APS 2012 Annual Report Download - page 141

PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
116
In selecting the pretax expected long-term rate of return on plan assets we consider past
performance and economic forecasts for the types of investments held by the plan. For the year 2013,
we are assuming a 7.0% long-term rate of return on plan assets, which we believe is reasonable given
our asset allocation in relation to historical and expected performance.
Assumed health care cost trend rates above have a significant effect on the amounts reported for
the health care plans. In selecting our health care trend rates, we consider past performance and
forecasts of health care costs. A one percentage point change in the assumed initial and ultimate health
care cost trend rates would have the following effects (dollars in millions):
1% Increase
1% Decrease
Effect on other postretirement benefits expense, after
consideration of amounts capitalized or billed to
electric plant participants
$ 14
$ (11)
Effect on service and interest cost components of net
periodic other postretirement benefit costs
17
(13)
Effect on the accumulated other postretirement benefit
obligation
172
(136)
Plan Assets
The Board of Directors has delegated oversight of the pension and other postretirement benefit
plans’ assets to an Investment Management Committee (“Committee”). The Committee has adopted
investment policy statements (“IPS”) for the pension and the other postretirement benefit plans’ assets.
The investment strategies for these plans include external management of plan assets, and prohibition of
investments in Pinnacle West securities.
The overall strategy of the pension plan’s IPS is to achieve an adequate level of trust assets
relative to the benefit obligations. To achieve this objective, the plan’s investment policy provides for
mixes of investments including long-term fixed income assets and return-generating assets. The target
allocation between return-generating and long-term fixed income assets is defined in the IPS and is a
function of the plan’s funded status. The plan’s funded status is reviewed on at least a monthly basis.
Long-term fixed income assets, also known as liability-hedging assets, are designed to offset
changes in the benefit obligations due to changes in interest rates. Long-term fixed income assets
consist primarily of fixed income debt securities issued by the U.S. Treasury, other government
agencies, and corporations. Long-term fixed income assets may also include interest rate swaps, U.S.
Treasury futures and other instruments.
Return-generating assets are intended to provide a reasonable long-term rate of investment
return with a prudent level of volatility. Return-generating assets are composed of U.S. equities,
international equities, and alternative investments. International equities include investments in both
developed and emerging markets. Alternative investments primarily include investments in real estate,
but may also include private equity and various other strategies. The plan may hold investments in
return-generating assets by holding securities in common and collective trusts.