APS 2011 Annual Report Download - page 73

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with Pinnacle West’s Consolidated
Financial Statements and APS’s Consolidated Financial Statements and the related Notes that appear in
Item 8 of this report. For information on the broad factors that may cause our actual future results to
differ from those we currently seek or anticipate, see “Forward-Looking Statements” at the front of this
report and “Risk Factors” in Item 1A.
OVERVIEW
Pinnacle West owns all of the outstanding common stock of APS. APS is a vertically-integrated
electric utility that provides either retail or wholesale electric service to most of the state of Arizona, with
the major exceptions of about one-half of the Phoenix metropolitan area, the Tucson metropolitan area
and Mohave County in northwestern Arizona. APS accounts for essentially all of our revenues and
earnings, and is expected to continue to 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 Unit 1 and Unit 2. In April 2011, the NRC approved APS’s application for renewed
operating licenses for the Palo Verde units, extending the licenses for Units 1, 2 and 3 to June 2045,
April 2046 and November 2047, respectively. APS management is working closely with regulators and
others in the nuclear industry to analyze the lessons learned and address any rulemaking or
improvements resulting from the March 2011 events impacting the Fukushima Daiichi Nuclear Power
Station in Japan.
Coal and Related Environmental Matters. APS-operated coal plants, Four Corners and Cholla,
achieved net capacity factors of 78% and 82%, respectively, in 2011. APS is focused on the impacts on its
coal fleet that may result from increased regulation and potential legislation concerning greenhouse gas
emissions. Concern over climate change and other emission-related issues could have a significant
impact on our capital expenditures and operating costs in the form of taxes, emissions allowances or
required equipment upgrades for these plants. APS is closely monitoring its long-range capital
management plans, understanding that any resulting regulation and legislation could impact the
economic viability of certain plants, as well as the willingness or ability of power plant participants to
fund any such equipment upgrades.
In addition, SCE, a participant in Four Corners, has indicated that certain California legislation
may prohibit it from making emission control expenditures at the plant. On November 8, 2010, APS and
SCE entered into an asset purchase agreement, providing for the purchase by APS of SCE’s 48% interest
in each of Units 4 and 5 of Four Corners. The purchase price is $294 million, subject to certain
adjustments. Completion of the purchase by APS, which is expected to occur in the second half of 2012,
is subject to the receipt of approvals by the ACC, the California Public Utilities Commission (the
“CPUC”) and the FERC. APS and SCE filed applications with their respective commissions seeking
requisite authority or approvals to complete the transaction. On February 17, 2012, the CPUC issued a