows, but does not impact net cash flows.
Our Condensed Consolidated Balance Sheets at September 30, 2010 include the following amounts
relating to the VIEs (in millions):
|
|
|
|
|
|
|
September 30, |
|
|
|
2010 |
|
Property plant and equipment, net of accumulated depreciation |
|
$ |
140 |
|
Long-term debt including current maturities |
|
|
143 |
|
Equity- Noncontrolling interests |
|
|
94 |
|
For regulatory ratemaking purposes the leases continue to be treated as operating leases,
and as a result we have recorded a regulatory asset of $32 million as of September 30, 2010.
APS is exposed to losses relating to these lessor trust VIEs upon the occurrence of certain
events that APS does not consider to be reasonably likely to occur. Under certain circumstances
(for example, the Nuclear Regulatory Commission (NRC) issuing specified violation orders with
respect to Palo Verde or the occurrence of specified nuclear events), APS would be required to make
specified payments to the VIEs noncontrolling equity participants, assume the VIEs debt, and take
title to the leased Unit 2 interests, which, if appropriate, may be required to be written down in
value. If such an event had occurred as of September 30, 2010, APS would have been required to pay
the noncontrolling equity participants approximately $152 million and assume $143 million of debt.
Since APS now consolidates the VIEs, the debt APS would be required to assume is already reflected
in our Condensed Consolidated Balance Sheets.
We also have certain long-term purchased power agreements to purchase substantially all of an
entitys output from a specified facility for a specified period. We have evaluated these
arrangements under the VIE accounting guidance and have determined that these agreements do not
represent variable interests. If these agreements had been deemed variable interests, we would not
be considered the primary beneficiary, as we do not have the power to direct the entities
activities in a manner that would significantly impact their economic performance and, therefore,
would not consolidate the entities. The adoption of the amended accounting guidance has not
changed how we account for these arrangements.
SunCor VIEs
SunCor is the primary beneficiary of certain land development trust arrangements and,
accordingly, consolidates these VIEs. We have determined that SunCor is the primary beneficiary of
these VIEs because SunCor controls the activities related to the development of the land held in
the trusts. Our adoption of amended VIE accounting guidance has not changed our accounting
treatment of the SunCor VIEs. Our Condensed Consolidated Balance Sheets reflect $18 million of
assets and $18 million of noncontrolling equity interests relating to these arrangements at
September 30, 2010. Our Condensed Consolidated Balance Sheets reflect $29 million of assets and
$29 million of noncontrolling equity interests related to these arrangements at December 31, 2009.
The assets relating to these VIEs consist strictly of land, all of which is restricted and may only
be used for payment to the noncontrolling interests. We have not provided, and are not required to
provide, financing or other financial support to these entities.
21
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. Derivative and Energy Trading Accounting
We are exposed to the impact of market fluctuations in the commodity price and transportation
costs of electricity, natural gas, coal, emissions allowances and in interest rates. We manage
risks associated with these market fluctuations by utilizing various derivative instruments,
including futures, forwards, options and swaps. As part of our overall risk management program, we
may use such instruments to hedge purchases and sales of electricity, fuels, and emissions
allowances and credits. Derivative instruments that are designated as cash flow hedges are used to
limit our exposure to cash flow variability on forecasted transactions. The changes in market
value of such contracts have a high correlation to price changes in the hedged transactions.
Our derivative instruments are accounted for at fair value and are presented on the Condensed
Consolidated Balance Sheets as Assets/Liabilities from Risk Management Activities (see Note 15
for a discussion of fair value measurements). Derivative instruments for the physical delivery of
purchase and sale quantities transacted in the normal course of business qualify for the normal
purchase and sales scope exception and are accounted for under the accrual method of accounting.
Due to the scope exception, these derivative instruments are excluded from our derivative
instrument discussion and disclosures below.
We enter into derivative instruments for economic hedging purposes. While we believe the
economic hedges mitigate exposure to fluctuations in commodity prices, some of these instruments
may not meet the specific hedge accounting requirements and are not designated as accounting
hedges. Economic hedges not designated as accounting hedges are recorded at fair value on our
balance sheet with changes in fair value recognized in the statement of income as incurred. These
instruments are included in the non-designated hedges discussion and disclosure below.
Hedge effectiveness is the degree to which the derivative instrument contract and the hedged
item are correlated and is measured based on the relative changes in fair value between the
derivative instrument contract and the hedged item over time. We assess hedge effectiveness both
at inception and on a continuing basis. These assessments exclude the time value of certain
options. For accounting hedges that are deemed an effective hedge, the effective portion of the
gain or loss on the derivative instrument is reported as a component of accumulated other
comprehensive income (AOCI) and reclassified into earnings in the same period during which the
hedged transaction affects earnings. We recognize in current earnings the gains and losses
representing hedge ineffectiveness, and the gains and losses on any hedge components which are
excluded from our effectiveness assessment. As of September 30, 2010, we hedged the majority of
certain exposures to the price variability of commodities for a maximum of 39 months.
In the electricity business, some contracts to purchase energy are netted against other
contracts to sell energy. This is called book-out and usually occurs in contracts that have the
same terms (quantities and delivery points) and for which power does not flow. We net these
book-outs, which reduces both revenues and fuel and purchased power costs in our Condensed
Consolidated Statements of Income, but this does not impact our financial condition, net income or
cash flows.
22
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For its regulated operations, APS defers for future rate treatment approximately 90% of
unrealized gains and losses on certain derivatives pursuant to the PSA mechanism that would
otherwise be recognized in income. Realized gains and losses on derivatives are deferred in
accordance with the PSA to the extent the amounts are above or below the portion of APS retail
base rates attributable to fuel and purchased power costs (Base Fuel Rate), which is currently
$0.0376 per kWh (see Note 3). Gains and losses from derivatives in the following tables represent
the amounts reflected in income before the effect of PSA deferrals.
As of September 30, 2010, we had the following outstanding gross notional amount of
derivatives, which represent both purchases and sales (does not reflect net position):
|
|
|
|
|
|
|
Commodity |
|
Quantity |
Power |
|
|
14,149,591 |
|
|
megawatt hours |
Gas |
|
|
149,026,687 |
|
|
MMBTU (a) |
|
|
|
(a) |
|
MMBTU is one million British thermal units. |
Derivative Instruments in Designated Accounting Hedging Relationships
The following table provides information about gains and losses from derivative instruments in
designated accounting hedging relationships and their impact on our Condensed Consolidated
Statements of Income during the three and nine months ended September 30, 2010 and 2009 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
Financial Statement |
|
September 30, |
|
|
September 30, |
|
Commodity Contracts |
|
Location |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Amount of Gain
(Loss) Recognized
in AOCI on Derivative Instruments (Effective Portion) |
|
Accumulated other comprehensive loss-derivative instruments |
|
$ |
(67,856 |
) |
|
$ |
4,959 |
|
|
$ |
(168,110 |
) |
|
$ |
(128,035 |
) |
Amount of Loss
Reclassified from AOCI into Income (Effective Portion Realized) |
|
Regulated electricity segment fuel and purchased power |
|
|
(59,801 |
) |
|
|
(81,660 |
) |
|
|
(102,130 |
) |
|
|
(154,990 |
) |
Amount of Gain
(Loss) Recognized
in Income from
Derivative
Instruments
(Ineffective
Portion and Amount Excluded from Effectiveness Testing) (a) |
|
Regulated electricity segment fuel and purchased power |
|
|
(68 |
) |
|
|
(9,085 |
) |
|
|
1,364 |
|
|
|
(12,993 |
) |
|
|
|
(a) |
|
During the three and nine months ended September 30, 2010 and 2009, we had no
amounts reclassified from AOCI to earnings related to discontinued cash flow hedges. |
During the next twelve months, we estimate that a net loss of $119 million before income taxes
will be reclassified from AOCI as an offset to the effect of market price changes for the related
hedged transactions. Approximately 90% of the amounts related to derivatives subject to the PSA
will be recorded as either a regulatory asset or liability and have no effect on earnings.
23
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Derivative Instruments Not Designated as Accounting Hedges
The following table provides information about gains and losses from derivative instruments
not designated as accounting hedging instruments and their impact on our Condensed Consolidated
Statements of Income during the three and nine months ended September 30, 2010 and 2009 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
Financial Statement |
|
September 30, |
|
|
September 30, |
|
Commodity Contracts |
|
Location |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Net
Gain Recognized
in Income from
Derivative
Instruments |
|
Regulated electricity segment revenue |
|
$ |
1,721 |
|
|
$ |
126 |
|
|
$ |
2,316 |
|
|
$ |
464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Net
Gain (Loss)
Recognized in
Income from
Derivative Instruments |
|
Regulated electricity segment fuel and purchased power expense |
|
|
(41,044 |
) |
|
|
23,463 |
|
|
|
(105,272 |
) |
|
|
(18,259 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
(39,323 |
) |
|
$ |
23,589 |
|
|
$ |
(102,956 |
) |
|
$ |
(17,795 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Fair Values of Derivative Instruments in the Condensed Consolidated Balance Sheets
The following table provides information about the fair value of our derivative instruments,
margin account and cash collateral reported on a gross basis. Transactions with counterparties
that have master netting arrangements are reported net on the balance sheet. These amounts are
located in the assets and liabilities from risk management activities lines of our Condensed
Consolidated Balance Sheets. Amounts are as of September 30, 2010 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
Current |
|
|
Deferred Credits |
|
|
Total Assets |
|
Commodity Contracts |
|
Current Assets |
|
|
and Other Assets |
|
|
Liabilities |
|
|
and Other |
|
|
(Liabilities) |
|
Derivatives designated as accounting hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
2 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2 |
|
Liabilities |
|
|
(1,311 |
) |
|
|
(2,159 |
) |
|
|
(123,351 |
) |
|
|
(86,043 |
) |
|
|
(212,864 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total hedging instruments |
|
|
(1,309 |
) |
|
|
(2,159 |
) |
|
|
(123,351 |
) |
|
|
(86,043 |
) |
|
|
(212,862 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as accounting hedging
instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
40,078 |
|
|
|
57,154 |
|
|
|
45,700 |
|
|
|
30,659 |
|
|
|
173,591 |
|
Liabilities |
|
|
(1,257 |
) |
|
|
(27 |
) |
|
|
(124,165 |
) |
|
|
(126,066 |
) |
|
|
(251,515 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-hedging instruments |
|
|
38,821 |
|
|
|
57,127 |
|
|
|
(78,465 |
) |
|
|
(95,407 |
) |
|
|
(77,924 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
|
37,512 |
|
|
|
54,968 |
|
|
|
(201,816 |
) |
|
|
(181,450 |
) |
|
|
(290,786 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Margin account |
|
|
23,822 |
|
|
|
|
|
|
|
2,068 |
|
|
|
|
|
|
|
25,890 |
|
Collateral provided to counterparties |
|
|
12,701 |
|
|
|
|
|
|
|
145,230 |
|
|
|
100,794 |
|
|
|
258,725 |
|
Collateral provided from counterparties |
|
|
(6,750 |
) |
|
|
|
|
|
|
(1,250 |
) |
|
|
|
|
|
|
(8,000 |
) |
Prepaid option premiums and other |
|
|
1,191 |
|
|
|
|
|
|
|
(79 |
) |
|
|
|
|
|
|
1,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Total |
|
$ |
68,476 |
|
|
$ |
54,968 |
|
|
$ |
(55,847 |
) |
|
$ |
(80,656 |
) |
|
$ |
(13,059 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table provides information about the fair value of our derivative
instruments, margin account and cash collateral reported on a gross basis at December 31, 2009
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
Current |
|
|
Deferred Credits |
|
|
Total Assets |
|
Commodity Contracts |
|
Current Assets |
|
|
and Other Assets |
|
|
Liabilities |
|
|
and Other |
|
|
(Liabilities) |
|
Derivatives designated as accounting hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
329 |
|
|
$ |
|
|
|
$ |
3,242 |
|
|
$ |
75 |
|
|
$ |
3,646 |
|
Liabilities |
|
|
(3,436 |
) |
|
|
(256 |
) |
|
|
(72,899 |
) |
|
|
(77,953 |
) |
|
|
(154,544 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total hedging instruments |
|
|
(3,107 |
) |
|
|
(256 |
) |
|
|
(69,657 |
) |
|
|
(77,878 |
) |
|
|
(150,898 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as accounting hedging
instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
31,220 |
|
|
|
29,807 |
|
|
|
34,645 |
|
|
|
44,631 |
|
|
|
140,303 |
|
Liabilities |
|
|
(4,123 |
) |
|
|
(696 |
) |
|
|
(81,722 |
) |
|
|
(71,408 |
) |
|
|
(157,949 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-hedging instruments |
|
|
27,097 |
|
|
|
29,111 |
|
|
|
(47,077 |
) |
|
|
(26,777 |
) |
|
|
(17,646 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
|
23,990 |
|
|
|
28,855 |
|
|
|
(116,734 |
) |
|
|
(104,655 |
) |
|
|
(168,544 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Margin account |
|
|
8,643 |
|
|
|
|
|
|
|
12,464 |
|
|
|
104 |
|
|
|
21,211 |
|
Collateral provided to counterparties |
|
|
17,986 |
|
|
|
|
|
|
|
49,412 |
|
|
|
42,108 |
|
|
|
109,506 |
|
Collateral provided from counterparties |
|
|
|
|
|
|
|
|
|
|
(1,050 |
) |
|
|
|
|
|
|
(1,050 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Total |
|
$ |
50,619 |
|
|
$ |
28,855 |
|
|
$ |
(55,908 |
) |
|
$ |
(62,443 |
) |
|
$ |
(38,877 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Risk and Credit-Related Contingent Features
We are exposed to losses in the event of nonperformance or nonpayment by counterparties. We
have risk management contracts with many counterparties, including two counterparties for which our
exposure represents approximately 51% of Pinnacle Wests $123 million of risk management assets as
of September 30, 2010. This exposure relates to long-term traditional wholesale contracts with
counterparties that have very high credit quality. Our risk management process assesses and
monitors the financial exposure of all counterparties. Despite the fact that the great majority of
our trading counterparties debt is rated as investment grade by the credit rating agencies, there
is still a possibility that one or more of these companies could default, resulting in a material
impact on consolidated earnings for a given period. Counterparties in the portfolio consist
principally of financial institutions, major energy companies, municipalities and local
distribution companies. We maintain credit policies that we believe minimize overall credit risk
to within acceptable limits. Determination of the credit quality of our counterparties is based
upon a number of factors, including credit ratings and our evaluation of their financial condition.
To manage credit risk, we employ collateral requirements and standardized agreements that allow
for the netting of positive and negative exposures associated with a single counterparty.
Valuation adjustments are established representing our estimated credit losses on our overall
exposure to counterparties.
26
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Certain of our derivative instrument contracts contain credit-risk-related contingent features
including, among other things, investment grade credit rating provisions, credit-related cross
default provisions, and adequate assurance provisions. Adequate assurance provisions allow a
counterparty with reasonable grounds for uncertainty to demand additional collateral based on
subjective events and/or conditions. The aggregate fair value of all derivative instruments with
credit-risk-related contingent features that were in a liability position on September 30, 2010 was
$430 million, for which we had posted collateral of $247 million in the normal course of business.
For those derivative instruments in a net liability position, with investment grade credit
contingencies, the counterparties could demand additional collateral if our debt credit rating were
to fall below investment grade (below BBB- for Standard & Poors Ratings Services (Standard &
Poors) or Fitch, Inc. (Fitch) or Baa3 for Moodys Investors Service, Inc. (Moodys)), which
would be a violation of the credit rating provisions. If the investment grade contingent features
underlying these agreements had been fully triggered on September 30, 2010, after off-setting asset
positions under master netting arrangements we would have been required to post approximately an
additional $111 million of collateral to our counterparties; this amount includes those contracts
that qualify for scope exceptions, which are excluded from the derivative details in the above
footnote. We also have energy related non-derivative instrument contracts with investment grade
credit-related contingent features which could require us to post additional collateral of
approximately $204 million if our debt credit ratings were to fall below investment grade.
