APS 2015 Annual Report Download - page 158

Table of Contents
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2033. At the end of the lease renewal periods, APS will have the option to purchase the leased assets at their fair market value, extend
the leases for up to two years, or return the assets to the lessors.
The fixed rate renewal periods give APS the ability to utilize the assets for a significant portion of the assets’ 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.
As a result of consolidation, we eliminate lease accounting and instead recognize depreciation and interest expense, resulting in
an increase in net income for 2015, 2014 and 2013 of $19 million, $26 million and $34 million, respectively, entirely attributable to the
noncontrolling interests. The income attributable to the noncontrolling interests decreased in 2015 and 2014 compared with the prior
year because of lower rent income resulting from the lease extensions.
In accordance with the regulatory treatment, higher depreciation expense and a regulatory liability were recorded in
consolidation to offset the decrease in the noncontrolling interests’ share of net income that resulted from the lease extensions.
Accordingly, income attributable to Pinnacle West shareholders was not impacted by the consolidation or the lease extensions.
Consolidation of these VIEs also results in changes to our Consolidated Statements of Cash Flows, but does not impact net cash flows.
Our Consolidated Balance Sheets at December 31, 2015 and December 31, 2014 include the following amounts relating to the
VIEs (dollars in thousands):
December 31, 2015
December 31, 2014
Palo Verde sale leaseback property, plant and equipment, net of accumulated depreciation $ 117,385
$ 121,255
Current maturities of long-term debt —
13,420
Equity-Noncontrolling interests 135,540
151,609
Assets of the VIEs are restricted and may only be used for payment to the noncontrolling interest holders. Other than the VIEs’
assets reported on our consolidated financial statements, the creditors of the VIEs have no other recourse to the assets of APS or
Pinnacle West, except in certain circumstances, such as a default by APS under the lease.
APS is exposed to losses relating to these VIEs upon the occurrence of certain events that APS does not consider reasonably
likely to occur. Under certain circumstances (for example, the NRC issuing specified violation orders with respect to Palo Verde or the
occurrence of specified nuclear events), APS could be required to make specified payments to the VIEs’ noncontrolling equity
participants and take title to the leased Unit 2 interests, which, if appropriate, may be required to be written down in value. If such an
event were to occur during the lease extension period, APS may be required to pay the noncontrolling equity participants approximately
$288 million beginning in 2016, and up to $465 million over the lease extension term.
For regulatory ratemaking purposes, the agreements continue to be treated as operating leases and, as a result, we have recorded
a regulatory asset relating to the arrangements.
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