PINNACLE WEST CAPITAL CORP, 10-Q filed on 11/7/2019
Quarterly Report
v3.19.3
Document and Entity Information - shares
9 Months Ended
Sep. 30, 2019
Oct. 31, 2019
Entity Information [Line Items]    
Entity Shell Company false  
Entity Interactive Data Current Yes  
Security Exchange Name NYSE  
Trading Symbol PNW  
Title of 12(b) Security Common Stock  
Entity Tax Identification Number 86-0512431  
Entity Address, Address Line One 400 North Fifth Street, P.O. Box 53999  
Entity Address, City or Town Phoenix  
Entity Address, State or Province AZ  
Entity Address, Postal Zip Code 85072-3999  
City Area Code (602)  
Local Phone Number 250-1000  
Entity File Number 1-8962  
Document Transition Report false  
Document Quarterly Report true  
Entity Registrant Name PINNACLE WEST CAPITAL CORPORATION  
Entity Central Index Key 0000764622  
Document Type 10-Q  
Document Period End Date Sep. 30, 2019  
Amendment Flag false  
Current Fiscal Year End Date --12-31  
Entity Current Reporting Status Yes  
Entity Filer Category Large Accelerated Filer  
Entity Emerging Growth Company false  
Entity Small Business false  
Entity Common Stock, Shares Outstanding (in shares)   112,410,824
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q3  
Entity Incorporation, State or Country Code AZ  
APS    
Entity Information [Line Items]    
Entity Shell Company false  
Entity Interactive Data Current Yes  
Entity Tax Identification Number 86-0011170  
Entity Address, Address Line One 400 North Fifth Street, P.O. Box 53999  
Entity Address, City or Town Phoenix  
Entity Address, State or Province AZ  
Entity Address, Postal Zip Code 85072-3999  
City Area Code (602)  
Local Phone Number 250-1000  
Entity File Number 1-4473  
Entity Registrant Name ARIZONA PUBLIC SERVICE COMPANY  
Entity Central Index Key 0000007286  
Document Type 10-Q  
Document Period End Date Sep. 30, 2019  
Amendment Flag false  
Current Fiscal Year End Date --12-31  
Entity Current Reporting Status Yes  
Entity Filer Category Non-accelerated Filer  
Entity Emerging Growth Company false  
Entity Small Business false  
Entity Common Stock, Shares Outstanding (in shares)   71,264,947
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q3  
Entity Incorporation, State or Country Code AZ  
v3.19.3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
OPERATING REVENUES $ 1,190,787 $ 1,268,034 $ 2,800,818 $ 2,934,871
OPERATING EXPENSES        
Fuel and purchased power 344,862 389,936 817,672 844,133
Operations and maintenance 238,582 246,545 711,759 780,624
Depreciation and amortization 149,450 145,971 445,531 436,232
Taxes other than income taxes 53,809 51,375 163,989 158,582
Other expenses 794 900 1,904 8,497
Total 787,497 834,727 2,140,855 2,228,068
OPERATING INCOME 403,290 433,307 659,963 706,803
OTHER INCOME (DEDUCTIONS)        
Allowance for equity funds used during construction 5,917 12,259 24,677 39,411
Pension and other postretirement non-service credits - net 5,752 12,449 17,240 37,314
Other income (Note 9) 15,191 6,958 35,245 17,541
Other expense (Note 9) (5,740) (5,063) (14,448) (12,063)
Total 21,120 26,603 62,714 82,203
INTEREST EXPENSE        
Interest charges 57,481 61,605 175,599 181,267
Allowance for borrowed funds used during construction (3,486) (5,913) (14,645) (18,959)
Total 53,995 55,692 160,954 162,308
INCOME BEFORE INCOME TAXES 370,415 404,218 561,723 626,698
INCOME TAXES 53,266 84,333 72,764 127,107
NET INCOME 317,149 319,885 488,959 499,591
Less: Net income attributable to noncontrolling interests (Note 6) 4,873 4,873 14,620 14,620
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS $ 312,276 $ 315,012 $ 474,339 $ 484,971
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING        
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING - BASIC (in shares) 112,463 112,148 112,408 112,094