27
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. Changes in Equity
The following tables show Pinnacle Wests changes in shareholders equity and changes in
equity of noncontrolling interests for the three and nine months ended September 30, 2010 and 2009
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2010 |
|
|
Three Months Ended September 30, 2009 |
|
|
|
Common |
|
|
Noncontrolling |
|
|
|
|
|
|
Common |
|
|
Noncontrolling |
|
|
|
|
|
|
Shareholders |
|
|
Interests |
|
|
Total |
|
|
Shareholders |
|
|
Interests |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, July 1 |
|
$ |
3,479,548 |
|
|
$ |
113,455 |
|
|
$ |
3,593,003 |
|
|
$ |
3,206,805 |
|
|
$ |
112,677 |
|
|
$ |
3,319,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
233,920 |
|
|
|
5,119 |
|
|
|
239,039 |
|
|
|
186,652 |
|
|
|
4,371 |
|
|
|
191,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on derivative instruments (a) |
|
|
(67,856 |
) |
|
|
|
|
|
|
(67,856 |
) |
|
|
4,959 |
|
|
|
|
|
|
|
4,959 |
|
Net reclassification of realized losses to income (b) |
|
|
59,801 |
|
|
|
|
|
|
|
59,801 |
|
|
|
81,660 |
|
|
|
|
|
|
|
81,660 |
|
Reclassification of pension and other postretirement benefits to income |
|
|
1,314 |
|
|
|
|
|
|
|
1,314 |
|
|
|
1,240 |
|
|
|
|
|
|
|
1,240 |
|
Net income tax benefit (expense) related to items of other
comprehensive income (loss) |
|
|
2,660 |
|
|
|
|
|
|
|
2,660 |
|
|
|
(34,495 |
) |
|
|
|
|
|
|
(34,495 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
(4,081 |
) |
|
|
|
|
|
|
(4,081 |
) |
|
|
53,364 |
|
|
|
|
|
|
|
53,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
229,839 |
|
|
|
5,119 |
|
|
|
234,958 |
|
|
|
240,016 |
|
|
|
4,371 |
|
|
|
244,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of capital stock |
|
|
2,506 |
|
|
|
|
|
|
|
2,506 |
|
|
|
2,756 |
|
|
|
|
|
|
|
2,756 |
|
Purchase of treasury stock, net of reissuances |
|
|
577 |
|
|
|
|
|
|
|
577 |
|
|
|
589 |
|
|
|
|
|
|
|
589 |
|
Other (primarily stock compensation) |
|
|
4,456 |
|
|
|
|
|
|
|
4,456 |
|
|
|
(372 |
) |
|
|
|
|
|
|
(372 |
) |
Dividends on common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53,132 |
) |
|
|
|
|
|
|
(53,132 |
) |
Net capital activities by noncontrolling interests |
|
|
|
|
|
|
(7,271 |
) |
|
|
(7,271 |
) |
|
|
|
|
|
|
(93 |
) |
|
|
(93 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, September 30 |
|
$ |
3,716,926 |
|
|
$ |
111,303 |
|
|
$ |
3,828,229 |
|
|
$ |
3,396,662 |
|
|
$ |
116,955 |
|
|
$ |
3,513,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2010 |
|
|
Nine Months Ended September 30, 2009 |
|
|
|
Common |
|
|
Noncontrolling |
|
|
|
|
|
|
Common |
|
|
Noncontrolling |
|
|
|
|
|
|
Shareholders |
|
|
Interests |
|
|
Total |
|
|
Shareholders |
|
|
Interests |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1 |
|
$ |
3,316,109 |
|
|
$ |
111,895 |
|
|
$ |
3,428,004 |
|
|
$ |
3,445,979 |
|
|
$ |
124,990 |
|
|
$ |
3,570,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
342,703 |
|
|
|
15,005 |
|
|
|
357,708 |
|
|
|
98,489 |
|
|
|
(690 |
) |
|
|
97,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized losses on derivative instruments (a) |
|
|
(168,110 |
) |
|
|
|
|
|
|
(168,110 |
) |
|
|
(128,035 |
) |
|
|
|
|
|
|
(128,035 |
) |
Net reclassification of realized losses to income (b) |
|
|
102,130 |
|
|
|
|
|
|
|
102,130 |
|
|
|
154,990 |
|
|
|
|
|
|
|
154,990 |
|
Reclassification of pension and other postretirement
benefits to income |
|
|
4,069 |
|
|
|
|
|
|
|
4,069 |
|
|
|
3,745 |
|
|
|
|
|
|
|
3,745 |
|
Net unrealized losses related to pension and other
postretirement benefits |
|
|
(6,933 |
) |
|
|
|
|
|
|
(6,933 |
) |
|
|
(4,204 |
) |
|
|
|
|
|
|
(4,204 |
) |
Net income tax benefit (expense) related to items of
other comprehensive income (loss) |
|
|
27,171 |
|
|
|
|
|
|
|
27,171 |
|
|
|
(10,337 |
) |
|
|
|
|
|
|
(10,337 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
(41,673 |
) |
|
|
|
|
|
|
(41,673 |
) |
|
|
16,159 |
|
|
|
|
|
|
|
16,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
|
301,030 |
|
|
|
15,005 |
|
|
|
316,035 |
|
|
|
114,648 |
|
|
|
(690 |
) |
|
|
113,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of capital stock |
|
|
260,665 |
|
|
|
|
|
|
|
260,665 |
|
|
|
8,102 |
|
|
|
|
|
|
|
8,102 |
|
Purchase of treasury stock, net of reissuances |
|
|
1,655 |
|
|
|
|
|
|
|
1,655 |
|
|
|
(957 |
) |
|
|
|
|
|
|
(957 |
) |
Other (primarily stock compensation) |
|
|
4,598 |
|
|
|
|
|
|
|
4,598 |
|
|
|
(11,899 |
) |
|
|
|
|
|
|
(11,899 |
) |
Dividends on common stock |
|
|
(167,131 |
) |
|
|
|
|
|
|
(167,131 |
) |
|
|
(159,211 |
) |
|
|
|
|
|
|
(159,211 |
) |
Net capital activities by noncontrolling interests |
|
|
|
|
|
|
(15,597 |
) |
|
|
(15,597 |
) |
|
|
|
|
|
|
(7,345 |
) |
|
|
(7,345 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, September 30 |
|
$ |
3,716,926 |
|
|
$ |
111,303 |
|
|
$ |
3,828,229 |
|
|
$ |
3,396,662 |
|
|
$ |
116,955 |
|
|
$ |
3,513,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
These amounts primarily include unrealized gains and losses on contracts used to
hedge our forecasted electricity and natural gas requirements to serve Native Load. These
changes are primarily due to changes in forward natural gas prices and wholesale
electricity prices. |
|
(b) |
|
These amounts primarily include the reclassification of unrealized gains and losses to
realized gains and losses for contracted commodities delivered during the period. |
29
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. Commitments and Contingencies
Palo Verde Nuclear Generating Station
Spent Nuclear Fuel and Waste Disposal
Nuclear power plant operators are required to enter into spent fuel disposal contracts
with the United States Department of Energy (DOE), and the DOE is required to accept and dispose
of all spent nuclear fuel and other high-level radioactive wastes generated by domestic power
reactors. Although the Nuclear Waste Policy Act required the DOE to develop a permanent repository
for the storage and disposal of spent nuclear fuel by 1998, the DOE announced that it would not be
able to open the repository by 1998 and sought to excuse its performance under the contract. In
November 1997, the United States Court of Appeals for the District of Columbia Circuit (D.C.
Circuit) issued a decision preventing the DOE from excusing its own delay, but refused to order the
DOE to begin accepting spent nuclear fuel.
Based on this decision and the DOEs delay, a number of utilities, including APS (on behalf of
itself and the other Palo Verde owners), filed damages actions against the DOE in the Court of
Federal Claims. APS pursued a damages claim for costs incurred through December 2006 in a trial
that began on January 28, 2009. On June 18, 2010, the court awarded APS and the other Palo Verde
owners approximately $30 million. APS received its share of this amount in October 2010, which is
approximately $9 million.
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 September 30, 2010, APS had a regulatory liability of $46 million that represents amounts
recovered in retail rates in excess of amounts spent for on-site interim spent fuel storage.
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 2010 and 2042 that include required purchase provisions. APS estimates the
contract requirements to be approximately $727 million in 2010; $527 million in 2011; $435 million
in 2012; $515 million in 2013; $550 million in 2014; and $7.6 billion thereafter. However, these
amounts may vary significantly pursuant to certain provisions in such contracts that permit us to
decrease required purchases under certain circumstances. These amounts have increased since the
2009 Form 10-K primarily due to increased commitments for fuel and purchased power and contracts
associated with meeting our renewable energy requirements.
Coal Mine Reclamation Obligations
APS is obligated to reimburse certain coal providers for amounts incurred for coal mine
reclamation. APS coal mine reclamation obligation recorded on the Condensed Consolidated Balance
Sheets was estimated to be $117 million at September 30, 2010 and $92 million at December 31, 2009.
30
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FERC Market Issues
APS reached a settlement on previously disputed matters resulting from its involvement in the
California energy market during specified time frames in the early 2000s. The settlement was
approved by the FERC in an order issued on June 30, 2008. The resolution of the claims related to
the parties involved in this settlement had no material adverse impact on APS financial position,
results of operations or cash flows.
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
judges 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
The Comprehensive Environmental Response, Compensation and Liability Act (Superfund)
establishes liability for the cleanup of hazardous substances found contaminating the soil, water
or air. Those who generated, transported or disposed of hazardous substances at a contaminated
site are among those who are potentially responsible parties under Superfund (PRPs). PRPs may be
strictly, and often are jointly and severally, liable for clean-up. On September 3, 2003, the
United States Environmental Protection Agency (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 $1.2 million, which is reserved as a liability on our financial statements. We
anticipate incurring additional expenditures in the future, but because the overall investigation
is not complete and ultimate remediation requirements are not yet finalized, at the present time we
cannot accurately estimate our total expenditures.
Landlord Bankruptcy
On April 16, 2009, the landlord for our corporate headquarters building announced that it is
seeking relief under Chapter 11 of the United States Bankruptcy Code. At September 30, 2010, we
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 $70 million which is included
in other deferred debits on the Condensed Consolidated Balance Sheets. 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. We are monitoring this matter
and, while there can be no assurances as to the ultimate outcome of the matter due to the
complexity of the bankruptcy proceedings, we currently do not expect that it will have a material
adverse effect on our financial position, results of operations, or cash flows.
31
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nuclear Insurance
The Palo Verde participants are insured against public liability for a nuclear incident up to
$12.6 billion per occurrence. As required by the Price Anderson Nuclear Industries Indemnity Act,
Palo Verde maintains the maximum available nuclear liability insurance in the amount of $375
million, which is provided by commercial insurance carriers. The remaining balance of $12.2
billion is provided through a mandatory industry wide retrospective assessment program. If losses
at any nuclear power plant covered by the program exceed the accumulated funds, APS could be
assessed retrospective premium adjustments. The maximum assessment per reactor under the program
for each nuclear incident is approximately $118 million, subject to an annual limit of $18 million
per incident, to be periodically adjusted for inflation. Based on APS interest in the three Palo
Verde units, APS maximum potential assessment per incident for all three units is approximately
$103 million, with an annual payment limitation of approximately $15 million.
The Palo Verde participants maintain all risk (including nuclear hazards) insurance for
property damage to, and decontamination of, property at Palo Verde in the aggregate amount of $2.75
billion, a substantial portion of which must first be applied to stabilization and decontamination.
APS has also secured insurance against portions of any increased cost of generation or purchased
power and business interruption resulting from a sudden and unforeseen accidental outage of any of
the three units. The property damage, decontamination, and replacement power coverages are
provided by Nuclear Electric Insurance Limited (NEIL). APS is subject to retrospective
assessments under all NEIL policies if NEILs 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 NEILs 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.
32
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11. Other Income and Other Expense
The following table provides detail of other income and other expense for the three and nine
months ended September 30, 2010 and 2009 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Other income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
943 |
|
|
$ |
543 |
|
|
$ |
2,597 |
|
|
$ |
1,185 |
|
Investment gains net |
|
|
3,390 |
|
|
|
3,696 |
|
|
|
1,051 |
|
|
|
120 |
|
Miscellaneous |
|
|
15 |
|
|
|
147 |
|
|
|
180 |
|
|
|
2,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
$ |
4,348 |
|
|
$ |
4,386 |
|
|
$ |
3,828 |
|
|
$ |
4,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating costs |
|
$ |
(2,894 |
) |
|
$ |
(1,643 |
) |
|
$ |
(5,917 |
) |
|
$ |
(6,498 |
) |
Miscellaneous |
|
|
(961 |
) |
|
|
(291 |
) |
|
|
(2,733 |
) |
|
|
(2,389 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
$ |
(3,855 |
) |
|
$ |
(1,934 |
) |
|
$ |
(8,650 |
) |
|
$ |
(8,887 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
12. Guarantees
We have issued parental guarantees and obtained surety bonds on behalf of our subsidiaries
including credit support instruments enabling APSES to offer energy-related products and surety
bonds at APS, principally related to self-insured workers compensation. Non-performance or
non-payment under the underlying contract by our subsidiaries would result in a payment liability
on our part under the guarantee or surety bond. No liability is currently recorded on the
Condensed Consolidated Balance Sheets related to Pinnacle Wests current outstanding guarantees and
surety bonds on behalf of our subsidiaries. At September 30, 2010, we had no outstanding claims
for payment under any of these guarantees. Our guarantees and surety bonds have no recourse or
collateral provisions to allow us to recover amounts paid under the guarantees or surety bonds from
our subsidiaries. The amounts and approximate terms of our guarantees and surety bonds for each
subsidiary at September 30, 2010 are as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees |
|
|
Surety Bonds |
|
|
|
|
|
|
|
Term |
|
|
|
|
|
|
Term |
|
|
|
Amount |
|
|
(in years) |
|
|
Amount |
|
|
(in years) |
|
APSES |
|
$ |
5 |
|
|
|
1 |
|
|
$ |
42 |
|
|
|
1 |
|
APS |
|
|
3 |
|
|
|
1 |
|
|
|
9 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8 |
|
|
|
|
|
|
$ |
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
APS has entered into various agreements that require letters of credit for financial assurance
purposes. At September 30, 2010, approximately $194 million of letters of credit were outstanding
to support existing pollution control bonds of approximately $190 million. The letters of credit
are available to fund the payment of principal and interest of such debt obligations. In
connection with the change of interest rate modes and termination of corresponding letters of
credit for certain pollution control bonds described in Note 2, the letters of credit outstanding
have decreased since September 30, 2010. Currently, there are approximately $44 million of letters
of credit outstanding to support existing pollution control bonds of approximately $44 million.
These letters of credit expire in 2011 and 2013. APS has also entered into approximately $61
million of letters of credit to support certain equity lessors in the Palo Verde sale leaseback
transactions (see Note 7 for further details on the Palo
Verde sale leaseback transactions). These letters of credit were amended and extended in
April 2010, and will expire in 2013.
33
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
We enter into agreements that include indemnification provisions relating to liabilities
arising from or related to certain of our agreements; most significantly, APS has agreed to
indemnify the equity participants and other parties in the Palo Verde sale leaseback transactions
with respect to certain tax matters. Generally, a maximum obligation is not explicitly stated in
the indemnification provisions and, therefore, the overall maximum amount of the obligation under
such indemnification provisions cannot be reasonably estimated. Based on historical experience and
evaluation of the specific indemnities, we do not believe that any material loss related to such
indemnification provisions is likely.
13. Earnings Per Share
The following table presents earnings per weighted average common share outstanding for the
three and nine months ended September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
attributable to common shareholders |
|
$ |
2.09 |
|
|
$ |
1.96 |
|
|
$ |
3.06 |
|
|
$ |
2.47 |
|
Income (loss) from
discontinued operations |
|
|
0.06 |
|
|
|
(0.12 |
) |
|
|
0.18 |
|
|
|
(1.50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share basic |
|
$ |
2.15 |
|
|
$ |
1.84 |
|
|
$ |
3.24 |
|
|
$ |
0.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
attributable to common shareholders |
|
$ |
2.08 |
|
|
$ |
1.96 |
|
|
$ |
3.04 |
|
|
$ |
2.46 |
|
Income (loss) from discontinued
operations |
|
|
0.06 |
|
|
|
(0.12 |
) |
|
|
0.18 |
|
|
|
(1.49 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share diluted |
|
$ |
2.14 |
|
|
$ |
1.84 |
|
|
$ |
3.22 |
|
|
$ |
0.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive stock options and performance shares (which are contingently issuable)
increased average diluted common shares outstanding by approximately 462,000 shares and 162,000
shares for the three months ended September 30, 2010 and 2009, respectively, and by approximately
472,000 and 77,000 shares for the nine months ended September 30, 2010 and 2009, respectively.
Options to purchase 175,333 shares of common stock for the three-month period ended
September 30, 2010, and 561,157 shares for the three-month period ended September 30, 2009 were
outstanding but were excluded from 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 322,333 shares and 595,335 shares of common stock for the nine-month periods ended
September 30, 2010 and September 30, 2009, respectively, were outstanding but were excluded from
the computation of diluted earnings per share because the options exercise prices were greater
than the average market price of the common shares.
34
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
14. Discontinued Operations
SunCor (real estate segment) In July 2010, SunCor sold land parcels, commercial assets and a
master planned home-building community for approximately $70 million, which approximated the
carrying value of these assets, resulting in a net gain of zero. At September 30, 2010, SunCor had
approximately $22 million of assets on its balance sheet classified as assets held for sale. These
assets consist of $18 million of consolidated VIEs (see Note 7), master planned home-building
communities and golf courses. Because it is expected that SunCor will dispose of these assets
within the next 12 months, they are classified as assets held for sale on the balance sheet. As a
result, for the three and nine months ended September 30, 2010, all of SunCors operations are
reflected in discontinued operations. Prior comparative period income statement amounts related to
these properties were reclassified from continuing operations to discontinued operations. In
addition, see Note 16 Real Estate Impairment Charge.
APSES (other) On June 22, 2010, our subsidiary, APSES, sold its district cooling business
consisting of operations in downtown Phoenix, Tucson, and on certain Arizona State University
campuses. As a result of the sale, we recorded an after-tax gain from discontinued operations of
approximately $25 million in June 2010. Prior period income statement amounts related to this sale
and the associated revenues and costs are reflected in discontinued operations in 2010 and 2009.
