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Table of contents

  • Page 1
    Pinnacle West Capital Corporation 2010 ANNUAL REPORT

  • Page 2

  • Page 3
    ...Arizona Pinnacle West Capital Corporation, an energy holding company based in Phoenix, has 6,700 employees in Arizona and New Mexico, consolidated assets of about $12.4 billion and 6,300 megawatts of generating capacity. Through its principal subsidiary, Arizona Public Service, the company provides...

  • Page 4
    ... utilities must make the investments necessary to meet these challenges while being mindful of the impact on customers during the current climate of economic uncertainty. We have positioned Pinnacle West and our principal operating subsidiary, Arizona Public Service (APS), to manage these changes...

  • Page 5
    AR10 "Our position benefits from the continued long-term growth potential of the APS service territory." DONALD E. BRANDT Chairman, President and Chief Executive Officer

  • Page 6
    ... with a pilot home energy information program studying the most effective ways to empower customers to manage their electricity usage. Power generation. Palo Verde Nuclear Generating Station ranked first in the nation for power production in 2010. Our ï¬,eet of fossil-fueled power plants once again...

  • Page 7
    ... 2010 with five cities in the Phoenix metropolitan area to secure the cooling water essential to power production for the next 40 years, and completed the installation of new reactor vessel heads for Units 1 and 3. INVESTING IN A SUSTAINABLE ENERGY FUTURE Through our AZ Sun program, we will invest...

  • Page 8
    ... power supply for APS customers, these lines will open up large areas of the state for new renewable energy projects. CULTIVATING ARIZONA'S IMPROVING REGULATORY CLIMATE In my letter to you in our 2009 annual report, I discussed the ACC's approval of a comprehensive settlement of our last rate case...

  • Page 9
    ...three percent, and kept operations and maintenance spending essentially ï¬,at for the second year in a row. Our concentration on cost management will continue as we remain committed to improving our earned return on equity. LOOKING TO THE FUTURE Although 125 years of service stands as an impressive...

  • Page 10
    ... and technologies to provide our customers an energy future that is reliable, cleaner and more efficient. We also are developing new programs and tools to help our customers manage their energy use and save money. $ At APS, we support diversity within our company and throughout Arizona. One way is...

  • Page 11
    Employees like APS Troubleman Brian Wheeler are driving productivity improvements each year. Employee Productivity Improvement APS Customers Served per Employee 242 199 131 1990 2000 2010 average annual APS residential price increase over the last 20 years - well below the rate of inflation 1% ...

  • Page 12
    ... company to meet 10 percent of our customers' electricity needs with renewable energy by 2015. 15 Pinnacle West is the top-ranked utility in Corporate Responsibility Magazine's list of 100 Best Corporate Citizens and ranks 15th overall. 60% More than 60 percent of the water APS uses during power...

  • Page 13
    ... the next five years, APS plans to spend $800 million on programs to help our customers use electricity more efficiently. This investment is expected to reduce the company's energy demand by about 2.7 million megawatt hours- the equivalent energy needed to power 200,000 Arizona homes for a year. In...

  • Page 14
    ... the number of customers impacted by each outage. 19.5% Pinnacle West's total return to shareholders in 2010 reached 19.5 percent, outperforming U.S. electric utilities (4.4 percent) and the broad stock market (15 percent) as measured by the S&P 500 index. 31.2M The Palo Verde Nuclear Generating...

  • Page 15
    ... 2010 J.D. Power Residential Customer Survey Ratings (large rge segment, investor-owned utilities) RATING 700 APS 675 650 625 600 INDUSTRY AVERAGE 575 550 525 500 APS Electric Reliability Average Electric Outages per APS Customer 600,000 smart meters installed on APS customer homes...

  • Page 16
    ... (67) 2010 Director, Health Care Delivery and Policy Program, Arizona State University; Emeritus President & Chief Executive Officer, Mayo Clinic Committees: Audit; Nuclear & Operating Humberto S. Lopez (65) 1995 President, HSL Properties, Inc. Committees: Audit; Human Resources Susan Clark-Johnson...

  • Page 17
    ...) 1992 President Emeritus, Thunderbird School of Global Management Committees: Corporate Governance; Finance; Human Resources, Chairman Pamela Grant (72) 1980 Civic Leader Committees: Audit; Human Resources The year shown indicates when the Director first joined the Board of a Pinnacle West company...

  • Page 18
    ...2010 Vice President & Treasurer ARIZONA PUBLIC SERVICE James R. Hatfield Senior Vice President & Chief Financial Officer Dwight C. Mims (61) 2007 Senior Vice President, Regulatory & Oversight, Palo Verde Nuclear Generating Station Mark A. Schiavoni (55) 2009 Senior Vice President, Fossil Operations...

  • Page 19
    PINNACLE WEST HIGHLIGHTS AR10 (Dollars and Shares in Millions, Except Per Share Amounts) STOCK SUMMARY 2010 2009 2008 Stock price per share-year-end Market capitalization-year-end Common shares outstanding-year-end PER SHARE HIGHLIGHTS (DILUTED) $ 41.45 $ 4,509 108.8 $ 36.58 $ 3,710 101.4 $...

  • Page 20
    ... assets Investments and other assets Property, plant and equipment-net Deferred debits Total assets LIABILITIES AND EQUITY $ 932 625 9,579 1,227 $ 929 673 9,405 979 $ 883 910 9,072 941 $ 12,363 $ 11,986 $ 11,806 Current liabilities, excluding current maturities of long-term debt Long-term...

  • Page 21
    ... currently expected or sought by us. A discussion of some of these risks and uncertainties is contained in our Annual Report on Form 10-K and is available on our website at pinnaclewest.com, which you should review carefully before placing any reliance on our forward-looking statements, financial...

  • Page 22
    ... Central Avenue Phoenix, Arizona 85004 Form 10-K Pinnacle West's 2010 Annual Report on Form 10-K filed with the Securities and Exchange Commission is available on our website or by writing to the Office of the Secretary. Statistical Report A detailed Statistical Report for Financial Analysis for...

  • Page 23
    ...12(g) of the Act: ARIZONA PUBLIC SERVICE COMPANY Common Stock, Par Value $2.50 per share Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. PINNACLE WEST CAPITAL CORPORATION Yes X No ARIZONA PUBLIC SERVICE COMPANY Yes X No Indicate...

  • Page 24
    ... and Director Independence 176 Item 14. Principal Accountant Fees and Services ...176 PART III Item 10. Item 11. Item 12. PART IV ...177 Item 15. Exhibits and Financial Statement Schedules...177 SIGNATURES ...219 This combined Form 10-K is separately filed by Pinnacle West and APS. Each registrant...

  • Page 25
    ...SRP SunCor TCA VIE West Phoenix Arizona Corporation Commission Arizona Department of Environmental Quality Allowance for Funds Used During Construction Arizona Nuclear Power Project, also known as Palo Verde Arizona Public Service Company, a subsidiary of the Company APS Energy Services Company, Inc...

  • Page 26
    ..., customer and sales growth (or decline), and the effects of energy conservation measures and distributed generation; power plant performance and outages; volatile fuel and purchased power costs; fuel and water supply availability; regulatory and judicial decisions, developments and proceedings; new...

  • Page 27
    ... financial information of our business segments. BUSINESS OF ARIZONA PUBLIC SERVICE COMPANY APS currently provides electric service to approximately 1.1 million customers. We own or lease more than 6,290 MW of regulated generation capacity and we hold a mix of both long-term and short-term purchased...

  • Page 28
    The following map shows APS's retail service territory, including the locations of its generating facilities and principal transmission lines. 4

  • Page 29
    ... stations and through purchased power agreements. Resource planning is an important function necessary to meet Arizona's future energy needs. APS's sources of energy by fuel type during 2010 were as follows: Generation Facilities APS has ownership interests in or leases the coal, nuclear, gas...

  • Page 30
    .... See Note 11 for information regarding APS's coal mine reclamation obligations. Nuclear Palo Verde Nuclear Generating Station - Palo Verde is a nuclear power plant located about 50 miles west of Phoenix, Arizona. APS operates the plant and owns 29.1% of Palo Verde Units 1 and 3 and about 17...

  • Page 31
    ...be issued in April 2011. APS is making preparations to secure resources necessary to operate the plant for the period of extended operation, including the execution in April 2010 of a Municipal Effluent Purchase and Sale Agreement that provides effluent water rights necessary for cooling purposes at...

  • Page 32
    ...of Palo Verde Units 1, 2 and 3 are currently included in APS's ACC jurisdictional rates. Decommissioning costs are recoverable through a non-bypassable system benefits charge (one paid by all retail customers taking service from the APS system), which allows APS to maintain its external sinking fund...

