UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| | | | | |
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2022March 31, 2023
OR
| | | | | |
| ☐ | 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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Commission File
Number | | Exact Name of Each Registrant as specified in its
charter; State of Incorporation; Address; and
Telephone Number | | IRS Employer
Identification No. |
| 1-8962 | | PINNACLE WEST CAPITAL CORPORATION | | 86-0512431 |
| | (an Arizona corporation) | | |
| | 400 North Fifth Street, P.O. Box 53999 | | |
| | Phoenix | Arizona | 85072-3999 | | | |
| | (602) | 250-1000 | | | | |
| 1-4473 | | ARIZONA PUBLIC SERVICE COMPANY | | 86-0011170 |
| | (an Arizona corporation) | | |
| | 400 North Fifth Street, P.O. Box 53999 | | |
| | Phoenix | Arizona | 85072-3999 | | | |
| | (602) | 250-1000 | | | | |
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock | PNW | The New York Stock Exchange |
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.
| | | | | | | | | | | | | | | | | |
| PINNACLE WEST CAPITAL CORPORATION | Yes | ☒ | | No | ☐ |
| ARIZONA PUBLIC SERVICE COMPANY | Yes | ☒ | | No | ☐ |
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
| | | | | | | | | | | | | | | | | |
| PINNACLE WEST CAPITAL CORPORATION | Yes | ☒ | | No | ☐ |
| ARIZONA PUBLIC SERVICE COMPANY | Yes | ☒ | | No | ☐ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
PINNACLE WEST CAPITAL CORPORATION
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| Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | | | | | | |
| Emerging growth company | ☐ | | | | | | |
ARIZONA PUBLIC SERVICE COMPANY
| | | | | | | | | | | | | | | | | | | | | | | |
| Large accelerated filer | ☐ | Accelerated filer | ☐ | Non-accelerated filer | ☒ | Smaller reporting company | ☐ |
| | | | | | | |
| Emerging growth company | ☐ | | | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether each registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| | | | | | | | | | | | | | | | | |
| PINNACLE WEST CAPITAL CORPORATION | Yes | ☐ | | No | ☒ |
| ARIZONA PUBLIC SERVICE COMPANY | Yes | ☐ | | No | ☒ |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| | | | | | | | |
| PINNACLE WEST CAPITAL CORPORATION | Number of shares of common stock, no par value, outstanding as of October 28, 2022:April 27, 2023: | 113,140,203113,255,998 |
| ARIZONA PUBLIC SERVICE COMPANY | Number of shares of common stock, $2.50 par value, outstanding as of October 28, 2022:April 27, 2023: | 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 quarterly report on 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 of this report also includes Combined Notes to Condensed Consolidated Financial Statements.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements based on current expectations. These forward-looking statements are often identified by words such as “estimate,” “predict,” “may,” “believe,” “plan,” “expect,” “require,” “intend,” “assume,” “project,” “anticipate,” “goal,” “seek,” “strategy,” “likely,” “should,” “will,” “could,” 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 Part I, Item 1A of the Pinnacle West/APS Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (“2021 Form 10-K”), Part II, Item 1A of the Pinnacle West/APS Quarterly Report on Form 10‑Q for the quarter ended March 31, 2022 (“2022 1st Quarter 10-Q”Form 10-K”), Part II, Item 1A of this report and in Part I, Item 2 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report, these factors include, but are not limited to:
•the potentialcurrent economic environment and its effects, of the continued Coronavirus (“COVID-19”) pandemic, including, but not limited to, demand for energy,such as lower economic growth, our employees and contractors, vaccine mandates,a tight labor market, inflation, supply chain delays, increased expenses, inflation,volatile capital markets, capital projects, operations and maintenance activities, uncollectable accounts, liquidity, cash flows or other unpredictable events;effects;
•our ability to manage capital expenditures and operations and maintenance costs while maintaining reliability and customer service levels;
•variations in demand for electricity, including those due to weather, seasonality (including large increases in ambient temperatures), the general economy or social conditions, customer and sales growth (or decline), the effects of energy conservation measures and distributed generation, and technological advancements;
•the potential effects of climate change on our electric system, including as a result of weather extremes, such as prolonged drought and high temperature variations in the area where APS conducts its business;
•power plant and transmission system performance and outages;
•competition in retail and wholesale power markets;
•regulatory and judicial decisions, developments, and proceedings;
•new legislation, ballot initiatives, and regulation or interpretations of existing legislation or regulations, including those relating to environmental requirements, regulatory and energy policy, nuclear plant operations, and potential deregulation of retail electric markets;
•fuel and water supply availability;
•our ability to achieve timely and adequate rate recovery of our costs through our rates and adjustor recovery mechanisms, including returns on and of debt and equity capital investment;
•our ability to meet renewable energy and energy efficiency mandates and recover related costs;
•the ability of APS to achieve its clean energy goals (including a goal by 2050 of 100% clean, carbon-free electricity) and, if these goals are achieved, the impact of such achievement on APS, its customers, and its business, financial condition, and results of operations;
•risks inherent in the operation of nuclear facilities, including spent fuel disposal uncertainty;
•current and future economic conditions in Arizona, including in real estate markets;Arizona;
•the direct or indirect effect on our facilities or business from cybersecurity threats or intrusions, data security breaches, war, acts of war, international sanctions, terrorist attack, physical attack, severe storms, or other catastrophic events, such as fires, explosions, pandemic health events, or similar occurrences;
•the development of new technologies which may affect electric sales or delivery;delivery, including as a result of delays in the development and application of new technologies;
•the cost of debt, including increased cost as a result of rising interest rates, and equity capital and the ability to access capital markets when required;
•general economic conditions, including inflation rates, monetary fluctuations, and supply chain constraints;
•environmental, economic, and other concerns surrounding coal-fired generation, including regulation of greenhouse gas emissions;emissions (“GHG”);
•volatile fuel and purchased power costs;
•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;
•the liquidity of wholesale power markets and the use of derivative contracts in our business;
•potential shortfalls in insurance coverage;
•new accounting requirements or new interpretations of existing requirements;
•generation, transmission, and distribution facility and system conditions and operating costs;
•the ability to meet the anticipated future need for additional generation and associated transmission facilities in our region;
•the willingness or ability of our counterparties, power plant participants, and power plant landowners to meet contractual or other obligations or extend the rights for continued power plant operations; and
•restrictions on dividends or other provisions in our credit agreements and Arizona Corporation Commission (“ACC”) orders.
These and other factors are discussed in the Risk Factors described in Part I, Item 1A of our 20212022 Form 10-K, Part II, Item 1A of our 2022 1st Quarter 10-Q, Part II, Item 1A of this report, and in Part I, Item 2 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report, which readers should review carefully before placing any reliance on our financial statements or disclosures. Neither Pinnacle West nor APS assumes any obligation to update these statements, even if our internal estimates change, except as required by law.
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(dollars and shares in thousands, except per share amounts)
| | | | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | | Three Months Ended
March 31, | |
| | | | 2022 | | 2021 | | 2022 | | 2021 | | | 2023 | | 2022 | |
| | OPERATING REVENUES (Note 2) | OPERATING REVENUES (Note 2) | | $ | 1,469,871 | | | $ | 1,308,254 | | | $ | 3,315,071 | | | $ | 3,004,978 | | OPERATING REVENUES (Note 2) | | $ | 944,955 | | | $ | 783,531 | | |
| | OPERATING EXPENSES | OPERATING EXPENSES | | | | | | OPERATING EXPENSES | | | | | |
| Fuel and purchased power | Fuel and purchased power | | 556,571 | | | 427,452 | | | 1,174,027 | | | 895,514 | | Fuel and purchased power | | 394,504 | | | 265,269 | | |
| Operations and maintenance | Operations and maintenance | | 251,663 | | | 232,386 | | | 715,392 | | | 692,131 | | Operations and maintenance | | 250,080 | | | 218,342 | | |
| | Depreciation and amortization | Depreciation and amortization | | 190,389 | | | 163,523 | | | 563,491 | | | 480,093 | | Depreciation and amortization | | 191,906 | | | 186,605 | | |
| Taxes other than income taxes | Taxes other than income taxes | | 53,475 | | | 57,608 | | | 165,591 | | | 176,586 | | Taxes other than income taxes | | 57,138 | | | 57,998 | | |
| Other expenses - net | | 200 | | | (2,088) | | | 1,410 | | | 5,361 | | |
| Other expenses | | Other expenses | | 610 | | | 825 | | |
| Total | Total | | 1,052,298 | | | 878,881 | | | 2,619,911 | | | 2,249,685 | | Total | | 894,238 | | | 729,039 | | |
| OPERATING INCOME | OPERATING INCOME | | 417,573 | | | 429,373 | | | 695,160 | | | 755,293 | | OPERATING INCOME | | 50,717 | | | 54,492 | | |
| OTHER INCOME (DEDUCTIONS) | OTHER INCOME (DEDUCTIONS) | | | | | | | | | OTHER INCOME (DEDUCTIONS) | | | | | |
| Allowance for equity funds used during construction | Allowance for equity funds used during construction | | 9,133 | | | 11,352 | | | 30,966 | | | 30,549 | | Allowance for equity funds used during construction | | 15,061 | | | 9,747 | | |
| Pension and other postretirement non-service credits - net (Note 5) | Pension and other postretirement non-service credits - net (Note 5) | | 24,673 | | | 28,135 | | | 73,739 | | | 84,101 | | Pension and other postretirement non-service credits - net (Note 5) | | 9,865 | | | 23,809 | | |
| Other income (Note 9) | Other income (Note 9) | | 2,219 | | | 12,083 | | | 5,605 | | | 36,719 | | Other income (Note 9) | | 6,077 | | | 1,704 | | |
| Other expense (Note 9) | Other expense (Note 9) | | (6,745) | | | (6,182) | | | (14,751) | | | (15,219) | | Other expense (Note 9) | | (4,131) | | | (3,422) | | |
| Total | Total | | 29,280 | | | 45,388 | | | 95,559 | | | 136,150 | | Total | | 26,872 | | | 31,838 | | |
| INTEREST EXPENSE | INTEREST EXPENSE | | | | | | | | | INTEREST EXPENSE | | | | | |
| Interest charges | Interest charges | | 72,185 | | | 64,067 | | | 205,677 | | | 188,782 | | Interest charges | | 88,119 | | | 65,389 | | |
| Allowance for borrowed funds used during construction | Allowance for borrowed funds used during construction | | (8,692) | | | (5,273) | | | (19,047) | | | (15,466) | | Allowance for borrowed funds used during construction | | (12,722) | | | (4,482) | | |
| Total | Total | | 63,493 | | | 58,794 | | | 186,630 | | | 173,316 | | Total | | 75,397 | | | 60,907 | | |
| INCOME BEFORE INCOME TAXES | INCOME BEFORE INCOME TAXES | | 383,360 | | | 415,967 | | | 604,089 | | | 718,127 | | INCOME BEFORE INCOME TAXES | | 2,192 | | | 25,423 | | |
| INCOME TAXES | INCOME TAXES | | 52,728 | | | 71,863 | | | 83,577 | | | 114,073 | | INCOME TAXES | | 1,183 | | | 4,161 | | |
| NET INCOME | NET INCOME | | 330,632 | | | 344,104 | | | 520,512 | | | 604,054 | | NET INCOME | | 1,009 | | | 21,262 | | |
| Less: Net income attributable to noncontrolling interests (Note 6) | Less: Net income attributable to noncontrolling interests (Note 6) | | 4,306 | | | 4,306 | | | 12,918 | | | 12,918 | | Less: Net income attributable to noncontrolling interests (Note 6) | | 4,306 | | | 4,306 | | |
| NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS | | $ | 326,326 | | | $ | 339,798 | | | $ | 507,594 | | | $ | 591,136 | | |
| NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS | | NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS | | $ | (3,297) | | | $ | 16,956 | | |
| | WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING - BASIC | WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING - BASIC | | 113,211 | | | 112,923 | | | 113,162 | | | 112,878 | | WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING - BASIC | | 113,358 | | | 113,102 | | |
| WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING -DILUTED | | 113,463 | | | 113,217 | | | 113,376 | | | 113,178 | | |
| WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING - DILUTED | | WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING - DILUTED | | 113,358 | | | 113,295 | | |
| | EARNINGS PER WEIGHTED-AVERAGE COMMON SHARE OUTSTANDING | EARNINGS PER WEIGHTED-AVERAGE COMMON SHARE OUTSTANDING | | | | | | EARNINGS PER WEIGHTED-AVERAGE COMMON SHARE OUTSTANDING | | | | | |
| Net income attributable to common shareholders - basic | | $ | 2.88 | | | $ | 3.01 | | | $ | 4.49 | | | $ | 5.24 | | |
| Net income attributable to common shareholders - diluted | | $ | 2.88 | | | $ | 3.00 | | | $ | 4.48 | | | $ | 5.22 | | |
| Net income (loss) attributable to common shareholders - basic | | Net income (loss) attributable to common shareholders - basic | | $ | (0.03) | | | $ | 0.15 | | |
| Net income (loss) attributable to common shareholders - diluted | | Net income (loss) attributable to common shareholders - diluted | | $ | (0.03) | | | $ | 0.15 | | |
The accompanying notes are an integral part of the financial statements.
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| NET INCOME | $ | 330,632 | | | $ | 344,104 | | | $ | 520,512 | | | $ | 604,054 | |
| | | | | | | |
| OTHER COMPREHENSIVE INCOME, NET OF TAX | | | | | | | |
| | | | | | | |
| Derivative instruments net unrealized gain (loss), net of tax benefit (expense) of $(169), $64, $(582), and $(308) | 513 | | | (194) | | | 1,772 | | | 938 | |
| | | | | | | |
| Pension and other postretirement benefit activity, net of tax benefit (expense) of $(329), $(363), $69 and $(720) | 1,001 | | | 1,106 | | | (211) | | | 2,192 | |
| Total other comprehensive income | 1,514 | | | 912 | | | 1,561 | | | 3,130 | |
| | | | | | | |
| COMPREHENSIVE INCOME | 332,146 | | | 345,016 | | | 522,073 | | | 607,184 | |
| Less: Comprehensive income attributable to noncontrolling interests | 4,306 | | | 4,306 | | | 12,918 | | | 12,918 | |
| | | | | | | |
| COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | 327,840 | | | $ | 340,710 | | | $ | 509,155 | | | $ | 594,266 | |
| | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | |
| | 2023 | | 2022 | | | | |
| | | | | | | |
| NET INCOME | $ | 1,009 | | | $ | 21,262 | | | | | |
| | | | | | | |
| OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX | | | | | | | |
| | | | | | | |
| Derivative instruments net unrealized gain (loss), net of tax benefit (expense) of $202 and $(83) | (616) | | | 252 | | | | | |
| | | | | | | |
| Pension and other postretirement benefit activity, net of tax expense of $169 and $296 | 515 | | | 901 | | | | | |
| Total other comprehensive income (loss) | (101) | | | 1,153 | | | | | |
| | | | | | | |
| COMPREHENSIVE INCOME | 908 | | | 22,415 | | | | | |
| Less: Comprehensive income attributable to noncontrolling interests | 4,306 | | | 4,306 | | | | | |
| | | | | | | |
| COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | (3,398) | | | $ | 18,109 | | | | | |
The accompanying notes are an integral part of the financial statements.
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands)
| | | | September 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
| ASSETS | ASSETS | | | | ASSETS | | | |
| | CURRENT ASSETS | CURRENT ASSETS | | | | CURRENT ASSETS | | | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 7,032 | | | $ | 9,969 | | Cash and cash equivalents | $ | 6,951 | | | $ | 4,832 | |
| Customer and other receivables | Customer and other receivables | 603,197 | | | 391,923 | | Customer and other receivables | 449,096 | | | 453,209 | |
| Accrued unbilled revenues | Accrued unbilled revenues | 221,023 | | | 133,980 | | Accrued unbilled revenues | 143,276 | | | 164,764 | |
| Allowance for doubtful accounts (Note 2) | Allowance for doubtful accounts (Note 2) | (23,999) | | | (25,354) | | Allowance for doubtful accounts (Note 2) | (22,112) | | | (23,778) | |
| Materials and supplies (at average cost) | Materials and supplies (at average cost) | 386,703 | | | 349,135 | | Materials and supplies (at average cost) | 425,457 | | | 410,481 | |
| Income tax receivable | Income tax receivable | — | | | 7,514 | | Income tax receivable | 11,699 | | | 14,086 | |
| Fossil fuel (at average cost) | Fossil fuel (at average cost) | 53,087 | | | 18,032 | | Fossil fuel (at average cost) | 39,571 | | | 40,155 | |
| Assets from risk management activities (Note 7) | Assets from risk management activities (Note 7) | 164,794 | | | 63,481 | | Assets from risk management activities (Note 7) | 16,095 | | | 87,835 | |
| Deferred fuel and purchased power regulatory asset (Note 4) | Deferred fuel and purchased power regulatory asset (Note 4) | 445,025 | | | 388,148 | | Deferred fuel and purchased power regulatory asset (Note 4) | 469,962 | | | 460,561 | |
| Other regulatory assets (Note 4) | Other regulatory assets (Note 4) | 94,676 | | | 130,376 | | Other regulatory assets (Note 4) | 130,840 | | | 78,318 | |
| Other current assets | Other current assets | 65,019 | | | 83,896 | | Other current assets | 77,551 | | | 60,091 | |
| Total current assets | Total current assets | 2,016,557 | | | 1,551,100 | | Total current assets | 1,748,386 | | | 1,750,554 | |
| INVESTMENTS AND OTHER ASSETS | INVESTMENTS AND OTHER ASSETS | | | | INVESTMENTS AND OTHER ASSETS | | | |
| Nuclear decommissioning trusts (Notes 11 and 12) | Nuclear decommissioning trusts (Notes 11 and 12) | 1,025,913 | | | 1,294,757 | | Nuclear decommissioning trusts (Notes 11 and 12) | 1,125,617 | | | 1,073,410 | |
| Other special use funds (Notes 11 and 12) | Other special use funds (Notes 11 and 12) | 359,394 | | | 358,410 | | Other special use funds (Notes 11 and 12) | 352,877 | | | 347,231 | |
| Assets from risk management activities (Note 7) | Assets from risk management activities (Note 7) | 86,864 | | | 46,908 | | Assets from risk management activities (Note 7) | 17,082 | | | 44,394 | |
| Other assets | Other assets | 121,346 | | | 97,884 | | Other assets | 147,430 | | | 125,672 | |
| Total investments and other assets | Total investments and other assets | 1,593,517 | | | 1,797,959 | | Total investments and other assets | 1,643,006 | | | 1,590,707 | |
| PROPERTY, PLANT AND EQUIPMENT | PROPERTY, PLANT AND EQUIPMENT | | | | PROPERTY, PLANT AND EQUIPMENT | | | |
| Plant in service and held for future use | Plant in service and held for future use | 22,275,468 | | | 21,688,661 | | Plant in service and held for future use | 22,624,104 | | | 22,452,146 | |
| Accumulated depreciation and amortization | Accumulated depreciation and amortization | (7,798,591) | | | (7,504,603) | | Accumulated depreciation and amortization | (8,072,595) | | | (7,929,878) | |
| Net | Net | 14,476,877 | | | 14,184,058 | | Net | 14,551,509 | | | 14,522,268 | |
| Construction work in progress | Construction work in progress | 1,684,481 | | | 1,329,478 | | Construction work in progress | 2,101,830 | | | 1,882,791 | |
| Palo Verde sale leaseback, net of accumulated depreciation (Note 6) | Palo Verde sale leaseback, net of accumulated depreciation (Note 6) | 91,264 | | | 94,166 | | Palo Verde sale leaseback, net of accumulated depreciation (Note 6) | 89,329 | | | 90,296 | |
| Intangible assets, net of accumulated amortization | Intangible assets, net of accumulated amortization | 246,690 | | | 273,693 | | Intangible assets, net of accumulated amortization | 260,454 | | | 258,880 | |
| Nuclear fuel, net of accumulated amortization | Nuclear fuel, net of accumulated amortization | 115,227 | | | 106,039 | | Nuclear fuel, net of accumulated amortization | 112,735 | | | 100,119 | |
| Total property, plant and equipment | Total property, plant and equipment | 16,614,539 | | | 15,987,434 | | Total property, plant and equipment | 17,115,857 | | | 16,854,354 | |
| DEFERRED DEBITS | DEFERRED DEBITS | | | | DEFERRED DEBITS | | | |
| Regulatory assets (Note 4) | Regulatory assets (Note 4) | 1,173,415 | | | 1,192,987 | | Regulatory assets (Note 4) | 1,258,663 | | | 1,283,221 | |
| Operating lease right-of-use assets | Operating lease right-of-use assets | 806,509 | | | 890,057 | | Operating lease right-of-use assets | 1,361,847 | | | 801,688 | |
| Assets for pension and other postretirement benefits (Note 5) | Assets for pension and other postretirement benefits (Note 5) | 595,511 | | | 545,723 | | Assets for pension and other postretirement benefits (Note 5) | 405,409 | | | 396,599 | |
| Other | Other | 44,550 | | | 37,962 | | Other | 47,205 | | | 46,282 | |
| Total deferred debits | Total deferred debits | 2,619,985 | | | 2,666,729 | | Total deferred debits | 3,073,124 | | | 2,527,790 | |
| | TOTAL ASSETS | TOTAL ASSETS | $ | 22,844,598 | | | $ | 22,003,222 | | TOTAL ASSETS | $ | 23,580,373 | | | $ | 22,723,405 | |
The accompanying notes are an integral part of the financial statements.
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands)
| | | | September 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
| LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | | | | LIABILITIES AND EQUITY | | | |
| | CURRENT LIABILITIES | CURRENT LIABILITIES | | | | CURRENT LIABILITIES | | | |
| Accounts payable | Accounts payable | $ | 475,362 | | | $ | 393,083 | | Accounts payable | $ | 361,410 | | | $ | 430,425 | |
| Accrued taxes | Accrued taxes | 285,689 | | | 168,645 | | Accrued taxes | 214,484 | | | 164,440 | |
| Accrued interest | Accrued interest | 61,892 | | | 57,332 | | Accrued interest | 72,146 | | | 61,217 | |
| Common dividends payable | Common dividends payable | — | | | 95,988 | | Common dividends payable | — | | | 97,895 | |
| Short-term borrowings (Note 3) | Short-term borrowings (Note 3) | 466,820 | | | 292,000 | | Short-term borrowings (Note 3) | 497,550 | | | 340,720 | |
| Current maturities of long-term debt (Note 3) | Current maturities of long-term debt (Note 3) | 27,628 | | | 150,000 | | Current maturities of long-term debt (Note 3) | 60,821 | | | 50,685 | |
| Customer deposits | Customer deposits | 41,731 | | | 42,293 | | Customer deposits | 41,186 | | | 41,769 | |
| Liabilities from risk management activities (Note 7) | Liabilities from risk management activities (Note 7) | 7,240 | | | 4,373 | | Liabilities from risk management activities (Note 7) | 83,874 | | | 37,697 | |
| Liabilities for asset retirements | Liabilities for asset retirements | 6,307 | | | 4,473 | | Liabilities for asset retirements | 20,321 | | | 12,232 | |
| | Operating lease liabilities | Operating lease liabilities | 128,618 | | | 100,443 | | Operating lease liabilities | 65,130 | | | 105,210 | |
| Regulatory liabilities (Note 4) | Regulatory liabilities (Note 4) | 420,357 | | | 296,271 | | Regulatory liabilities (Note 4) | 202,266 | | | 271,575 | |
| Other current liabilities | Other current liabilities | 139,260 | | | 151,968 | | Other current liabilities | 105,141 | | | 148,276 | |
| Total current liabilities | Total current liabilities | 2,060,904 | | | 1,756,869 | | Total current liabilities | 1,724,329 | | | 1,762,141 | |
| LONG-TERM DEBT LESS CURRENT MATURITIES (Note 3) | LONG-TERM DEBT LESS CURRENT MATURITIES (Note 3) | 7,344,205 | | | 6,913,735 | | LONG-TERM DEBT LESS CURRENT MATURITIES (Note 3) | 7,916,554 | | | 7,741,286 | |
| DEFERRED CREDITS AND OTHER | DEFERRED CREDITS AND OTHER | | | | DEFERRED CREDITS AND OTHER | | | |
| Deferred income taxes | Deferred income taxes | 2,418,914 | | | 2,311,862 | | Deferred income taxes | 2,379,720 | | | 2,384,421 | |
| Regulatory liabilities (Note 4) | Regulatory liabilities (Note 4) | 2,108,289 | | | 2,499,213 | | Regulatory liabilities (Note 4) | 2,060,273 | | | 2,061,776 | |
| Liabilities for asset retirements | Liabilities for asset retirements | 785,540 | | | 762,909 | | Liabilities for asset retirements | 787,220 | | | 785,530 | |
| Liabilities for pension benefits (Note 5) | Liabilities for pension benefits (Note 5) | 148,403 | | | 152,865 | | Liabilities for pension benefits (Note 5) | 114,290 | | | 116,286 | |
| | Customer advances | Customer advances | 362,140 | | | 257,151 | | Customer advances | 532,596 | | | 422,103 | |
| Coal mine reclamation | Coal mine reclamation | 178,095 | | | 174,616 | | Coal mine reclamation | 180,446 | | | 179,255 | |
| Deferred investment tax credit | Deferred investment tax credit | 179,418 | | | 186,570 | | Deferred investment tax credit | 184,427 | | | 180,677 | |
| Unrecognized tax benefits | Unrecognized tax benefits | 4,717 | | | 4,657 | | Unrecognized tax benefits | 38,863 | | | 38,658 | |
| Operating lease liabilities | Operating lease liabilities | 642,573 | | | 728,401 | | Operating lease liabilities | 1,240,584 | | | 639,247 | |
| Other | Other | 249,287 | | | 232,914 | | Other | 256,620 | | | 252,149 | |
| Total deferred credits and other | Total deferred credits and other | 7,077,376 | | | 7,311,158 | | Total deferred credits and other | 7,775,039 | | | 7,060,102 | |
| COMMITMENTS AND CONTINGENCIES (Note 8) | COMMITMENTS AND CONTINGENCIES (Note 8) | | | | COMMITMENTS AND CONTINGENCIES (Note 8) | | | |
| EQUITY | EQUITY | | | | EQUITY | | | |
| Common stock, no par value; authorized 150,000,000 shares, 113,108,728 and 113,014,528 issued at respective dates | 2,720,364 | | | 2,702,743 | | |
| Treasury stock at cost; 36,204 and 87,608 shares at respective dates | (2,603) | | | (6,401) | | |
| Common stock, no par value; authorized 150,000,000 shares, 113,359,467 and 113,247,189 issued at respective dates | | Common stock, no par value; authorized 150,000,000 shares, 113,359,467 and 113,247,189 issued at respective dates | 2,730,851 | | | 2,724,740 | |
| Treasury stock at cost; 106,141 and 73,613 shares at respective dates | | Treasury stock at cost; 106,141 and 73,613 shares at respective dates | (7,451) | | | (5,005) | |
| Total common stock | Total common stock | 2,717,761 | | | 2,696,342 | | Total common stock | 2,723,400 | | | 2,719,735 | |
| Retained earnings | Retained earnings | 3,580,102 | | | 3,264,719 | | Retained earnings | 3,357,052 | | | 3,360,347 | |
| Accumulated other comprehensive loss (Note 13) | Accumulated other comprehensive loss (Note 13) | (53,300) | | | (54,861) | | Accumulated other comprehensive loss (Note 13) | (31,536) | | | (31,435) | |
| Total shareholders’ equity | Total shareholders’ equity | 6,244,563 | | | 5,906,200 | | Total shareholders’ equity | 6,048,916 | | | 6,048,647 | |
| Noncontrolling interests (Note 6) | Noncontrolling interests (Note 6) | 117,550 | | | 115,260 | | Noncontrolling interests (Note 6) | 115,535 | | | 111,229 | |
| Total equity | Total equity | 6,362,113 | | | 6,021,460 | | Total equity | 6,164,451 | | | 6,159,876 | |
| | TOTAL LIABILITIES AND EQUITY | TOTAL LIABILITIES AND EQUITY | $ | 22,844,598 | | | $ | 22,003,222 | | TOTAL LIABILITIES AND EQUITY | $ | 23,580,373 | | | $ | 22,723,405 | |
The accompanying notes are an integral part of the financial statements.
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
| | | | Nine Months Ended
September 30, | | Three Months Ended
March 31, |
| | | 2022 | | 2021 | | 2023 | | 2022 |
| CASH FLOWS FROM OPERATING ACTIVITIES | CASH FLOWS FROM OPERATING ACTIVITIES | | | | CASH FLOWS FROM OPERATING ACTIVITIES | | | |
| Net income | Net income | $ | 520,512 | | | $ | 604,054 | | Net income | $ | 1,009 | | | $ | 21,262 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | | | | Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation and amortization including nuclear fuel | Depreciation and amortization including nuclear fuel | 612,958 | | | 532,341 | | Depreciation and amortization including nuclear fuel | 208,772 | | | 203,639 | |
| Deferred fuel and purchased power | Deferred fuel and purchased power | (228,483) | | | (224,541) | | Deferred fuel and purchased power | (90,305) | | | (6,110) | |
| Deferred fuel and purchased power amortization | Deferred fuel and purchased power amortization | 171,607 | | | 25,195 | | Deferred fuel and purchased power amortization | 80,904 | | | 39,442 | |
| Allowance for equity funds used during construction | Allowance for equity funds used during construction | (30,966) | | | (30,549) | | Allowance for equity funds used during construction | (15,061) | | | (9,747) | |
| Deferred income taxes | Deferred income taxes | 43,440 | | | 104,128 | | Deferred income taxes | (5,150) | | | 3,835 | |
| Deferred investment tax credit | Deferred investment tax credit | (7,152) | | | (8,333) | | Deferred investment tax credit | 3,749 | | | (319) | |
| | Change in derivative instruments fair value | | Change in derivative instruments fair value | 786 | | | — | |
| Stock compensation | Stock compensation | 12,824 | | | 16,708 | | Stock compensation | 3,635 | | | 5,338 | |
| Changes in current assets and liabilities: | Changes in current assets and liabilities: | | | | Changes in current assets and liabilities: | | | |
| Customer and other receivables | Customer and other receivables | (213,181) | | | (110,584) | | Customer and other receivables | 2,831 | | | 66,146 | |
| Accrued unbilled revenues | Accrued unbilled revenues | (87,043) | | | (58,334) | | Accrued unbilled revenues | 21,488 | | | 1,215 | |
| Materials, supplies and fossil fuel | Materials, supplies and fossil fuel | (72,623) | | | (46,744) | | Materials, supplies and fossil fuel | (14,392) | | | (11,892) | |
| Income tax receivable | Income tax receivable | 7,514 | | | 6,792 | | Income tax receivable | 2,387 | | | 542 | |
| Other current assets | Other current assets | 54,272 | | | (19,129) | | Other current assets | (8,110) | | | 13,347 | |
| Accounts payable | Accounts payable | 137,433 | | | 19,005 | | Accounts payable | (69,576) | | | (13,873) | |
| Accrued taxes | Accrued taxes | 117,044 | | | 93,953 | | Accrued taxes | 50,044 | | | 53,847 | |
| Other current liabilities | Other current liabilities | 12,575 | | | (26,491) | | Other current liabilities | (84,239) | | | (40,211) | |
| Change in margin and collateral accounts - assets | Change in margin and collateral accounts - assets | 8,832 | | | (77) | | Change in margin and collateral accounts - assets | 11 | | | 8,600 | |
| | Change in other long-term assets | Change in other long-term assets | 208,599 | | | (284,291) | | Change in other long-term assets | (58,036) | | | 52,153 | |
| Change in operating lease assets | Change in operating lease assets | 98,081 | | | 106,802 | | Change in operating lease assets | (8,920) | | | 324 | |
| Change in other long-term liabilities | Change in other long-term liabilities | (235,986) | | | 62,012 | | Change in other long-term liabilities | 138,649 | | | (47,883) | |
| Change in operating lease liabilities | Change in operating lease liabilities | (98,343) | | | (101,404) | | Change in operating lease liabilities | 51,129 | | | 953 | |
| Net cash provided by operating activities | Net cash provided by operating activities | 1,031,914 | | | 660,513 | | Net cash provided by operating activities | 211,605 | | | 340,608 | |
| CASH FLOWS FROM INVESTING ACTIVITIES | CASH FLOWS FROM INVESTING ACTIVITIES | | | | CASH FLOWS FROM INVESTING ACTIVITIES | | | |
| Capital expenditures | Capital expenditures | (1,276,861) | | | (1,006,431) | | Capital expenditures | (445,171) | | | (391,583) | |
| Contributions in aid of construction | Contributions in aid of construction | 103,366 | | | 67,278 | | Contributions in aid of construction | 25,165 | | | 28,262 | |
| Allowance for borrowed funds used during construction | Allowance for borrowed funds used during construction | (18,381) | | | (15,466) | | Allowance for borrowed funds used during construction | (12,722) | | | (4,422) | |
| Proceeds from nuclear decommissioning trusts sales and other special use funds | Proceeds from nuclear decommissioning trusts sales and other special use funds | 911,003 | | | 797,179 | | Proceeds from nuclear decommissioning trusts sales and other special use funds | 226,626 | | | 361,754 | |
| Investment in nuclear decommissioning trusts and other special use funds | Investment in nuclear decommissioning trusts and other special use funds | (929,965) | | | (815,193) | | Investment in nuclear decommissioning trusts and other special use funds | (227,196) | | | (361,809) | |
| Other | Other | (11,057) | | | 10,321 | | Other | (19,941) | | | (6,543) | |
| Net cash used for investing activities | Net cash used for investing activities | (1,221,895) | | | (962,312) | | Net cash used for investing activities | (453,239) | | | (374,341) | |
| CASH FLOWS FROM FINANCING ACTIVITIES | CASH FLOWS FROM FINANCING ACTIVITIES | | | | CASH FLOWS FROM FINANCING ACTIVITIES | | | |
| Issuance of long-term debt | Issuance of long-term debt | 455,628 | | | 596,999 | | Issuance of long-term debt | 185,136 | | | 312,052 | |
| Short-term borrowing and (repayments) - net | Short-term borrowing and (repayments) - net | 174,820 | | | (25,000) | | Short-term borrowing and (repayments) - net | 156,830 | | | (29,050) | |
| | Short-term debt repayments under revolving credit facility | — | | | (19,000) | | |
| | Dividends paid on common stock | Dividends paid on common stock | (282,838) | | | (275,329) | | Dividends paid on common stock | (96,078) | | | (94,265) | |
| Repayment of long-term debt | Repayment of long-term debt | (150,000) | | | — | | Repayment of long-term debt | — | | | (150,000) | |
| Common stock equity issuances and (purchases) -net | 62 | | | 477 | | |
| Distributions to noncontrolling interests | (10,628) | | | (10,628) | | |
| Common stock equity issuances and (purchases) - net | | Common stock equity issuances and (purchases) - net | (2,135) | | | (1,005) | |
| | | Net cash provided by financing activities | Net cash provided by financing activities | 187,044 | | | 267,519 | | Net cash provided by financing activities | 243,753 | | | 37,732 | |
| | NET DECREASE IN CASH AND CASH EQUIVALENTS | (2,937) | | | (34,280) | | |
| NET INCREASE IN CASH AND CASH EQUIVALENTS | | NET INCREASE IN CASH AND CASH EQUIVALENTS | 2,119 | | | 3,999 | |
| | CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 9,969 | | | 59,968 | | CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 4,832 | | | 9,969 | |
| | CASH AND CASH EQUIVALENTS AT END OF PERIOD | CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 7,032 | | | $ | 25,688 | | CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 6,951 | | | $ | 13,968 | |
The accompanying notes are an integral part of the financial statements.
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(unaudited)
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 |
| Common Stock | | Treasury Stock | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Noncontrolling Interests | | Total |
| Shares | | Amount | | Shares | | Amount | | | | | | | | |
| Balance, July 1, 2022 | 113,078,049 | | | $ | 2,712,297 | | | (41,531) | | | $ | (2,976) | | | $ | 3,253,772 | | | $ | (54,814) | | | $ | 113,244 | | | $ | 6,021,523 | |
| Net income | | | — | | | | | — | | | 326,326 | | | | | 4,306 | | | 330,632 | |
| Other comprehensive income | | | — | | | | | — | | | — | | | 1,514 | | | — | | | 1,514 | |
| | | | | | | | | | | | | | | |
| Issuance of common stock | 30,679 | | | 8,067 | | | | | — | | | — | | | — | | | — | | | 8,067 | |
| Purchase of treasury stock (a) | | | — | | | (3,735) | | | (279) | | | — | | | — | | | — | | | (279) | |
| Reissuance of treasury stock for stock-based compensation and other | | | — | | | 9,062 | | | 652 | | | — | | | — | | | — | | | 652 | |
| | | | | | | | | | | | | | | |
| Other | | | — | | | | | — | | | 4 | | | — | | | — | | | 4 | |
| Balance, September 30, 2022 | 113,108,728 | | | $ | 2,720,364 | | | (36,204) | | | $ | (2,603) | | | $ | 3,580,102 | | | $ | (53,300) | | | $ | 117,550 | | | $ | 6,362,113 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
| Common Stock | | Treasury Stock | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Noncontrolling Interests | | Total |
| Shares | | Amount | | Shares | | Amount | | | | | | | | |
| Balance, December 31, 2022 | 113,247,189 | | | $ | 2,724,740 | | | (73,613) | | | $ | (5,005) | | | $ | 3,360,347 | | | $ | (31,435) | | | $ | 111,229 | | | $ | 6,159,876 | |
| Net income (loss) | | | — | | | | | — | | | (3,297) | | | — | | | 4,306 | | | 1,009 | |
| Other comprehensive loss | | | — | | | | | — | | | — | | | (101) | | | — | | | (101) | |
| | | | | | | | | | | | | | | |
| Issuance of common stock | 112,278 | | | 6,111 | | | | | — | | | — | | | — | | | — | | | 6,111 | |
| Purchase of treasury stock (a) | | | — | | | (33,154) | | | (2,490) | | | — | | | — | | | — | | | (2,490) | |
| Reissuance of treasury stock for stock-based compensation and other | | | — | | | 626 | | | 44 | | | — | | | — | | | — | | | 44 | |
| | | | | | | | | | | | | | | |
| Other | | | — | | | | | — | | | 2 | | | — | | | — | | | 2 | |
| Balance, March 31, 2023 | 113,359,467 | | | $ | 2,730,851 | | | (106,141) | | | $ | (7,451) | | | $ | 3,357,052 | | | $ | (31,536) | | | $ | 115,535 | | | $ | 6,164,451 | |
| | | Three Months Ended September 30, 2021 | | Three Months Ended March 31, 2022 |
| | Common Stock | | Treasury Stock | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Noncontrolling Interests | | Total | | Common Stock | | Treasury Stock | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Noncontrolling Interests | | Total |
| | Shares | | Amount | | Shares | | Amount | | | | | | | | | | Shares | | Amount | | Shares | | Amount | | | | | | | | |
| Balance, July 1, 2021 | 112,819,703 | | | $ | 2,692,015 | | | (36,153) | | | $ | (3,079) | | | $ | 3,089,266 | | | $ | (60,578) | | | $ | 117,275 | | | $ | 5,834,899 | | |
| Balance, December 31, 2021 | | Balance, December 31, 2021 | 113,014,528 | | | $ | 2,702,743 | | | (87,608) | | | $ | (6,401) | | | $ | 3,264,719 | | | $ | (54,861) | | | $ | 115,260 | | | $ | 6,021,460 | |
| Net income | Net income | | — | | | — | | | 339,798 | | | — | | | 4,306 | | | 344,104 | | Net income | | — | | | — | | | 16,956 | | | — | | | 4,306 | | | 21,262 | |
| Other comprehensive income | Other comprehensive income | | — | | | — | | | — | | | 912 | | | — | | | 912 | | Other comprehensive income | | — | | | — | | | — | | | 1,153 | | | — | | | 1,153 | |
| Dividends on common stock | Dividends on common stock | | — | | | — | | | 11 | | | — | | | — | | | 11 | | Dividends on common stock | | — | | | — | | | (74) | | | — | | | — | | | (74) | |
| Issuance of common stock | Issuance of common stock | 32,418 | | | 6,537 | | | — | | | — | | | — | | | — | | | 6,537 | | Issuance of common stock | 33,171 | | | 3,582 | | | — | | | — | | | — | | | — | | | 3,582 | |
| Purchase of treasury stock (a) | | Purchase of treasury stock (a) | | — | | | (24,885) | | | (1,665) | | | — | | | — | | | — | | | (1,665) | |
| Reissuance of treasury stock for stock-based compensation and other | | Reissuance of treasury stock for stock-based compensation and other | | — | | | 61,572 | | | 4,418 | | | — | | | — | | | — | | | 4,418 | |
| | Other | | — | | | — | | | 1 | | | — | | | — | | | 1 | | |
| Balance, September 30, 2021 | 112,852,121 | | | $ | 2,698,552 | | | (36,153) | | | $ | (3,079) | | | $ | 3,429,076 | | | $ | (59,666) | | | $ | 121,581 | | | $ | 6,186,464 | | |
| Balance, March 31, 2022 | | Balance, March 31, 2022 | 113,047,699 | | | $ | 2,706,325 | | | (50,921) | | | $ | (3,648) | | | $ | 3,281,601 | | | $ | (53,708) | | | $ | 119,566 | | | $ | 6,050,136 | |
(a)Primarily represents shares of common stock withheld from certain stock awards for tax purposes.
The accompanying notes are an integral part of the financial statements.
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(unaudited)
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2022 |
| Common Stock | | Treasury Stock | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Noncontrolling Interests | | Total |
| Shares | | Amount | | Shares | | Amount | | | | | | | | |
| Balance, January 1, 2022 | 113,014,528 | | | $ | 2,702,743 | | | (87,608) | | | $ | (6,401) | | | $ | 3,264,719 | | | $ | (54,861) | | | $ | 115,260 | | | $ | 6,021,460 | |
| Net income | | | — | | | | | — | | | 507,594 | | | — | | | 12,918 | | | 520,512 | |
| Other comprehensive income | | | — | | | | | — | | | — | | | 1,561 | | | — | | | 1,561 | |
| Dividends on common stock ($1.70 per share) | | | — | | | | | — | | | (192,213) | | | — | | | — | | | (192,213) | |
| Issuance of common stock | 94,200 | | | 17,621 | | | | | — | | | — | | | — | | | — | | | 17,621 | |
| Purchase of treasury stock (a) | | | — | | | (28,620) | | | (1,994) | | | — | | | — | | | — | | | (1,994) | |
| Reissuance of treasury stock for stock-based compensation and other | | | — | | | 80,024 | | | 5,792 | | | — | | | — | | | — | | | 5,792 | |
| Capital activities by noncontrolling interests | | | — | | | | | — | | | — | | | — | | | (10,628) | | | (10,628) | |
| Other | | | — | | | | | — | | | 2 | | | — | | | — | | | 2 | |
| Balance, September 30, 2022 | 113,108,728 | | | $ | 2,720,364 | | | (36,204) | | | $ | (2,603) | | | $ | 3,580,102 | | | $ | (53,300) | | | $ | 117,550 | | | $ | 6,362,113 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2021 |
| Common Stock | | Treasury Stock | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Noncontrolling Interests | | Total |
| Shares | | Amount | | Shares | | Amount | | | | | | | | |
| Balance, January 1, 2021 | 112,760,051 | | | $ | 2,677,482 | | | (72,006) | | | $ | (6,289) | | | $ | 3,025,106 | | | $ | (62,796) | | | $ | 119,290 | | | $ | 5,752,793 | |
| Net income | | | — | | | | | — | | | 591,136 | | | — | | | 12,918 | | | 604,054 | |
| Other comprehensive income | | | — | | | | | — | | | — | | | 3,130 | | | — | | | 3,130 | |
| Dividends on common stock ($1.66 per share) | | | — | | | | | — | | | (187,165) | | | — | | | — | | | (187,165) | |
| Issuance of common stock | 92,070 | | | 21,070 | | | | | — | | | — | | | — | | | — | | | 21,070 | |
| Purchase of treasury stock (a) | | | — | | | (17,437) | | | (1,333) | | | — | | | — | | | — | | | (1,333) | |
| Reissuance of treasury stock for stock-based compensation and other | | | — | | | 53,290 | | | 4,543 | | | — | | | — | | | — | | | 4,543 | |
| Capital activities by noncontrolling interests | | | — | | | | | — | | | — | | | — | | | (10,628) | | | (10,628) | |
| Other | | | — | | | | | — | | | (1) | | | — | | | 1 | | | — | |
| Balance, September 30, 2021 | 112,852,121 | | | $ | 2,698,552 | | | (36,153) | | | $ | (3,079) | | | $ | 3,429,076 | | | $ | (59,666) | | | $ | 121,581 | | | $ | 6,186,464 | |
(a)Primarily represents shares of common stock withheld from certain stock awards for tax purposes.
The accompanying notes are an integral part of the financial statements.
