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PNW11
2011 ANNUAL REPORT
Pinnacle West Capital Corporation
Pinnacle West Capital Corporation 2011 ANNUAL REPORT

Table of contents

  • Page 1
    Pinnacle West Capital Corporation 2011 ANNUAL REPORT PNW11 2011 ANNUAL REPORT Pinnacle West Capital Corporation

  • Page 2

  • Page 3
    PINNACLE WEST CAPITAL CORPORATION COMBINES A SOLID FOUNDATION...Superior reliability and operating performance across our business • Excellent customer satisfaction and deep community involvement • Affordable electricity rates • A balanced, high-performing power generation portfolio • A ...

  • Page 4
    ... business in 2011 by rewriting the record books. The company achieved new bests for reliable service, customer satisfaction, power generation and employee safety. These achievements and others marked an outstanding year for APS, the principal operating subsidiary of Pinnacle West Capital Corporation...

  • Page 5
    /3 DONALD E . BRANDT Chairman, President and Chief Executive Officer

  • Page 6
    ... INVESTOR-OWNED ELECTRIC UTILITIES IN THE 2011 J.D. POWER CUSTOMER SATISFACTION SURVEY. Paut of puoviding gueat seuvice includes assisting customeus with the expanding options fou managing theiu home eneugy use. In 2011, we helped APS customeus take actions that collectively saved 440,000 megawatt...

  • Page 7
    ...megawatt Hyder Solar Plant as the first completed projects in our AZ Sun portfolio. In addition to pursuing the continued operation of Four Corners and developing Arizona's solar potential, we plan to meet future electricity demand with new investments in transmission. Our 10-year plan includes $550...

  • Page 8
    ... $3.3 million in service to the community. Our employees also support our communities through the annual Community Services Fund campaign, which benefits United Way and other local non-profit agencies. APS employees contributed $4 million to the community in 2011. PINNACLE WEST CAPITAL CORPORATION

  • Page 9
    ...pride in their day-to-day work on behalf of our customers and have committed themselves to achieve our vision of a sustainable energy future for Arizona. Thank you for your support and your investment in Pinnacle West. DONALD E . BRANDT Chairman, President and Chief Executive Officer March 7, 2012

  • Page 10
    8 / SOLAR PHOTOVOLTAIC ARRAYS PRODUCING CLEAN, RENEWABLE ENERGY AT THE COTTON CENTER SOLAR PLANT IN GILA BEND, ARIZONA.

  • Page 11
    PINNACLE WEST CAPITAL CORPORATION

  • Page 12
    ... POWER SUPPLY APS's diverse generation ï¬,eet had another strong year in 1011. The Palo Verde Nuclear Generating Station marked its 10th consecutive year as the nation's largest power producer, and generated the most megawatt-hours of energy in its history. In addition, APS's coal power plants...

  • Page 13
    A TURBINE GENERATOR AT THE PALO VERDE NUCLEAR GENERATING STATION'S UNIT 1.

  • Page 14
    TRANSMISSION BREAKERS AT APS'S MORGAN SUBSTATION NEAR ARIZONA'S LAKE PLEASANT.

  • Page 15
    ..., APS constructed or rebuilt 100 miles of transmission lines and upgraded several substations around the state in 2011. These actions helped the company deliver exceptional levels of power reliability. In 2011, the average APS customer experienced 0.79 outages with 69 minutes of interrupted service...

  • Page 16
    ... our customers to manage their energy use, install renewable power and save money. To date, we have placed more than 750,000 new digital meters on customer homes and businesses, providing our customers greater levels of control and functionality. In 2011, our award-winning energy efficiency programs...

  • Page 17
    NEW DIGITAL METERS BEING TESTED PRIOR TO INSTALLATION ON THE HOMES AND BUSINESSES OF APS CUSTOMERS.

  • Page 18
    ...Pinnacle West company. Officers Donald E. Brandt Chairman of the Board & Chief Executive Officer Donald G. Robinion 1978 President & Chief Operating Officer Randall K. Edington 2007 Executive Vice President & Chief Nuclear Officer, Palo Verde Nuclear Generating Station David P. Falck Executive Vice...

  • Page 19
    PINNACLE WEST HIGHLIGHTS / 17 DOLLARS AND SHARES IN MILLIONS, EXCEPT PER SHARE AMOUNTS 2011 2010 2009 STOCK SUMMARY Stock price per share - year-end Market capitalization - year-end Common shares outstanding - year-end PER SHARE HIGHLIGHTS (DILUTED) $ $ 48.18 5,263 109.2 $ $ 41.45 4,509 ...

  • Page 20
    ... FINANCIAL STATEMENTS DOLLARS IN MILLIONS 2011 2010 2009 YEAR ENDED DECEMBER 31, CONDENSED CONSOLIDATED STATEMENTS OF INCOME Operating revenues Fuel and purchased power Other operating expenses Operating income Net other income Interest expense Income taxes Income from continuing operations...

  • Page 21
    / 19 PINNACLE WEST CAPITAL CORPORATION NON- GAAP FINANCIAL INFORMATION Reconciliation of Net Income Attributable to Common Shareholders (GAAP Measure) to On-going Earnings (Non-GAAP Financial Measure) DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS 2011 MILLIONS PER SHARE MILLIONS 2010 PER SHARE...

  • Page 22
    ..., Director (602) 250-5668 ADMINISTRATIVE INFORMATION Company contact: Jacqueline Patterson (602) 250-5511 [email protected] CORPORATE HEADQUARTERS STOCK LISTING ANNUAL MEETING OF SHAREHOLDERS 400 North 5th Street Phoenix, Arizona 85004 Mailing address: P.O. Box 53999 Phoenix...

  • Page 23
    ...common equity, as of the last business day of each registrant's most recently completed second fiscal quarter: PINNACLE WEST CAPITAL CORPORATION $4,848,522,427 as of June 30, 2011 ARIZONA PUBLIC SERVICE COMPANY $0 as of June 30, 2011 The number of shares outstanding of each registrant's common stock...

  • Page 24
    ...on Accounting and Financial Disclosure ...172 Item 9A. Controls and Procedures ...172 Item 9B. Other Information ...173 ...173 Directors, Executive Officers and Corporate Governance of Pinnacle West . 173 Executive Compensation...173 Security Ownership of Certain Beneficial Owners and Management and...

  • Page 25
    ... Palo Verde Pinnacle West PRP PSA Alternating Current 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...

  • Page 26
    ... purchased power costs; fuel and water supply availability; regulatory and judicial decisions, developments and proceedings; new legislation or regulation, including those relating to environmental requirements and nuclear plant operations; our ability to meet renewable energy and energy efficiency...

  • Page 27
    ... and distribution. BUSINESS OF ARIZONA PUBLIC SERVICE COMPANY APS currently provides electric service to approximately 1.1 million customers. We own or lease approximately 6,340 MW of regulated generation capacity and we hold a mix of both long-term and short-term purchased power agreements for...