  • Page 33
    ... located within a certain test area in Flagstaff, Arizona. Purchased Power Contracts In addition to its own available generating capacity, APS purchases electricity under various arrangements, including long-term contracts and purchases through short-term markets to supplement its owned or leased...

  • Page 34
    ...-term seasonal purchases and unit contingent purchases, resulted in an actual reserve margin, at the time of the 2010 peak demand, of 21.8%. The power actually available to APS from its resources fluctuates from time to time due in part to planned and unplanned plant and transmission outages. Future...

  • Page 35
    ... own solar resources is the ―AZ Sun Program.â€- As approved by the ACC, the AZ Sun Program will allow APS to own 100 MW of solar photovoltaic power plants across Arizona by investing up to $500 million through 2014. Under this program to date, APS has executed contracts for the development of 83...

  • Page 36
    ... Purchased Power Agreements Distributed Energy Solar: APS Owned (e) Third-party Owned (f) Agreement 1 Agreement 2 (g) Total Distributed Energy Total Renewable Portfolio Actual/ Target Commercial Operation Date Term (Years) Net Capacity In Operation (MW) Net Capacity Planned/ Under Development...

  • Page 37
    ... of APS's property used to provide retail electric service and approve or receive prior notification of certain transactions between Pinnacle West, APS and their respective affiliates. APS is subject to varying degrees of competition from other investor-owned electric and gas utilities in Arizona...

  • Page 38
    ...for information regarding APS's transmission rates.) During 2010, approximately 5.8% of APS's electric operating revenues resulted from such sales and services. APS's wholesale activity primarily consists of managing fuel and purchased power supplies to serve retail customer energy requirements. APS...

  • Page 39
    ...1368 in 2006 to address greenhouse gas emissions. In December 2010, the California Air Resources Board approved regulations that will establish a cap-and-trade program for greenhouse gas emissions which is scheduled to be launched in 2012 as part of the state's program implementing AB32. In addition...

  • Page 40
    ... impact on its current operations. The rule will require APS to consider the impact of greenhouse gas emissions as part of its traditional New Source Review analysis for new sources and major modifications to existing plants. At the present time, we cannot predict what other rules or regulations may...

  • Page 41
    ... a number of initiatives to address emission concerns, including renewable energy procurement and development, promotion of programs and rates that promote energy conservation, renewable energy use and energy efficiency. (See ―Energy Sources and Resource Planning - Current and Future Resources...

  • Page 42
    ... of our recommended plan are included in our environmental expenditure estimates (see ―Management's Discussion and Analysis of Financial Condition and Results of Operations - Capital Expendituresâ€- in Item 7). Four Corners and the Navajo Plant. EPA Region 9 previously requested that APS, as the...

  • Page 43
    ... of these portions of the recommended plans are included in our environmental expenditure estimates (see ―Management's Discussion and Analysis of Financial Condition and Results of Operations - Capital Expendituresâ€- in Item 7). Mercury and other Hazardous Air Pollutants. In early 2008, the...

  • Page 44
    ... time, APS is unable to predict what impact the adoption of these standards may have on its operations. New Source Review. On April 6, 2009, APS received a request from the EPA under Section 114 of the Clean Air Act seeking detailed information regarding projects at and operations of Four Corners...

  • Page 45
    ... Site in Maricopa County, Arizona. APS, along with three other electric utility companies, owns a parcel of property on which a transmission pole and a portion of a transmission line are located. The property abuts the Gila River Indian Community boundary and, at one time, may have been part of an...

  • Page 46
    ...to other Navajo Acts. APS cannot currently predict the outcome of this matter. Water Supply Assured supplies of water are important for APS's generating plants. At the present time, APS has adequate water to meet its needs. However, the Four Corners region, in which Four Corners is located, has been...

  • Page 47
    ...Arizona, Superior Court. Palo Verde is located within the geographic area subject to the summons. APS's rights and the rights of the other Palo Verde participants to the use of groundwater and effluent at Palo Verde are potentially at issue in this action. As operating agent of Palo Verde, APS filed...

  • Page 48
    ..., and project management) with a focus on energy efficiency and renewable energy to commercial and industrial retail customers in the western United States. On June 22, 2010, APSES sold its district cooling business consisting of operations in downtown Phoenix, Tucson, and on certain Arizona State...

  • Page 49
    ... realize the value of its existing investments. On a long-term basis, Pinnacle West may use El Dorado, when appropriate, for investments that are strategic to the business of generating, distributing and marketing electricity. Financial Summary. 2010 Net income (loss) Total assets at December...

  • Page 50
    ... fossil generation, energy delivery and customer service business areas expires in April 2011, and the parties began negotiating a successor agreement in February 2011. The agreement with union employees serving as Palo Verde security officers expires in 2013. WHERE TO FIND MORE INFORMATION We use...

  • Page 51
    ... influence its business, liquidity, results of operations and its ability to fully recover costs from utility customers in a timely manner. The ACC regulates APS's retail electric rates and the FERC regulates rates for wholesale power sales and transmission services. The profitability of APS is...

  • Page 52
    ... changes in, or liabilities under, existing or new laws or regulations may increase APS's cost of operations or impact its business plans. APS is subject to numerous environmental laws and regulations affecting many aspects of its present and future operations, including air emissions, water quality...

  • Page 53
    ... NSPS program of the Clean Air Act. If the EPA seeks to impose New Source Review requirements at Four Corners or any other APS plant, or if the citizen suit is filed and the citizens' group prevails, significant capital investments could be required to install new pollution control technologies. The...

  • Page 54
    ... Air Resources Board approved regulations that will establish a cap-andtrade program for greenhouse gas. This legislation, regulation and other state-specific initiatives may affect APS's business, including sales into the impacted states or the ability of its out-of-state power plant participants...

  • Page 55
    ... will deem these vendors ―public service corporationsâ€- subject to ACC regulation a nd when, and the extent to which, additional service providers will enter APS's service territory, increasing the level of competition in the market. OPERATIONAL RISKS APS's results of operations can be adversely...

  • Page 56
    ... result in uncertainty related to continued leases, easements and rights-of-way, which could have a significant impact on our business. Certain APS power plants, including Four Corners, and portions of the transmission lines that carry power from these plants are located on Indian lands pursuant to...

  • Page 57
    ... futures and options and over-the-counter forwards, options, and swaps. As part of our overall risk management program, we enter into derivative transactions to hedge purchases and sales of electricity and fuels. The changes in market value of such contracts have a high correlation to price changes...

  • Page 58
    ... for power supply, which could adversely affect APS's business. APS is pursuing and implementing smart grid technologies, including advanced transmission and distribution system technologies, digital meters enabling two-way communications between the utility and its customers, and electric usage...

  • Page 59
    ... additional support in the form of letters of credit or cash or other collateral to various counterparties. If our short-term ratings were to be lowered, it could completely eliminate any possible future access to the commercial paper market. We note that the ratings from rating agencies are...

  • Page 60
    .... A decline in the market value of the investments in these trusts may increase our funding requirements. Additionally, the pension plan and other postretirement benefit liabilities are impacted by the discount rate, which is the interest rate used to discount future pension and other postretirement...

  • Page 61
    ... us; favorable or adverse regulatory or legislative developments; our dividend policy; future sales by the Company of equity or equity-linked securities; and general domestic and international economic conditions. In addition, the stock market in general has experienced volatility that has often...

  • Page 62
    ... brought by property owners and potential funding obligations to local taxing districts that financed infrastructure at certain of its real estate developments. Pinnacle West has not guaranteed any of SunCor's obligations. SunCor's remaining business operations, and its ability to generate cash from...

  • Page 63
    ...Business of Arizona Public Service Company - Energy Sources and Resource Planning - Generation Facilities - Nuclearâ€- in Item 1 for details regarding leased interests in Palo Verde. The other participants are Salt River Project (17.49%), SCE (15.8%), El Paso Electric Company (15.8%), Public Service...

  • Page 64
    ... on the operation of certain of APS's generating facilities. See ―Business of Arizona Public Service Companyâ€- in Item 1 for a map detailing the location of APS's major power plants and principal transmission lines. Transmission and Distribution Facilities Current Facilities. APS's transmission...

  • Page 65
    .... APS is currently working with the Navajo Nation to extend the Four Corners leases and the transmission rights-of-way discussed below for an additional twenty-five years. (See ―Business of Arizona Public Service Company - Energy Sources and Resource Planning - Generation Facilities - Coal Fueled...