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(dollars in thousands)
| | | | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | | Three Months Ended
March 31, | |
| | | | 2022 | | 2021 | | 2022 | | 2021 | | | 2023 | | 2022 | |
| | OPERATING REVENUES (Note 2) | OPERATING REVENUES (Note 2) | | $ | 1,469,871 | | | $ | 1,308,254 | | | $ | 3,315,071 | | | $ | 3,004,978 | | OPERATING REVENUES (Note 2) | | $ | 944,955 | | | $ | 783,531 | | |
| | OPERATING EXPENSES | OPERATING EXPENSES | | | | | | OPERATING EXPENSES | | | | | |
| Fuel and purchased power | Fuel and purchased power | | 556,571 | | | 427,452 | | | 1,174,027 | | | 895,514 | | Fuel and purchased power | | 394,504 | | | 265,269 | | |
| Operations and maintenance | Operations and maintenance | | 248,808 | | | 229,432 | | | 705,683 | | | 682,531 | | Operations and maintenance | | 246,179 | | | 214,601 | | |
| Depreciation and amortization | Depreciation and amortization | | 190,368 | | | 163,484 | | | 563,427 | | | 480,012 | | Depreciation and amortization | | 191,884 | | | 186,583 | | |
| Taxes other than income taxes | Taxes other than income taxes | | 53,456 | | | 57,591 | | | 165,509 | | | 176,541 | | Taxes other than income taxes | | 57,125 | | | 57,959 | | |
| Other expenses - net | | 200 | | | (2,088) | | | 1,410 | | | 5,361 | | |
| Other expenses | | Other expenses | | 610 | | | 825 | | |
| Total | Total | | 1,049,403 | | | 875,871 | | | 2,610,056 | | | 2,239,959 | | Total | | 890,302 | | | 725,237 | | |
| OPERATING INCOME | OPERATING INCOME | | 420,468 | | | 432,383 | | | 705,015 | | | 765,019 | | OPERATING INCOME | | 54,653 | | | 58,294 | | |
| OTHER INCOME (DEDUCTIONS) | OTHER INCOME (DEDUCTIONS) | | | | | | | | | OTHER INCOME (DEDUCTIONS) | | | | | |
| Allowance for equity funds used during construction | Allowance for equity funds used during construction | | 9,133 | | | 11,352 | | | 30,966 | | | 30,549 | | Allowance for equity funds used during construction | | 15,061 | | | 9,747 | | |
| Pension and other postretirement non-service credits - net (Note 5) | Pension and other postretirement non-service credits - net (Note 5) | | 24,791 | | | 28,191 | | | 74,080 | | | 84,262 | | Pension and other postretirement non-service credits - net (Note 5) | | 10,106 | | | 23,907 | | |
| Other income (Note 9) | Other income (Note 9) | | 1,661 | | | 11,597 | | | 4,209 | | | 35,120 | | Other income (Note 9) | | 5,075 | | | 1,152 | | |
| Other expense (Note 9) | Other expense (Note 9) | | (3,023) | | | (2,196) | | | (7,657) | | | (9,807) | | Other expense (Note 9) | | (2,617) | | | (1,849) | | |
| Total | Total | | 32,562 | | | 48,944 | | | 101,598 | | | 140,124 | | Total | | 27,625 | | | 32,957 | | |
| INTEREST EXPENSE | INTEREST EXPENSE | | | | | | | | | INTEREST EXPENSE | | | | | |
| Interest charges | Interest charges | | 66,296 | | | 61,362 | | | 192,828 | | | 180,680 | | Interest charges | | 75,222 | | | 62,309 | | |
| Allowance for borrowed funds used during construction | Allowance for borrowed funds used during construction | | (8,269) | | | (5,273) | | | (18,381) | | | (15,466) | | Allowance for borrowed funds used during construction | | (11,157) | | | (4,422) | | |
| Total | Total | | 58,027 | | | 56,089 | | | 174,447 | | | 165,214 | | Total | | 64,065 | | | 57,887 | | |
| INCOME BEFORE INCOME TAXES | INCOME BEFORE INCOME TAXES | | 395,003 | | | 425,238 | | | 632,166 | | | 739,929 | | INCOME BEFORE INCOME TAXES | | 18,213 | | | 33,364 | | |
| INCOME TAXES | INCOME TAXES | | 59,004 | | | 77,269 | | | 93,385 | | | 128,313 | | INCOME TAXES | | 3,247 | | | 4,859 | | |
| NET INCOME | NET INCOME | | 335,999 | | | 347,969 | | | 538,781 | | | 611,616 | | NET INCOME | | 14,966 | | | 28,505 | | |
| Less: Net income attributable to noncontrolling interests (Note 6) | Less: Net income attributable to noncontrolling interests (Note 6) | | 4,306 | | | 4,306 | | | 12,918 | | | 12,918 | | Less: Net income attributable to noncontrolling interests (Note 6) | | 4,306 | | | 4,306 | | |
| NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDER | NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDER | | $ | 331,693 | | | $ | 343,663 | | | $ | 525,863 | | | $ | 598,698 | | NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDER | | $ | 10,660 | | | $ | 24,199 | | |
The accompanying notes are an integral part of the financial statements.
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(dollars in thousands)
| | | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | Three Months Ended
March 31, | |
| | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
| | NET INCOME | NET INCOME | $ | 335,999 | | | $ | 347,969 | | | $ | 538,781 | | | $ | 611,616 | | NET INCOME | $ | 14,966 | | | $ | 28,505 | | |
| | OTHER COMPREHENSIVE INCOME, NET OF TAX | OTHER COMPREHENSIVE INCOME, NET OF TAX | | | | | OTHER COMPREHENSIVE INCOME, NET OF TAX | | | | |
| | Pension and other postretirement benefits activity, net of tax benefit (expense) of $(300), $(330), $142, and $(685) | 909 | | | 1,000 | | | (432) | | | 2,086 | | |
| Pension and other postretirement benefits activity, net of tax expense of $150 and $269 | | Pension and other postretirement benefits activity, net of tax expense of $150 and $269 | 457 | | | 820 | | |
| Total other comprehensive income (loss) | Total other comprehensive income (loss) | 909 | | | 1,000 | | | (432) | | | 2,086 | | Total other comprehensive income (loss) | 457 | | | 820 | | |
| | COMPREHENSIVE INCOME | COMPREHENSIVE INCOME | 336,908 | | | 348,969 | | | 538,349 | | | 613,702 | | COMPREHENSIVE INCOME | 15,423 | | | 29,325 | | |
| Less: Comprehensive income attributable to noncontrolling interests | Less: Comprehensive income attributable to noncontrolling interests | 4,306 | | | 4,306 | | | 12,918 | | | 12,918 | | Less: Comprehensive income attributable to noncontrolling interests | 4,306 | | | 4,306 | | |
| | COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON SHAREHOLDER | COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON SHAREHOLDER | $ | 332,602 | | | $ | 344,663 | | | $ | 525,431 | | | $ | 600,784 | | COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON SHAREHOLDER | $ | 11,117 | | | $ | 25,019 | | |
The accompanying notes are an integral part of the financial statements.
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands)
| | | | | | | | | | | | |
| | March 31,
2023 | | December 31,
2022 |
| ASSETS | | | | |
| | | | |
| PROPERTY, PLANT AND EQUIPMENT | | | | |
| Plant in service and held for future use | | $ | 22,620,643 | | | $ | 22,448,685 | |
| Accumulated depreciation and amortization | | (8,069,288) | | | (7,926,575) | |
| Net | | 14,551,355 | | | 14,522,110 | |
| Construction work in progress | | 2,036,078 | | | 1,829,004 | |
| Palo Verde sale leaseback, net of accumulated depreciation (Note 6) | | 89,329 | | | 90,296 | |
| Intangible assets, net of accumulated amortization | | 260,299 | | | 258,725 | |
| Nuclear fuel, net of accumulated amortization | | 112,735 | | | 100,119 | |
| Total property, plant and equipment | | 17,049,796 | | | 16,800,254 | |
| | | | |
| INVESTMENTS AND OTHER ASSETS | | | | |
| Nuclear decommissioning trusts (Notes 11 and 12) | | 1,125,617 | | | 1,073,410 | |
| Other special use funds (Notes 11 and 12) | | 352,877 | | | 347,231 | |
| Assets from risk management activities (Note 7) | | 17,082 | | | 44,394 | |
| Other assets | | 44,165 | | | 43,344 | |
| Total investments and other assets | | 1,539,741 | | | 1,508,379 | |
| | | | |
| CURRENT ASSETS | | | | |
| Cash and cash equivalents | | 6,648 | | | 4,042 | |
| Customer and other receivables | | 438,251 | | | 448,880 | |
| Accrued unbilled revenues | | 143,276 | | | 164,764 | |
| Allowance for doubtful accounts (Note 2) | | (22,112) | | | (23,778) | |
| Materials and supplies (at average cost) | | 425,457 | | | 410,481 | |
| Fossil fuel (at average cost) | | 39,571 | | | 40,155 | |
| Income tax receivable | | 1,102 | | | 1,102 | |
| Assets from risk management activities (Note 7) | | 15,961 | | | 87,704 | |
| Deferred fuel and purchased power regulatory asset (Note 4) | | 469,962 | | | 460,561 | |
| Other regulatory assets (Note 4) | | 130,840 | | | 78,318 | |
| Other current assets | | 70,443 | | | 50,043 | |
| Total current assets | | 1,719,399 | | | 1,722,272 | |
| | | | |
| DEFERRED DEBITS | | | | |
| Regulatory assets (Note 4) | | 1,258,663 | | | 1,283,221 | |
| Operating lease right-of-use assets | | 1,356,781 | | | 796,544 | |
| Assets for pension and other postretirement benefits (Note 5) | | 397,877 | | | 389,142 | |
| Other | | 46,401 | | | 44,040 | |
| Total deferred debits | | 3,059,722 | | | 2,512,947 | |
| | | | |
| TOTAL ASSETS | | $ | 23,368,658 | | | $ | 22,543,852 | |
The accompanying notes are an integral part of the financial statements.
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands)
| | | | | | | | | | | | |
| | March 31,
2023 | | December 31,
2022 |
| LIABILITIES AND EQUITY | | | | |
| | | | |
| CAPITALIZATION | | | | |
| Common stock | | $ | 178,162 | | | $ | 178,162 | |
| Additional paid-in capital | | 3,321,696 | | | 3,171,696 | |
| Retained earnings | | 3,618,125 | | | 3,607,464 | |
| Accumulated other comprehensive loss (Note 13) | | (15,139) | | | (15,596) | |
| Total shareholder equity | | 7,102,844 | | | 6,941,726 | |
| Noncontrolling interests (Note 6) | | 115,535 | | | 111,229 | |
| Total equity | | 7,218,379 | | | 7,052,955 | |
| Long-term debt less current maturities (Note 3) | | 6,794,124 | | | 6,793,529 | |
| Total capitalization | | 14,012,503 | | | 13,846,484 | |
| CURRENT LIABILITIES | | | | |
| Short-term borrowings (Note 3) | | 463,000 | | | 325,000 | |
| Accounts payable | | 349,410 | | | 417,732 | |
| Accrued taxes | | 211,940 | | | 156,746 | |
| Accrued interest | | 69,816 | | | 60,518 | |
| Common dividends payable | | — | | | 97,900 | |
| Customer deposits | | 41,186 | | | 41,769 | |
| Liabilities from risk management activities (Note 7) | | 83,874 | | | 37,697 | |
| Liabilities for asset retirements | | 20,321 | | | 12,232 | |
| Operating lease liabilities | | 64,593 | | | 104,728 | |
| Regulatory liabilities (Note 4) | | 202,266 | | | 271,575 | |
| Other current liabilities | | 104,865 | | | 144,733 | |
| Total current liabilities | | 1,611,271 | | | 1,670,630 | |
| DEFERRED CREDITS AND OTHER | | | | |
| Deferred income taxes | | 2,384,586 | | | 2,385,647 | |
| Regulatory liabilities (Note 4) | | 2,060,273 | | | 2,061,776 | |
| Liabilities for asset retirements | | 787,220 | | | 785,530 | |
| Liabilities for pension benefits (Note 5) | | 106,535 | | | 108,068 | |
| | | | |
| Customer advances | | 532,596 | | | 422,103 | |
| Coal mine reclamation | | 180,446 | | | 179,255 | |
| Deferred investment tax credit | | 184,427 | | | 180,677 | |
| Unrecognized tax benefits | | 38,863 | | | 38,658 | |
| Operating lease liabilities | | 1,235,619 | | | 634,199 | |
| Other | | 234,319 | | | 230,825 | |
| Total deferred credits and other | | 7,744,884 | | | 7,026,738 | |
| COMMITMENTS AND CONTINGENCIES (Note 8) | | | | |
| TOTAL LIABILITIES AND EQUITY | | $ | 23,368,658 | | | $ | 22,543,852 | |
| | | | | | | | | | | | |
| | September 30,
2022 | | December 31,
2021 |
| ASSETS | | | | |
| | | | |
| PROPERTY, PLANT AND EQUIPMENT | | | | |
| Plant in service and held for future use | | $ | 22,272,007 | | | $ | 21,685,200 | |
| Accumulated depreciation and amortization | | (7,795,293) | | | (7,501,317) | |
| Net | | 14,476,714 | | | 14,183,883 | |
| Construction work in progress | | 1,660,618 | | | 1,327,721 | |
| Palo Verde sale leaseback, net of accumulated depreciation (Note 6) | | 91,264 | | | 94,166 | |
| Intangible assets, net of accumulated amortization | | 246,535 | | | 273,537 | |
| Nuclear fuel, net of accumulated amortization | | 115,227 | | | 106,039 | |
| Total property, plant and equipment | | 16,590,358 | | | 15,985,346 | |
| | | | |
| INVESTMENTS AND OTHER ASSETS | | | | |
| Nuclear decommissioning trusts (Notes 11 and 12) | | 1,025,913 | | | 1,294,757 | |
| Other special use funds (Notes 11 and 12) | | 359,394 | | | 358,410 | |
| Assets from risk management activities (Note 7) | | 86,864 | | | 46,908 | |
| Other assets | | 42,742 | | | 42,440 | |
| Total investments and other assets | | 1,514,913 | | | 1,742,515 | |
| | | | |
| CURRENT ASSETS | | | | |
| Cash and cash equivalents | | 5,302 | | | 9,374 | |
| Customer and other receivables | | 602,084 | | | 390,533 | |
| Accrued unbilled revenues | | 221,023 | | | 133,980 | |
| Allowance for doubtful accounts (Note 2) | | (23,999) | | | (25,354) | |
| Materials and supplies (at average cost) | | 386,703 | | | 349,135 | |
| Fossil fuel (at average cost) | | 53,087 | | | 18,032 | |
| Income tax receivable | | — | | | 10,756 | |
| Assets from risk management activities (Note 7) | | 164,794 | | | 63,481 | |
| Deferred fuel and purchased power regulatory asset (Note 4) | | 445,025 | | | 388,148 | |
| Other regulatory assets (Note 4) | | 94,676 | | | 130,376 | |
| Other current assets | | 53,645 | | | 57,729 | |
| Total current assets | | 2,002,340 | | | 1,526,190 | |
| | | | |
| DEFERRED DEBITS | | | | |
| Regulatory assets (Note 4) | | 1,173,415 | | | 1,192,987 | |
| Operating lease right-of-use assets | | 801,288 | | | 888,207 | |
| Assets for pension and other postretirement benefits (Note 5) | | 586,482 | | | 537,092 | |
| Other | | 42,708 | | | 37,319 | |
| Total deferred debits | | 2,603,893 | | | 2,655,605 | |
| | | | |
| TOTAL ASSETS | | $ | 22,711,504 | | | $ | 21,909,656 | |
The accompanying notes are an integral part of the financial statements.
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETSSTATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
| | | | | | | | | | | | |
| | September 30,
2022 | | December 31,
2021 |
| LIABILITIES AND EQUITY | | | | |
| | | | |
| CAPITALIZATION | | | | |
| Common stock | | $ | 178,162 | | | $ | 178,162 | |
| Additional paid-in capital | | 3,171,696 | | | 3,021,696 | |
| Retained earnings | | 3,804,098 | | | 3,470,235 | |
| Accumulated other comprehensive loss (Note 13) | | (35,312) | | | (34,880) | |
| Total shareholder equity | | 7,118,644 | | | 6,635,213 | |
| Noncontrolling interests (Note 6) | | 117,550 | | | 115,260 | |
| Total equity | | 7,236,194 | | | 6,750,473 | |
| Long-term debt less current maturities (Note 3) | | 6,396,740 | | | 6,266,693 | |
| Total capitalization | | 13,632,934 | | | 13,017,166 | |
| CURRENT LIABILITIES | | | | |
| Short-term borrowings (Note 3) | | 443,000 | | | 278,700 | |
| Accounts payable | | 467,638 | | | 389,365 | |
| Accrued taxes | | 322,779 | | | 152,012 | |
| Accrued interest | | 59,531 | | | 56,622 | |
| Common dividends payable | | — | | | 96,000 | |
| Customer deposits | | 41,731 | | | 42,293 | |
| Liabilities from risk management activities (Note 7) | | 7,240 | | | 4,373 | |
| Liabilities for asset retirements | | 6,307 | | | 4,473 | |
| Operating lease liabilities | | 128,191 | | | 100,199 | |
| Regulatory liabilities (Note 4) | | 420,357 | | | 296,271 | |
| Other current liabilities | | 142,905 | | | 145,286 | |
| Total current liabilities | | 2,039,679 | | | 1,565,594 | |
| DEFERRED CREDITS AND OTHER | | | | |
| Deferred income taxes | | 2,385,751 | | | 2,331,701 | |
| Regulatory liabilities (Note 4) | | 2,108,289 | | | 2,499,213 | |
| Liabilities for asset retirements | | 785,540 | | | 762,909 | |
| Liabilities for pension benefits (Note 5) | | 135,466 | | | 138,328 | |
| | | | |
| Customer advances | | 362,140 | | | 257,151 | |
| Coal mine reclamation | | 178,095 | | | 174,616 | |
| Deferred investment tax credit | | 179,418 | | | 186,570 | |
| Unrecognized tax benefits | | 37,134 | | | 37,423 | |
| Operating lease liabilities | | 637,446 | | | 726,572 | |
| Other | | 229,612 | | | 212,413 | |
| Total deferred credits and other | | 7,038,891 | | | 7,326,896 | |
| COMMITMENTS AND CONTINGENCIES (Note 8) | | | | |
| TOTAL LIABILITIES AND EQUITY | | $ | 22,711,504 | | | $ | 21,909,656 | |
| | | | | | | | | | | |
| | Three Months Ended
March 31, |
| | 2023 | | 2022 |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | |
| Net income | $ | 14,966 | | | $ | 28,505 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation and amortization including nuclear fuel | 208,750 | | | 203,617 | |
| Deferred fuel and purchased power | (90,305) | | | (6,110) | |
| Deferred fuel and purchased power amortization | 80,904 | | | 39,442 | |
| Allowance for equity funds used during construction | (15,061) | | | (9,747) | |
| Deferred income taxes | (1,693) | | | (106) | |
| Deferred investment tax credit | 3,749 | | | (319) | |
| | | |
| Changes in current assets and liabilities: | | | |
| Customer and other receivables | 9,347 | | | 65,736 | |
| Accrued unbilled revenues | 21,488 | | | 1,215 | |
| Materials, supplies and fossil fuel | (14,392) | | | (11,892) | |
| Income tax receivable | — | | | 5,207 | |
| Other current assets | (11,050) | | | 5,261 | |
| Accounts payable | (64,008) | | | (17,074) | |
| Accrued taxes | 55,194 | | | 57,718 | |
| Other current liabilities | (82,658) | | | (37,579) | |
| Change in margin and collateral accounts - assets | 11 | | | 8,600 | |
| | | |
| Change in other long-term assets | (55,909) | | | 53,827 | |
| Change in operating lease assets | (8,998) | | | 254 | |
| Change in other long-term liabilities | 138,094 | | | (46,790) | |
| Change in operating lease liabilities | 51,212 | | | 1,027 | |
| Net cash provided by operating activities | 239,641 | | | 340,792 | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | |
| Capital expenditures | (439,647) | | | (386,873) | |
| Contributions in aid of construction | 25,165 | | | 28,262 | |
| Allowance for borrowed funds used during construction | (11,157) | | | (4,422) | |
| Proceeds from nuclear decommissioning trusts sales and other special use funds | 226,626 | | | 361,754 | |
| Investment in nuclear decommissioning trusts and other special use funds | (227,196) | | | (361,809) | |
| Other | (926) | | | (258) | |
| Net cash used for investing activities | (427,135) | | | (363,346) | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | |
| | | |
| Short-term borrowings and (repayments) - net | 138,000 | | | (28,700) | |
| | | |
| | | |
| Equity infusion | 150,000 | | | 150,000 | |
| | | |
| Dividends paid on common stock | (97,900) | | | (96,000) | |
| | | |
| Net cash provided by financing activities | 190,100 | | | 25,300 | |
| NET INCREASE IN CASH AND CASH EQUIVALENTS | 2,606 | | | 2,746 | |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 4,042 | | | 9,374 | |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 6,648 | | | $ | 12,120 | |
The accompanying notes are an integral part of the financial statements.
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
| | | | | | | | | | | |
| | Nine Months Ended
September 30, |
| | 2022 | | 2021 |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | |
| Net income | $ | 538,781 | | | $ | 611,616 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation and amortization including nuclear fuel | 612,894 | | | 532,260 | |
| Deferred fuel and purchased power | (228,483) | | | (224,541) | |
| Deferred fuel and purchased power amortization | 171,607 | | | 25,195 | |
| Allowance for equity funds used during construction | (30,966) | | | (30,549) | |
| Deferred income taxes | (9,257) | | | 81,255 | |
| Deferred investment tax credit | (7,152) | | | (8,333) | |
| | | |
| Changes in current assets and liabilities: | | | |
| Customer and other receivables | (213,458) | | | (111,220) | |
| Accrued unbilled revenues | (87,043) | | | (58,334) | |
| Materials, supplies and fossil fuel | (72,623) | | | (46,744) | |
| Income tax receivable | 10,756 | | | — | |
| Other current assets | 39,479 | | | (20,678) | |
| Accounts payable | 133,357 | | | 19,776 | |
| Accrued taxes | 170,767 | | | 121,917 | |
| Other current liabilities | 21,134 | | | (35,386) | |
| Change in margin and collateral accounts - assets | 8,832 | | | (77) | |
| | | |
| Change in other long-term assets | 219,472 | | | (272,832) | |
| Change in operating lease assets | 97,858 | | | 106,723 | |
| Change in other long-term liabilities | (237,486) | | | 61,973 | |
| Change in operating lease liabilities | (98,113) | | | (101,324) | |
| Net cash provided by operating activities | 1,040,356 | | | 650,697 | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | |
| Capital expenditures | (1,254,693) | | | (1,006,431) | |
| Contributions in aid of construction | 103,366 | | | 67,278 | |
| Allowance for borrowed funds used during construction | (18,381) | | | (15,466) | |
| Proceeds from nuclear decommissioning trusts sales and other special use funds | 911,003 | | | 797,179 | |
| Investment in nuclear decommissioning trusts and other special use funds | (929,965) | | | (815,193) | |
| Other | 570 | | | 3,053 | |
| Net cash used for investing activities | (1,188,100) | | | (969,580) | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | |
| Issuance of long-term debt | 128,000 | | | 446,999 | |
| Short-term borrowings and (repayments) - net | 164,300 | | | 125,000 | |
| | | |
| | | |
| Equity infusion | 150,000 | | | — | |
| | | |
| Dividends paid on common stock | (288,000) | | | (280,500) | |
| Distributions to noncontrolling interests | (10,628) | | | (10,628) | |
| Net cash provided by financing activities | 143,672 | | | 280,871 | |
| NET DECREASE IN CASH AND CASH EQUIVALENTS | (4,072) | | | (38,012) | |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 9,374 | | | 57,310 | |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 5,302 | | | $ | 19,298 | |
The accompanying notes are an integral part of the financial statements.
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(unaudited)
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Noncontrolling Interests | | Total |
| Shares | | Amount | | | | | | | | | | |
| Balance, July 1, 2022 | 71,264,947 | | | $ | 178,162 | | | $ | 3,171,696 | | | $ | 3,472,403 | | | $ | (36,221) | | | $ | 113,244 | | | $ | 6,899,284 | |
| Net Income | | | — | | | — | | | 331,693 | | | — | | | 4,306 | | | 335,999 | |
| Other comprehensive income | | | — | | | — | | | — | | | 909 | | | — | | | 909 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Other | | | — | | | — | | | 2 | | | — | | | — | | | 2 | |
| Balance, September 30, 2022 | 71,264,947 | | | $ | 178,162 | | | $ | 3,171,696 | | | $ | 3,804,098 | | | $ | (35,312) | | | $ | 117,550 | | | $ | 7,236,194 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Noncontrolling Interests | | Total |
| Shares | | Amount | | | | | | | | | | |
| Balance, December 31, 2022 | 71,264,947 | | | $ | 178,162 | | | $ | 3,171,696 | | | $ | 3,607,464 | | | $ | (15,596) | | | $ | 111,229 | | | $ | 7,052,955 | |
| Equity infusion from Pinnacle West | | | — | | | 150,000 | | | — | | | — | | | — | | | 150,000 | |
| Net income | | | — | | | — | | | 10,660 | | | — | | | 4,306 | | | 14,966 | |
| Other comprehensive income | | | — | | | — | | | — | | | 457 | | | — | | | 457 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Other | | | — | | | — | | | 1 | | | — | | | — | | | 1 | |
| Balance, March 31, 2023 | 71,264,947 | | | $ | 178,162 | | | $ | 3,321,696 | | | $ | 3,618,125 | | | $ | (15,139) | | | $ | 115,535 | | | $ | 7,218,379 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2021 |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Noncontrolling Interests | | Total |
| Shares | | Amount | | | | | | | | | | |
| Balance, July 1, 2021 | 71,264,947 | | | $ | 178,162 | | | $ | 2,871,696 | | | $ | 3,284,989 | | | $ | (39,832) | | | $ | 117,275 | | | $ | 6,412,290 | |
| Net Income | | | — | | | — | | | 343,663 | | | — | | | 4,306 | | | 347,969 | |
| Other comprehensive income | | | — | | | — | | | — | | | 1,000 | | | — | | | 1,000 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Balance, September 30, 2021 | 71,264,947 | | | $ | 178,162 | | | $ | 2,871,696 | | | $ | 3,628,652 | | | $ | (38,832) | | | $ | 121,581 | | | $ | 6,761,259 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Noncontrolling Interests | | Total |
| Shares | | Amount | | | | | | | | | | |
| Balance, December 31, 2021 | 71,264,947 | | | $ | 178,162 | | | $ | 3,021,696 | | | $ | 3,470,235 | | | $ | (34,880) | | | $ | 115,260 | | | $ | 6,750,473 | |
| Equity infusion from Pinnacle West | | | — | | | 150,000 | | | — | | | — | | | — | | | 150,000 | |
| Net income | | | — | | | — | | | 24,199 | | | — | | | 4,306 | | | 28,505 | |
| Other comprehensive income | | | — | | | — | | | — | | | 820 | | | — | | | 820 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Other | | | — | | | — | | | (2) | | | — | | | — | | | (2) | |
| Balance, March 31, 2022 | 71,264,947 | | | $ | 178,162 | | | $ | 3,171,696 | | | $ | 3,494,432 | | | $ | (34,060) | | | $ | 119,566 | | | $ | 6,929,796 | |
The accompanying notes are an integral part of the financial statements.
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(unaudited)
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2022 |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Noncontrolling Interests | | Total |
| Shares | | Amount | | | | | | | | | | |
| Balance, January 1, 2022 | 71,264,947 | | | $ | 178,162 | | | $ | 3,021,696 | | | $ | 3,470,235 | | | $ | (34,880) | | | $ | 115,260 | | | $ | 6,750,473 | |
| Equity infusion from Pinnacle West | | | — | | | 150,000 | | | — | | | — | | | — | | | 150,000 | |
| Net Income | | | — | | | — | | | 525,863 | | | — | | | 12,918 | | | 538,781 | |
| Other comprehensive loss | | | — | | | — | | | — | | | (432) | | | — | | | (432) | |
| Dividends on common stock | | | — | | | — | | | (192,000) | | | — | | | — | | | (192,000) | |
| Capital activities by noncontrolling activities | | | — | | | — | | | — | | | — | | | (10,628) | | | (10,628) | |
| | | | | | | | | | | | | |
| Balance, September 30, 2022 | 71,264,947 | | | $ | 178,162 | | | $ | 3,171,696 | | | $ | 3,804,098 | | | $ | (35,312) | | | $ | 117,550 | | | $ | 7,236,194 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2021 |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Noncontrolling Interests | | Total |
| Shares | | Amount | | | | | | | | | | |
| Balance, January 1, 2021 | 71,264,947 | | | $ | 178,162 | | | $ | 2,871,696 | | | $ | 3,216,955 | | | $ | (40,918) | | | $ | 119,290 | | | $ | 6,345,185 | |
| Net Income | | | — | | | — | | | 598,698 | | | — | | | 12,918 | | | 611,616 | |
| Other comprehensive income | | | — | | | — | | | — | | | 2,086 | | | — | | | 2,086 | |
| Dividends on common stock | | | — | | | — | | | (187,000) | | | — | | | — | | | (187,000) | |
| Capital activities by noncontrolling activities | | | — | | | — | | | — | | | — | | | (10,628) | | | (10,628) | |
| Other | | | — | | | — | | | (1) | | | — | | | 1 | | | — | |
| Balance, September 30, 2021 | 71,264,947 | | | $ | 178,162 | | | $ | 2,871,696 | | | $ | 3,628,652 | | | $ | (38,832) | | | $ | 121,581 | | | $ | 6,761,259 | |
The accompanying notes are an integral part of the financial statements.
COMBINED 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, 4C Acquisition, LLC (“4CA”), Bright Canyon Energy Corporation (“BCE”), and El Dorado Investment Company (“El Dorado”). See Note 8 for more information on 4CA matters. 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 Generating Station (“Palo Verde”) sale leaseback variable interest entities (“VIEs”). See Note 6 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.
Amounts reported in our interim Condensed Consolidated Statements of Income are not necessarily indicative of amounts expected for the respective annual periods, due to the effects of seasonal temperature variations on energy consumption, timing of maintenance on electric generating units (“EGU”), and other factors.
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. Certain information and footnote disclosures normally included in financial statements prepared in conformity with GAAP have been condensed or omitted pursuant to such regulations, although we believe that the disclosures provided are adequate to make the interim information presented not misleading. The accompanying condensed consolidated financial statements and these notes should be read in conjunction with the audited consolidated financial statements and notes included in our 20212022 Form 10-K.
On June 30, 2020, the United States Federal Energy Regulatory Commission (“FERC”) issued an order granting a waiver request related to the existing Allowance for Funds Used During Construction (“AFUDC”) rate calculation beginning March 1, 2020, through February 28, 2021. On February 23, 2021, this waiver was extended until September 30, 2021. On September 21, 2021, it was further extended until March 31, 2022. The order provided a simplified approach that companies may elect to implement in order to minimize the significant distorted effect on the AFUDC formula resulting from increased short-term debt financing during the COVID-19 pandemic. APS adopted this simplified approach to computing the AFUDC composite rate by using a simple average of the actual historical short-term debt balances for 2019, instead of current period short-term debt balances, and left all other aspects of the AFUDC formula composite rate calculation unchanged. This change impacted the AFUDC composite rate in 2021 and for the three-month period ended March 31, 2022. Furthermore, the change in the composite rate calculation did not impact our accounting treatment for these costs. The change did not have a material impact on our financial statements. See Note 1 in our 2021 Form 10-K for information on the accounting treatment for AFUDC.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Cash Flow Information
The following table summarizes supplemental Pinnacle West cash flow information (dollars in thousands):
| | | | | | | | | | | |
| | Nine Months Ended
September 30, |
| | 2022 | | 2021 |
| Cash paid (received) during the period for: | | | |
| Income taxes, net of refunds | $ | 4,784 | | | $ | (763) | |
| Interest, net of amounts capitalized | 177,767 | | | 166,257 | |
| Significant non-cash investing and financing activities: | | | |
| Accrued capital expenditures | $ | 112,579 | | | $ | 129,503 | |
| Right-of-use operating lease assets obtained in exchange for operating lease liabilities | 14,533 | | | 251,119 | |
| | | |
| | | |
| | | | | | | | | | | |
| | Three Months Ended
March 31, |
| | 2023 | | 2022 |
| Cash paid (received) during the period for: | | | |
| Income taxes, net of refunds | $ | (12) | | | $ | — | |
| Interest, net of amounts capitalized | 62,241 | | | 55,208 | |
| Significant non-cash investing and financing activities: | | | |
| Accrued capital expenditures | $ | 115,559 | | | $ | 131,778 | |
| | | |
| | | |
| | | |
The following table summarizes supplemental APS cash flow information (dollars in thousands):
| | | Nine Months Ended
September 30, | | Three Months Ended
March 31, |
| | | 2022 | | 2021 | | 2023 | | 2022 |
| Cash paid during the period for: | | | | |
| Cash paid (received) during the period for: | | Cash paid (received) during the period for: | | | |
| Income taxes, net of refunds | Income taxes, net of refunds | $ | 12,327 | | | $ | 17,612 | | Income taxes, net of refunds | $ | — | | | $ | (25) | |
| Interest, net of amounts capitalized | Interest, net of amounts capitalized | 167,854 | | | 160,467 | | Interest, net of amounts capitalized | 53,610 | | | 53,982 | |
| Significant non-cash investing and financing activities: | Significant non-cash investing and financing activities: | | Significant non-cash investing and financing activities: | |
| Accrued capital expenditures | Accrued capital expenditures | $ | 112,574 | | | $ | 129,503 | | Accrued capital expenditures | $ | 112,219 | | | $ | 124,778 | |
| Right-of-use operating lease assets obtained in exchange for operating lease liabilities | 10,939 | | | 251,119 | | |
| |
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. Revenue
Sources of Revenue
The following table provides detail of Pinnacle West’s consolidated revenue disaggregated by revenue sources (dollars in thousands):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | |
| | 2022 | 2021 | | 2022 | 2021 | | 2023 | 2022 | |
| Retail Electric Service | Retail Electric Service | | | | | Retail Electric Service | | | |
| Residential | Residential | | $ | 743,061 | | $ | 681,918 | | | $ | 1,647,996 | | $ | 1,554,473 | | Residential | | $ | 409,724 | | $ | 367,346 | | |
| Non-Residential | Non-Residential | | 547,979 | | 480,671 | | | 1,370,164 | | 1,216,449 | | Non-Residential | | 406,137 | | 359,516 | | |
| Wholesale Energy Sales | Wholesale Energy Sales | | 139,741 | | 108,539 | | | 198,546 | | 144,143 | | Wholesale Energy Sales | | 95,603 | | 28,903 | | |
| Transmission Services for Others | Transmission Services for Others | | 36,321 | | 35,816 | | | 91,165 | | 77,388 | | Transmission Services for Others | | 31,791 | | 25,492 | | |
| Other Sources | Other Sources | | 2,769 | | 1,310 | | | 7,200 | | 12,525 | | Other Sources | | 1,700 | | 2,274 | | |
| Total operating revenues | Total operating revenues | | $ | 1,469,871 | | $ | 1,308,254 | | | $ | 3,315,071 | | $ | 3,004,978 | | Total operating revenues | | $ | 944,955 | | $ | 783,531 | | |
Retail Electric Revenue. Pinnacle West’s retail electric revenue is generated by wholly owned, regulated subsidiary APS’s sale of electricity to our regulated customers within the authorized service territory at tariff rates approved by the ACC and based on customer usage. Revenues related to the sale of electricity are generally recognized when service is rendered, or electricity is delivered to customers. The billing of electricity sales to individual customers is based on the reading of their meters. We obtain customers’ meter data on a systematic basis throughout the month, and generally bill customers within a month from when service was provided. Customers are generally required to pay for services within 21 days of when the services are billed. See “Allowance for Doubtful Accounts” discussion below for additional details regarding payment terms.
Wholesale Energy Sales and Transmission Services for Others. Revenues from wholesale energy sales and transmission services for others represent energy and transmission sales to wholesale customers. These activities primarily consist of managing fuel and purchased power risks in connection with the cost of serving our retail customers’ energy requirements. We may also sell into the wholesale markets generation that is not needed for APS’s retail load. Our wholesale activities and tariff rates are regulated by FERC.
In the electricity business, some contracts to purchase energy are settled by netting against other contracts to sell electricity. This is referred to as a book-out, and usually occurs in contracts that have the same terms (product type, quantities, and delivery points) and for which power does not flow. We net these book-outs, which reduces both wholesale revenues and fuel and purchased power costs.
Revenue Activities
Our revenues primarily consist of activities that are classified as revenues from contracts with customers. We derive our revenues from contracts with customers primarily from sales of electricity to our regulated retail customers. Revenues from contracts with customers also include wholesale and transmission activities. Our revenues from contracts with customers for the three and nine months ended September 30,March 31, 2023 and 2022 were $1,465$922 million and $3,299 million, respectively, and for the three and nine months ended September 30, 2021 were $1,304 million and $2,967$772 million, respectively.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
We have certain revenues that do not meet the specific accounting criteria to be classified as revenues from contracts with customers. For the three and nine months ended September 30,March 31, 2023 and 2022, our revenues that do not
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
qualify as revenue from contracts with customers were $5$23 million and $16 million, respectively, and for the three and nine months ended September 30, 2021 were $4 million and $38$12 million, respectively. This amount includes revenues related to certain regulatory cost recovery mechanisms that are considered alternative revenue programs. We recognize revenue associated with alternative revenue programs when specific events permitting recognition are completed. Certain amounts associated with alternative revenue programs will subsequently be billed to customers; however, we do not reclassify billed amounts into revenue from contracts with customers. See Note 4 for a discussion of our regulatory cost recovery mechanisms.
Contract Assets and Liabilities from Contracts with Customers
There were no material contract assets, contract liabilities, or deferred contract costs recorded on the Condensed Consolidated Balance Sheets as of September 30, 2022,March 31, 2023, or December 31, 2021.2022.
Allowance for Doubtful Accounts
The allowance for doubtful accounts represents our best estimate of accounts receivable and accrued unbilled revenues that will ultimately be uncollectible due to credit loss risk. The allowance includes a write-off component that is calculated by applying an estimated write-off factor to retail electric revenues. The write-off factor used to estimate uncollectible accounts is based upon consideration of historical collections experience, the current and forecasted economic environment, changes to our collection policies, and management’s best estimate of future collections success. We continue to monitor the impacts of our disconnection policies, payment arrangements, among other considerations impacting our estimated write-off factor, and allowance for doubtful accounts.
The following table provides a rollforward of Pinnacle West’s allowance for doubtful accounts (dollars in thousands):
| | | September 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
| Allowance for doubtful accounts, balance at beginning of period | Allowance for doubtful accounts, balance at beginning of period | | $ | 25,354 | | | $ | 19,782 | | Allowance for doubtful accounts, balance at beginning of period | | $ | 23,778 | | | $ | 25,354 | |
| Bad debt expense | Bad debt expense | | 13,422 | | | 22,251 | | Bad debt expense | | 3,522 | | | 17,006 | |
| Actual write-offs | Actual write-offs | | (14,777) | | | (16,679) | | Actual write-offs | | (5,188) | | | (18,582) | |
| Allowance for doubtful accounts, balance at end of period | Allowance for doubtful accounts, balance at end of period | | $ | 23,999 | | | $ | 25,354 | | Allowance for doubtful accounts, balance at end of period | | $ | 22,112 | | | $ | 23,778 | |
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Long-Term Debt and Liquidity Matters
Pinnacle West and APS maintain committed revolving credit facilities in order to enhance liquidity and provide credit support for their commercial paper programs, to refinance indebtedness, and for other general corporate purposes.
Pinnacle West
On December 21, 2021,April 10, 2023, Pinnacle West entered into a $450replaced its $200 million term loan facility that matures December 20, 2024. On December 21, 2021, $150 million of the proceeds were received and recognized as long-term debt on the Condensed Consolidated Balance Sheets. On January 6, 2022, the remaining $300 million of proceeds were received and recognized on that date as long-term debt on the Condensed Consolidated Balance Sheets. The proceeds were used for general corporate purposes.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On December 23, 2020, Pinnacle West entered into a $150 million term loanrevolving credit facility that would have matured June 30, 2022. The proceeds were received on January 4, 2021 and used for general corporate purposes. We recognized the term loan facility as long-term debt upon settlement on January 4, 2021. On January 6, 2022, Pinnacle West repaid this loan facility early.
At September 30, 2022, Pinnacle West hadMay 28, 2026, with a new $200 million revolving credit facility that matures on May 28, 2026.April 10, 2028. 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. Interest rates are based on Pinnacle West’s senior unsecured debt credit ratings and the agreement includes a sustainability-linked pricing metric which permits an interest rate reduction or increase by meeting or missing targets related to specific environmental and employee health and safety sustainability objectives. The facility is available to support Pinnacle West’s general corporate purposes, including support for Pinnacle West’s $200 million commercial paper program, for bank borrowings or for issuances of letters of credit. At September 30, 2022,March 31, 2023, Pinnacle West had no outstanding borrowings under its revolving credit facility, no letters of credit outstanding under the credit facility, and $24$35 million of outstanding commercial paper borrowings.
On December 16, 2022, Pinnacle West entered into a $175 million term loan facility that matures December 16, 2024. The proceeds were received on January 6, 2023 and used for general corporate purposes. We recognized the term loan facility as long-term debt upon settlement on January 6, 2023.
APS
At September 30, 2022,On April 10, 2023, APS hadreplaced its two $500 million revolving credit facilities that total $1 billion and that maturewould have matured on May 28, 2026.2026, with a new $1.25 billion revolving credit facility that matures on April 10, 2028. APS mayhas the option to increase the amount of eachthe facility up to a maximum of $700$400 million, for a total of $1.4$1.65 billion, upon the satisfaction of certain conditions and with the consent of the lenders. Interest rates are based on APS’s senior unsecured debt credit ratings and the agreements include a sustainability-linked pricing metric which permits an interest rate reduction or increase by meeting or missing targets related to specific environmental and employee health and safety sustainability objectives. These facilities areThis facility is available to support APS’s general corporate purposes, including support for APS’s $750 million commercial paper program, which was increased from $750 million to $1 billion on April 10, 2023, for bank borrowings or for issuances of letters of credit. At September 30, 2022,March 31, 2023, APS had no outstanding borrowings under its revolving credit facilities, no letters of credit outstanding under the credit facilities, and $443$463 million of outstanding commercial paper borrowings.
On December 17, 2020, the ACC issued a financing order in which, subject to specified parameters and procedures, it approved APS’s short-term debt authorization equal to the sum of (i) 7% of APS’s capitalization, and (ii) $500 million (which is required to be used for costs relating to purchases of natural gas and power) and a long-term debt authorization of $7.5 billion. On April 6, 2022, APS filed an application with the ACC to increase the long-term debt limit under the terms required by APS from $7.5 billion to $8.0 billion (subject to appropriate regulatory treatment of PPA lease agreements) and to continue its authorization of short-term debt granted in the 2020 financing order. On October 31, 2022, the Arizona Corporation Commission staff (“ACC Staff”) filed a report agreeing with APS's proposal to exclude financing lease PPAs from the definition of long-term debt and adopting APS’s primary proposal to increase APS’s long-term debt limit to $8 billion. This application is pending review by the ACC’s Hearing Division and a final decision by the full Commission. APS cannot predict the outcome of this matter.
On January 6, 2022,2023, Pinnacle West contributed $150 million into APS in the form of an equity infusion. APS used this contribution to repay short-term indebtedness.
On September 15, 2022, APS remarketed $128 million of the Maricopa County, Arizona Pollution Control Corporation Revenue Refunding Bonds, 2009 Series B, C, D and E, due May 1, 2029 (the “Bonds”). The Bonds were originally issued on June 26, 2009, and prior to this remarketing were held as treasury bonds. Each series of the Bonds has a principal amount of $32 million. All series of the Bonds have been remarketed and issued in weekly variable interest rate modes and are classified as long-term debt on our Condensed Consolidated Balance Sheets.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
See “Financial Assurances” in Note 8 for a discussion of other outstanding letters of credit.
BCE
On February 11, 2022, a special purpose subsidiary of BCE entered into a credit agreement to finance capital expenditures and related costs for a 31 MWmegawatt (“MW”) solar and battery storage project in Los Alamitos, California (“Los Alamitos”) that is under development by the subsidiary. The credit agreement consists of an approximately $33 million equity bridge loan facility, an approximately $38$42 million non-recourse construction to term loan facility, and an approximately $5 million letter of credit facility. In connection with the
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
credit agreement, Pinnacle West has issued a guarantee of up to $42 million primarily relating to the equity bridge loan. As of September 30, 2022, $27.6March 31, 2023, $28 million has been drawn from the equity bridge loan and there is noa $33 million outstanding balance for the non-recourse construction to term loanfacility and $2.5 million letters of credit outstanding under the letter of credit facility. The equity bridge loan and construction facility mature and are due on the project’s commercial operation date, expected on or before August 15, 2023. BCE expects to convert the construction facility into a term loan upon the project’s commercial operation date. On October 19, 2022, BCE executed an interest rate swap to hedge the variable interest rate exposure of this credit facility. See Note 7.
On April 18, 2023, Pinnacle West issued performance guarantees in connection with BCE’s Kūpono investment project financing. BCE holds an equity method investment relating to the Kūpono project. See Note 8.
Debt Fair Value
Our long-term debt fair value estimates are classified within Level 2 of the fair value hierarchy. The following table presents the estimated fair value of our long-term debt, including current maturities (dollars in thousands):
| | | | As of September 30, 2022 | | As of December 31, 2021 | | As of March 31, 2023 | | As of December 31, 2022 |
| | | Carrying
Amount | | Fair Value | | Carrying
Amount | | Fair Value | | Carrying
Amount | | Fair Value | | Carrying
Amount | | Fair Value |
| Pinnacle West | Pinnacle West | $ | 947,752 | | | $ | 898,160 | | | $ | 797,042 | | | $ | 792,735 | | Pinnacle West | $ | 1,123,101 | | | $ | 1,084,455 | | | $ | 947,892 | | | $ | 905,525 | |
| APS | APS | 6,396,740 | | | 5,167,359 | | | 6,266,693 | | | 6,933,619 | | APS | 6,794,124 | | | 5,898,167 | | | 6,793,529 | | | 5,629,491 | |
| BCE | BCE | 27,341 | | | 27,628 | | | — | | | — | | BCE | 60,150 | | | 60,821 | | | 50,550 | | | 50,685 | |
| Total | Total | $ | 7,371,833 | | | $ | 6,093,147 | | | $ | 7,063,735 | | | $ | 7,726,354 | | Total | $ | 7,977,375 | | | $ | 7,043,443 | | | $ | 7,791,971 | | | $ | 6,585,701 | |
4. Regulatory Matters
2022 Retail Rate Case
APS filed an application with the ACC on October 28, 2022 (the “2022 Rate Case”) seeking an increase in annual retail base rates on the date rates become effective (“Day 1”) of a net $460 million. This Day 1 net impact represents a total base revenue deficiency of $772 million offset by proposed adjustor transfers of cost recovery to annual retail rates and adjustor mechanism modifications. The average annual customer bill impact of APS’s request on Day 1 is an increase of 13.6%.