  • 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
    .... Resource planning is an important function necessary to meet Arizona's future energy needs. APS's sources of energy by fuel type during 2011 were as follows: Gas, Oil & Other 17.1% Purchased Power 19.0% Coal 36.7% Nuclear 27.2% Generation Facilities APS has ownership interests in or leases...

  • Page 30
    ...Item 7 for developments impacting these coal facilities. 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...

  • Page 31
    ... of Federal Claims ruled in favor of APS and in October 2010 awarded $30.2 million in damages to the Palo Verde participants for costs incurred through December 2006. The DOE had planned to meet its NWPA and Standard Contract disposal obligations by designing, licensing, constructing, and operating...

  • 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 (paid by all retail customers taking service from the APS system). See Note 23 for additional information about APS's nuclear...

  • Page 33
    ... on Palo Verde or APS. Natural Gas and Oil Fueled Generating Facilities APS has six natural gas power plants located throughout Arizona, consisting of Redhawk, located near the Palo Verde Nuclear Generating Station; Ocotillo, located in Tempe; Sundance, located in Coolidge; West Phoenix, located in...

  • Page 34
    ... Resources - Renewable Energy Standard - Renewable Energy Portfolio." Current and Future Resources Current Demand and Reserve Margin Electric power demand is generally seasonal. In Arizona, demand for power peaks during the hot summer months. APS's 2011 peak one-hour demand on its electric system...

  • Page 35
    ... RES requirements includes executing purchased power contracts for new facilities, ongoing development of distributed energy resources and procurement of new facilities to be owned by APS. APS continues to develop owned solar resources through the AZ Sun Program. The AZ Sun Program allows APS to own...

  • Page 36
    ... conditions, including successful siting, permitting and interconnection of the projects to the electric grid. Actual/ Target Commercial Operation Date Net Capacity In Operation (MW AC) Net Capacity Planned/ Under Development (MW AC) Location APS Owned Solar: AZ Sun Program: Paloma Gila Bend, AZ...

  • Page 37
    ... Community Power Project. Achieved through incentive-based programs. Includes resources with production-based incentives that have terms of 10-20 years. Agreement ramps up to 40 MW over three years. Demand Side Management In recent years, Arizona regulators have placed an increased focus on energy...

  • Page 38
    ...for information regarding APS's transmission rates.) During 2011, approximately 4.8% 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
    ... may prohibit it from making emission control expenditures at the plant. (See "Energy Sources and Resource Planning - Generation Facilities - Coal Fueled Generating Facilities - Four Corners" above for details of the pending sale of SCE's interest in Four Corners to APS.) Regulatory Initiatives. In...

  • Page 40
    ...Source Performance Standards ("NSPS") for greenhouse gas emissions from certain new and modified electric generating units. The proposed standards are currently under review at the White House Office of Management and Budget, and a final rule is expected in 2012. In addition, it is possible that the...

  • Page 41
    ... any federal common law right to seek abatement of greenhouse gas emissions from fossil fuel-fired power plants. However, the Court left open the issue of whether such claims may be available under state law. Oral argument in the Kivalina case was heard on November 28, 2011; the parties await the...

  • Page 42
    ... Four Corners. If APS's purchase of SCE's interest in Units 4 and 5 is consummated and Units 1-3 are closed, APS's total costs for these controls would be approximately $300 million. (See "Energy Sources and Resource Planning - Generation Facilities - Coal Fueled Generating Facilities - Four Corners...

  • Page 43
    ... on a voluntary basis. APS's share of the costs related to the implementation 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 Expenditures" in Item...

  • Page 44
    ... on its financial position, results of operations, or cash flows. 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. This request is part of an enforcement...

  • Page 45
    ... cannot accurately estimate our total expenditures. Manufactured Gas Plant Sites. Certain properties which APS now owns or which were previously owned by it or its corporate predecessors were at one time sites of, or sites associated with, manufactured gas plants. APS is taking action to voluntarily...

  • Page 46
    ... Corners. Conflicting claims to limited amounts of water in the southwestern United States have resulted in numerous court actions, which, in addition to future supply conditions, have the potential to impact APS operations. San Juan River Adjudication. Both groundwater and surface water in areas...

  • Page 47
    ... River Watershed in Arizona to assert any claims to water on or before January 20, 1987, in an action pending in Maricopa County, 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...

  • Page 48
    ...ventures. El Dorado's short-term goal is to prudently realize the value of its existing investments. As of December 31, 2011, El Dorado had total assets of $20 million. SunCor SunCor was a developer of residential, commercial and industrial real estate projects in Arizona, Idaho, New Mexico and Utah...

  • Page 49
    ... a new three-year collective bargaining agreement with union employees in the fossil generation, energy delivery and customer service business areas that expires in April 2014. The agreement with union employees serving as Palo Verde security officers expires in 2013. WHERE TO FIND MORE INFORMATION...

  • Page 50
    ... and uncertainties apply to Pinnacle West and its subsidiaries, including APS. REGULATORY RISKS Our financial condition depends upon APS's ability to recover costs in a timely manner from customers through regulated rates and otherwise execute its business strategy. APS is subject to comprehensive...

  • Page 51
    ... 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 52
    ... the City of Kivalina, Alaska against us and several other utilities seeking damages related to climate change. Financial Risks - Potential Legislation and Regulation. It is possible that some form of legislation or EPA action to regulate domestic greenhouse gas emissions may occur in the future at...

  • Page 53
    ... APS's service territory. In 2010, the ACC issued a decision holding that solar vendors that install and operate solar facilities for non-profit schools and governments pursuant to a specific type of contract that calculates payments based on the energy produced are not "public service corporations...

  • Page 54
    ... will likely increase participation by APS customers in energy efficiency and conservation programs and other demand-side management efforts, which in turn will impact the demand for electricity. The rules also include a requirement for the ACC to review and address financial disincentives, recovery...

  • Page 55
    ..., health, fuel supply, spent fuel disposal, regulatory and financial risks and the risk of terrorist attack. APS has an ownership interest in and operates, on behalf of a group of participants, Palo Verde, which is the largest nuclear electric generating facility in the United States. Palo Verde is...

  • Page 56
    ... of our business could result in financial losses that negatively impact our results of operations. APS's operations include managing market risks related to commodity prices. APS is exposed to the impact of market fluctuations in the price and transportation costs of electricity, natural gas and...

  • Page 57
    ... of insurance addressing such activities could increase costs and have a material adverse impact on our financial results. These types of events could also require significant management attention and resources, and could adversely affect Pinnacle West's and APS's reputation with customers and the...

  • Page 58
    ... funds available to us for operations, future business opportunities or other purposes. A downgrade of our credit ratings could materially and adversely affect our business, financial condition and results of operations. Our current ratings are set forth in "Liquidity and Capital Resources - Credit...

  • Page 59
    ...financial condition. We have significant pension plan and other postretirement benefits plan obligations to our employees and retirees and legal obligations to fund nuclear decommissioning trusts for Palo Verde. We hold and invest substantial assets in these trusts that are designed to provide funds...