  • Page 66
    ...West; Chief Financial Officer of APS Chief Financial Officer of Pinnacle West Executive Vice President of APS President and Chief Operating Officer of APS Senior Vice President, Planning and Administration of APS Vice President, Planning of APS Vice President, Controller and Chief Accounting Officer...

  • Page 67
    ... Senior Vice President and Chief Financial Officer of Pinnacle West and APS Treasurer of Pinnacle West and APS Senior Vice President and Chief Financial Officer of OGE Energy Corp. Vice President, Communications of APS Director, Corporate Communications of Southern California Edison Vice President...

  • Page 68
    ... II ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Pinnacle West's common stock is publicly held and is traded on the New York Stock Exchange. At the close of business on February 15, 2011, Pinnacle West's common stock was held of...

  • Page 69
    ... Purchases of Equity Securities The following table contains information about our purchases of our common stock during the fourth quarter of 2010. Total Number of Shares Purchased (1) --1,994 1,994 Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs ----Maximum Number...

  • Page 70
    ... 6. SELECTED FINANCIAL DATA PINNACLE WEST CAPITAL CORPORATION - CONSOLIDATED 2010 OPERATING RESULTS Operating revenues: Regulated electricity segment Marketing and trading Other revenues Total operating revenues Income from continuing operations Discontinued operations - net of income taxes (a) Net...

  • Page 71
    SELECTED FINANCIAL DATA ARIZONA PUBLIC SERVICE COMPANY - CONSOLIDATED 2010 OPERATING RESULTS Electric operating revenues Fuel and purchased power costs Other operating expenses Operating income Other income (deductions) Interest deductions - net of AFUDC Net income Less: Net income attributable to ...

  • Page 72
    .... These projects are designed to provide safety benefits, eliminate costly inspections and reduce the duration of future outages. Coal and Related Environmental Matters. APS-operated coal plants, Four Corners and Cholla, achieved net capacity factors of 82% and 79%, respectively, in 2010. APS is...

  • Page 73
    ... average customer outage time and its best reliability year to date. During 2010, APS undertook several significant transmission projects, including the Morgan to Pinnacle Peak transmission line scheduled for completion in 2011. APS's 2011 transmission plan projects that it will invest approximately...

  • Page 74
    ...owned by APS, purchased power contracts for new facilities and ongoing development of distributed energy resources. Through the AZ Sun Program, approved by the ACC on March 3, 2010, APS plans to own 100 MW of solar photovoltaic power plants across Arizona by investing up to $500 million through 2014...

  • Page 75
    ... to help shape Arizona's energy future outside of continual rate cases. See Note 3 for a detailed discussion of the settlement agreement terms and information on APS's FERC rates. APS has several recovery mechanisms in place that provide more timely recovery to APS of its fuel and transmission costs...

  • Page 76
    ...energy efficiency programs, electricity rates and tariffs, the recovery of PSA deferrals and the operation of other recovery mechanisms. Off-system sales of excess generation output, purchased power and natural gas are included in regulated electricity segment revenues and related fuel and purchased...

  • Page 77
    ... our electricity sales volumes, existing contracts for purchased power and generation fuel, our power plant performance, transmission availability or constraints, prevailing market prices, new generating plants being placed in service in our market areas, our hedging program for managing such costs...

  • Page 78
    ... wholesale electricity businesses (primarily electricity service to Native Load customers) and related activities and includes electricity generation, transmission and distribution. Our reportable business segments reflect a change from previously reported information. As of December 31, 2010, our...

  • Page 79
    ..., 2010 2009 Net Change (dollars in millions) Regulated Electricity Segment: Operating revenues less fuel and purchased power expenses Operations and maintenance Depreciation and amortization Taxes other than income taxes Other income (expenses), net Interest charges, net of allowance for funds used...

  • Page 80
    ... increases, net of deferrals Line extension revenues (Note 3) Transmission rate increases Higher demand-side management and renewable energy surcharges (substantially offset in operations and maintenance expense) Higher fuel and purchased power costs offset by the effects of higher off-system sales...

  • Page 81
    ...higher rates in the current year for the allowance for equity and borrowed funds used during construction, partially offset by higher interest charges due to higher debt balances. Interest charges, net of allowance for funds used during construction are comprised of the regulated electricity segment...

  • Page 82
    ... 2008 Net Change (dollars in millions) Regulated Electricity Segment: Operating revenues less fuel and purchased power expenses Operations and maintenance Depreciation and amortization Taxes other than income taxes Other income (expenses), net Interest charges, net of allowance for funds used during...

  • Page 83
    ... quarter of 2009 Lower retail sales primarily due to lower usage per customer, including the effects of the Company's energy efficiency programs, but excluding the effects of weather Higher fuel and purchased power costs including the effects of lower off-system sales, net of related PSA deferrals...

  • Page 84
    ... plant in service. The increases in utility plant in service are the result of various improvements to APS's existing fossil and nuclear generating plants and distribution and transmission infrastructure additions and upgrades. Interest charges, net of allowance for funds used during construction...

  • Page 85
    ... estate sales primarily due to a commercial property sale in 2008. The increase of approximately $338 million in net cash used for financing activities is primarily due to repayments of short-term borrowings, partially offset by APS's issuance of $500 million of unsecured senior notes. 2010 $ 750...

  • Page 86
    ...Arizona Public Service Company The following table presents APS's net cash provided by (used for) operating, investing and financing activities for the years ended December 31, 2010, 2009 and 2008 (dollars in millions): Net cash flow provided by operating activities Net cash flow used for investing...

  • Page 87
    ... construction, related information systems and facility costs. Examples of the types of projects included in the forecast include power lines, substations, line extensions to new residential and commercial developments and upgrades to customer information systems. Capital expenditures will be funded...

  • Page 88
    ... payments on our short-term and long-term debt. The level of our common stock dividends and future dividend growth will be dependent on a number of factors including, but not limited to, payout ratio trends, free cash flow and financial market conditions. On January 19, 2011, the Pinnacle West Board...

  • Page 89
    ... to an APS tax accounting method change approved by the IRS in the third quarter of 2009 and the current year tax benefits related to the SunCor strategic asset sales that closed in 2010. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 includes provisions making...

  • Page 90
    ...third-party credit support for the bonds in the term rate mode. On August 10, 2010, APS changed the letter of credit supporting the approximately $17 million of Coconino County, Arizona Pollution Control Corporation Pollution Control Revenue Bonds (Arizona Public Service Company Project) Series 1998...

  • Page 91
    ...have sinking fund features that are serviced by the lease payments. See Note 20 for additional discussion of the VIEs. Other Financing Matters -- See Note 3 for information regarding the PSA approved by the ACC. Although APS defers actual retail fuel and purchased power costs on a current basis, APS...

  • Page 92
    ... policies, natural gas transportation, fuel supply, and other energy-related contracts. At this time, we believe we have sufficient liquidity to cover a downward revision to our credit ratings. Moody's Pinnacle West Senior unsecured (a) Commercial paper Outlook APS Senior unsecured Secured lease...

  • Page 93
    ... Rule 415. Pinnacle West currently has no outstanding, rated senior unsecured securities. However, Moody's assigned a provisional (P) rating and Standard & Poor's assigned a preliminary (prelim) rating to the senior unsecured securities that can be issued under such shelf registration. Off-Balance...

  • Page 94
    ... average rates at December 31, 2010 (see Note 6). The short-term debt represents commercial paper borrowings at Pinnacle West (see Note 5). Our fuel and purchased power commitments include purchases of coal, electricity, natural gas, renewable energy and nuclear fuel (see Notes 3 and 11). Contracts...

  • Page 95
    ... position. The most relevant actuarial assumptions are the discount rate used to measure our liability and net periodic cost, the expected long-term rate of return on plan assets used to estimate earnings on invested funds over the long-term, and the assumed healthcare cost trend rates. We review...

  • Page 96
    ... December 31, 2010 reported pension liability on the Consolidated Balance Sheets and our 2010 reported pension expense, after consideration of amounts capitalized or billed to electric plant participants, on Pinnacle West's Consolidated Statements of Income (dollars in millions): Increase (Decrease...

  • Page 97
    ...held for future development, and commercial property, as ―held and used.â€- When events or changes in circumstances indicated that the carrying value of real estate assets considered held and used were not recoverable, we compared the undiscounted cash flows that we estimated would be generated by...

  • Page 98
    ...estimated would be generated by each asset discounted for market risk. Our impairment assessments and fair value determinations required significant judgment regarding key assumptions such as future sales prices, future construction and land development costs, future sales timing, and discount rates...

