APS 2013 Annual Report Download - page 133

Table of Contents
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Assurances
APS has entered into various agreements that require letters of credit for financial assurance purposes. At December 31, 2013, approximately $76
million of letters of credit were outstanding to support existing pollution control bonds of a similar amount. The letters of credit are available to fund the
payment of principal and interest of such debt obligations. One of these letters of credit expires in 2015 and two 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 19 for further details on the Palo Verde sale
leaseback transactions). These letters of credit will expire on December 31, 2015, and totaled approximately $32 million at December 31, 2013. Additionally,
APS has issued letters of credit to support collateral obligations under certain risk management arrangements, including certain natural gas tolling contracts
entered into with third parties. At December 31, 2013, $55 million of such letters of credit were outstanding that will expire in 2014 and 2015.
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 has issued parental guarantees and surety bonds for APS which were not material at December 31, 2013.
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. During the fourth quarter of 2013, a new
decommissioning study with updated cash flow estimates was completed for Palo Verde.
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. The Four Corners coal-fired power plant asset retirement obligation relates to final plant decommissioning, including ash pond closures. In
the fourth quarter of 2012, a new study related to ash pond closure was completed which updated the total costs estimates and related cash flows. In the
fourth quarter of 2013, APS finalized the transaction to acquire SCE’s interest in Four Corners. As part of that transaction, APS assumed SCE’s asset
retirement obligation. Also, APS retired Four Corners Units 1-3 on December 30, 2013. Decommissioning activities began for Units 1-3 in January 2014. An
update was made to the timing of the Units 1-3 decommissioning cash out flows to coincide with the expected decommissioning activities.
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
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