APS 2011 Annual Report Download - page 152

PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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 transactions (see Note 20 for further details on the Palo Verde sale leaseback transactions).
These letters of credit will expire at December 31, 2015, totaling approximately $52 million.
Additionally, APS has issued two letters of credit to support the collateral obligations under a certain
natural gas tolling contracts entered into with third parties. At December 31, 2011, $30 million of
letters of credit were outstanding to support these tolling contract obligations. These letters of credit
will expire in 2015 and 2016.
We enter into agreements that include indemnification provisions relating to liabilities arising
from or related to certain of our agreements; most significantly, APS has agreed to indemnify the
equity participants and other parties in the Palo Verde sale leaseback transactions with respect to
certain tax matters. Generally, a maximum obligation is not explicitly stated in the indemnification
provisions and, therefore, the overall maximum amount of the obligation under such indemnification
provisions cannot be reasonably estimated. Based on historical experience and evaluation of the
specific indemnities, we do not believe that any material loss related to such indemnification
provisions is likely.
Pinnacle West sold its investment in APSES on August 19, 2011. Upon the closing of the sale,
Pinnacle West was released from its parental guarantee and surety bond obligations related to the
APSES business. Pinnacle West has also issued parental guarantees and surety bonds for APS which
were not material at December 31, 2011.
12. Asset Retirement Obligations
APS has asset retirement obligations for its Palo Verde nuclear facilities and certain other
generation, transmission and distribution assets. The Palo Verde asset retirement obligation primarily
relates to final plant decommissioning. This obligation is based on the NRC’s requirements for
disposal of radiated property or plant and agreements APS reached with the ACC for final
decommissioning of the plant. In the first quarter of 2011, a new decommissioning study with updated
cash flow estimates was completed for Palo Verde. This study reflects the twenty-year license
extension approved by the NRC on April 21, 2011, which extends the commencement of
decommissioning to 2045. The non-nuclear generation asset retirement obligations primarily relate to
requirements for removing portions of those plants at the end of the plant life or lease term.
Some of APS’s transmission and distribution assets have asset retirement obligations because
they are subject to right of way and easement agreements that require final removal. These agreements
have a history of uninterrupted renewal that APS expects to continue. As a result, APS cannot
reasonably estimate the fair value of the asset retirement obligation related to such distribution and
transmission assets.
Additionally, APS has aquifer protection permits for some of its generation sites that require
the closure of certain facilities at those sites.
The following schedule shows the change in our asset retirement obligations for 2011 and 2010
(dollars in millions):