  • Page 99
    ...1,619,150 $ 3,640,276 $ 3,869,681 2010 2011 2012 2013 2014 2015 Years thereafter Total Fair value $ $ Pinnacle West - Consolidated Short-Term Debt Interest Rates Amount 1.09% -----$ 153,715 -----$ 153,715 $ 153,715 Variable-Rate Long-Term Debt Interest Rates Amount 1.66% 2.00% 5.25% 5.25% --$ 276...

  • Page 100
    ... exchange-traded futures and options and over-the-counter forwards, options and swaps. As part of our risk management program, we use such instruments to hedge purchases and sales of electricity and fuels. The changes in market value of such contracts have a high correlation to price changes in the...

  • Page 101
    ...) 2013 $ -(14) 2014 $ --- 2015 $ --- (7) (4) (7) $ (147) $ (51) $ (21) $ (6) (6) $ (6) (6) $ The table below shows the impact that hypothetical price movements of 10% would have on the market value of our risk management assets and liabilities included on Pinnacle West's Consolidated Balance...

  • Page 102
    ... 31, 2010 Gain (Loss) Mark-to-market changes reported in: Earnings Electricity Natural gas Regulatory asset (liability) or OCI (a) Electricity Natural gas Total (a) Price Up 10% $ -1 13 42 56 Price Down 10% $ -(1) (13) (42) (56) December 31, 2009 Gain (Loss) Price Up 10% $ 1 1 21 59 82 Price Down...

  • Page 103
    ...West Consolidated Statements of Changes in Equity for 2010, 2009 and 2008 ...Notes to Pinnacle West's Consolidated Financial Statements ...Management's Report on Internal Control Over Financial Reporting (Arizona Public Service Company)...Report of Independent Registered Public Accounting Firm...APS...

  • Page 104
    ...CONTROL OVER FINANCIAL REPORTING (PINNACLE WEST CAPITAL CORPORATION) Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f), for Pinnacle West Capital Corporation. Management conducted...

  • Page 105
    ... REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Pinnacle West Capital Corporation Phoenix, Arizona We have audited the accompanying consolidated balance sheets of Pinnacle West Capital Corporation and subsidiaries (the ―Companyâ€-) as of December 31, 2010 and...

  • Page 106
    ... on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or...

  • Page 107
    ... WEST CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (dollars and shares in thousands, except per share amounts) 2010 OPERATING REVENUES Regulated electricity segment Marketing and trading Other revenues Total OPERATING EXPENSES Regulated electricity segment fuel and purchased power Marketing...

  • Page 108
    ...WEST CAPITAL CORPORATION CONSOLIDATED BALANCE SHEETS (dollars in thousands) December 31, 2010 ASSETS CURRENT ASSETS Cash and cash equivalents Customer and other receivables Accrued unbilled revenues Allowance for doubtful accounts Materials and supplies (at average cost) Fossil fuel (at average cost...

  • Page 109
    PINNACLE WEST CAPITAL CORPORATION CONSOLIDATED BALANCE SHEETS (dollars in thousands) December 31, 2010 LIABILITIES AND EQUITY CURRENT LIABILITIES Accounts payable Accrued taxes (Note 4) Accrued interest Short-term borrowings (Note 5) Current maturities of long-term debt (Note 6) Customer deposits ...

  • Page 110
    ...-term assets Change in other long-term liabilities Net cash flow provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures Contributions in aid of construction Allowance for borrowed funds used during construction Proceeds from the sale of district cooling business...

  • Page 111
    PINNACLE WEST CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (dollars in thousands) 2010 COMMON STOCK (Note 7) Balance at beginning of year Issuance of common stock Other Balance at end of year TREASURY STOCK (Note 7) Balance at beginning of year Purchase of treasury stock ...

  • Page 112
    ...Pinnacle West Marketing & Trading. APS's consolidated financial statements include the accounts of APS and the Palo Verde sale leaseback VIEs. Intercompany accounts and transactions between the consolidated companies have been eliminated. APS is a vertically-integrated electric utility that provides...

  • Page 113
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Amount reported after adoption of amended VIE accounting guidance and discontinued operations $ -26,723 --831,863 407,463 123,277 24,534 5,278 237,527 (10,430) 136,506 252,558 (179,794) 72,764 4,434 As previously Statement...

  • Page 114
    ... - Regulatory assets Current Liabilities - Current maturities of long-term debt Long-Term Debt Less Current Maturities Palo Verde sale leaseback lessor notes Deferred Credits and Other - Other Equity - Noncontrolling interests As previously reported $ -781,714 277,693 -200,015 29,571 Statement of...

  • Page 115
    .... As part of our overall risk management program, we use such instruments to hedge purchases and sales of electricity and fuels. The changes in market value of such contracts have a high correlation to price changes in the hedged transactions. We account for our derivative contracts in accordance...

  • Page 116
    ... assets would be written off as a charge in current period earnings. See Note 3 for additional information. Utility Plant and Depreciation Utility plant is the term we use to describe the business property and equipment that supports electric service, consisting primarily of generation, transmission...

  • Page 117
    ... in regulated rates the costs capitalized in accordance with this accounting guidance. We record depreciation on utility plant on a straight-line basis over the remaining useful life of the related assets. The approximate remaining average useful lives of our utility property at December 31, 2010...

  • Page 118
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Allowance for Funds Used During Construction AFUDC represents the approximate net composite interest cost of borrowed funds and an allowed return on the equity funds used for construction of regulated utility plant. Both ...

  • Page 119
    ... for future development, and commercial property as ―held and used.â€- When events or changes in circumstances indicated that the carrying values of real estate assets considered held and used would not be recoverable, we compared the undiscounted cash flows that we estimated would be generated by...

  • Page 120
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APS $0.001 per kWh of nuclear generation. See Note 11 for information on spent nuclear fuel disposal and Note 14 for information on nuclear decommissioning costs. Income Taxes Income taxes are provided using the asset and ...

  • Page 121
    ... accounting treatment for line extension payments received for new or upgraded service from January 1, 2010 through year end 2012 (or until new rates are established in APS's next general rate case, if that is before the end of 2012); An authorized return on common equity of 11%; A capital structure...

  • Page 122
    ... plan, including approval of the AZ Sun Program and the Community Power Project in Flagstaff, Arizona described below. On March 3, 2010, the ACC approved the AZ Sun Program, which contemplates the addition of 100 MW of APS-owned solar resources through 2014. Through this program, APS plans to invest...

  • Page 123
    ... on September 30, 2010. PSA Mechanism and Balance. The PSA, which the ACC initially approved in 2005 as a part of APS's 2003 rate case, and which was modified by the ACC in 2007, provides for the adjustment of retail rates to reflect variations in retail fuel and purchased power costs. The PSA is...

  • Page 124
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS an adjustment to the PSA rate is made annually each February 1st (unless otherwise approved by the ACC) and goes into effect automatically unless suspended by the ACC; the PSA uses a forward-looking estimate of fuel and ...

  • Page 125
    ...to transmission services used for APS's retail customers. On May 20, 2010, APS filed with the ACC an application for the related reduction of its TCA rate. The ACC approved the TCA reduction on July 27, 2010. Regulatory Assets and Liabilities The detail of regulatory assets is as follows (dollars in...

  • Page 126
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, Removal costs (Note 1) (a) Asset retirement obligations (Note 12) Deferred fuel and purchased power (b)(c) Renewable energy standard (b) Spent nuclear fuel (Note 11) Deferred gains on utility property Tax ...

  • Page 127
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Total unrecognized tax benefits, January 1 Additions for tax positions of the current year Additions for tax positions of prior years Reductions for tax positions of prior years for: Changes in judgment Settlements with ...

  • Page 128
    ... Increases (reductions) in tax expense resulting from: State income tax net of federal income tax benefit Credits and favorable adjustments related to prior years resolved in current year Medicare Subsidy Part-D (see Note 8) Allowance for equity funds used during construction (see Note 1) Palo Verde...

  • Page 129
    ... for sale Renewable energy incentives Credit and loss carryforwards Other Total deferred tax assets DEFERRED TAX LIABILITIES Plant-related Risk management activities Regulatory assets: Allowance for equity funds used during construction Deferred fuel and purchased power - mark-to-market Pension and...

  • Page 130
    ... CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. Lines of Credit and Short-Term Borrowings Pinnacle West and APS maintain committed revolving credit facilities in order to enhance liquidity and provide credit support for the commercial paper programs. During the first quarter of 2010...

  • Page 131
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS with the consent of the lenders. APS will use the facility for general corporate purposes, commercial paper program support and for the issuance of letters of credit. Interest rates are based on APS's senior unsecured debt ...

  • Page 132
    ... it approved APS's request, subject to specified parameters and procedures, to increase (a) APS's short-term debt authorization from 7% of APS's capitalization to (i) 7% of APS's capitalization plus (ii) $500 million (which is required to be used for purchases of natural gas and power) and (b) APS...