The following table provides revenue, income (loss) before income taxes and income (loss)
after taxes classified as discontinued operations in Pinnacle Wests Condensed Consolidated
Statements of Income for the three and nine months ended September 30, 2010 and 2009 (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SunCor |
|
$ |
4 |
|
|
$ |
49 |
|
|
$ |
25 |
|
|
$ |
85 |
|
APSES |
|
|
|
|
|
|
5 |
|
|
|
7 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
4 |
|
|
$ |
54 |
|
|
$ |
32 |
|
|
$ |
99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SunCor |
|
$ |
14 |
|
|
$ |
(20 |
) |
|
$ |
(10 |
) |
|
$ |
(252 |
) |
APSES |
|
|
(2 |
) |
|
|
1 |
|
|
|
42 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income (loss) before taxes |
|
$ |
12 |
|
|
$ |
(19 |
) |
|
|
32 |
|
|
$ |
(249 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) after taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SunCor (a) |
|
$ |
8 |
|
|
$ |
(12 |
) |
|
$ |
(6 |
) |
|
$ |
(153 |
) |
APSES |
|
|
(1 |
) |
|
|
1 |
|
|
|
26 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income (loss) after taxes |
|
$ |
7 |
|
|
$ |
(11 |
) |
|
$ |
20 |
|
|
$ |
(151 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes a tax (expense) benefit recognized by the parent company in accordance
with an intercompany tax sharing agreement of ($6) million and $8 million for the three
months ended September 30, 2010, and 2009, respectively; and $4 million and $99 million for
the nine months ended September 30, 2010 and 2009, respectively. |
35
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
15. 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 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 derivative instruments 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, certain
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.
36
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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
inputs 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 funds net asset value and are classified within Level 2. We may transact in the fund on a
semi-monthly basis. Our trustee provides valuation of our nuclear decommissioning trust assets by
using pricing services to determine fair market value. We assess these valuations and verify that
pricing can be supported by actual recent market transactions. The trust fund investments have
been established to satisfy APS nuclear decommissioning obligations.
37
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Tables
The following table presents the fair value at September 30, 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 & |
|
|
September 30, |
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Other (b) |
|
|
2010 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
$ |
122 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
122 |
|
Risk management activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts |
|
|
|
|
|
|
98 |
|
|
|
76 |
|
|
|
(51 |
) |
|
|
123 |
|
Nuclear decommissioning
trust: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. commingled funds |
|
|
|
|
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
151 |
|
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury |
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67 |
|
Corporate |
|
|
|
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
63 |
|
Mortgage-backed |
|
|
|
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
61 |
|
Municipality |
|
|
|
|
|
|
71 |
|
|
|
|
|
|
|
|
|
|
|
71 |
|
Other |
|
|
|
|
|
|
54 |
|
|
|
|
|
|
|
(13 |
) |
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
189 |
|
|
$ |
498 |
|
|
$ |
76 |
|
|
$ |
(64 |
) |
|
$ |
699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk management activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts |
|
$ |
(2 |
) |
|
$ |
(338 |
) |
|
$ |
(125 |
) |
|
$ |
328 |
|
|
$ |
(137 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Primarily consists of long-dated electricity contracts. |
|
(b) |
|
Primarily represents netting under master netting arrangements, including
margin and collateral. See Note 8. |
38
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 8. |
39
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the changes in fair value for assets and liabilities that are
measured at fair value on a recurring basis using Level 3 inputs for the three and nine months
ended September 30, 2010 and 2009 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Commodity Contracts |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net derivative balance at beginning of period |
|
$ |
(42 |
) |
|
$ |
(16 |
) |
|
$ |
(10 |
) |
|
$ |
(7 |
) |
Total net gains (losses) realized/unrealized: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings |
|
|
1 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
3 |
|
Included in OCI |
|
|
(11 |
) |
|
|
(2 |
) |
|
|
(20 |
) |
|
|
(3 |
) |
Deferred as a regulatory asset
or liability |
|
|
(15 |
) |
|
|
6 |
|
|
|
(39 |
) |
|
|
12 |
|
Settlements |
|
|
12 |
|
|
|
(4 |
) |
|
|
15 |
|
|
|
(1 |
) |
Transfers into Level 3 from Level 2 |
|
|
(2 |
) |
|
|
(2 |
) |
|
|
6 |
|
|
|
(23 |
) |
Transfers from Level 3 into Level 2 |
|
|
8 |
|
|
|
4 |
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net derivative balance at end of period |
|
$ |
(49 |
) |
|
$ |
(13 |
) |
|
$ |
(49 |
) |
|
$ |
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) included in
earnings related to instruments still held
at end of period |
|
$ |
1 |
|
|
$ |
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.
We apply nonrecurring fair value measurements to certain real estate assets. These
adjustments to fair value are the result of write-downs of individual assets due to impairment.
Our real estate assets have been impaired due to the distressed real estate market. The majority
of our real estate assets reflect the expected sales price less cost to sell at September 30, 2010.
Due to these unobservable inputs, the valuation of real estate assets are considered Level 3
measurements.
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.
40
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 |
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
|
|
|
Carrying |
|
|
|
|
|
|
Carrying |
|
|
|
|
|
|
Amount |
|
|
Fair Value |
|
|
Amount |
|
|
Fair Value |
|
|
|
Pinnacle West |
|
$ |
175 |
|
|
$ |
178 |
|
|
$ |
175 |
|
|
$ |
180 |
|
APS |
|
|
3,521 |
|
|
|
3,919 |
|
|
|
3,530 |
|
|
|
3,667 |
|
SunCor (a) |
|
|
6 |
|
|
|
6 |
|
|
|
95 |
|
|
|
95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,702 |
|
|
$ |
4,103 |
|
|
$ |
3,800 |
|
|
$ |
3,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
See Note 2 for further discussion related to SunCors debt and liquidity
matters. |
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 a tax efficient manner in fixed income securities and domestic equity securities. APS
classifies investments in decommissioning trust funds as available for sale, and therefore, we
record the decommissioning trust funds at their fair value on our Condensed Consolidated Balance
Sheets. Because of the ability of APS to recover decommissioning costs in rates and in accordance
with the regulatory treatment for decommissioning trust funds, we have recorded the offsetting
amount of gains or losses on investment securities in other regulatory liabilities or assets.
The following table summarizes the fair value of APS nuclear decommissioning trust fund
assets at September 30, 2010 and December 31, 2009 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Total |
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
Fair Value |
|
|
Gains |
|
|
Losses |
|
September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
151 |
|
|
$ |
31 |
|
|
$ |
(4 |
) |
Fixed income securities |
|
|
316 |
|
|
|
20 |
|
|
|
|
|
Net payables (a) |
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
454 |
|
|
$ |
51 |
|
|
$ |
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Net payables relate to pending securities sales and purchases. |
41
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Total |
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
Fair Value |
|
|
Gains |
|
|
Losses |
|
December 31, 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 realized gains and losses and proceeds from the sale of
securities by the nuclear decommissioning trust funds (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Realized gains |
|
$ |
1 |
|
|
$ |
3 |
|
|
$ |
15 |
|
|
$ |
8 |
|
Realized losses |
|
|
|
|
|
|
(1 |
) |
|
|
(3 |
) |
|
|
(6 |
) |
Proceeds from the
sale of securities
(a) |
|
|
94 |
|
|
|
126 |
|
|
|
424 |
|
|
|
370 |
|
|
|
|
(a) |
|
Proceeds are reinvested in the trust. |
The fair value of fixed income securities, summarized by contractual maturities, at
September 30, 2010 is as follows (dollars in millions):
|
|
|
|
|
|
|
Fair Value |
|
Less than one year |
|
$ |
26 |
|
1 year - 5 years |
|
|
74 |
|
5 years - 10 years |
|
|
93 |
|
Greater than 10 years |
|
|
123 |
|
|
|
|
|
Total |
|
$ |
316 |
|
|
|
|
|
42
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
16. Real Estate Impairment Charge
In 2009, SunCor undertook and completed a review of its assets and strategies within its
various markets as a result of the distressed conditions in real estate and credit markets. Based
on the results of the review, on March 27, 2009, SunCors Board of Directors authorized a series of
strategic transactions to dispose of SunCors homebuilding operations, master-planned communities,
land parcels, commercial assets and golf courses in order to reduce SunCors outstanding debt. In
July 2010, SunCor sold land parcels, commercial assets and a master planned home-building
community for approximately $70 million, which approximated the carrying value of these assets,
resulting in a net gain of zero. It is expected that SunCor will dispose of its other assets
within the next 12 months. As a result, they are classified as assets held for sale on the balance
sheet at September 30, 2010 and all of SunCors operations
are reflected in discontinued
operations. The detail of the impairment charges are as follows (dollars in millions, and before
income taxes):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Discontinued Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding and master-planned communities |
|
$ |
|
|
|
$ |
10 |
|
|
$ |
1 |
|
|
$ |
160 |
|
Land parcels and commercial assets |
|
|
|
|
|
|
27 |
|
|
|
11 |
|
|
|
81 |
|
Golf courses |
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
19 |
|
Other |
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
|
|
38 |
|
|
|
17 |
|
|
|
260 |
|
Less noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
38 |
|
|
$ |
17 |
|
|
$ |
246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Note 2 for a discussion of SunCors debt and liquidity matters.
43
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
ELECTRIC OPERATING REVENUES |
|
$ |
1,116,220 |
|
|
$ |
1,083,825 |
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
Fuel and purchased power |
|
|
353,904 |
|
|
|
381,543 |
|
Operations and maintenance |
|
|
217,044 |
|
|
|
193,530 |
|
Depreciation and amortization |
|
|
104,152 |
|
|
|
102,954 |
|
Income taxes |
|
|
126,841 |
|
|
|
118,923 |
|
Taxes other than income taxes |
|
|
37,270 |
|
|
|
33,782 |
|
|
|
|
|
|
|
|
Total |
|
|
839,211 |
|
|
|
830,732 |
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
|
277,009 |
|
|
|
253,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (DEDUCTIONS) |
|
|
|
|
|
|
|
|
Income taxes |
|
|
1,272 |
|
|
|
1,070 |
|
Allowance for equity funds used during construction |
|
|
5,524 |
|
|
|
2,197 |
|
Other income (Note S-2) |
|
|
2,962 |
|
|
|
3,530 |
|
Other expense (Note S-2) |
|
|
(4,074 |
) |
|
|
(2,790 |
) |
|
|
|
|
|
|
|
Total |
|
|
5,684 |
|
|
|
4,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE |
|
|
|
|
|
|
|
|
Interest on long-term debt |
|
|
53,946 |
|
|
|
54,252 |
|
Interest on short-term borrowings |
|
|
2,013 |
|
|
|
1,058 |
|
Debt discount, premium and expense |
|
|
1,121 |
|
|
|
1,115 |
|
Allowance for borrowed funds used during construction |
|
|
(6,163 |
) |
|
|
(1,343 |
) |
|
|
|
|
|
|
|
Total |
|
|
50,917 |
|
|
|
55,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
|
231,776 |
|
|
|
202,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to noncontrolling interests
(Note 7) |
|
|
5,128 |
|
|
|
4,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDER |
|
$ |
226,648 |
|
|
$ |
197,065 |
|
|
|
|
|
|
|
|
See Notes to Pinnacle Wests Condensed Consolidated Financial Statements and Supplemental Notes to
Arizona Public Service Companys Condensed Consolidated Financial Statements.
44
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2010 |
|
2009 |
|
|
|
ELECTRIC OPERATING REVENUES |
|
$ |
2,527,163 |
|
|
$ |
2,499,072 |
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
Fuel and purchased power |
|
|
821,244 |
|
|
|
920,630 |
|
Operations and maintenance |
|
|
632,235 |
|
|
|
595,929 |
|
Depreciation and amortization |
|
|
307,731 |
|
|
|
303,814 |
|
Income taxes |
|
|
177,089 |
|
|
|
158,041 |
|
Taxes other than income taxes |
|
|
100,171 |
|
|
|
100,077 |
|
|
|
|
|
|
|
|
Total |
|
|
2,038,470 |
|
|
|
2,078,491 |
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
|
488,693 |
|
|
|
420,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (DEDUCTIONS) |
|
|
|
|
|
|
|
|
Income taxes |
|
|
3,769 |
|
|
|
3,684 |
|
Allowance for equity funds used during construction |
|
|
16,417 |
|
|
|
11,919 |
|
Other income (Note S-2) |
|
|
3,872 |
|
|
|
7,580 |
|
Other expense (Note S-2) |
|
|
(11,091 |
) |
|
|
(10,798 |
) |
|
|
|
|
|
|
|
Total |
|
|
12,967 |
|
|
|
12,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE |
|
|
|
|
|
|
|
|
Interest on long-term debt |
|
|
161,918 |
|
|
|
157,980 |
|
Interest on short-term borrowings |
|
|
5,734 |
|
|
|
5,326 |
|
Debt discount, premium and expense |
|
|
3,376 |
|
|
|
3,560 |
|
Allowance for borrowed funds used during construction |
|
|
(12,254 |
) |
|
|
(8,284 |
) |
|
|
|
|
|
|
|
Total |
|
|
158,774 |
|
|
|
158,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
|
342,886 |
|
|
|
274,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to noncontrolling interests
(Note 7) |
|
|
15,034 |
|
|
|
14,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDER |
|
$ |
327,852 |
|
|
$ |
260,130 |
|
|
|
|
|
|
|
|
See Notes to Pinnacle Wests Condensed Consolidated Financial Statements and Supplemental
Notes to Arizona Public Service Companys Condensed Consolidated Financial
Statements.
45
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT |
|
|
|
|
|
|
|
|
Plant in service and held for future use |
|
$ |
12,982,572 |
|
|
$ |
12,781,256 |
|
Accumulated depreciation and amortization |
|
|
(4,456,017 |
) |
|
|
(4,326,908 |
) |
|
|
|
|
|
|
|
Net |
|
|
8,526,555 |
|
|
|
8,454,348 |
|
|
|
|
|
|
|
|
|
|
Construction work in progress |
|
|
555,137 |
|
|
|
460,748 |
|
Palo Verde sale leaseback, net of accumulated
depreciation (Note 7) |
|
|
140,145 |
|
|
|
146,722 |
|
Intangible assets, net of accumulated amortization |
|
|
178,479 |
|
|
|
164,183 |
|
Nuclear fuel, net of accumulated amortization |
|
|
124,101 |
|
|
|
118,243 |
|
|
|
|
|
|
|
|
Total property, plant and equipment |
|
|
9,524,417 |
|
|
|
9,344,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTMENTS AND OTHER ASSETS |
|
|
|
|
|
|
|
|
Nuclear decommissioning trust (Note 15) |
|
|
453,963 |
|
|
|
414,576 |
|
Assets from risk management activities (Note 8) |
|
|
54,968 |
|
|
|
28,855 |
|
Other assets |
|
|
70,383 |
|
|
|
68,839 |
|
|
|
|
|
|
|
|
Total investments and other assets |
|
|
579,314 |
|
|
|
512,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
162,272 |
|
|
|
120,798 |
|
Customer and other receivables |
|
|
359,053 |
|
|
|
280,226 |
|
Accrued unbilled revenues |
|
|
180,006 |
|
|
|
110,971 |
|
Allowance for doubtful accounts |
|
|
(7,660 |
) |
|
|
(6,063 |
) |
Materials and supplies (at average cost) |
|
|
174,428 |
|
|
|
176,020 |
|
Fossil fuel (at average cost) |
|
|
21,826 |
|
|
|
39,245 |
|
Assets from risk management activities (Note 8) |
|
|
68,476 |
|
|
|
50,619 |
|
Deferred income taxes |
|
|
81,719 |
|
|
|
53,990 |
|
Other current assets |
|
|
42,901 |
|
|
|
25,724 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,083,021 |
|
|
|
851,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEFERRED DEBITS |
|
|
|
|
|
|
|
|
Regulatory assets |
|
|
879,056 |
|
|
|
813,161 |
|
Income tax receivable (Note 6) |
|
|
65,498 |
|
|
|
65,498 |
|
Unamortized debt issue costs |
|
|
19,719 |
|
|
|
20,959 |
|
Other |
|
|
77,448 |
|
|
|
73,909 |
|
|
|
|
|
|
|
|
Total deferred debits |
|
|
1,041,721 |
|
|
|
973,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
12,228,473 |
|
|
$ |
11,681,571 |
|
|
|
|
|
|
|
|
See Notes to Pinnacle Wests Condensed Consolidated Financial Statements and Supplemental
Notes to Arizona Public Service Companys Condensed Consolidated Financial Statements.