  • Page 60
    ... parties of significant claims or proceedings against 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...

  • Page 61
    ... and construction claims that may be 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...

  • Page 62
    ... "Business of Arizona Public Service Company - Energy Sources and Resource Planning - Generation Facilities - Nuclear" 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 63
    ... Project (10%), Public Service Company of New Mexico (13%), SCE (48%), Tucson Electric Power Company (7%) and El Paso Electric Company (7%). The plant is operated by APS. As discussed under "Business of Arizona Public Service Company - Energy Sources and Resource Planning - Generation Facilities...

  • Page 64
    ... constructed as capable of stringing a 230kV line as a second circuit. APS continues to work with regulators to identify transmission projects necessary to support renewable energy facilities. Two such projects, which are included in APS's 2012 transmission plan, are the Delaney to Palo Verde line...

  • Page 65
    ... See "Business of Arizona Public Service Company - Environmental Matters" in Item 1 with regard to pending or threatened litigation and other disputes. See Note 3 for ACC and FERC-related matters. See Note 11 for information relating to the FERC proceedings on Pacific Northwest energy market issues...

  • Page 66
    ..., 2012, current positions and principal occupations for the past five years are as follows: Name Donald E. Brandt Age 57 Position Chairman of the Board and Chief Executive Officer of Pinnacle West; Chairman of the Board of APS President of Pinnacle West Chief Executive Officer of APS Chief Operating...

  • Page 67
    ...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 and Chief Customer Officer General Manager Customer Service/Southern Arizona Operations...

  • Page 68
    ... of APS Vice President, Human Resources and Ethics of APS Vice President, Human Resources of APS Vice President, Employee Relations, Safety, Compliance & Embrace of American Express Company Vice President, HR Relationship Leader, Global Corporate Travel Division of American Express Company 2011...

  • Page 69
    PART 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, 2012, Pinnacle West's common stock was ...

  • Page 70
    ... Purchases of Equity Securities The following table contains information about our purchases of our common stock during the fourth quarter of 2011. Total Number of Shares Purchased (1) --2,433 2,433 Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs ----Maximum Number...

  • Page 71
    ... SELECTED FINANCIAL DATA PINNACLE WEST CAPITAL CORPORATION - CONSOLIDATED 2011 OPERATING RESULTS Operating revenues: Regulated electricity Marketing and trading Other revenues Total operating revenues Income from continuing operations Income (loss) from discontinued operations - net of income taxes...

  • Page 72
    SELECTED FINANCIAL DATA ARIZONA PUBLIC SERVICE COMPANY - CONSOLIDATED 2011 OPERATING RESULTS Electric operating revenues Fuel and purchased power costs Other operating expenses Operating income Other income Interest expense - net of allowance for borrowed funds Net income Less: Net income ...

  • Page 73
    ...do so. Areas of Business Focus Operational Performance, Reliability and Recent Developments. Nuclear. In 2011, Palo Verde achieved its best generation year ever, producing over 31 million megawatt-hours, with an overall station capacity factor of 90.7%. In 2011, Palo Verde successfully refueled both...

  • Page 74
    ... for upgrades and replacements. APS is working closely with regulators to identify and plan for transmission needs resulting from the current focus on renewable energy. APS is also working to establish and expand smart grid technology throughout its service territory designed to provide long-term...

  • Page 75
    ...by APS, purchased power contracts for new facilities and ongoing development of distributed energy resources. Through the AZ Sun Program, APS plans to own up to 200 MW of solar photovoltaic power plants across Arizona by investing up to $975 million through 2015. Under this program, APS has executed...

  • Page 76
    ... future outside of continual rate cases. See Note 3 for details regarding the current rate case, the Settlement Agreement terms and for 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, and costs...

  • Page 77
    ...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 78
    .... An allowance for borrowed funds 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. RESULTS OF OPERATIONS Pinnacle West's reportable business segment is our regulated electricity segment...

  • Page 79
    ...2011 2010 Net Change (dollars in millions) Regulated Electricity Segment: Operating revenues less fuel and purchased power expenses (a) (b) Operations and maintenance (a) (b) Depreciation and amortization Taxes other than income taxes Other expenses, net Interest charges, net of allowances for funds...

  • Page 80
    ... income, but increased both electric operating revenues and operations and maintenance expenses by $28 million. Costs related to the settlement were offset by related revenues from SCE, which leases the related transmission line from APS. (b) Operating revenues less fuel and purchased power expenses...

  • Page 81
    ... current year and income tax benefits recognized in the prior year related to a reduction in the Company's 2010 effective income tax rate. Discontinued Operations Income from discontinued operations for year ended December 31, 2011 included a gain of $10 million related to the sale of our investment...

  • Page 82
    ... 2009 Net Change (dollars in millions) Regulated Electricity Segment: Operating revenues less fuel and purchased power expenses (a) Operations and maintenance (a) Depreciation and amortization Taxes other than income taxes Other expenses, net Interest charges, net of allowance for funds used during...

  • Page 83
    ... 2010: Retail base rate increases, net of deferrals Line extension revenues (Note 3) Transmission rate increases Higher demand-side management and renewable energy surcharges Higher fuel and purchased power costs, net of off-system sales Recovery of PSA deferrals Lower usage per customer Effects of...

  • Page 84
    ...balances. Interest charges, net of allowance for funds used during construction are comprised of the regulated electricity segment portions of the line items interest expense and allowance for equity and borrowed funds used during construction from the Consolidated Statements of Income. Income taxes...

  • Page 85
    ... financing and equity infusions from Pinnacle West. Many of APS's current capital expenditure projects qualify for bonus depreciation. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 includes provisions making qualified property placed into service after September...

  • Page 86
    ... cash provided as a result of changes in commodity prices, and other changes in working capital. In addition, APS's operating cash flows included income tax payments to the parent company of approximately $81 million in 2010. Other Pinnacle West sponsors a qualified defined benefit pension plan and...

  • Page 87
    ... 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...

  • Page 88
    ...On September 7, 2011, APS entered into a new letter of credit agreement supporting its approximately $27 million aggregate principal amount of Coconino County, Arizona Pollution Control Corporation Pollution Control Revenue Refunding Bonds (Arizona Public Service Company Navajo Project), 2009 Series...

  • Page 89
    ... a letter of credit agreement supporting its approximately $17 million aggregate principal amount of Coconino County, Arizona Pollution Control Corporation Pollution Control Revenue Bonds (Arizona Public Service Company Project), 1998. The agreement expires December 8, 2016. On January 10, 2012, APS...

  • Page 90
    ... 6 for further discussions of liquidity matters. Credit Ratings The ratings of securities of Pinnacle West and APS as of February 15, 2012 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...

  • Page 91
    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 Corporate credit rating Commercial paper Outlook APS Senior unsecured Secured lease obligation bonds Corporate credit ...