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING - DILUTED (in shares) 112,746 112,533 112,739 112,499
EARNINGS PER WEIGHTED-AVERAGE COMMON SHARE OUTSTANDING        
Net income attributable to common shareholders - basic (in dollars per share) $ 2.78 $ 2.81 $ 4.22 $ 4.33
Net income attributable to common shareholders - diluted (in dollars per share) $ 2.77 $ 2.80 $ 4.21 $ 4.31
APS        
OPERATING REVENUES $ 1,190,787 $ 1,267,997 $ 2,800,818 $ 2,931,966
OPERATING EXPENSES        
Fuel and purchased power 344,862 389,889 817,672 862,037
Operations and maintenance 235,440 226,346 699,958 732,946
Depreciation and amortization 149,428 145,949 445,467 434,594
Taxes other than income taxes 53,798 51,366 163,957 157,877
Other expenses 794 900 1,904 1,497
Total 784,322 814,450 2,128,958 2,188,951
OPERATING INCOME 406,465 453,547 671,860 743,015
OTHER INCOME (DEDUCTIONS)        
Allowance for equity funds used during construction 5,917 12,259 24,677 39,411
Pension and other postretirement non-service credits - net 6,133 12,812 18,389 38,398
Other income (Note 9) 14,534 6,153 32,641 16,160
Other expense (Note 9) (2,826) (3,361) (10,132) (9,679)
Total 23,758 27,863 65,575 84,290
INTEREST EXPENSE        
Interest charges 53,812 58,551 164,068 172,440
Allowance for borrowed funds used during construction (3,486) (5,913) (14,645) (18,959)
Total 50,326 52,638 149,423 153,481
INCOME BEFORE INCOME TAXES 379,897 428,772 588,012 673,824
INCOME TAXES 56,154 85,533 76,070 133,415
NET INCOME 323,743 343,239 511,942 540,409
Less: Net income attributable to noncontrolling interests (Note 6) 4,873 4,873 14,620 14,620
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS $ 318,870 $ 338,366 $ 497,322 $ 525,789
v3.19.3
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
NET INCOME $ 317,149 $ 319,885 $ 488,959 $ 499,591
Derivative instruments:        
Net unrealized loss, net of tax expense 0 0 0 (96)
Reclassification of net realized loss, net of tax benefit 218 451 950 1,316
Pension and other postretirement benefits activity, net of tax expense (benefit) 880 1,099 220 (2,740)
Total other comprehensive income (loss) 1,098 1,550 1,170 (1,520)
COMPREHENSIVE INCOME 318,247 321,435 490,129 498,071
Less: Comprehensive income attributable to noncontrolling interests 4,873 4,873 14,620 14,620
COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS 313,374 316,562 475,509 483,451
APS        
NET INCOME 323,743 343,239 511,942 540,409
Derivative instruments:        
Net unrealized loss, net of tax expense 0 0 0 (96)
Reclassification of net realized loss, net of tax benefit 218 451 950 1,316
Pension and other postretirement benefits activity, net of tax expense (benefit) 755 952 (146) (2,955)
Total other comprehensive income (loss) 973 1,403 804 (1,735)
COMPREHENSIVE INCOME 324,716 344,642 512,746 538,674
Less: Comprehensive income attributable to noncontrolling interests 4,873 4,873 14,620 14,620
COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS $ 319,843 $ 339,769 $ 498,126 $ 524,054
v3.19.3
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Parenthetical) - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Net unrealized loss, tax expense $ 0 $ 0 $ 0 $ 96
Reclassification of net realized loss, net of tax benefit (71) (149) (313) (381)
Pension and other postretirement benefits activity, net of tax expense (benefit) 290 361 72 (754)
APS        
Net unrealized loss, tax expense 0 0 0 96
Reclassification of net realized loss, net of tax benefit (71) (149) (313) (381)
Pension and other postretirement benefits activity, net of tax expense (benefit) $ 249 $ 313 $ (48) $ (947)
v3.19.3
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) - USD ($)
$ in Thousands
Sep. 30, 2019
Dec. 31, 2018
Dec. 31, 2017
CURRENT ASSETS      
Cash and cash equivalents $ 29,852 $ 5,766  