The principal provisions of APS’s application are:
•Aa test year comprised of twelve months ended June 30, 2022, adjusted as described below;
•Anan original cost rate base of $10.5 billion, which approximates the ACC-jurisdictional portion of the book value of utility assets, net of accumulated depreciation and other credits;
•Thethe following proposed capital structure and costs of capital:
| | | | | | | | | | | | | | | | | | | | |
| | Capital Structure | | Cost of Capital | |
| Long-term debt | | 48.07 | | % | 3.85 | | % |
| Common stock equity | | 51.93 | | % | 10.25 | | % |
| Weighted-average cost of capital | | | | 7.17 | | % |
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | |
| | Capital Structure | | Cost of Capital | |
| Long-term debt | | 48.07 | | % | 3.85 | | % |
| Common stock equity | | 51.93 | | % | 10.25 | | % |
| Weighted-average cost of capital | | | | 7.17 | | % |
•Aa 1% return on the increment of fair value rate base above APS’s original cost rate base, as provided for by Arizona law;
•Aa rate of $0.038321 per kWh for the portion of APS’s retail base rates attributable to fuel and purchased power costs (“Base Fuel Rate”);
•Modificationmodification of its adjustment mechanisms including:
▪eliminate the Environmental Improvement Surcharge and collect costs through base rates,
▪eliminate the Lost Fixed Cost Recovery mechanism and collect costs through base rates and the Demand Side Management Adjustment Charge (“DSMAC”),
▪maintain as inactive the Tax Expense Adjustor Mechanism,
▪maintain the Transmission Cost Adjustment mechanism,
▪modify the performance incentive in the DSMAC, and
▪modify the Renewable Energy Adjustment Charge to include recovery of capital carrying costs of APS owned renewable and storage resources;
•Changeschanges to its limited-income program, including a second tier to provide an additional discount for customers with greater need; and
•Twelvetwelve months of post-Test Year plant investments to reflect used and useful projects that will be placed into service prior to July 1, 2023.
APS requested that the increase become effective December 1, 2023. The hearing for this rate case is currently scheduled to begin in August 2023. APS cannot predict the outcome of its request.
2019 Retail Rate Case
On October 31, 2019, APS filed an application with the ACC on October 31, 2019for an annual increase in retail base rates (the “2019 Rate Case”) seeking an increase in annual retail base rates of $69 million. This amount includes recovery of the deferral and rate base effects of the Four Corners Power Plant (“Four Corners”) selective catalytic reduction (“SCR”) project that was the subject of a separate proceeding. See “Four Corners SCR Cost Recovery” below. It also reflects a net credit to base rates of approximately $115 million primarily due to the prospective inclusion of rate refunds currently provided through the Tax Expense Adjustment Mechanism (“TEAM”). The proposed total annual revenue increase in APS’s application is $184 million. The average annual customer bill impact of APS’s request is an increase of 5.6% (the average annual bill impact for a typical APS residential customer is 5.4%).
The principal provisions of APS’s application were:
•a test year comprised of 12 months ended June 30, 2019, adjusted as described below;
•an original cost rate base of $8.87 billion, which approximates the ACC-jurisdictional portion of the book value of utility assets, net of accumulated depreciation and other credits;
•the following proposed capital structure and costs of capital:
| | | | | | | | | | | | | | | | | | | | |
| | | Capital Structure | | Cost of Capital | |
| Long-term debt | | 45.3 | | % | 4.10 | | % |
| Common stock equity | | 54.7 | | % | 10.15 | | % |
| Weighted-average cost of capital | | | | 7.41 | | % |
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
•a 1% return on the increment of fair value rate base above APS’s original cost rate base, as provided for by Arizona law;
•a rate of $0.030168 per kWh for the Base Fuel Rate;
•authorization to defer until APS’s next general rate case the increase or decrease in its Arizona property taxes attributable to tax rate changes after the date the rate application is adjudicated;
•a number of proposed rate and program changes for residential customers, including:
▪a super off-peak period during the winter months for APS’s time-of-use with demand rates;
▪additional $1.25 million in funding for APS’s limited-income crisis bill program; and
▪a flat bill/subscription rate pilot program;
•proposed rate design changes for commercial customers, including an experimental program designed to provide access to market pricing for up to 200 MW of medium and large commercial customers;
•recovery of the deferral and rate base effects of the construction and operating costs of the Ocotillo modernization project (see discussion below of the 2017 Settlement Agreement); and
•continued recovery of the remaining investment and other costs related to the retirement and closure of the Navajo Generating Station (the “Navajo Plant”) (see “Navajo Plant” below).
On October 2, 2020, the ACC Staff, the Residential Utility Consumer Office (“RUCO”) and other intervenors filed their initial written testimony with the ACC. The ACC Staff recommended, among other things, (i) an $89.7 million revenue increase, (ii) an average annual customer bill increase of 2.7%, (iii) a return on equity of 9.4%, (iv) a 0.3% or, as an alternative, a 0% return on the increment of fair value rate base greater than original cost, (v) the recovery of the deferral and rate base effects of the construction and operating costs of the Four Corners SCR project and (vi) the recovery of the rate base effects of the construction and ongoing consideration of the deferral of the Ocotillo modernization project. RUCO recommended, among other things, (i) a $20.8 million revenue decrease, (ii) an average annual customer bill decrease of 0.63%, (iii) a return on equity of 8.74%, (iv) a 0% return on the increment of fair value rate base, (v) the nonrecovery of the deferral and rate base effects of the construction and operating costs of the Four Corners SCR project pending further consideration, and (vi) the recovery of the deferral and rate base effects of the construction and operating costs of the Ocotillo modernization project.
The filed ACC Staff and intervenor testimony include additional recommendations, some of which materially differ from APS’s filed application. On November 6, 2020, APS filed its rebuttal testimony and the principal provisions which differ from its initial application include, among other things, (i) a $169 million revenue increase, (ii) average annual customer bill increase of 5.14%, (iii) return on equity of 10%, (iv) return on the increment of fair value rate base of 0.8%, (v) new cost recovery adjustor mechanism, the Advanced Energy Mechanism (“AEM”), to enable more timely recovery of clean investments as APS pursues its clean energy commitment, (vi) recognition that securitization is a potentially useful financing tool to recover the remaining book value of retiring assets and effectuate a transition to a cleaner energy future that APS intends to pursue, provided legislative hurdles are addressed, and (vii) a Coal Community Transition (“CCT”) plan related to the closure or future closure of coal-fired generation facilities, of which $25 million would be funds that are not recoverable through rates with a proposal that the remainder be funded by customers over 10 years.
The CCT plan includes the following proposed components: (i) $100 million that will be paid over 10 years to the Navajo Nation for a sustainable transition to a post-coal economy, which would be funded by customers, (ii) $1.25 million that will be paid over five years to the Navajo Nation to fund an economic development organization, which would be funds not recoverable through rates, (iii) $10 million to facilitate electrification projects within the Navajo Nation, which would be funded equally by funds not recoverable through rates and by customers, (iv) $2.5 million per year in transmission revenue sharing to be paid to the Navajo Nation beginning after the closure of the Four Corners through 2038, which would be funds not recoverable through rates, (v) $12 million that will be paid over five years to the Navajo County Communities
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
surrounding Cholla Power Plant, which would primarily be funded by customers, and (vi) $3.7 million that will be paid over five years to the Hopi Tribe related to APS’s ownership interests in the Navajo Plant, which would primarily be funded by customers. The commitment of funds that would not be recoverable through rates of $25 million were recognized in our December 31, 2020 financials. In 2021, APS committed an additional $900,000 to be paid to the Hopi Tribe related to APS’s ownership interests in the Navajo Plant, and this amount was recognized in its December 31, 2021 financials.
On December 4, 2020, the ACC Staff and intervenors filed surrebuttal testimony. The ACC Staff reduced its recommended rate increase to $59.8 million, or an average annual customer bill increase of 1.82%. In RUCO’s surrebuttal, the recommended revenue decrease changed to $50.1 million, or an average annual customer bill decrease of 1.52%. The hearing concluded on March 3, 2021, and the post-hearing briefing concluded on April 30, 2021.
On August 2, 2021, thean Administrative Law Judge issued a Recommended Opinion and Order in the 2019 Rate Case (the “2019 Rate Case ROO”) and issued corrections on September 10 and September 20, 2021.
The 2019 Rate Case ROO recommended, among other things, (i) a $111 million decrease in annual revenue requirements, (ii) a return on equity of 9.16%, (iii) a 0.30% return on the increment of fair value rate base greater than original cost, with total fair value rate of return further adjusted to include a 0.03% reduction to return on equity resulting in an effective fair value rate of return of 4.95%, (iv) the nonrecovery of the deferral and rate base effects of the operating costs and construction of the Four Corners SCRPower Plant (“Four Corners”) selective catalytic reduction (“SCR”) project (see “Four Corners SCR Cost Recovery” below for additional information), (v) the recovery of the deferral and rate base effects of the operating costs and construction of the Ocotillo modernization project, which includes a reduction in the return on the deferral, (vi) a 15% disallowance of annual amortization of the Navajo PlantGenerating Station (the “Navajo Plant”) regulatory asset recovery related to the closure of the Navajo Plant (see “Navajo Plant” below), (vii) the denial of the request to defer, until APS’s next general rate case, the increase or decrease in its Arizona property taxes attributable to tax rate changes, and (viii) a collaborative process to review and recommend revisions to APS’s adjustment mechanisms within 12 months after the date of the decision. The 2019 Rate Case ROO also recommended that the CCTCoal Community Transition (“CCT”) plan related to the closure or future closure of coal-fired generation facilities include the following components: (i) $50 million that will be paid over 10 years to the Navajo Nation, (ii) $5 million that will be paid over five years to the Navajo County Communities surrounding Cholla Power Plant, and (iii) $1.675 million that will be paid to the Hopi Tribe related to APS’s ownership interests in the Navajo Plant. These amounts would be recoverable from APS’s customers through the Arizona Renewable Energy Standard and Tariff (“RES”) adjustment mechanism. APS filed exceptions on September 13, 2021, regarding the disallowance of the SCR cost deferrals and plant investments that was recommended in the 2019 Rate Case ROO, among other issues.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On October 6, 2021 and October 27, 2021, the ACC voted on various amendments to the 2019 Rate Case ROO that would result in, among other things, (i) a return on equity of 8.70%, (ii) the recovery of the deferral and rate base effects of the operating costs and construction of the Four Corners SCR project, with the exception of $215.5 million (see “Four Corners SCR Cost Recovery” below), (iii) that the CCT plan include the following components: (a) a payment of $1 million to the Hopi Tribe within 60 days of the 2019 Rate Case decision, (b) a payment of $10 million over three years to the Navajo Nation, (c) a payment of $0.5 million to the Navajo County communities within 60 days of the 2019 Rate Case decision, (d) up to $1.25 million for electrification of homes and businesses on the Hopi reservation, and (e) up to $1.25 million for the electrification of homes and businesses on the Navajo Nation reservation. These payments and expenditures are attributable to the future closures of Four Corners and Cholla, along with the prior closure of the Navajo Plant and all ordered payments and expenditures would be recoverable through rates, and (iv) a change in the residential on-peak time-of-use period from 3 p.m. to 8 p.m. to 4 p.m. to 7 p.m. Monday through Friday, excluding holidays. The 2019 Rate Case ROO, as amended, resultsresulted in a total annual revenue decrease for APS of $4.8 million, excluding temporary CCT payments and expenditures.expenditures, under the CCT plan. On November 2, 2021, the ACC approved the 2019 Rate Case ROO, as amended.
On November 24, 2021, APS filed an application for
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
rehearing of the 2019 Rate Case with the ACC and the application was deemed denied on December 15, 2021, as the ACC did not act upon it. On December 17, 2021, APS filed its Notice of Direct Appeal at the Arizona Court of Appeals and a Petition for Special Action with the Arizona Supreme Court, requesting review of the disallowance of $215$215.5 million of Four Corners SCR plant investments and deferrals (see “Four Corners SCR Cost Recovery” below for additional information) and the 20 basis point20-basis-point penalty reduction to the return on equity. On February 8, 2022, the Arizona Supreme Court declined to accept jurisdiction on APS’s Petition for Special Action. The appeal at the Arizona Court of Appeals is proceedingheard oral arguments on November 30, 2022. On March 6, 2023, the Court issued its opinion in this matter, affirming in part and reversing in part the ACC’s decision in the normal course,2019 Rate Case. The Court vacated the 20-basis-point penalty included in the ACC’s allowed return on equity, as the Court determined the use of customer service metrics to justify the reduction exceeded the ACC’s ratemaking authority. Additionally, the Court vacated the disallowance of $215.5 million of APS’s Four Corners SCR investment because the ACC did not consider APS’s contractual obligations and oral arguments have been setimproperly considered post-investment data in violation of its own rules. The Court remanded the issue to the ACC for November 30, 2022.further proceedings. The ACC requested an extension of the 30-day deadline to appeal the matter to the Arizona Supreme Court, and the Arizona Supreme Court granted the extension of the deadline to May 8, 2023. APS cannot predict the outcome of this proceeding.
Consistent with the 2019 Rate Case decision, APS implemented the new rates effective as of December 1, 2021. On December 3, 2021, ACC Staff notified the ACC of a discrepancy between the written decision, which approved the change in time-of-use on-peak hours to 4 p.m. to 7 p.m. but did not explicitly approve the 10 months contemplated in APS’s verbal testimony to implement the new time-of-use hours. On December 16, 2021, the ACC ordered APS to complete the implementation of the time-of-use peak period by April 1, 2022. On January 12, 2022, the ACC voted to extend the deadline until September 1, 2022, to complete the implementation of the new on-peak hours for residential customers. In addition, the ACC ordered extensive compliance and reporting obligations and will be continuing to explore whether penalties or rebates would be owed to certain customers.obligations. APS completed the implementation of the new on-peak hours for residential customers before the September 1, 2022 deadline. APS cannot predict if the outcome ofACC will take any further action on this matter.
Additionally, consistent with the 2019 Rate Case decision, as of April 2022,2023, APS has completed the following payments that will be recoverable through rates related to the CCT: (i) $3.33$6.66 million to the Navajo Nation; (ii) $500,000$0.5 million to the Navajo County communities; and (iii) $1 million to the Hopi Tribe. Consistent with APS’s commitment to the impacted communities, APS has also completed the following payments: (i) $500,000$1 million to the Navajo Nation for CCT; (ii) $1.1 million to the Navajo County Communities for CCT and economic development; and (iii) $1.25 million to the Hopi Tribe for CCT and economic development. The ACC has also authorized $1.25 million to be recovered through rates for electrification of homes and businesses on both the Navajo Nation and Hopi reservation. Expenditure of the recoverable funds for electrification of homes and businesses on the Navajo Nation and the Hopi reservations is contingent upon completion of a census of the unelectrified homes and businesses in each that are also within APS service territory.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Matter of Impact of the Closures of Fossil-Based Generation Plan on Impacted Communities
On September 28, 2022, ACC Staff filed their staff report in the Matter of Impact of the Closures of Fossil-Based Generation Plan on Impacted Communities. APS and other interested parties filed comments on the report. On October 21, 2022, ACC Staff filed a revised report and proposed order. The revised report and proposed order recommendrecommended that funds for CCT shall not be collected from rate payers. On December 8, 2022, the ACC voted against ACC Staff’s proposed order, and on April 17, 2023, the ACC closed the docket. Any further action on CCT issues will take place in utility rate cases, including the currently pending 2022 Rate Case. APS cannot predict the outcome of this matter.
Information Technology ACC Investigation
On December 16, 2021, the ACC opened an investigation into various matters related to APS’s Information Technology department, including information about technology projects, costs, vendor management leadership and decision making. APS is cooperating with the investigation. APS cannot predict the outcome of this matter.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2016 Retail Rate Case Filing and the 2017 Settlement Agreement
On June 1, 2016, APS filed an application with the ACC for an annual increase in retail base rates. On March 27, 2017, a majority of the stakeholders in the general retail rate case, including the ACC Staff, RUCO, limited income advocates and private rooftop solar organizations signed a settlement agreement (the “2017 Settlement Agreement”) and filed it with the ACC. The 2017 Settlement Agreement provides for, among other things, a net retail base rate increase of $94.6 million, excluding the transfer of adjustor balances, consisting of: (1) a non-fuel, non-depreciation, base rate increase of $87.2 million per year; (2) a base rate decrease of $53.6 million attributable to reduced fuel and purchased power costs; and (3) a base rate increase of $61.0 million due to changes in depreciation schedules.
Other key provisions of the 2017 Settlement Agreement include the following:
•an authorized return on common equity of 10.0%;
•a capital structure comprised of 44.2% debt and 55.8% common equity;
•a cost deferral order for potential future recovery in APS’s next general retail rate case for the construction and operating costs APS incurs for its Ocotillo modernization project;
•a cost deferral and procedure to allow APS to request rate adjustments prior to its next general retail rate case related to its share of the construction costs associated with installing SCR equipment at the Four Corners;
•a deferral for future recovery (or credit to customers) of the Arizona property tax expense above or below a specified test year level caused by changes to the applicable Arizona property tax rate;
•an expansion of the Power Supply Adjustor (“PSA”) to include certain environmental chemical costs and third-party energy storage costs;
•a new AZ Sun II program (now known as “APS Solar Communities”) for utility-owned solar distributed generation (“DG”) with the purpose of expanding access to rooftop solar for low-and moderate-income Arizonans, recoverable through the RES, to be no less than $10 million per year in capital costs, and not more than $15 million per year in capital costs;
•an increase to the per kWh cap for the environmental improvement surcharge from $0.00016 to $0.00050 and the addition of a balancing account;
•rate design changes, including:
▪a change in the on-peak time-of-use period from noon to 7 p.m. to 3 p.m. to 8 p.m. Monday through Friday, excluding holidays;
▪non-grandfathered DG customers would be required to select a rate option that has time of use rates and either a new grid access charge or demand component;
▪a Resource Comparison Proxy (“RCP”) for exported energy of 12.9 cents per kWh in year one; and
•an agreement by APS not to pursue any new self-build generation (with certain exceptions) having an in-service date prior to January 1, 2022 (extended to December 31, 2027, for combined-cycle generating units), unless expressly authorized by the ACC.
On August 15, 2017, the ACC approved the 2017 Settlement Agreement without material modifications, and on August 18, 2017, the ACC issued a final written Opinion and Order reflecting its decision in APS’s general retail rate case (the “2017 Rate Case Decision”). The new rates went into effect on August 19, 2017.
See “Rate Plan Comparison Tool and Investigation” below for information regarding a review and investigation pertaining to the rate plan comparison tool offered to APS customers and other related issues.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Cost Recovery Mechanisms
APS has received regulatory decisions that allow for more timely recovery of certain costs outside of a general retail rate case through the following recovery mechanisms. See “2022 Retail Rate Case” above for proposed modifications of adjustment mechanisms in the 2022 rate case.Rate Case.
Renewable Energy Standard. In 2006, the ACC approved the RES. Under the RES, electric utilities that are regulated by the ACC must supply an increasing percentage of their retail electric energy sales from eligible renewable resources, including solar, wind, biomass, biogas and geothermal technologies. In order to achieve these requirements, the ACC allows APS to include a RES surcharge as part of customer bills to recover the approved amounts for use on renewable energy projects. Each year, APS is required to file a five-year implementation plan with the ACC and seek approval for funding the upcoming year’s RES budget. In
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2015, the ACC revised the RES rules to allow the ACC to consider all available information, including the number of rooftop solar arrays in a utility’s service territory, to determine compliance with the RES.
On November 20, 2017, APS filed an updated 2018 RES budget to include budget adjustments for APS Solar Communities (formerly known as AZ Sun II), which was approved as part of the 2017 Rate Case Decision. APS Solar Communities is a 3-year program authorizing APS to spend $10 million to $15 million in capital costs each year to install utility-owned DG systems for low to moderate income residential homes, non-profit entities, Title I schools and rural government facilities. The 2017 Rate Case Decision provided that all operations and maintenance expenses, property taxes, marketing and advertising expenses, and the capital carrying costs for this program will be recovered through the RES.
On July 1, 2019, APS filed its 2020 RES Implementation Plan and proposed a budget of approximately $86.3 million. APS’s budget request supports existing approved projects and commitments and requests a permanent waiver of the RES residential distributed energy requirement for 2020. On September 23, 2020, the ACC approved the 2020 RES Implementation Plan, including APS’s requested waiver of the residential distributed energy requirements for 2020. In addition, the ACC approved the implementation of a new pilot program that incentivizes Arizona households to install at-home battery systems. Recovery of the costs associated with the pilot will be addressed in the 2021 Demand Side Management Implementation Plan (“DSM Plan”).
On July 1, 2020, APS filed its 2021 RES Implementation Plan and proposed a budget of approximately $84.7 million. APS’s budget request supportssupported existing approved projects and commitments and requestsrequested a permanent waiver of the RES residential distributed energy requirement for 2021. In the 2021 RES Implementation Plan, APS requested $4.5 million to meet revenue requirements associated with the APS Solar Communities program to complete installations delayed as a result of the COVID-19 pandemicpandemic. The APS Solar Communities program was originally a 3-year program authorizing APS to spend $10 million to $15 million in 2020.capital costs each year to install utility-owned distributed renewable energy (“DG”) systems for low to moderate income residential homes, non-profit entities, Title I schools and rural government facilities. On June 7, 2021, the ACC approved the 2021 RES Implementation Plan, including APS’s requested waiver of the residential distributed energy requirements for 2021. As part of the approval, the ACC approved the requested budget and authorized APS to collect $68.3 million through the Renewable Energy Adjustment Charge to support APS’s RES programs.
In June 2021, the ACC adopted a clean energy rules package which would require APS to meet certain clean energy standards and technology procurement mandates, obtain approval for its action plan included in its IRP, and seek cost recovery in a rate process. Since the adopted clean energy rules differed substantially from the original Recommended Order and Opinion, supplemental rulemaking procedures were required before the rules could become effective. On January 26, 2022, the ACC reversed its prior decision and declined to send the final draft energy rules through the rulemaking process. Instead, the ACC opened a new docket to consider all-source requests for proposals (“RFP”) requirements and the IRP process. See “Energy Modernization Plan” below for more information.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On July 1, 2021, APS filed its 2022 RES Implementation Plan and proposed a budget of approximately $93.1 million. APS filed an amended 2022 RES Implementation Plan on December 9, 2021, with a proposed budget of $100.5 million. This budget includes funding for programs to comply with the decision in the 2019 Rate Case, including the ACC authorizing spending $20 million to $30 million in capital costs for the continuation of the APS Solar Communities program each year for a period of three years from the effective date of the 2019 Rate Case decision. APS’s budget proposal supports existing approved projects and commitments and requests a waiver of the RES residential and non-residential distributed energy requirements for 2022. On May 18, 2022, the ACC approved the 2022 RES Implementation Plan, including an amendment requiring a stakeholder working group convene to develop a community solar program for the Commission’s consideration at a future date. On September 23, 2022, APS filed a community solar proposal in compliance with the ACC order that was informed by a stakeholder working group. APS is proposing a small, pilot-scale program size of up to 140MW140 MW that would be selected through a competitive RFP. The ACC has not yet ruled on the proposal. However, on November 10, 2022, the ACC approved a bifurcated community solar process, directing ACC Staff to develop a statewide policy through additional stakeholder involvement and establishing a separate evidentiary hearing to define other policy components. The community solar program was deferred to the ACC’s Hearing Division so that a formal evidentiary hearing could be held to consider issues of substance related to community solar. APS cannot predict the outcomes of these future activities.
On July 1, 2022, APS filed its 2023 RES Implementation Plan and proposed a budget of approximately $86.2 million, excluding any funding offsets. This budget contains funding for programs to comply with Commission-approved initiatives, including the 2019 Rate Case decision. APS’s budget proposal supports existing approved projects and commitments and requests a waiver of the RES residential and non-residential distributed energy requirements for 2022. TheOn November 10, 2022, the ACC has not yet ruled onapproved the 2023 RES Implementation Plan, including APS’s requested waiver of the distributed energy requirement for 2023.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In response to an ACC inquiry, the ACC Staff filed a report providing the history of APS’s long-term purchased power contract of the 280 MW Concentrating Solar Power Plant. This report outlines alternative options that the ACC could pursue to address the costs of this contract, which was executed in February 2008. On July 13, 2022, the ACC approved an option to take no action at this time.
Demand Side Management Adjustor Charge. The ACC Electric Energy Efficiency Standards require APS to submit a DSM Plan annually for review and approval by the ACC. Verified energy savings from APS’s resource savings projects can be counted toward compliance with the Electric Energy Efficiency Standards; however, APS is not allowed to count savings from systems savings projects toward determination of the achievement of performance incentives, nor may APS include savings from these system savings projects in the calculation of its Lost Fixed Cost Recovery (“LFCR”) mechanism. See below for discussion of the LFCR.
On September 1, 2017, APS filed its 2018 DSM Plan, which proposed modifications to the DSM portfolio to better meet system and customer needs by focusing on peak demand reductions, storage, load shifting and demand response programs in addition to traditional energy savings measures. The 2018 DSM Plan sought a requested budget of $52.6 million and requested a waiver of the Electric Energy Efficiency Standard for 2018. On November 14, 2017, APS filed an amended 2018 DSM Plan, which revised the allocations between budget items to address customer participation levels but kept the overall budget at $52.6 million.
On December 31, 2018, APS filed its 2019 DSM Plan, which requested a budget of $34.1 million and focused on DSM strategies to better meet system and customer needs, such as peak demand reduction, load shifting, storage and electrification strategies.
On December 31, 2019, APS filed its 2020 DSM Plan, which requested a budget of $51.9 million and continued APS’s focus on DSM strategies such as peak demand reduction, load shifting, storage and electrification strategies. The 2020 DSM Plan addressed all components of the pending 2018 and 2019 DSM plans, which enabled the ACC to review the 2020 DSM Plan only. On May 15, 2020, APS filed an amended 2020 DSM Plan to provide assistance to customers experiencing economic impacts of the COVID-19
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
pandemic. The amended 2020 DSM Plan requested the same budget amount of $51.9 million. On September 23, 2020, the ACC approved the amended 2020 DSM Plan.
On April 17, 2020, APS filed an application with the ACC requesting a COVID-19 emergency relief package to provide additional assistance to its customers. On May 5, 2020, the ACC approved APS returning $36 million that had been collected through the DSM Adjustor Charge, but not allocated for current DSM programs, directly to customers through a bill credit in June 2020. APS has refunded approximately $43 million to customers. The additional $7 million over the ACC-approved amount was the result of the kWh credit being based on historic consumption which was different than actual consumption during the refund period. The difference was recorded to the DSM balancing account and was included in the 2021 DSM Implementation Plan, as described below.
On December 31, 2020, APS filed its 2021 DSM Implementation Plan, which requested a budget of $63.7 million and continued APS’s focus on DSM strategies, such as peak demand reduction, load shifting, storage and electrification strategies, as well as enhanced assistance to customers impacted economically by COVID-19. On April 6, 2021, APS filed an amended 2021 DSM Implementation Plan that proposed an additional performanceone-time incentive for customers participating in the residential energy storage pilot program approved in the 2020 RES Implementation Plan. On July 13, 2021, the ACC approved the amended 2021 DSM Implementation Plan.
On December 17, 2021, APS filed its 2022 DSM Implementation Plan in accordance with an extension granted in 2021. The 2022 DSM Plan requested a budget of $78.4 million and represents an increase of approximately $14 million in DSM spending above 2021. In MarchOn November 10, 2022, the ACC approved the 2022 DSM Implementation Plan, including a proposed performance incentive. On November 30, 2022, APS indicated that it intends to filefiled its 2023 DSM Implementation Plan, within 120 days after the ACC has taken action on APS’s 2022 DSM Plan.which requested a budget of $88 million. The ACC has not yet ruled on the 20222023 DSMImplementation Plan.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Power Supply Adjustor Mechanism and Balance. The PSAPower Supply Adjustor (“PSA”) provides for the adjustment of retail rates to reflect variations primarily in retail fuel and purchased power costs. The PSA is subject to specified parameters and procedures, including the following:
•APS records deferrals for recovery or refund to the extent actual retail fuel and purchased power costs vary from the Base Fuel Rate;
•an adjustment to the PSA rate is made annually each February 1 (unless otherwise approved by the ACC) and goes into effect automatically unless suspended by the ACC;
•the PSA uses a forward-looking estimate of fuel and purchased power costs to set the annual PSA rate, which is reconciled to actual costs experienced for each PSA Year (February 1 through January 31) (see the following bullet point);
•the PSA rate includes (a) a “forward component,” under which APS recovers or refunds differences between expected fuel and purchased power costs for the upcoming calendar year and those embedded in the Base Fuel Rate; (b) a “historical component,” under which differences between actual fuel and purchased power costs and those recovered or refunded through the combination of the Base Fuel Rate and the Forward Component are recovered during the next PSA Year; and (c) a “transition component,” under which APS may seek mid-year PSA changes due to large variances between actual fuel and purchased power costs and the combination of the Base Fuel Rate and the Forward Component; and
•the PSA rate may not be increased or decreased more than $0.004 per kWh in a year without permission of the ACC.
The following table shows the changes in the deferred fuel and purchased power regulatory asset for 20222023 and 20212022 (dollars in thousands):
| | | | | | | | | | | |
| | Nine Months Ended
September 30, |
| | 2022 | | 2021 |
| Beginning balance | $ | 388,148 | | | $ | 175,835 | |
| Deferred fuel and purchased power costs — current period | 228,483 | | | 224,541 | |
| Amounts charged to customers | (171,606) | | | (25,195) | |
| Ending balance | $ | 445,025 | | | $ | 375,181 | |
On November 27, 2019, APS filed its PSA rate for the PSA year beginning February 1, 2020. That rate was $(0.000456) per kWh, which consisted of a forward component of $(0.002086) per kWh and a historical component of $0.001630 per kWh. The 2020 PSA rate is a $0.002115 per kWh decrease compared to the 2019 PSA year. These rates went into effect as filed on February 1, 2020. | | | | | | | | | | | |
| | Three Months Ended
March 31, |
| | 2023 | | 2022 |
| Beginning balance | $ | 460,561 | | | $ | 388,148 | |
| Deferred fuel and purchased power costs — current period | 90,305 | | | 6,110 | |
| Amounts charged to customers | (80,904) | | | (39,442) | |
| Ending balance | $ | 469,962 | | | $ | 354,816 | |
On November 30, 2020, APS filed its PSA rate for the PSA year beginning February 1, 2021. That rate was $0.003544 per kWh, which consisted of a forward component of $0.003434 per kWh and a historical component of $0.000110 per kWh. The 2021 PSA rate is a $0.004 per kWh increase compared to the 2020 PSA year, which is the maximum permitted under the Plan of Administration for the PSA. This left $215.9 million of fuel and purchased power costs above this annual cap which will bewas reflected in future year resets of the PSA. These rates were to be effective on February 1, 2021, but APS delayed the effectiveness of these rates until the first billing cycle of April 2021 due to concerns of the impact on customers during
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COVID-19. In March 2021, the ACC voted to implement the 2021 PSA rate on a staggered basis, with 50% of the rate increase taking effect in April 2021, and the remaining 50% taking effect in November 2021. The PSA rate implemented on April 1, 2021 was $0.001544 per kWh, which consisted of a forward component of $(0.004444) per kWh and a historical component of $0.005988 per kWh. On November 1, 2021, the remaining increase was implemented to a rate of $0.003544 per kWh and consisted of a forward component of $(0.004444) per kWh and a historical component of $0.007988 per kWh. As part of this approval, the ACC ordered ACC Staff to conduct a fuel and purchased power procurement audit to better understand the factors that contributed to the increase in fuel costs.
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On April 1, 2022, the ACC filed a final report of its third-party audit findings regarding APS’s fuel and purchased power costs for the period January 2019 through January 2021. The report contains an in-depth review of APS’s fuel and purchased power contracts, its monthly fuel accounting activities, its forecasting and dispatching procedures, and its monthly PSA filings, among other fuel-related activities. The report finds that the APS’s fuel processing accounting practices, dispatching procedures, and procedures for hedging activity are reasonable and appropriate. The report includes several recommendations for the ACC’s consideration, including review of current contracts, maintenance schedules, and certain changes and improvements to the schedules in APS’s monthly PSA filings. APS cannot predictOn December 27, 2022, ACC Staff filed a proposed order supporting adoption of the future impacts, if any, of this audit.recommendations in the third-party audit report, and the ACC approved the proposed order on February 22, 2023.
On November 30, 2021, APS filed its PSA rate for the PSA year beginning February 1, 2022. That rate was $0.007544 per kWh, which consisted of a forward component of $(0.004842) per kWh and a historical component of $0.012386 per kWh. The 2022 PSA rate iswas a $0.004 per kWh increase compared to the 2021 PSA year, which is the maximum permitted under the Plan of Administration for the PSA. These rates went into effect as filed on February 1, 2022. At the time of the compliance filing, the amount remaining over the annual cap was approximately $365 million of fuel and purchased power costs which will be reflected in future year resets of the PSA.
On November 30, 2022, APS filed its PSA rate for the PSA year beginning February 1, 2023. To address the growing under-collected PSA balance, APS also requested that one of three different options be adopted, including a temporary or permanent increase of the annual cap to $0.006 per kWh. On February 23, 2023, the ACC approved an overall PSA rate of $0.019074 per kWh, which consisted of a forward component of $(0.005527) per kWh, a historical component of $0.013071 per kWh and a transition component of $0.011530 per kWh, that will continue until further notice of the ACC. The rate became effective with the first billing cycle in March 2023 and is designed to bring the PSA balancing account to near-zero over a 24-month period. APS is also required to notify the ACC when the PSA balancing account approaches $0.5 million.
In accordance with the approved PSA Plan of Administration, on March 15, 2019, APS filed an application with the ACC requesting approval to recover the costs related to two energy storage power purchase tolling agreements through the PSA, and on January 12, 2021, the ACC approved this application. On October 28, 2021, APS filed an application requesting approval to recover costs related to three additional third-party energy storage projects through the PSA once the systems are in service, and on December 16, 2021, the ACC approved this application. On February 22, 2022, APS filed an application requesting similar recovery throughof the PSA forenergy storage portion of a third-party solar plus energy storage project through the PSA, and on April 13, 2022, the ACC approved this application. For eachOn December 21, 2022, APS filed an application requesting similar recovery through the PSA for the energy storage portion of these applications that have been approved byanother third-party solar plus energy storage project, and on February 22, 2023, the ACC approved this application. On March 6, 2023, APS filed an application requesting similar recovery through the PSA for the energy storage portion of another third-party solar plus energy storage project, and on May 2, 2023, the ACC approved this application. The ACC has not yet ruled on prudency.the prudency of APS’s acquisition of these projects.
Environmental Improvement Surcharge.Surcharge (“EIS”). The EIS permits APS to recover the capital carrying costs (rate of return, depreciation and taxes) plus incremental operations and maintenance expenses associated with environmental improvements made outside of a test year to comply with environmental standards set by federal, state, tribal, or local laws and regulations. A filing is made on or before February 1 each year for qualified environmental improvements since the prior rate case test year, and the new charge becomes effective April 1 unless suspended by the ACC. There isThe EIS includes an overall cap of $0.0005 per kWh (approximately $13 million to $14$15 million per year). APS’s February 1, 20222023 application requested an increase in the charge to $11.4$14.7 million, or $1.1$3.3 million over the prior-period charge. On March 10, 2023, APS filed an amended application requesting an EIS charge of $4.0 million, a decrease of $10.7 million from the
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February EIS request and ita decrease of $7.5 million from the prior-period charge. The revised 2023 EIS became effective with the first billing cycle in April 2022.2023.
Transmission Rates, Transmission Cost Adjustor (“TCA”) and Other Transmission Matters. In July 2008, FERC approved a modification to APS’s Open Access Transmission Tariff to allow APS to move from fixed rates to a formula rate-setting methodology in order to more accurately reflect and recover the costs that APS incurs in providing transmission services. A large portion of the rate represents charges for transmission services to serve APS’s retail customers (“Retail Transmission Charges”). In order to recover the
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Retail Transmission Charges, APS was previously required to file an application with, and obtain approval from, the ACC to reflect changes in Retail Transmission Charges through the TCA. Under the terms of the settlement agreement entered into in 2012 regarding APS’s rate case (“2012 Settlement Agreement”), however, an adjustment to rates to recover the Retail Transmission Charges will be made annually each June 1 and will go into effect automatically unless suspended by the ACC.
The formula rate is updated each year effective June 1 on the basis of APS’s actual cost of service, as disclosed in APS’s FERC Form 1 report for the previous fiscal year. Items to be updated include actual capital expenditures made as compared with previous projections, transmission revenue credits and other items. 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 with FERC. Settlement or litigated resolution of disputed issues could require an extended period of time and could have a significant effect on the Retail Transmission Charges because any adjustment, though applied prospectively, may be calculated to account for previously over- or under-collected amounts. The resolution of proposed adjustments can result in significant volatility in the revenues to be collected.
On March 17, 2020, APS made a filing to make modifications to its annual transmission formula to provide additional transparency for excess and deficient accumulated deferred income taxes resulting from the Tax Cuts and Job Act (the “Tax Act”), as well as for future local, state, and federal statutory tax rate changes. APS amended its March 17, 2020 filing on April 28, 2020, September 29, 2021, and October 27, 2021. In January 2022, FERC approved APS’s modifications to its annual transmission formula.
Effective June 1, 2020, APS’s annual wholesale transmission revenue requirement for all users of its transmission system decreased by approximately $6.1 million for the 12-month period beginning June 1, 2020, in accordance with the FERC-approved formula. Of this net amount, wholesale customer rates increased by $4.8 million and retail customer rates would have decreased by approximately $10.9 million. However, since changes in Retail Transmission Charges are reflected through the TCA after consideration of transmission recovery in retail base rates and the ACC approved balancing account, the retail revenue requirement decreased by a total of $7.4 million, resulting in reductions to both residential and commercial rates. An adjustment to APS’s retail rates to recover FERC approved transmission charges went into effect automatically on June 1, 2020.
Effective June 1, 2021, APS’s annual wholesale transmission revenue requirement for all users of its transmission system increased by approximately $4 million for the 12-month period beginning June 1, 2021, in accordance with the FERC-approved formula. Of this net amount, wholesale customer rates decreased by approximately $3.2 million and retail customer rates would have increased by approximately $7.2 million. However, since changes in Retail Transmission Charges are reflected through the TCA after consideration of transmission recovery in retail base rates and the ACC approved balancing account, the retail revenue requirement decreased by $28.4 million, resulting in reductions to both residential and commercial rates. An adjustment to APS’s retail rates to recover FERC-approved transmission charges went into effect automatically on June 1, 2021.
Effective June 1, 2022, APS’s annual wholesale transmission revenue requirement for all users of its transmission system decreased by approximately $33 million for the 12-month period beginning June 1, 2022, in accordance with the FERC-approved formula. Of this net amount, wholesale customer rates decreased by approximately $6.4 million and retail customer rates would have decreased by approximately $26.6 million. However, since changes in Retail Transmission Charges are reflected through the TCA after consideration of transmission recovery in retail base rates and the ACC approved balancing account, the retail revenue requirement decreased by $2.4 million, resulting in a reduction to the residential rate and increases to
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commercial rates. An adjustment to APS’s retail rates to recover FERC-approved transmission charges went into effect automatically on June 1, 2022.
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Lost Fixed Cost Recovery Mechanism. The LFCR mechanism permits APS to recover on an after-the-fact basis a portion of its fixed costs that would otherwise have been collected by APS in the kWh sales lost due to APS energy efficiency programs and to DG such as rooftop solar arrays. The fixed costs recoverable by the LFCR mechanism were 2.5 cents for both lost residential and non-residential kWh as set forth in the 2017 Settlement Agreement. The fixed costs recoverable by the LFCR mechanism are currently 2.56 cents for lost residential kWh and 2.68 cents for lost non-residential kWh as set forth in the 2019 Rate Case decision. The LFCR adjustment has a year-over-year cap of 1% of retail revenues. Any amounts left unrecovered in a particular year because of this cap can be carried over for recovery in a future year. The kWhs lost from energy efficiency are based on a third-party evaluation of APS’s energy efficiency programs. DG sales losses are determined from the metered output from the DG units.
On February 14, 2020, APS filed its 2020 annual LFCR adjustment, requesting that effective May 1, 2020, the annual LFCR recovery amount be reduced to $26.6 million (a $9.6 million decrease from previous levels). On April 14, 2020, the ACC approved the 2020 LFCR adjustment as filed, effective with the first billing cycle in May 2020. On February 15, 2021, APS filed its 2021 annual LFCR adjustment, requesting that effective May 1, 2021, the annual LFCR recovery amount be increased to $38.5 million (an $11.8 million increase from previous levels). On April 13, 2021, the ACC voted not to approve the requested $11.8 million increase to the annual LFCR adjustment; thus, the previously approved rates continued to remain intact and the $11.8 million increase was reflected in APS’s 2022 filing in accordance with the compliance requirements.
As a result of the 2019 Rate Case decision, APS’s annual LFCR adjustor rate will be dependent on an annual earnings test filing, which will compare APS’s previous year’s rate of return with the related authorized rate of return. If the actual rate of return is higher than the authorized rate of return, the LFCR rate for the subsequent year is set at zero. APS determined that the changes to the LFCR mechanism, as a result of the 2019 Rate Case decision effective on December 1, 2021, did not materially impact its results of operations and financial statements for the year ended December 31, 2021. However, as a result of certain changes made to the LFCR mechanism in the 2019 Rate Case decision, the mechanism no longer qualified for alternative revenue program accounting treatment, which impacts the future timing of related revenue recognition.
On February 15, 2022, APS filed its 2022 annual LFCR adjustment, requesting that effective May 1, 2022, the annual LFCR recovery amount be increased to $59.1 million (a $32.5 million increase from previous levels, which was inclusive of the $11.8 million balance from the 2021 filing). On May 9, 2022, the ACC Staff filed its revised report and proposed order regarding APS’s 2022 LFCR adjustment, concluding that APS calculated the adjustment in accordance with its Plan of Administration. On May 18, 2022, the ACC approved the 2022 LFCR adjustment, with a rate effective date of June 1, 2022.
On February 15, 2023, APS filed a letter to the ACC docket stating that, in accordance with Decision No. 78585, APS and ACC Staff have agreed to move the filing date for the annual LFCR adjustment to July 31 each year. APS does not believe further ACC approval is needed to move the filing date, and APS intends to file its 2023 annual LFCR adjustment later in 2023 in accordance with the July 31 deadline.
Tax Expense Adjustor Mechanism. As part of the 2017 Settlement Agreement, the parties agreed to a rate adjustment mechanism to address potential federal income tax reform and enable the pass-through of certain income tax effects to customers. The TEAM expressly applies to APS’s retail rates with the exception of a small subset of customers taking service under specially-approved tariffs. On December 22, 2017, the Tax Act was enacted. This legislation made significant changes to the federal income tax laws including a reduction in the corporate tax rate from 35% to 21% effective January 1, 2018.
On August 13, 2018, APS filed a request with the ACC that addressed the return of $86.5 million in tax savings to customers related to the amortization of non-depreciation related excess deferred taxes previously collected from customers (“TEAM Phase II”). The ACC approved this request on March 13, 2019, effective the first billing cycle in April 2019 through the last billing cycle in March 2020.
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On March 19, 2020, due to the COVID-19 pandemic, APS delayed the discontinuation of TEAM Phase II until the first billing cycle in May 2020. Amounts credited to customers after the last billing cycle in March 2020 were recorded as a part of the balancing account and were addressed for recovery as part of the 2019 Rate Case. Both the timing of the reduction in revenues refunded through TEAM Phase II and the offsetting income tax benefit were recognized based upon our seasonal kWh sales pattern.
On April 10, 2019, APS filed a third request with the ACC that addressed the amortization of depreciation related excess deferred taxes over a 28.5-year period consistent with IRS normalization rules (“TEAM Phase III”). On October 29, 2019, the ACC approved TEAM Phase III providing both (i) a one-time bill credit of $64 million which was credited to customers on their December 2019 bills, and (ii) a monthly bill credit effective the first billing cycle in December 2019 which provided an additional benefit of $39.5 million to customers through December 31, 2020. On November 20, 2020, APS filed an application to continue the TEAM Phase III monthly bill credit through the earlier of December 31, 2021, or at the conclusion of the 2019 Rate Case. On December 9, 2020, the ACC approved this request. Both the timing of the reduction in revenues refunded through the TEAM Phase III monthly bill credit and the offsetting income tax benefit were recognized based upon APS’s seasonal kWh sales pattern.
As part of the 2019 Rate Case decision, the TEAM rates were reset to zero beginning December 31, 2021, and all impacts of the Tax Act were removed from the TEAM and incorporated into APS’s base rates. The TEAM was retained to address potential changes in tax law that may be enacted prior to a decision in a subsequent APS rate case.
Net Metering
APS’s 2017 Rate Case Decision provides that payments by utilities for energy exported to the grid from residential DG solar facilities will be determined using a RCP methodology as determined in the ACC’s generic Value and Cost of Distributed Generation docket. RCP is a method that is based on the most recent five-year rolling average price that APS incurs for utility-scale solar photovoltaic projects. The price established by this RCP method will be updated annually (between general retail rate cases) but will not be decreased by more than 10% per year. The ACC is no longer pursuing development of a forecasted avoided cost methodology as an option for utilities in place of the RCP. Commercial customers, grandfathered residential solar customers, and residential customers with DG systems other than solar facilities continue to qualify for net metering.