  • Page 92
    ...: (a) APS Pinnacle West Total long-term debt payments, including interest and capital lease obligations Fuel and purchased power commitments (b) Renewable energy credits (c) Purchase obligations (d) Nuclear decommissioning funding requirements Noncontrolling interests Operating lease payments Total...

  • Page 93
    ... 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 these assumptions on an annual basis and adjust them as necessary. The following chart reflects the sensitivities that a change in...

  • Page 94
    ... obligation on the Consolidated Balance Sheets and our 2011 reported other postretirement benefit 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) Impact on...

  • Page 95
    ... trust fund also has risks associated with the changing market value of its investments. Nuclear decommissioning costs are recovered in regulated electricity prices. The tables below present contractual balances of our consolidated long-term and short-term debt at the expected maturity dates as...

  • Page 96
    ... 3,640,276 $ 3,869,681 $ 2011 2012 2013 2014 2015 2016 Years thereafter Total Fair value 2010 2011 2012 2013 2014 2015 Years thereafter Total Fair value Short-Term Debt Interest Rates Amount 0.84% -----$ 16,600 -----$ 16,600 $ 16,600 Variable-Rate Long-Term Debt Interest Rates Amount 0.32% -0.32...

  • Page 97
    ...,420 314,000 1,605,150 $ 3,335,107 $ 3,758,811 $ 2011 2012 2013 2014 2015 2016 Years thereafter Total Fair value $ $ 2010 2011 2012 2013 2014 2015 Years thereafter Total Fair value Commodity Price Risk Variable-Rate Long-Term Debt Interest Rates Amount 0.32% -0.32% ---$ 26,710 -16,870 ---43,580...

  • Page 98
    ...to changes in forward natural gas prices. The table below shows the fair value of maturities of our derivative contracts (dollars in millions) at December 31, 2011 by maturities and by the type of valuation that is performed to calculate the fair values. See Note 1, "Derivative Accounting" and "Fair...

  • Page 99
    December 31, 2011 Gain (Loss) Mark-to-market changes reported in: Earnings Natural gas Regulatory asset (liability) or OCI (a) Electricity Natural gas Total (a) Price Up 10% $ 1 Price Down 10% $ (1) December 31, 2010 Gain (Loss) Price Up 10% $ 1 Price Down 10% $ (1) $ 5 27 33 $ (5) (27) (33) $...

  • Page 100
    (This฀page฀intentionally฀left฀blank)

  • Page 101
    ...of Changes in Equity for 2011, 2010 and 2009 ...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 Consolidated Statements of...

  • Page 102
    ...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 103
    REPORT OF INDEPENDENT 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 "Company") as of December ...

  • Page 104
    ... fairly, in all material respects, the financial position of Pinnacle West Capital Corporation and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011, in conformity with accounting...

  • Page 105
    PINNACLE WEST CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (dollars and shares in thousands, except per share amounts) 2011 OPERATING REVENUES Regulated electricity Other revenues Total OPERATING EXPENSES Regulated electricity fuel and purchased power Operations and maintenance Depreciation...

  • Page 106
    PINNACLE WEST CAPITAL CORPORATION CONSOLIDATED BALANCE SHEETS (dollars in thousands) December 31, 2011 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 ...

  • Page 107
    PINNACLE WEST CAPITAL CORPORATION CONSOLIDATED BALANCE SHEETS (dollars in thousands) December 31, 2011 LIABILITIES AND EQUITY CURRENT LIABILITIES Accounts payable Accrued taxes Accrued interest Short-term borrowings (Note 5) Current maturities of long-term debt (Note 6) Customer deposits Liabilities...

  • Page 108
    ... 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 sale of district cooling business Proceeds from sale of energy-related products and services business...

  • Page 109
    PINNACLE WEST CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (dollars in thousands) Year Ended December 31, 2010 $ 2,153,295 263,297 4,780 2,421,372 (3,812) (82) 1,655 (2,239) 1,298,213 350,053 (224,305) -1,423,961 $ 2011 COMMON STOCK (Note 7) Balance at beginning of year Issuance...

  • Page 110
    ... projects to commercial and industrial retail customers in competitive markets in the western United States. APSES was sold in 2011 and is now reported as discontinued operations (see Note 21). El Dorado is an investment firm. Pinnacle West's Consolidated Financial Statements include the accounts...

  • Page 111
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following tables show the impact of the reclassifications of prior years (previously reported) amounts (dollars in thousands): As previously reported $ 82,967 877,406 414,555 135,334 65,651 6,368 (9,764) ...

  • Page 112
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Amount reported after reclassification for regulatory assets and liabilities $ 62,286 124,897 986,370 58,442 80,526 1,863,861 Balance Sheets - December 31, 2010 Current Assets - Other regulatory assets Current Assets - ...

  • Page 113
    ...from those estimates. Regulatory Accounting APS is regulated by the ACC and the FERC. The accompanying financial statements reflect the rate-making policies of these commissions. As a result, we capitalize certain costs that would be included as expense in the current period by unregulated companies...

  • Page 114
    ... supports electric service, consisting primarily of generation, transmission and distribution facilities. We report utility plant at its original cost, which includes material and labor; contractor costs; capitalized leases; construction overhead costs (where applicable); and allowance for funds...

  • Page 115
    ... into commercial operation. AFUDC was calculated by using a composite rate of 10.25% for 2011, 9.2% for 2010, and 5.9% for 2009. APS compounds AFUDC semi-annually and ceases to accrue AFUDC when construction work is completed and the property is placed in service. Materials and Supplies APS values...

  • Page 116
    ... 14 for additional information about fair value measurements. Derivative Accounting We are exposed to the impact of market fluctuations in the commodity price and transportation costs of electricity, natural gas, coal, emission allowances and in interest rates. We manage risks associated with market...

  • Page 117
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Retirement Plans and Other Benefits Pinnacle West sponsors a qualified defined benefit and account balance pension plan for the employees of Pinnacle West and its subsidiaries. We also sponsor another postretirement benefit...

  • Page 118
    ... million in 2012, $35 million in 2013, $28 million in 2014, $21 million in 2015, and $13 million in 2016. At December 31, 2011, the weighted average remaining amortization period for intangible assets was 7 years. Investments El Dorado accounts for its investments using either the equity method (if...

  • Page 119
    ...-term debt Common stock equity Weighted-average cost of capital ï,· a Base Fuel Rate of $0.03242 per kWh based on estimated 2012 prices (a decrease from the current Base Fuel Rate of $0.03757 per kWh). APS proposed that its PSA be modified to allow full pass-through of all fuel and purchased power...

  • Page 120
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS transfer of cost recovery for certain renewable energy projects from the RES surcharge to base rates in an estimated amount of $36.8 million. APS also agreed not to file its next general rate case before May 31, 2015, and ...

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

  • Page 122
    ... 2008 retail rate case settlement agreement requires APS to submit an annual Energy Efficiency Implementation Plan for review by and approval of the ACC. In 2010, the DSMAC was modified to recover estimated amounts for use on certain demand-side management programs over the current year. Previously...