46
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAPITALIZATION |
|
|
|
|
|
|
|
|
Common stock |
|
$ |
178,162 |
|
|
$ |
178,162 |
|
Additional paid-in capital |
|
|
2,379,696 |
|
|
|
2,126,863 |
|
Retained earnings |
|
|
1,421,679 |
|
|
|
1,250,126 |
|
Accumulated other comprehensive loss: |
|
|
|
|
|
|
|
|
Pension and other postretirement benefits |
|
|
(31,149 |
) |
|
|
(29,114 |
) |
Derivative instruments |
|
|
(120,614 |
) |
|
|
(80,682 |
) |
|
|
|
|
|
|
|
Total shareholder equity |
|
|
3,827,774 |
|
|
|
3,445,355 |
|
Noncontrolling interests (Note 7) |
|
|
94,073 |
|
|
|
82,324 |
|
|
|
|
|
|
|
|
Total equity |
|
|
3,921,847 |
|
|
|
3,527,679 |
|
Long-term debt less current maturities (Note 2) |
|
|
3,349,924 |
|
|
|
3,180,406 |
|
Palo Verde sale leaseback lessor notes (Notes 2 and 7) |
|
|
113,379 |
|
|
|
126,000 |
|
|
|
|
|
|
|
|
Total capitalization |
|
|
7,385,150 |
|
|
|
6,834,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
Current maturities of long-term debt (Note 2) |
|
|
57,275 |
|
|
|
222,959 |
|
Accounts payable |
|
|
227,224 |
|
|
|
213,833 |
|
Accrued taxes |
|
|
174,192 |
|
|
|
158,051 |
|
Accrued interest |
|
|
52,112 |
|
|
|
54,099 |
|
Customer deposits |
|
|
68,206 |
|
|
|
70,780 |
|
Liabilities from risk management activities (Note 8) |
|
|
55,847 |
|
|
|
55,908 |
|
Other current liabilities |
|
|
135,931 |
|
|
|
124,995 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
770,787 |
|
|
|
900,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEFERRED CREDITS AND OTHER |
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
1,840,300 |
|
|
|
1,582,945 |
|
Deferred fuel and purchased power regulatory liability (Note 3) |
|
|
41,385 |
|
|
|
87,291 |
|
Other regulatory liabilities |
|
|
685,908 |
|
|
|
679,072 |
|
Liability for asset retirements |
|
|
323,134 |
|
|
|
301,783 |
|
Liabilities for pension and other postretirement
benefits (Note 4) |
|
|
697,686 |
|
|
|
766,378 |
|
Liabilities from risk management activities (Note 8) |
|
|
80,656 |
|
|
|
62,443 |
|
Customer advances |
|
|
127,449 |
|
|
|
136,595 |
|
Coal mine reclamation |
|
|
117,029 |
|
|
|
92,060 |
|
Unrecognized tax benefits (Note 6) |
|
|
65,863 |
|
|
|
140,638 |
|
Other |
|
|
93,126 |
|
|
|
97,656 |
|
|
|
|
|
|
|
|
Total deferred credits and other |
|
|
4,072,536 |
|
|
|
3,946,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (SEE NOTES) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND EQUITY |
|
$ |
12,228,473 |
|
|
$ |
11,681,571 |
|
|
|
|
|
|
|
|
See Notes to Pinnacle Wests Condensed Consolidated Financial Statements and Supplemental
Notes to Arizona Public Service Companys Condensed Consolidated Financial Statements.
47
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net Income |
|
$ |
342,886 |
|
|
$ |
274,384 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization including nuclear fuel |
|
|
349,267 |
|
|
|
334,092 |
|
Deferred fuel and purchased power |
|
|
50,020 |
|
|
|
(46,743 |
) |
Deferred fuel and purchased power amortization |
|
|
(95,926 |
) |
|
|
115,214 |
|
Allowance for equity funds used during construction |
|
|
(16,417 |
) |
|
|
(11,919 |
) |
Deferred income taxes |
|
|
218,575 |
|
|
|
252,282 |
|
Change in mark-to-market valuations |
|
|
3,716 |
|
|
|
(5,970 |
) |
Changes in current assets and liabilities: |
|
|
|
|
|
|
|
|
Customer and other receivables |
|
|
(93,394 |
) |
|
|
(92,535 |
) |
Accrued unbilled revenues |
|
|
(69,035 |
) |
|
|
(56,420 |
) |
Materials, supplies and fossil fuel |
|
|
19,011 |
|
|
|
(16,781 |
) |
Other current assets |
|
|
(17,177 |
) |
|
|
(2,473 |
) |
Accounts payable |
|
|
37,150 |
|
|
|
(28,018 |
) |
Accrued taxes |
|
|
16,141 |
|
|
|
(149,990 |
) |
Other current liabilities |
|
|
6,375 |
|
|
|
(740 |
) |
Change in margin and collateral accounts assets |
|
|
(4,336 |
) |
|
|
1,251 |
|
Change in margin and collateral accounts liabilities |
|
|
(143,725 |
) |
|
|
3,564 |
|
Change in regulatory liabilities |
|
|
40,121 |
|
|
|
92,598 |
|
Change in unrecognized tax benefits |
|
|
(72,217 |
) |
|
|
92,973 |
|
Change in other long-term assets |
|
|
(53,566 |
) |
|
|
(54,781 |
) |
Change in other long-term liabilities |
|
|
(11,686 |
) |
|
|
13,473 |
|
|
|
|
|
|
|
|
Net cash flow provided by operating activities |
|
|
505,783 |
|
|
|
713,461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(552,331 |
) |
|
|
(551,042 |
) |
Contributions in aid of construction |
|
|
25,258 |
|
|
|
17,393 |
|
Allowance for borrowed funds used during construction |
|
|
(12,254 |
) |
|
|
(8,284 |
) |
Proceeds from nuclear decommissioning trust sales |
|
|
424,255 |
|
|
|
370,399 |
|
Investment in nuclear decommissioning trust |
|
|
(442,567 |
) |
|
|
(386,743 |
) |
Other |
|
|
9,621 |
|
|
|
(1,404 |
) |
|
|
|
|
|
|
|
Net cash flow used for investing activities |
|
|
(548,018 |
) |
|
|
(559,681 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Issuance of long-term debt |
|
|
|
|
|
|
863,903 |
|
Repayment of long-term debt |
|
|
(9,538 |
) |
|
|
(350,312 |
) |
Short-term borrowings and payments-net |
|
|
|
|
|
|
(521,684 |
) |
Equity infusion |
|
|
252,833 |
|
|
|
|
|
Dividends paid on common stock |
|
|
(156,300 |
) |
|
|
(127,500 |
) |
Noncontrolling interests |
|
|
(3,286 |
) |
|
|
(3,393 |
) |
|
|
|
|
|
|
|
Net cash flow provided by (used for) financing activities |
|
|
83,709 |
|
|
|
(138,986 |
) |
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
41,474 |
|
|
|
14,794 |
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
|
|
120,798 |
|
|
|
71,544 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
162,272 |
|
|
$ |
86,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Income taxes, net of (refunds) |
|
$ |
76,364 |
|
|
$ |
13,555 |
|
Interest, net of amounts capitalized |
|
$ |
157,385 |
|
|
$ |
146,062 |
|
See Notes to Pinnacle Wests Condensed Consolidated Financial Statements and Supplemental
Notes to Arizona Public Service Companys Condensed Consolidated Financial Statements.
48
Certain notes to APS Condensed Consolidated Financial Statements are combined with the
Notes to Pinnacle Wests Condensed Consolidated Financial Statements. Listed below are the
Condensed Consolidated Notes to Pinnacle Wests Condensed Consolidated Financial Statements, the
majority of which also relate to APS Condensed Consolidated Financial Statements. In addition,
listed below are the Supplemental Notes that are required disclosures for APS and should be read in
conjunction with Pinnacle Wests Condensed Consolidated Notes.
|
|
|
|
|
|
|
|
|
|
|
Condensed |
|
|
APS |
|
|
|
Consolidated |
|
|
Supplemental |
|
|
|
Note |
|
|
Note |
|
|
|
Reference |
|
|
Reference |
|
Consolidation and Nature of Operations |
|
Note 1 |
|
|
|
|
Long-term Debt and Liquidity Matters |
|
Note 2 |
|
|
|
|
Regulatory Matters |
|
Note 3 |
|
|
|
|
Retirement Plans and Other Benefits |
|
Note 4 |
|
|
|
|
Business Segments |
|
Note 5 |
|
|
|
|
Income Taxes |
|
Note 6 |
|
|
|
|
Variable Interest Entities |
|
Note 7 |
|
|
|
|
Derivative and Energy Trading Accounting |
|
Note 8 |
|
|
|
|
Changes in Equity |
|
Note 9 |
|
Note S-1 |
Commitments and Contingencies |
|
Note 10 |
|
|
|
|
Other Income and Other Expense |
|
Note 11 |
|
Note S-2 |
Guarantees |
|
Note 12 |
|
|
|
|
Earnings Per Share |
|
Note 13 |
|
|
|
|
Discontinued Operations |
|
Note 14 |
|
|
|
|
Fair Value Measurements |
|
Note 15 |
|
|
|
|
Real Estate Impairment Charge |
|
Note 16 |
|
|
|
|
49
ARIZONA PUBLIC SERVICE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
S-1. Changes in Equity
The following tables show APS changes in shareholder equity and changes in equity of
noncontrolling interests for the three and nine months ended September 30, 2010 and 2009 (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2010 |
|
|
Three Months Ended September 30, 2009 |
|
|
|
Shareholder |
|
|
Noncontrolling |
|
|
|
|
|
|
Shareholder |
|
|
Noncontrolling |
|
|
|
|
|
|
Equity |
|
|
Interests |
|
|
Total |
|
|
Equity |
|
|
Interests |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance,
July 1 |
|
$ |
3,605,292 |
|
|
$ |
88,944 |
|
|
$ |
3,694,236 |
|
|
$ |
3,284,568 |
|
|
$ |
83,509 |
|
|
$ |
3,368,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
226,648 |
|
|
|
5,128 |
|
|
|
231,776 |
|
|
|
197,065 |
|
|
|
4,953 |
|
|
|
202,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on derivative instruments (a) |
|
|
(67,856 |
) |
|
|
|
|
|
|
(67,856 |
) |
|
|
4,959 |
|
|
|
|
|
|
|
4,959 |
|
Net reclassification of realized losses to income (b) |
|
|
59,801 |
|
|
|
|
|
|
|
59,801 |
|
|
|
81,660 |
|
|
|
|
|
|
|
81,660 |
|
Reclassification of pension and other postretirement benefits to income |
|
|
1,172 |
|
|
|
|
|
|
|
1,172 |
|
|
|
999 |
|
|
|
|
|
|
|
999 |
|
Net income tax benefit (expense) related to items of other comprehensive income (loss) |
|
|
2,717 |
|
|
|
|
|
|
|
2,717 |
|
|
|
(34,644 |
) |
|
|
|
|
|
|
(34,644 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
(4,166 |
) |
|
|
|
|
|
|
(4,166 |
) |
|
|
52,974 |
|
|
|
|
|
|
|
52,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
222,482 |
|
|
|
5,128 |
|
|
|
227,610 |
|
|
|
250,039 |
|
|
|
4,953 |
|
|
|
254,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on common
stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42,500 |
) |
|
|
|
|
|
|
(42,500 |
) |
Equity infusion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,571 |
|
|
|
|
|
|
|
4,571 |
|
Other |
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
(8 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance,
September 30 |
|
$ |
3,827,774 |
|
|
$ |
94,073 |
|
|
$ |
3,921,847 |
|
|
$ |
3,496,678 |
|
|
$ |
88,454 |
|
|
$ |
3,585,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
These amounts primarily include unrealized gains and losses on contracts used to
hedge our forecasted electricity and natural gas requirements to serve Native Load.
These changes are primarily due to changes in forward natural gas prices and wholesale
electricity prices. |
|
(b) |
|
These amounts primarily include the reclassification of unrealized gains and
losses to realized gains and losses for contracted commodities delivered during the
period. |
50
ARIZONA PUBLIC SERVICE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2010 |
|
|
Nine Months Ended September 30, 2009 |
|
|
|
Shareholder |
|
|
Noncontrolling |
|
|
|
|
|
|
Shareholder |
|
|
Noncontrolling |
|
|
|
|
|
|
Equity |
|
|
Interests |
|
|
Total |
|
|
Equity |
|
|
Interests |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance,
January 1 |
|
$ |
3,445,355 |
|
|
$ |
82,324 |
|
|
$ |
3,527,679 |
|
|
$ |
3,339,150 |
|
|
$ |
77,601 |
|
|
$ |
3,416,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
327,852 |
|
|
|
15,034 |
|
|
|
342,886 |
|
|
|
260,130 |
|
|
|
14,254 |
|
|
|
274,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized losses on derivative instruments (a) |
|
|
(168,110 |
) |
|
|
|
|
|
|
(168,110 |
) |
|
|
(128,035 |
) |
|
|
|
|
|
|
(128,035 |
) |
Net reclassification of realized losses to income (b) |
|
|
102,130 |
|
|
|
|
|
|
|
102,130 |
|
|
|
154,990 |
|
|
|
|
|
|
|
154,990 |
|
Reclassification of pension and other postretirement benefits to income |
|
|
3,499 |
|
|
|
|
|
|
|
3,499 |
|
|
|
2,991 |
|
|
|
|
|
|
|
2,991 |
|
Net unrealized losses related to pension benefits |
|
|
(6,863 |
) |
|
|
|
|
|
|
(6,863 |
) |
|
|
(3,774 |
) |
|
|
|
|
|
|
(3,774 |
) |
Net income tax benefit (expense) related to items of other comprehensive income (loss) |
|
|
27,377 |
|
|
|
|
|
|
|
27,377 |
|
|
|
(10,348 |
) |
|
|
|
|
|
|
(10,348 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
(41,967 |
) |
|
|
|
|
|
|
(41,967 |
) |
|
|
15,824 |
|
|
|
|
|
|
|
15,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
285,885 |
|
|
|
15,034 |
|
|
|
300,919 |
|
|
|
275,954 |
|
|
|
14,254 |
|
|
|
290,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on common
stock |
|
|
(156,300 |
) |
|
|
|
|
|
|
(156,300 |
) |
|
|
(127,500 |
) |
|
|
|
|
|
|
(127,500 |
) |
Equity infusion |
|
|
252,833 |
|
|
|
|
|
|
|
252,833 |
|
|
|
9,074 |
|
|
|
|
|
|
|
9,074 |
|
Other |
|
|
1 |
|
|
|
(3,285 |
) |
|
|
(3,284 |
) |
|
|
|
|
|
|
(3,401 |
) |
|
|
(3,401 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance,
September 30 |
|
$ |
3,827,774 |
|
|
$ |
94,073 |
|
|
$ |
3,921,847 |
|
|
$ |
3,496,678 |
|
|
$ |
88,454 |
|
|
$ |
3,585,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
These amounts primarily include unrealized gains and losses on contracts used to
hedge our forecasted electricity and natural gas requirements to serve Native Load.
These changes are primarily due to changes in forward natural gas prices and wholesale
electricity prices. |
|
(b) |
|
These amounts primarily include the reclassification of unrealized gains and
losses to realized gains and losses for contracted commodities delivered during the
period. |
51
ARIZONA PUBLIC SERVICE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
S-2. Other Income and Other Expense
The following table provides detail of APS other income and other expense for the three and
nine months ended September 30, 2010 and 2009 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Other income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
373 |
|
|
$ |
63 |
|
|
$ |
2,653 |
|
|
$ |
402 |
|
Investment gains net |
|
|
2,574 |
|
|
|
3,320 |
|
|
|
1,038 |
|
|
|
5,189 |
|
Miscellaneous |
|
|
15 |
|
|
|
147 |
|
|
|
181 |
|
|
|
1,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
$ |
2,962 |
|
|
$ |
3,530 |
|
|
$ |
3,872 |
|
|
$ |
7,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating costs (a) |
|
$ |
(2,969 |
) |
|
$ |
(1,714 |
) |
|
$ |
(6,453 |
) |
|
$ |
(6,225 |
) |
Asset dispositions |
|
|
(186 |
) |
|
|
(182 |
) |
|
|
(395 |
) |
|
|
(540 |
) |
Miscellaneous |
|
|
(919 |
) |
|
|
(894 |
) |
|
|
(4,243 |
) |
|
|
(4,033 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
$ |
(4,074 |
) |
|
$ |
(2,790 |
) |
|
$ |
(11,091 |
) |
|
$ |
(10,798 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
As defined by the FERC, includes below-the-line non-operating utility income and expense
(items excluded from utility rate recovery). |
52
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
INTRODUCTION
The following discussion should be read in conjunction with Pinnacle Wests Condensed
Consolidated Financial Statements and Arizona Public Service Companys Condensed Consolidated
Financial Statements and the related Notes that appear in Item 1 of this report. For purposes of
this report, a Note refers to a Note to Pinnacle Wests Condensed Consolidated Financial
Statements in Item 1 of this report. For information on the broad factors that may cause our
actual future results to differ from those we currently seek or anticipate, see Forward-Looking
Statements at the front of this report and Risk Factors in Item 1A of the 2009 Form 10-K.
OVERVIEW
Pinnacle West owns all of the outstanding common stock of APS. APS is a vertically-integrated
electric utility that provides either retail or wholesale electric service to most of the state of
Arizona, with the major exceptions of about one-half of the Phoenix metropolitan area, the Tucson
metropolitan area and Mohave County in northwestern Arizona. APS accounts for substantially all of
our revenues and earnings, and is expected to continue to do so.
Areas of Business Focus
Nuclear. APS operates and is a joint-owner of the Palo Verde Nuclear Generating Station.
With a focus on safely and efficiently generating electricity for the long-term, APS applied for
twenty-year renewals of its operating licenses for each of the three Palo Verde units, and is
making preparations to secure necessary resources to operate the plant during this extended period
of time.
Coal and Related Environmental Matters. APS is a joint-owner of three coal-fired power plants
and acts as operating agent for two of the plants. APS is focused on the impacts on its coal fleet
that may result from potential legislation and increased regulation concerning greenhouse gas
emissions. Recent concern over climate change and other emission-related issues could have a
significant impact on APS capital expenditures and operating costs in the form of taxes, emissions
allowances or required equipment upgrades for these plants. APS is closely monitoring its long
range capital management plans, understanding that the resulting legislation and regulation could
impact the economic viability of certain plants, as well as the willingness or ability of power
plant participants to fund any such equipment upgrades. In particular, on October 6, 2010, the EPA
issued its proposed determination for Best Available Retrofit
Technology (BART) requirements for the
Four Corners Power Plant (Four Corners) that, as proposed, would require installation of
additional pollution control equipment on all five of the
plants units. APS estimates that its total costs for the
proposed controls could be up to approximately $422 million for
nitrogen oxide controls and about $220 million for particulate
removal equipment. It is currently evaluating the impacts of the
proposed determination and intends to submit comments during the
EPA's comment period. (See "Environmental Matters Regional
Haze Rules" in Part II, Item 5.) In addition, Southern
California Edison, a participant in Four Corners, has indicated that certain California legislation
may prohibit it from making emission control expenditures at the plant.