Customer and other receivables 361,951 267,887  
Accrued unbilled revenues 155,836 137,170  
Allowance for doubtful accounts (7,282) (4,069)  
Materials and supplies (at average cost) 293,899 269,065  
Fossil fuel (at average cost) 18,527 25,029  
Income tax receivable 14,063   $ 0
Assets from risk management activities (Note 7) 817 1,113  
Deferred fuel and purchased power regulatory asset (Note 4) 59,474 37,164  
Other regulatory assets (Note 4) 138,033 129,738  
Other current assets 67,985 56,128  
Total current assets 1,133,155 924,991  
INVESTMENTS AND OTHER ASSETS      
Nuclear decommissioning trust (Notes 11 and 12) 967,673 851,134  
Other special use funds (Notes 11 and 12) 243,982 236,101  
Other assets 102,116 103,247  
Total investments and other assets 1,313,771 1,190,482  
PROPERTY, PLANT AND EQUIPMENT      
Plant in service and held for future use 19,677,773 18,736,628  
Accumulated depreciation and amortization (6,552,177) (6,366,014)  
Net 13,125,596 12,370,614  
Construction work in progress 738,492 1,170,062  
Palo Verde sale leaseback, net of accumulated depreciation (Note 6) 102,873 105,775  
Intangible assets, net of accumulated amortization 266,587 262,902  
Nuclear fuel, net of accumulated amortization 141,903 120,217  
Total property, plant and equipment 14,375,451 14,029,570  
DEFERRED DEBITS      
Regulatory assets (Note 4) 1,329,446 1,342,941  
Operating lease right-of-use assets (Note 16) 156,050 0  
Assets for other postretirement benefits (Note 5) 31,717 46,906  
Other 37,976 129,312  
Total deferred debits 1,555,189 1,519,159  
TOTAL ASSETS 18,377,566 17,664,202  
CURRENT LIABILITIES      
Accounts payable 276,117 277,336  
Accrued taxes 220,930 154,819  
Accrued interest 50,993 61,107  
Common dividends payable 0 82,675  
Short-term borrowings (Note 3) 57,375 76,400  
Current maturities of long-term debt (Note 3) 450,000 500,000  
Customer deposits 78,173 91,174  
Liabilities from risk management activities (Note 7) 44,349 35,506  
Liabilities for asset retirements 12,850 19,842  
Operating lease liabilities (Note 16) 26,221 0  
Regulatory liabilities (Note 4) 208,022 165,876  
Other current liabilities 161,716 184,229  
Total current liabilities 1,586,746 1,648,964  
Long-term debt less current maturities (Note 3) 4,984,996 4,638,232  
DEFERRED CREDITS AND OTHER      
Deferred income taxes 1,975,989 1,807,421  
Regulatory liabilities (Note 4) 2,310,131 2,325,976  
Liabilities for asset retirements 736,079 706,703  
Liabilities for pension benefits (Note 5) 297,843 443,170  
Liabilities from risk management activities (Note 7) 27,305 24,531  
Customer advances 192,374 137,153  
Coal mine reclamation 165,695 212,785  
Deferred investment tax credit 193,118 200,405  
Unrecognized tax benefits 6,341 22,517  
Operating lease liabilities (Note 16) 52,472 0  
Other 166,772 147,640  
Total deferred credits and other 6,124,119 6,028,301  
COMMITMENTS AND CONTINGENCIES (SEE NOTE 8)  
EQUITY      
Common stock, no par value; authorized 150,000,000 shares, 112,403,751 and 112,159,896 issued at respective dates 2,654,430 2,634,265  
Treasury stock at cost; 57,947 and 58,135 shares at respective dates (5,117) (4,825)  
Total common stock 2,649,313 2,629,440  
Retained earnings 2,949,891 2,641,183  
Accumulated other comprehensive loss (46,538) (47,708)  
Total shareholders’ equity 5,552,666 5,222,915  
Noncontrolling interests (Note 6) 129,039 125,790  
Total equity 5,681,705 5,348,705 5,135,730
TOTAL LIABILITIES AND EQUITY 18,377,566 17,664,202  
APS      
CURRENT ASSETS      
Cash and cash equivalents 29,542 5,707  
Customer and other receivables 351,029 257,654  
Accrued unbilled revenues 155,836 137,170  
Allowance for doubtful accounts (7,282) (4,069)  
Materials and supplies (at average cost) 293,899 269,065  
