APS 2015 Annual Report Download - page 139

Table of Contents
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notice of Intent to Sue Related to Four Corners
On December 21, 2015, several environmental groups filed a notice of intent to sue with OSM and other federal agencies under
the Endangered Species Act alleging that OSM’s reliance on the Biological Opinion and Incidental Take Statement prepared in
connection with a federal environmental review were not in accordance with applicable law. The environmental review was undertaken
as part of the DOI's review process necessary to allow for the effectiveness of lease amendments and related rights-of-way renewals for
Four Corners. We are monitoring this matter and will intervene if a lawsuit is filed. We cannot predict the timing or outcome of this
matter.
New Mexico Tax Matter
On May 23, 2013, the New Mexico Taxation and Revenue Department ("NMTRD") issued a notice of assessment for coal
severance surtax, penalty, and interest totaling approximately $30 million related to coal supplied under the coal supply agreement for
Four Corners (the “Assessment”). APS’s share of the Assessment is approximately $12 million. For procedural reasons, on behalf of
the Four Corners co-owners, including APS, the coal supplier made a partial payment of the Assessment and immediately filed a refund
claim with respect to that partial payment in August 2013. The NMTRD denied the refund claim. On December 19, 2013, the coal
supplier and APS, on its own behalf and as operating agent for Four Corners, filed a complaint with the New Mexico District Court
contesting both the validity of the Assessment and the refund claim denial. On June 30, 2015, the court ruled that the Assessment was
not valid and further ruled that APS and the other Four Corners co-owners receive a refund of all of the contested amounts previously
paid under the applicable tax statute. The NMTRD filed an appeal of the decision on August 31, 2015. The parties are engaged in
settlement discussions and we do not expect the outcome to have a material impact on our financial position, results of operations or
cash flows.
Financial Assurances
In the normal course of business, we obtain standby letters of credit and surety bonds from financial institutions and other third
parties. These instruments guarantee our own future performance and provide third parties with financial and performance assurance in
the event we do not perform. These instruments support certain debt arrangements, commodity contract collateral obligations, and other
transactions. As of December 31, 2015, standby letters of credit totaled $79 million and will expire in 2016. As of December 31, 2015,
surety bonds expiring through 2018 totaled $158 million. The underlying liabilities insured by these instruments are reflected on our
balance sheets, where applicable. Therefore, no additional liability is reflected for the letters of credit and surety bonds themselves.
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 has provided indemnification under certain surety bonds for APS which were
not material at December 31, 2015.
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