Transmission and Delivery. APS 2010 transmission plan projects that it will invest
approximately $520 million in new transmission over the next ten years, which includes 270 miles of
new lines. APS is working closely with regulators to identify and plan for transmission needs
resulting from the current focus on renewable energy. APS is also working to establish and expand
smart grid technology throughout its service territory designed to provide a variety of benefits
both to APS and its customers. This technology is designed to allow customers to better monitor
their energy use and needs, minimize system outage durations and the number of customers that
experience outages, and facilitate
cost savings to APS through improved reliability and the automation of certain distribution
functions, including remote meter reading and remote connects and disconnects.
53
Renewable Energy. APS is committed to increasing the amount of energy produced by renewable
energy resources. The ACC approved the RES in 2006, recognizing the importance of renewable energy
to our state. In the Settlement Agreement for the 2008 general retail rate case, APS agreed to
exceed the RES standards, committing that approximately 10% of APS energy will come from renewable
resources by the year 2015. A component of the original RES is focused on stimulating development
of distributed energy systems (generally speaking, small-scale renewable technologies that are
located on customers properties). As of September 30, 2010, customers have installed 41 MW of
distributed energy system through APS renewable incentive programs. A variety of other provisions
in the Settlement Agreement reinforce APS dedication to renewable energy through initiatives such
as building photovoltaic solar plants, seeking an Arizona wind generation project and installing
solar rooftop panels on schools and government buildings.
To procure the additional renewable resources required under our Settlement Agreement, APS
issued three requests for proposals (RFPs) for renewable resources in the first half of 2010.
The first RFP was for wind projects between 15 and 100 MW to be located within Arizona. The
second RFP was for utility-scale solar photovoltaic (PV) projects between 15 and 50 MW. The
third RFP, the 2010 Small Generation RFP, serves as the first in a series of solicitations that
will focus on a broad base of renewable technologies for projects
between 2 and 15 MW. Resulting
from these and prior solicitations, as of September 30, 2010,
APS has entered into two long-term power purchase contracts, the
first for a 15 MW solar PV project located in Bagdad, Arizona
and the second for a 99 MW wind project located north of
Williams, Arizona, known as Perrin Ranch Wind. Each of these agreements is subject to various conditions, including successful
siting, permitting and interconnection of the project to the electric grid.
On March 3, 2010, the ACC approved the AZ Sun Program, under which APS plans to own 100 MW of
solar PV power plants across Arizona by investing up to $500 million through 2014. See Note 3
for additional details of this program, including the related cost recovery. APS expects to
acquire these resources through competitive procurement processes, with projects being placed into
service in the 2011 to 2014 timeframe. The ultimate timing of these projects will depend on the
outcome of current and future procurement processes. APS plans to
invest approximately $150 million to develop the following two
projects announced to date:
|
|
|
|
|
|
|
|
|
|
|
Expected |
|
|
|
|
|
|
Commercial |
|
|
AZ
Sun Program Contracts: |
|
Capacity |
|
Operation Date |
|
Type |
Glendale, AZ |
|
15 MW |
|
Summer 2011 |
|
Solar PV |
Gila Bend, AZ |
|
18 MW |
|
Late 2011 |
|
Solar PV |
Amount
Remaining Under AZ Sun Program |
|
67 MW |
|
|
|
|
|
|
|
|
|
|
|
TOTAL AZ Sun Program |
|
100 MW |
|
|
|
|
|
|
|
|
|
|
|
54
Energy Efficiency. Arizona regulators are placing an increased focus on energy efficiency and
demand side management programs to encourage customers to conserve energy, while incentivizing
utilities to aid in these efforts that ultimately reduce the demand for energy. In December 2009,
the ACC initiated Energy Efficiency rulemaking, with a proposed Energy Efficiency Standard of 22%
annual energy savings by 2020. The 22% figure represents the cumulative reduction in future energy
usage through 2020 attributable to energy efficiency initiatives. On July 27, 2010, the proposed
Energy Efficiency Standard was approved by the ACC subject to review and approval by the Arizona
Attorney General, which should be completed before the end of 2010. An ambitious standard, such as
that approved by the ACC, will increase participation by APS customers in these conservation and
energy efficiency programs, which in turn will impact Arizonas future energy resource needs.
Rate Matters. APS needs timely recovery through rates of its capital and operating
expenditures to maintain adequate financial health. APS retail rates are regulated by the ACC and
its wholesale electric rates (primarily for transmission) are regulated by the FERC. At the end of
2009, the ACC approved a settlement agreement entered into by APS and twenty-one of the
twenty-three other parties to APS general retail rate case, with modifications that did not
materially affect the overall economic terms of the agreement. The rate case settlement should
strengthen APS financial condition by allowing for rate stability and a greater level of cost
recovery and return on investment. It also authorizes and requires equity infusions into APS of at
least $700 million prior to the end of 2014 ($253 million of which was infused into APS from
proceeds of a Pinnacle West equity issuance in the second quarter of 2010 (see Note 2)). The
settlement demonstrates cooperation among APS, the ACC staff, the Residential Utility Consumer
Office and other intervenors to the rate case, and sets forth a future rate case filing plan that
allows APS the opportunity to help shape Arizonas energy future outside of continual rate cases.
See Note 3 for a discussion of the Settlement Agreement terms and information on APS FERC rates.
APS has several recovery mechanisms in place that provide more timely recovery to APS of its
fuel and transmission costs, and costs associated with the promotion and implementation of its
energy efficiency, demand-side management and renewable energy efforts and customer programs.
These mechanisms are described more fully in Note 3.
On
October 18, 2010, the Chairman of the ACC issued a draft
decoupling policy statement. Decoupling refers to a ratemaking design
which reduces or removes the linkage between sales and utility
revenues and/or profits, reducing utility disincentives to the
adoption of programs that benefit customers by saving energy.
Mechanically, decoupling compares actual versus authorized revenues
or revenue per customer over a period and either credits or collects
any differences from customers in a subsequent period. The draft policy is supportive of decoupling using a
revenue-per-customer methodology, which is the mechanism APS and a
number of other parties support because it recognizes increased costs
associated with additional customers. The draft policy would allow a
utility to file a decoupling plan in its next general rate case.
Subsequent steps by the ACC prior to approving any
policy statement will likely depend on the nature and extent of the
comments received from various stakeholders.
Financial Strength and Flexibility. Pinnacle West and APS currently have ample borrowing
capacity under their respective credit facilities and have been able to access these facilities as
well as the commercial paper market, ensuring adequate liquidity for each company. In early
February 2010, APS entered into a $500 million revolving credit facility, replacing its $377
million facility that would have otherwise terminated in December 2010. At that same time,
Pinnacle West entered into a $200 million revolving credit facility that replaced its $283 million
facility that also would have otherwise terminated 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.
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 capital contributions to repay short-term indebtedness, to finance capital
expenditures and for other general corporate purposes.
55
Since the beginning of the third quarter, APS changed the interest rate modes on
approximately $180 million of its pollution control bonds from daily rate modes to term rate modes. The letters of credit
supporting each of these series of bonds were terminated in conjunction with the rate changes. See Note 2 for additional details of these changes.
SunCor Real Estate Operations. As a result of the distressed conditions in the real estate
markets, during 2009 SunCor undertook a program to dispose of its homebuilding operations,
master-planned communities, land parcels, commercial assets and golf courses in order to reduce its
outstanding debt. In July 2010, SunCor sold land parcels, commercial assets and a master planned
home-building community for approximately $70 million, which approximated the carrying value of
these assets, resulting in a net gain of zero. In connection with this sale, SunCor negotiated a
restructuring of certain of its credit facilities, including its principal loan facility. The debt
restructuring resulted in an after-tax gain of approximately $9 million, which was recognized in
the third quarter of 2010. At September 30, 2010, SunCor had approximately $22 million of assets
on its balance sheet classified as assets held for sale. These assets consisted of $18 million of
consolidated VIEs (see Note 7), master planned home-building communities and golf courses. Because
it is expected that SunCor will dispose of these assets within the next 12 months, they are
classified as assets held for sale on the balance sheet. See Pinnacle West Consolidated
Liquidity and Capital Resources Other Subsidiaries SunCor below for a discussion of SunCors
outstanding debt and related matters and Note 16 for a discussion of related impairment charges.
Other Subsidiary Matters. The operations of APSES and our other first tier subsidiary, El
Dorado, are not expected to have any material impact on our financial results, or to require any
material amounts of capital, over the next three years.
Key Financial Drivers
In addition to the continuing impact of the matters described above, many factors influence
our financial results and our future financial outlook, including those listed below. We closely
monitor these factors to plan for the Companys current needs, and to adjust our expectations,
financial budgets and forecasts appropriately.
Regulated Electricity Segment Revenues. For the years 2007 through 2009, retail electric
revenues comprised approximately 94% of our total electric operating revenues. Our electric
operating revenues are affected by customer growth or decline, variations in weather from period to
period, customer mix, average usage per customer and the impacts of energy efficiency programs,
electricity rates and tariffs, the recovery of PSA deferrals and the operation of other recovery
mechanisms. Off-system sales of excess generation output, purchased power and natural gas are
included in regulated electricity segment revenues and related fuel and purchased power because
they are credited to APS retail customers through the PSA. These revenue transactions are
affected by the availability of excess generation or other energy resources and wholesale market
conditions, including competition, demand and prices.
Customer and Sales Growth. Customer growth in APS service territory for the nine-month
period ended September 30, 2010 was 0.6% compared with the prior year period. For the three years
2007 through 2009, APS customer growth averaged 1.8% per year. We currently expect annual
customer growth to average about 1% for 2010 through 2012 due to economic conditions both
nationally and in Arizona. Retail sales in kilowatt-hours, adjusted to exclude the effects of
weather variations, for the nine-month period ended September 30, 2010 declined 1.0% compared to
the same period in the prior year, reflecting the poor economic conditions and the effects of our
energy efficiency programs. For the
three years 2007 through 2009, APS actual retail electricity sales in kilowatt-hours,
adjusted to exclude the effects of weather variations, grew at an average annual rate of 0.2%. We
currently estimate that total annual retail electricity sales in kilowatt-hours will remain flat on
average during 2010 through 2012, including the effects of APS energy efficiency programs, but
excluding the effects of weather variations. A continuation of the economic downturn, or the
failure of the Arizona economy to rebound in the near future, could further impact these estimates.
The customer and sales growth referred to in this paragraph apply to Native Load customers.
56
Actual sales growth, excluding weather-related variations, may differ from our projections as
a result of numerous factors, such as economic conditions, customer growth or decline, usage
patterns, impacts of energy efficiency programs and responses to retail price changes. Our
experience indicates that a reasonable range of variation in our kilowatt-hour sales projection
attributable to such economic factors under normal business conditions can result in increases or
decreases in annual net income of up to $10 million.
Weather. In forecasting the retail sales growth numbers provided above, we assume normal
weather patterns based on historical data. Historical extreme weather variations have resulted in
annual variations in net income in excess of $20 million. However, our experience indicates that
the more typical variations from normal weather can result in increases or decreases in annual net
income of up to $10 million.
Fuel and Purchased Power Costs. Fuel and purchased power costs included on our Condensed
Consolidated Statements of Income are impacted by our electricity sales volumes, existing contracts
for purchased power and generation fuel, our power plant performance, transmission availability or
constraints, prevailing market prices, new generating plants being placed in service in our market
areas, our hedging program for managing such costs and PSA deferrals and the related amortization.
Operations and Maintenance Expenses. Operations and maintenance expenses are impacted by
growth, power plant operations, maintenance of utility plant (including generation, transmission,
and distribution facilities), inflation, outages, higher-trending pension and other postretirement
benefit costs, renewable energy and demand side management related expenses (which are offset by
the same amount of regulated electricity segment operating revenues) and other factors. In its
retail rate case settlement, APS committed to operational expense reductions from 2010 through 2014
and received approval to defer certain pension and other postretirement benefit cost increases to
be incurred in 2011 and 2012.
Depreciation and Amortization Expenses. Depreciation and amortization expenses are impacted
by net additions to utility plant and other property (such as new generation, transmission, and
distribution facilities), and changes in depreciation and amortization rates. The Capital
Expenditures section below provides information regarding the planned additions to our facilities.
We have also applied to the NRC for renewed operating licenses for each of the Palo Verde units.
If the NRC grants the extension, we estimate that our annual pretax depreciation expense will
decrease by approximately $34 million at the later of the license extension date or January 1,
2012.
Property Taxes. Taxes other than income taxes consist primarily of property taxes, which are
affected by the value of property in-service and under construction, assessment ratios, and tax
rates. The average property tax rate for APS, which currently owns the majority of our property,
was 7.5% of the assessed value in 2009 and 7.8% of the assessed value in 2008. We expect property
taxes to increase as we add new utility plants (including new generation, transmission and
distribution facilities) and as we improve our existing facilities.
57
Income Taxes. Income taxes are affected by the amount of pre-tax book income, income tax
rates, and certain non-taxable items, such as the allowance for equity funds used during
construction. In addition, income taxes may also be affected by the settlement of issues with
taxing authorities.
Interest Expense. Interest expense is affected by the amount of debt outstanding and the
interest rates on that debt (see Note 2). The primary factors affecting borrowing levels are
expected to be our capital expenditures, long-term debt maturities, and internally generated cash
flow. An allowance for borrowed funds offsets a portion of interest expense while capital projects
are under construction. We stop accruing the allowance for borrowed funds on a project when it is
placed in commercial operation.
PINNACLE WEST CONSOLIDATED RESULTS OF OPERATIONS
Our results of operations, provided below, are based upon our two reportable business
segments:
|
|
|
our regulated electricity segment, which consists of traditional regulated retail
and wholesale electricity businesses (primarily retail and wholesale sales supplied to
Native Load customers) and related activities and includes electricity generation,
transmission and distribution; and |
|
|
|
our real estate segment, which consists of SunCors real estate development and
investment activities. All of SunCors operations are reflected in discontinued
operations (see Notes 5 and 14). The real estate segment activities are presented
separately in the period-over-period discussions that follow. |
Operating Results Three-month period ended September 30, 2010 compared with three-month period
ended September 30, 2009
Our consolidated net income attributable to common shareholders for the three months ended
September 30, 2010 was $234 million, compared with net income of $187 million for the comparable
prior-year period. The $47 million variance consists of a $29 million increase in income from
continuing operations and an $18 million increase from discontinued operations (primarily real
estate segment). As discussed in greater detail below, the improved results reflect an increase of approximately $25 million in
regulated electricity segment net income primarily due to increased revenues related to APS retail rate
increases, partially offset by increased operations and maintenance expenses.
58
The following table presents net income attributable to common shareholders by business
segment compared with the prior-year period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Net Change |
|
|
|
(dollars in millions) |
|
Regulated Electricity Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues less fuel and purchased
power expenses |
|
$ |
762 |
|
|
$ |
702 |
|
|
$ |
60 |
|
Operations and maintenance |
|
|
(220 |
) |
|
|
(195 |
) |
|
|
(25 |
) |
Depreciation and amortization |
|
|
(104 |
) |
|
|
(103 |
) |
|
|
(1 |
) |
Taxes other than income taxes |
|
|
(38 |
) |
|
|
(34 |
) |
|
|
(4 |
) |
Other income (expenses), net |
|
|
|
|
|
|
2 |
|
|
|
(2 |
) |
Interest charges, net of allowance for
funds used during construction |
|
|
(48 |
) |
|
|
(56 |
) |
|
|
8 |
|
Income taxes |
|
|
(122 |
) |
|
|
(111 |
) |
|
|
(11 |
) |
Noncontrolling interests (Note 7) |
|
|
(5 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated electricity segment net
income |
|
|
225 |
|
|
|
200 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other (a) |
|
|
2 |
|
|
|
(2 |
) |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations
Attributable to Common Shareholders |
|
|
227 |
|
|
|
198 |
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate impairment charges (Note 16) |
|
|
|
|
|
|
(38 |
) |
|
|
38 |
|
Other real estate operations |
|
|
13 |
|
|
|
18 |
|
|
|
(5 |
) |
Income taxes |
|
|
(5 |
) |
|
|
8 |
|
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
Real estate segment net income (loss) |
|
|
8 |
|
|
|
(12 |
) |
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other (a) |
|
|
(1 |
) |
|
|
1 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Discontinued
Operations Attributable to
Common Shareholders |
|
|
7 |
|
|
|
(11 |
) |
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Attributable to Common
Shareholders |
|
$ |
234 |
|
|
$ |
187 |
|
|
$ |
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes activities related to APSES and El Dorado. None of the activities of
either of these companies constitutes a reportable segment. |
59
Regulated electricity segment
This section includes a discussion of major variances in income and expense amounts for the
regulated electricity segment.