In addition, the ACC made the following determinations in the Value and Cost of Distributed Generation docket:
•RCP customers who have interconnected a DG system or submitted an application for interconnection for DG systems will be grandfathered for a period of 20 years from the date the customer’s interconnection application was accepted by the utility (for APS residential customers, as of September 1, 2017, based on APS’s 2017 Rate Case Decision);
•customers with DG solar systems are to be considered a separate class of customers for ratemaking purposes; and
•once an initial export price is set for utilities, no netting or banking of retail credits will be available for new DG customers, and the then-applicable export price will be guaranteed for new customers for a period of 10 years.
This decision of the ACC addresses policy determinations only. The decision states that its principles will be applied in future general retail rate cases, and the policy determinations themselves may be subject to future change, as are all ACC policies.
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In accordance with the 2017 Rate Case Decision, APS filed its request for a RCP export energy price of 10.5 cents per kWh on May 1, 2019. This price also reflects the 10% annual reduction discussed above. The new rate rider became effective on October 1, 2019. APS filed its request for a fourth-year export energy price of 9.4 cents per kWh on May 1, 2020, with a requested effective date of September 1, 2020. This price reflects the 10% annual reduction discussed above. On September 23, 2020, the ACC approved the annual reduction of the export energy price but voted to delay the effectiveness of the reduction in export prices until October 1, 2021. In accordance with this decision, the RCP export energy price of 9.4 cents per kWh became effective on October 1, 2021. On April 29, 2022, APS filed an application to decrease the RCP price to 8.46 cents per kWh, reflecting a 10% annual reduction, to become effective September 1, 2022. On July 12, 2022, the ACC approved the RCP as filed.
See “2016 Retail Rate Case Filing” above for information regarding an ACC order in connection with the rate review of the 2017 Rate Case Decision requiring APS to provide grandfathered net metering customers on legacy demand rates with an opportunity to switch to another legacy rate to enable such customers to benefit from legacy net metering rates.
Subpoena from Former Arizona Corporation Commissioner Robert Burns
On August 25, 2016, then-Commissioner Robert Burns, individually and not by action of the ACC as a whole, served subpoenas in APS’s then current retail rate proceeding on APS and Pinnacle West for the production of records and information relating to a range of expenditures from 2011 through 2016. The subpoenas requested information concerning marketing and advertising expenditures, charitable donations, lobbying expenses, contributions to 501(c)(3) and (c)(4) nonprofits and political contributions. The return date for the production of information was set as September 15, 2016. The subpoenas also sought testimony from Company personnel having knowledge of the material, including the Chief Executive Officer.
After various proceedings between September 2016 and March 2020, at which time Burns’ appeal of a prior dismissal by the trial court was pending before the Arizona Court of Appeals, Burns’ position as an ACC commissioner ended on January 4, 2021. Nevertheless, Burns filed a motion with the Court of Appeals arguing that the appeal was not mooted by this fact and the court should decide the matter.On March 4, 2021, the Court of Appeals found Burns’ motion to be moot because the Court of Appeals had issued an opinion deciding the matter that same day.
In its March 4, 2021, opinion, the Court of Appeals affirmed the trial court’s dismissal of Burns’ complaint, concluding that Burns could not overturn the ACC’s 4-1 vote refusing to enforce his subpoenas.On May 15, 2021, Burns filed a petition for review with the Arizona Supreme Court asking for reversal of the Court of Appeals opinion and the trial court’s judgment. APS and the ACC filed responses to Burns’ petition on July 14, 2021, requesting that the petition be denied.The Arizona Supreme Court granted Burns’ petition and heard oral argument on March 8, 2022.On September 27, 2022, the Arizona Supreme Court issued a decision in favor of Burns reversing the Court of Appeals’ decision. The Court held that the ACC acting by a majority of its commissioners may not prevent an individual commissioner from exercising investigatory powers pursuant to certain provisions of the Arizona Constitution and that a commissioner aggrieved by such action may seek judicial recourse by way of declaratory judgment. Pinnacle West and APS do not believe there will be any immediate implications given the underlying issues at hand are moot, but we cannot predict if or how this authority may be used by commissioners in the future.
Energy Modernization Plan
On January 30, 2018, the initial Energy Modernization Plan was proposed, which consisted of a series of energy policies tied to clean energy sources. Draft energy rules were subsequently issued and a series of
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revisions were made to the draft rules in 2019 and 2020. On July 30, 2020, the ACC Staff issued final draft energy rules which proposed 100% of retail kWh sales from clean energy resources by the end of 2050. Nuclear power was defined as a clean energy resource. The proposed rules also required 50% of retail energy served be renewable by the end of 2035. A new Energy Efficiency Standard (“EES”) was not included in the proposed rules.
The ACC discussed the final draft energy rules at several different meetings in 2020 and 2021. On November 13, 2020, the ACC approved a final draft energy rules package. On April 19, 2021, the Administrative Law Judge issued a Recommended Order and Opinion on the final energy rules. In June 2021, the ACC adopted revised clean energy rules based on a series of ACC amendments. The adopted rules included a final standard of 100% clean energy by 2070 and the following interim standards for carbon reduction from baseline carbon emissions level: 50% reduction by December 31, 2032; 65% reduction by December 31, 2040; 80% reduction by December 31, 2050, and 95% reduction by December 31, 2060. Since the adopted clean energy rules differed substantially from the original Recommended Order and Opinion, supplemental rulemaking procedures were required before the rules could become effective. On January 26, 2022, the ACC reversed its prior decision and declined to send the final draft energy rules through the rulemaking process. Instead, the ACC opened a new docket to consider all-source RFP requirements and the IRP process. During the August 2022 Open Meeting, Commissioners voted to postpone a decision on the All-Sourceall-source RFP and IRP rulemaking package until next year.2023. APS cannot predict the outcome of this matter.
Integrated Resource Planning
ACC rules require utilities to develop triennial 15-year IRPs which describe how the utility plans to serve customer load in the plan timeframe. The ACC reviews each utility’s IRP to determine if it meets the necessary requirements and whether it should be acknowledged. Based on an ACC decision, APS was originally required to file its next IRP by April 1, 2020. On February 20, 2020, the ACC extended the deadline for all utilities to file their IRPs from April 1, 2020, to June 26, 2020. On June 26, 2020, APS filed its final IRP. On July 15, 2020, the ACC extended the schedule for final ACC review of utility IRPs to February 2021. In February 2022, the ACC acknowledged APS’s IRP.2020 IRP filed on June 26, 2020. The ACC also approved certain amendments to the IRP process, including, setting an EES of 1.3% of retail sales annually (averaged over a three-year period) and a demand-side resource capacity of 35% of 2020 peak demand by 2030 and authorizing future rate base treatment of qualifying demand-side resources as proposed in future rate cases.January 1, 2030. APS intends to file its next IRP on August 1, 2023. See “Energy Modernization Plan” above for information regarding proposed changes to the IRP filings.
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Public Utility Regulatory Policies Act
Under the Public Utility Regulatory Policies Act of 1978 (“PURPA”), qualifying facilities are provided the right to sell energy and/or capacity to utilities and are granted relief from certain regulatory burdens. On December 17, 2019, the ACC mandated a minimum contract length of 18 years for qualifying facilities over 100 kW in Arizona and established that the rate paid to qualifying facilities must be based on the long-term avoided cost. “Avoided cost” is generally defined as the price at which the utility could purchase or produce the same amount of power from sources other than the qualifying facility on a long-term basis. During calendar year 2020, APS entered into two 18-year PPAs with qualified facilities, each for 80 MW solar facilities. In March 2021, the ACC approved these agreements.
On July 16, 2020, FERC issued a final rule revising FERC’s regulations implementing PURPA. The final rule went into effect on December 31, 2020.
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Residential Electric Utility Customer Service Disconnections
On June 13, 2019, APS voluntarily suspended electric disconnections for residential customers who had not paid their bills. On June 20, 2019, the ACC voted to enact emergency rule amendments to prevent residential electric utility customer service disconnections during the period June 1 through October 15 (“Summer Disconnection Moratorium”). During the Summer Disconnection Moratorium, APS could not charge late fees and interest on amounts that were past due from customers. Customer deposits must also be used to pay delinquent amounts before disconnection can occur and customers will have four months to pay back their deposit and any remaining delinquent amounts.occur. In accordance with the emergency rules, APS began putting delinquent customers on a mandatory four-month payment plan beginning on October 16, 2019.
In June 2019, the ACC began a formal regular rulemaking process to allow stakeholder input and time for consideration of permanent rule changes. The ACC further ordered that each regulated utility serving retail customers in Arizona update its service conditions by incorporating the emergency rule amendments, restore power to any customers who were disconnected during the month of June 2019 and credit any fees that were charged for a reconnection. The ACC Staff and ACC proposed draft amendments to the customer service disconnections rules. On April 14, 2021, the ACC voted to send to the formal rulemaking process a draft rules package governing customer disconnections that allows utilities to choose between a temperature threshold (above 95 degrees and below 32 degrees) or calendar method (June 1 – October 15) for disconnection moratoriums. On November 2, 2021, the ACC approved the final rules, and on November 23, 2021, the rules were submitted to the Arizona Office of the Attorney General for final review and approval. The new rules became effective on April 18, 2022, and APS has employed the calendar method for its disconnection moratorium.2022.
In accordance with the ACC service disconnection rules, APS now uses the calendar basedcalendar-based method to suspend the disconnection of customers for nonpayment from June 1 through October 15 each year (“Annual Disconnection Moratorium”). Customers with past due balances of $75 or greater as of the beginningend of the Annual Disconnection Moratorium are automatically placed on six-month payment arrangements. In addition, APS voluntarily began waiving late payment fees of its customers (“Late Fee Waivers”) on March 13, 2020. APS is continuing to apply Late Fee WaiversEffective February 1, 2023, late payment fees for residential customers; however, effective May 1, 2022, latecustomers were reinstated. Late payment fees for commercial and industrial customers were reinstated.reinstated effective May 1, 2022. Since the suspensions and moratoriums on disconnections began, APS has experienced an increase in bad debt expense and the related write-offs of delinquent customer accounts.
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Retail Electric Competition Rules
On November 17, 2018, the ACC voted to re-examine the facilitation of a deregulated retail electric market in Arizona. On July 1 and July 2, 2019, ACC Staff issued a report and initial proposed draft rules regarding possible modifications to the ACC’s retail electric competition rules. On February 10, 2020, two ACC Commissioners filed two sets of draft proposed retail electric competition rules. On February 12, 2020, ACC Staff issued its second report regarding possible modifications to the ACC’s retail electric competition rules. During a July 15, 2020, ACC Staff meeting, the ACC Commissioners discussed the possible development of a retail competition pilot program, but no action was taken. The ACC continues to discuss matters related to retail electric competition, including the potential for additional buy-through programs or other pilot programs. In April 2022, the Arizona Legislature passed and the Governor signed a bill that would nullify a 24-year-oldrepealed the electric deregulation law that hashad been in place in Arizona since 1998. The bill was signed by the Arizona Governor and took effect September 23, 2022. APS cannot predict what impact, if any, this change will have on APS.
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On August 4, 2021, Green Mountain Energy filed an application seeking a certificate of convenience and necessity to allow it to provide competitive electric generation service in Arizona. Green Mountain Energy has requested that the ACC grant it the ability to provide competitive service in APS’s and Tucson Electric Power Company’s certificated service territories and proposes to deliver a 100% renewable energy product to residential and general service customers in those service territories. APS opposes Green Mountain Energy’s application and intends to intervene to contest it.application. On November 3, 2021, the ACC submitted questions to the Arizona Attorney General requesting legal opinions related to a number of issues surrounding retail electric competition and the ACC’s ability to issue competitive certificates of convenience and necessity. On November 26, 2021, the Administrative Law Judge issued a procedural order indicating it would not be appropriate to set a schedule until the Attorney General has provided his insights on the applicable law. As the ACC’s questions pertained to the retail competition law subsequently repealed in April 2022, the Attorney General has not responded to the ACC’s request and the questions are now moot. No action has been taken by the ACC regarding this application since that time.
On October 28, 2021, an ACC Commissioner docketed a letter directing ACC Staff and interested stakeholders to design a 200-300200 to 300 MW pilot program that would allow residential and small commercial customers of APS to elect a competitive electricity supplier. The letter also states that similar programs should be designed for other Arizona regulated electric utilities. APS cannot predict the outcome of these future activities.
Rate Plan Comparison Tool and Investigation
On November 14, 2019, APS learned that its rate plan comparison tool was not functioning as intended due to an integration error between the tool and APS’s meter data management system. APS immediately removed the tool from its website and notified the ACC. The purpose of the tool was to provide customers with a rate plan recommendation based upon historical usage data. Upon investigation, APS determined that the error may have affected rate plan recommendations to customers between February 4, 2019, and November 14, 2019. By the middle of May 2020, APS provided refunds to approximately 13,000 potentially impacted customers equal to the difference between what they paid for electricity and the amount they would have paid had they selected their most economical rate, as applicable, and a $25 payment for any inconvenience that the customer may have experienced. The refunds and payment for inconvenience being provided did not have a material impact on APS’s financial statements. In February 2020, APS launched a new online rate comparison tool. The ACC hired an outside consultant to evaluate the extent of the error and the overall effectiveness of the tool. On August 20, 2020, ACC Staff filed the outside consultant’s report on APS’s rate comparison tool. The report concluded APS’s new rate comparison tool is working as intended.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The report also identified a small population of additional customers that may have been affected by the error and APS has provided refunds and the $25 inconvenience payment to approximately 3,800 additional customers. These additional refunds and payment for inconvenience did not have a material impact on APS’s financial statements. On September 28, 2020, the ACC discussed this report but did not take any action. APS cannot predict whether additional inquiries or actions may be taken by the ACC.
APS received civil investigative demands from the Office of the Arizona Attorney General, Civil Litigation Division, Consumer Protection & Advocacy Section (“Attorney General”) seeking information pertaining to the rate plan comparison tool offered to APS customers and other related issues including implementation of rates from the 2017 Settlement Agreement and its Customer Education and Outreach Plan associated with the 2017 Settlement Agreement. APS fully cooperated with the Attorney General’s Office in this matter. On February 22, 2021, APS entered into a consent agreement with the Attorney General as a way to settle the matter. The settlement resulted in APS paying $24.75 million, approximately $24 million of which has been returned to customers as restitution. While this matter has been resolved with the Attorney General, APS cannot predict whether additional inquiries or actions may be taken by the ACC.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Four Corners SCR Cost Recovery
On December 29, 2017, in accordance with the 2017 Rate Case Decision, APS filed a Notice of Intent to file its SCR Adjustment to permit recovery of costs associated with the installation of SCR equipment at Four Corners Units 4 and 5. APS filed the SCR Adjustment request in April 2018. The SCR Adjustment request provided that there would be a $67.5 million annual revenue impact that would be applied as a percentage of base rates for all applicable customers. Also, as provided for in the 2017 Rate Case Decision, APS requested that the adjustment become effective no later than January 1, 2019. The hearing for this matter occurred in September 2018. At the hearing, APS accepted ACC Staff’s recommendation of a lower annual revenue impact of approximately $58.5 million. The Administrative Law Judge issued a Recommended Opinion and Order finding that the costs for the SCR project were prudently incurred and recommending authorization of the $58.5 million annual revenue requirement related to the installation and operation of the SCRs. The ACC did not issue a decision on this matter. APS included the costs for the SCR project in the retail rate base in its 2019 Rate Case filing with the ACC.
On November 2, 2021, the 2019 Rate Case decision was approved by the ACC allowing approximately $194 million of SCR related plant investments and cost deferrals in rate base and to recover, depreciate and amortize in rates based on an end-of-life assumption of July 2031. The decision also included a partial and combined disallowance of $215.5 million on the SCR investments and deferrals. APS believes the SCR plant investments and related SCR cost deferrals were prudently incurred, and on December 17, 2021, APS filed its Notice of Direct Appeal at the Arizona Court of Appeals requesting review of the $215.5 million disallowance. The appeal is proceedingArizona Court of Appeals heard oral arguments on November 30, 2022. On March 6, 2023, the Court of Appeals issued its order in the normal course,matter, vacating the ACC’s disallowance of the SCR investment and oral arguments are scheduledremanding the matter back to the ACC for November 30, 2022.further review in accordance with ACC rules and the order of the Court of Appeals. The parties have until May 8, 2023 to file a petition requesting review by the Arizona Supreme Court. APS cannot predict the outcome of this proceeding. Based on the partial recovery of these investments and cost deferrals in current rates, the favorable Court of Appeals order, and the uncertainty of the outcome of the legal appeals process,potential for further appellate review, APS has not recorded an impairment or write-off relating to the SCR plant investments or deferrals as of September 30, 2022.March 31, 2023. If the 2019 Rate Case decision to disallow $215.5 million of the SCRs is ultimately upheld, APS will be required to record a charge to its results of operations, net of tax, of approximately $154.4 million. We cannot predict the outcome of the legal challenges nor the timing of when this matter will be resolved. See above for further discussion on the 2019 Rate Case decision.
Cholla
On September 11, 2014, APS announced that it would close Unit 2 of the Cholla Power Plant (“Cholla”) and cease burning coal at the other APS-owned units (Units 1 and 3) at the plant by the mid-2020s, if the United States Environmental Protection Agency (“EPA”) approved a compromise proposal offered by APS to meet required environmental and emissions standards and rules. On April 14, 2015, the ACC approved APS’s plan to retire Unit 2, without expressing any view on the future recoverability of APS’s remaining investment in the unit. APS closed Unit 2 on October 1, 2015. In early 2017, EPA approved a final rule incorporating APS’s compromise proposal, which took effect on April 26, 2017. In December 2019, PacifiCorp notified APS that it planned to retire Cholla Unit 4 by the end of 2020 and the unit ceased operation in December 2020. APS has committedis required to end the use ofcease burning coal at its remaining Cholla units by April 2025.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Previously, APS estimated Cholla Unit 2’s end of life to be 2033. APS has been recovering a return on and of the net book value of the unit in base rates. Pursuant to the 2017 Settlement Agreement described above, APS will be allowed continued recovery of the net book value of the unit and the unit’s decommissioning and other retirement-related costs, $38.4$36.1 million as of September 30, 2022,March 31, 2023, in addition to a return on its investment. In accordance with GAAP, in the third quarter of 2014, Unit 2’s remaining net book value was reclassified from property, plant and equipment to a regulatory asset. In accordance with the 2019 Rate Case decision, the regulatory asset is being amortized through 2033.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Navajo Plant
The Navajo Plant ceased operations in November 2019. The co-owners and the Navajo Nation executed a lease extension on November 29, 2017, that allows for decommissioning activities to begin after the plant ceased operations. In accordance with GAAP, in the second quarter of 2017, APS’s remaining net book value of its interest in the Navajo Plant was reclassified from property, plant and equipment to a regulatory asset.
APS has been recovering a return on and of the net book value of its interest in the Navajo plant in base rates over its previously estimated life through 2026. Pursuant to the 2019 Rate Case decision described above, APS will be allowed continued recovery of the book value of its remaining investment in the Navajo plant, $55.0$50.2 million as of September 30, 2022,March 31, 2023, in addition to a return on the net book value, with the exception of 15% of the annual amortization expense in rates. In addition, APS will be allowed recovery of other costs related to retirement and closure, including the Navajo coal reclamation regulatory asset, $14.6$13.1 million as of September 30, 2022.March 31, 2023. The disallowed recovery of 15% of the annual amortization does not have a material impact on APS financial statements.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Regulatory Assets and Liabilities
The detail of regulatory assets is as follows (dollars in thousands):
| | | | Amortization Through | | September 30, 2022 | | December 31, 2021 | | | | | | | | | | | | | | | |
| | | | Current | | Non-Current | | Current | | Non-Current | | Amortization Through | | March 31, 2023 | December 31, 2022 |
| Pension | Pension | (a) | | $ | — | | | $ | 511,382 | | | $ | — | | | $ | 509,751 | | Pension | (a) | | $ | 628,727 | | | $ | 637,656 | |
| Deferred fuel and purchased power (b) (c) | Deferred fuel and purchased power (b) (c) | 2023 | | 445,025 | | | — | | | 388,148 | | | — | | Deferred fuel and purchased power (b) (c) | 2024 | | 469,962 | | | 460,561 | |
| Income taxes — allowance for funds used during construction (“AFUDC”) equity | Income taxes — allowance for funds used during construction (“AFUDC”) equity | 2052 | | 7,625 | | | 173,136 | | | 7,625 | | | 164,768 | | Income taxes — allowance for funds used during construction (“AFUDC”) equity | 2053 | | 179,818 | | | 179,631 | |
| Ocotillo deferral (e) | Ocotillo deferral (e) | 2031 | | 9,507 | | | 131,013 | | | 9,507 | | | 138,143 | | Ocotillo deferral (e) | 2031 | | 135,766 | | | 138,143 | |
| SCR deferral (e)(f) | | SCR deferral (e)(f) | 2031 | | 95,588 | | | 97,624 | |
| Retired power plant costs | Retired power plant costs | 2033 | | 15,157 | | | 87,324 | | | 15,160 | | | 99,681 | | Retired power plant costs | 2033 | | 94,903 | | | 98,692 | |
| SCR deferral (e)(f) | 2031 | | 8,147 | | | 91,514 | | | 8,147 | | | 97,624 | | |
| Deferred fuel and purchased power — mark-to-market (Note 7) | | Deferred fuel and purchased power — mark-to-market (Note 7) | 2025 | | 61,858 | | | — | |
| Deferred property taxes | Deferred property taxes | 2027 | | 8,569 | | | 34,630 | | | 8,569 | | | 41,057 | | Deferred property taxes | 2027 | | 38,915 | | | 41,057 | |
| Deferred compensation | Deferred compensation | 2036 | | — | | | 34,251 | | | — | | | 33,997 | | Deferred compensation | 2036 | | 34,492 | | | 33,660 | |
| Income taxes — investment tax credit basis adjustment | Income taxes — investment tax credit basis adjustment | 2056 | | 826 | | | 22,996 | | | 1,129 | | | 23,639 | | Income taxes — investment tax credit basis adjustment | 2056 | | 24,095 | | | 23,977 | |
| Lost fixed cost recovery (b) | 2023 | | 23,275 | | | — | | | 63,889 | | | — | | |
| Palo Verde VIEs (Note 6) | Palo Verde VIEs (Note 6) | 2046 | | — | | | 20,973 | | | — | | | 21,094 | | Palo Verde VIEs (Note 6) | 2046 | | 20,893 | | | 20,933 | |
| Active Union Medical Trust | Active Union Medical Trust | (g) | | — | | | 19,086 | | | — | | | 1,175 | | Active Union Medical Trust | (g) | | 15,010 | | | 18,226 | |
| Four Corners cost deferral | Four Corners cost deferral | 2024 | | 8,077 | | | 9,941 | | | 8,077 | | | 15,998 | | Four Corners cost deferral | 2024 | | 13,979 | | | 15,999 | |
| Coal reclamation | 2026 | | 2,978 | | | 11,628 | | | 2,978 | | | 13,862 | | |
| Navajo coal reclamation | | Navajo coal reclamation | 2026 | | 13,117 | | | 13,862 | |
| Loss on reacquired debt | Loss on reacquired debt | 2038 | | 1,648 | | | 8,183 | | | 1,648 | | | 9,372 | | Loss on reacquired debt | 2038 | | 9,238 | | | 9,468 | |
| Mead-Phoenix transmission line contributions in aid of construction (“CIAC”) | Mead-Phoenix transmission line contributions in aid of construction (“CIAC”) | 2050 | | 332 | | | 8,799 | | | 332 | | | 9,048 | | Mead-Phoenix transmission line contributions in aid of construction (“CIAC”) | 2050 | | 8,965 | | | 9,048 | |
| Tax expense adjustor mechanism (b) | Tax expense adjustor mechanism (b) | 2031 | | 656 | | | 5,354 | | | 656 | | | 5,845 | | Tax expense adjustor mechanism (b) | 2031 | | 5,681 | | | 5,845 | |
| TCA balancing account (b) | 2023 | | 5,413 | | | — | | | 170 | | | 3,663 | | |
| Tax expense of Medicare subsidy | 2024 | | 1,235 | | | 1,111 | | | 1,235 | | | 2,469 | | |
| Lost fixed cost recovery (b) | | Lost fixed cost recovery (b) | 2023 | | — | | | 9,547 | |
| Other | Other | Various | | 1,231 | | | 2,094 | | | 1,254 | | | 1,801 | | Other | Various | | 8,458 | | | 8,171 | |
| Total regulatory assets (d) | Total regulatory assets (d) | | | $ | 539,701 | | | $ | 1,173,415 | | | $ | 518,524 | | | $ | 1,192,987 | | Total regulatory assets (d) | | | $ | 1,859,465 | | | $ | 1,822,100 | |
| Less: current regulatory assets | | Less: current regulatory assets | | $ | 600,802 | | | $ | 538,879 | |
| Total non-current regulatory assets | | Total non-current regulatory assets | | $ | 1,258,663 | | | $ | 1,283,221 | |
(a)This asset represents the future recovery of pension benefit obligations and expense through retail rates. If these costs are disallowed by the ACC, this regulatory asset would be charged to OCI and result in lower future revenues. As a result of the 2019 Rate Case decision,Decision, the amount authorized for inclusion in rate base was determined using an averaging methodology, which resulted in a reduced return in retail rates. See Note 5 for further discussion.
(b)See “Cost Recovery Mechanisms” discussion above.
(c)Subject to a carrying charge.
(d)There are no regulatory assets for which the ACC has allowed recovery of costs, but not allowed a return by exclusion from rate base. FERC rates are set using a formula rate as described in “Transmission Rates, Transmission Cost Adjustor and Other Transmission Matters.”
(e)Balance includes amounts for future regulatory consideration and amortization period determination.
(f)See “Four Corners SCR Cost Recovery” discussion above.
(g)Collected in retail rates.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The detail of regulatory liabilities is as follows (dollars in thousands):
| | | | Amortization Through | | September 30, 2022 | | December 31, 2021 | | | | | | | | | | | | | | | |
| | | | Current | | Non-Current | | Current | | Non-Current | | Amortization Through | | March 31, 2023 | December 31, 2022 |
| Excess deferred income taxes — ACC - Tax Act (a) | Excess deferred income taxes — ACC - Tax Act (a) | 2046 | | $ | 40,903 | | | $ | 926,539 | | | $ | 40,903 | | | $ | 971,545 | | Excess deferred income taxes — ACC - Tax Act (a) | 2046 | | $ | 970,578 | | | $ | 971,545 | |
| Excess deferred income taxes — FERC - Tax Act (a) | Excess deferred income taxes — FERC - Tax Act (a) | 2058 | | 7,239 | | | 213,913 | | | 7,239 | | | 221,877 | | Excess deferred income taxes — FERC - Tax Act (a) | 2058 | | 221,708 | | | 221,877 | |
| Asset retirement obligations | | Asset retirement obligations | 2057 | | 396,107 | | | 354,002 | |
| Other postretirement benefits | Other postretirement benefits | (d) | | 50,624 | | | 292,490 | | | 37,789 | | | 337,027 | | Other postretirement benefits | (d) | | 258,955 | | | 270,604 | |
| Asset retirement obligations | 2057 | | — | | | 316,513 | | | — | | | 614,683 | | |
| Deferred fuel and purchased power — mark-to-market (Note 7) | 2024 | | 172,946 | | | 86,243 | | | 60,693 | | | 46,908 | | |
| Removal costs | Removal costs | (c) | | 72,955 | | | 35,619 | | | 69,476 | | | 50,104 | | Removal costs | (c) | | 106,102 | | | 106,889 | |
| Income taxes — change in rates | Income taxes — change in rates | 2051 | | 2,876 | | | 61,642 | | | 2,876 | | | 64,802 | | Income taxes — change in rates | 2051 | | 64,739 | | | 64,806 | |
| Four Corners coal reclamation | Four Corners coal reclamation | 2038 | | 2,316 | | | 50,013 | | | 2,316 | | | 53,076 | | Four Corners coal reclamation | 2038 | | 53,348 | | | 52,592 | |
| Income taxes — deferred investment tax credit | Income taxes — deferred investment tax credit | 2056 | | 2,264 | | | 45,436 | | | 2,264 | | | 47,337 | | Income taxes — deferred investment tax credit | 2056 | | 49,031 | | | 48,035 | |
| Spent nuclear fuel | Spent nuclear fuel | 2027 | | 7,224 | | | 33,377 | | | 6,701 | | | 38,581 | | Spent nuclear fuel | 2027 | | 37,313 | | | 39,217 | |
| Renewable energy standard (b) | Renewable energy standard (b) | 2024 | | 29,626 | | | 661 | | | 38,453 | | | 187 | | Renewable energy standard (b) | 2024 | | 30,188 | | | 35,720 | |
| Sundance maintenance | | Sundance maintenance | 2031 | | 17,667 | | | 16,893 | |
| Property tax deferral (e) | | Property tax deferral (e) | 2024 | | 14,353 | | | 15,521 | |
| Demand side management (b) | | Demand side management (b) | 2023 | | 14,207 | | | 8,461 | |
| FERC transmission true up (b) | FERC transmission true up (b) | 2024 | | 21,354 | | | 659 | | | 21,379 | | | 12,924 | | FERC transmission true up (b) | 2025 | | 12,597 | | | 22,895 | |
| Property tax deferral (e) | 2024 | | 4,671 | | | 12,018 | | | 4,671 | | | 15,521 | | |
| Sundance maintenance | 2031 | | — | | | 16,119 | | | — | | | 13,797 | | |
| Demand side management (b) | 2023 | | 4,759 | | | 9,214 | | | — | | | 5,417 | | |
| Tax expense adjustor mechanism (b) (e) | Tax expense adjustor mechanism (b) (e) | N/A | | — | | | 4,835 | | | — | | | 4,835 | | Tax expense adjustor mechanism (b) (e) | N/A | | 4,835 | | | 4,835 | |
| Deferred fuel and purchased power — mark-to-market (Note 7) | | Deferred fuel and purchased power — mark-to-market (Note 7) | 2025 | | 3,396 | | | 96,367 | |
| Other | Other | Various | | 600 | | | 2,998 | | | 1,511 | | | 592 | | Other | Various | | 7,415 | | | 3,092 | |
| Total regulatory liabilities | Total regulatory liabilities | | | $ | 420,357 | | | $ | 2,108,289 | | | $ | 296,271 | | | $ | 2,499,213 | | Total regulatory liabilities | | | $ | 2,262,539 | | | $ | 2,333,351 | |
| Less: current regulatory liabilities | | Less: current regulatory liabilities | | $ | 202,266 | | | $ | 271,575 | |
| Total non-current regulatory liabilities | | Total non-current regulatory liabilities | | $ | 2,060,273 | | | $ | 2,061,776 | |
(a)For purposes of presentation on the Statement of Cash Flows, amortization of the regulatory liabilities for excess deferred income taxes are reflected as “Deferred income taxes” under Cash Flows From Operating Activities.
(b)See “Cost Recovery Mechanisms” discussion above.
(c)In accordance with regulatory accounting guidance, APS accrues removal costs for its regulated assets, even if there is no legal obligation for removal.
(d)See Note 5.
(e)Balance includes amounts for future regulatory consideration and amortization period determination.
5. Retirement Plans and Other Postretirement 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. The other postretirement benefit plans include a group life and medical plan and a post-65 retiree health reimbursement arrangement (“HRA”). Pinnacle West uses a December 31 measurement date each year for its pension and other postretirement benefit plans. The market-related value of our plan assets is their fair value at the measurement date.
COMBINED 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 thousands):
| | | | Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits |
| | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | Three Months Ended
March 31, | | | | Three Months Ended
March 31, | | |
| | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | | | 2023 | | 2022 | | |
| Service cost — benefits earned during the period | Service cost — benefits earned during the period | $ | 13,868 | | | $ | 15,309 | | | $ | 41,605 | | | $ | 45,927 | | | $ | 4,117 | | | $ | 4,449 | | | $ | 12,352 | | | $ | 13,347 | | Service cost — benefits earned during the period | $ | 10,157 | | | $ | 14,331 | | | | | $ | 2,120 | | | $ | 4,218 | | | |
| Non-service costs (credits): | Non-service costs (credits): | | Non-service costs (credits): | | | | |
| Interest cost on benefit obligation | Interest cost on benefit obligation | 26,873 | | | 24,641 | | | 80,619 | | | 73,924 | | | 4,372 | | | 4,128 | | | 13,118 | | | 12,385 | | Interest cost on benefit obligation | 38,362 | | | 27,023 | | | | | 5,673 | | | 4,463 | | | |
| Expected return on plan assets | Expected return on plan assets | (46,443) | | | (50,657) | | | (139,331) | | | (151,971) | | | (11,510) | | | (10,361) | | | (34,531) | | | (31,083) | | Expected return on plan assets | (45,561) | | | (46,394) | | | | | (10,872) | | | (11,510) | | | |
| Amortization of: | Amortization of: | | | | | | | | | | | | | | Amortization of: | | | | | | | | | |
| Prior service credit | Prior service credit | — | | | — | | | — | | | — | | | (9,447) | | | (9,425) | | | (28,341) | | | (28,279) | | Prior service credit | — | | | — | | | | | (9,447) | | | (9,447) | | | |
| Net actuarial loss (gain) | Net actuarial loss (gain) | 4,379 | | | 3,987 | | | 13,136 | | | 11,961 | | | (3,209) | | | (2,523) | | | (9,627) | | | (7,569) | | Net actuarial loss (gain) | 9,713 | | | 4,768 | | | | | (2,303) | | | (2,982) | | | |
| Net periodic benefit | $ | (1,323) | | | $ | (6,720) | | | $ | (3,971) | | | $ | (20,159) | | | $ | (15,677) | | | $ | (13,732) | | | $ | (47,029) | | | $ | (41,199) | | |
| Net periodic cost/(benefit) | | Net periodic cost/(benefit) | $ | 12,671 | | | $ | (272) | | | | | $ | (14,829) | | | $ | (15,258) | | | |
| Portion of benefit charged to expense | Portion of benefit charged to expense | $ | (4,246) | | | $ | (7,803) | | | $ | (12,258) | | | $ | (24,428) | | | $ | (11,318) | | | $ | (9,765) | | | $ | (33,736) | | | $ | (28,901) | | Portion of benefit charged to expense | $ | 7,227 | | | $ | (3,290) | | | | | $ | (10,737) | | | $ | (10,895) | | | |
Contributions
We have not made any voluntary contributions to our pension plan year-to-date in 2022.2023. The minimum required contributions for the pension plan are zero for the next three years and we do not expect to make any contributions in 2022, 2023, 2024 or 2024.2025. With regard to contributions to our other postretirement benefit plan, we have not made a contribution year-to-date in 20222023 and do not expect to make any contributions in 2022, 2023, 2024 or 2024. In 2022 and 2021, the Company has been reimbursed $26 million and $24 million, respectively, for prior years retiree medical claims from the other postretirement benefit plan trust assets.2025.
6. Palo Verde Sale Leaseback Variable Interest Entities
In 1986, APS entered into agreements with three separate VIE lessor trust entities in order to sell and lease back interests in Palo Verde Unit 2 and related common facilities. APS will retain the assets through 2033 under all three lease agreements. APS will be required to make payments relating to the three leases in total of approximately $21 million annually for the period 20222023 through 2033. At the end of the lease period, APS will have the option to purchase the leased assets at their fair market value, extend the leases for up to two years, or return the assets to the lessors.
The leases’ terms giveFor regulatory reporting purposes, APS the ability to utilize the assets 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. Predominantly due to the lease terms, APS has been deemed the primary beneficiary of these VIEs and therefore consolidates the VIEs.
As a result of consolidation, we eliminate lease accounting and instead recognize depreciation expense, resulting in an increase in net incomeaccounts for the three leases as operating leases for income
statement and nine months ended September 30, 2022, of $4 million and $13 million respectively,cash flow statement purposes, and for thebalance sheet purposes all three and nine months ended September 30, 2021leases are classified as finance leases. See Note 14 for a discussion of $4 million and $13 million, respectively. The increase in net income is entirely attributable to the noncontrolling interests. Income attributable to Pinnacle West shareholders is not impacted by the consolidation.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Our Condensed Consolidated Balance Sheets at September 30, 2022, and December 31, 2021, include the following amounts relating to the VIEs (dollars in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Palo Verde sale leaseback property, plant and equipment, net of accumulated depreciation | $ | 91,264 | | | $ | 94,166 | |
| Equity — Noncontrolling interests | 117,550 | | | 115,260 | |
Assets of the VIEs are restricted and may only be used for payment to the noncontrolling interest holders. These assets are reported on our condensed consolidated financial statements.
APS is exposed to losses relating to these 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 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 were to occur during the lease periods, APS may be required to pay the noncontrolling equity participants approximately $315$324 million beginning in 2022,2023, and up to $501 million over the lease terms.
For regulatory ratemaking purposes, the agreements continue to be treated as operating leases and, as a result, we have recorded a regulatory asset relating to the arrangements.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. Derivative Accounting
Derivative financial instruments are used to manage exposure to commodity price and transportation costs of electricity, natural gas, emissions allowances, and interest rates. Risks associated with market volatility are managed by utilizing various physical and financial derivative instruments, including futures, forwards, options, and swaps. As part of our overall risk management program, we may use derivative instruments to hedge purchases and sales of electricity and natural gas. Derivative instruments that meet certain hedge accounting criteria may be designated as cash flow hedges and are used to limit our exposure to cash flow variability on forecasted transactions. The changes in market value of such instruments have a high correlation to price changes in the hedged transactions. Derivative instruments are also entered into for economic hedging purposes. While economic hedges may mitigate exposure to fluctuations in commodity prices, these instruments have not been designated as accounting hedges. Contracts that have the same terms (quantities, delivery points, and delivery periods) and for which power does not flow are netted, which reduces both revenues and fuel and purchased power costs in our Condensed Consolidated Statements of Income, but does not impact our financial condition, net income, or cash flows.
Our derivative instruments, excluding those qualifying for a scope exception, are recorded on the balance sheets as an asset or liability and are measured at fair value. See Note 11 for a discussion of fair value measurements. Derivative instruments may qualify for the normal purchases and normal sales scope exception if they require physical delivery, and the quantities represent those transacted in the normal course of business. Derivative instruments qualifying for the normal purchases and sales scope exception are accounted for under the accrual method of accounting and excluded from our derivative instrument discussion and disclosures below.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For its regulated operations, APS defers for future rate treatment 100% of the unrealized gains and losses on derivatives pursuant to the PSA mechanism that would otherwise be recognized in income. Realized gains and losses on energy derivatives are deferred in accordance with the PSA to the extent the amounts are above or below the Base Fuel Rate. See Note 4. Gains and losses from energy derivatives in the following tables represent the amounts reflected in income before the effect of PSA deferrals.
The following table shows the outstanding gross notional volume of energy derivatives, which represent both purchases and sales (does not reflect net position):
| | | Quantity | | Quantity |
| Commodity | Commodity | | Unit of Measure | September 30, 2022 | | December 31, 2021 | Commodity | | Unit of Measure | March 31, 2023 | | December 31, 2022 |
| Power | Power | | GWh | 781 | | | — | | Power | | GWh | 1,664 | | | 1,197 | |
| Gas | Gas | | Billion cubic feet | 139 | | | 155 | | Gas | | Billion cubic feet | 194 | | | 149 | |
On October 19, 2022, BCE executed an interest rate swap to hedge the variable interest rate exposure relating to the Los Alamitos credit agreement. See Note 3. We are applying cash flow hedge accounting treatment to these derivative instruments.
Gains and Losses from Energy Derivative Instruments
For the three and nine months ended September 30,March 31, 2023 and 2022, and 2021, APS had no energy derivative instruments in designated accounting hedging relationships.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table provides information about gains and losses from energy derivative instruments not designated as accounting hedging instruments (dollars in thousands):
| | | | | Financial Statement Location | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | | Financial Statement Location | | Three Months Ended
March 31, | |
| Commodity Contracts | Commodity Contracts | | 2022 | | 2021 | | 2022 | | 2021 | Commodity Contracts | | 2023 | | 2022 | |
| | Net Gain Recognized in Income | | Fuel and purchased power (a) | | $ | 138,855 | | | $ | 147,712 | | | $ | 425,122 | | | $ | 269,686 | | |
| Net Gain (Loss) Recognized in Income | | Net Gain (Loss) Recognized in Income | | Fuel and purchased power (a) | | $ | (188,930) | | | $ | 223,742 | | |
|
(a)Amounts are before the effect of PSA deferrals.
Energy Derivative Instruments in the Condensed Consolidated Balance Sheets
Our energy derivative transactions are typically executed under standardized or customized agreements, which include collateral requirements and, in the event of a default, would allow for the netting of positive and negative exposures associated with a single counterparty. Agreements that allow for the offsetting of positive and negative exposures associated with a single counterparty are considered master netting arrangements. Transactions with counterparties that have master netting arrangements are offset and reported net on the Condensed Consolidated Balance Sheets. Transactions that do not allow for offsetting of positive and negative positions are reported gross on the Condensed Consolidated Balance Sheets.
We do not offset a counterparty’s current energy derivative contracts with the counterparty’s non-current energy derivative contracts, although our master netting arrangements would allow current and non-current positions to be offset in the event of a default. These types of transactions may include non-derivative instruments, derivatives qualifying for scope exceptions, trade receivables and trade payables arising from settled positions, and other forms of non-cash collateral (such as letters of credit). These types of transactions are excluded from the offsetting tables presented below.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following tables provide information about the fair value of our risk management activities reported on a gross basis, and the impacts of offsetting. These amounts relate to commodity contracts and are located in the assets and liabilities from risk management activities lines of ourAPS’s Condensed Consolidated Balance Sheets.
| As of September 30, 2022:
(dollars in thousands) | | Gross Recognized Derivatives (a) | | Amounts
Offset
(b) | | Net Recognized Derivatives | | Other (c) | | Amount Reported on Balance Sheets | |
As of March 31, 2023:
(dollars in thousands) | | As of March 31, 2023:
(dollars in thousands) | | Gross Recognized Derivatives (a) | | Amounts
Offset
(b) | | Net Recognized Derivatives | | Other (c) | | Amount Reported on Balance Sheets |
| Current assets | Current assets | | $ | 175,362 | | | $ | (10,586) | | | $ | 164,776 | | | $ | 18 | | | $ | 164,794 | | Current assets | | $ | 22,994 | | | $ | (7,050) | | | $ | 15,944 | | | $ | 17 | | | $ | 15,961 | |
| Investments and other assets | Investments and other assets | | 87,391 | | | (527) | | | 86,864 | | | — | | | 86,864 | | Investments and other assets | | 26,746 | | | (9,664) | | | 17,082 | | | — | | | 17,082 | |
| Total assets | Total assets | | 262,753 | | | (11,113) | | | 251,640 | | | 18 | | | 251,658 | | Total assets | | 49,740 | | | (16,714) | | | 33,026 | | | 17 | | | 33,043 | |
| | Current liabilities | Current liabilities | | (2,416) | | | 1,786 | | | (630) | | | (6,610) | | | (7,240) | | Current liabilities | | (84,853) | | | 7,050 | | | (77,803) | | | (6,071) | | | (83,874) | |
| Deferred credits and other | Deferred credits and other | | (1,148) | | | 527 | | | (621) | | | — | | | (621) | | Deferred credits and other | | (23,349) | | | 9,664 | | | (13,685) | | | — | | | (13,685) | |
| Total liabilities | Total liabilities | | (3,564) | | | 2,313 | | | (1,251) | | | (6,610) | | | (7,861) | | Total liabilities | | (108,202) | | | 16,714 | | | (91,488) | | | (6,071) | | | (97,559) | |
| Total | Total | | $ | 259,189 | | | $ | (8,800) | | | $ | 250,389 | | | $ | (6,592) | | | $ | 243,797 | | Total | | $ | (58,462) | | | $ | — | | | $ | (58,462) | | | $ | (6,054) | | | $ | (64,516) | |
(a)All of our gross recognized derivative instruments were subject to master netting arrangements.
(b)IncludesNo cash collateral has been provided to counterparties, or received from counterparties, of $8,800 thousand that is subject to offsetting.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(c)Represents cash collateral and cash margin that is not subject to offsetting. Amounts relate to non-derivative instruments, derivatives qualifying for scope exceptions, or collateral and margin posted or received in excess of the recognized derivative instrument. Includes cash collateral received from counterparties of $6,610$6,071 thousand and cash margin provided to counterparties of $18$17 thousand.
| As of December 31, 2021:
(dollars in thousands) | | Gross Recognized Derivatives (a) | | Amounts
Offset
(b) | | Net Recognized Derivatives | | Other (c) | | Amount
Reported on
Balance Sheets | |
As of December 31, 2022:
(dollars in thousands) | | As of December 31, 2022:
(dollars in thousands) | | Gross Recognized Derivatives (a) | | Amounts
Offset
(b) | | Net Recognized Derivatives | | Other (c) | | Amount
Reported on
Balance Sheets |
| Current assets | Current assets | | $ | 66,777 | | | $ | (3,346) | | | $ | 63,431 | | | $ | 50 | | | $ | 63,481 | | Current assets | | $ | 103,484 | | | $ | (15,808) | | | $ | 87,676 | | | $ | 28 | | | $ | 87,704 | |
| Investments and other assets | Investments and other assets | | 48,302 | | | (1,394) | | | 46,908 | | | — | | | 46,908 | | Investments and other assets | | 49,777 | | | (5,383) | | | 44,394 | | | — | | | 44,394 | |
| Total assets | Total assets | | 115,079 | | | (4,740) | | | 110,339 | | | 50 | | | 110,389 | | Total assets | | 153,261 | | | (21,191) | | | 132,070 | | | 28 | | | 132,098 | |
| | Current liabilities | Current liabilities | | (6,084) | | | 3,346 | | | (2,738) | | | (1,635) | | | (4,373) | | Current liabilities | | (47,670) | | | 15,808 | | | (31,862) | | | (5,835) | | | (37,697) | |
| Deferred credits and other | Deferred credits and other | | (1,394) | | | 1,394 | | | — | | | — | | | — | | Deferred credits and other | | (9,223) | | | 5,383 | | | (3,840) | | | — | | | (3,840) | |
| Total liabilities | Total liabilities | | (7,478) | | | 4,740 | | | (2,738) | | | (1,635) | | | (4,373) | | Total liabilities | | (56,893) | | | 21,191 | | | (35,702) | | | (5,835) | | | (41,537) | |
| Total | Total | | $ | 107,601 | | | $ | — | | | $ | 107,601 | | | $ | (1,585) | | | $ | 106,016 | | Total | | $ | 96,368 | | | $ | — | | | $ | 96,368 | | | $ | (5,807) | | | $ | 90,561 | |
(a)All of our gross recognized derivative instruments were subject to master netting arrangements.