  • Page 133
    ...Palo Verde sale leaseback lessor notes Unamortized discount Capitalized lease obligations Subtotal (e) SUNCOR Notes payable Capitalized lease obligations Subtotal PINNACLE WEST Senior notes Total long-term debt Less current maturities: APS SunCor Pinnacle West Total TOTAL LONG-TERM DEBT LESS CURRENT...

  • Page 134
    ...third-party credit support for the bonds in the term rate mode. On August 10, 2010, APS changed the letter of credit supporting the approximately $17 million of Coconino County, Arizona Pollution Control Corporation Pollution Control Revenue Bonds (Arizona Public Service Company Project) Series 1998...

  • Page 135
    ... fund features that are serviced by the lease payments. See Note 20 for additional discussion of the VIEs. SunCor In 2010, SunCor sold land parcels, commercial assets and master planned home-building communities for approximately $72 million, which approximated the carrying value of these assets...

  • Page 136
    ...WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table shows principal payments due on Pinnacle West's and APS's total longterm debt and capitalized lease requirements (dollars in millions): Year 2011 2012 2013 2014 2015 Thereafter Total 7. Consolidated Pinnacle West...

  • Page 137
    ... FINANCIAL STATEMENTS form of equity infusions. APS has used these contributions to repay short-term indebtedness, to finance capital expenditures and for other general corporate purposes. 8. Retirement Plans and Other Benefits Pinnacle West sponsors a qualified defined benefit and account balance...

  • Page 138
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Pension 2010 Service cost-benefits earned during the period Interest cost on benefit obligation Expected return on plan assets Amortization of: Transition obligation Prior service cost (credit) Net actuarial loss Net ...

  • Page 139
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table shows the projected benefit obligation and the accumulated benefit obligation for the pension plan in excess of plan assets as of December 31, 2010 and 2009 (dollars in thousands): 2010 2009 Projected ...

  • Page 140
    ...point change in the assumed initial and ultimate health care cost trend rates would have the following effects (dollars in millions): 1% Increase Effect on other postretirement benefits expense, after consideration of amounts capitalized or billed to electric plant participants Effect on service and...

  • Page 141
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS reviewed on at least an annual basis. Other investment strategies include the prohibition of investments in Pinnacle West securities and the external management of the plans' assets. Long-term fixed income assets consist ...

  • Page 142
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Quoted Prices in Active Markets for Identical Assets (Level 1) Pension Plan: Assets: Cash and cash equivalents Debt Securities: Corporate U.S. Treasury Other (b) Equities: U.S. Companies International Companies Other ...

  • Page 143
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Quoted Prices in Active Markets for Identical Assets (Level 1) Pension Plan: Assets: Cash and cash equivalents Debt Securities: Corporate Other (b) Interest rate swaps Equities: U.S. Companies International Companies Other ...

  • Page 144
    ...to be approximately $20 million each year. APS and other subsidiaries fund their share of the contributions. APS's share is approximately 98% of both plans. Estimated Future Benefit Payments Benefit payments, which reflect estimated future employee service, for the next five years and the succeeding...

  • Page 145
    ...The expected future other benefit payments take into account the Medicare Part D subsidy. Employee Savings Plan Benefits Pinnacle West sponsors a defined contribution savings plan for eligible employees of Pinnacle West and its subsidiaries. In 2010, costs related to APS's employees represented 98...

  • Page 146
    .... 10. Jointly-Owned Facilities APS shares ownership of some of its generating and transmission facilities with other companies. Our share of operations and maintenance expense and utility plant costs related to these facilities is accounted for using proportional consolidation. The following table...

  • Page 147
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. Commitments and Contingencies Palo Verde Nuclear Generating Station Spent Nuclear Fuel and Waste Disposal APS currently estimates it will incur $132 million (in 2010 dollars) over the current life of Palo Verde for its...

  • Page 148
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Of the various fuel and purchased power contracts mentioned above, some of those contracts have take-or-pay provisions. The contracts APS has for its coal supply include take-or-pay provisions. The current take-or-pay coal ...

  • Page 149
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS on September 23, 2009, APS agreed with the EPA and one other PRP to voluntarily assist with the funding and management of the site-wide groundwater remedial investigation and feasibility study work plan. We estimate that ...

  • Page 150
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2010 Asset retirement obligations at the beginning of year Changes attributable to: Liabilities settled Accretion expense Estimated cash flow revisions Asset retirement obligations at the end of year $ 302 -22 5 $ 329 $ $ ...

  • Page 151
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS reduction in operations and maintenance of $2,149, an increase in operating income of $20,034, an increase in income taxes of $8,308, and an increase in income from continuing operations of $12,755. The adjustments also ...

  • Page 152
    ... the asset or liability occur in sufficient frequency and volume to provide information on an ongoing basis. This category includes derivative instruments that are exchange-traded such as futures, cash equivalents invested in exchange-traded money market funds, exchange-traded equities, and nuclear...

  • Page 153
    ... our retirement and other benefit plans (see Note 8). Cash Equivalents Cash equivalents represent short-term investments in exchange-traded money market funds that are valued using quoted prices in active markets. Risk Management Activities Exchange-traded contracts are valued using quoted prices in...

  • Page 154
    ...provides valuation of our nuclear decommissioning trust assets by using pricing services to determine fair market value. We assess these valuations and verify that pricing can be supported by actual recent market transactions. The trust fund investments have been established to satisfy APS's nuclear...

  • Page 155
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Quoted Prices in Active Markets for Identical Assets (Level 1) Assets Cash equivalents Risk management activities: Commodity contracts Nuclear decommissioning trust: Equity securities: U.S. commingled funds Fixed income ...

  • Page 156
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Quoted Prices in Active Markets for Identical Assets (Level 1) Assets Cash equivalents Risk management activities: Commodity contracts Nuclear decommissioning trust: Equity securities: U.S. commingled funds Fixed income ...

  • Page 157
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table shows the changes in fair value for assets and liabilities that are measured at fair value on a recurring basis using Level 3 inputs for the years ended December 31, 2010 and 2009 (dollars in millions): ...

  • Page 158
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2010 Carrying Amount Fair Value Pinnacle West APS SunCor Total Nuclear Decommissioning Trust To fund the costs APS expects to incur to decommission Palo Verde, APS established external decommissioning ...

  • Page 159
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The costs of securities sold are determined on the basis of specific identification. The following table sets forth approximate gains and losses and proceeds from the sale of securities by the nuclear decommissioning trust ...

  • Page 160
    ... restricted stock unit payable in cash represents the right to receive a cash payment equal to the fair market value of one share of Pinnacle West's common stock. Restricted stock unit awards vest and settle in annual installments over a four-year period. In addition, officers and key employees will...

  • Page 161
    .... As the restricted stock unit award is accounted for as a liability award, compensation costs, initially measur ed based on the Company's stock price on the grant date, are remeasured at each balance sheet date, using Pinnacle West's closing stock price. Restricted stock unit awards were granted to...

  • Page 162
    ... at the minimum statutory required rate. Compensation costs, initially measured based on the Company's stock price on the grant date, are remeasured at each balance sheet date, using Pinnacle West's closing stock price. Management also evaluates the probability of meeting the performance criteria at...

  • Page 163
    ... was accounted for as a liability award, compensation costs, initially measured based on the Company's stock price on the grant date, were remeasured at each balance sheet date, using Pinnacle West's closing stock price. The amount of cash to settle the payment on the first business day of 2010 was...

  • Page 164
    ... current policy is to issue new shares to satisfy share requirements for stock compensation plans and it does not expect to repurchase any shares except to satisfy tax withholding obligations upon the vesting of restricted stock during 2011. 17. Business Segments Pinnacle West's reportable business...

  • Page 165
    ... FINANCIAL STATEMENTS Business Segments for the Year Ended December 31, 2010 Regulated Electricity Segment All other (a) Total $ 3,181 $ 83 $ 3,264 1,047 -1,047 1,009 69 1,078 1,125 14 1,139 415 -415 226 2 228 (22) 3 (19) 506 161 345 9 3 6 515 164 351 Operating revenues Fuel and purchased power...

  • Page 166
    ... FINANCIAL STATEMENTS Business Segments for the Year Ended December 31, 2009 Regulated Electricity Segment All other (a) Total $ 3,149 $ 27 $ 3,176 1,179 -1,179 948 32 980 1,022 (5) 1,017 407 -407 226 1 227 (16) 10 (6) 405 143 262 (16) (7) (9) 389 136 253 Operating revenues Fuel and purchased power...