Operating revenues less fuel and purchased power expenses Regulated electricity segment
operating revenues less fuel and purchased power expenses were $60 million higher for the three
months ended September 30, 2010 compared with the prior-year period. The following table describes
the major components of this change:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) |
|
|
|
|
|
|
|
Fuel and |
|
|
|
|
|
|
|
|
|
|
purchased |
|
|
|
|
|
|
Operating |
|
|
power |
|
|
|
|
|
|
revenues |
|
|
expenses |
|
|
Net change |
|
|
|
(dollars in millions) |
|
|
|
Retail regulatory settlement effective
January 1, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
Retail base rate increases, net of deferrals |
|
$ |
98 |
|
|
$ |
43 |
|
|
$ |
55 |
|
Line extension revenues (Note 3) |
|
|
6 |
|
|
|
|
|
|
|
6 |
|
Transmission rate decreases |
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
Higher demand-side management and renewable
energy surcharges (substantially offset in
operations and maintenance expense) |
|
|
11 |
|
|
|
|
|
|
|
11 |
|
Effects of weather on retail sales |
|
|
6 |
|
|
|
2 |
|
|
|
4 |
|
Lower retail revenues related to recovery of PSA
deferrals, substantially offset by lower
amortization of fuel and purchased power
expense |
|
|
(90 |
) |
|
|
(92 |
) |
|
|
2 |
|
Higher fuel and purchased power costs including
the effects of higher off-system sales, net of
related PSA deferrals |
|
|
22 |
|
|
|
24 |
|
|
|
(2 |
) |
Lower retail sales primarily due to lower usage
per customer, including the effects of the
Companys energy efficiency programs, but
excluding the effects of weather |
|
|
(15 |
) |
|
|
(5 |
) |
|
|
(10 |
) |
Miscellaneous items, net |
|
|
(4 |
) |
|
|
1 |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
33 |
|
|
$ |
(27 |
) |
|
$ |
60 |
|
|
|
|
|
|
|
|
|
|
|
Operations and maintenance Operations and maintenance expenses increased $25 million for the
three months ended September 30, 2010 compared with the prior-year period primarily because of:
|
|
|
An increase of $8 million related to demand-side management and renewable energy
programs, which are primarily offset in operating revenues; |
|
|
|
An increase of $6 million related to employee benefits costs; and |
|
|
|
|
An increase of $4 million in generation costs, including the acceleration of
fossil-plant planned maintenance. |
60
Interest charges, net of allowance for funds used during construction Interest charges, net
of allowance for funds used during construction, decreased $8 million for the three months ended
September 30, 2010 compared with the prior-year period primarily because of higher rates in the
current year for the allowance for equity and borrowed funds used during construction.
Income taxes Income taxes were $11 million higher for the three months ended September 30,
2010 compared with the prior-year period primarily because of higher pretax income in the
current-year period.
Real estate segment
As of September 30, 2010, all of SunCors operations have been reclassified to discontinued
operations. The real estate segment net income attributable to common shareholders was $20 million
higher for the three months ended September 30, 2010 compared with the prior-year period primarily
because of:
|
|
|
A decrease in real estate impairment charges of $38 million; |
|
|
|
A decrease in income from other real estate operations of $5 million primarily due
to a gain from debt restructuring of approximately $14 million recorded in the
current-year period (see Note 2) compared with income from parcel sales in the
prior-year period; and |
|
|
|
An increase in income taxes of $13 million primarily because of higher pretax income
in the current-year period. |
Operating Results Nine-month period ended September 30, 2010 compared with nine-month period
ended September 30, 2009
Our consolidated net income attributable to common shareholders for the nine months ended
September 30, 2010 was $343 million, compared with $98 million for the comparable prior-year
period. The improved results were primarily due to lower real estate impairment charges recorded
in 2010 compared with the prior-year period by SunCor.
In addition, regulated electricity segment net income increased approximately $63 million from
the prior-year period due to increased revenues related to APS retail rate increases and other
factors, partially offset by milder weather in the second quarter of 2010. Our consolidated
results for 2010 also include a gain of $25 million after income taxes related to the sale of
APSES district cooling business.
61
The following table presents net income (loss) attributable to common shareholders by business
segment compared with the prior-year period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Net Change |
|
|
|
(dollars in millions) |
|
Regulated Electricity Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues less fuel and
purchased power expenses |
|
$ |
1,706 |
|
|
$ |
1,578 |
|
|
$ |
128 |
|
Operations and maintenance |
|
|
(639 |
) |
|
|
(603 |
) |
|
|
(36 |
) |
Depreciation and amortization |
|
|
(308 |
) |
|
|
(304 |
) |
|
|
(4 |
) |
Taxes other than income taxes |
|
|
(101 |
) |
|
|
(101 |
) |
|
|
|
|
Other income (expenses), net |
|
|
(5 |
) |
|
|
1 |
|
|
|
(6 |
) |
Interest charges, net of allowance for
funds used during construction |
|
|
(152 |
) |
|
|
(156 |
) |
|
|
4 |
|
Income taxes |
|
|
(166 |
) |
|
|
(143 |
) |
|
|
(23 |
) |
Noncontrolling interests (Note 7) |
|
|
(15 |
) |
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated electricity segment net
income |
|
|
320 |
|
|
|
257 |
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other (a) |
|
|
3 |
|
|
|
(8 |
) |
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations
Attributable to Common Shareholders |
|
|
323 |
|
|
|
249 |
|
|
|
74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate impairment charges (Note 16) |
|
|
(17 |
) |
|
|
(246 |
) |
|
|
229 |
|
Other real estate operations |
|
|
7 |
|
|
|
(6 |
) |
|
|
13 |
|
Income taxes |
|
|
4 |
|
|
|
99 |
|
|
|
(95 |
) |
|
|
|
|
|
|
|
|
|
|
Real estate segment net loss |
|
|
(6 |
) |
|
|
(153 |
) |
|
|
147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other (a) |
|
|
26 |
|
|
|
2 |
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Discontinued
Operations Attributable to Common
Shareholders |
|
|
20 |
|
|
|
(151 |
) |
|
|
171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Attributable to Common
Shareholders |
|
$ |
343 |
|
|
$ |
98 |
|
|
$ |
245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes activities related to APSES and El Dorado. None of the activities of either of these
companies constitutes a reportable segment. Income from discontinued operations for the period
ended September 30, 2010 includes a gain of $25 million after income taxes related to the sale of
APSES district cooling business. |
62
Regulated electricity segment
This section includes a discussion of major variances in income and expense amounts for the
regulated electricity segment.
Operating revenues less fuel and purchased power expenses Regulated electricity segment
operating revenues less fuel and purchased power expenses were $128 million higher for the nine
months ended September 30, 2010 compared with the prior-year period. The following table describes
the major components of this change:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) |
|
|
|
|
|
|
|
Fuel and |
|
|
|
|
|
|
|
|
|
|
purchased |
|
|
|
|
|
|
Operating |
|
|
power |
|
|
|
|
|
|
revenues |
|
|
expenses |
|
|
Net change |
|
|
|
(dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail regulatory settlement effective
January 1, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
Retail base rate increases, net of deferrals |
|
$ |
217 |
|
|
$ |
100 |
|
|
$ |
117 |
|
Line extension revenues (Note 3) |
|
|
14 |
|
|
|
|
|
|
|
14 |
|
Transmission rate increases |
|
|
8 |
|
|
|
|
|
|
|
8 |
|
Higher demand-side management and renewable
energy surcharges (substantially offset in
operations and maintenance expense) |
|
|
26 |
|
|
|
|
|
|
|
26 |
|
Lower retail revenues related to recovery of PSA
deferrals, substantially offset by lower
amortization of fuel and purchased power
expense |
|
|
(211 |
) |
|
|
(216 |
) |
|
|
5 |
|
Higher fuel and purchased power costs including
the effects of higher off-system sales, net of
related PSA deferrals |
|
|
24 |
|
|
|
29 |
|
|
|
(5 |
) |
Lower retail sales primarily due to lower usage
per customer, including the effects of the
Companys energy efficiency programs, but
excluding the effects of weather |
|
|
(16 |
) |
|
|
(7 |
) |
|
|
(9 |
) |
Effects of weather on retail sales, primarily due
to milder weather in the second quarter 2010 |
|
|
(27 |
) |
|
|
(8 |
) |
|
|
(19 |
) |
Miscellaneous items, net |
|
|
(7 |
) |
|
|
2 |
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
28 |
|
|
$ |
(100 |
) |
|
$ |
128 |
|
|
|
|
|
|
|
|
|
|
|
Operations and maintenance Operations and maintenance expenses increased $36 million for the
nine months ended September 30, 2010 compared with the prior-year period primarily because of:
|
|
|
An increase of $20 million related to demand-side management and renewable energy
programs, which are primarily offset in operating revenues; |
|
|
|
An increase of $7 million related to employee benefits costs; and |
|
|
|
|
An increase of $5 million related to customer service and other costs. |
63
Income taxes Income taxes were $23 million higher for the nine months ended September 30,
2010 compared with the prior-year period primarily because of higher pretax income in the
current-year period, partially offset by $11 million related to a reduction in the Companys 2010
effective income tax rate. See Note 6.
All other
All other earnings from continuing operations were $11 million higher for the nine months
ended September 30, 2010 compared to the prior-year period primarily because of improved margins
from APSES products and services business and investment losses at El Dorado in 2009.
Real estate segment
During the first quarter of 2009, SunCors Board of Directors authorized a series of strategic
transactions to dispose of SunCors assets. This decision resulted in impairment charges of
approximately $246 million pretax in the first nine months of 2009. As of September 30, 2010, all
of SunCors operations have been reclassified to discontinued operations (see Note 14). The real
estate segment net loss attributable to common shareholders was $147 million lower for the nine
months ended September 30, 2010 compared with the prior-year period primarily because of:
|
|
|
A decrease in real estate impairment charges of $229 million; |
|
|
|
An increase in income from other real estate operations of $13 million primarily due
to a gain from debt restructuring of approximately $14 million recorded in the
current-year period (see Note 2); and |
|
|
|
A decrease in income tax benefits of $95 million primarily because of a lower net
loss for the 2010 period. |
All other
All other earnings from discontinued operations were $24 million higher for the nine months
ended September 30, 2010 compared to the prior-year period primarily because of a gain of $25
million after income taxes related to the sale of APSES district cooling business in 2010.
64
PINNACLE WEST CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
The following table presents net cash provided by (used for) operating, investing and
financing activities for the nine months ended September 30, 2010 and 2009 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
Net cash flow provided by operating activities |
|
$ |
570 |
|
|
$ |
771 |
|
Net cash flow used for investing activities |
|
|
(377 |
) |
|
|
(537 |
) |
Net cash flow used for financing activities |
|
|
(142 |
) |
|
|
(239 |
) |
The decrease of approximately $201 million in net cash provided by operating activities is
primarily due to changes in collateral and margin cash provided as a result of changes in commodity
prices and a voluntary pension contribution in 2010 of approximately $100 million; partially offset
by other changes in working capital.
The decrease of approximately $160 million in net cash used for investing activities is
primarily due to approximately $100 million of proceeds from the sale of the district cooling
business in June 2010 and the proceeds from the sale of commercial real estate investments in 2010
of approximately $70 million.
The decrease of approximately $97 million in net cash used for financing activities is
primarily due to lower levels of repayment of short-term borrowings in 2010 offset by lower net
sources of equity and long-term debt financing including the proceeds of approximately $253 million from the issuance of
equity in April 2010 and APS issuance of $500 million of unsecured senior notes in
2009.
Liquidity
Capital Expenditure Requirements
The following table summarizes the actual capital expenditures for the nine months ended
September 30, 2009 and 2010 and the estimated capital expenditures for the next three years:
65
CAPITAL EXPENDITURES
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Estimated for the Year Ended |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2010 |
|
|
2010 (a) |
|
|
2011 |
|
|
2012 |
|
APS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Generation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nuclear Fuel |
|
$ |
64 |
|
|
$ |
63 |
|
|
$ |
63 |
|
|
$ |
68 |
|
|
$ |
65 |
|
Renewables |
|
|
|
|
|
|
1 |
|
|
|
14 |
|
|
|
225 |
|
|
|
184 |
|
Environmental |
|
|
30 |
|
|
|
2 |
|
|
|
20 |
|
|
|
80 |
|
|
|
220 |
|
Other Generation |
|
|
88 |
|
|
|
126 |
|
|
|
167 |
|
|
|
147 |
|
|
|
134 |
|
Distribution |
|
|
172 |
|
|
|
183 |
|
|
|
271 |
|
|
|
333 |
|
|
|
328 |
|
Transmission |
|
|
159 |
|
|
|
83 |
|
|
|
134 |
|
|
|
160 |
|
|
|
192 |
|
Other (b) |
|
|
30 |
|
|
|
43 |
|
|
|
55 |
|
|
|
60 |
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total APS |
|
|
543 |
|
|
|
501 |
|
|
|
724 |
|
|
|
1,073 |
|
|
|
1,172 |
|
Other |
|
|
8 |
|
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
551 |
|
|
$ |
505 |
|
|
$ |
728 |
|
|
$ |
1,073 |
|
|
$ |
1,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Estimated 2010 capital expenditures are lower than the estimate in the 2009
Form 10-K, primarily due to the timing of renewable expenditures. |
|
(b) |
|
Primarily information systems and facilities projects. |
Generation capital expenditures are comprised of various improvements to APS existing fossil
and nuclear plants. Examples of the types of projects included in this category are additions,
upgrades and capital replacements of various power plant equipment, such as turbines, boilers and
environmental equipment. We are also monitoring the status of certain
environmental matters, which, depending on their final outcome, could require modification to our environmental
expenditures. (See Environmental Matters Regional Haze Rules and Environmental Matters Coal
Combustion Waste in Part II, Item 5 below and Environmental Matters Mercury and Other Hazardous
Air Pollutants in Part II, Item 5 of the Pinnacle West/APS Quarterly Report on Form 10-Q for the
quarter ended June 30, 2010 (2nd Quarter 10-Q)).
Distribution and transmission capital expenditures are comprised of infrastructure additions
and upgrades, capital replacements, new customer construction, related information systems and
facility costs. Examples of the types of projects included in the forecast include power lines,
substations, line extensions to new residential and commercial developments and upgrades to
customer information systems.
Capital expenditures will be funded with internally generated cash and external financings,
which may include issuances of long-term debt and Pinnacle West common stock.
Pinnacle West (Parent Company)
Our primary cash needs are for dividends to our shareholders and principal and interest
payments on our short-term and long-term debt. The level of our common stock dividends and future
dividend growth will be dependent on a number of factors including, but not limited to, payout
ratio trends, free cash flow and financial market conditions.
66
On October 20, 2010, the Pinnacle West Board of Directors declared a quarterly dividend of
$0.525 per share of common stock, payable on December 1, 2010, to shareholders of record on
November 1, 2010.
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
September 30, 2010, APS common equity ratio, as defined, was 53%. Its total common 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 total capitalization remains the same.
Pinnacle West and APS maintain committed revolving credit facilities in order to enhance
liquidity and provide credit support for their commercial paper programs. During the first quarter
of 2010, Pinnacle West and APS refinanced existing credit facilities that would have otherwise
matured in December 2010.
On February 12, 2010, Pinnacle West refinanced its $283 million revolving credit facility that
would have matured in December 2010, and decreased the size of the facility to $200 million. The
new facility matures in February 2013. 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 support and for the issuance of letters of credit. Interest rates are based on
Pinnacle Wests senior unsecured debt credit ratings. As a result of the downsized credit
facility, the Company also reduced the size of its commercial paper program to $200 million from
$250 million.
At September 30, 2010, the $200 million credit facility was available to support the issuance
of up to $200 million in commercial paper or for bank borrowings, including issuances of letters of
credit up to $100 million. At September 30, 2010, Pinnacle West had no outstanding borrowings
under its revolving credit facility, no commercial paper borrowings and no outstanding letters of
credit.
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. Pinnacle West intends to issue equity to provide most of
the funds for the equity infusions into APS required by the retail rate case settlement. Such
equity issuances may occur at any time in the period through 2014, in Pinnacle Wests discretion.
See Note 3.
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.
Pinnacle West expects to receive approximately $132 million of cash tax benefits related to
SunCors strategic asset sales (see Note 16), which will not be fully realized until all of the
asset sales are completed. Approximately $7 million of these benefits were recorded in the nine
months ended September 30, 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.
67
The $88 million income tax receivables on the Condensed 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.
Pinnacle West sponsors a qualified defined benefit and account balance pension plan and a
non-qualified supplemental excess benefit retirement plan for the employees of Pinnacle West and
our subsidiaries. IRS regulations require us to contribute a minimum amount to the qualified plan.
We contribute at least the minimum amount required under IRS regulations, but no more than the
maximum tax-deductible amount. The minimum required funding takes into consideration the value of
plan assets and our pension obligation. The assets in the plan are comprised of fixed-income,
equity and short-term investments. Future year contribution amounts are dependent on plan asset
performance and plan actuarial assumptions. We made no contribution to our pension plan in 2009.
We currently estimate that our annual pension contributions could average around $100 million for
several years, assuming the discount rate remains at approximately current levels. During the
first quarter of 2010, we made a voluntary contribution of approximately $100 million to our
pension plan. The contribution to our other postretirement benefit plans in 2010 is estimated to
be approximately $15 million. APS and other subsidiaries fund their share of the contributions.
APS share is approximately 98% of both plans.
APS
APS capital requirements consist primarily of capital expenditures and maturities of
long-term debt. APS funds its capital requirements with cash from operations and, to the extent
necessary, equity infusions from Pinnacle West and external financings. See Pinnacle West (Parent
Company) above for a discussion of the common equity ratio that APS must maintain in order to pay
dividends to Pinnacle West.
On February 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. The new credit facility
terminates in February 2013. APS has the option to 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 support and
for the issuance of letters of credit. Interest rates are based on APS senior unsecured debt
credit ratings.
