APS 2013 Annual Report Download - page 153

Table of Contents
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Other Income and Other Expense
The following table provides detail of other income and other expense for 2013, 2012 and 2011 (dollars in thousands):
2013 2012 2011
Other income:
Interest income $1,629 $1,239 $1,850
Investment gains — net — — 1,165
Miscellaneous 75 367 96
Total other income $1,704 $1,606 $3,111
Other expense:
Non-operating costs $(8,207) $ (7,777) $ (7,037)
Investment loss — net (3,711)(2,453) —
Miscellaneous (4,106)(9,612)(3,414)
Total other expense $(16,024)$ (19,842)$(10,451)
19. Palo Verde Sale Leaseback Variable Interest Entities
In 1986, APS entered into agreements with three separate VIE lessor trusts in order to sell and lease back interests in Palo Verde Unit 2 and related
common facilities. APS will pay approximately $49 million per year during 2014 and 2015 related to these leases. The lease agreements include fixed rate
renewal periods which give APS the ability to utilize the asset for a significant portion of the asset’s economic life, and therefore provide APS with the power to
direct activities of the VIEs that most significantly impact the VIEs’ economic performance. Predominately due to the fixed rate renewal periods, APS has been
deemed the primary beneficiary of these VIEs and therefore consolidates the VIEs.
On December 31, 2012, APS notified the lessor trust entities that APS will retain the assets beyond 2015 by either exercising the fixed rate lease
renewals or by purchasing the assets. If APS elects to purchase the assets, the purchase price will be based on the fair market value of the assets at the end of
2015. If APS elects to extend the leases, we will be required to make payments beginning in 2016 of approximately $23 million annually. The length of the
lease extensions is unknown at this time, as it must be determined through an appraisal process. APS must give notice to the lessor trusts by June 30, 2014
notifying them which of these two options (lease renewal or purchasing the assets) it will exercise. The December 31, 2012 notification does not impact APS’s
consolidation of the VIEs, as APS continues to be deemed the primary beneficiary of the VIEs.
As a result of consolidation, we eliminate rent expense and recognize depreciation and interest expense, resulting in an increase in net income for
2013, 2012 and 2011 of $34 million, $32 million and $28 million, respectively, entirely attributable to the noncontrolling interests. Income attributable to
Pinnacle West shareholders remains the same. Consolidation of these VIEs also results in changes to our Consolidated Statements of Cash Flows, but does
not impact net cash flows.
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