  • Page 123
    ... 2012 requirement under such rules is for energy efficiency savings of 1.75% of APS retail sales for the prior year. This energy savings requirement is slightly higher than the goal established by the settlement agreement related to APS's 2008 retail rate case (1.5% of total energy resources). APS...

  • Page 124
    ... CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table shows the changes in the deferred fuel and purchased power regulatory asset (liability) for 2011 and 2010 (dollars in millions): Year Ended December 31, Beginning balance Deferred fuel and purchased power costs-current...

  • Page 125
    ...detail of regulatory assets is as follows (dollars in millions): Remaining Amortization Period Pension and other postretirement benefits Income taxes -AFUDC equity Deferred fuel and purchased power - mark-to-market (Note 18) Transmission vegetation management Coal reclamation Palo Verde VIE (Note 20...

  • Page 126
    ...3 $ 139 Non-Current $ 357 184 --41 16 1 -15 614 Removal costs Asset retirement obligations Renewable energy standard (b) Income taxes - change in rates Spent nuclear fuel Deferred gains on utility property Income taxes-unamortized investment tax credit Deferred fuel and purchased power (b)(c) Other...

  • Page 127
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS which decreased our effective tax rate. Additionally, the settlement resulted in the recognition of net interest benefits of approximately $4 million through the effective tax rate. The following is a tabular reconciliation...

  • Page 128
    ... income tax benefit Credits and favorable adjustments related to prior years resolved in current year Medicare Subsidy Part-D Allowance for equity funds used during construction (see Note 1) Palo Verde VIE noncontrolling interest (see Note 20) Other Income tax expense - continuing operations $ 188...

  • Page 129
    ... CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table shows the net deferred income tax liability recognized on the Consolidated Balance Sheets (dollars in thousands): December 31, 2011 2010 130,571 $ 124,897 (1,925,388) (1,863,861) (1,794,817) $ (1,738,964) Current...

  • Page 130
    ... investments and assets held 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...

  • Page 131
    ...unsecured debt credit ratings. At December 31, 2011, the Pinnacle West credit facility was available to refinance indebtedness of the Company and for other general corporate purposes, including credit support for its $200 million commercial paper program. Pinnacle West has the option to increase the...

  • Page 132
    ...31, 2010 (dollars in millions): Letters of Credit Used Weighted Average Interest Rate Credit Facility Pinnacle West Revolving Credit Facility Pinnacle West Commercial Paper APS Revolving Credit Facility APS Revolving Credit Facility Total Expiration Amount Committed Short-Term Borrowings Unused...

  • Page 133
    ..., APS requested authorization to (i) allow for other types of securities providing long-term capital financing, including preferred stock, trust preferred securities or other forms of hybrid securities, and (ii) manage interest rate risks and exposure associated with any long-term or short-term...

  • Page 134
    ... WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, Maturity Dates (a) APS Pollution Control Bonds: Variable Fixed Pollution control bonds with senior notes Total Pollution Control Bonds Senior unsecured notes Palo Verde sale leaseback lessor notes Capitalized lease...

  • Page 135
    ...expires September 22, 2016. On December 8, 2011, APS extended a letter of credit agreement supporting its approximately $17 million aggregate principal amount of Coconino County, Arizona Pollution Control Corporation Pollution Control Revenue Bonds (Arizona Public Service Company Project), 1998. The...

  • Page 136
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS See Lines of Credit and Short-Term Borrowings in Note 5 and "Financial Assurances" in Note 11 for discussion of APS's other letters of credit. Debt Provisions Pinnacle West's and APS's debt covenants related to their ...

  • Page 137
    ... into APS in the form of equity infusions. APS has used these contributions to repay short-term indebtedness, to finance capital expenditures and for other general corporate purposes. At December 31, 2011, Pinnacle West had 10 million shares of serial preferred stock authorized with no par value...

  • Page 138
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS to receive using information about the participant. The pension plan covers nearly all employees. The supplemental excess benefit retirement plan covers officers of the Company and highly compensated employees designated ...

  • Page 139
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Pension 2011 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 140
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2011 $ 2,699,126 2,396,575 1,850,550 2010 $ 2,345,060 2,065,091 1,775,596 Projected benefit obligation Accumulated benefit obligation Fair value of plan assets The following table shows the amounts recognized on the ...

  • Page 141
    ... income assets and return-generating assets. Long-term fixed income assets are designed to offset changes in benefit obligations due to changes in discount rates and inflation. Return-generating assets are intended to provide a reasonable long-term rate of investment return with a prudent level of...

  • Page 142
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS assets is reviewed on at least an annual basis. Other investment strategies include the external management of the plans' assets, and the prohibition of investments in Pinnacle West securities. Long-term fixed income assets...

  • Page 143
    ... WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The fair value of Pinnacle West's pension plan and other postretirement benefit plan assets at December 31, 2011, by asset category, are as follows (dollars in thousands): Quoted Prices in Active Markets for Identical Assets (Level...

  • Page 144
    ... WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The fair value of Pinnacle West's pension plan and other postretirement benefit plan assets at December 31, 2010, by asset category, are as follows (dollars in thousands): Quoted Prices in Active Markets for Identical Assets (Level...

  • Page 145
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table shows the changes in fair value for assets that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2010 (dollars in thousands...

  • Page 146
    ...FINANCIAL STATEMENTS Year 2012 2013 2014 2015 2016 Years 2017-2021 (a) $ Pension 113,075 122,750 132,302 141,516 154,379 941,377 Other Benefits (a) $ 27,610 30,562 33,451 36,489 39,525 246,091 The estimated future other benefit payments take into account the Medicare Part D subsidy. Electric plant...

  • Page 147
    ... facilities with other companies. Our share of operations and maintenance expense and utility plant costs related to these facilities is accounted for using proportional consolidation. The following table shows APS's interests in those jointly-owned facilities recorded on the Consolidated Balance...

  • Page 148
    ... 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 $122 million (in 2011 dollars) over the current life of Palo Verde for its share...

  • Page 149
    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 150
    ... any federal common law right to seek abatement of greenhouse gas emissions from fossil fuel-fired power plants. However, the Court left open the issue of whether such claims may be available under state law. Oral argument in the Kivalina case was heard on November 28, 2011; the parties await the...

  • Page 151
    ...WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Within the same time period that APS's Yuma customers lost service, a series of transmission and generation disruptions occurred across the systems of several utilities that resulted in outages affecting portions of southern Arizona...

  • Page 152
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS the payment of principal and interest of such debt obligations. These letters of credit expire in 2016. APS has also entered into letters of credit to support certain equity participants in the Palo Verde sale leaseback ...

  • Page 153
    ... Quarterly Financial Data (Unaudited) Consolidated quarterly financial information for 2011 and 2010 is as follows (dollars in thousands, except per share amounts): March 31,(a) Operating revenues Operations and maintenance Operating income Income taxes Income (loss) from continuing operations Net...