  • Page 167
    ... costs of electricity, natural gas, coal, emissions allowances and in interest rates. We manage risks associated with these market fluctuations by utilizing various derivative instruments, including futures, forwards, options and swaps. As part of our overall risk management program, we may use...

  • Page 168
    ...book-outs, which reduces both revenues and fuel and purchased power costs in our Consolidated Statements of Income, but this does not impact our financial condition, net income or cash flows. For its regulated operations, APS defers for future rate treatment approximately 90% of unrealized gains and...

  • Page 169
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Derivative Instruments in Designated Accounting Hedging Relationships The following table provides information about gains and losses from derivative instruments in designated accounting hedging relationships and their ...

  • Page 170
    ... are reported net on the balance sheet. These amounts are located in the assets and liabilities from risk management activities lines of our Consolidated Balance Sheets. Amounts are as of December 31, 2010 (dollars in thousands): Commodity Contracts Derivatives designated as accounting hedging...

  • Page 171
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table provides information about the fair value of our derivative instruments, margin account and cash collateral reported on a gross basis at December 31, 2009 (dollars in thousands): Commodity Contracts ...

  • Page 172
    ... Station (―Palo Verdeâ€-) Unit 2 and related common facilities. The VIE lessor trusts are single-asset leasing entities. APS will pay approximately $49 million per year for the years 2010 to 2015 related to these leases. The leases do not contain fixed price purchase options or residual value...

  • Page 173
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS include fixed rate renewal periods which may have a significant impact on the VIEs' economic performance. We have concluded that these fixed rate renewal periods may give APS the ability to utilize the asset for a ...

  • Page 174
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS VIEs, the debt APS would be required to assume is already reflected in our Consolidated Balance Sheets. We also have certain long-term purchased power agreements to purchase substantially all of an entity's output from a ...

  • Page 175
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS specific indemnities, we do not believe that any material loss related to such indemnification provisions is likely. 22. Discontinued Operations SunCor (real estate segment) - In 2009, our real estate subsidiary, SunCor, ...

  • Page 176
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (a) Includes a tax benefit recognized by the parent company in accordance with an intercompany tax sharing agreement of $4 million for the year ended December 31, 2010, and $113 million for the year ended December 31, 2009....

  • Page 177
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  • Page 178
    ... CONTROL OVER FINANCIAL REPORTING (ARIZONA PUBLIC SERVICE COMPANY) Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f), for Arizona Public Service Company. Management conducted an...

  • Page 179
    ... REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholder of Arizona Public Service Company Phoenix, Arizona We have audited the accompanying consolidated balance sheets of Arizona Public Service Company and subsidiary (the ―Companyâ€-) as of December 31, 2010 and 2009...

  • Page 180
    .... As disclosed in Note 2 to the consolidated financial statements of Pinnacle West Capital Corporation, the Company adopted amended accounting guidance related to the consolidation of variable interest entities on January 1, 2010. /s/ DELOITTE & TOUCHE LLP Phoenix, Arizona February 18, 2011 155

  • Page 181
    ARIZONA PUBLIC SERVICE COMPANY CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands) Year Ended December 31, 2009 $ 3,149,500 1,178,620 812,903 407,159 158,661 122,358 2,679,701 469,799 6,087 14,999 10,808 (18,001) 13,893 212,654 6,315 4,675 (10,386) 213,258 270,434 $ 2010 ELECTRIC OPERATING ...

  • Page 182
    ARIZONA PUBLIC SERVICE COMPANY CONSOLIDATED BALANCE SHEETS (dollars in thousands) December 31, 2010 2009 ASSETS PROPERTY, PLANT AND EQUIPMENT (Notes 1, 6, 9 and 10) Plant in service and held for future use Accumulated depreciation and amortization Net Construction work in progress Palo Verde sale ...

  • Page 183
    ARIZONA PUBLIC SERVICE COMPANY CONSOLIDATED BALANCE SHEETS (dollars in thousands) December 31, 2010 LIABILITIES AND EQUITY CAPITALIZATION Common stock Additional paid-in capital Retained earnings Accumulated other comprehensive (loss): Pension and other postretirement benefits (Note 8) Derivative ...

  • Page 184
    ... and amortization including nuclear fuel Deferred fuel and purchased power Deferred fuel and purchased power amortization Allowance for equity funds used during construction Deferred income taxes Change in mark-to-market valuations Changes in current assets and liabilities: Customer and other...

  • Page 185
    ARIZONA PUBLIC SERVICE COMPANY CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (dollars in thousands) Year Ended December 31, 2009 $ 178,162 $ 2010 COMMON STOCK ADDITIONAL PAID-IN CAPITAL Balance at beginning of year Equity infusion Other Balance at end of year RETAINED EARNINGS Balance at beginning ...

  • Page 186
    ... 23 -- Summary of Significant Accounting Policies New Accounting Standards Regulatory Matters Income Taxes Lines of Credit and Short-Term Borrowings Long-Term Debt and Liquidity Matters Common Stock and Treasury Stock Retirement Plans and Other Benefits Leases Jointly-Owned Facilities Commitments...

  • Page 187
    ...regulated operations. The regulatory assets are for certain temporary differences, primarily the allowance for equity funds used during construction and pension and other postretirement benefits. The regulatory liabilities relate to deferred taxes resulting primarily from investment tax credits. APS...

  • Page 188
    ARIZONA PUBLIC SERVICE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS there will be any significant increases or decreases in our unrecognized tax benefits within the next twelve months. We reflect interest and penalties, if any, on unrecognized tax benefits in the statement of income as income ...

  • Page 189
    ... Increases (reductions) in tax expense resulting from: State income tax net of federal income tax benefit Credits and favorable adjustments related to prior years resolved in current year Medicare Subsidy Part-D (see Note 8) Allowance for equity funds used during construction (see Note 1) Palo Verde...

  • Page 190
    ... incentives Other Total deferred tax assets DEFERRED TAX LIABILITIES Plant-related Risk management activities Regulatory assets: Allowance for equity funds used during construction Deferred fuel and purchased power - mark-to-market Pension and other postretirement benefits Other Other Total deferred...

  • Page 191
    ARIZONA PUBLIC SERVICE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS S-2. Selected Quarterly Financial Data (Unaudited) Quarterly financial information for 2010 and 2009 is as follows (dollars in thousands): March 31, Operating revenues Operations and maintenance Operating income Net income (...

  • Page 192
    ARIZONA PUBLIC SERVICE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS S-3. Other Income and Other Expense The following table provides detail of APS's other income and other expense for 2010, 2009 and 2008 (dollars in thousands): 2010 Other income: Interest income SO2 emission allowance sales ...

  • Page 193
    PINNACLE WEST CAPITAL CORPORATION HOLDING COMPANY SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF INCOME (in thousands) 2010 Operating revenues Operating expenses Fuel and purchased power Other operating expenses Total Operating income (loss) Other Equity in ...

  • Page 194
    PINNACLE WEST CAPITAL CORPORATION HOLDING COMPANY SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS (in thousands) Balance at December 31, 2010 2009 Assets Current assets Cash and cash equivalents Customer and other receivables Current deferred income taxes Income ...

  • Page 195
    PINNACLE WEST CAPITAL CORPORATION HOLDING COMPANY SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2009 $ 68,330 37,214 127 (106,536) -(2,303) 466 44,625 -170,000 (2,379) 209,...

  • Page 196
    ...WEST CAPITAL CORPORATION SCHEDULE II - RESERVE FOR UNCOLLECTIBLES (dollars in thousands) Column A Column B Column C Additions Balance at beginning of period Charged to cost and expenses Charged to other accounts Balance at end of period Column D Column E Description Reserve for uncollectibles: 2010...

  • Page 197
    ... PUBLIC SERVICE COMPANY SCHEDULE II - RESERVE FOR UNCOLLECTIBLES (dollars in thousands) Column A Column B Column C Additions Balance at beginning of period Charged to cost and expenses Charged to other accounts Balance at end of period Column D Column E Description Reserve for uncollectibles: 2010...

  • Page 198
    ... Control Over Financial Reporting (Pinnacle West Capital Corporation)â€- on page 80 of this report and ―Management's Report on Internal Control Over Financial Reporting (Arizona Public Service Company)â€- on page 153 of this report. (c) Attestation Reports of the Registered Public Accounting Firm...

  • Page 199
    ... affect, Pinnacle West's or APS's internal control over financial reporting. ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF PINNACLE WEST Reference is hereby made to ―Information About Our Board and Corporate Governance,â€- ―Proposal...