At September 30, 2010, APS had two credit facilities totaling $989 million, including the $500
million credit facility described above and a $489 million facility that terminates in September
2011. These facilities are available either to support the issuance of up to $250 million in
commercial paper or for bank borrowings, including issuances of letters of credit up to $739
million. At September 30, 2010, APS had no borrowings outstanding under any of its credit
facilities and no outstanding commercial paper. A $20 million letter of credit was issued under
APS $489 million credit facility in the second quarter of 2010.
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.
68
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 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
with an 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 Lessor Trusts (see Note 7) and, as a result of consolidation of
these VIEs, APS has reported the Lessor Trusts long-term debt on its Condensed Consolidated
Balance Sheets. Interest rates on these debt instruments are 8% and are fixed for the remaining
life of the debt. As of September 30, 2010 approximately $30 million was classified as current
maturities of long-term debt and $113 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 7 for additional discussion of the VIEs.
Other Financing Matters See Note 3 for information regarding the PSA approved by the ACC.
Although APS defers actual retail fuel and purchased power costs on a current basis, APS recovery
of the deferrals from its ratepayers is subject to annual and, if necessary, periodic PSA
adjustments.
See Note 3 for information regarding the retail rate case settlement, which includes ACC
authorization and requires equity infusions into APS of at least $700 million by December 31, 2014.
See Note 8 for information related to the change in our margin accounts.
Other Subsidiaries
SunCor In July 2010, SunCor sold land parcels, commercial assets and a master planned
home-building community for approximately $70 million, which approximated the carrying value of
these assets, resulting in a net gain of zero. In connection with this sale, SunCor negotiated a
restructuring of certain of its credit facilities, including its principal loan facility. The debt
restructuring resulted in an after-tax gain of approximately $9 million, which was recognized in
the third quarter of 2010.
At September 30, 2010, SunCor had approximately $22 million of assets on its balance sheet
classified as assets held for sale. These assets consist of $18 million of consolidated VIEs (see
Note 7), master planned home-building communities and golf courses. Because it is expected that
SunCor will dispose of these assets within the next 12 months, they are classified as assets held
for sale on the balance sheet.
69
At September 30, 2010, SunCor had $6 million debt outstanding, a portion of which is in
default. Neither Pinnacle West nor any of its other subsidiaries has guaranteed any SunCor
indebtedness. A SunCor debt default would not result in a cross-default of any of the debt of
Pinnacle West or any of its other subsidiaries. While there can be no assurances as to the
ultimate outcome of this matter, Pinnacle West does not believe that SunCors inability to repay
remaining debt outstanding would have a material adverse impact on Pinnacle Wests cash flows or
liquidity.
As of September 30, 2010, SunCor could not transfer any cash dividends to Pinnacle West. This
restriction does not affect Pinnacle Wests ability to meet its ongoing capital requirements.
El Dorado El Dorado expects minimal capital requirements over the next three years and
intends to focus on prudently realizing the value of its existing investments.
APSES APSES expects minimal capital expenditures over the next three years.
Debt Provisions
Pinnacle Wests and APS debt covenants related to their respective bank financing
arrangements include maximum debt to capitalization ratios. Pinnacle West and APS comply with
these covenants and each anticipates it will continue to meet these and other significant covenant
requirements. For both Pinnacle West and APS, these covenants require that the ratio of
consolidated debt to total consolidated capitalization not exceed 65%. At September 30, 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 Wests nor APS financing agreements contain rating triggers that would
result in an acceleration of the required interest and principal payments in the event of a rating
downgrade. However, our bank financial agreements contain a pricing grid in which the interest
costs we pay for borrowings thereafter are determined by our current credit ratings.
All of Pinnacle Wests loan agreements contain cross-default provisions that would result in
defaults and the potential acceleration of payment under these loan agreements if Pinnacle West or
APS were to default under certain other material agreements. All of APS bank agreements contain
cross-default provisions that would result in defaults and the potential acceleration of payment
under these bank agreements if APS were to default under certain other material agreements.
Pinnacle West and APS do not have a material adverse change restriction for credit facility
borrowings.
See Note 2 for further discussions of liquidity matters.
Credit Ratings
The ratings of securities of Pinnacle
West and APS as of October 25, 2010 are shown below.
The ratings reflect the respective views of the rating agencies, from which an explanation of the
significance of their ratings may be obtained. There is no assurance that these ratings will
continue for any given period of time. The ratings may be revised or withdrawn entirely by the
rating agencies if, in their respective judgments, circumstances so warrant. Any downward revision
or withdrawal may adversely affect the market price of Pinnacle Wests or APS securities and serve
to increase the cost of and limit access to capital. It may also require substantial additional
cash or other collateral requirements related to certain derivative instruments, insurance
policies, natural gas transportation, fuel supply, and
other energy-related contracts. At this time, we believe we have sufficient liquidity to cover a
downward revision to our credit ratings.
70
|
|
|
|
|
|
|
|
|
Moodys |
|
Standard & Poors |
|
Fitch |
Pinnacle West |
|
|
|
|
|
|
Senior unsecured (a) |
|
Baa3 (P) |
|
BB+ (prelim) |
|
N/A |
Commercial paper |
|
P-3 |
|
A-3 |
|
F3 |
Outlook |
|
Stable |
|
Positive |
|
Stable |
|
|
|
|
|
|
|
APS |
|
|
|
|
|
|
Senior unsecured |
|
Baa2 |
|
BBB- |
|
BBB |
Secured lease
obligation bonds |
|
Baa2 |
|
BBB- |
|
BBB |
Commercial paper |
|
P-2 |
|
A-3 |
|
F3 |
Outlook |
|
Stable |
|
Positive |
|
Stable |
|
|
|
(a) |
|
Pinnacle West has a shelf registration under the Securities and Exchange
Commission (SEC) Rule 415. Pinnacle West currently has no outstanding, rated senior
unsecured securities. However, Moodys assigned a provisional (P) rating and Standard
& Poors assigned a preliminary (prelim) rating to the senior unsecured securities that
can be issued under such shelf registration. |
Off-Balance Sheet Arrangements
On January 1, 2010 we adopted amended accounting guidance relating to VIEs and, as a result,
we have consolidated certain entities which were previously not consolidated. The consolidation of
these entities has impacted our consolidated financial statement results. See Note 7 for a
discussion of these impacts.
Guarantees and Letters of Credit
We have issued parental guarantees and obtained surety bonds on behalf of our subsidiaries
including credit support instruments enabling APSES to offer energy-related products and surety
bonds at APS, principally related to self-insured workers compensation. Non-performance or
non-payment under the underlying contract by our subsidiaries would result in a payment liability
on our part under the guarantee or surety bond. No liability is currently recorded on the
Condensed Consolidated Balance Sheets related to Pinnacle Wests current outstanding guarantees and
surety bonds on behalf of our subsidiaries. At September 30, 2010, we had no outstanding claims
for payment under any of these guarantees. Our guarantees and surety bonds have no recourse or
collateral provisions to allow us to recover amounts paid under the guarantees or surety bonds from
our subsidiaries. We generally agree to indemnification provisions related to liabilities arising
from or related to certain of our agreements, with limited exceptions depending on the particular
agreement. See Note 12 for additional information regarding guarantees and letters of credit.
71
Contractual Obligations
Our future contractual
obligations for fuel and purchased
power contracts and purchase obligations have increased from approximately $8.8 billion at December 31, 2009 to
$10.3 billion at September 30, 2010 as follows (dollars in billions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2011-2012 |
|
|
2013-2014 |
|
|
Thereafter |
|
|
Total |
|
$ |
0.7 |
|
$ |
1.0 |
|
|
$ |
1.0 |
|
|
$ |
7.6 |
|
|
$ |
10.3 |
|
These amounts have increased since the 2009 Form 10-K primarily due to increased
commitments for fuel and purchased power and contracts associated with meeting our renewable energy
requirements.
See Note 2 for a list of payments due on total long-term debt and capitalized lease
requirements.
CRITICAL ACCOUNTING POLICIES
In preparing the financial statements in accordance with GAAP, management must often make
estimates and assumptions that affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosures at the date of the financial statements and during the reporting
period. Some of those judgments can be subjective and complex, and actual results could differ
from those estimates. There have been no changes to our critical accounting policies since our
2009 Form 10-K. See Critical Accounting Policies in Item 7 of the 2009 Form 10-K for further
details about our critical accounting policies.
OTHER ACCOUNTING MATTERS
On January 1, 2010 we adopted amended accounting guidance relating to VIEs, and as a
result we have consolidated certain entities which were previously not consolidated. The
consolidation of these entities has impacted our consolidated financial statement results. See
Notes 1 and 7 for a discussion of these impacts.
MARKET AND CREDIT RISKS
Market Risks
Our operations include managing market risks related to changes in interest rates, commodity
prices and investments held by our nuclear decommissioning trust fund.
Interest Rate and Equity Risk
We have exposure to changing interest rates. Changing interest rates will affect interest
paid on variable-rate debt and the market value of fixed income securities held by our nuclear
decommissioning trust fund (see Note 15). The nuclear decommissioning trust fund also has risks
associated with the changing market value of its investments. Nuclear decommissioning costs are
recovered in regulated electricity prices.
Commodity Price Risk
We are exposed to the impact of market fluctuations in the commodity price and
transportation costs of electricity and natural gas. Our risk management committee, consisting of
officers and key management personnel, oversees company-wide energy risk management activities to
ensure compliance with our stated energy risk management policies. We manage risks associated with
these market fluctuations by utilizing various commodity instruments that qualify as derivatives,
including exchange-traded futures and options and over-the-counter forwards, options and swaps. As
part of our risk management program, we use such instruments to hedge purchases and sales of
electricity and fuels.
The changes in market value of such contracts have a high correlation to price changes in the
hedged commodities.
72
The following table shows the net pretax changes in mark-to-market of our derivative positions
for the nine months ended September 30, 2010 and 2009 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
Mark-to-market of net positions at beginning of
period |
|
$ |
(169 |
) |
|
$ |
(282 |
) |
Recognized in earnings: |
|
|
|
|
|
|
|
|
Change in mark-to-market losses for future
period deliveries |
|
|
(7 |
) |
|
|
(3 |
) |
Mark-to-market losses realized including
ineffectiveness during the period |
|
|
3 |
|
|
|
9 |
|
Decrease (increase) in regulatory asset |
|
|
(52 |
) |
|
|
59 |
|
Recognized in other comprehensive income (OCI): |
|
|
|
|
|
|
|
|
Change in mark-to-market losses for future
period deliveries (a) |
|
|
(168 |
) |
|
|
(128 |
) |
Mark-to-market losses realized during the
period |
|
|
102 |
|
|
|
155 |
|
Change in valuation techniques |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark-to-market of net positions at end of period |
|
$ |
(291 |
) |
|
$ |
(190 |
) |
|
|
|
|
|
|
|
|
|
|
(a) |
|
The changes in mark-to-market recorded in OCI are due primarily to changes in
forward natural gas prices. |
The table below shows the fair value of maturities of our derivative contracts (dollars in
millions and excluding margin and collateral) at September 30, 2010 by maturities and by the type
of valuation that is performed to calculate the fair values. See Note 1, Derivative Accounting
and Fair Value Measurements, in Item 8 of our 2009 Form 10-K and Note 15 for more discussion of
our valuation methods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years |
|
|
fair |
|
Source of Fair Value |
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
thereafter |
|
|
value |
|
Prices actively quoted |
|
$ |
(1 |
) |
|
$ |
(1 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(2 |
) |
Prices provided by
other external sources |
|
|
(33 |
) |
|
|
(144 |
) |
|
|
(48 |
) |
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
(240 |
) |
Prices based on models
and other valuation
methods |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(4 |
) |
|
|
(10 |
) |
|
|
(8 |
) |
|
|
(21 |
) |
|
|
(49 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total by maturity |
|
$ |
(37 |
) |
|
$ |
(148 |
) |
|
$ |
(52 |
) |
|
$ |
(25 |
) |
|
$ |
(8 |
) |
|
$ |
(21 |
) |
|
$ |
(291 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
The table below shows the impact that hypothetical price movements of 10% would have on the
market value of our risk management assets and liabilities included on Pinnacle Wests Condensed
Consolidated Balance Sheets at September 30, 2010 and December 31, 2009 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
|
|
|
Gain (Loss) |
|
|
Gain (Loss) |
|
|
|
Price Up 10% |
|
|
Price Down 10% |
|
|
Price Up 10% |
|
|
Price Down 10% |
|
Mark-to-market changes
reported in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electricity |
|
$ |
1 |
|
|
$ |
(1 |
) |
|
$ |
1 |
|
|
$ |
(1 |
) |
Natural gas |
|
|
1 |
|
|
|
(1 |
) |
|
|
1 |
|
|
|
(1 |
) |
Regulatory asset,
liability or OCI (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electricity |
|
|
15 |
|
|
|
(15 |
) |
|
|
21 |
|
|
|
(21 |
) |
Natural gas |
|
|
38 |
|
|
|
(38 |
) |
|
|
59 |
|
|
|
(59 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
55 |
|
|
$ |
(55 |
) |
|
$ |
82 |
|
|
$ |
(82 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
These contracts are hedges of our forecasted purchases of natural gas and
electricity. The impact of these hypothetical price movements would substantially
offset the impact that these same price movements would have on the physical exposures
being hedged. To the extent the amounts are eligible for inclusion in the PSA, the
amounts are recorded as either a regulatory asset or liability. |
Credit Risk
We are exposed to losses in the event of non-performance or non-payment by counterparties.
See Note 15 Fair Value Measurements for a discussion of our credit valuation adjustment
policy. See Note 8 for a further discussion of credit risk.
74
ARIZONA PUBLIC SERVICE COMPANY RESULTS OF OPERATIONS
Operating Results Three-month period ended September 30, 2010 compared with three-month period
ended September 30, 2009
APS consolidated net income attributable to common shareholder for the three months ended
September 30, 2010 was $227 million, compared with net income of $197 million for the comparable
prior-year period. As discussed in greater detail below, net income increased approximately $30 million from the prior-year period primarily due
to increased revenues related to APS retail rate increases, partially offset by increased operations and maintenance expenses.
The following table presents net income attributable to common shareholder compared with the
prior-year period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Net Change |
|
|
|
(dollars in millions) |
|
Operating revenues less fuel and
purchased
power expenses |
|
$ |
762 |
|
|
$ |
702 |
|
|
$ |
60 |
|
Operations and maintenance |
|
|
(217 |
) |
|
|
(193 |
) |
|
|
(24 |
) |
Depreciation and amortization |
|
|
(104 |
) |
|
|
(103 |
) |
|
|
(1 |
) |
Taxes other than income taxes |
|
|
(37 |
) |
|
|
(34 |
) |
|
|
(3 |
) |
Other income (expenses), net |
|
|
(1 |
) |
|
|
1 |
|
|
|
(2 |
) |
Interest charges, net of allowance for
funds used during construction |
|
|
(45 |
) |
|
|
(53 |
) |
|
|
8 |
|
Income taxes |
|
|
(126 |
) |
|
|
(118 |
) |
|
|
(8 |
) |
Noncontrolling interests (Note 7) |
|
|
(5 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Attributable to Common
Shareholder |
|
$ |
227 |
|
|
$ |
197 |
|
|
$ |
30 |
|
|
|
|
|
|
|
|
|
|
|
75
Operating revenues less fuel and purchased power expenses
Electric operating revenues less fuel and purchased power expenses were $60 million higher for
the three months ended September 30, 2010 compared with the prior-year period. The following table
describes the major components of this change:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) |
|
|
|
|
|
|
|
Fuel and |
|
|
|
|
|
|
|
|
|
|
purchased |
|
|
|
|
|
|
Operating |
|
|
power |
|
|
|
|
|
|
revenues |
|
|
expenses |
|
|
Net change |
|
|
|
(dollars in millions) |
|
|
|
|
|
Retail regulatory settlement effective
January 1, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
Retail base rate increases, net of deferrals |
|
$ |
98 |
|
|
$ |
43 |
|
|
$ |
55 |
|
Line extension revenues (Note 3) |
|
|
6 |
|
|
|
|
|
|
|
6 |
|
Transmission rate decreases |
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
Higher demand-side management and renewable
energy surcharges (substantially offset in
operations and maintenance expense) |
|
|
11 |
|
|
|
|
|
|
|
11 |
|
Effects of weather on retail sales |
|
|
6 |
|
|
|
2 |
|
|
|
4 |
|
Lower retail revenues related to recovery of PSA
deferrals, substantially offset by lower
amortization of fuel and purchased power
expense |
|
|
(90 |
) |
|
|
(92 |
) |
|
|
2 |
|
Higher fuel and purchased power costs, including
the effects of higher off-system sales, net of
related PSA deferrals |
|
|
22 |
|
|
|
24 |
|
|
|
(2 |
) |
Lower retail sales primarily due to lower usage
per customer, including the effects of the
Companys energy efficiency programs, but
excluding the effects of weather |
|
|
(15 |
) |
|
|
(5 |
) |
|
|
(10 |
) |
Miscellaneous items, net |
|
|
(4 |
) |
|
|
1 |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
33 |
|
|
$ |
(27 |
) |
|
$ |
60 |
|
|
|
|
|
|
|
|
|
|
|
Operations and maintenance Operations and maintenance expenses increased $24 million for the
three months ended September 30, 2010 compared with the prior-year period primarily because of:
|
|
|
An increase of $8 million related to demand-side management and renewable energy
programs, which are primarily offset in operating revenues; |
|
|
|
An increase of $6 million related to employee benefit costs; and |
|
|
|
An increase of $4 million in generation costs, including the acceleration of
fossil-plant planned maintenance. |
Interest charges, net of allowance for funds used during construction Interest charges, net
of allowance for funds used during construction, decreased $8 million for the three months ended
September 30, 2010 compared with the prior-year period primarily because of higher rates in the
current year for the allowance for equity and borrowed funds used during construction.