  • Page 154
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, As originally reported in the 2010 10-K: Operating revenues Operations and maintenance Operating income Income taxes Income from continuing operations Net income (loss) attributable to common shareholders ...

  • Page 155
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. Fair Value Measurements We classify our assets and liabilities that are carried at fair value within the fair value hierarchy. This hierarchy ranks the quality and reliability of the inputs used to determine fair ...

  • Page 156
    ... fair value discussion of plan assets held in our retirement and other benefit plans. Cash Equivalents Cash equivalents represent short-term investments with original maturities of three months or less in exchange traded money market funds that are valued using quoted prices in active markets. Risk...

  • Page 157
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Cash equivalents reported within Level 2 represent investments held in a short-term investment commingled fund, valued using NAV, which invests in U.S. government fixed income securities. We may transact in this commingled ...

  • Page 158
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Quoted Prices in Active Markets for Identical Assets (Level 1) Assets Risk management activities-derivative instruments: Commodity contracts Nuclear decommissioning trust: U.S. commingled equity funds Fixed income ...

  • Page 159
    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-derivative instruments: Commodity contracts Nuclear decommissioning trust: U.S. commingled equity funds Fixed...

  • Page 160
    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, 2011 and 2010 (dollars in millions): ...

  • Page 161
    ... Stock-Based Compensation Pinnacle West grants long-term incentive awards under the 2007 long-term incentive plan ("2007 Plan") in the form of Stock Grants, Restricted Stock Units, Restricted Stock and Performance Shares and may grant incentive and stock options, stock appreciation rights, dividend...

  • Page 162
    ... in the same form as the restricted stock unit payment election. Restricted stock unit awards are accounted for as a liability award, with compensation cost initially calculated on the date of grant using Pinnacle West's closing stock price, and remeasured at each balance sheet date. Compensation...

  • Page 163
    ...share awards are accounted for as a liability awards, with compensation cost initially calculated on the date of grant using Pinnacle West's closing stock price, and remeasured at each balance sheet date. Compensation expense for retirement eligible participants is recognized immediately. Management...

  • Page 164
    ... at each balance sheet date, using Pinnacle West's closing stock price. The amount of cash to settle the payment on the first business day of 2010 was $1.3 million, and 2009 was $1.1 million. Incentive Shares On January 21, 2009, the Human Resources Committee approved under the 2007 Plan payment of...

  • Page 165
    ... cost that has been charged against income was $22 million in 2011, $15 million in 2010, and $4 million in 2009. Pinnacle West's current policy is to issue new shares to satisfy share requirements for stock compensation plans and it does not expect to repurchase any shares except to satisfy tax...

  • Page 166
    ... electricity service to Native Load customers) and related activities and includes electricity generation, transmission and distribution. Financial data for 2011, 2010 and 2009 is provided as follows (dollars in millions): Business Segments for the Year Ended December 31, 2011 Regulated Electricity...

  • Page 167
    ... FINANCIAL STATEMENTS Business Segments for the Year Ended December 31, 2010 Regulated Electricity All other (a) Total Segment $ 3,181 $ 8 $ 3,189 1,047 -1,047 4 1,013 1,009 1,125 4 1,129 415 -415 226 2 228 2 (20) (22) 506 161 345 ---506 161 345 Operating revenues Fuel and purchased power costs...

  • Page 168
    ... reportable business segment. 18. Derivative Accounting We are exposed to the impact of market fluctuations in the commodity price and transportation costs of electricity, natural gas, coal, emissions allowances and in interest rates. We manage risks associated with market volatility by utilizing...

  • Page 169
    ... FINANCIAL STATEMENTS may not meet the specific hedge accounting requirements and are not designated as accounting hedges. Contracts that have the same terms (quantities and delivery points) and for which power does not flow are netted, which reduces both revenues and fuel and purchased power costs...

  • Page 170
    ... not designated as accounting hedges during the year ended December 31, 2011 and December 31, 2010 (dollars in thousands): Commodity Contracts Net Gain (Loss) Recognized in Income Financial Statement Location Regulated electricity revenue Regulated electricity fuel and purchased power expense...

  • Page 171
    ... represents counterparty netting, options, and other risk management contracts. The following table provides information about the fair value of our risk management activities reported on a gross basis at December 31, 2010 (dollars in thousands): Not Designated as Hedging Instruments $ 64,153 60...

  • Page 172
    ... 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...

  • Page 173
    ... in Palo Verde Unit 2 and related common facilities. APS will pay approximately $49 million per year for the years 2011 to 2015 related to these leases. The leases do not contain fixed price purchase options or residual value guarantees. However, the lease agreements include fixed rate renewal...

  • Page 174
    ... $2 million of other assets. In February 2012, SunCor filed for protection under the United States Bankruptcy Code to complete an orderly liquidation of its business. We do not expect SunCor's bankruptcy to have a material impact on Pinnacle West's financial position, results of operations, or cash...

  • Page 175
    ... Total 23. Nuclear Decommissioning Trust $ 1 11 1 4 17 -17 $ 2009 170 87 23 -280 (14) 266 $ $ To fund the costs APS expects to incur to decommission Palo Verde, APS established external decommissioning trusts in accordance with NRC regulations. Third-party investment managers are authorized to...

  • Page 176
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS funds are invested in fixed income securities and equity securities. APS classifies investments in decommissioning trust funds as available for sale. As a result, we record the decommissioning trust funds at their fair ...

  • Page 177
    PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The fair value of fixed income securities, summarized by contractual maturities, at December 31, 2011 is as follows (dollars in millions): Fair Value $ 13 83 114 130 $ 340 Less than one year 1 year - 5 years 5 years - 10 ...

  • 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
    REPORT OF INDEPENDENT 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 "Company") as of December 31, 2011 ...

  • Page 180
    ... deteriorate. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Arizona Public Service Company and subsidiary as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each...

  • Page 181
    ARIZONA PUBLIC SERVICE COMPANY CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands) Year Ended December 31, 2010 $ 3,180,807 $ 2011 ELECTRIC OPERATING REVENUES OPERATING EXPENSES Fuel and purchased power Operations and maintenance Depreciation and amortization Income taxes (Notes 4 and S-1) ...

  • Page 182
    ARIZONA PUBLIC SERVICE COMPANY CONSOLIDATED BALANCE SHEETS (dollars in thousands) December 31, 2011 2010 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, 2011 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
    ... by operating activities: Depreciation 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...

  • Page 185
    ARIZONA PUBLIC SERVICE COMPANY CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (dollars in thousands) Year Ended December 31, 2010 $ 178,162 $ 2011 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
    ...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 and Contingencies Asset Retirement Obligations Selected Quarterly Financial Data (Unaudited) Fair Value...

  • Page 187
    ... related to income taxes on its Balance Sheets in accordance with accounting guidance for regulated operations. The regulatory assets are for certain temporary differences, primarily the allowance for equity funds used during construction and pension and other postretirement benefits. The regulatory...