  • Page 200
    ...include shares subject to awards outstanding under three equity compensation plans that were approved by our shareholders: (a) the Pinnacle West Capital Corporation 1994 Long-Term Incentive Plan, under which no new stock awards may be granted; (b) the Pinnacle West Capital Corporation 2002 Long-Term...

  • Page 201
    ... reported above, which primarily consist of fees for an IFRS Assessment for work performed in 2009 and employee benefit plan audits performed in 2010 and 2009. Pinnacle West's Audit Committee pre-approves each audit service and non-audit service to be provided by APS's registered public accounting...

  • Page 202
    ... File No. 1-4473 4.12 to Pinnacle West April 29, 2005 Form 8-K Report, File No. 1-8962 3.2 Pinnacle West 8-3-10 3.3 APS 9-29-93 3.4 APS Arizona Public Service Company Bylaws, amended as of December 16, 2008 Specimen Certificate of Pinnacle West Capital Corporation Common Stock, no par value...

  • Page 203
    ... 4.10 to APS's Registration Statement Nos. 33-55473, 33-64455 and 333-15379 by means of April 7, 1997 Form 8-K Report, File No. 1-4473 10.2 to Pinnacle West's March 31, 2003 Form 10-Q Report, File No. 1-8962 4.2a Pinnacle West APS 1-11-95 4.3 Pinnacle West APS Indenture dated as of November...

  • Page 204
    ...West's Registration Statement No. 333-52476 a Date Filed 12-21-00 4.5 Pinnacle West 4.2 to Pinnacle West's Registration Statement No. 333-52476 12-21-00 4.6 Pinnacle West APS 4.10 to APS's Registration Statement Nos. 333-15379 and 333-27551 by means of January 13, 1998 Form 8-K Report, File...

  • Page 205
    ...of the Company's total assets 8-3-06 4.6g Pinnacle West APS 2-25-09 4.7 Pinnacle West 8-9-04 4.7a Pinnacle West 4.1 to Pinnacle West's Form S-3 Registration Statement No. 333-155641, File No. 18962 11-25-08 4.8 Pinnacle West 4.1 to Pinnacle West's 1987 Form 10-K Report, File No. 1-8962...

  • Page 206
    ... to APS's 1993 Form 10K Report, File No. 1-4473 a Date Filed 3-30-94 10.1.1 Pinnacle West APS 10.2 to APS's September 30, 1991 Form 10-Q Report, File No. 1-4473 11-14-91 10.1.1a Pinnacle West APS 10.1 to APS's 1994 Form 10-K Report, File No. 1-4473 3-30-95 10.1.1b Pinnacle West APS 10...

  • Page 207
    ... Filed as Exhibit: a Date Filed 3-28-97 10.6 to APS's 1996 Form 10-K Report, File No. 1-4473 10.1.1e Pinnacle West APS 10.2 to Pinnacle West's March 31, 2002 Form 10-Q Report, File No. 1-8962 5-15-02 10.1.1f Pinnacle West APS 10.4 to Pinnacle West's March 2002 Form 10-Q Report, File...

  • Page 208
    ...a Date Filed 3-26-92 10.1 to Pinnacle West's 1991 Form 10-K Report, File No. 1-8962 10.1.2a Pinnacle West APS 10.2 to APS's 1992 Form 10-K Report, File No. 1-4473 3-30-93 10.1.2b Pinnacle West APS 10.3 to APS's 1994 Form 10-K Report, File No. 1-4473 3-30-95 10.1.2c Pinnacle West APS 10...

  • Page 209
    ... Filed as Exhibit: APS 10.5 to APS's 1996 Form 10-K Report, File No. 1-4473 a Date Filed 3-28-97 10.1.2e Pinnacle West APS 10.1 to Pinnacle West's March 31, 2002 Form 10-Q Report, File No. 1-8962 5-15-02 10.1.2f Pinnacle West APS 10.3 to Pinnacle West's March 31, 2002 Form 10-Q Report, File...

  • Page 210
    ... Amendment to the Arizona Public Service Company Deferred Compensation Plan effective January 1, 2001 Previously Filed as Exhibit: a Date Filed 3-8-89 10.4 to APS's 1988 Form 10-K Report, File No. 1-4473 10.2.1ab Pinnacle West APS 10.3A to APS's 1993 Form 10-K Report, File No. 1-4473 3-30...

  • Page 211
    ... Public Service 1999 Form 10-K Report, File Company Directors No. 1-8962 Deferred Compensation Plan, effective as of January 1, 1999 Trust for the Pinnacle 10.14A to Pinnacle West's West Capital 1999 Form 10-K Report, File Corporation, Arizona No. 1-8962 Public Service Company and SunCor Development...

  • Page 212
    ... Pinnacle West Capital Corporation, Arizona Public Service Company, SunCor Development Company and El Dorado Investment Company Deferred Compensation Plan 10.10A to APS's 1995 Form 10-K Report, File No. 1-4473 10.2.4b Pinnacle West APS 3-29-96 10.2.4ab Pinnacle West APS 10.7A to Pinnacle West...

  • Page 213
    ...4bb Registrant(s) Pinnacle West APS Description Second Amendment effective January 1, 2000 to the Pinnacle West Capital Corporation, Arizona Public Service Company, SunCor Development Company and El Dorado Investment Company Deferred Compensation Plan Third Amendment to the Pinnacle West Capital...

  • Page 214
    ... Excess Benefit Retirement Plan of 2005 Letter Agreement dated December 21, 1993, between APS and William L. Stewart Letter Agreement dated August 16, 1996 between APS and William L. Stewart Previously Filed as Exhibit: a Date Filed 2-20-09 10.2.6 to Pinnacle West/APS 2008 Form 10-K Report, File...

  • Page 215
    ... K. Edington Letter Agreement dated June 17, 2008 between Pinnacle West/APS and James R. Hatfield Description of 2008 Palo Verde Specific Compensation Opportunity for Randall K. Edington Previously Filed as Exhibit: a Date Filed 11-12-97 10.2 to APS's September 30, 1997 Form 10-Q Report, File No...

  • Page 216
    ... of 2010 Palo Verde Specific Compensation Opportunity for Randall K. Edington Letter Agreement dated May 21, 2009, between Pinnacle West Capital Corporation and David P. Falck Key Executive Employment and Severance Agreement between Pinnacle West and certain executive officers of Pinnacle West and...

  • Page 217
    ...West APS 10.5.3 to Pinnacle West/APS 2009 Form 10-K Report, File Nos. 1-8962 and 1-4473 2-19-10 10.6.1b Pinnacle West APS Appendix A to the Proxy Statement for the Plan Report for Pinnacle West's 1994 Annual Meeting of Shareholders, File No. 18962 10.12A to Pinnacle West's 1999 Form 10-K Report...

  • Page 218
    ...Plan Performance Share Agreement under the Pinnacle West Capital Corporation 2007 LongTerm Incentive Plan Previously Filed as Exhibit: 10.1 to Pinnacle West/APS December 9, 2005 Form 8-K Report, File Nos. 1-8962 and 1-4473 a Date Filed 12-15-05 10.6.2bbd Pinnacle West APS 10.1 to Pinnacle West...

  • Page 219
    ... Pinnacle West Form of Restricted Stock 10.2 to Pinnacle West/APS Unit Agreement under the June 30, 2010 Form 10-Q Pinnacle West Capital Report, File No. 1-8962 Corporation 2007 LongTerm Incentive Plan Pinnacle West Capital Corporation 2000 Director Equity Plan Pinnacle West Capital Corporation...

  • Page 220
    ... Corners Plant Site Application and Amendment No. 1 to Grant of multi-party rights-of-way and easements, Four Corners Power Plant Site dated April 25, 1985 Previously Filed as Exhibit: a Date Filed 10.7.1 Pinnacle West APS Pinnacle West APS 5.01 to APS's Form S-7 Registration Statement, File...

  • Page 221
    ...-of-way and easements, Navajo Plant Water Service Contract Assignment with the United States Department of Interior, Bureau of Reclamation, Navajo Plant Previously Filed as Exhibit: 5.05 to APS's Form S-7 Registration Statement, File No. 2-59644 a Date Filed 9-1-77 10.7.3a Pinnacle West APS 10...

  • Page 222
    ... Committee Agreement No. 1 dated as of September 30, 1971 Previously Filed as Exhibit: a Date Filed 3-13-06 10.107 to Pinnacle West/APS 2005 Form 10-K Report, File Nos. 1-8962 and 1-4473 10.8.5 Pinnacle West APS 10.108 to Pinnacle West/APS 2005 Form 10-K Report, File Nos. 1-8962 and...