(b)No cash collateral has been provided to counterparties, or received from counterparties, that is subject to offsetting.
(c)Represents cash collateral and cash margin that is not subject to offsetting. Amounts relate to non-derivative instruments, derivatives qualifying for scope exceptions, or collateral and margin posted in excess of the recognized derivative instrument. Includes cash collateral received from counterparties of $1,635$5,835 thousand and cash margin provided to counterparties of $50$28 thousand.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSInterest Rate Derivatives
On October 19, 2022, Bright Canyon Energy entered into an interest rate swap to hedge the variable interest rate exposure relating to the credit agreement for the Los Alamitos project.The transaction qualifies and has been designated as cash flow hedge.The hedge’s gain or loss is reported as a component of other comprehensive income and subsequently will be reclassified into earnings in the periods during which the related interest expense on the debt is incurred.As of March 31, 2023, the interest rate swap has a notional value of $32 million with a maturity in 2041.Relating to this derivative, our Condensed Consolidated Balance Sheet as of March 31, 2023, includes approximately $1.7 million reported as a liability within the liabilities from risk management activities line within the deferred credits and other section, and $0.1 million reported as a current asset within the assets from risk management activities line.As of March 31, 2023, the Condensed Consolidated Income Statement includes a pretax loss of approximately $1.6 million recognized in other comprehensive income relating to the interest rate swap.There were no gains or losses reclassified out of accumulated other comprehensive income as of March 31, 2023, and we expect $0.1 million of losses will be reclassified into earnings over the next 12 months.
Credit Risk and Credit Related Contingent Features
We are exposed to losses in the event of nonperformance or nonpayment by counterparties and have risk management contracts with many counterparties. As of September 30, 2022,March 31, 2023, we have one counterparty for which our exposure represents approximately 18%20% of Pinnacle West’s $252$33 million of risk management assets. This exposure relates to a master agreement with the counterparty, and the counterparty is rated as investment grade. Our risk management process assesses and monitors the financial exposure of all counterparties.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
Certain of our energy derivative instrument contracts contain credit-risk-related contingent features including, among other things, investment grade credit rating provisions, credit-related cross-default provisions, and adequate assurance provisions. Adequate assurance provisions allow a counterparty with reasonable grounds for uncertainty to demand additional collateral based on subjective events and/or conditions. For those derivative instruments in a net liability position, with investment grade credit contingencies, the counterparties could demand additional collateral if our debt credit rating were to fall below investment grade (below BBB- for Standard & Poor’s or Fitch or Baa3 for Moody’s).
The following table provides information about our energy derivative instruments that have credit-risk-related contingent features (dollars in thousands):
| | | | | |
| | September 30, 2022March 31, 2023 |
| Aggregate fair value of derivative instruments in a net liability position | $ | 3,563108,202 | |
| |
| Additional cash collateral in the event credit-risk-related contingent features were fully triggered (a) | 54573,886 | |
(a)This amount is after counterparty netting and includes those contracts which qualify for scope exceptions, which are excluded from the derivative details above.
We have energy-related non-derivative instrument contracts with investment grade credit-related contingent features, which could require us to post additional collateral of approximately $76 million if our debt credit ratings were to fall below investment grade.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. Commitments and Contingencies
Palo Verde Generating Station
Spent Nuclear Fuel and Waste Disposal
On December 19, 2012, APS, acting on behalf of itself and the participant owners of Palo Verde, filed a second breach of contract lawsuit against the United States Department of Energy (“DOE”)DOE in the United States Court of Federal Claims (“Court of Federal Claims”). The lawsuit sought to recover damages incurred due to DOE’s breach of the Contract for Disposal of Spent Nuclear Fuel and/or High-LevelHigh Level Radioactive Waste (“Standard Contract”) for failing to accept Palo Verde’s spent nuclear fuel and high level waste from January 1, 2007, through June 30, 2011, as it was required to do pursuant to the terms of the Standard Contract and the Nuclear Waste Policy Act. On August 18, 2014, APS and DOE entered into a settlement agreement, stipulatingwhich required DOE to a dismissal of the lawsuit and payment by DOE topay the Palo Verde owners for certain specified costs incurred by Palo Verde during the period January 1, 2007, through June 30, 2011. In addition, the settlement agreement as amended, providesprovided APS with a method for submitting claims and getting recovery for costs incurred through December 31, 2022.2016, which was extended to December 31, 2025.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APS has submitted eight claims pursuant to the terms of the August 18, 2014 settlement agreement, for eight separate time periods during July 1, 2011 through June 30, 2021. The DOE has approved and paid $123.9 million for these claims (APS’s share is $36.0 million). The amounts recovered were primarily recorded as adjustments to a regulatory liability and had no impact on reported net income. In accordance with the 2017 Rate Case Decision, this regulatory liability is being refunded to customers. See Note 4. On October 31, 2022, APS filed its ninth claim pursuant to the terms of the August 18, 2014 settlement agreementagreement. On March 16,2023, the DOE approved a payment in the amount of $14.3 million (APS’s share is $4.2 million)., and on April 6, 2023, APS received this payment.
Nuclear Insurance
Public liability for incidents at nuclear power plants is governed by the Price-Anderson Nuclear Industries Indemnity Act (“Price-Anderson Act”), which limits the liability of nuclear reactor owners to the amount of insurance available from both commercial sources and an industry-wide retrospective payment plan. In accordance with the Price-Anderson Act, the Palo Verde participants are insured against public liability for a nuclear incident of up to approximately $13.7 billion per occurrence. Palo Verde maintains the maximum available nuclear liability insurance in the amount of $450 million, which is provided by American Nuclear Insurers (“ANI”).Insurers. The remaining balance of approximately $13.2 billion of liability coverage is provided through a mandatory, industry-wide retrospective premium program. If losses at any nuclear power plant covered by the program exceed the accumulated funds, APS could be responsible for retrospective premiums. The maximum retrospective premium per reactor under the program for each nuclear liability incident is approximately $137.6 million, subject to a maximum annual premium of approximately $20.5 million per incident. Based on APS’s ownership interest in the three Palo Verde units, APS’s maximum retrospective premium per incident for all three units is approximately $120.1 million, with a maximum annual retrospective premium of approximately $17.9 million.
The Palo Verde participants maintain insurance for property damage to, and decontamination of, property at Palo Verde in the aggregate amount of $2.8 billion. APS has also secured accidental outage insurance for a sudden and unforeseen accidental outage of any of the three units. The property damage, decontamination, and accidental outage insurance are provided by Nuclear Electric Insurance Limited (“NEIL”). APS is subject to retrospective premium adjustments under all NEIL policies if NEIL’s losses in any policy year exceed accumulated funds. The maximum amount APS could incur under the current NEIL policies totals approximately $22.3$22.4 million for each retrospective premium assessment declared by NEIL’s Board of Directors due to losses. Additionally, at the sole discretion of the NEIL Board of Directors, APS would be liable to provide approximately $62.6 million in deposit premium within 20 days of request as assurance to satisfy any site obligation of retrospective premium assessment. The insurance coverage discussed in this, and the previous paragraph is subject to certain policy conditions, sublimits, and exclusions.
Contractual Obligations
As of March 31, 2023, our fuel and purchased power and purchase obligation commitments have increased from the information provided in our 2022 Form 10-K. The increase is primarily due to new purchased power and energy storage commitments of approximately $1.9 billion. The majority of the changes relate to 2025 and thereafter. This amount includes approximately $1.6 billion of commitments relating to purchased power lease contracts. See Note 14.
Other than the items described above, there have been no material changes, as of March 31, 2023, outside the normal course of business in contractual obligations from the information provided in our 2022 Form 10-K. See Note 3 for discussion regarding changes in our short-term and long-term debt obligations.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Board of Directors due to losses. In addition, NEIL policies contain rating triggers that would result in APS providing approximately $62.8 million of collateral assurance within 20 business days of a rating downgrade to non-investment grade. The insurance coverage discussed in this and the previous paragraph is subject to certain policy conditions, sublimits and exclusions.
Contractual Obligations
As of September 30, 2022, our fuel and purchased power and purchase obligation commitments have increased from the information provided in our 2021 Form 10-K. The increase is primarily due to new purchased power and energy storage commitments of approximately $1.3 billion. The majority of the changes relate to 2024 and thereafter. This amount includes approximately $500 million of commitments relating to a new purchased power lease contract that is included in our non-commenced lease discussion below.
At September 30, 2022, we have various lease arrangements that have been executed but have not yet commenced. These arrangements primarily relate to energy storage assets, with expected lease commencement dates ranging from December 2022 through June 2024, with terms expiring through May 2044. We expect the total fixed consideration paid for these arrangements, which includes both lease and nonlease payments, will approximate $1.8 billion over the term of the arrangements. The lease commencement dates for these leased assets have experienced delays. APS continues to work with the lessors to determine the revised commencement dates that will be achieved. For additional information regarding our lease commitments see our 2021 Form 10-K.
Other than the items described above, there have been no material changes, as of September 30, 2022, outside the normal course of business in contractual obligations from the information provided in our 2021 Form 10-K. See Note 3 for discussion regarding changes in our short-term and long-term debt obligations.
Superfund and Other Related Matters
The Comprehensive Environmental Response Compensation and Liability Act (“Superfund” or “CERCLA”) establishes liability for the cleanup of hazardous substances found contaminating the soil, water or air. Those who released, generated, transported to or disposed of hazardous substances at a contaminated site are among the parties who are potentially responsible (each a “PRP”). PRPs may be strictly, jointly, and severally liable for clean-up. On September 3, 2003, EPA advised APS that EPA considers APS to be a PRP in the Motorola 52nd Street Superfund Site, Operable Unit 3 (“OU3”) in Phoenix, Arizona. APS has facilities that are within this Superfund site. APS and Pinnacle West have agreed with EPA to perform certain investigative activities of the APS facilities within OU3. In addition, on September 23, 2009, APS agreed with EPA and one other PRP to voluntarily assist with the funding and management of the site-wide groundwater remedial investigation and feasibility study (“RI/FS”). Based upon discussions between the OU3 working group parties and EPA, along with the results of recent technical analyses prepared by the OU3 working group to supplement theThe RI/FS for OU3 APS anticipates finalizing the RI/FS beforewas finalized and submitted to EPA at the end of 2022. APS cannot predict the EPA’s timing with respect to this matter. APS’s estimated costs related to this investigation and study areis approximately $3 million. APS anticipates incurring additional expenditures in the future, but because the overall investigation is not complete and ultimate remediation requirements are not yet finalized by EPA, at the present time expenditures related to this matter cannot be reasonably estimated.
On August 6, 2013, the Roosevelt Irrigation District (“RID”) filed a lawsuit in Arizona District Court against APS and 24 other defendants, alleging that RID’s groundwater wells were contaminated by the release of hazardous substances from facilities owned or operated by the defendants. The lawsuit also alleges that, under Superfund laws, the defendants are jointly and severally liable to RID. The allegations against APS arise out of APS’s current and former ownership of facilities in and around OU3. As part of a state governmental
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
investigation into groundwater contamination in this area, on January 25, 2015, the Arizona Department of Environmental Quality (“ADEQ”)ADEQ sent a letter to APS seeking information concerning the degree to which, if any, APS’s current and former ownership of these facilities may have contributed to groundwater contamination in this area. APS responded to ADEQ on May 4, 2015. On December 16, 2016, two RID environmental and engineering contractors filed an ancillary lawsuit for recovery of costs against APS and the other defendants in the RID litigation. That same day, another RID service provider filed an additional ancillary CERCLA lawsuit against certain of the defendants in the main RID litigation but excluded APS and certain other parties as named defendants. Because the ancillary lawsuits concern past costs allegedly incurred by these RID vendors, which were ruled unrecoverable directly by RID in November of 2016, the additional lawsuits do not increase APS’s exposure or risk related to these matters.
On April 5, 2018, RID and the defendants in that particular litigation executed a settlement agreement, fully resolving RID’s CERCLA claims concerning both past and future cost recovery. APS’s share of this settlement was immaterial. In addition, the two environmental and engineering vendors voluntarily dismissed their lawsuit against APS and the other named defendants without prejudice. An order to this effect was entered on April 17, 2018. With this disposition of the case, the vendors may file their lawsuit again in the future. On August 16, 2019, Maricopa County, one of the three direct defendants in the service provider lawsuit, filed a third-party complaint seeking contribution for its liability, if any, from APS and 28 other third-party defendants. While this lawsuit remains pending, on September 30, 2022, the U.S. District Court for the District of Arizona granted partial summary judgment to the direct defendants for $20.7 million of the $21 million in CERCLA response costs claimed by the service provider. We are unable to predict the outcome of these matters;any further litigation related to the remaining response costs at issue in this litigation; however, we do not expect the outcome to have a material impact on our financial position, results of operations or cash flows.
On February 28, 2022, EPA provided APS with a request for information under CERCLA related to APS’s Ocotillo power plant site located in Tempe, Arizona. In particular, EPA seeks information from APS regarding APS’s use, storage, and disposal of substances containing per-and polyfluoroalkyl (“PFAS”) compounds at the Ocotillo power plant site in order to aid EPA’s investigation into actual or threatened releases of PFAS into groundwater within the South Indian Bend Wash (“SIBW”) Superfund site. The SIBW
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Superfund site includes the APS Ocotillo power plant site. On April 29, 2022, APS filed its response to this information request.request on April 29, 2022. On January 17, 2023, EPA contacted APS to inform the Company that it would be commencing on-site investigations within the SIBW site, including the Ocotillo power plant, and performing a remedial investigation and feasibility study related to potential PFAS impacts to groundwater over the next two to three years. At the present time, we are unable to predict the outcome of this matter and expenditures related to this matter cannot be reasonably estimated.
Arizona Attorney General Matter
APS received civil investigative demands from the Attorney General seeking information pertaining to the rate plan comparison tool offered to APS customers and other related issues including implementation of rates from the 2017 Settlement Agreement and its Customer Education and Outreach Plan associated with the 2017 Settlement Agreement. APS fully cooperated with the Attorney General’s Office in this matter. On February 22, 2021, APS entered into a consent agreement with the Attorney General as a way to settle the matter. The settlement resulted in APS paying $24.75 million, approximately $24 million of which was returned to customers as restitution.
Four Corners SCR Cost Recovery
As part of APS’s 2019 Rate Case, APS included recovery of the deferral and rate base effects of the Four Corners SCR project. On November 2, 2021, the 2019 Rate Case decision was approved by the ACC allowing approximately $194 million of SCR related plant investments and cost deferrals in rate base and to recover, depreciate and amortize in rates based on an end-of-life assumption of July 2031. The decision also included a partial and combined disallowance of $215.5 million on the SCR investments and deferrals. APS believes the SCR plant investments and related SCR cost deferrals were prudently incurred, and on December 17, 2021, APS filed its Notice of Direct Appeal at the Arizona Court of Appeals requesting review of the $215.5 million disallowance. The appeal is proceedingArizona Court of Appeals heard oral arguments on November 30, 2022. On March 6, 2023, the Court of Appeals issued its order in the normal course,matter, vacating the ACC’s disallowance of the SCR investment and oral arguments are
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
scheduled for November 30, 2022.the Court of Appeals. The parties have until May 8, 2023 to file a petition requesting review by the Arizona Supreme Court. APS cannot predict the outcome of this proceeding. Based on the partial recovery of these investments and cost deferrals in current rates, the favorable Court of Appeals order, and the uncertainty of the outcome of the legal appeals process,potential for further appellate review, APS has not recorded an impairment or write-off relating to the SCR plant investments or deferrals as of September 30, 2022.March 31, 2023. If the 2019 Rate Case decision to disallow $215.5 million of the SCRs is ultimately upheld, APS will be required to record a charge to its results of operations, net of tax, of approximately $154.4 million. We cannot predict the outcome of the legal challenges nor the timing of when this matter will be resolved. See Note 43 for additional information regarding the Four Corners SCR cost recovery.
Environmental Matters
APS is subject to numerous environmental laws and regulations affecting many aspects of its present and future operations, including air emissions of both conventional pollutants and greenhouse gases, water quality, wastewater discharges, solid waste, hazardous waste, and coal combustion residuals (“CCRs”). These laws and regulations can change from time to time, imposing new obligations on APS resulting in increased capital, operating, and other costs. Associated capital expenditures or operating costs could be material. APS intends to seek recovery of any such environmental compliance costs through our rates but cannot predict whether it will obtain such recovery. The following proposed and final rules involve material compliance costs to APS.
Regional Haze Rules.APS has received the final rulemaking imposing pollution control requirements on Four Corners. EPA required the plant to install pollution control equipment that constitutes best available retrofit technology (“BART”) to lessen the impacts of emissions on visibility surrounding the plant. Based on EPA’s final standards, APS’s 63% share of the cost of required controls for Four Corners Units 4 and 5 was approximately $400 million, which has been incurred.
In addition, EPA issued a final rule for Regional Haze compliance at Cholla that does not involve the installation of new pollution controls and that will replace an earlier BART determination for this facility. See “Cholla” in Note 4 for information regarding future plans for Cholla and details related to the resulting regulatory asset and see “Four Corners SCR Cost Recovery” above regarding recovery of the Four Corners SCR project.
Coal Combustion Waste. On December 19, 2014, EPA issued its final regulations governing the handling and disposal of CCR, such as fly ash and bottom ash. The rule regulates CCR as a non-hazardous waste under Subtitle D of the Resource Conservation and Recovery Act (“RCRA”) and establishes national minimum criteria for existing and new CCR landfills and surface impoundments and all lateral expansions. These criteria include standards governing location restrictions, design and operating criteria, groundwater monitoring and corrective action, closure requirements and post closure care, and recordkeeping, notification, and internet posting requirements. The rule generally requires any existing unlined CCR surface impoundment to stop receiving CCR and either retrofit or close, and further requires the closure of any CCR landfill or surface impoundment that cannot meet the applicable performance criteria for location restrictions or structural
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
integrity. Such closure requirements are deemed “forced closure” or “closure for cause” of unlined surface impoundments and are the subject of recent regulatory and judicial activities described below.
Since these regulations were finalized, EPA has taken steps to substantially modify the federal rules governing CCR disposal. While certain changes have been prompted by utility industry petitions, others have resulted from judicial review, court-approved settlements with environmental groups, and statutory changes to RCRA. The following lists the pending regulatory changes that, if finalized, could have a material impact as to how APS manages CCR at its coal-fired power plants:
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
•Following the passage of the Water Infrastructure Improvements for the Nation Act in 2016, EPA possesses authority to either authorize states to develop their own permit programs for CCR management or issue federal permits governing CCR disposal both in states without their own permit programs and on tribal lands. Although ADEQ has taken steps to develop a CCR permitting program, including supporting the passage of new state legislation providing ADEQ with appropriate permitting authority for CCR under the state solid waste management program, it is not clear when that program will be put into effect. On December 19, 2019, EPA proposed its own set of regulations governing the issuance of CCR management permits. The proposal remains pending.
•On March 1, 2018, as a result of a settlement with certain environmental groups, EPA proposed adding boron to the list of constituents that trigger corrective action requirements to remediate groundwater impacted by CCR disposal activities. Apart from a subsequent proposal issued on August 14, 2019, to add a specific, health-based groundwater protection standard for boron, EPA has yet to take action on this proposal.
•With respect to APS’s Cholla facility, the Company’sAPS’s application for alternative closure was submitted to EPA on November 30, 2020. While EPA has deemed APS’s application administratively “complete,” the Agency’s approval remains pending. If granted, this application would allow the continued disposal of CCR within Cholla’s existing unlined CCR surface impoundments until the required date for ceasing coal-fired boiler operations in April 2025. This application will be subject to public comment and, potentially, judicial review. We expect to have a proposed decision from EPA regarding Cholla sometime in 2023.
We cannot at this time predict the outcome of these regulatory proceedings or when the EPA will take final action on those matters that are still pending. Depending on the eventual outcome, the costs associated with APS’s management of CCR could materially increase, which could affect APS’s financial position, results of operations, or cash flows.
APS currently disposes of CCR in ash ponds and dry storage areas at Cholla and Four Corners. APS estimates that its share of incremental costs to comply with the CCR rule for Four Corners is approximately $30 million and its share of incremental costs to comply with the CCR rule for Cholla is approximately $16 million. The Navajo Plant disposed of CCR only in a dry landfill storage area. To comply with the CCR rule for the Navajo Plant, APS’s share of incremental costs was approximately $1 million, which has been incurred. Additionally, the CCR rule requires ongoing, phased groundwater monitoring.
As of October 2018, APS has completed the statistical analyses for its CCR disposal units that triggered assessment monitoring. APS determined that several of its CCR disposal units at Cholla and Four Corners will need to undergo corrective action. In addition, under the current regulations, all such disposal units must have ceased operating and initiated closure by April 11, 2021, at the latest (except for those disposal units subject to alternative closure). APS completed the assessments of corrective measures on June 14, 2019; however, additional investigations and engineering analyses that will support the remedy selection are still
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
underway. In addition, APS will also solicit input from the public and host public hearings as part of this process. Based on the work performed to date, APS currently estimates that its share of corrective action and monitoring costs at Four Corners will likely range from $10 million to $15 million, which would be incurred over 30 years. The analysis neededAs to perform a similar cost estimate for Cholla, remains ongoingAPS currently estimates that its share of corrective action and monitoring costs at this time. facility will likely range from $30 million to $35 million, which similarly would be incurred over 30 years.As APS continues to implement the CCR rule’s corrective action assessment process, the current cost estimates may change. Given uncertainties that may exist until we have fully completed the corrective action assessment and final remedy selection process, weAPS cannot predict any ultimate impacts to the Company;APS; however, at this time we doAPS does not believe the cost estimates for Cholla andthat any potential changechanges to the cost estimate for Four Corners or Cholla would have a material impact on ourits financial position, results of operations or cash flows.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
EPA ClimateClean Power Plan/Affordable Clean Energy Regulations. On June 19, 2019, EPA took final action on its proposals to repeal EPA’s 2015 Clean Power Plan (“CPP”) and replace those regulations with a new rule, the Affordable Clean Energy (“ACE”) regulations. EPA originally finalized the CPP on August 3, 2015, and such rules would have had far broader impact on the electric power sector than the ACE regulations. On January 19, 2021, the U.S. Court of Appeals for the D.C. Circuit vacated the ACE regulations and remanded them back to EPA to develop new existing power plant carbon regulations consistent with the court’s ruling. That rulingdecision, which endorsed an expansive view of the federal Clean Air Act consistent with EPA’s 2015 CPP. Thereafter, on June 30, 2022,CPP was subsequently reversed by the U.S. Supreme Court reversed the D.C. Circuit’s ruling, holding that existing power plant carbon regulations on the scale of the CPP are not authorized by the federal Clean Air Act.June 30, 2022. While the Bidencurrent administration has nonetheless expressed an intent to continue its effort to regulatedevelop new carbon emissionsemission regulations governing existing power plants sometime in this sector more aggressively under the Clean Air Act (consistent with2023, such action will be constrained by the U.S. Supreme Court’s June 30 ruling), wedecision that the CPP violated the Clean Air Act. Nonetheless, APS cannot at this time predict the outcome of pending EPA rulemaking proceedings related to the regulation of carbon emissions from existing power plants.
Other environmental rules that could involve material compliance costs include those related to effluent limitations, the ozone national ambient air quality standard and other rules or matters involving the Clean Air Act, Clean Water Act, Endangered Species Act, RCRA, Superfund, the Navajo Nation, and water supplies for our power plants. The financial impact of complying with current and future environmental rules could jeopardize the economic viability of our coalAPS’s fossil-fuel powered plants or the willingness or ability of power plant participants to fund any required equipment upgrades or continue their participation in these plants. The economics of continuing to own certain resources, particularly our coal plants, may deteriorate, warranting early retirement of those plants, which may result in asset impairments. APS would seek recovery in rates for the book value of any remaining investments in the plants, as well as other costs related to early retirement, but cannot predict whether it would obtain such recovery.
Four Corners National Pollutant Discharge Elimination System (“NPDES”) Permit
The latest NPDES permit for Four Corners was issued on September 30, 2019. Based upon a November 1, 2019, filing by several environmental groups, the Environmental Appeals Board (“EAB”) took up review of the Four Corners NPDES Permit. The EAB denied the environmental group petition on September 30, 2020. While on January 22, 2021, the environmental groups had filed a petition for review of the EAB’s decision with the U.S. Court of Appeals for the Ninth Circuit, on May 2, 2022, the parties to the litigation executed(including APS) finalized a settlement agreement. We doon May 2, 2022. This settlement requires investigation of thermal wastewater discharges from Four Corners, administratively closes the litigation filed in January of 2021, and is not anticipate that this agreement willexpected to have a material impact on ourAPS’s financial position, results of operations, or cash flows.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Four Corners — 4CA Matter
On July 6, 2016, 4CA purchased El Paso’s 7% interest in Four Corners. NTEC purchased this 7% interest on July 3, 2018, from 4CA. NTEC purchased the 7% interest at 4CA’s book value, approximately $70 million, and paid 4CA the purchase price over a period of four years pursuant to a secured interest-bearing promissory note, which was paid in full as of June 30, 2022.
In connection with the sale, Pinnacle West guaranteed certain obligations that NTEC will have to the other owners of Four Corners, such as NTEC’s 7% share of capital expenditures and operating and maintenance expenses. Pinnacle West’s guarantee is secured by a portion of APS’s payments to be owed to NTEC under the 2016 Coal Supply Agreement.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BCE Matters
BCE owns a minority equity ownership interest relating to the Clear Creek wind farm. Tenaska Clear Creek Wind, LLC, the developer, owner, and operator of the Clear Creek wind farm, has disputed the proposed cost allocation of system upgrades related to connecting the Clear Creek wind farm to the transmission system and filed a complaint with FERC on May 21, 2021, which was denied on September 9, 2022, and a Petition for Review with the U.S. Court of Appeals, which is still pending. 2022.Subsequently, Tenaska Clear Creek Wind, LLC filed with FERC a request for rehearing and a motion for stay of the September 9, 2022 order. WhileOn October 7, 2022, the dispute is ongoingrequest for rehearing was denied by FERC.FERC has not ruled on the motion for stay.Clear Creek has filed a Petition for Review with the U.S. Court of Appeals and Motion for Stay Pending Appeal, both of which are still pending.
Tenaska Clear Creek Wind, LLC filed a second complaint with FERC on May 25, 2022, alleging that the wind farm was being curtailed in a discriminatory manner. The May 25, 2022 Complaint was denied by FERC on December 15, 2022 and Tenaska Clear Creek Wind, LLC requested Rehearing of the denial on January 13, 2023.
Due to the disputed system upgrades and the ultimate costs that will be allocated to connectrelated curtailment, the Clear Creek wind farm has experienced a significant reduction in power generation that has had a material adverse impact on the project’s ability to generate cash flow for investors.These energy curtailments are expected to persist, unless and until system upgrades are implemented to alleviate the present transmission system congestion, or the disputes are determined in favor of, or settled in a manner favorable to, Tenaska Clear Creek Wind, LLC.As such, during the fourth quarter of 2022, due to these on-going disputes, cost allocation uncertainties, and no probable favorable resolution, BCE determined its equity method investment was fully impaired.Prior to the transmission system are unknown,impairment, the ultimate resolutioninvestment had a carrying value of $17.1 million, which has been written-down to reflect the investment’s estimated fair value of zero as of December 31, 2022.Pinnacle West’s Consolidated Statement of Income for the year ended December 31, 2022 included an after-tax loss of $12.8 million relating to this dispute may haveimpairment.
BCE and Ameresco, Inc. jointly own a negative impact on BCE’s investmentspecial purpose entity that is sponsoring the Kūpono Solar project. This project is a 42 MW solar and battery storage facility in Oʻahu, Hawaii that will supply clean renewable energy and capacity under a 20-year power purchase agreement with Hawaiian Electric Company, Inc. The Kūpono Solar project is expected to be completed in 2024. On April 18, 2023, the Clear Creek wind farm. Pinnacle West cannot predictKūpono Solar special purpose entity entered into a $140 million non-recourse construction financing agreement. The construction financing will convert into a sale leaseback agreement upon commercial operation of the outcomeproject. The financing agreement requires $40 million of this matter. As discussed, under “Financial Assurances,”sponsor equity, which has been funded by the project’s equity participants. In connection with the financing, Pinnacle West has issued the Equity Contribution Guarantees and PTC Guarantees in connection with Clear Creek. BCE accounts for this investment as an equity method investment. As of September 30, 2022, Pinnacle West’s Condensed Consolidated Balance Sheet included $17 millionperformance guarantees relating to the Clear Creek wind farm.project.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Financial Assurances
In the normal course of business, we obtain standby letters of credit and surety bonds from financial institutions and other third parties. These instruments guarantee our own future performance and provide third parties with financial and performance assurance in the event we do not perform. These instruments support commodity contract collateral obligations and other transactions. As of September 30, 2022,March 31, 2023, standby letters of credit totaled $9approximately $10 million and will expire in 2023.2023 and 2024. As of September 30, 2022,March 31, 2023, surety bonds expiring through 20232025 totaled $8approximately $21 million. The underlying liabilities insured by these instruments are reflected on our balance sheets, where applicable. Therefore, no additional liability is reflected for the letters of credit and surety bonds themselves.
We enter into agreements that include indemnification provisions relating to liabilities arising from or related to certain of our agreements. Most significantly, APS has agreed to indemnify the equity participants and other parties in the Palo Verde sale leaseback transactions with respect to certain tax matters. Generally, a maximum obligation is not explicitly stated in the indemnification provisions and, therefore, the overall maximum amount of the obligation under such indemnification provisions cannot be reasonably estimated. Based on historical experience and evaluation of the specific indemnities, we do not believe that any material loss related to such indemnification provisions is likely.
Pinnacle West has issued parental guarantees and has provided indemnification under certain surety bonds for APS which were not material at September 30, 2022.March 31, 2023. In connection with the sale of 4CA’s 7% interest to NTEC, Pinnacle West is guaranteeing certain obligations that NTEC will have to the other owners of Four Corners. (SeeSee “Four Corners — 4CA Matter” above for information related to this guarantee).guarantee. Pinnacle West has not needed to perform under this guarantee. A maximum obligation is not explicitly stated in the guarantee and, therefore, the overall maximum amount of the obligation under such guarantee cannot be reasonably estimated; however, we consider the fair value of this guarantee, including expected credit losses, to be immaterial.
In connection with BCE’s acquisition of minority ownership positions in the Clear Creek wind farm in Missouri and Nobles 2 wind farms,farm in Minnesota, Pinnacle West has issued parental guarantees to guarantee the obligations of BCE subsidiaries to make required equity contributions to fund project construction (the “Equity Contribution Guarantees”) and to make production tax credit funding payments to borrowers of the projects (the “PTC Guarantees”). The amounts guaranteed by Pinnacle West are reduced as payments are made under the respective guarantee agreements. The Equity ContributionAs of March 31, 2023 there is approximately $33 million of remaining guarantees primarily relating to the PTC Guarantees remaining asthat is expected to terminate by 2030.
In connection with the credit agreement entered into by a special purpose subsidiary of September 30,BCE on February 11, 2022, are immaterialPinnacle West has issued a guarantee of up to $42 million primarily related to the bridge loan. See Note 6 for additional details.
On April 18, 2023, Pinnacle West issued performance guarantees in connection with BCE’s Kūpono investment project financing. BCE holds an equity method investment relating to the Kūpono project. See discussion above.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
amount and the PTC Guarantees (approximately $34 million as of September 30, 2022) are currently expected to be terminated ten years following the commercial operation date of the applicable project.
In connection with the credit agreement entered into by Los Alamitos on February 11, 2022, Pinnacle West has issued a guarantee of up to $42 million primarily related to the equity bridge loan. See Note 3 for additional details.
9. Other Income and Other Expense
The following table provides detail of Pinnacle West’s Consolidated other income and other expense (dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Other income: | | | | | | | |
| Interest income | $ | 1,785 | | | $ | 1,602 | | | $ | 5,118 | | | $ | 5,236 | |
| | | | | | | |
| Debt return on Four Corners SCR deferrals (Note 4) | — | | | 4,091 | | | — | | | 12,266 | |
| Debt return on Ocotillo modernization project (Note 4) | — | | | 6,386 | | | — | | | 19,169 | |
| Miscellaneous | 434 | | | 4 | | | 487 | | | 48 | |
| Total other income | $ | 2,219 | | | $ | 12,083 | | | $ | 5,605 | | | $ | 36,719 | |
| Other expense: | | | | | | | |
| Non-operating costs | (2,956) | | | (2,973) | | | (9,110) | | | (9,013) | |
| Investment losses — net | (935) | | | (704) | | | (2,191) | | | (1,478) | |
| Miscellaneous | (2,854) | | | (2,505) | | | (3,450) | | | (4,728) | |
| Total other expense | $ | (6,745) | | | $ | (6,182) | | | $ | (14,751) | | | $ | (15,219) | |
| | | | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | |
| 2023 | | 2022 | | | | |
| Other income: | | | | | | | |
| Interest income | $ | 6,026 | | | $ | 1,642 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Miscellaneous | 51 | | | 62 | | | | | |
| Total other income | $ | 6,077 | | | $ | 1,704 | | | | | |
| Other expense: | | | | | | | |
| Non-operating costs | (2,640) | | | (2,453) | | | | | |
| Investment losses — net | (1,061) | | | (681) | | | | | |
| Miscellaneous | (430) | | | (288) | | | | | |
| Total other expense | $ | (4,131) | | | $ | (3,422) | | | | | |
The following table provides detail of APS’s other income and other expense (dollars in thousands):
| | | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | Three Months Ended
March 31, | | |
| | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | |
| Other income: | Other income: | | | | | | | | Other income: | | | | | |
| Interest income | Interest income | $ | 1,402 | | | $ | 1,118 | | | $ | 3,897 | | | $ | 3,645 | | Interest income | $ | 5,024 | | | $ | 1,099 | | | |
| Debt return on Four Corners SCR deferrals (Note 4) | — | | | 4,091 | | | — | | | 12,266 | | |
| Debt return on Ocotillo modernization project (Note 4) | — | | | 6,386 | | | — | | | 19,169 | | |
| | Miscellaneous | Miscellaneous | 259 | | | 2 | | | 312 | | | 40 | | Miscellaneous | 51 | | | 53 | | | |
| Total other income | Total other income | $ | 1,661 | | | $ | 11,597 | | | $ | 4,209 | | | $ | 35,120 | | Total other income | $ | 5,075 | | | $ | 1,152 | | | |
| Other expense: | Other expense: | | | | | | | | Other expense: | | | | | |
| Non-operating costs | Non-operating costs | (2,369) | | | (1,892) | | | (6,407) | | | (7,284) | | Non-operating costs | (2,188) | | | (1,561) | | | |
| Miscellaneous | Miscellaneous | (654) | | | (304) | | | (1,250) | | | (2,523) | | Miscellaneous | (429) | | | (288) | | | |
| Total other expense | Total other expense | $ | (3,023) | | | $ | (2,196) | | | $ | (7,657) | | | $ | (9,807) | | Total other expense | $ | (2,617) | | | $ | (1,849) | | | |
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. Earnings Per Share
The following table presents the calculation of Pinnacle West’s basic and diluted earnings per share (in thousands, except per share amounts):
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | |
| | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
| Net income attributable to common shareholders | $ | 326,326 | | | $ | 339,798 | | | $ | 507,594 | | | $ | 591,136 | | |
| Net income (loss) attributable to common shareholders | | Net income (loss) attributable to common shareholders | $ | (3,297) | | | $ | 16,956 | | |
| Weighted average common shares outstanding — basic | Weighted average common shares outstanding — basic | 113,211 | | | 112,923 | | | 113,162 | | | 112,878 | | Weighted average common shares outstanding — basic | 113,358 | | | 113,102 | | |
| Net effect of dilutive securities: | Net effect of dilutive securities: | | Net effect of dilutive securities: | | |
| Contingently issuable performance shares and restricted stock units | Contingently issuable performance shares and restricted stock units | 252 | | | 294 | | | 214 | | | 300 | | Contingently issuable performance shares and restricted stock units | 239 | | | 193 | | |
| Weighted average common shares outstanding — diluted | Weighted average common shares outstanding — diluted | 113,463 | | | 113,217 | | | 113,376 | | | 113,178 | | Weighted average common shares outstanding — diluted | 113,597 | | | 113,295 | | |
| Earnings per weighted-average common share outstanding | Earnings per weighted-average common share outstanding | | | | | | | | Earnings per weighted-average common share outstanding | | | | |
| Net income attributable to common shareholders — basic | $ | 2.88 | | | $ | 3.01 | | | $ | 4.49 | | | $ | 5.24 | | |
| Net income attributable to common shareholders — diluted | $ | 2.88 | | | $ | 3.00 | | | $ | 4.48 | | | $ | 5.22 | | |
| Net income (loss) attributable to common shareholders — basic | | Net income (loss) attributable to common shareholders — basic | $ | (0.03) | | | $ | 0.15 | | |
| Net income (loss) attributable to common shareholders — diluted | | Net income (loss) attributable to common shareholders — diluted | $ | (0.03) | | | $ | 0.15 | | |
For the three months ended March 31, 2023, 239 thousand shares were excluded from the calculation of diluted weighted average common shares outstanding, as their inclusion would have been antidilutive. For the three months ended March 31, 2022, no shares were excluded from the calculation of diluted weighted average common shares outstanding.
11. Fair Value Measurements
We classify our assets and liabilities that are carried at fair value within the fair value hierarchy. This hierarchy ranks the quality and reliability of the inputs used to determine fair values, which are then classified and disclosed in one of three categories. The three levels of the fair value hierarchy are:
Level 1 — Inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2 — Other significant observable inputs, including quoted prices in active markets for similar assets or liabilities; quoted prices in markets that are not active, and model-derived valuations whose inputs are observable (such as yield curves).
Level 3 — Valuation models with significant unobservable inputs that are supported by little or no market activity. Instruments in this category may include long-dated derivative transactions where valuations are unobservable due to the length of the transaction, options, and transactions in locations where observable market data does not exist. The valuation models we employ utilize spot prices, forward prices, historical market data and other factors to forecast future prices.
Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Thus, a valuation may be classified in Level 3 even though the valuation may include significant inputs that are readily observable. We maximize the use of observable inputs and minimize the use of unobservable inputs. We rely primarily on the market approach of using prices and other market information for identical and/or comparable assets and liabilities. If market data is not readily available, inputs
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
may reflect our own assumptions about the inputs market participants would use. Our assessment of the inputs and the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities as well as their placement within the fair value hierarchy levels. We assess whether a market is active by obtaining observable broker quotes, reviewing actual market activity, and assessing the volume of transactions. We consider broker quotes observable inputs when the quote is
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
binding on the broker, we can validate the quote with market activity, or we can determine that the inputs the broker used to arrive at the quoted price are observable.
Certain instruments have been valued using the concept of Net Asset Value (“NAV”) as a practical expedient. These instruments are typically structured as investment companies offering shares or units to multiple investors for the purpose of providing a return. These instruments are similar to mutual funds; however, their NAV is generally not published and publicly available, nor are these instruments traded on an exchange. Instruments valued using NAV as a practical expedient are included in our fair value disclosures; however, in accordance with GAAP are not classified within the fair value hierarchy levels.
Recurring Fair Value Measurements
We apply recurring fair value measurements to cash equivalents, derivative instruments, and investments held in the nuclear decommissioning trusts and other special use funds. On an annual basis, we apply fair value measurements to plan assets held in our retirement and other benefit plans. See Note 87 in the 20212022 Form 10-K for fair value discussion of plan assets held in our retirement and other benefit plans.
Cash Equivalents
Cash equivalents represent certain investments in money market funds that are valued using quoted prices in active markets.
Risk Management Activities — Energy Derivative Instruments
Exchange traded commodity contracts are valued using unadjusted quoted prices. For non-exchange traded commodity contracts, we calculate fair value based on the average of the bid and offer price, discounted to reflect net present value. We maintain certain valuation adjustments for a number of risks associated with the valuation of future commitments. These include valuation adjustments for liquidity and credit risks. The liquidity valuation adjustment represents the cost that would be incurred if all unmatched positions were closed out or hedged. The credit valuation adjustment represents estimated credit losses on our net exposure to counterparties, taking into account netting agreements, expected default experience for the credit rating of the counterparties and the overall diversification of the portfolio. We maintain credit policies that management believes minimize overall credit risk.
Certain non-exchange traded commodity contracts are valued based on unobservable inputs due to the long-term nature of contracts, characteristics of the product, or the unique location of the transactions. Our long-dated energy transactions consist of observable valuations for the near-term portion and unobservable valuations for the long-term portions of the transaction. We rely primarily on broker quotes to value these instruments. When our valuations utilize broker quotes, we perform various control procedures to ensure the quote has been developed consistent with fair value accounting guidance. These controls include assessing the quote for reasonableness by comparison against other broker quotes, reviewing historical price relationships, and assessing market activity. When broker quotes are not available, the primary valuation technique used to calculate the fair value is the extrapolation of forward pricing curves using observable market data for more liquid delivery points in the same region and actual transactions at more illiquid delivery points.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
When the unobservable portion is significant to the overall valuation of the transaction, the entire transaction is classified as Level 3.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSOur interest rate derivative instruments relate to an interest rate swap, which is valued using financial models that utilize observable inputs for similar instruments and are classified as Level 2. Inputs include yield curves and credit quality of the counterparties.
Investments Held in Nuclear Decommissioning Trusts and Other Special Use Funds
The nuclear decommissioning trusts and other special use funds invest in fixed income and equity securities. Other special use funds include the coal reclamation escrow account and the active union employee medical account. See Note 12 for additional discussion about our investment accounts.
We value investments in fixed income and equity securities using information provided by our trustees and escrow agent. Our trustees and escrow agent use pricing services that utilize the valuation methodologies described below to determine fair market value. We have internal control procedures designed to ensure this information is consistent with fair value accounting guidance. These procedures include assessing valuations using an independent pricing source, verifying that pricing can be supported by actual recent market transactions, assessing hierarchy classifications, comparing investment returns with benchmarks, and obtaining and reviewing independent audit reports on the trustees’ and escrow agent’s internal operating controls and valuation processes.
Fixed Income Securities
Fixed income securities issued by the U.S. Treasury are valued using quoted active market prices and are typically classified as Level 1. Fixed income securities issued by corporations, municipalities, and other agencies, including mortgage-backed instruments, are valued using quoted inactive market prices, quoted active market prices for similar securities, or by utilizing calculations which incorporate observable inputs such as yield curves and spreads relative to such yield curves. These fixed income instruments are classified as Level 2. Whenever possible, multiple market quotes are obtained which enables a cross-check validation. A primary price source is identified based on asset type, class, or issue of securities.
Fixed income securities may also include short-term investments in certificates of deposit, variable rate notes, time deposit accounts, U.S. Treasury and Agency obligations, U.S. Treasury repurchase agreements, commercial paper, and other short-term instruments. These instruments are valued using active market prices or utilizing observable inputs described above.
Equity Securities
The nuclear decommissioning trusts’ equity security investments are held indirectly through commingled funds. The commingled funds are valued using the funds’ NAV as a practical expedient. The funds’ NAV is primarily derived from the quoted active market prices of the underlying equity securities held by the funds. We may transact in these commingled funds on a semi-monthly basis at the NAV. The commingled funds are maintained by a bank and hold investments in accordance with the stated objective of tracking the performance of the S&P 500 Index. Because the commingled funds’ shares are offered to a limited group of investors, they are not considered to be traded in an active market. As these instruments are valued using NAV, as a practical expedient, they have not been classified within the fair value hierarchy.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The nuclear decommissioning trusts and other special use funds may also hold equity securities that include exchange traded mutual funds and money market accounts for short-term liquidity purposes. These short-term, highly-liquid investments are valued using active market prices.
Fair Value Tables
The following table presents the fair value at March 31, 2023, of our assets and liabilities that are measured at fair value on a recurring basis (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Level 1 | | Level 2 | | Level 3 | | Other | | | | Total |
| ASSETS | | | | | | | | | | | |
| Cash equivalents | $ | 14 | | | $ | — | | | $ | — | | | $ | — | | | | | $ | 14 | |
| Risk management activities — derivative instruments: | | | | | | | | | | | |
| Commodity contracts | — | | | 28,483 | | | 21,257 | | | (16,697) | | | (a) | | 33,043 | |
| Interest rate swaps | — | | | 134 | | | — | | | — | | | | | 134 | |
| Subtotal risk management activities - derivative instruments | — | | | 28,617 | | | 21,257 | | | (16,697) | | | | | 33,177 | |
| | | | | | | | | | | |
| Nuclear decommissioning trust: | | | | | | | | | | | |
| Equity securities | 9,665 | | | — | | | — | | | (1,135) | | | (b) | | 8,530 | |
| U.S. commingled equity funds | — | | | — | | | — | | | 507,706 | | | (c) | | 507,706 | |
| U.S. Treasury debt | 231,003 | | | — | | | — | | | — | | | | | 231,003 | |
| Corporate debt | — | | | 149,541 | | | — | | | — | | | | | 149,541 | |
| Mortgage-backed securities | — | | | 157,330 | | | — | | | — | | | | | 157,330 | |
| Municipal bonds | — | | | 63,950 | | | — | | | — | | | | | 63,950 | |
| Other fixed income | — | | | 7,557 | | | — | | | — | | | | | 7,557 | |
| Subtotal nuclear decommissioning trust | 240,668 | | | 378,378 | | | — | | | 506,571 | | | | | 1,125,617 | |
| | | | | | | | | | | |
| Other special use funds: | | | | | | | | | | | |
| Equity securities | 27,642 | | | — | | | — | | | 1,041 | | | (b) | | 28,683 | |
| U.S. Treasury debt | 320,196 | | | — | | | — | | | — | | | | | 320,196 | |
| Municipal bonds | — | | | 3,998 | | | — | | | — | | | | | 3,998 | |
| Subtotal other special use funds | 347,838 | | | 3,998 | | | — | | | 1,041 | | | | | 352,877 | |
| | | | | | | | | | | |
| Total assets | $ | 588,520 | | | $ | 410,993 | | | $ | 21,257 | | | $ | 490,915 | | | | | $ | 1,511,685 | |
| | | | | | | | | | | |
| LIABILITIES | | | | | | | | | | | |
| Risk management activities — derivative instruments: | | | | | | | | | | | |
| Commodity contracts | $ | — | | | $ | (93,567) | | | $ | (14,635) | | | $ | 10,643 | | | (a) | | $ | (97,559) | |
| Interest rate swaps | — | | | (1,698) | | | — | | | — | | | | | (1,698) | |
| Subtotal risk management activities - derivative instruments | — | | | (95,265) | | | (14,635) | | | 10,643 | | | | | (99,257) | |
| | | | | | | | | | | |
| Total liabilities | $ | — | | | $ | (95,265) | | | $ | (14,635) | | | $ | 10,643 | | | | | $ | (99,257) | |
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(a)Represents counterparty netting, margin, and collateral. See Note 7.