  • Page 188
    ARIZONA PUBLIC SERVICE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of the balance sheet date, the tax year ended December 31, 2008 and all subsequent tax years remain subject to examination by the IRS. With few exceptions, we are no longer subject to state income tax examinations by tax ...

  • Page 189
    ... rate 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 Allowance for equity funds used during construction (see Note 1) Palo Verde...

  • Page 190
    ... 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 Deferred fuel and purchased power - mark-to-market Pension...

  • Page 191
    ARIZONA PUBLIC SERVICE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS S-2. Selected Quarterly Financial Data (Unaudited) Quarterly financial information for 2011 and 2010 is as follows (dollars in thousands): March 31, Operating revenues Operations and maintenance Operating income Net income (...

  • Page 192
    PINNACLE WEST CAPITAL CORPORATION HOLDING COMPANY SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF INCOME (in thousands) Year Ended December 31, 2010 $ 2,810 9,880 (7,070) $ 2011 Operating revenues Operating expenses Operating loss Other Equity in earnings (losses)...

  • Page 193
    PINNACLE WEST CAPITAL CORPORATION HOLDING COMPANY SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS (in thousands) Balance at December 31, 2010 2011 ASSETS Current assets Cash and cash equivalents Customer and other receivables Current deferred income taxes Income ...

  • Page 194
    PINNACLE WEST CAPITAL CORPORATION HOLDING COMPANY SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2010 2011 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided ...

  • Page 195
    PINNACLE 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 ...

  • Page 196
    ARIZONA 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...

  • Page 197
    ... Control Over Financial Reporting (Pinnacle West Capital Corporation)" on page 77 of this report and "Management's Report on Internal Control Over Financial Reporting (Arizona Public Service Company)" on page 153 of this report. (c) Attestation Reports of the Registered Public Accounting Firm...

  • Page 198
    ... 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," "Proposal...

  • Page 199
    ... or review of the financial statements that are not included in Audit Fees reported above, which primarily consist of fees for employee benefit plan audits performed in 2011 and 2010. (2) Pinnacle West's Audit Committee pre-approves each audit service and non-audit service to be provided by APS...

  • Page 200
    ...31, 2008 Form 10K, File No. 1-4473 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 2-20-09 4.1 Pinnacle West 4.1 to Pinnacle West June 28, 2011 Form 8-K Report, File No...

  • Page 201
    ... 33-55473 by means of January 1, 1995 Form 8-K Report, File No. 1-4473 4.2a Pinnacle West APS 1-11-95 4.3 Pinnacle West APS Indenture dated as of November 15, 1996 between APS and The Bank of New York, as Trustee 11-22-96 4.5 to APS's Registration Statements Nos. 33-61228, 33-55473, 33-64455...

  • Page 202
    ...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 203
    ... to Pinnacle West/APS August 22, 2011 Form 8-K Report, File Nos. 1-8962 and 1-4473 4.1 to Pinnacle West/APS January 10, 2012 Form 8-K Report, File Nos. 1-8962 and 1-4473 4.4 to Pinnacle West's June 23, 2004 Form 8-K Report, File No. 1-8962 4.6e Pinnacle West APS Ninth Supplemental Indenture dated...

  • Page 204
    ... and Restated Pinnacle West Capital Corporation Investors Advantage Plan dated as of November 25, 2008 Agreement, dated March 29, 1988, relating to the filing of instruments defining the rights of holders of longterm debt not in excess of 10% of the Company's total assets Agreement, dated March 21...

  • Page 205
    ... (PVNGS Unit 3), dated as of December 19, 2003 Previously Filed as Exhibit: a Date Filed 3-30-95 10.2 to APS's 1994 Form 10-K Report, File No. 1-4473 10.1.1c Pinnacle West APS 10.4 to APS's 1996 Form 10-K Report , File No. 14473 3-28-97 10.1.1d Pinnacle West APS 10.6 to APS's 1996 Form 10...

  • Page 206
    ... two separate Facility Leases, each relating to an undivided interest in PVNGS Unit 2 First Amendment to Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2), dated as of November 1, 1992 Previously Filed as Exhibit: 10.1 to Pinnacle West/APS March 31, 2007 Form 10-Q Report, File Nos...

  • Page 207
    ... (PVNGS Unit 2), dated as of December 19, 2003 Previously Filed as Exhibit: a Date Filed 3-30-95 10.3 to APS's 1994 Form 10-K Report, File No. 1-4473 10.1.2c Pinnacle West APS 10.1 to APS's June 30, 1996 Form 10-Q Report, File No. 1-4473 8-9-96 10.1.2d Pinnacle West APS APS 10.5 to APS...

  • Page 208
    ... to the Arizona Public Service Company Deferred Compensation Plan effective January 1, 1997 Previously Filed as Exhibit: a Date Filed 2-27-08 10.1.2h to Pinnacle West's 2007 Form 10-K Report, File No. 1-8962 10.2.1b Pinnacle West APS 10.4 to APS's 1988 Form 10-K Report, File No. 1-4473...

  • Page 209
    ...8962 Company Directors Deferred Compensation Plan, effective as of January 1, 1999 10.14A to Pinnacle West's Trust for the Pinnacle 1999 Form 10-K Report, File West Capital No. 1-8962 Corporation, Arizona Public Service Company and SunCor Development Company Deferred Compensation Plans dated August...

  • Page 210
    ...: a Date Filed Pinnacle West APS First Amendment dated 10.15A to Pinnacle West's December 7, 1999 to the 1999 Form 10-K Report, File Trust for the Pinnacle No. 1-8962 West Capital Corporation, Arizona Public Service Company and SunCor Development Company Deferred Compensation Plans Pinnacle West...

  • Page 211
    ...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 212
    ..., 2003 Pinnacle West Capital Corporation Supplemental Excess Benefit Retirement Plan of 2005 Letter Agreement dated December 20, 2006 between APS and Randall K. Edington Previously Filed as Exhibit: 10.2.6a to Pinnacle West/APS 2009 Form 10-K Report, File Nos. 1-8962 and 1-4473 a Date Filed 2-19...

  • Page 213
    ... Capital Corporation and David P. Falck Key Executive Employment and Severance Agreement between Pinnacle West and certain executive officers of Pinnacle West and its subsidiaries Previously Filed as Exhibit: 10.3 to Pinnacle West/APS June 30, 2008 Form 10-Q Report, File No. 1-4473 a Date Filed...

  • Page 214
    ...Plan Performance Share Agreement under the Pinnacle West Capital Corporation 2002 LongTerm Incentive Plan Previously Filed as Exhibit: 10.4 to Pinnacle West/APS September 30, 2007 Form 10-Q Report, File Nos. 18962 and 1-4473 a Date Filed 11-6-07 10.5.2bd Pinnacle West APS 10.3 to Pinnacle West...