  • Page 223
    ... Public Service Company of New Mexico, El Paso Electric Company, Southern California Public Power Authority, and Department of Water and Power of the City of Los Angeles Previously Filed as Exhibit: a Date Filed 3-8-89 10. 1 to APS's 1988 Form 10-K Report, File No. 1-4473 10.9.1a Pinnacle West...

  • Page 224
    ... Service Company of New Mexico, El Paso Electric Company, Southern California Public Power Authority, and Department of Water and Power of the City of Los Angeles Amendment No. 15, dated November 29, 2010, to Arizona Nuclear Power Project Participation Agreement, dated August 23, 1973, among APS...

  • Page 225
    ... APS and United States Department of Energy Western Area Power Administration, Salt Lake Area Integrated Projects for Firm Transmission Service dated May 5, 1995 10.3 to APS's 1995 Form 10K Report, File No. 1-4473 8-8-91 10.10.2a Pinnacle West APS 3-29-96 10.10.3 Pinnacle West APS 10.4 to APS...

  • Page 226
    ..., 2010 among Pinnacle West Capital Corporation, as Borrower, Bank of America, N.A, as Agent, and the lenders and other parties thereto Previously Filed as Exhibit: a Date Filed 3-29-96 10.6 to APS's 1995 Form 10-K Report, File No. 1-4473 10.11.1 Pinnacle West APS 10.11.3 to Pinnacle West/APS...

  • Page 227
    ... as of April 16, 2010 Previously Filed as Exhibit: a Date Filed 10.11.5 Pinnacle West APS 10.2 to Pinnacle West/APS March 31, 2010 Form 10-Q Report, File Nos. 1-8962 and 1-4473 5-6-10 10.11.6 Pinnacle West APS 10.3 to Pinnacle West/APS March 31, 2010 Form 10-Q Report, File Nos. 1-8962 and...

  • Page 228
    Exhibit No. 10.12.1c Registrant(s) Pinnacle West APS Description Previously Filed as Exhibit: a Date Filed 10-24-86 Facility Lease, dated as of 4.3 to APS's Form 18 August 1, 1986, between Registration Statement, File U.S. Bank National No. 33-9480 Association, successor to State Street Bank ...

  • Page 229
    ... Bank and Trust Company, as successor to The First National Bank of Boston, as Lessor, and APS, as Lessee 4.13 to APS's Form 18 Registration Statement No. 33-9480 by means of August 1, 1987 Form 8-K Report, File No. 1-4473 10.12.2 Pinnacle West APS 1-20-87 10.12.2a Pinnacle West APS 8-24-87...

  • Page 230
    ...the Transfer and Use of Wastewater and Effluent by and between APS, SRP and PWE dated June 1, 2001 Agreement for the Sale and Purchase of Wastewater Effluent dated November 13, 2000, by and between the City of Tolleson, Arizona, APS and SRP 10.102 to Pinnacle West/APS 2004 Form 10-K Report, File Nos...

  • Page 231
    ... dated April 29, 2010, by and between City of Phoenix, City of Mesa, City of Tempe, City of Scottsdale, City of Glendale, APS and Salt River Project Agricultural Improvement and Power District Contract, dated July 21, 1984, with DOE providing for the disposal of nuclear fuel and/or high-level...

  • Page 232
    ...Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d14(a) of the Securities Exchange Act, as amended Previously Filed as Exhibit: a Date Filed 6-26-98 10.2 to APS's May 19, 1998 Form 8-K Report, File No. 14473 10.16 Pinnacle West APS 10.1 to Pinnacle West/APS November 8, 2010 Form...

  • Page 233
    ...-Oxley Act of 2002 Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Previously Filed as Exhibit: a Date Filed 31.3 APS 31.4 APS 32.1 Pinnacle West 32.2 APS 208

  • Page 234
    ... Registrant(s) Pinnacle West APS Description Previously Filed as Exhibit: a Date Filed 3-30-93 Collateral Trust Indenture 4.2 to APS's 1992 Form 10among PVNGS II K Report, File No. 1-4473 Funding Corp., Inc., APS and Chemical Bank, as Trustee Supplemental Indenture 4.3 to APS's 1992 Form 10to...

  • Page 235
    ..., and the Equity Participant named therein Previously Filed as Exhibit: a Date Filed 12-4-86 10.8 to APS's September 30, 1986 Form 10-Q Report by means of Amendment No. 1, on December 3, 1986 Form 8, File No. 1-4473 99.2bc Pinnacle West APS 28.4 to APS's 1992 Form 10-K Report, File No. 1-4473...

  • Page 236
    ... as Owner Trustee, and Chemical Bank, as Indenture Trustee Previously Filed as Exhibit: 4.5 to APS's Form 18 Registration Statement, File No. 33-9480 a Date Filed 10-24-86 99.3ac Pinnacle West APS 10.6 to APS's September 30, 1986 Form 10-Q Report by means of Amendment No. 1 on December 3, 1986...

  • Page 237
    ... Trustee Previously Filed as Exhibit: a Date Filed 3-30-93 4.4 to APS's 1992 Form 10-K Report, File No. 1-4473 99.4c Pinnacle West APS 28.3 to APS's Form 18 Registration Statement, File No. 33-9480 10-24-86 99.4ac Pinnacle West APS 10.10 to APS's September 30, 1986 Form 10-Q Report by...

  • Page 238
    ... Trustee Previously Filed as Exhibit: a Date Filed 3-30-93 28.6 to APS's 1992 Form 10-K Report, File No. 1-4473 99.5 Pinnacle West APS Participation Agreement, 28.2 to APS's September 30, dated as of December 15, 1992 Form 10-Q Report, File 1986, among PVNGS No. 1-4473 Funding Report Corp...

  • Page 239
    ...the Owner Participant named therein Previously Filed as Exhibit: a Date Filed 8-10-87 28.20 to APS's Form 18 Registration Statement No. 33-9480 by means of a November 6, 1986 Form 8-K Report, File No. 1-4473 99.5b Pinnacle West APS 28.5 to APS's 1992 Form 10-K Report, File No. 1-4473 3-30-93...

  • Page 240
    ... Bank, as Indenture Trustee Previously Filed as Exhibit: a Date Filed 1-20-87 10.2 to APS's November 18, 1986 Form 10-K Report, File No. 1-4473 99.6a Pinnacle West APS 4.13 to APS's Form 18 Registration Statement No. 33-9480 by means of August 1, 1987 Form 8-K Report, File No. 1-4473 8-24-87...

  • Page 241
    ...1992 Form 10K Report, File No. 1-4473 a Date Filed 3-30-93 99.7 Pinnacle West APS 10.5 to APS's November 18, 1986 Form 8-K Report, File No. 1-4473 1-20-87 99.7a Pinnacle West APS 28.7 to APS's 1992 Form 10-K Report, File No. 1-4473 3-30-93 99.8c Pinnacle West APS 28.3 to APS's 1992 Form...

  • Page 242
    ... Agreement to Chemical Bank Arizona Corporation Commission Order, Decision No. 61969, dated September 29, 1999, including the Retail Electric Competition Rules Purchase Agreement by and among Pinnacle West Energy Corporation and GenWest, L.L.C. and Nevada Power Company, dated June 21, 2005 XBRL...

  • Page 243
    ...(s) Pinnacle West APS Description XBRL Taxonomy Definition Linkbase Document Previously Filed as Exhibit: a Date Filed _____ Reports filed under File No. 1-4473 and 1-8962 were filed in the office of the Securities and Exchange Commission located in Washington, D.C. Management contract or...

  • Page 244
    ... caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PINNACLE WEST CAPITAL CORPORATION (Registrant) Date: February 18, 2011 /s/ Donald E. Brandt (Donald E. Brandt, Chairman of the Board of Directors, President and Chief Executive Officer) Power of Attorney...

  • Page 245
    ... S. Lopez (Humberto S. Lopez) Director February 18, 2011 Director February 18, 2011 Director February 18, 2011 Director February 18, 2011 Director February 18, 2011 Director February 18, 2011 Director February 18, 2011 Director February 18, 2011 Director (Kathryn L. Munro) /s/ Bruce...

  • Page 246
    ... has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ARIZONA PUBLIC SERVICE COMPANY (Registrant) Date: February 18, 2011 /s/ Donald E. Brandt (Donald E. Brandt, Chairman of the Board of Directors and Chief Executive Officer) Power of Attorney We, the...

  • Page 247
    ... S. Lopez (Humberto S. Lopez) Director February 18, 2011 Director February 18, 2011 Director February 18, 2011 Director February 18, 2011 Director February 18, 2011 Director February 18, 2011 Director February 18, 2011 Director February 18, 2011 Director (Kathryn L. Munro) /s/ Bruce...

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