Income taxes Income taxes were $8 million higher for the three months ended September 30,
2010 compared with the prior-year period primarily because of higher pretax income in the
current-year period.
76
Operating Results Nine-month period ended September 30, 2010 compared with nine-month period
ended September 30, 2009
APS net income attributable to common shareholder for the nine months ended September 30,
2010 was $328 million, compared with $260 million for the comparable prior-year period. Net income
increased approximately $68 million from the prior-year period due to increased revenues related to
APS retail rate increases and other factors, partially offset by milder weather in the second
quarter of 2010.
The following table presents net income attributable to common shareholder compared with the
prior-year period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Net Change |
|
|
|
(dollars in millions) |
|
Operating revenues less fuel and
purchased
power expenses |
|
$ |
1,706 |
|
|
$ |
1,578 |
|
|
$ |
128 |
|
Operations and maintenance |
|
|
(632 |
) |
|
|
(596 |
) |
|
|
(36 |
) |
Depreciation and amortization |
|
|
(308 |
) |
|
|
(304 |
) |
|
|
(4 |
) |
Taxes other than income taxes |
|
|
(100 |
) |
|
|
(100 |
) |
|
|
|
|
Other income (expenses), net |
|
|
(7 |
) |
|
|
(3 |
) |
|
|
(4 |
) |
Interest charges, net of allowance for
funds used during construction |
|
|
(143 |
) |
|
|
(147 |
) |
|
|
4 |
|
Income taxes |
|
|
(173 |
) |
|
|
(154 |
) |
|
|
(19 |
) |
Noncontrolling interests (Note 7) |
|
|
(15 |
) |
|
|
(14 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Attributable to Common
Shareholder |
|
$ |
328 |
|
|
$ |
260 |
|
|
$ |
68 |
|
|
|
|
|
|
|
|
|
|
|
77
Operating revenues less fuel and purchased power expenses
Electric operating revenues less fuel and purchased power expenses were $128 million higher
for the nine months ended September 30, 2010 compared with the prior-year period. The following
table describes the major components of this change:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) |
|
|
|
|
|
|
|
Fuel and |
|
|
|
|
|
|
|
|
|
|
purchased |
|
|
|
|
|
|
Operating |
|
|
power |
|
|
|
|
|
|
revenues |
|
|
expenses |
|
|
Net change |
|
|
|
(dollars in millions) |
|
|
|
Retail regulatory settlement effective
January 1, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
Retail base rate increases, net of deferrals |
|
$ |
217 |
|
|
$ |
100 |
|
|
$ |
117 |
|
Line extension revenues (Note 3) |
|
|
14 |
|
|
|
|
|
|
|
14 |
|
Transmission rate increases |
|
|
8 |
|
|
|
|
|
|
|
8 |
|
Higher demand-side management and renewable
energy surcharges (substantially offset in
operations and maintenance expense) |
|
|
26 |
|
|
|
|
|
|
|
26 |
|
Lower retail revenues related to recovery of PSA
deferrals, substantially offset by lower
amortization of fuel and purchased power
expense |
|
|
(211 |
) |
|
|
(216 |
) |
|
|
5 |
|
Higher fuel and purchased power costs including
the effects of higher off-system sales, net of
related PSA deferrals |
|
|
24 |
|
|
|
29 |
|
|
|
(5 |
) |
Lower retail sales primarily due to lower usage
per customer, including the effects of the
Companys energy efficiency programs, but
excluding the effects of weather |
|
|
(16 |
) |
|
|
(7 |
) |
|
|
(9 |
) |
Effects of weather on retail sales, primarily due
to milder weather in the second quarter 2010 |
|
|
(27 |
) |
|
|
(8 |
) |
|
|
(19 |
) |
Miscellaneous items, net |
|
|
(7 |
) |
|
|
2 |
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
28 |
|
|
$ |
(100 |
) |
|
$ |
128 |
|
|
|
|
|
|
|
|
|
|
|
Operations and maintenance Operations and maintenance expenses increased $36 million for the
nine months ended September 30, 2010 compared with the prior-year period primarily because of:
|
|
|
An increase of $20 million related to demand-side management and renewable energy
programs, which are primarily offset in operating revenues; |
|
|
|
An increase of $7 million related to employee benefit costs; and |
|
|
|
An increase of $5 million related to customer service and other costs. |
78
Income taxes Income taxes were $19 million higher for the nine months ended September 30,
2010 compared with the prior-year period primarily because of higher pretax income in the
current-year period, partially offset by $15 million related to a reduction in APS 2010 effective
income tax rate. See Note 6.
ARIZONA PUBLIC SERVICE COMPANY LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
The following table presents net cash provided by (used for) operating, investing and
financing activities for the nine months ended September 30, 2010 and 2009 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
Net cash flow provided by operating activities |
|
$ |
506 |
|
|
$ |
713 |
|
Net cash flow used for investing activities |
|
|
(548 |
) |
|
|
(560 |
) |
Net cash flow provided by (used for)
financing activities |
|
|
84 |
|
|
|
(139 |
) |
The decrease of approximately $207 million in net cash provided by operating activities is
primarily due to increased collateral and margin cash provided as a result of changes in commodity
prices, the payment of income taxes in 2010, and a voluntary pension contribution in 2010 of
approximately $100 million. These were partially offset by other changes in working capital.
The decrease of approximately $12 million in net cash used for investing activities is
primarily due to higher contributions in aid of construction and other cash flows.
The decrease of approximately $223 million in net cash used for financing activities is
primarily due to the repayment of short-term borrowings in 2009 offset by lower net sources of
equity and long-term debt financing including the proceeds of approximately $253 million from the infusion of equity from
Pinnacle West in 2010 and by APS issuance of $500 million of unsecured senior notes
in 2009.
Contractual Obligations
APS future contractual obligations for fuel and purchased
power contracts and purchase obligations have increased from approximately $8.8 billion at December 31, 2009 to $10.3
billion at September 30, 2010 as follows (dollars in billions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2011-2012 |
|
|
2013-2014 |
|
|
Thereafter |
|
|
Total |
|
$ |
0.7 |
|
$ |
1.0 |
|
|
$ |
1.0 |
|
|
$ |
7.6 |
|
|
$ |
10.3 |
|
These amounts have increased since the 2009 Form 10-K primarily due to increased commitments
for fuel and purchased power and contracts associated with meeting our renewable energy
requirements.
See Note 2 for a list of payments due on total long-term debt and capitalized lease
requirements.
79
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Key Financial Drivers and Market and Credit Risks in Item 2 above for a discussion of
quantitative and qualitative disclosures about market risks.
Item 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
The term disclosure controls and procedures means controls and other procedures of a company
that are designed to ensure that information required to be disclosed by a company in the reports
that it files or submits under the Securities Exchange Act of 1934, as amended (the Exchange Act)
(15 U.S.C. 78a et seq.), is recorded, processed, summarized and reported, within the time periods
specified in the SECs rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed by
a company in the reports that it files or submits under the Exchange Act is accumulated and
communicated to a companys management, including its principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow timely decisions
regarding required disclosure.
Pinnacle Wests management, with the participation of Pinnacle Wests Chief Executive Officer
and Chief Financial Officer, have evaluated the effectiveness of Pinnacle Wests disclosure
controls and procedures as of September 30, 2010. Based on that evaluation, Pinnacle Wests Chief
Executive Officer and Chief Financial Officer have concluded that, as of that date, Pinnacle Wests
disclosure controls and procedures were effective.
APS management, with the participation of APS Chief Executive Officer and Chief Financial
Officer, have evaluated the effectiveness of APS disclosure controls and procedures as of
September 30, 2010. Based on that evaluation, APS Chief Executive Officer and Chief Financial
Officer have concluded that, as of that date, APS disclosure controls and procedures were
effective.
(b) Changes in Internal Control Over Financial Reporting
The term internal control over financial reporting (defined in SEC Rule 13a-15(f)) refers to
the process of a company that is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in
accordance with GAAP.
No change in Pinnacle Wests or APS internal control over financial reporting occurred during
the fiscal quarter ended September 30, 2010 that materially affected, or is reasonably likely to
materially affect, Pinnacle Wests or APS internal control over financial reporting.
80
Part II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See Environmental Matters in Item 5 below, Part II, Item 5 of the Pinnacle West/APS
Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 and the 2nd Quarter
10-Q, and Business of Arizona Public Service Company Environmental Matters in Item 1 of the
2009 Form 10-K in regard to pending or threatened litigation or other disputes.
See Note 10 with regard to a lawsuit brought by APS on behalf of itself and the other Palo
Verde owners against the DOE, for information relating to FERC proceedings on California and
Pacific Northwest energy market issues and for information regarding bankruptcy proceedings
involving the landlord for our corporate headquarters building.
Item 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider
the factors discussed in Part I, Item 1A. Risk Factors in the 2009 Form 10-K, which could
materially affect the business, financial condition, cash flows or future results of Pinnacle West
and APS. The risks described in the 2009 Form 10-K are not the only risks facing Pinnacle West and
APS. Additional risks and uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect the business, financial condition, cash flows
and/or operating results of Pinnacle West and APS.
Item 5. OTHER INFORMATION
Environmental Matters
Superfund
See Superfund in Note 10 for a discussion of a Superfund site.
EPA Environmental Regulation
Regional Haze Rules. EPA Region 9 previously requested that APS, as the operating agent for
Four Corners, and Salt River Project Agricultural Improvement and Power District (SRP), as the
operating agent for the Navajo Generating Station
(Navajo), perform a BART analysis for each of Four Corners and Navajo, respectively. See Business of
Arizona Public Service Company Environmental Matters EPA Environmental Regulation Regional
Haze Rules in Item 1 of the 2009 Form 10-K for additional background on the BART analyses and the
underlying process. APS and SRP each submitted an analysis to the EPA concluding that certain
combustion control equipment constitutes BART for these plants. Based on the analyses and comments
received through EPAs rulemaking process, the EPA will determine what it believes constitutes BART
for each plant. The Four Corners and Navajo plant participants obligations to comply with the
EPAs final BART determinations, coupled with the financial impact of future climate change
legislation, other environmental regulations and other business considerations, could jeopardize
the economic viability of these plants or the ability of individual participants to continue their
participation in these plants.
81
In order to coordinate with each plants other scheduled activities, the plants are currently
implementing portions of their recommended plans on a voluntary basis. APS share of the costs
related to
the implementation of these portions of the recommended plans are included in our
environmental expenditure estimates (see Managements Discussion and Analysis of Financial
Condition and Results of Operations Capital Expenditures in Part I, Item 2).
On October 6, 2010, the EPA issued its proposed BART determination for Four Corners, which is
subject to a sixty day public comment period beginning on October 19th, the date it was published in the Federal Register. APS has requested a sixty day extension. Once the comment period has run, the EPA
will then consider the comments submitted and issue a final rule. The
rule, as proposed, would require the installation of post-combustion controls on each of Units 1-5
at Four Corners to reduce nitrogen oxides emissions. As previously disclosed, APS total costs for these
controls could be up to approximately $422 million for Four Corners. The EPA also indicated in the
proposal that it may require the installation of electrostatic precipitators or baghouses on Units
1, 2 and 3 to reduce particulate matter emissions. APS estimates that its total costs for such particulate
removal equipment is approximately $220 million, which may also be required by no later than 2014 under the anticipated mercury rules. (See Environmental Matters Mercury and Other Hazardous Air Pollutants in
Part II, Item 5 of the 2nd Quarter 10-Q for additional information on these anticipated rules.)
The EPA proposed a 10% stack opacity limitation
for all five units and a 20% opacity limitation on certain fugitive dust emissions, although the
proposed fugitive dust provision is unrelated to BART. APS is currently evaluating the impacts of
the proposed rule and intends to submit comments to the EPA during the comment period.
The EPA has not yet issued a proposed rule for the Navajo plant. The participant owners of Four Corners and the Navajo plant will have five years after
the EPA issues its final determinations for each plant, respectively, to achieve compliance with
their BART requirements.
Coal Combustion Waste. On June 21, 2010, the EPA released its proposed regulations governing
the handling and disposal of coal combustion residuals (CCRs), such as fly ash and bottom ash.
APS currently disposes of CCRs in ash ponds and dry storage areas at Cholla and Four Corners, and
also sells a portion of its fly ash for beneficial reuse as a constituent in concrete production.
The EPA proposes regulating CCRs as either non-hazardous waste or hazardous waste and is seeking
comment on three different alternatives. The hazardous waste proposal would phase out the use of
ash ponds for disposal of CCRs. The other two proposals regulate CCRs as non-hazardous waste and
impose performance standards for ash disposal. One of these proposals would require retrofitting
or closure of currently unlined ash ponds, while the other proposal would not require the
installation of liners or pond closures. The EPA has not yet indicated a preference for any of the
alternatives.
APS intends to file comments on the proposed rule during the public comment period, which was
recently extended by the EPA to end on November 19, 2010. We do not know when the EPA will issue a
final rule, including required compliance dates. We cannot currently predict the outcome of the
EPAs actions or whether such actions will have a material adverse impact on our financial
position, results of operations or cash flows.
82
Item 6. EXHIBITS
(a) Exhibits
|
|
|
|
|
|
|
Exhibit No. |
|
Registrant(s) |
|
Description |
|
|
|
|
|
|
|
|
12.1 |
|
|
Pinnacle West
|
|
Ratio of Earnings to Fixed Charges |
|
|
|
|
|
|
|
|
12.2 |
|
|
APS
|
|
Ratio of Earnings to Fixed Charges |
|
|
|
|
|
|
|
|
12.3 |
|
|
Pinnacle West
|
|
Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements |
|
|
|
|
|
|
|
|
31.1 |
|
|
Pinnacle West
|
|
Certificate of Donald E. Brandt, Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended |
|
|
|
|
|
|
|
|
31.2 |
|
|
Pinnacle West
|
|
Certificate of James R. Hatfield, Senior Vice President and Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended |
|
|
|
|
|
|
|
|
31.3 |
|
|
APS
|
|
Certificate of Donald E. Brandt, Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended |
|
|
|
|
|
|
|
|
31.4 |
|
|
APS
|
|
Certificate of James R. Hatfield, Senior Vice President and Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended |
|
|
|
|
|
|
|
|
32.1 |
* |
|
Pinnacle West
|
|
Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
|
|
32.2 |
* |
|
APS
|
|
Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
|
|
101.INS |
* |
|
Pinnacle West
APS**
|
|
XBRL Instance Document |
|
|
|
|
|
|
|
|
101.SCH |
* |
|
Pinnacle West
APS**
|
|
XBRL Taxonomy Extension Schema Document |
83
|
|
|
|
|
|
|
Exhibit No. |
|
Registrant(s) |
|
Description |
|
|
|
|
|
|
|
|
101.CAL*
|
|
|
Pinnacle West
APS**
|
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
|
|
|
|
|
101.LAB*
|
|
|
Pinnacle West
APS**
|
|
XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE*
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Pinnacle West
APS**
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XBRL Taxonomy Extension Presentation Linkbase Document |
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101.DEF*
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Pinnacle West
APS**
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XBRL Taxonomy Definition Linkbase Document |
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* |
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Furnished herewith as an Exhibit. |
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** |
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Furnished voluntarily. |
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In addition, Pinnacle West hereby incorporates the following Exhibits pursuant to Exchange Act
Rule 12b-32 and Regulation §229.10(d) by reference to the filings set forth below:
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Exhibit |
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Previously Filed as |
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Date |
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No. |
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Registrant(s) |
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Description |
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Exhibit1 |
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Filed |
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3.1 |
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Pinnacle West
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Pinnacle West Capital Corporation Bylaws, amended as of May 19, 2010
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3.1 to Pinnacle West/APS June 30, 2010 Form 10-Q Report, File Nos. 1-8962 and 1-4473 |
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8-3-10 |
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3.2 |
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Pinnacle West
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Articles of Incorporation, restated as of May 21, 2008
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3.1 to Pinnacle West/APS June 30, 2008 Form 10-Q Report, File Nos. 1-8962 and 1-4473 |
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8-7-08 |
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3.3 |
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APS
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Articles of Incorporation, restated as of May 25, 1988
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4.2 to APS Form S-3 Registration Nos. 33-33910 and 33-55248 by means of September 24, 1993 Form 8-K Report, File No. 1-4473 |
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9-29-93 |
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3.4 |
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APS
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Arizona Public Service Company Bylaws, amended as of December 16, 2008
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3.4 to Pinnacle West/APS December 31, 2008 Form 10-K, File Nos. 1-8962 and 1-4473 |
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2-20-09 |
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1 |
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Reports filed under File Nos. 1-4473 and 1-8962 were
filed in the office of the Securities and Exchange Commission located in
Washington, D.C. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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PINNACLE WEST CAPITAL CORPORATION
(Registrant)
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Dated: October 28, 2010 |
By: |
/s/ James R. Hatfield |
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James R. Hatfield |
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Sr. Vice President and Chief Financial Officer
(Principal Financial Officer and
Officer Duly Authorized to sign this Report) |
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ARIZONA PUBLIC SERVICE COMPANY
(Registrant)
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Dated: October 28, 2010 |
By: |
/s/ James R. Hatfield |
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James R. Hatfield |
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Sr. Vice President and Chief Financial Officer
(Principal Financial Officer and
Officer Duly Authorized to sign this Report) |
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86