  • Page 215
    ... Long-Term Incentive Plan Performance Share Agreement under the Pinnacle West Capital Corporation 2002 LongTerm Incentive Plan Pinnacle West Capital Corporation 2007 LongTerm Incentive Plan Previously Filed as Exhibit: a Date Filed 3-16-05 10.98 to Pinnacle West/APS 2004 Form 10-K Report, File...

  • Page 216
    ... Directors Summary of 2012 CEO Variable Incentive Plan and Officer Variable Incentive Plan Indenture of Lease with Navajo Tribe of Indians, Four Corners Plant 5.01 to APS's Form S-7 Registration Statement, File No. 2-59644 10.1 to Pinnacle West/APS September 30, 2007 Form 10-Q Report, File...

  • Page 217
    ...multi-party rights-of-way and easements, Four Corners Plant Site Previously Filed as Exhibit: 5.02 to APS's Form S-7 Registration Statement, File No. 2-59644 a Date Filed 9-1-77 10.7.1b Pinnacle West APS 7-25-85 10.36 to Pinnacle West's Registration Statement on Form 8-B Report, File No. 18962...

  • Page 218
    ...of Arizona Public Service Company rightsof-way and easements, Four Corners Power Plant Site dated April 25, 1985 Four Corners Project CoTenancy Agreement Amendment No. 6 Indenture of Lease, Navajo Units 1, 2, and 3 Previously Filed as Exhibit: 10.37 to Pinnacle West's Registration Statement on Form...

  • Page 219
    ... 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 220
    ... 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 221
    ... Company, 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: 99.1 to Pinnacle West's June 30, 2000 Form 10-Q Report, File No. 1-8962 a Date Filed...

  • Page 222
    ...APS dated April 5, 1995 Contract among PacifiCorp, 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...

  • Page 223
    ...Pinnacle West Capital Corporation, as Borrower, Barclays Bank PLC, 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 10.11.2 Pinnacle West 10.3 to Pinnacle West...

  • Page 224
    Exhibit No. 10.11.4 Registrant(s) APS Description $500,000,000 Four-Year Credit Agreement dated as of February 14, 2011 among Arizona Public Service Company as Borrower, Barclays Bank PLC, as Agent and Issuing Bank, Credit Suisse Securities (USA) LLC, as Syndication Agent, Credit Suisse AG, Cayman...

  • Page 225
    ...Exhibit: 10.3 to Pinnacle West/APS March 31, 2010 Form 10-Q Report, File Nos. 1-8962 and 1-4473 a Date Filed 5-6-10 10.11.6a Pinnacle West APS 10.12.1c Pinnacle West APS Facility Lease, dated as of 4.3 to APS's Form 18 August 1, 1986, between Registration Statement, File U.S. Bank National No...

  • Page 226
    ...1-4473 3-8-89 10.12.1cc Pinnacle West APS Amendment No. 3, dated 10.3 to APS's 1992 Form as of March 17, 1993, to 10-K Report, File No. 1-4473 Facility Lease, dated as of August 1, 1986, between U.S. Bank National Association, successor to State Street Bank and Trust Company, as successor to The...

  • Page 227
    ...Registrant(s) Pinnacle West APS Description Previously Filed as Exhibit: a Date Filed 1-20-87 Facility Lease, dated as of 10.1 to APS's November 18, December 15, 1986, 1986 Form 8-K Report, File between U.S. Bank No. 1-4473 National Association, successor to State Street Bank and Trust Company...

  • Page 228
    Exhibit No. 10.13.1 Registrant(s) Pinnacle West APS Description Agreement between Pinnacle West Energy Corporation and Arizona Public Service Company for Transportation and Treatment of Effluent by and between Pinnacle West Energy Corporation and APS dated as of the 10th day of April, 2001 ...

  • Page 229
    ...Registrant(s) Pinnacle West APS Description Municipal Effluent Purchase and Sale Agreement 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...

  • Page 230
    ... No. 10.16 Registrant(s) Pinnacle West APS Description Purchase and Sale Agreement dated November 8, 2010 by and between Southern California Edison Company and APS Proposed Settlement Agreement dated January 6, 2012 by and among APS and certain parties to its retail rate case Ratio of Earnings to...

  • Page 231
    ...-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 32.1e Pinnacle West 32.2e APS 206

  • Page 232
    ...99.1 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 4.3 to APS's 1992 Form 10Supplemental Indenture...

  • Page 233
    ...No. 99.2ac Registrant(s) Pinnacle West APS Description Amendment No. 1 dated as of November 1, 1986, to Participation Agreement, dated as of August 1, 1986, among PVNGS Funding Corp., Inc., Bank of America National Trust and Savings Association, State Street Bank and Trust Company, as successor to...

  • Page 234
    ... 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 235
    ... Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner 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...

  • Page 236
    ...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., Inc., State Street Bank and Trust Company...

  • Page 237
    Exhibit No. 99.5a Registrant(s) Pinnacle West APS Description Amendment No. 1, dated as of August 1, 1987, to Participation Agreement, dated as of December 15, 1986, among PVNGS Funding Corp., Inc. as Funding Corporation, State Street Bank and Trust Company, as successor to The First National Bank...

  • Page 238
    ... Company, as successor to The First National Bank of Boston, as Owner Trustee, and Chemical 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...

  • Page 239
    ... Company, as successor to The First National Bank of Boston, as Owner Trustee Indemnity Agreement dated as of March 17, 1993 by APS Previously Filed as Exhibit: 4.5 to APS's 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...

  • Page 240
    ...(s) Pinnacle West APS Description Extension Letter, dated as of August 13, 1987, from the signatories of the Participation Agreement to Chemical Bank Arizona Corporation Commission Order, Decision No. 61969, dated September 29, 1999, including the Retail Electric Competition Rules Purchase...

  • Page 241
    ...(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 242
    ... caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PINNACLE WEST CAPITAL CORPORATION (Registrant) Date: February 24, 2012 /s/ Donald E. Brandt (Donald E. Brandt, Chairman of the Board of Directors, President and Chief Executive Officer) Power of Attorney...

  • Page 243
    ...Johnson (Susan Clark-Johnson) Director February 24, 2012 /s/ Denis A. Cortese (Denis A. Cortese) Director February 24, 2012 /s/ Michael L. Gallagher (Michael L. Gallagher) Director February 24, 2012 /s/ Pamela Grant (Pamela Grant) Director February 24, 2012 /s/ Roy A. Herberger, Jr. (Roy...

  • Page 244
    ... the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ARIZONA PUBLIC SERVICE COMPANY (Registrant) Date: February 24, 2012 /s/ Donald E. Brandt (Donald E. Brandt, Chairman of the Board of Directors and Chief Executive Officer) Power of...

  • Page 245
    ...Johnson (Susan Clark-Johnson) Director February 24, 2012 /s/ Denis A. Cortese (Denis A. Cortese) Director February 24, 2012 /s/ Michael L. Gallagher (Michael L. Gallagher) Director February 24, 2012 /s/ Pamela Grant (Pamela Grant) Director February 24, 2012 /s/ Roy A. Herberger, Jr. (Roy...

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