(b)Represents net pending securities sales and purchases.
(c)Valued using NAV as a practical expedient and, therefore, are not classified in the fair value hierarchy.
Fair Value Tables
The following table presents the fair value at September 30,December 31, 2022, of our assets and liabilities that are measured at fair value on a recurring basis (dollars in thousands):
| | | | Level 1 | | Level 2 | | Level 3 | | Other | | | | Total | | Level 1 | | Level 2 | | Level 3 | | Other | | | | Total |
| Assets | | | | | | | | | | | | |
| ASSETS | | ASSETS | | | | | | | | | |
| | Risk management activities — derivative instruments: | Risk management activities — derivative instruments: | | Risk management activities — derivative instruments: | |
| Commodity contracts | Commodity contracts | $ | — | | | $ | 251,715 | | | $ | 11,038 | | | $ | (11,095) | | | (a) | | $ | 251,658 | | Commodity contracts | $ | — | | | $ | 127,129 | | | $ | 26,132 | | | $ | (21,163) | | | (a) | | $ | 132,098 | |
| Interest rate swaps | | Interest rate swaps | — | | | 131 | | | — | | | — | | | 131 | |
| Subtotal risk management activities - derivative instruments | | Subtotal risk management activities - derivative instruments | — | | | 127,260 | | | 26,132 | | | (21,163) | | | 132,229 | |
| | Nuclear decommissioning trust: | Nuclear decommissioning trust: | | Nuclear decommissioning trust: | |
| Equity securities | Equity securities | 2,849 | | | — | | | — | | | 5,249 | | | (b) | | 8,098 | | Equity securities | 14,658 | | | — | | | — | | | 3,827 | | | (b) | | 18,485 | |
| U.S. commingled equity funds | U.S. commingled equity funds | — | | | — | | | — | | | 438,122 | | | (c) | | 438,122 | | U.S. commingled equity funds | — | | | — | | | — | | | 472,582 | | | (c) | | 472,582 | |
| U.S. Treasury debt | U.S. Treasury debt | 199,314 | | | — | | | — | | | — | | | | | 199,314 | | U.S. Treasury debt | 211,923 | | | — | | | — | | | — | | | 211,923 | |
| Corporate debt | Corporate debt | — | | | 164,700 | | | — | | | — | | | | | 164,700 | | Corporate debt | — | | | 149,226 | | | — | | | — | | | 149,226 | |
| Mortgage-backed securities | Mortgage-backed securities | — | | | 142,214 | | | — | | | — | | | | | 142,214 | | Mortgage-backed securities | — | | | 147,938 | | | — | | | — | | | 147,938 | |
| Municipal bonds | Municipal bonds | — | | | 64,457 | | | — | | | — | | | | | 64,457 | | Municipal bonds | — | | | 64,881 | | | — | | | — | | | 64,881 | |
| Other fixed income | Other fixed income | — | | | 9,008 | | | — | | | — | | | | | 9,008 | | Other fixed income | — | | | 8,375 | | | — | | | — | | | 8,375 | |
| Subtotal nuclear decommissioning trust | Subtotal nuclear decommissioning trust | 202,163 | | | 380,379 | | | — | | | 443,371 | | | 1,025,913 | | Subtotal nuclear decommissioning trust | 226,581 | | | 370,420 | | | — | | | 476,409 | | | 1,073,410 | |
| | Other special use funds: | Other special use funds: | | Other special use funds: | |
| | Equity securities | Equity securities | 38,569 | | | — | | | — | | | 1,123 | | | (b) | | 39,692 | | Equity securities | 66,974 | | | — | | | — | | | 963 | | | (b) | | 67,937 | |
| U.S. Treasury debt | U.S. Treasury debt | 315,643 | | | — | | | — | | | — | | | 315,643 | | U.S. Treasury debt | 275,267 | | | — | | | — | | | — | | | 275,267 | |
| Municipal bonds | Municipal bonds | — | | | 4,059 | | | — | | | — | | | 4,059 | | Municipal bonds | — | | | 4,027 | | | — | | | — | | | 4,027 | |
| Subtotal other special use funds | Subtotal other special use funds | 354,212 | | | 4,059 | | | — | | | 1,123 | | | 359,394 | | Subtotal other special use funds | 342,241 | | | 4,027 | | | — | | | 963 | | | 347,231 | |
| | Total assets | Total assets | $ | 556,375 | | | $ | 636,153 | | | $ | 11,038 | | | $ | 433,399 | | | $ | 1,636,965 | | Total assets | $ | 568,822 | | | $ | 501,707 | | | $ | 26,132 | | | $ | 456,209 | | | $ | 1,552,870 | |
| Liabilities | | | | | | | | | | | | |
| | LIABILITIES | | LIABILITIES | |
| Risk management activities — derivative instruments: | Risk management activities — derivative instruments: | | | | | | | | | | | | Risk management activities — derivative instruments: | |
| Commodity contracts | Commodity contracts | $ | — | | | $ | (2,933) | | | $ | (630) | | | $ | (4,298) | | | (a) | | $ | (7,861) | | Commodity contracts | $ | — | | | $ | (25,874) | | | $ | (31,020) | | | $ | 15,357 | | | (a) | | $ | (41,537) | |
| Interest rate swaps | | Interest rate swaps | — | | | (909) | | | — | | | — | | | (909) | |
| Subtotal risk management activities - derivative instruments | | Subtotal risk management activities - derivative instruments | — | | | (26,783) | | | (31,020) | | | 15,357 | | | (42,446) | |
| | Total liabilities | | Total liabilities | $ | — | | | $ | (26,783) | | | $ | (31,020) | | | $ | 15,357 | | | $ | (42,446) | |
(a)Represents counterparty netting, margin, and collateral. See Note 7.
(b)Represents net pending securities sales and purchases.
(c)Valued using NAV as a practical expedient and, therefore, are not classified in the fair value hierarchy.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the fair value at December 31, 2021, of our assets and liabilities that are measured at fair value on a recurring basis (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Level 1 | | Level 2 | | Level 3 | | Other | | | | Total |
| Assets | | | | | | | | | | | |
| | | | | | | | | | | |
| Risk management activities — derivative instruments: | | | | | | | | | | | |
| Commodity contracts | $ | — | | | $ | 115,079 | | | $ | — | | | $ | (4,690) | | | (a) | | $ | 110,389 | |
| Nuclear decommissioning trust: | | | | | | | | | | | |
| Equity securities | 45,264 | | | — | | | — | | | (27,782) | | | (b) | | 17,482 | |
| U.S. commingled equity funds | — | | | — | | | — | | | 595,048 | | | (c) | | 595,048 | |
| U.S. Treasury debt | 240,745 | | | — | | | — | | | — | | | | | 240,745 | |
| Corporate debt | — | | | 203,454 | | | — | | | — | | | | | 203,454 | |
| Mortgage-backed securities | — | | | 155,574 | | | — | | | — | | | | | 155,574 | |
| Municipal bonds | — | | | 72,189 | | | — | | | — | | | | | 72,189 | |
| Other fixed income | — | | | 10,265 | | | — | | | — | | | | | 10,265 | |
| Subtotal nuclear decommissioning trust | 286,009 | | | 441,482 | | | — | | | 567,266 | | | | | 1,294,757 | |
| | | | | | | | | | | |
| Other special use funds: | | | | | | | | | | | |
| Equity securities | 47,570 | | | — | | | — | | | 936 | | | (b) | | 48,506 | |
| U.S. Treasury debt | 298,170 | | | — | | | — | | | — | | | | | 298,170 | |
| Municipal bonds | — | | | 11,734 | | | — | | | — | | | | | 11,734 | |
| Subtotal other special use funds | 345,740 | | | 11,734 | | | — | | | 936 | | | | | 358,410 | |
| | | | | | | | | | | |
| Total assets | $ | 631,749 | | | $ | 568,295 | | | $ | — | | | $ | 563,512 | | | | | $ | 1,763,556 | |
| Liabilities | | | | | | | | | | | |
| Risk management activities — derivative instruments: | | | | | | | | | | | |
| Commodity contracts | $ | — | | | $ | (4,740) | | | $ | (2,738) | | | $ | 3,105 | | | (a) | | $ | (4,373) | |
(a)Represents counterparty netting, margin, and collateral. See Note 7.
(b)Represents net pending securities sales and purchases.
(c)Valued using NAV as a practical expedient and, therefore, are not classified in the fair value hierarchy.
Fair Value Measurements Classified as Level 3
The significant unobservable inputs used in the fair value measurement of our energy derivative contracts include broker quotes that cannot be validated as an observable input primarily due to the long-term nature of the quote or other characteristics of the product. Significant changes in these inputs in isolation would result in significantly higher or lower fair value measurements. Changes in our derivative contract fair values, including changes relating to unobservable inputs, typically will not impact net income due to regulatory accounting treatment. See Note 4.
Because our forward commodity contracts classified as Level 3 are currently in a net purchase position, we would expect price increases of the underlying commodity to result in increases in the net fair value of the related contracts. Conversely, if the price of the underlying commodity decreases, the net fair value of the related contracts would likely decrease.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Other unobservable valuation inputs include credit and liquidity reserves which do not have a material impact on our valuations; however, significant changes in these inputs could also result in higher or lower fair value measurements.
The following tables provide information regarding our significant unobservable inputs used to value our risk management derivative Level 3 instruments at March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023
Fair Value (thousands) | | Valuation | | Significant | | | | | | Weighted-Average |
| Commodity Contracts | Assets | | Liabilities | | Technique | | Unobservable Input | | Range | | (b) |
| Electricity: | | | | | | | | | | | | | |
| Forward Contracts (a) | $ | 21,084 | | | $ | 14,385 | | | Discounted cash flows | | Electricity forward price (per MWh) | | $37.79 | - | $306.34 | | $ | 157.00 | |
| Natural Gas: | | | | | | | | | | | | | |
| Forward Contracts (a) | 173 | | | 250 | | | Discounted cash flows | | Natural gas forward price (per MMBtu) | | $(0.02) | - | $0.14 | | $ | 0.02 | |
| Total | $ | 21,257 | | | $ | 14,635 | | | | | | | | | | | |
(a)Includes swaps and physical and financial contracts.
(b)Unobservable inputs were weighted by the relative fair value of the instrument.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022
Fair Value (thousands) | | Valuation | | Significant | | | | | | Weighted-Average |
| Commodity Contracts | Assets | | Liabilities | | Technique | | Unobservable Input | | Range | | (b) |
| Electricity: | | | | | | | | | | | | | |
| Forward Contracts (a) | $ | 26,132 | | | $ | 1,759 | | | Discounted cash flows | | Electricity forward price (per MWh) | | $37.79 | - | $310.69 | | $ | 163.92 | |
| Natural Gas: | | | | | | | | | | | | | |
| Forward Contracts (a) | — | | | 29,261 | | | Discounted cash flows | | Natural gas forward price (per MMBtu) | | $(11.81) | - | $0.00 | | $ | (5.08) | |
| Total | $ | 26,132 | | | $ | 31,020 | | | | | | | | | | | |
(a)Includes swaps and physical and financial contracts.
(b)Unobservable inputs were weighted by the relative fair value of the instrument.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the changes in fair value for our risk management activities’ assets and liabilities that are measured at fair value on a recurring basis using Level 3 inputs for the three months ended March 31, 2023 and 2022 (dollars in thousands):
| | | | | | | | | | | | | | |
| | | Three Months Ended
March 31, |
| Commodity Contracts | | 2023 | | 2022 |
| Net derivative balance at beginning of period | | $ | (4,888) | | | $ | (2,738) | |
| Total net gains (losses) realized/unrealized: | | | | |
| | | | |
| | | | |
| Deferred as a regulatory asset or liability | | (30,427) | | | 16,807 | |
| Settlements | | 41,937 | | | (4,419) | |
| Transfers into Level 3 from Level 2 | | — | | | — | |
| Transfers from Level 3 into Level 2 | | — | | | — | |
| Net derivative balance at end of period | | $ | 6,622 | | | $ | 9,650 | |
| Net unrealized gains included in earnings related to instruments still held at end of period | | $ | — | | | $ | — | |
Transfers in or out of Level 3 are typically related to our long dated energy transactions that extend beyond available quoted periods.
Financial Instruments Not Carried at Fair Value
The carrying value of our short-term borrowings approximate fair value and are classified within Level 2 of the fair value hierarchy. See Note 3 for our long-term debt fair values.
12. Investments in Nuclear Decommissioning Trusts and Other Special Use Funds
We have investments in debt and equity securities held in Nuclear Decommissioning Trusts, Coal Reclamation Escrow Account, and an Active Union Employee Medical Account.Investments in debt securities are classified as available-for-sale securities.We record both debt and equity security investments at their fair value on our Condensed Consolidated Balance Sheets.See Note 11 for a discussion of how fair value is determined and the classification of the investments within the fair value hierarchy.The investments in each trust or account are restricted for use and are intended to fund specified costs and activities as further described for each fund below.
Nuclear Decommissioning Trusts — APS established external decommissioning trusts in accordance with NRC regulations to fund the future costs APS expects to incur to decommission Palo Verde.Third-party investment managers are authorized to buy and sell securities per stated investment guidelines.The trust funds are invested in fixed income securities and equity securities. Earnings and proceeds from sales and maturities of securities are reinvested in the trusts. Because of the ability of APS to recover decommissioning costs in rates, and in accordance with the regulatory treatment, APS has deferred realized and unrealized gains and losses (including credit losses) in other regulatory liabilities.
Coal Reclamation Escrow Account — APS has investments restricted for the future coal mine reclamation funding related to Four Corners.This escrow account is primarily invested in fixed income securities. Earnings and proceeds from sales of securities are reinvested in the escrow account.Because of the ability of APS to recover coal reclamation costs in rates, and in accordance with the regulatory treatment, APS has deferred realized and unrealized gains and losses (including credit losses) in other regulatory liabilities.Activities relating to APS coal mine reclamation escrow account investments are included within the other special use funds in the table below.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Active Union Employee Medical Account — APS has investments restricted for paying active union employee medical costs.These investments may be used to pay active union employee medical costs incurred in the current and future periods. In 2022, and 2021, APS was reimbursed $15 million for each year, for prior year active union employee medical claims from the active union employee medical account.The account is invested primarily in fixed income securities.In accordance with the ratemaking treatment, APS has deferred the unrealized gains and losses (including credit losses) in other regulatory liabilities. Activities relating to active union employee medical account investments are included within the other special use funds in the table below.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APS
The following tables present the unrealized gains and losses based on the original cost of the investment and summarizes the fair value of APS’s nuclear decommissioning trusts and other special use fund assets (dollars in thousands):
| | | September 30, 2022 | | March 31, 2023 |
| | | Fair Value | | Total
Unrealized
Gains | | Total
Unrealized
Losses | | Fair Value | | Total
Unrealized
Gains | | Total
Unrealized
Losses |
| Investment Type: | Investment Type: | Nuclear Decommissioning Trusts | | Other Special Use Funds | | Total | | Investment Type: | Nuclear Decommissioning Trusts | | Other Special Use Funds | | Total | |
| Equity securities | Equity securities | $ | 440,971 | | | $ | 38,569 | | | $ | 479,540 | | | $ | 302,627 | | | $ | (458) | | Equity securities | $ | 517,371 | | | $ | 27,642 | | | $ | 545,013 | | | $ | 367,791 | | | $ | (39) | |
| Available for sale-fixed income securities | Available for sale-fixed income securities | 579,693 | | | 319,702 | | | 899,395 | | (a) | 1,136 | | | (87,618) | | Available for sale-fixed income securities | 609,381 | | | 324,194 | | | 933,575 | | (a) | 6,728 | | | (54,178) | |
| Other | Other | 5,249 | | | 1,123 | | | 6,372 | | (b) | — | | | (25) | | Other | (1,135) | | | 1,041 | | | (94) | | (b) | 1 | | | (11) | |
| Total | Total | $ | 1,025,913 | | | $ | 359,394 | | | $ | 1,385,307 | | | $ | 303,763 | | | $ | (88,101) | | Total | $ | 1,125,617 | | | $ | 352,877 | | | $ | 1,478,494 | | | $ | 374,520 | | | $ | (54,228) | |
(a)As of September 30, 2022,March 31, 2023, the amortized cost basis of these available-for-sale investments is $986$981 million.
(b)Represents net pending securities sales and purchases.
| | | December 31, 2021 | | December 31, 2022 |
| | | Fair Value | | Total
Unrealized
Gains | | Total
Unrealized
Losses | | Fair Value | | Total
Unrealized
Gains | | Total
Unrealized
Losses |
| Investment Type: | Investment Type: | Nuclear Decommissioning Trusts | | Other Special Use Funds | | Total | | Investment Type: | Nuclear Decommissioning Trusts | | Other Special Use Funds | | Total | |
| Equity securities | Equity securities | $ | 640,312 | | | $ | 47,570 | | | $ | 687,882 | | | $ | 451,387 | | | $ | — | | Equity securities | $ | 487,240 | | | $ | 66,974 | | | $ | 554,214 | | | $ | 334,817 | | | $ | (267) | |
| Available for sale-fixed income securities | Available for sale-fixed income securities | 682,227 | | | 309,904 | | | 992,131 | | (a) | 24,283 | | | (4,063) | | Available for sale-fixed income securities | 582,343 | | | 279,294 | | | 861,637 | | (a) | 3,177 | | | (68,795) | |
| Other | Other | (27,782) | | | 936 | | | (26,846) | | (b) | — | | | — | | Other | 3,827 | | | 963 | | | 4,790 | | (b) | — | | | (29) | |
| Total | Total | $ | 1,294,757 | | | $ | 358,410 | | | $ | 1,653,167 | | | $ | 475,670 | | | $ | (4,063) | | Total | $ | 1,073,410 | | | $ | 347,231 | | | $ | 1,420,641 | | | $ | 337,994 | | | $ | (69,091) | |
(a)As of December 31, 2021,2022, the amortized cost basis of these available-for-sale investments is $972$927 million.
(b)Represents net pending securities sales and purchases.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following tables settable sets forth APS’s realized gains and losses relating to the sale and maturity of available-for-sale debt securities and equity securities, and the proceeds from the sale and maturity of these investment securities (dollars in thousands):
| | | | Three Months Ended September 30, | | Three Months Ended March 31, |
| | | Nuclear Decommissioning Trusts | | Other Special Use Funds | | Total | | Nuclear Decommissioning Trusts | | Other Special Use Funds | | Total |
| 2023 | | 2023 | | | | | |
| Realized gains | | Realized gains | $ | 1,210 | | | $ | — | | | $ | 1,210 | |
| Realized losses | | Realized losses | (5,694) | | | — | | | (5,694) | |
| Proceeds from the sale of securities (a) | | Proceeds from the sale of securities (a) | 136,185 | | | 90,441 | | | 226,626 | |
| 2022 | 2022 | | | | | | 2022 | |
| Realized gains | Realized gains | $ | 788 | | | $ | — | | | $ | 788 | | Realized gains | $ | 1,023 | | | $ | — | | | $ | 1,023 | |
| Realized losses | Realized losses | (6,908) | | | — | | | (6,908) | | Realized losses | (7,235) | | | — | | | (7,235) | |
| Proceeds from the sale of securities (a) | Proceeds from the sale of securities (a) | 153,573 | | | 65,244 | | | 218,817 | | Proceeds from the sale of securities (a) | 319,693 | | | 41,545 | | | 361,238 | |
| 2021 | | |
| Realized gains | $ | 1,652 | | | $ | — | | | $ | 1,652 | | |
| Realized losses | (1,555) | | | (7) | | | (1,562) | | |
| Proceeds from the sale of securities (a) | 181,728 | | | 27,608 | | | 209,336 | | |
(a) Proceeds are reinvested in the nuclear decommissioning trusts and other special use funds, excluding amounts reimbursed to the Company for active union employee medical claims from the active union employee medical account.
| | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | Nuclear Decommissioning Trusts | | Other Special Use Funds | | Total |
| 2022 | | | | | |
| Realized gains | $ | 8,093 | | | $ | — | | | $ | 8,093 | |
| Realized losses | (26,582) | | | — | | | (26,582) | |
| Proceeds from the sale of securities (a) | 783,232 | | | 127,255 | | | 910,487 | |
| 2021 | | | | | |
| Realized gains | $ | 6,026 | | | $ | — | | | $ | 6,026 | |
| Realized losses | (6,849) | | | (7) | | | (6,856) | |
| Proceeds from the sale of securities (a) | 606,796 | | | 190,382 | | | 797,178 | |
(a) Proceeds are reinvested in the nuclear decommissioning trusts and other special use funds, excluding amounts reimbursed to the Company for active union employee medical claims from the active union employee medical account.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Fixed Income Securities Contractual Maturities
The fair value of APS’s fixed income securities, summarized by contractual maturities, at September 30, 2022,March 31, 2023, is as follows (dollars in thousands):
| | | | Nuclear Decommissioning Trusts | | Coal Reclamation Escrow Account | | Active Union Employee Medical Account | | Total | | Nuclear Decommissioning Trusts | | Coal Reclamation Escrow Account | | Active Union Employee Medical Account | | Total |
| Less than one year | Less than one year | $ | 16,334 | | | $ | 53,384 | | | $ | 59,724 | | | $ | 129,442 | | Less than one year | $ | 14,591 | | | $ | 53,718 | | | $ | 74,788 | | | $ | 143,097 | |
| 1 year – 5 years | 1 year – 5 years | 184,936 | | | 34,386 | | | 161,376 | | | 380,698 | | 1 year – 5 years | 174,911 | | | 36,821 | | | 110,034 | | | 321,766 | |
| 5 years – 10 years | 5 years – 10 years | 113,793 | | | — | | | 6,773 | | | 120,566 | | 5 years – 10 years | 137,708 | | | — | | | 44,835 | | | 182,543 | |
| Greater than 10 years | Greater than 10 years | 264,630 | | | 4,059 | | | — | | | 268,689 | | Greater than 10 years | 282,171 | | | 3,998 | | | — | | | 286,169 | |
| Total | Total | $ | 579,693 | | | $ | 91,829 | | | $ | 227,873 | | | $ | 899,395 | | Total | $ | 609,381 | | | $ | 94,537 | | | $ | 229,657 | | | $ | 933,575 | |
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
13. Changes in Accumulated Other Comprehensive Loss
The following tables show the changes in Pinnacle West’s consolidated accumulated other comprehensive loss, including reclassification adjustments, net of tax, by component (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension and Other Postretirement Benefits | | | | Derivative Instruments | | | | Total |
| Three Months Ended September 30 | | | | | | | | | |
| Balance June 30, 2022 | $ | (55,097) | | | | | $ | 283 | | | | | $ | (54,814) | |
| OCI before reclassifications | — | | | | | 513 | | | | | 513 | |
| Amounts reclassified from accumulated other comprehensive loss | 1,001 | | | (a) | | — | | | | | 1,001 | |
| Balance September 30, 2022 | $ | (54,096) | | | | | $ | 796 | | | | | $ | (53,300) | |
| | | | | | | | | |
| Balance June 30, 2021 | $ | (59,639) | | | | | $ | (939) | | | | | $ | (60,578) | |
| OCI before reclassifications | — | | | | | (194) | | | | | (194) | |
| Amounts reclassified from accumulated other comprehensive loss | 1,106 | | | (a) | | — | | | | | 1,106 | |
| | | | | | | | | |
| Balance September 30, 2021 | $ | (58,533) | | | | | $ | (1,133) | | | | | $ | (59,666) | |
| | | Pension and Other Postretirement Benefits | | Derivative Instruments | | | Total | | Pension and Other Postretirement Benefits | | Derivative Instruments | | | Total |
| Nine Months Ended September 30 | | | | | | | |
| Three Months Ended March 31 | | Three Months Ended March 31 | | | | | | |
| Balance December 31, 2022 | | Balance December 31, 2022 | $ | (32,332) | | | $ | 897 | | | | $ | (31,435) | |
| OCI (loss) before reclassifications | | OCI (loss) before reclassifications | — | | | (616) | | | | (616) | |
| Amounts reclassified from accumulated other comprehensive loss | | Amounts reclassified from accumulated other comprehensive loss | 515 | | | (a) | | — | | | | 515 | |
| Balance March 31, 2023 | | Balance March 31, 2023 | $ | (31,817) | | | $ | 281 | | | | $ | (31,536) | |
| | Balance December 31, 2021 | Balance December 31, 2021 | $ | (53,885) | | | $ | (976) | | | | $ | (54,861) | | Balance December 31, 2021 | $ | (53,885) | | | $ | (976) | | | | $ | (54,861) | |
| OCI (loss) before reclassifications | OCI (loss) before reclassifications | (3,213) | | | 1,772 | | | | (1,441) | | OCI (loss) before reclassifications | — | | | 252 | | | | 252 | |
| Amounts reclassified from accumulated other comprehensive loss | Amounts reclassified from accumulated other comprehensive loss | 3,002 | | | (a) | | — | | | | 3,002 | | Amounts reclassified from accumulated other comprehensive loss | 901 | | | (a) | | — | | | | 901 | |
| Balance September 30, 2022 | $ | (54,096) | | | $ | 796 | | | | $ | (53,300) | | |
| | Balance December 31, 2020 | $ | (60,725) | | | $ | (2,071) | | | | $ | (62,796) | | |
| OCI (loss) before reclassifications | (1,125) | | | 938 | | | | (187) | | |
| Amounts reclassified from accumulated other comprehensive loss | 3,317 | | | (a) | | — | | | | 3,317 | | |
| | Balance September 30, 2021 | $ | (58,533) | | | $ | (1,133) | | | | $ | (59,666) | | |
| Balance March 31, 2022 | | Balance March 31, 2022 | $ | (52,984) | | | $ | (724) | | | | $ | (53,708) | |
(a) These amounts primarily represent amortization of actuarial loss and are included in the computation of net periodic pension cost. See Note 5.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following tables show the changes in APS’s consolidated accumulated other comprehensive loss, including reclassification adjustments, net of tax, by component (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| Pension and Other Postretirement Benefits | | | | | | | | |
Three Months Ended September 30March 31 | | | | | | | | | |
Balance June 30,December 31, 2022 | $ | (36,221)(15,596) | | | | | | | | | |
| OCI (loss) before reclassifications | — | | | | | | | | | |
| Amounts reclassified from accumulated other comprehensive loss | 909457 | | | (a) | | | | | | |
Balance September 30, 2022March 31, 2023 | $ | (35,312)(15,139) | | | | | | | | | |
| | | | | | | | | |
Balance June 30,December 31, 2021 | $ | (39,832)(34,880) | | | | | | | | | |
| OCI (loss) before reclassifications | — | | | | | | | | | |
| Amounts reclassified from accumulated other comprehensive loss | 1,000820 | | | (a) | | | | | | |
| | | | | | | | | |
Balance September 30, 2021 | $ | (38,832) | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Pension and Other Postretirement Benefits | | | | | | | | |
Nine Months Ended September 30 | | | | | | | | | |
Balance DecemberMarch 31, 2021 | $ | (34,880) | | | | | | | | | |
OCI (loss) before reclassifications | (3,160) | | | | | | | | | |
Amounts reclassified from accumulated other comprehensive loss | 2,728 | | | (a) | | | | | | |
Balance September 30, 2022 | $ | (35,312) | | | | | | | | | |
| | | | | | | | | |
Balance December 31, 2020 | $ | (40,918) | | | | | | | | | |
OCI (loss) before reclassifications | (914) | | | | | | | | | |
Amounts reclassified from accumulated other comprehensive loss | 3,000 | | | (a) | | | | | | |
| | | | | | | | | |
Balance September 30, 2021 | $ | (38,832)(34,060) | | | | | | | | | |
(a) These amounts primarily represent amortization of actuarial loss and are included in the computation of net periodic pension cost. See Note 5.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
14.Leases
We lease certain land, buildings, vehicles, equipment and other property through operating rental agreements with varying terms, provisions, and expiration dates. APS also has certain purchased power and energy storage agreements that qualify as lease arrangements. Our leases have remaining terms that expire in 2023 through 2073. Substantially all of our leasing activities relate to APS.
In 1986, APS entered into agreements with three separate lessor trust entities in order to sell and lease back interests in Palo Verde Unit 2 and related common facilities. These lessor trust entities have been deemed VIEs for which APS is the primary beneficiary. As the primary beneficiary, APS consolidated these lessor trust entities. The impacts of these sale leaseback transactions are excluded from our lease disclosures as lease accounting is eliminated upon consolidation. See Note 6 for a discussion of VIEs.
APS has purchased power lease agreements that allow APS the right to the generation capacity from certain natural-gas fueled generators during certain months of each year throughout the term of the arrangements. As APS only has rights to use the assets during certain periods of each year the leases have non-consecutive periods of use. APS does not operate or maintain the leased assets. APS controls the dispatch of the leased assets during the months of use and is required to pay a fixed monthly capacity payment during these periods of use. For these types of leased assets APS has elected to combine both the lease and non-lease payment components and accounts for the entire fixed payment as a lease obligation. In addition to the fixed monthly capacity payments, APS must also pay variable charges based on the actual production volume of the assets. The variable consideration is not included in the measurement of our lease obligation.
In January 2023, APS modified two existing purchase power operating lease agreements. Among other changes, the modifications extend the expiration dates of these contracts from October 2027 to October 2032 for one of the leases, and from September 2026 to October 2034 for the other lease. These lease agreements previously commenced in 2020 and 2021.
The following tables provide information related to our lease costs (dollars in thousands):
| | | | | | | | | | | | | | |
| | Three Months Ended
March 31, |
| | 2023 | | 2022 |
| Operating Lease Cost - Purchased Power Lease Contracts | | $ | — | | | $ | — | |
| Operating Lease Cost - Land, Property, and Other Equipment | | 4,600 | | | 4,572 | |
| Total Operating Lease Cost | | 4,600 | | | 4,572 | |
| Variable lease cost (a) | | 16,721 | | | 18,695 | |
| Short-term lease cost | | 1,402 | | | 1,302 | |
| Total lease cost | | $ | 22,723 | | | $ | 24,569 | |
(a) Primarily relates to purchased power lease contracts.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Lease costs are primarily included as a component of operating expenses on our Condensed Consolidated Statements of Income. Lease costs relating to purchased power lease contracts are recorded in fuel and purchased power on the Condensed Consolidated Statements of Income, and are subject to recovery under the PSA or RES (see Note 4). The tables above reflect the lease cost amounts before the effect of regulatory deferral under the PSA and RES. Variable lease costs are recognized in the period the costs are incurred, and primarily relate to renewable purchased power lease contracts. Payments under most renewable purchased power lease contracts are dependent upon environmental factors, and due to the inherent uncertainty associated with the reliability of the fuel source, the payments are considered variable and are excluded from the measurement of lease liabilities and right-of-use lease assets. Certain of our lease agreements have lease terms with non-consecutive periods of use. For these agreements, we recognize lease costs during the periods of use. Leases with initial terms of 12 months or less are considered short-term leases and are not recorded on the balance sheet.
The following table provides information related to the maturity of our operating lease liabilities (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 |
| Year | | Purchased Power Lease Contracts | | Land, Property & Equipment Leases | | Total |
| 2023 (remaining nine months of 2023) | | $ | 106,152 | | | $ | 11,981 | | | $ | 118,133 | |
| 2024 | | 104,315 | | | 13,098 | | | 117,413 | |
| 2025 | | 121,082 | | | 10,422 | | | 131,504 | |
| 2026 | | 134,806 | | | 8,308 | | | 143,114 | |
| 2027 | | 160,727 | | | 6,395 | | | 167,122 | |
| 2028 | | 164,524 | | | 4,338 | | | 168,862 | |
| Thereafter | | 779,792 | | | 68,372 | | | 848,164 | |
| Total lease commitments | | 1,571,398 | | | 122,914 | | | 1,694,312 | |
| Less imputed interest | | 342,694 | | | 45,904 | | | 388,598 | |
| Total lease liabilities | | $ | 1,228,704 | | | $ | 77,010 | | | $ | 1,305,714 | |
We recognize lease assets and liabilities upon lease commencement. At March 31, 2023, we have lease arrangements that have been executed, but have not yet commenced. These arrangements primarily relate to energy storage assets. The lease commencement dates for these arrangements have experienced delays. APS continues to work with the lessors to determine revised commencement dates. We expect lease commencement dates ranging from June 2023 through June 2025, with lease terms expiring through May 2045. We expect the total fixed consideration paid for these arrangements, which includes both lease and non-lease payments, will approximate $3.5 billion over the terms of the arrangements.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following tables provide other additional information related to operating lease liabilities (dollars in thousands):
| | | | | | | | | | | |
| Three Months Ended
March 31, 2023 | | Three Months Ended March 31, 2022 |
| Cash paid for amounts included in the measurement of lease liabilities — operating cash flows: | $ | 3,851 | | | $ | 3,358 | |
| Right-of-use operating lease assets obtained in exchange for operating lease liabilities | 551,239 | | (a) | 4,889 | |
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Weighted average remaining lease term | 10 years | | 7 years |
| Weighted average discount rate (b) | 4.44 | % | | 2.21 | % |
(a) Primarily relates to the two purchased power operating lease agreements that were modified in January 2023.
(b) Most of our lease agreements do not contain an implicit rate that is readily determinable. For these agreements we use our incremental borrowing rate to measure the present value of lease liabilities. We determine our incremental borrowing rate at lease commencement based on the rate of interest that we would have to pay to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. We use the implicit rate when it is readily determinable.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with Pinnacle West’s Condensed Consolidated Financial Statements and APS’s Condensed Consolidated Financial Statements and the related Combined Notes that appear in Item 1 of this report. For information on 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 Part 1, Item 1A of the 20212022 Form 10-KPart II, Item 1A of our 2022 1st Quarter 10-Q, and Part II, Item 1A of this report.
OVERVIEW
Business Overview
Pinnacle West is an investor-owned electric utility holding company based in Phoenix, Arizona with consolidated assets of about $23$24 billion. For over 130 years, Pinnacle West and our affiliates have provided energy and energy-related products to people and businesses throughout Arizona.
Pinnacle West derives essentially all of our revenues and earnings from our principal subsidiary, APS. APS is Arizona’s largest and longest-serving electric company that generates safe, affordable and reliable electricity for approximately 1.3 million retail customers in 11 of Arizona’s 15 counties. APS is also the operator and co-owner of Palo Verde — a primary source of electricity for the southwest United States and the largest nuclear power plant in the United States.
Inflation
Overall inflation has grown by 13%8.5% in Phoenix over the past twelve months, compared to 8%6% nationally; however, APS’s work with national and international companies has helped to partially reduce local cost escalation impacts on APS. The impacts from inflation have varied across separate categories of APS’s spending. PricingSharp price increases across major categories have ranged from 8%begun to 10% for vendor services andlevel off; however, APS has continued to see increases of up to 15% to 60% for equipment10% in the first three quartersquarter of 2023 from the heightened market in the fourth quarter 2022. APS has seen specific inflationary impacts in individualvolatile spend categories such as wellfuel, chemicals, and electrical components impacted by raw material markets. Inflation has also impacted spend categories through pass-through costs such as general inflationary pricing impacts on a broader setsupplier’s increased material costs, cost of spend categories. Some of the highest increases so far in 2022 as compared to 2021 have been in chemical costsinsurance, and contract services.wage rates.
Even prior to these increases, APS has focused on its customer affordability initiative, which has enabled APS to mitigate against inflationary pressure. This initiative includes identifying efficiency opportunities through APS'APS’s LEAN Sigma approach as well as other corporate decisions. For example, APS maintains its inventory to take advantage of lower pricing, when available, and to minimize supply chain delays that can increase the pricing due to expediting fees. Additionally, APS has proactively entered into long-term contracts to hedge against price volatility, which has allowed it to mitigate against several procurement spend areas such as transformers.
Inflation Reduction Act of 2022
On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (“IRA”). The IRA significantly expands the availability of tax credits for investments in clean energy generation technologies and
energy storage. Key provisions that are relevant to the Company's clean energy commitment include (i) an
extension of tax credits for solar and wind generation, including a new option for solar investments to claim a Production Tax Credit (“PTC”) in lieu of the Investment Tax Credit (“ITC”) beginning in 2022; (ii) expansion of the ITC to cover stand-alone energy storage technology beginning in 2023,2023; and (iii) introduction of a new PTC for nuclear energy produced by existing nuclear energy plants, available from 2024 through 2032. The Internal Revenue Service and U.S. Treasury are expectedcontinue to issue regulations and other guidance which will provide additional details and clarifications regarding how the Company may be able to claim each of these credits.
In addition, the IRA contains several provisions which could create additional tax liabilities for corporations, including a 15% corporate alternative minimum tax for corporations with net profits in excess of $1 billion and a 1% excise tax on stock buybacks. We currently do not believe the Company will be subject to any material tax liabilities as a result of these legislative provisions.
COVID-19 Pandemic
Essential planned work and capital investments have continued duringDuring the COVID-19 pandemic, with priority given to support fire mitigation and summer storm efforts, as well as heat related outages. Raw material shortages, rising inflation, COVID-19 related work force disruptions and natural disasters are putting increased pressure on the global supply chain. APS is experiencingexperienced some delays in finished materials and a tight labor markets. To date, APS has not experienced labor or material supply chain shortages that have significantly impacted its ability to serve its customers’ needs. However, shortages are causing some delays and shifting of work projects based on material availability. If APS continues to experience delays in materials, it could experience an increase in purchased power costs for future summer generation needs. Such increased purchased power costs would be expected to be recoverable through the PSA. See Note 4 for additional information on the PSA.market. APS has measures in place to continually monitor and evaluate resource and labor needs and supply chain adequacy but cannot predict whether there will be material supply chain or labor shortages in the future.
Though the total expected impactfuture as a result of COVID-19, on future sales remains unknown,another pandemic, or otherwise. APS also experienced higher electric residential sales and lower electric commercial and industrial sales from the outset of the pandemic through April 2021. Beginning in May 2021, electric sales tofrom commercial and industrial customers increased to levels in line with pre-COVIDpre-COVID-19 sales but residential sales continued to be higher than pre-COVID-19 sales.
Due to COVID-19, APS voluntarily suspended disconnections of customers for nonpayment beginning March 13, 2020 until December 31, 2020.The suspension of disconnection of customers for nonpayment ended on January 1, 2021, and such sales levels have remained to date.customers were automatically placed on eight-month payment arrangements if they had past due balances at the end of the disconnection period of $75 or greater.APS voluntarily began waiving late payment fees of its customers on March 13, 2020.Effective February 1, 2023, late payment fees for residential customers were reinstated, and late payment fees for commercial and industrial customers were reinstated effective May 1, 2022.See Note 3 for additional information regarding the Summer Disconnection Moratorium.
The Coronavirus Aid, Relief, and Economic Security (“CARES”(“CARES”) Act allowed employers to defer payments of the employer share of Social Security payroll taxes that would have otherwise been owed from March 27, 2020, through December 31, 2020. We deferred the cash payment of the employer’s portion of Social Security payroll taxes for the period July 1, 2020, through December 31, 2020, which was approximately $18 million. WeAs of December 31, 2022, we have paid half of this cash deferral by December 31, 2021, and the remainder will be paid by December 31, 2022.
On June 30, 2020, in fullthe United States Federal Energy Regulatory Commission (“FERC”) issued an order granting a waiver request related to the existing Allowance for Funds Used During Construction (“AFUDC”) rate calculation beginning March 1, 2020 through February 28, 2021. On February 23, 2021, this waiver was extended until September 30, 2021. On September 21, 2021, it was further extended until March 31, 2022. The order provided a simplified approach that companies may elect to implement in order to minimize the significant distorted effect on the AFUDC formula resulting from increased short-term debt financing during the COVID-19 pandemic. APS adopted this simplified approach to computing the AFUDC composite rate by using a simple average of the actual historical short-term debt balances for 2019, instead of current period short-term debt balances, and left all other aspects of the AFUDC formula composite rate calculation
unchanged. This change impacted the AFUDC composite rate in 2021 and for the three month ended March 31, 2022. Furthermore, the change in the composite rate calculation did not impact our accounting treatment for these costs. The change did not have a material impact on our financial statements.See Note 1..
Strategic Overview
Our strategy is to deliver shareholder value by creating a sustainable energy future for Arizona by serving our customers with clean, reliable, and affordable energy.
Clean Energy Commitment
We are committed to doing our part to make the future clean and carbon-free. As Arizona stewards, we do what is right for the people and prosperity of Arizona. Our vision is to create a sustainable energy future for Arizona through providing clean, affordable, and reliable energy. We can accomplish our visions through collaboration with customers, communities, employees, policymakers, shareholders, and other stakeholders. Our clean energy goal is based on sound science and supports continued growth and economic development while maintaining reliability and affordable prices for APS’s customers.
APS’s clean energy goals consist of three parts:
•A 2050 goal to provide 100% clean, carbon-free electricity;
•A 2030 target of achieving a resource mix that is 65% clean energy, with 45% of the generation portfolio coming from renewable energy; and
•A commitment to end APS’s use of coal-fired generation by 2031.
APS’s ability to successfully execute its clean energy commitment is dependent upon a number of important external factors, some of which include a supportive regulatory environment, sales and customer growth, development of clean energy technologies, and continued access to capital markets.
2050 Goal: 100% Clean, Carbon-Free Electricity. Achieving a fully clean, carbon-free energy mix by 2050 is our aspiration. The 2050 goal will involve new thinking and depends on improved and new technologies.
2030 Goal: 65% Clean Energy. APS has an energy mix that is already 50% clean with existing plans to add more renewables and energy storage before 2025.By building on those plans, APS intends to attain an energy mix that is 65% clean by 2030, with 45% of APS’s generation portfolio coming from renewable energy. “Clean”“Clean” is measured as percent of energy mix, which includes all carbon-free resources like nuclear, renewables, and demand-side management,management.“Renewable” energy includes generation sources such as solar, wind, and “renewable”biomass, and is expressedmeasured in accordance with the ACC’s Renewable Energy Standard as a percentpercentage of retail sales. This target will serve as a checkpoint for our resource planning, investment strategy, and customer affordability efforts as APS moves toward a 100% clean, carbon-free energy mix by 2050.
2031 Goal: End APS’s Use of Coal-Fired Generation. The commitment to end APS’s use of coal-fired generation by 2031 will require APS to cease use of coal-generation at Four Corners. APS has permanently retired more than 1,000 MW of coal-fired electric generating capacity. These closures and other measures taken by APS have resulted in a total reduction of carbon emissions of 32%33% since 2005. In addition, APS has committed to end the use of coal at its remaining Cholla units by 2025.
APS understands that the transition away from coal-fired power plants toward a clean energy future will pose unique economic challenges for the communities around these plants. We worked collaboratively with stakeholders and leaders of the Navajo Nation to consider the impacts of ceasing operation of APS coal-
firedcoal-fired power plants on the communities surrounding those facilities to propose a comprehensive Coal Community Transition (“CCT”) plan. The proposed framework provided substantial financial and economic development support to build new economic opportunities and addresses a transition strategy for plant employees. We are committed to continuing our long-running partnership with the Navajo Nation in other areas as well, including expanding electrification and developing tribal renewable energy projects. Our proposed CCT plan supported the Navajo Nation, where Four Corners is located, the communities surrounding the Cholla Power Plant, and the Hopi Tribe, which iswas impacted by closure of the Navajo Plant. On
November 2, 2021, the ACC approved an amended 2019 Rate Case ROO that will require (i) equal payments over a three-year period that total $10 million to the Navajo Nation, (ii) a $1 million one-time payment to the Hopi Tribe within 60 days of the 2019 Rate Case decision, (iii) a $500,000 one-time payment to the Navajo County communities within 60 days of the 2019 Rate Case decision, (iv) up to $1.25 million for electrification of homes and businesses on the Hopi reservation, and (v) up to $1.25 million for the electrification of homes and businesses on the Navajo Nation reservation. The payments and expenditures are attributable to the future closures of Four Corners and Cholla, along with the prior closure of the Navajo Plant. All ordered payments and expenditures would be recoverable through rates. See Note 4 for a discussion of the CCT plan.
Consistent with the 2019 Rate Case decision, as of April 2022,2023, APS has completed the following payments that will be recoverable through rates related to the CCT: (i) $3.33$6.66 million to the Navajo Nation; (ii) $500,000$0.5 million to the Navajo County communities; and (iii) $1 million to the Hopi Tribe. Consistent with APS’s commitment to the impacted communities, APS has also completed the following payments: (i)$500,000 $1 million to the Navajo Nation for CCT; (ii) $1.1 million to the Navajo County Communities for CCT and economic development; and (iii) $1.25 million to the Hopi Tribe for CCT and economic development. The ACC has authorized $1.25 million to be recovered through rates for electrification of homes and businesses on both the Navajo Nation and Hopi reservation. Expenditure of the recoverable funds for electrification of homes and businesses on the Navajo Nation and the Hopi reservations is contingent upon completion of a census of the unelectrified homes and businesses in each that are also within APS service territory.