Fossil fuel (at average cost) 18,527 25,029  
Income tax receivable 15,982 0  
Assets from risk management activities (Note 7) 817 1,113  
Deferred fuel and purchased power regulatory asset (Note 4) 59,474 37,164  
Other regulatory assets (Note 4) 138,033 129,738  
Other current assets 45,506 35,111  
Total current assets 1,101,363 893,682  
INVESTMENTS AND OTHER ASSETS      
Nuclear decommissioning trust (Notes 11 and 12) 967,673 851,134  
Other special use funds (Notes 11 and 12) 243,982 236,101  
Other assets 55,846 40,817  
Total investments and other assets 1,267,501 1,128,052  
PROPERTY, PLANT AND EQUIPMENT      
Plant in service and held for future use 19,674,286 18,733,142  
Accumulated depreciation and amortization (6,548,921) (6,362,771)  
Net 13,125,365 12,370,371  
Construction work in progress 738,493 1,170,062  
Palo Verde sale leaseback, net of accumulated depreciation (Note 6) 102,873 105,775  
Intangible assets, net of accumulated amortization 266,432 262,746  
Nuclear fuel, net of accumulated amortization 141,903 120,217  
Total property, plant and equipment 14,375,066 14,029,171  
DEFERRED DEBITS      
Regulatory assets (Note 4) 1,329,446 1,342,941  
Operating lease right-of-use assets (Note 16) 154,205 0  
Assets for other postretirement benefits (Note 5) 28,071 43,212  
Other 37,080 128,265  
Total deferred debits 1,548,802 1,514,418  
TOTAL ASSETS 18,292,732 17,565,323  
CURRENT LIABILITIES      
Accounts payable 268,163 266,277  
Accrued taxes 215,320 176,357  
Accrued interest 48,374 60,228  
Common dividends payable 0 82,700  
Short-term borrowings (Note 3) 2,900 0  
Current maturities of long-term debt (Note 3) 450,000 500,000  
Customer deposits 78,173 91,174  
Liabilities from risk management activities (Note 7) 44,349 35,506  
Liabilities for asset retirements 12,850 19,842  
Operating lease liabilities (Note 16) 26,028 0  
Regulatory liabilities (Note 4) 208,022 165,876  
Other current liabilities 159,992 178,137  
Total current liabilities 1,514,171 1,576,097  
Long-term debt less current maturities (Note 3) 4,535,728 4,189,436  
DEFERRED CREDITS AND OTHER      
Deferred income taxes 1,976,662 1,812,664  
Regulatory liabilities (Note 4) 2,310,131 2,325,976  
Liabilities for asset retirements 736,079 706,703  
Liabilities for pension benefits (Note 5) 281,605 425,404  
Liabilities from risk management activities (Note 7) 27,305 24,531  
Customer advances 192,374 137,153  
Coal mine reclamation 165,695 212,785  
Deferred investment tax credit 193,118 200,405  
Unrecognized tax benefits 43,434 41,861  
Operating lease liabilities (Note 16) 50,669 0  
Other 143,190 125,511  
Total deferred credits and other 6,120,262 6,012,993  
COMMITMENTS AND CONTINGENCIES (SEE NOTE 8)  
EQUITY      
Total common stock 178,162 178,162  
Additional paid-in capital 2,721,696 2,721,696  
Retained earnings 3,119,977 2,788,256  
Accumulated other comprehensive loss (26,303) (27,107)  
Total shareholders’ equity 5,993,532 5,661,007  
Noncontrolling interests (Note 6) 129,039 125,790  
Total equity 6,122,571 5,786,797 $ 5,385,869
Total capitalization 10,658,299 9,976,233  
TOTAL LIABILITIES AND EQUITY $ 18,292,732 $ 17,565,323  
v3.19.3
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) - $ / shares
Sep. 30, 2019
Dec. 31, 2018
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest [Abstract]    
Common stock, par value (in dollars per share)
Common stock, authorized shares (in shares) 150,000,000 150,000,000
Common stock, issued shares (in shares) 112,403,751 112,159,896
Treasury stock at cost, shares (in shares) 57,947 58,135
v3.19.3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($)
$ in Thousands
9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
CASH FLOWS FROM OPERATING ACTIVITIES    
NET INCOME $ 488,959 $ 499,591
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization including nuclear fuel 500,801 489,861
Deferred fuel and purchased power (60,911) (82,486)
Deferred fuel and purchased power amortization 38,601 92,397
Allowance for equity funds used during construction (24,677) (39,411)
Deferred income taxes 83,703 117,571
Deferred investment tax credit (7,288) (7,397)
Stock compensation 16,486 16,140
Changes in current assets and liabilities:    
Customer and other receivables (91,506) (65,203)
Accrued unbilled revenues (18,666) (83,939)
Materials, supplies and fossil fuel (18,332) (20,591)
Income tax receivable (14,063) 0
Other current assets (10,104) 23,661
Accounts payable 33,899 (11,399)
Accrued taxes 66,111 78,624
Other current liabilities (68,927) 12,852
Change in other long-term assets (52,276) 14,120
Change in other long-term liabilities (27,049) (74,628)
Net cash flow provided by operating activities 834,761 959,763
CASH FLOWS FROM INVESTING ACTIVITIES    
Capital expenditures (857,883) (898,455)
Contributions in aid of construction 34,121 22,611
Allowance for borrowed funds used during construction (14,645) (18,959)
Proceeds from nuclear decommissioning trust sales and other special use funds 520,996 443,215
Investment in nuclear decommissioning trust and other special use funds (523,573) (461,777)
Other 8,971 49
Net cash flow used for investing activities (832,013) (913,316)
CASH FLOWS FROM FINANCING ACTIVITIES    
Issuance of long-term debt 794,981 295,245
Short-term borrowing and payments — net (6,025) 19,800
Short-term debt borrowings 49,000 45,000
Short-term debt repayments (62,000) (32,000)
Repayment of long-term debt (500,000) (82,000)
Dividends paid on common stock (243,116) (228,037)
Common stock equity issuance - net of purchases (130) (1,984)
Distributions to noncontrolling interests (11,372) (11,372)
Net cash flow provided by financing activities 21,338 4,652
NET INCREASE IN CASH AND CASH EQUIVALENTS 24,086 51,099
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,766 13,892
CASH AND CASH EQUIVALENTS AT END OF PERIOD 29,852 64,991
APS    
CASH FLOWS FROM OPERATING ACTIVITIES    
NET INCOME 511,942 540,409
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization including nuclear fuel 500,737 488,223
Deferred fuel and purchased power (60,911) (82,486)
Deferred fuel and purchased power amortization 38,601 92,397
Allowance for equity funds used during construction (24,677) (39,411)
Deferred income taxes 97,002 86,319
Deferred investment tax credit (7,288) (7,397)
Changes in current assets and liabilities:    
Customer and other receivables (90,817) (56,874)
Accrued unbilled revenues (18,666) (83,939)
Materials, supplies and fossil fuel (18,332) (20,694)
Income tax receivable (15,982) 0
Other current assets (8,642) 20,258
Accounts payable 37,004 (8,857)
Accrued taxes 38,963 106,172
Other current liabilities (66,368) 9,289
Change in other long-term assets (54,872) 25,405
Change in other long-term liabilities (27,521) (80,895)
Net cash flow provided by operating activities 830,173 987,919
CASH FLOWS FROM INVESTING ACTIVITIES    
Capital expenditures (857,883) (889,347)
Contributions in aid of construction 34,121 22,611
Allowance for borrowed funds used during construction (14,645) (18,959)
Proceeds from nuclear decommissioning trust sales and other special use funds 520,996 443,040
Investment in nuclear decommissioning trust and other special use funds (523,573) (461,602)
Other (3,563) (1,261)
Net cash flow used for investing activities (844,547) (905,518)
CASH FLOWS FROM FINANCING ACTIVITIES    
Issuance of long-term debt 794,981 295,245
Short-term borrowing and payments — net 2,900 0
Short-term debt borrowings 0 25,000
Short-term debt repayments 0 (25,000)
Repayment of long-term debt (500,000) (82,000)