On September 28, 2022, the Arizona Corporation Commission staff ("ACC Staff")Staff filed their staff report in the Matter of Impact of the Closures of Fossil-Based Generation Plan on Impacted Communities. APS and other interested parties filed comments on the report. On October 21, 2022, ACC Staff filed a revised report and proposed order. The revised report and proposed order recommendrecommended that funds for CCT shall not be collected from rate payers. On December 8, 2022, the ACC voted against ACC Staff’s proposed order, and on April 17, 2023, the ACC closed the docket. Any further action on CCT issues will take place in utility rate cases, including the currently pending 2022 Rate Case. APS cannot predict the outcome of this matter.
In June 2021, APS and the owners of Four Corners entered into an agreement that would allow Four Corners to operate seasonally at the election of the owners beginning in fall 2023, subject to the necessary governmental approvals and conditions associated with changes in plant ownership. Under seasonal operation,
one generating unit would be shut down during seasons where electricity demand is reduced, such as the winter and spring. The other unit would remain online year-round, subject to market conditions as well as planned maintenance outages and unplanned outages. As of the enddate of July 2022,this report, APS anticipates that it will elect not to begin seasonal operation in November 2023, unless market conditions change.
Renewables. APS’s IRP (see Note 4 for additional information) establishes the path to meeting our clean energy commitment and maintaining reliable electric service for our customers. APS intends to strengthen its already diverse energy mix by increasing its investments in carbon-free resources. Our IRP rapidly adds clean energy and storage resources while maintaining reliable and affordable service. Its near-term actions are focused on clean, reliable energy and positive customer outcomes and includes:include: (a) competitive solicitations“all source” requests for proposal (“RFPs”) that provide an on-ramp to procure additional clean energy resources such as solar, wind, energy storage, and DSM resources, all of which lead to a cleaner grid;grid and (b) strategic, short-term wholesale market purchases from a combination of existing merchant natural gas units, neighboring utility systems and wholesale market participants that ensure operational reliability.
APS has a diverse portfolio of existing and planned renewable resources, including solar, wind, geothermal, biomass and biogas, that supports our commitment to clean energy. ThatThis commitment has its
foundation in theis already strengthened by Palo Verde, generating station, which is the nation’s largest carbon-free, clean energy resource, and itwhich provides criticalthe foundation for reliable and affordable service for APS customers. APS’s longer-term clean energy strategy
includes pursuing the right mix of purchased power contracts for new facilities, procurement of new facilities to be owned by APS, and the ongoing development of distributed energy resources. This balance will ensure an appropriately diverse portfolio designed to achieve the same operational reliability and customer affordability as APS’s near-term strategies. In addition, APS is actively seeking to include future facility purchase options in its PPAs that will enable investments with greater financial flexibility.
APS uses competitive “all source” requests for proposal (“RFPs”)RFPs to pursue market resources that meet its system needs and offer the best value for customers. APS selects projects based on cost, ability to meet system requirements and non-cost factors,commercial viability, taking into consideration timing and likelihood of successful contracting and development. Under current market conditions, APS must aggressively contract for resources that can withstand supply chain and other geopolitical pressures. Available projects are guided by IRP timelines and quantities and APS maintains a flexible approach that allows it to optimize system reliability and customer affordability through the RFP process. Agreements for the development and completion of future resources are subject to various conditions, including successful siting, permitting and interconnection of the projects to the electric grid. See “Business of Arizona Public Service Company — Energy Sources and Resource Planning — Current and Future Resources — Renewable Energy Standard — Renewable Energy Portfolio” in Item 1 for details regarding APS’s renewable energy resources.
In September 2019, APS issued an RFP that requested up to 250 MW of wind resources to be in service as soon as possible, but no later than 2022. As a result of this RFP, APS executed a 200 MW PPA for a wind resource that went into service in January 2022. In December 2020, APS issued two additional RFPs: (i) a battery storage RFP for projects to be located at two AZ Sun sites; and (ii) an all-source RFP that solicited resources to meet our clean energy needs and capacity to maintain system reliability, and was later amended to include a request for 150 MW of solar resources to be developed on APS property and owned by APS (collectively, the “December 2020 RFPs”). As a result of the all-source RFP,December 2020 RFPs, APS executed two solar plus storage PPAs totaling 275 combined MWs, MW, a PPA for a 238 MW wind resource, two energy storage PPAs for a combined 300 MWs;MW; extended an existing natural gas tolling agreement; agreement and also executed an engineering, procurement, and construction contract in November 2021 for a 150 MW solar resource to be owned by APS and in service in early 2023.
In May 2022, APS issued anall-source RFP to address resource needs for 2025 and beyond (“2022 all-source RFP”). The 2022 all-source RFP solicits competitive proposals for approximately 1,000 MW to 1,500 MW of resources, including up to 600 MW to 800 MW of renewable resources to meet the needs of 2025 and 2026 while considering resources that can be online as late as 2027. The 2022 RFP stopped accepting bids on July 15, 2022, and APS sent notifications to shortlisted bidders on September 23, 2022. As a result of the 2022 RFP, and as of March 31, 2023, APS has signed two solar plus energy storage PPAs totaling 470 MW of solar resources and approximately 514 MW of energy storage resources and a PPA for 216 MW of wind resources. In addition to the renewable resources described above, the 2022 RFP also resulted in the extension of two merchant gas facilities. Once it secures those important resources and closes out the 2022 RFP, APS intends to issue its next RFP to address future resource needs.
The following table summarizes the resources in APS’s renewable energy portfolio that are in operation andor under development as of September 30, 2022.March 31, 2023. Agreements for the development and completion of future resources are subject to various conditions, including successful siting, permitting, and interconnection of the projects to the electric grid.
| | | | Net Capacity in Operation
(MW) | | Net Capacity Planned / Under
Development (MW) | | | Net Capacity in Operation
(MW) | | Net Capacity Planned / Under
Development (MW) | |
| Total APS Owned: Solar | Total APS Owned: Solar | 250 | | | 150 | | | Total APS Owned: Solar | 264 | | | 150 | | |
| Purchased Power Agreements Renewables: | Purchased Power Agreements Renewables: | | | | | Purchased Power Agreements Renewables: | | | | |
| Solar | Solar | 310 | | | 435 | | | Solar | 310 | | | 905 | | |
| Wind | Wind | 399 | | | 238 | | | Wind | 399 | | | 454 | | |
| Geothermal | Geothermal | 10 | | | — | | | Geothermal | 10 | | | — | | |
| Biomass | Biomass | 14 | | | — | | | Biomass | 14 | | | — | | |
| Biogas | Biogas | 3 | | | — | | | Biogas | 3 | | | — | | |
| Total Purchased Power Agreements | Total Purchased Power Agreements | 736 | | | 673 | | | Total Purchased Power Agreements | 736 | | | 1,359 | | |
| Total Distributed Energy: Solar (a) | Total Distributed Energy: Solar (a) | 1,369 | | | 129 | | (b) | Total Distributed Energy: Solar (a) | 1,477 | | | 103 | | (b) |
| Total Renewable Portfolio | Total Renewable Portfolio | 2,355 | | | 952 | | | Total Renewable Portfolio | 2,477 | | | 1,612 | | |
(a)Includes rooftop solar facilities owned by third parties. Distributed generation is produced in Direct Current and is converted to Alternating Current for reporting purposes.
(b) Applications received by APS that are not yet installed and online.
Energy Storage. APS deploys a number of advanced technologies on its system, including energy storage. Energy storage provides capacity, improves power quality, can be utilized for system regulation and, in certain circumstances, be used to defer certain traditional infrastructure investments. Energy storage also aids in integrating renewable generation by storing excess energy when system demand is low and renewable production is high and then releasing the stored energy during peak demand hours later in the day and after sunset. APS is utilizing grid-scale energy storage projects to meet customer reliability requirements, increase renewable utilization, and to further our understanding of how storage works with other advanced technologies and the grid.
In 2018, APS issued an RFP for approximately 106 MW of energy storage to be located at up to five of its AZ Sun sites. Based upon its evaluation of the RFP responses, APS decided to expand the initial phase of battery deployment to 141 MW by adding a sixth AZ Sun site. These battery storage facilities are expected to be in service by the end of 2022. On August 2, 2021, APS executed a contract for an additional 60 MW of utility-owned energy storage to be located on APS’s AZ Sun sites. This contract with a 2023 in-service date, will completecompletes the addition of storage on current APS-owned utility-scale solar facilities. These battery storage facilities are currently expected to be in service during the first through third quarters of 2023. As of May 2, 2023, the 141 MW of the initial phase of battery deployment at AZ Sun sites has entered into service.
Additionally, in February 2019, APS signed two 20-year PPAs for energy storage totaling 150 MW. These PPAs were subject to ACC approval in order to allow for cost recovery through the PSA. APS received the requested ACC approval on January 12, 2021, and service under the agreements is contractedexpected to begin in 2022 with respect to 100 MW and in 2023 with respect to 50 MW; however, these agreements are facing delays and APS is currently working with the developers to determine revised in-service dates.2023.
As a result of its December 2020 RFPs, as of May 2022, APS has executed four 20-year PPAs for resources that include energy storage: (a) two PPAs for standalone energy storage resources totaling 300 MW;MW, and (b) two PPAs for solar plus energy storage resources totaling 275 MW solar plus storage resource.MW. The PPAs are also subject to ACC approval to enable cost recovery through the PSA. APS received the requested ACC approval for three out of four of the projects on December 16, 2021. The remaining project was filed in February 2022 for ACC approval and on
on December 16, 2021 and on April 13, 2022 for the ACC approved this application.remaining project. Service under the agreements is expected to begin in 2023 and 2024.
Following the 2022 RFP, as of March 31, 2023, APS has executed two 20-year PPAs for solar plus storage resources totaling 470 MW of solar resources and approximately 514 MW of energy storage resources. The PPAs are subject to ACC approval to enable cost recovery through the PSA. Approval for one PPA was requested in December 2022 and granted in February 2023. Approval for the second PPA was requested in March 2023 and granted in May 2023. Service under these agreements are expected to begin in 2025.
APS currently plans to install more than 9001,400 MW of energy storage by 2025, including the energy storage projects under PPAs and AZ Sun retrofits described above. The remaining energy storage is expected to be made up of resources solicited through current and future RFPs.
The following table summarizes the resources in APS’s energy storage portfolio that are in operation andor under development as of September 30, 2022.March 31, 2023. Agreements for the development and completion of future resources are subject to various conditions.
| | | | Net Capacity in Operation (MW) | | Net Capacity Planned / Under Development (MW) | | Net Capacity in Operation (MW) | | Net Capacity Planned / Under Development (MW) |
| APS Owned: Energy Storage | APS Owned: Energy Storage | — | | | 201 | | APS Owned: Energy Storage | — | | | 201(b) |
| Purchase Power Agreements - Energy Storage | Purchase Power Agreements - Energy Storage | — | | | 725 | | Purchase Power Agreements - Energy Storage | — | | | 1,239 | |
| Residential Energy Storage | Residential Energy Storage | 17(a) | | 6 | | Residential Energy Storage | 22(a) | | 5 | |
| Total Energy Storage Portfolio | Total Energy Storage Portfolio | 17 | | | 932 | | Total Energy Storage Portfolio | 22 | | | 1,244 | |
(a) This includes 16.421.3 MW of APS customer-owned batteries and 0.2 MW of APS-owned residential batteries.
(b) This includes 141 MW of batteries at AZ Sun sites that have entered into service as of May 2, 2023.
Palo Verde. Palo Verde, the nation’s largest carbon-free, clean energy resource, will continue to be a foundational part of APS’s resource portfolio. The plant currently supplies nearly 70% of our clean energy and provides the foundation for the reliable and affordable service for APS customers. Palo Verde is not just the cornerstone of our current clean energy mix; it also is a significant provider of clean energy to the southwest United States. The plant is a critical asset to the Southwest, generating more than 32 million megawatt-hoursMWh annually – enough power for more than 4roughly 3.4 million households, or approximately 8.5 million people. Its continued operation is important to a carbon-free and clean energy future for Arizona and the region, as a reliable, continuous, affordable resource and as a large contributor to the local economy.
Affordable
Building upon existing cost management efforts, APS launched a customer affordability initiative in 2019. The initiative was implemented company-wide to thoughtfully and deliberately assess our business processes and organizational approaches through LEAN Sigma procedures to identifycompleting high-value work and developachieving internal efficiencies. We continueAPS continues to drive this initiative by identifying opportunities to streamline ourits business processes to assist in mitigating cost increases, increasing employee retention, and improving customer satisfaction.
Participation in the Energy Imbalance Market (“EIM”) continues to be a tool for creating savings for APS’s customers from the real-time, voluntary market. APS continues to expect that its participation in EIM will lower its fuel and purchased-power costs, improve situational awareness for system operations in the Western Interconnection power grid, and improve integration of APS’s renewable resources. APS continues to evaluate opportunities that benefit our customers and is exploring opportunities to move to a day-ahead market with the expectation of reliably achieving incrementally greater cost savings and using the region’s increasing renewable resources more efficiently. As part of that effort, APS is exploring several options. APS is in
discussions with the current EIM operator, the CAISO, the Western Resource Adequacy Program, the Western Markets Exploratory Group, and the Southwest Power Pool. Each of these explorations also involve other entities and are being undertaken to ensure reliable operations and evaluate the feasibility and cost/benefit of creating a voluntary day-ahead market as well as potential future market steps beyond a day-ahead market.
Reliable
While our energy mix evolves, the obligation to deliver reliable service to our customers remains. APS is managing through significant growth in the Phoenix metropolitan area while experiencing supply chain issues similar to other industries.
Planned investments will support operating and maintaining the grid, updating technology, accommodating customer growth, and enabling more renewable energy resources. Our advanced distribution management system allows operators to locate outages, control line devices remotely and helps them coordinate more closely with field crews to safely maintain an increasingly dynamic grid. The system will also integratesintegrate a new meter data management system that increaseswill increase grid visibility and givesgive customers access to more of their energy usage data.
Wildfire safety remains a critical focus for APS and other utilities. We increased investment in fire mitigation efforts to clear defensible space around our infrastructure, continue ongoing system upgrades, build partnerships with government entities and first responders and educate customers and communities. These programs contribute to customer reliability, responsible forest management and safe communities.
The new units at our modernized Ocotillo Power Plant provide cleaner-running and more efficient units. They support reliability by responding quickly to the variability of solar generation and delivering energy in the late afternoon and early evening when solar production declines as the sun sets and customer demand peaks. APS continues to evaluate options to meet growing energy demand and ensure grid reliability, including through upgrades to and/or modernization of additional existing gas facilities.
In October of 2021, APS announced plans to evaluate regional market solutions as part of the informal Western Markets Exploratory Group (“WMEG”). As part of WMEG, APS is exploring the potential for a staged approach to new market services, including day-ahead energy sales, transmission system expansion, and other power supply and grid solutions consistent with existing state regulations. WMEG hopes to identify market solutions that can help achieve carbon reduction goals while supporting reliable, affordable service for customers. APS is unable to predict the outcome of these discussions.
APS’s key elements to delivering reliable power include resource planning, sufficient reserve margins, customer partnerships to manage peak demand, fire mitigation, and operational preparedness. Seasonal readiness procedures at APS also include walkdownsinspections to ensure good material conditions and critical control system surveys. APS also plans for the unexpected by conducting emergency operations drills and coordinating on fire and emergency management with federal, state, and local agencies.
Customer-Focused
Recognizing that creating customer value is inextricably linked to increasing shareholder value, APS’s focus remains on its customers and the communities it serves.Accordingly, it is APS’s goal to achieve an industry-leading, best-in-class customer experience, while demonstrating compassion and advocacy for its customers.This multi-year objective includes incrementally improving APS’s J.D. Power (“JDP”) overall
customer satisfaction ratings from the fourth quartile to the first quartile of its peer set comprised of large investor-owned utilities.APS made noteworthy progress on that front.
As previously disclosed, APS’s JDP residentialResidential rankings for overall customer satisfaction rating improved in each of 2020, and 2021 and in the first half2022, and APS ended 2022 as one of 2022. That improvement trend continued with the latest JDP residential 2022 third-quarter results. Compared to 2021, APS has made quartile gains in every single driver of customer satisfaction and made significant headway that placed the company firmly into the second quartile, and well above industry benchmarks for overall satisfaction when compared to our large investor-owned peers. APS’s strongest performing drivers in the first three quarters of 2022 were Customer Care
(phone and digital), Power Quality and Reliability, and Corporate Citizenship, and Billing & Payment. APS’s improvement also is being recognized by our business customers, as evidenced by JDP’s Business 2022 mid-year results placing APS in the first quartile nationally for business customers. APS is among the most improved utilityutilities in the nation for both businessresidential and residentialbusiness customer satisfaction. Residential customer satisfaction finished 2022 ranked in the second quartile among large investor-owned utilities, and business customer satisfaction ranked in the first quartile of utilities nationally.
Developing Clean Energy Technologies
Electric Vehicles
APS is making electric vehicle charging more accessible for its customers and helping Arizona businesses, schools and governments electrify their fleets.In 2021, APS continued its expansion of its Take Charge AZ Pilot Program.As of September 13, 2022,February 7, 2023, APS had installed 638684 Level 2 (“L2”(“L2”) charging ports at customer locations, with more stations expected to be added through 2023.the remainder of 2022. The program provides charging equipment, installation, and maintenance to business customers, government agencies, non-profits, and multifamily housing communities.In addition to the L2 charging stations, APS has begun construction ofdeployed DC fast charging (“DCFC”) stations that will beare owned and operated by APS at five locations in Arizona, with theArizona.The first location opened for public use in March 2022 in Show Low, Arizona.The other four projects in Sedona, Prescott, Globe, and Payson are expected to be completedwere energized by the end of 2022.Each location features 2-150 kilowatt and 2-350 kilowatt DCFC ports.Charging at these stations will be accessible through the Electrify America charging network.APS has a goal ofto reach 450,000 light-duty electric vehicles in its service territory by 2030.
Additionally, as part of APS’s DSM Plan, APS has launched an Electric Vehicle Charging Demand Management Pilot Program to proactively address the growing electric demand from electric vehicle charging as electric vehicles become more widely adopted.This program includes the APS SmartCharge data gathering program, a $250 residential electric vehicle smart charger rebate for qualifying electric vehicle chargers, Fleet Advisory Services, and a $100 rebate to home builders for new homes to be built EV ready with 240V charging station garage outlets.APS filed its 2023 DSM Plan on November 30, 2022, which proposes two new programs, an expanded residential EV Managed Charging Program and a Commercial Make-Ready Program.The Commercial Make-Ready Program is intended to help reduce some of the high upfront cost for our customers installing DCFC stations, and enables APS to deploy effective load management strategies at these commercial sites.
The ACC ordered certain public service corporations, including APS, to develop a long-term, comprehensive statewide transportation electrification plan (“TE Plan”) for Arizona.The statewide TE Plan is intended to provide a roadmap for transportation electrification in Arizona, focused on realizing the associated air quality and economic development benefits for all residents in the state along with understanding the impact of electric vehicle charging on the grid. APS actively participated in the development of that plan, which was approved by the ACC in December 2021.In the decision, the ACC also ordered APS and another large Arizona electric public service corporation to each develop and submit for ACC approval their own TE Plans and corresponding budget for 2023.Accordingly, APS met its compliance obligation and filed its first TE Annual Progress Report on March 15, 2022, itsboth a 2023 TE Plan on June 1, 2022 and a supplemental TE Plan on November 30, 2022. APS filed its mid-yearrequired TE Progress Reportprogress report on March 15 and will file its next required progress report on September 15, 2022. APS will file2023, along with a supplement to the 20232024 TE Plan later this year.
Hydrogen Production
Palo Verde,APS, in partnership with Idaho National Laboratory (“INL”), Energy Harbor Corporation (“Energy Harbor”), and Xcel Energy Incorporated (“Xcel”), was chosen by the DOE’s Office of Nuclear Energy to participate in a series of hydrogen production projects with the goal to improve the long-term economic competitiveness of the nuclear power industry.The multi-phase projects began in 2020 with a series of small-scale hydrogen production demonstration projects led by Energy Harbor and Xcel, as well as a technical and economic assessment performed by INL of using electricity generated at Palo Verde to produce hydrogen.
Based on the experience from Palo Verde’s utility partners’ developing small scale demonstration projects and from the Palo Verde-specific preliminary technical and economic assessment performed by INL, in April 2021, PNW Hydrogen LLC (“PNW Hydrogen”), a newly formed subsidiary of Pinnacle West, applied
for DOE funding for a larger scale hydrogen production demonstration project using electricity sourced from Palo Verde. On October 7, 2021, PNW Hydrogen was notified that DOE’s Office of Energy Efficiency & Renewable Energy and Office of Nuclear Energy had selected PNW Hydrogen’s application for an award of $20 million in federal funding to support the hydrogen production demonstration project, subject to negotiation and execution of a definitive Cooperative Agreement funding instrument between PNW Hydrogen and DOE. As of April 1, 2023, PNW Hydrogen continues to work throughhas concluded its negotiations with the DOE whileand is no longer pursuing the demonstration project due to economic hurdles that none of the iterations of the project could successfully overcome. PNW Hydrogen also investigating how bestultimately chose not to coordinate its efforts with Regionalinclude a project in the Southwest Clean Hydrogen Hub development opportunities.Innovation Network (“SHINe”) regional hub for similar reasons.
On November 15, 2021, President Biden signedTheSHINe regional hub was formed due to the Infrastructure Investment and Jobs Act (“IIJA”), also known as the Bipartisan Infrastructure Bill, which was signed into law. Included in this bill was $8 billionlaw on November 15, 2021. Among other things, the IIJA included money for Regional Clean Hydrogen Hubs which is intended to create jobs to expand the use ofregional clean hydrogen in the industrial sectorhubs, and beyond. Onon February 15, 2022, the Department of Energy (“DOE”)DOE announced a Request for Information to collect feedback from stakeholders to inform the implementation and design of the Regional Hydrogen Hub.regional hubs.
On May 12, 2022, APS,Arizona’s three public universities along with three other Arizona energy providers, and the State’s three public universitiesincluding APS, announced the formation of a new, interdisciplinary coalition, called the Arizona Center for a Carbon Neutral Economy (“AzCaNE”), with the goal of attaining a carbon neutral economy in Arizona. AzCaNE’s first action iswas to pursue the creation of an Arizona-led approach to securing regional clean hydrogen hub funding.Leading professionals from the seven founding participants, along with representatives of Arizona, the Navajo Nation and companies working to develop a hydrogen ecosystem within Arizona make up the Governance Committee for AzCaNE’s current efforts.
On September 22, 2022, , the DOE opened applications for athe up to $7 billion program to create six to ten regional clean hydrogen hubs across the country. These hubs are intended to be a central driver in helping communities across the country benefit from clean energy investments, good-paying jobs, and improved energy security while supporting the President’s goal of a net-zero carbon economy by 2050. Concept papers for each regional hub arewere due by November 7, 2022, and AzCaNE submitted a concept paper for the SHINe regional hub, which also includes projects in Nevada. On December 27, 2022, the SHINe regional hub was one of thirty-three regional hubs encouraged to submit a full applications are dueapplication by the DOE. SHINe’s full application was submitted to the DOE on April 7, 2023.
Carbon Capture
Carbon capture technologies can isolate CO2 and either sequester it permanently in geologic formations or convert it for use in products. Currently, almost all existing fossil fuel generators do not control carbon emissions the way they control emissions of other air pollutants such as sulfur dioxide or oxides of nitrogen. Carbon capture technologies are still in the demonstration phase and while they show promise, they are still
being tested in real-world conditions. These technologies could offer the potential to keep in operation existing generators that otherwise would need to be retired. APS will continue to monitor this emerging technology.
Environmental, Social, and Governance (“ESG”) Practices
Pinnacle West has been integrating ESG practices into its core work for almost 30 years. As a business strategy, we seek solutions that provide “shared value,” meaning solutions that address societal and environmental challenges in a way that also delivers business value. Our commitment extends beyond implementing sustainability practices; we are dedicated to working with our stakeholders to identify and address the sustainability issues that we are uniquely positioned to impact through our business. In 2020, in support of our clean energy commitment and the growing focus on ESG within our organization, we increased our efforts by dedicating a new Sustainability Department at Pinnacle West to integrating ESG best practices into the everyday work of the Company.
As a first step, the Company engaged the Electric Power Research Institute (“EPRI”) and leveraged input from employees, large customers, limited-income advocates, economic development groups, environmental non-governmental organizations, leading sustainability academics and other stakeholders to
identify and assess the sustainability issues that matter most.In total, 23 Priority Sustainability Issues (“PSIs”) were identified and prioritized.The most critical category, Integral Shared Value, includes four issues deemed most important and most able to be impacted by our actions: clean energy, customer experience, energy access and reliability and safety and health.These Integral PSIs provide the foundation for informing our strategic direction, creating a framework for incorporating best practices and driving enterprise-wide alignment and accountability.In 2021, the Company engaged EPRI for the second phase of this work, focused on benchmarking best practices within these four Integral Shared Value PSIs.We are usingutilized the benchmarking information to identify opportunities for further improvement in our ESG performance.
In 2021, the Company established a Social Issues Committee Framework.The goal of the framework is to provide a process for considering emergent social issues, and for determining whether or how best to engage. The committee’s responsibility is to determine, using a set of principles grounded in the APS Promise and the PSIs, whether engagement on specific emergent social issues is appropriate and, if so, how best to engage.
In 2021, theThe Company also finalized an ESG Strategic Framework to guide our work.The framework is based upon three foundational pillars: ESG Policy Advocacy (we advocate for policy that supports our clean energy goals); Driving Performance (improving our ESG performance in the most important areas, including our PSIs); and effectively communicating and amplifying our ESG story to our various stakeholders, including investors, customers, employees and beyond. The framework will guide and shapeThroughout 2022, the ESG Strategic Framework has guided our ESG work moving forward.activities allowing the Sustainability Department to prioritize projects and collaborate with our teams in the Company.Also in 2022, the Company developed an ESG Narrative, aligned to the APS Promise, to guide the Company’s communications strategy internally and externally to customers to effectively share APS’s sustainability story.
Regulatory Overview
2022 Retail Rate Case
APS filed an application with the ACC on October 28, 2022 (the “2022 Rate Case”) seeking an increase in annual retail base rates on the date rates become effective (“Day 1”) of a net $460 million. This Day 1 net impact represents a total base revenue deficiency of $772 million offset by proposed adjustor transfers of cost recovery to annual retail rates and adjustor mechanism modifications. The average annual customer bill impact of APS’s request on Day 1 is an increase of 13.6%.
The principal provisions of APS’s application are:
•A test year comprised of twelve months ended June 30, 2022, adjusted as described below;
•An original cost rate base of $10.5 billion, which approximates the ACC-jurisdictional portion of the book value of utility assets, net of accumulated depreciation and other credits;
•The following proposed capital structure and costs of capital:
| | | | | | | | | | | | | | | | | | | | |
| | Capital Structure | | Cost of Capital | |
| Long-term debt | | 48.07 | | % | 3.85 | | % |
| Common stock equity | | 51.93 | | % | 10.25 | | % |
| Weighted-average cost of capital | | | | 7.17 | | % |
•A 1% return on the increment of fair value rate base above APS’s original cost rate base, as provided for by Arizona law;
•A rate of $0.038321 per kWh for the portion of APS’s retail base rates attributable to fuel and purchased power costs;
•Modification of its adjustment mechanisms including:
▪eliminate the Environmental Improvement Surcharge and collect costs through base rates,
▪eliminate the Lost Fixed Cost Recovery mechanism and collect costs through base rates and the Demand Side Management Adjustment Charge (“DSMAC”),
▪maintain as inactive the Tax Expense Adjustor Mechanism,
▪maintain the Transmission Cost Adjustment mechanism,
▪modify the performance incentive in the DSMAC, and
▪modify the Renewable Energy Adjustment Charge to include recovery of capital carrying costs of APS owned renewable and storage resources;
•Changes to its limited-income program, including a second tier to provide an additional discount for customers with greater need; and
•Twelve months of post-Test Yearpost-test year plant to reflect used and useful projects that will be placed into service prior to July 1, 2023.
APS requested that the increase become effective December 1, 2023. The hearing for this rate case is currently scheduled to begin in August 2023. APS cannot predict the outcome of its request.
2019 Retail Rate Case
On October 31, 2019, APS filed an application with the ACC (the “2019 Rate Case”) seeking an increase in annual retail base rates. On August 2, 2021, the Administrative Law Judge issued a Recommended Opinion and Order in the 2019 Rate Case (the “2019 Rate Case ROO”) and issued corrections on September 10 and September 20, 2021. See Note 4 for information regarding the 2019 Rate Case ROO.
On October 6, 2021 and October 27, 2021, the ACC voted on various amendments to the 2019 Rate Case ROO that would result in, among other things, (i) a return on equity of 8.70%, (ii) the recovery of the deferral and rate base effects of the operating costs and construction of the Four Corners SCR project, with the exception of $215.5 million (see “Four Corners SCR Cost Recovery” below), (iii) that the CCT plan include the following components: (a) a payment of $1 million to the Hopi Tribe within 60 days of the 2019 Rate Case decision, (b) a payment of $10 million over three years to the Navajo Nation, (c) a payment of $500,000$0.5 million to the Navajo County communities within 60 days of the 2019 Rate Case decision, (d) up to $1.25 million for electrification of homes and businesses on the Hopi reservation and (e) up to $1.25 million for the electrification of homes and businesses on the Navajo Nation reservation. These payments and expenditures are attributable to the future closures of Four Corners and Cholla, along with the prior closure of the Navajo Plant and all ordered payments and expenditures would be recoverable through rates, and (iv) a change in the residential on-peak time-of-use period from 3 p.m. to 8 p.m. to 4 p.m. to 7 p.m. Monday through Friday, excluding holidays. The 2019 Rate Case ROO, as amended, results in a total annual revenue decrease for APS of $4.8 million, excluding temporary CCT payments and expenditures. On November 2, 2021, the ACC approved the 2019 Rate Case ROO, as amended.
On November 24, 2021, APS filed with the ACC an application for rehearing of the 2019 Rate Case with the ACC and the application was deemed denied on December 15, 2021, as the ACC did not act upon it. On December 17, 2021, APS filed its Notice of Direct Appeal at the Arizona Court of Appeals and a Petition for Special Action with the Arizona Supreme Court, requesting review of the disallowance of $215 million of Four Corners SCR plant investments and deferrals (see “Four Corners SCR Cost Recovery” below for additional information) and the 20 basis point20-basis-point penalty reduction to the return on equity. On February 8, 2022, the Arizona Supreme Court declined to accept jurisdiction on APS’s Petition for Special Action. The appeal at the Arizona Court of Appeals is proceedingheard oral arguments on November 30, 2022.
On March 6, 2023, the Court issued its opinion in this matter, affirming in part and reversing in part the ACC’s decision in the normal course,2019 Rate Case. The Court vacated the 20-basis-point penalty included in the ACC’s allowed return on equity, as the Court determined the use of customer service metrics to justify the reduction exceeded the ACC's ratemaking authority. Additionally, the Court vacated the disallowance of $215.5 million of APS’s Four Corners SCR investment because the ACC did not consider APS’s contractual obligations and oral arguments are scheduledimproperly considered post-investment data in violation of its own rules. The Court remanded the issue to the ACC for November 30, 2022.further proceedings. The ACC requested an extension of the 30-day deadline to appeal the matter to the Arizona Supreme Court, and the Arizona Supreme Court granted the extension of the deadline to May 8, 2023. APS cannot predict the outcome of this proceeding. See Note 4 for addition information regarding the 2019 Rate Case and the appeal.
Consistent with the 2019 Rate Case decision, APS implemented the new rates effective as of December 1, 2021. On December 3, 2021, ACC Staff notified the ACC of a discrepancy between the written decision, which approved the change in time-of-use on-peak hours to 4 p.m. to 7 p.m. but did not explicitly
approve the 10-months contemplated in APS’s verbal testimony to implement the new time-of-use hours. On December 16, 2021, the ACC ordered APS to complete the implementation of the time-of-use peak period by April 1, 2022. On January 12, 2022, the ACC voted to extend until September 1, 2022, the deadline to complete the implementation of the new on-peak hours for residential customers. In addition, the ACC ordered extensive compliance and reporting obligations and will be continuing to explore whether penalties or rebates would be owed to certain customers.obligations. APS completed the implementation of the new on-peak hours for residential customers before the September 1, 2022 deadline. APS cannot predict if the outcome ofACC will take any further action on this matter.
Additionally, consistent with the 2019 Rate Case decision, as of April 2022,2023, APS has completed the following payments that will be recoverable through rates related to the CCT: (i) $3.33$6.66 million to the Navajo Nation; (ii) $500,000$0.5 million to the Navajo County communities; and (iii) $1 million to the Hopi Tribe. Consistent with APS’s commitment to the impacted communities, APS has also completed the following payments: (i) $500,000$1 million to the Navajo Nation for CCT; (ii) $1.1 million to the Navajo County Communities for CCT and economic development; and (iii) $1.25 million to the Hopi Tribe for CCT and economic development. The ACC has also authorized $1.25 million to be recovered through rates for electrification of homes and businesses on both the Navajo Nation and Hopi reservation. Expenditure of the recoverable funds for electrification of homes and businesses on the Navajo Nation and the Hopi reservations is contingent upon
completion of a census of the unelectrified homes and businesses in each that are also within APS service territory.
See Note 4 for information regarding additional regulatory matters.
Four Corners SCR Cost Recovery
As part of APS’s 2019 Rate Case, APS included recovery of the deferral and rate base effects of the Four Corners SCR project. On November 2, 2021, the 2019 Rate Case decision was approved by the ACC allowing approximately $194 million of SCR related plant investments and cost deferrals in rate base and to recover, depreciate and amortize in rates based on an end-of-life assumption of July 2031. The decision also included a partial and combined disallowance of $215.5 million on the SCR investments and deferrals. APS believes the SCR plant investments and related SCR cost deferrals were prudently incurred, and on December 17, 2021, APS filed its Notice of Direct Appeal at the Arizona Court of Appeals requesting review of the $215.5 million disallowance. The appeal is proceedingArizona Court of Appeals heard oral arguments on November 30, 2022. On March 6, 2023, the Court of Appeals issued its opinion in the normal course,matter, vacating the ACC’s dissallowance of the SCR investment and oral arguments are scheduledremanding the matter back to the ACC for November 30, 2022.further review in accordance with ACC rule and the order of the Court of Appeals. The parties have until May 8, 2023 to file a petition requesting review by the Arizona Supreme Court. APS cannot predict the outcome of this proceeding. Based on the partial recovery of these investments and cost deferrals in current rates, the favorable Court of Appeals order, and the uncertainty of the outcome of the legal appeals process,potential for further appellate review, APS has not recorded an impairment or write-off relating to the SCR plant investments or deferrals as of September 30, 2022.March 31, 2023. If the 2019 Rate Case decision to disallow $215.5 million of the SCRs is ultimately upheld, APS will be required to record a charge to its results of operations, net of tax, of approximately $154.4 million. We cannot predict the outcome of the legal challenges nor the timing of when this matter will be resolved. See Note 4 for additional information regarding the Four Corners SCR cost recovery.
Financial Strength and Flexibility
Pinnacle West and APS currently have ample borrowing capacity under their respective credit facilities and may readily access these facilities ensuring adequate liquidity for each company. 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.
Other Subsidiaries
Bright Canyon Energy. On July 31, 2014, Pinnacle West announced its creation of a wholly-owned subsidiary, BCE. BCE’s strategy is to develop, own, operate and acquire energy infrastructure in a manner that leverages the Company’s core expertise in the electric energy industry. As of September 30, 2022,March 31, 2023, BCE had total assets of approximately $83$148 million.
In 2014, BCE formed a 50/50 joint venture with BHE U.S. Transmission LLC, a subsidiary of Berkshire Hathaway Energy Company. The joint venture, named TransCanyon, is pursuing independent electric transmission opportunities within the 11 U.S. states that comprise the Western Electricity Coordinating Council,Interconnection, excluding opportunities related to transmission service that would otherwise be provided under the tariffs of the retail service territories of the venture partners’ utility affiliates.
On December 20, 2019, BCE owns aacquired minority equity ownership interest relating topositions in two wind farms under development by Tenaska Energy, Inc. and Tenaska Energy Holdings, LLC, the 242 MW Clear Creek and the 250 MW Nobles 2 wind farm. farms.Clear Creek achieved commercial operation in May 2020 and Nobles 2
achieved commercial operation in December 2020.Both wind farms deliver power under long-term PPAs.BCE indirectly owns 9.9% of Clear Creek and 5.1% of Nobles 2.
Tenaska Clear Creek Wind, LLC, the developer, owner, and operator of the Clear Creek wind farm, has disputed the proposed cost allocation of system upgrades related to connecting the Clear Creek wind farm to the transmission system and filed a complaint with FERC on May 21, 2021, which was denied on September 9, 2022, and a Petition for Review with the U.S. Court of Appeals, which is still pending. 2022.Subsequently, Tenaska Clear Creek Wind, LLC filed with FERC a request for rehearing and a motion for stay of the September 9, 2022 order. WhileOn October 7, 2022, the dispute is ongoingrequest for rehearing was denied by FERC.FERC has not ruled on the motion for stay.Clear Creek has filed a Petition for Review with the U.S. Court of Appeals and Motion for Stay Pending Appeal, both of which are still pending.
Tenaska Clear Creek Wind, LLC filed a second complaint with FERC on May 25, 2022, alleging that the wind farm was being curtailed in a discriminatory manner.The May 25, 2022 Complaint was denied by FERC on December 15, 2022 and Tenaska Clear Creek Wind, LLC requested Rehearing of the denial on January 13, 2023.
Due to the disputed system upgrades and the ultimate costs that will be allocated to connectrelated curtailment, the Clear Creek wind farm has experienced a significant reduction in power generation that has had a material adverse impact on the project’s ability to generate cash flow for investors.These energy curtailments are expected to persist, unless and until system upgrades are implemented to alleviate the present transmission system congestion, or the disputes are determined in favor of, or settled in a manner favorable to, Tenaska Clear Creek Wind, LLC.As such, during the fourth quarter of 2022, due to these on-going disputes, cost allocation uncertainties, and no probable favorable resolution, BCE determined its equity method investment was fully impaired.Prior to the transmission system are unknown,impairment, the ultimate resolutioninvestment had a carrying value of this dispute may have a negative impact on BCE's investment in$17.1 million, which has been written-down to reflect the Clear Creek wind farm. Asinvestment’s estimated fair value of September 30,zero as of December 31, 2022.Pinnacle West's CondensedWest’s Consolidated Balance Sheet included $17Statement of Income for the year ended December 31, 2022 includes an after-tax loss of $12.8 million relating to the Clear Creek wind farm.this impairment.
BCE has started construction on a microgrid facility in Los Alamitos, California (“Los Alamitos”) featuring 31 MW of solar, 20 MW of battery storage, and 3 MW of backup generators. Supported by a long-term power purchase agreement with San Diego Gas and Electric Company, Los Alamitos will supply 20 MW of solar and battery storage capacity to the Southern California grid and provide resilient backup power in the event of a grid emergency to the Army and California National Guard at Joint Forces Training Base Los Alamitos. The Los Alamitos project is scheduled to achieve commercial operation in third-quarter 2023. See Note 3 regarding a credit agreement entered into by BCE to finance capital expenditures and related costs for this microgrid project.
BCE and Ameresco, Inc. jointly own a special purpose entity that is sponsoring the Kūpono Solar project. This project is a 42 MW solar and battery storage facility in Oʻahu, Hawaii that will supply clean renewable energy and capacity under a 20-year power purchase agreement with Hawaiian Electric Company, Inc. The Kūpono Solar project is expected to be completed in 2024. On April 18, 2023, the Kūpono Solar special purpose entity, entered into a $140 million non-recourse construction financing agreement. The construction financing will convert into a sale leaseback agreement upon commercial operation of the project. The financing agreement requires $40 million of sponsor equity, which has been funded by the project’s equity participants. In connection with the financing, Pinnacle West has issued performance guarantees relating to the project.
El Dorado. El Dorado is a wholly-owned subsidiary of Pinnacle West. El Dorado owns debt investments and minority interests in several energy-related investments and Arizona community-based ventures. In particular, El Dorado committed to a $25 million investment in the Energy Impact Partners fund,
which is an organization that focuses on fostering innovation and supporting the transformation of the utility industry. The investment will be made by El Dorado as investments are selected by the Energy Impact Partners fund. As of September 30, 2022,March 31, 2023, El Dorado has contributed approximately $12$14.6 million to the Energy Impact Partners fund. Additionally, El Dorado committed to a $25 million investment in AZ-VC (formally(formerly the invisionAZ Fund), which is a fund focused on analyzing, investing, managing and otherwise dealing with investments in privately held early stage and emerging growth technology companies and businesses primarily based in the State of Arizona, or based in other jurisdictions and having existing or potential strategic or economic ties to companies or other interests in the State of Arizona. As of September 30, 2022,March 31, 2023, El Dorado has contributed approximately $3$4.2 million to the AZ-VC (formally invisionAZ Fund).AZ-VC. The remainder of the investment will be contributed by El Dorado as investments are selected by AZ-VC.
Key Financial Drivers
In addition to the continuing impact of the matters described above, many factors influence our financial results and our future financial outlook, including those listed below. We closely monitor these factors to plan for the Company’s current needs, and to adjust our expectations, financial budgets and forecasts appropriately.
Electric Operating Revenues. For the years 20192020 through 2021,2022, retail electric revenues comprised approximately 94%92% of our total 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, distributed energy additions, electricity rates and tariffs, the recovery of PSA deferrals and the operation of other recovery mechanisms. These revenue transactions are affected by the availability of excess generation or other energy resources and wholesale market conditions, including competition, demand, and prices.
Actual and Projected Customer and Sales Growth. Retail customers in APS’s service territory increased 2.0% for the nine-monththree-month period ended September 30, 2022,March 31, 2023, compared with the prior-year period.For the three years through 2021,2022, APS’s customer growth averaged 2.2% per year.We currently project annual customer growth to be 1.5% to 2.5% for 2022,2023 and that the average annual growth willto be in the range of 1.5% to 2.5% through 20242025 based on anticipated steady population growth in Arizona during that period.
Retail electricity sales in kWh, adjusted to exclude the effects of weather variations, increased 2.7%3.6% for the nine-monththree-month period ended September 30, 2022,March 31, 2023, compared with the prior-year period.While steady customer growth was somewhat offset by energy savings driven by customer conservation, energy efficiency, and distributed renewable generation initiatives, the main drivers of positive sales for this period were continued strong sales to commercial and industrial customers and the ramp-up of new data center customers.Though the total expected impact of COVID-19 on future sales remains unknown, APS experienced higher electric residential sales and lower electric commercial and industrial sales from the outset of the pandemic through April 2021.Beginning in May 2021, electric sales to commercial and industrial customers increased to levels in line with pre-COVID sales and such sales levels have remained to date.
For the three years through 2021, annual retail electricity sales growth averaged 1.7%, adjusted to exclude the effects of weather variations. Due to the continued strength in commercial and industrial electricity sales, we are now projecting that annual retail electricity sales in kWh will increase in the range of 2.0% to 3.0% for 2022 (increased from our prior range of 1.5% to 2.5% for 2022), while we continue to expect average annual growth in the range of 3.5% to 4.5% through 2024, including the effects of customer conservation, energy efficiency and distributed renewable generation initiatives, but excluding the effects of weather variations. This projected sales growth range includes the impacts of new, large manufacturing facilities, which are expected to contribute to average annual growth in the range of 1.0% to 2.0% through 2024.This projected sales growth range also includes our estimated contributions of several large data centers, but not all, and we will continue to estimate contributions and evaluate sales guidance as these customers develop more usage history.These estimates could be further impacted by changes in the expected growth of the Arizona economy, slower than expected ramp-up of the new data centers, larger manufacturing facilities not coming to Arizona as expected, a change in the duration of remote work, changes in the expected commercial and industrial expansions, or acceleration of the expected effects of customer conservation, energy efficiency and distributed renewable generation initiatives.
Actual sales growth, excluding weather-related variations, may differ from our projections as a result of numerous factors, such as economic conditions, customer growth, usage patterns and energy conservation, slower ramp-up of and/or fewer data centers and large manufacturing facilities, slower than expected commercial and industrial expansions, impacts of energy efficiency programs, and growth in DG, and responses to retail price
changes. Based on past experience, a 1% variation in our annual residential and small commercial and industrial kWh sales projections under normal business conditions can result in increases or decreases in annual net income of approximately $20 million, and a 1% variation in our annual large commercial and industrial kWh sales projections under normal business conditions can result in increases or decreases in annual net income of approximately $5 million.
For the three years through 2022, annual retail electricity sales growth averaged 2.5%, adjusted to exclude the effects of weather variations.Due to the expected rapid growth of several large data centers and
new large manufacturing facilities, we currently project that annual retail electricity sales in kWh will increase in the range of 3.5% to 5.5% for 2023 and that average annual growth will be in the range of 4.5% to 6.5% through 2025, including the effects of customer conservation, energy efficiency, and distributed renewable generation initiatives, but excluding the effects of weather variations.This projected sales growth range includes the impacts of several large data centers and new large manufacturing facilities, which are expected to contribute to average annual growth in the range of 3.5% to 5.5% through 2025.
Longer term, APS has been preparing for and can serve significant load growth from residential and business customers. On top of these existing growth trends, APS is also now receiving unprecedented incremental requests for service from extra-large commercial energy users (over 25 MW) with very high energy demands that persist virtually around-the-clock. These incremental requests for service by extra-large energy users far exceed available generation and transmission resource capacity in the Southwest region for the foreseeable future. In April 2023, APS notified prospective extra-large customers without existing commitments from APS that it is not able to commit at this time to their future extra-large projects (over 25 MW) and that APS is exploring available options for securing sufficient electric generation and transmission to meet these projections of future customer needs.
Weather. In forecasting the retail sales growth numbers provided above, we assume normal weather patterns based on historical data. Historically, extreme weather variations have resulted in annual variations in net income in excess of $25 million. However, ourOur experience indicates that the more typical variations from normal weather can result in increases orand decreases in annual net income of up to $15 million.million; however, extreme weather variations have resulted in larger annual variations in net income.