Dividends paid on common stock (248,300) (233,300)
Distributions to noncontrolling interests (11,372) (11,372)
Net cash flow provided by financing activities 38,209 (31,427)
NET INCREASE IN CASH AND CASH EQUIVALENTS 23,835 50,974
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,707 13,851
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 29,542 $ 64,825
v3.19.3
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited) - USD ($)
$ in Thousands
Total
Common Stock
Treasury Stock
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Noncontrolling Interests
APS
APS
Common Stock
APS
Additional Paid-In Capital
APS
Retained Earnings
APS
Accumulated Other Comprehensive Income (Loss)
APS
Noncontrolling Interests
Beginning balance (in shares) at Dec. 31, 2017   111,816,170 64,463         71,264,947        
Balance at beginning of period at Dec. 31, 2017 $ 5,135,730 $ 2,614,805 $ (5,624) $ 2,442,511 $ (45,002) $ 129,040 $ 5,385,869 $ 178,162 $ 2,571,696 $ 2,533,954 $ (26,983) $ 129,040
Increase (Decrease) in Shareholders' Equity                        
Net Income 499,591     484,971   14,620 540,409     525,789   14,620
Other comprehensive income (loss) (1,520)       (1,520)   (1,735)       (1,735)  
Dividends on common stock (155,607)     (155,607)     (155,601)     (155,601)    
Issuance of common stock (in shares)   199,779                    
Issuance of common stock 14,822 $ 14,822                    
Purchase of treasury stock (in shares) [1]     (81,278)                  
Purchase of treasury stock [1] (6,285)   $ (6,285)                  
Reissuance of treasury stock for stock-based compensation and other (in shares)     128,373                  
Reissuance of treasury stock for stock-based compensation and other 10,501   $ 10,500 1                
Capital activities by noncontrolling interests 11,372         11,372 11,372         11,372
Reclassification of income tax effects related to new tax reform (8,552)     8,552 [2] (8,552) [2]         5,038 [3] (5,038) [3]  
Other 1         1 1         1
Ending balance (in shares) at Sep. 30, 2018   112,015,949 17,368         71,264,947        
Balance at end of period at Sep. 30, 2018 5,485,861 $ 2,629,627 $ (1,409) 2,780,428 (55,074) 132,289 5,757,571 $ 178,162 2,571,696 2,909,180 (33,756) 132,289
Beginning balance (in shares) at Jun. 30, 2018   111,990,222 17,633         71,264,947        
Balance at beginning of period at Jun. 30, 2018 5,159,434 $ 2,624,672 $ (1,431) 2,465,402 (56,624) 127,415 5,412,930 $ 178,162 2,571,696 2,570,816 (35,159) 127,415
Increase (Decrease) in Shareholders' Equity                        
Net Income 319,885     315,012   4,873 343,239     338,366   4,873
Other comprehensive income (loss) 1,550       1,550   1,403       1,403  
Dividends on common stock 14     14                
Issuance of common stock (in shares)   25,727                    
Issuance of common stock 4,955 $ 4,955                    
Purchase of treasury stock (in shares) [4]     (101)                  
Purchase of treasury stock [4] (8)   $ (8)                  
Reissuance of treasury stock for stock-based compensation and other (in shares)     366                  
Reissuance of treasury stock for stock-based compensation and other 30   $ 30 0                
Other 1         1 (1)     (2)   1
Ending balance (in shares) at Sep. 30, 2018   112,015,949 17,368         71,264,947        
Balance at end of period at Sep. 30, 2018 $ 5,485,861 $ 2,629,627 $ (1,409) 2,780,428 (55,074) 132,289 5,757,571 $ 178,162 2,571,696 2,909,180 (33,756) 132,289
Beginning balance (in shares) at Dec. 31, 2018 112,159,896 112,159,896 58,135         71,264,947        
Balance at beginning of period at Dec. 31, 2018 $ 5,348,705 $ 2,634,265 $ (4,825) 2,641,183 (47,708) 125,790 5,786,797 $ 178,162 2,721,696 2,788,256 (27,107) 125,790