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, changes in our generation resource allocation, 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 customer and sales growth, power plant operations, maintenance of utility plant (including generation, transmission, and distribution facilities), inflation, unplanned outages, planned outages (typically scheduled in the spring and fall), renewable energy and demand side managementDSM related expenses (which are offset by the same amount of operating revenues) and other factors.
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. See “Liquidity and Capital Resources” below for information regarding the planned additions to our facilities.
Pension and Other Postretirement Non-Service Credits, Net. Pension and other postretirement non-service credits can be impacted by changes in our actuarial assumptions.The most relevant actuarial assumptions are the discount rate used to measure our net periodic costs/credit, the expected long-term rate of return on plan assets used to estimate earnings on invested funds over the long-term, the mortality assumptions and the assumed healthcare cost trend rates.We review these assumptions on an annual basis and adjust them as necessary.
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 in Arizona for APS, which owns essentially all of our property, was 10.7%10.2% of the assessed
value for 2022, 10.7% for 2021 and 10.8% for 2020 and 10.9% for 2019. We expect property2020.Property taxes to decreasedecreased in 2022 due to recent legislative changes reducing both property tax assessment ratios and rates in Arizona.As we add new generating units and continue with improvements and expansions to our existing generation, transmission, and distribution facilities in future years, we anticipate property taxes may increase, though these increases will continue to be partially offset by the impacts of the recent legislative changes noted above.
Pension and other postretirement non-service credits - netIncome Taxes. PensionIncome taxes are affected by the amount of pretax book income, income tax rates, certain deductions, and other postretirement non-service credits cannon-taxable items, such as AFUDC. In addition, income taxes may also be impactedaffected by the settlement of issues with taxing authorities.On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted and was generally effective on January 1, 2018.Changes impacting the Company include a reduction in the corporate tax rate to 21%, revisions to the rules related to tax bonus depreciation, limitations on interest deductibility and an associated exception for certain public utilities, and requirements that certain excess deferred tax amounts of regulated utilities be normalized.See Note 4 for details of the impacts on the Company as of December 31, 2022.In APS’s 2017 Rate Case Decision, the ACC approved the TEAM, which was being used to pass through the income tax effects to retail customers of the Tax Act.As part of the 2019 Rate Case (defined above), all impacts of the Tax Act were removed from the TEAM and incorporated into APS’s base rates.The TEAM was retained to address potential changes in our actuarial assumptions. The most relevant actuarial assumptions aretax law that may be enacted prior to a decision in APS’s next rate case.See Note 3 for details of the discount rate used to measure our net periodic costs/credit, the expected long-term rate of return on plan assets used to estimate earnings on invested funds over the long-term, the mortality assumptions and the assumed healthcare cost trend rates. We review these assumptions on an annual basis and adjust them as necessary.TEAM.
Interest Expense. Interest expense is affected by the amount of debt outstanding and the interest rates on that debt (seedebt.See Note 3).3 for further details. The primary factors affecting borrowing levels are expected to be our capital expenditures, long-term debt maturities, equity issuances and internally generated cash flow. An allowance for borrowed funds used during construction offsets a portion of interest expense while capital projects are under construction. We stop accruing AFUDC on a project when it is placed in commercial operation.
Income Taxes. Income taxes are affected by the amount of pretax book income, income tax rates, certain deductions and non-taxable items, such as AFUDC. In addition, income taxes may also be affected by the settlement of issues with taxing authorities.
RESULTS OF OPERATIONS
Pinnacle West’s only reportable business segment is our regulated electricity segment, which consists of traditional regulated retail and wholesale electricity businesses (primarily sales supplied under traditional cost-based rate regulation) and related activities and includes electricity generation, transmission and distribution.
Operating Results — Three-month period ended September 30, 2022,March 31, 2023, compared with three-month period ended September 30, 2021.March 31, 2022.
Our consolidated net incomeloss attributable to common shareholders for the three months ended September 30, 2022,March 31, 2023, was $326$3 million, compared with consolidated net income attributable to common shareholders of $340$17 million for the prior-year period. The results reflect a decrease of approximately $13$19 million for the regulated electricity segment, which includeprimarily as a result of higher operations and maintenance expense, lower pension and other postretirement non-service credits, higher interest charges, and higher depreciation and amortization expense primarilymostly due to the absence of the Ocotillo modernization project and the Four Corners SCR project regulatory deferrals that ended upon the 2019 Rate Case effective date (see Note 4), increased plant assets and updated depreciation rates. In addition, the results reflect lower revenue driven by the Lost Fixed Cost Recovery (“LFCR”) alternative revenue treatment and higher operations and maintenance expense.assets. These negative factors were partially offset by higher revenue driven by the effects of weather, customer growth and usage, and lower income taxes.
The following table presents net incomeincome/(loss) attributable to common shareholders by business segment compared with the prior-year period:
| | | Three Months Ended
September 30, | | | Three Months Ended
March 31, | |
| | 2022 | | 2021 | | Net Change | | 2023 | | 2022 | | Net Change |
| | (dollars in millions) | | (dollars in millions) |
| Regulated Electricity Segment: | Regulated Electricity Segment: | | Regulated Electricity Segment: | |
| Operating revenues less fuel and purchased power expenses | Operating revenues less fuel and purchased power expenses | $ | 913 | | | $ | 882 | | | $ | 31 | | Operating revenues less fuel and purchased power expenses | $ | 550 | | | $ | 516 | | | $ | 34 | |
| Operations and maintenance | Operations and maintenance | (250) | | | (231) | | | (19) | | Operations and maintenance | (249) | | | (217) | | | (32) | |
| Depreciation and amortization | Depreciation and amortization | (191) | | | (164) | | | (27) | | Depreciation and amortization | (192) | | | (187) | | | (5) | |
| Taxes other than income taxes | Taxes other than income taxes | (53) | | | (58) | | | 5 | | Taxes other than income taxes | (57) | | | (58) | | | 1 | |
| Pension and other postretirement non-service credits - net | Pension and other postretirement non-service credits - net | 25 | | | 28 | | | (3) | | Pension and other postretirement non-service credits - net | 10 | | | 24 | | | (14) | |
| All other income and expenses, net | All other income and expenses, net | 4 | | | 19 | | | (15) | | All other income and expenses, net | 17 | | | 9 | | | 8 | |
| Interest charges, net of allowance for borrowed funds used during construction | Interest charges, net of allowance for borrowed funds used during construction | (63) | | | (59) | | | (4) | | Interest charges, net of allowance for borrowed funds used during construction | (75) | | | (61) | | | (14) | |
| Income taxes | Income taxes | (53) | | | (72) | | | 19 | | Income taxes | (1) | | | (4) | | | 3 | |
| Less income related to noncontrolling interests (Note 6) | Less income related to noncontrolling interests (Note 6) | (4) | | | (4) | | | — | | Less income related to noncontrolling interests (Note 6) | (4) | | | (4) | | | — | |
| Regulated electricity segment income | 328 | | | 341 | | | (13) | | |
| Regulated electricity segment income/(loss) | | Regulated electricity segment income/(loss) | (1) | | | 18 | | | (19) | |
| All other | All other | (2) | | | (1) | | | (1) | | All other | (2) | | | (1) | | | (1) | |
| Net Income Attributable to Common Shareholders | $ | 326 | | | $ | 340 | | | $ | (14) | | |
| Net Income/(Loss) Attributable to Common Shareholders | | Net Income/(Loss) Attributable to Common Shareholders | $ | (3) | | | $ | 17 | | | $ | (20) | |
Operating revenues less fuel and purchased power expenses. Regulated electricity segment operating revenues less fuel and purchased power expenses were $31$34 million higher for the three months ended September 30, 2022,March 31, 2023, compared with the prior-year period. The following table summarizes the major components of this change:
| | | Increase (Decrease) | | Increase (Decrease) |
| | Operating
revenues | | Fuel and
purchased
power expenses | | Net change | | Operating
revenues | | Fuel and
purchased
power expenses | | Net change |
| | (dollars in millions) | | (dollars in millions) |
| Lower refunds in the current year related to the Tax Act (Note 4) | $ | 51 | | | $ | — | | | $ | 51 | | |
| | Effects of weather | Effects of weather | 46 | | | 11 | | | 35 | | Effects of weather | $ | 18 | | | $ | 5 | | | $ | 13 | |
| Higher transmission revenues (Note 4) | 6 | | | — | | | 6 | | |
| Retail revenue due to customer growth and changes in customer usage patterns, partially offset by the impacts of energy efficiency and distributed generation | | Retail revenue due to customer growth and changes in customer usage patterns, partially offset by the impacts of energy efficiency and distributed generation | 17 | | | 7 | | | 10 | |
| Higher renewable energy regulatory surcharges, partially offset by operations and maintenance costs | Higher renewable energy regulatory surcharges, partially offset by operations and maintenance costs | 5 | | | 3 | | | 2 | | Higher renewable energy regulatory surcharges, partially offset by operations and maintenance costs | 7 | | | (1) | | | 8 | |
| LFCR revenue (Note 4) | | LFCR revenue (Note 4) | 3 | | | — | | | 3 | |
| Changes in net fuel and purchased power costs, including off-system sales margins and related deferrals | Changes in net fuel and purchased power costs, including off-system sales margins and related deferrals | 111 | | | 111 | | | — | | Changes in net fuel and purchased power costs, including off-system sales margins and related deferrals | 119 | | | 119 | | | — | |
| Retail revenue due to customer growth and changes in customer usage patterns, offset primarily by the impacts of energy efficiency and distributed generation | 4 | | | 4 | | | — | | |
| LFCR alternative revenue treatment (Note 4) | (15) | | | — | | | (15) | | |
| Impact of new retail base rates from 2019 ACC general rate case effective December 1, 2021 | (52) | | | — | | | (52) | | |
| | Miscellaneous items, net | Miscellaneous items, net | 4 | | | — | | | 4 | | Miscellaneous items, net | (1) | | | (1) | | | — | |
| Total | Total | $ | 160 | | | $ | 129 | | | $ | 31 | | Total | $ | 163 | | | $ | 129 | | | $ | 34 | |
Operations and maintenance. Operations and maintenance expenses increased $19$32 million for the three months ended September 30, 2022,March 31, 2023, compared with the prior-year period primarily because of:
•An increase of $12 million related to employee benefits;non-nuclear generation costs primarily due to higher operating costs;
•An increase of $2$10 million primarily related to costs for renewable energy and similar regulatory programs, which are partially offset in operating revenues and purchased power;
•An increase of $5 million related to information technology costs;
•An increase of $5 million related to nuclear generation costs;
•An increaseA decrease of $1$7 million primarily related to strategic planning consulting costs;employee benefits; and
•An increase of $4$7 million for corporate resources and other miscellaneous factors.
Depreciation and amortization. Depreciation and amortization expenses were $27$5 million higher for the three months ended September 30, 2022,March 31, 2023, compared to the prior-year period primarily due to $15 million for the Ocotillo modernization project and the Four Corners SCR project regulatory deferrals recorded in the prior year period that ended upon the 2019 Rate Case effective date and the related 2022 regulatory deferral amortization, and $12 million related to increased plant in service and updated depreciation rates.service.
Taxes other than income taxes. Taxes other than income taxes were $5 million lower for the three months ended September 30, 2022, compared with the prior-year period primarily due to the property tax deferrals that ended upon the 2019 Rate Case effective date and the related 2022 property tax deferral amortization.
Pension and other postretirement non-service credits, net. Pension and other postretirement non-service credits, net were $3$14 million lower for the three months ended September 30, 2022,March 31, 2023, compared to the prior-year period primarily due to the effect of higher discount rates and actual market returns being lower than estimated returns in 2021.2022.
Other income and expenses, net. Other income and expenses, net were $15$8 million lowerhigher for the three months ended September 30, 2022,March 31, 2023, compared to the prior-year period primarily due to the Ocotillo modernizationhigher allowance for equity funds used during construction due to increased capital expenditures and Four Corners SCR debt deferrals that ended upon the 2019 Rate Case effective date.higher interest income.
Interest charges, net of allowance for borrowed funds used during construction. Interest charges, net of allowance for borrowed funds used during construction were $4$14 million higher for the three months ended September 30, 2022,March 31, 2023, compared to the prior-year period primarily due to higher debt balances and higher interest rates in the current period, partially offset by higher allowance for borrowed funds due to increased capital expenditures.
Income taxes. Income taxes were $19$3 million lower for the three months ended September 30, 2022,March 31, 2023, compared with the prior-year period primarily due to lower pre-tax income and higher amortization of excess deferred taxes.
Operating Results — Nine-month period ended September 30, 2022, compared with nine-month period ended September 30, 2021.
Our consolidated net income attributable to common shareholders for the nine months ended September 30, 2022, was $508 million, compared with consolidated net income attributable to common shareholders of $591 million for the prior-year period. The results reflect a decrease of approximately $82 million for the regulated electricity segment, which include higher depreciation and amortization expense primarily due to the absence of the Ocotillo modernization project and the Four Corners SCR project regulatory deferrals that ended upon the 2019 Rate Case effective date (see Note 4), increased plant assets and updated depreciation rates. In addition, the results reflect lower revenue driven by the LFCR alternative revenue treatment and higher operations and maintenance expense. These negative factors were partially offset by higher revenue driven by the effects of weather, customer usage and growth, increased transmission revenue and lower income taxes.
The following table presents net income attributable to common shareholders by business segment compared with the prior-year period:
| | | | | | | | | | | | | | | | | |
| Nine Months Ended
September 30, | | |
| 2022 | | 2021 | | Net Change |
| (dollars in millions) |
| Regulated Electricity Segment: | | | | | |
| Operating revenues less fuel and purchased power expenses | $ | 2,137 | | | $ | 2,104 | | | $ | 33 | |
| Operations and maintenance | (712) | | | (689) | | | (23) | |
| Depreciation and amortization | (563) | | | (480) | | | (83) | |
| Taxes other than income taxes | (165) | | | (176) | | | 11 | |
| Pension and other postretirement non-service credits - net | 74 | | | 84 | | | (10) | |
| All other income and expenses, net | 25 | | | 51 | | | (26) | |
| Interest charges, net of allowance for borrowed funds used during construction | (187) | | | (173) | | | (14) | |
| Income taxes | (84) | | | (114) | | | 30 | |
| Less income related to noncontrolling interests (Note 6) | (13) | | | (13) | | | — | |
| Regulated electricity segment income | 512 | | | 594 | | | (82) | |
| All other | (4) | | | (3) | | | (1) | |
| Net Income Attributable to Common Shareholders | $ | 508 | | | $ | 591 | | | $ | (83) | |
Operating revenues less fuel and purchased power expenses. Regulated electricity segment operating revenues less fuel and purchased power expenses were $33 million higher for the nine months ended September 30, 2022, compared with the prior-year period. The following table summarizes the major components of this change: | | | | | | | | | | | | | | | | | |
| Increase (Decrease) |
| Operating
revenues | | Fuel and
purchased
power expenses | | Net change |
| (dollars in millions) |
| Lower refunds in the current year related to the Tax Act (Note 4) | $ | 120 | | | $ | — | | | $ | 120 | |
| Effects of weather | 38 | | | 9 | | | 29 | |
| Higher retail revenue due to customer growth and changes in customer usage patterns, partially offset by the impacts of energy efficiency and distributed generation | 38 | | | 20 | | | 18 | |
| Higher transmission revenues (Note 4) | 13 | | | — | | | 13 | |
| Higher renewable energy regulatory surcharges, partially offset by operations and maintenance costs | 16 | | | 6 | | | 10 | |
| Changes in net fuel and purchased power costs, including off-system sales margins and related deferrals | 245 | | | 243 | | | 2 | |
| LFCR alternative revenue treatment (Note 4) | (42) | | | — | | | (42) | |
| Impact of new retail base rates from 2019 ACC general rate case effective December 1, 2021 | (119) | | | — | | | (119) | |
| Miscellaneous items, net | 2 | | | — | | | 2 | |
| Total | $ | 311 | | | $ | 278 | | | $ | 33 | |
Operations and maintenance. Operations and maintenance expenses increased $23 million for the nine months ended September 30, 2022, compared with the prior-year period primarily because of:
•An increase of $14 million primarily related to a decreased recovery from contributions of administrative and general costs from Palo Verde owners and increased operating costs;
•An increase of $9 million primarily related to costs for renewable energy and similar regulatory programs, which are partially offset in operating revenues and purchased power;
•An increase of $6 million primarily related to strategic planning consulting costs;
•An increase of $4 million for costs related to transmission, distribution and customer service;
•A decrease of $19 million in non-nuclear generation costs primarily due to lower planned outages and lower operating costs; and
•An increase of $9 million for corporate resources and other miscellaneous factors.
Depreciation and amortization. Depreciation and amortization expenses were $83 million higher for the nine months ended September 30, 2022, compared to the prior-year period primarily due to $45 million for the Ocotillo modernization project and the Four Corners SCR project regulatory deferrals recorded in the prior year period that ended upon the 2019 Rate Case effective date and the related 2022 regulatory deferral amortization, and $38 million related to increased plant in service and updated depreciation rates.
Taxes other than income taxes. Taxes other than income taxes were $11 million lower for the nine months ended September 30, 2022, compared with the prior-year period primarily due to the impacts of recent legislative changes reducing both property tax assessment ratios and rates in Arizona and property tax deferrals that ended upon the 2019 Rate Case effective date and the related 2022 property tax deferral amortization.
Pension and other postretirement non-service credits, net. Pension and other postretirement non-service credits, net were $10 million lower for the nine months ended September 30, 2022, compared to the prior-year period primarily due to actual market returns being lower than estimated returns in 2021.
Other income and expenses, net. Other income and expenses, net were $26 million lower for the nine months ended September 30, 2022, compared to the prior-year period primarily due to the Ocotillo modernization and Four Corners SCR debt deferrals that ended upon the 2019 Rate Case effective date.
Interest charges, net of allowance for borrowed funds used during construction. Interest charges, net of allowance for borrowed funds used during construction were $14 million higher for the nine months ended September 30, 2022, compared to the prior-year period primarily due to higher debt balances and higher interest rates in the current period, partially offset by higher allowance for borrowed funds due to increased capital expenditures.
Income taxes. Income taxes were $30 million lower for the nine months ended September 30, 2022, compared with the prior-year period primarily due to lower pre-tax income and higher income tax benefits associated with the amortization of excess deferred taxes which are expected to reverse by year end, partially offset by the net operating loss carryback benefit that the Company recognized during the first quarter of 2021.income.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Pinnacle West’s primary cash needs are for dividends to our shareholders and principal and interest payments on our indebtedness. The level of our common stock dividends and future dividend growth will be dependent on declaration by our Board of Directors and based on a number of factors, including our financial condition, payout ratio, free cash flow and other factors.
Our primary sources of cash are dividends from APS and external debt and equity issuances. An ACC order requires APS to maintain a common equity ratio of at least 40%. As defined in the related ACC order,
the common equity ratio is defined as 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, 2022,March 31, 2023, APS’s common equity ratio, as defined, was 52%50%. Its total shareholder equity was approximately $7.1 billion and total capitalization was approximately $13.7$14.1 billion. Under this order, APS would be prohibited from paying dividends if such payment would reduce its total shareholder equity below approximately $5.5$5.6 billion, assuming APS’s total capitalization remains the same. This restriction does not materially affect Pinnacle West’s ability to meet its ongoing cash needs or ability to pay dividends to shareholders.
APS’s 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, external debt financing and equity infusions from Pinnacle West.
Summary of Cash Flows
The following tables present net cash provided by (used for) operating, investing and financing activities (dollars in millions):
Pinnacle West Consolidated
| | | | Nine Months Ended
September 30, | | Net | | Three Months Ended
March 31, | | Net |
| | | 2022 | | 2021 | | Change | | 2023 | | 2022 | | Change |
| Net cash flow provided by operating activities | Net cash flow provided by operating activities | $ | 1,032 | | | $ | 661 | | | $ | 371 | | Net cash flow provided by operating activities | $ | 211 | | | $ | 340 | | | $ | (129) | |
| Net cash flow used for investing activities | Net cash flow used for investing activities | (1,222) | | | (962) | | | (260) | | Net cash flow used for investing activities | (453) | | | (374) | | | (79) | |
| Net cash flow provided by financing activities | Net cash flow provided by financing activities | 187 | | | 267 | | | (80) | | Net cash flow provided by financing activities | 244 | | | 38 | | | 206 | |
| Net change in cash and cash equivalents | Net change in cash and cash equivalents | $ | (3) | | | $ | (34) | | | $ | 31 | | Net change in cash and cash equivalents | $ | 2 | | | $ | 4 | | | $ | (2) | |
Arizona Public Service Company
| | | | Nine Months Ended
September 30, | | Net | | Three Months Ended
March 31, | | Net |
| | | 2022 | | 2021 | | Change | | 2023 | | 2022 | | Change |
| Net cash flow provided by operating activities | Net cash flow provided by operating activities | $ | 1,040 | | | $ | 651 | | | $ | 389 | | Net cash flow provided by operating activities | $ | 240 | | | $ | 341 | | | $ | (101) | |
| Net cash flow used for investing activities | Net cash flow used for investing activities | (1,188) | | | (970) | | | (218) | | Net cash flow used for investing activities | (427) | | | (363) | | | (64) | |
| Net cash flow provided by financing activities | Net cash flow provided by financing activities | 144 | | | 281 | | | (137) | | Net cash flow provided by financing activities | 190 | | | 25 | | | 165 | |
| Net change in cash and cash equivalents | Net change in cash and cash equivalents | $ | (4) | | | $ | (38) | | | $ | 34 | | Net change in cash and cash equivalents | $ | 3 | | | $ | 3 | | | $ | — | |
Operating Cash Flows
Nine-monthThree-month period ended September 30, 2022,March 31, 2023, compared with nine-monththree-month period ended September 30, 2021.March 31, 2022. Pinnacle West’s consolidated net cash provided by operating activities was $1,032$211 million in 2023, compared to $340 million in 2022, compared to $661 million in 2021, an increasea decrease of $371$129 million in net cash provided by operating activities primarily due to $211$221 million higher fuel and purchased power costs, $103 million higher payments for operations and maintenance costs and $7 million higher interest payments, partially offset by $119 million higher cash receipts from electric revenues, $103$53 million lower paymentshigher customer advances for operationsconstruction and maintenance costs, $100 million lower pension contributions, $70$33 million other changes in working capital, $14 million higher cash collateral posted in 2022, $9 million lower other taxes, partially offset by $118 million higher fuel and purchased power costs and $12 million higher interest payments.capital.
Retirement plans and other postretirement benefits. Pinnacle West sponsors a qualified defined benefit pension plan and a non-qualified supplemental excess benefit retirement plan for the employees of Pinnacle West and our subsidiaries. Pinnacle West also sponsors other postretirement benefit plans for the
employees of Pinnacle West and its subsidiaries. The requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”) require us to contribute a minimum amount to the qualified plan. We contribute at least the minimum amount required under ERISA 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 benefit obligations. Under ERISA, the qualified pension plan was 138%112% funded as of January 1, 2022,2023, and 131%139% as of January 1, 2021.22. Future year contribution amounts are dependent on plan asset performance and plan actuarial assumptions. We have not made any voluntary contributions to our pension plan year-to-date in 2022.2023. The minimum required contributions for the pension plan are zero for the next three years and we do not expect to make any voluntary contributions in 2022, 2023, 2024 or 2024.2025. With regard to contributions to our other postretirement benefit plan, we have not made a contribution year-to-date in 20222023 and do not expect to make any contributions in 2022, 2023, 2024 or 2024. In 2022 and 2021, the Company has been reimbursed $26 million and $24 million, respectively, for prior years retiree medical claims from the other postretirement benefit plan trust assets.2025. We continually monitor financial
market volatility and its impact on our retirement plans and other postretirement benefits, but we believe our liability driven investment strategy helps to minimize the impact of market volatility on our plan’s funded status. For instance, our pension plan’s funded status, as measured for accounting principles generally accepted in the United States of America (“GAAP”) purposes, is still above 107%was 106% funded as of December 31, 2021,2022, and our postretirement benefit plans have awere 159% funded, status, also as measured for GAAP purposes at December 31, 2021, in excess of 145%.2022. See Note 5 for additional details.
The CARES Act allowed employers to defer payments of the employer share of Social Security payroll taxes that would have otherwise been owed from March 27, 2020, through December 31, 2020.We deferred the cash payment of the employer’s portion of Social Security payroll taxes for the period July 1, 2020, through December 31, 2020, thatwhich was approximately $18 million. We As of December 31, 2022, we have paid approximately $9 million on December 28, 2021, and will pay the second half of this cash deferral by December 31, 2022.in full.
Investing Cash Flows
Nine-monthThree-month period ended September 30, 2022,March 31, 2023, compared with nine-monththree-month period ended September 30, 2021.March 31, 2022. Pinnacle West’s consolidated net cash used for investing activities was $1,222$453 million in 2023, compared to $374 million in 2022, compared to $962 million in 2021, an increase of $260$79 million primarily related to increased capital expenditures and BCE investment activity.expenditures.
Capital Expenditures. The following table summarizes the estimated capital expenditures for the next three years:
Capital Expenditures
(dollars in millions)
| | | | 2022 | | 2023 | | 2024 | | 2023 | | 2024 | | 2025 |
| APS | APS | | | | | | APS | | | | | |
| Generation: | Generation: | | Generation: | |
| Clean: | Clean: | | Clean: | |
| Nuclear Generation | Nuclear Generation | $ | 110 | | | $ | 120 | | | $ | 110 | | Nuclear Generation | $ | 120 | | | $ | 120 | | | $ | 120 | |
| Renewables and Energy Storage Systems (“ESS”) (a) | Renewables and Energy Storage Systems (“ESS”) (a) | 240 | | | 210 | | | 450 | | Renewables and Energy Storage Systems (“ESS”) (a) | 240 | | | 345 | | | 400 | |
| | Other Generation (b) | Other Generation (b) | 240 | | | 270 | | | 190 | | Other Generation (b) | 265 | | | 245 | | | 245 | |
| Distribution | Distribution | 560 | | | 530 | | | 500 | | Distribution | 520 | | | 530 | | | 530 | |
| Transmission | Transmission | 210 | | | 210 | | | 210 | | Transmission | 260 | | | 300 | | | 300 | |
| Other (c) | Other (c) | 165 | | | 185 | | | 190 | | Other (c) | 265 | | | 260 | | | 255 | |
| Total APS | Total APS | $ | 1,525 | | | $ | 1,525 | | | $ | 1,650 | | Total APS | $ | 1,670 | | | $ | 1,800 | | | $ | 1,850 | |
(a)APS Solar Communities program, energy storage, renewable projects, and other clean energy projects.
(b)Includes generation environmental projects.
(c)Primarily information systems and facilities projects.
The table above does not include capital expenditures related to BCE projects.
Generation capital expenditures are comprised of various additions and improvements to APS’s
clean resources, including nuclear plants, renewables and ESS. Generation capital expenditures also include improvements to existing fossil plants. Examples of the types of projects included in the forecast of generation capital expenditures are additions of renewables and energy storage, and upgrades and capital replacements of
various nuclear and fossil power plant equipment, such as turbines, boilers, and environmental equipment. We are monitoring the status of environmental matters, which, depending on their final outcome, could require modification to our planned environmental expenditures.
Distribution and transmission capital expenditures are comprised of infrastructure additions and upgrades, capital replacements, and new customer construction. Examples of the types of projects included in the forecast include power lines, substations, and line extensions to new residential and commercial developments.
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.
Financing Cash Flows and Liquidity
Nine-monthThree-month period ended September 30, 2022,March 31, 2023, compared with nine-monththree-month period ended September 30, 2021.March 31, 2022. Pinnacle West’s consolidated net cash provided by financing activities was $187$244 million in 2023, compared to $38 million in 2022, compared to $267 million in 2021, a decreasean increase of $80$206 million in net cash provided by financing activities primarily due to $150 million higherlower long-term debt repayments and $142a net increase in short-term borrowings of $186 million, partially offset by $127 million in lower issuances of long-term debt, partially offset by a net increase in short-term borrowing of $219 million.debt.
APS’s consolidated net cash provided by financing activities was $144$190 million in 2023, compared to $25 million in 2022, compared to $281 million in 2021, a decreasean increase of $137$165 million in net cash provided by financing activities primarily due to $319 million in lower issuances of long-term debt, partially offset by an equity infusion of $150 million in 2022 and a net increase in short-term borrowing of $39 million.borrowings.
Significant Financing Activities. On October 20, 2022,April 19, 2023, the Pinnacle West Board of Directors declared a dividend of $0.865 per share of common stock, payable on DecemberJune 1, 2022,2023, to shareholders of record on NovemberMay 1, 2022. This represents an increase in the indicated annual dividend from $3.40 per share to $3.46 per share.2023.
Available Credit Facilities. Pinnacle West and APS maintain committed revolving credit facilities in order to enhance liquidity and provide credit support for their commercial paper programs, to finance indebtedness, and other general corporate purposes. See Note 3 for more information on available credit facilities.
Other Financing Matters. See Note 7 for information related to the change in our margin and collateral accounts.
Debt Provisions
Pinnacle West’s and APS’s debt covenants related to their respective bank financing arrangements include maximum debt to capitalization ratios. Pinnacle West and APS comply with these covenants. 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, 2022,March 31, 2023, the ratio was approximately 56%59% for Pinnacle West and 49%51% for APS. Failure to comply with such covenant levels would result in an event of default which, generally
speaking, would require the immediate repayment of the debt subject to the covenants and could “cross-default” other debt. See further discussion of “cross-default” provisions below.
Neither Pinnacle West’s nor APS’s financing agreements contain “rating triggers” that would result in an acceleration of the required interest and principal payments in the event of a rating downgrade. However,
our bank credit agreements contain a pricing grid in which the interest rates we pay for borrowings thereunder are determined by our current credit ratings.
All of Pinnacle West’s loan agreements contain “cross-default” provisions that would result in defaults and the potential acceleration of payment under these loan agreements if Pinnacle West or APS were to default under certain other material agreements. All of APS’s bank agreements contain “cross-default” provisions that would result in defaults and the potential acceleration of payment under these bank agreements if APS were to default under certain other material agreements. Pinnacle West and APS do not have a material adverse change restriction for credit facility borrowings.
On December 17, 2020, the ACC issued a financing order that, subject to specified parameters and procedures, increased APS’s long-term debt limit, from $5.9 billion to $7.5 billion, and authorized APS’s short-term debt authorization equal to the sum of (i) 7% of APS’s capitalization, and (ii) $500 million (which is required to be used for costs relating to purchases of natural gas and power). On December 15, 2022, the ACC issued a financing order approving APS’s application filed April 6, 2022 APS filed an application with the ACCrequesting to further increase the long-term debt limit under the terms required by APS from $7.5 billion to $8.0 billion (subject to appropriate regulatory treatment of PPA lease agreements) and to continue its authorization of short-term debt granted in the 2020 financing order. On October 31, 2022, the ACC Staff filed a report agreeing with APS’s proposal to exclude financing lease PPAs from the definition of long-term debt and adopting APS’s primary proposal to increase APS’s long-term debt limit to $8 billion. This application is pending review byfor purposes of the ACC’s Hearing Division and a final decision by the full Commission. APS cannot predict the outcome of this matter.ACC financing orders. See Note 3 for further discussions of liquidity matters.
Credit Ratings
The ratings of securities of Pinnacle West and APS as of October 28, 2022,April 27, 2023, are shown below. We are disclosing these credit ratings to enhance understanding of our cost of short-term and long-term capital and our ability to access the markets for liquidity and long-term debt. 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. The ratings may be revised or withdrawn entirely by the rating agencies if, in their respective judgments, circumstances so warrant. Any downward revision or withdrawal may adversely affect the market price of Pinnacle West’s or APS’s securities and/or result in an increase in the cost of, or limit access to, capital. Such revisions may also result in 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 available liquidity resources to respond to a potential downward revision to our credit ratings.
| | | | | | | | | | | | | | | | | |
| | Moody’s | | Standard & Poor’s | | Fitch |
| Pinnacle West | | | | | |
| Corporate credit rating | Baa1 | | BBB+ | | BBB+ |
| Senior unsecured | Baa1 | | BBB | | BBB+ |
| Commercial paper | P-2 | | A-2 | | F2 |
| Outlook | Negative | | Negative | | Negative |
| | | | | | |
| APS | | | | | |
| Corporate credit rating | A3 | | BBB+ | | BBB+ |
| Senior unsecured | A3 | | BBB+ | | A- |
| Commercial paper | P-2 | | A-2 | | F2 |
| Outlook | Negative | | Negative | | Negative |
Contractual Obligations
Pinnacle West has contractual obligations and other commitments that will need to be funded in the future, in addition to its capital expenditure programs. Material contractual obligations and other commitments are as follows:
•Pinnacle West and APS have material long-term debt obligations that mature at various dates through 2050 and bear interest principally at fixed rates. Interest on variable-rate long-term debt is determined by using average rates at September 30, 2022.March 31, 2023. See Note 3.
•Pinnacle West and APS maintain committed revolving credit facilities. See Note 3 for short-term debt details.
•Fuel and purchased power commitments include purchases of coal, electricity, natural gas, renewable energy, nuclear fuel, and natural gas transportation. See Notes 4 and 8. Purchase obligations includes capital expenditures and other obligations. Commitments related to purchased power lease contracts are also considered fuel and purchased power commitments. See Note 8.
•APS holds certain contracts to purchase renewable energy credits in compliance with the RES. See Notes 4 and 8.
•APS is required to make payments to the noncontrolling interests related to the Palo Verde sale leaseback through 2033. See Note 6.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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 and estimates since our 20212022 Form 10-K. See “Critical Accounting Policies” in Item 7 of the 20212022 Form 10-K for further details about our critical accounting policies and estimates.
MARKET AND CREDIT RISKS
Market Risks
Our operations include managing market risks related to changes in interest rates, commodity prices, investments held by our nuclear decommissioning trusts, other special use funds and benefit plan assets.
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 trusts, other special use funds (see Notes 11 and 12), and benefit plan assets. The nuclear decommissioning trusts, other special use funds and benefit plan assets also have risks associated with the changing market value of their equity and other non-fixed income investments. Nuclear decommissioning and benefit plan 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 may qualify as derivatives, including futures, forwards, options and swaps. As part of our risk management program, we use such instruments to hedge purchases and sales of electricity and natural gas. The changes in market value of such contracts have a high correlation to price changes in the hedged commodities.
The following table shows the net pretax changes in mark-to-market of APS’sour energy derivative positions (dollars in millions):
| | | | Nine Months Ended
September 30, | | Three Months Ended
March 31, |
| | | 2022 | | 2021 | | 2023 | | 2022 |
| Mark-to-market of net positions at beginning of period | Mark-to-market of net positions at beginning of period | $ | 107 | | | $ | (13) | | Mark-to-market of net positions at beginning of period | $ | 96 | | | $ | 107 | |
| Increase in regulatory liability | 152 | | | 208 | | |
| Increase (decrease) in regulatory liability | | Increase (decrease) in regulatory liability | (155) | | | 190 | |
| | Mark-to-market of net positions at end of period | Mark-to-market of net positions at end of period | $ | 259 | | | $ | 195 | | Mark-to-market of net positions at end of period | $ | (59) | | | $ | 297 | |
APS had no activities or amounts recognized in OCI during the nine months ended September 30, 2022 and 2021.
The table below shows the fair value of maturities of APS’sour energy derivative contracts (dollars in millions) at September 30, 2022,March 31, 2023, by maturities and by the type of valuation that is performed to calculate the fair values, classified in their entirety based on the lowest level of input that is significant to the fair value measurement. See Note 1, “Derivative Accounting” and “Fair Value Measurements” in Item 8 of our 20212022 Form 10-K and Note 11 for more discussion of our valuation methods.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| Source of Fair Value | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Total
Fair
Value |
| Observable prices provided by other external sources | | $ | 48 | | | $ | 146 | | | $ | 55 | | | $ | — | | | $ | — | | | $ | 249 | |
| Prices based on unobservable inputs | | (1) | | | 8 | | | 3 | | | — | | | — | | | 10 | |
| Total by maturity | | $ | 47 | | | $ | 154 | | | $ | 58 | | | $ | — | | | $ | — | | | $ | 259 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| Source of Fair Value | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Total
Fair
Value |
| Observable prices provided by other external sources | | $ | (61) | | | $ | (3) | | | $ | (2) | | | $ | — | | | $ | — | | | $ | (66) | |
| Prices based on unobservable inputs | | (4) | | | 11 | | | — | | | — | | | — | | | 7 | |
| Total by maturity | | $ | (65) | | | $ | 8 | | | $ | (2) | | | $ | — | | | $ | — | | | $ | (59) | |
The table below shows the impact that hypothetical price movements of 10% would have on the market value of our risk management assets and liabilities included on Pinnacle West’s Condensed Consolidated Balance Sheets (dollars in millions):
| | | | September 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
| | | Gain (Loss) | | Gain (Loss) | | Gain (Loss) | | Gain (Loss) |
| | | Price Up 10% | | Price Down 10% | | Price Up 10% | | Price Down 10% | | Price Up 10% | | Price Down 10% | | Price Up 10% | | Price Down 10% |
| Mark-to-market changes reported in: | Mark-to-market changes reported in: | | | | | | | | Mark-to-market changes reported in: | | | | | | | |
| Regulatory asset (liability) (a) | Regulatory asset (liability) (a) | | | | | | | | Regulatory asset (liability) (a) | | | | | | | |
| Electricity | Electricity | $ | 6 | | | $ | (6) | | | $ | — | | | $ | — | | Electricity | $ | 14 | | | $ | (14) | | | $ | 12 | | | $ | (12) | |
| Natural gas | Natural gas | 62 | | | (62) | | | 50 | | | (50) | | Natural gas | 47 | | | (47) | | | 55 | | | (55) | |
| Total | Total | $ | 68 | | | $ | (68) | | | $ | 50 | | | $ | (50) | | Total | $ | 61 | | | $ | (61) | | | $ | 67 | | | $ | (67) | |
(a)These contracts are economic 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 7 for a discussion of our credit valuation adjustment policy.
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 SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to a company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Pinnacle West’s management, with the participation of Pinnacle West’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of Pinnacle West’s disclosure controls and procedures as of September 30, 2022.March 31, 2023. Based on that evaluation, Pinnacle West’s Chief Executive Officer and Chief Financial Officer have concluded that, as of that date, Pinnacle West’s disclosure controls and procedures were effective.
APS’s management, with the participation of APS’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of APS’s disclosure controls and procedures as of September 30, 2022.March 31, 2023. Based on that evaluation, APS’s Chief Executive Officer and Chief Financial Officer have concluded that, as of that date, APS’s 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 West’s or APS’s internal control over financial reporting occurred during the fiscal quarter ended September 30, 2022,March 31, 2023, that materially affected, or is reasonably likely to materially affect, Pinnacle West’s or APS’s internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See “Business of Arizona Public Service Company — Environmental Matters” in Item 1 of the 20212022 Form 10-K with regard to pending or threatened litigation and other matters.
See Note 4 for ACC and FERC-related matters.
See Note 8 for information regarding environmental matters, Superfund-related matters and other disputes.
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 20212022 Form 10-K and Part II, Item 1A — Risk Factors in the 2022 1st Quarter 10-Q,, which could materially affect the business, financial condition, cash flows or future results of Pinnacle West and APS. The risks described in the 20212022 Form 10-K and 2022 1st Quarter 10-Q 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.
The risk factor below is an update to our 2021 Form 10-K.
Item 5. OTHER INFORMATION
APS’s ability to conduct its business operations and avoid negative operational and financial impacts depends in part upon compliance with federal, state and local laws, judicial decisions, statutes, regulations and ACC requirements, which may be revised from time to time by legislative or other action, and obtaining and maintaining certain regulatory permits, approvals, and certificates.Union Matters
Approximately, 1,100 APS must complyemployees are union employees represented by the International Brotherhood of Electrical Workers (“IBEW”). The collective bargaining agreement expired on April 1, 2023, and APS and IBEW have engaged the services of a federal mediator to help facilitate ongoing negotiations. APS and IBEW remain committed to continue bargaining in good faith, with all applicable statutes, regulations, rules, tariffs, and orders of agencies that regulate APS’s business, including FERC, NRC, EPA, the ACC, and state and local governmental agencies. These agencies regulate many aspects of APS’s utility operations, including safety and performance, emissions, siting and construction of facilities, customer service and the rates that APS can charge retailcurrent contract remains in full force and wholesale customers. Failure to comply can subject APS to, among other things, fines and penalties. For example, under the Energy Policy Act of 2005, FERC can impose penalties (approximately $1.2 million per day per violation) for failure to comply with mandatory electric reliability standards. APS is also required to have numerous permits, approvals and certificates from these agencies. APS believes the necessary permits, approvals and certificates have been obtained for its existing operations and that APS’s business is conducted in accordance with applicable laws in all material respects.effect while negotiations continue.
Environmental Matters
Changes in lawsEPA Revised Effluent Limitation Guideline Proposal. With respect to the management of bottom-ash transport wastewater at Four Corners, on March 8, 2023 EPA issued a revised proposal for effluent limitation guidelines governing power plant wastewater. For discharges of bottom-ash transport wastewater, EPA has proposed a more stringent “zero-liquid discharge” standard. We cannot at this time predict the outcome of this regulatory proceeding or regulations that govern APS, new interpretations of law and regulations, orwhen the imposition of new or revised laws or regulations could have an adverse impactEPA will take final action on this proposal. Depending on the manner ineventual outcome, the costs associated with APS’s management of bottom-ash transport wastewater could materially increase, which we operate our business and ourcould affect APS’s financial position, results of operations. In particular, newoperations, or revised laws or interpretationscash flows.
Revised Mercury and Air Toxics Standard (“MATS”) Proposal.On April 5, 2023, EPA proposed revisions to the existing MATS regulations governing emissions of toxic air pollution from existing laws or regulations may impact or call into questioncoal-fired power plants.If finalized, the ACC’s permissive regulatory authority, which may result in uncertainty asproposal would make the limits used to jurisdictional authoritydemonstrate compliance with MATS, filterable particulate matter, significantly more stringent (potentially by an order of magnitude) and require the use of continuous emissions monitoring systems to ensure compliance (as opposed to periodic performance testing).Regulations would take effect for existing coal-fired power plants within our state, and uncertainty as to whether ACC decisions will be binding or challenged by other agencies or bodies asserting jurisdiction. In November 2021, the Arizona Court of Appeals issued an opinion that called into question the ACC-approved limitation of liability provision found in the APS Service Schedules. APS sought reviewthree years of the decisionproposal becoming final. We cannot at the Arizona Supreme Court, which was denied, however the Supreme Court depublished portions of the Court of Appeals’ decision.APS intends to seek revised tariff language to mitigate potential adverse impacts on APS’s future, potential litigation exposure which may result from this court decision. We are unable totime predict the impactoutcome of this regulatory proceeding or when the EPA will take final action on our business and operating results from any pending or future regulatory or legislative rulemaking.this proposal. Depending on the eventual outcome, the costs associated with APS’s
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS
(a) Exhibits
| | | | | | | | | | | | | | |
| Exhibit No. | | Registrant(s) | | Description |
| | | | |
| | | | |
| 31.1 | | Pinnacle West | | |
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| 31.2 | | Pinnacle West | | |
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| 31.3 | | APS | | |
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| 31.4 | | APS | | |
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| 32.1* | | Pinnacle West | | |
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| 32.2* | | APS | | |
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| 101.INS | | Pinnacle West APS | | XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. |
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| 101.SCH | | Pinnacle West APS | | XBRL Taxonomy Extension Schema Document |
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| 101.CAL | | Pinnacle West APS | | XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.LAB | | Pinnacle West APS | | XBRL Taxonomy Extension Label Linkbase Document |
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| 101.PRE | | Pinnacle West APS | | XBRL Taxonomy Extension Presentation Linkbase Document |
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| 101.DEF | | Pinnacle West APS | | XBRL Taxonomy Definition Linkbase Document |
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| 104 | | Pinnacle West APS | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
*Furnished herewith as an Exhibit.
In addition, Pinnacle West and APS hereby incorporate 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 No. | | Registrant(s) | | Description | | Previously Filed as Exhibit(1) | | Date Filed |
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| 3.1 | | | Pinnacle West | | | | 3.1 to Pinnacle West/APS February 25, 2020 Form 8-K Report, File Nos. 1-8962 and 1-4473 | | 2/25/2020 |
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| 3.2 | | | Pinnacle West | | | | 3.1 to Pinnacle West/APS June 30, 2008 Form 10-Q Report, File Nos. 1-8962 and 1-4473 | | 8/7/2008 |
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| 3.3 | | | APS | | Articles of Incorporation, restated as of May 25, 1988 | | 4.2 to APS’s Form S-3 Registration Nos. 33-33910 and 33-55248 by means of September 24, 1993 Form 8-K Report, File No. 1-4473 | | 9/29/1993 |
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| 3.4 | | | APS | | | | 3.1 to Pinnacle West/APS May 22, 2012 Form 8-K Report, File Nos. 1-8962 and 1-4473 | | 5/22/2012 |
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| 3.5 | | | APS | | | | 3.4 to Pinnacle West/APS December 31, 2008 Form 10-K Report, File Nos. 1-8962 and 1-4473 | | 2/20/2009 |
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| 10.1 | | | Pinnacle West | | | | 10.1 to Pinnacle West/APS April 10, 2023 Form 8-K Report, File Nos. 1-8962 and 1-4473 | | 4/10/2023 |
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| 10.2 | | | Pinnacle West APS | | | | 10.2 to Pinnacle West/APS April 10, 2023 Form 8-K Report, File Nos. 1-8962 and 1-4473 | | 4/10/2023 |
(1) 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.
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: | November 3, 2022May 4, 2023 | | By: | /s/ Andrew Cooper |
| | | | Andrew Cooper |
| | | | Senior 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: | November 3, 2022May 4, 2023 | | By: | /s/ Andrew Cooper |
| | | | Andrew Cooper |
| | | | Senior Vice President and |
| | | | Chief Financial Officer |
| | | | (Principal Financial Officer and |
| | | | Officer Duly Authorized to sign this Report) |