Increase (Decrease) in Shareholders' Equity                        
Net Income 488,959     474,339   14,620 511,942     497,322   14,620
Other comprehensive income (loss) 1,170       1,170   804       804  
Dividends on common stock (165,631)     (165,631)     (165,600)     (165,600)    
Issuance of common stock (in shares)   243,855                    
Issuance of common stock 20,165 $ 20,165                    
Purchase of treasury stock (in shares) [1]     (75,894)                  
Purchase of treasury stock [1] (6,892)   $ (6,892)                  
Reissuance of treasury stock for stock-based compensation and other (in shares)     76,082                  
Reissuance of treasury stock for stock-based compensation and other 6,600   $ 6,600 0                
Capital activities by noncontrolling interests 11,372         11,372 11,372         11,372
Other $ 1         1 0     (1)   1
Ending balance (in shares) at Sep. 30, 2019 112,403,751 112,403,751 57,947         71,264,947        
Balance at end of period at Sep. 30, 2019 $ 5,681,705 $ 2,654,430 $ (5,117) 2,949,891 (46,538) 129,039 6,122,571 $ 178,162 2,721,696 3,119,977 (26,303) 129,039
Beginning balance (in shares) at Jun. 30, 2019   112,361,595 58,219         71,264,947        
Balance at beginning of period at Jun. 30, 2019 5,357,243 $ 2,648,234 $ (5,140) 2,637,620 (47,636) 124,165 5,797,857 $ 178,162 2,721,696 2,801,110 (27,276) 124,165
Increase (Decrease) in Shareholders' Equity                        
Net Income 317,149     312,276   4,873 323,743     318,870   4,873
Other comprehensive income (loss) 1,098       1,098   973       973  
Dividends on common stock (5)     (5)                
Issuance of common stock (in shares)   42,156                    
Issuance of common stock 6,196 $ 6,196                    
Purchase of treasury stock (in shares) [4]     (103)                  
Purchase of treasury stock [4] (10)   $ (10)                  
Reissuance of treasury stock for stock-based compensation and other (in shares)     375                  
Reissuance of treasury stock for stock-based compensation and other 33   $ 33 0                
Other $ 1         1 (2)     (3)   1
Ending balance (in shares) at Sep. 30, 2019 112,403,751 112,403,751 57,947         71,264,947        
Balance at end of period at Sep. 30, 2019 $ 5,681,705 $ 2,654,430 $ (5,117) $ 2,949,891 $ (46,538) $ 129,039 $ 6,122,571 $ 178,162 $ 2,721,696 $ 3,119,977 $ (26,303) $ 129,039
[1]
Primarily represents shares of common stock withheld from certain stock awards for tax purposes.
[2]
In 2018, the Company adopted new accounting guidance and elected to reclassify income tax effects of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) on items within accumulated other comprehensive income to retained earnings.
[3]
In 2018, the Company adopted new accounting guidance and elected to reclassify income tax effects of the Tax Act on items within accumulated other comprehensive income to retained earnings.
[4]
Primarily represents shares of common stock withheld from certain stock awards for tax purposes.
v3.19.3
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited) Parenthetical - $ / shares
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Statement of Stockholders' Equity [Abstract]        
DIVIDENDS DECLARED PER SHARE (in dollars per share) $ 0 $ 0 $ 1.48 $ 1.39
v3.19.3
Consolidation and Nature of Operations
9 Months Ended
Sep. 30, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Consolidation and Nature of Operations
Consolidation and Nature of Operations
 
The unaudited condensed consolidated financial statements include the accounts of Pinnacle West and our subsidiaries:  APS, 4C Acquisition, LLC ("4CA"), Bright Canyon Energy Corporation ("BCE") and El Dorado Investment Company ("El Dorado").  See Note 8 for more information on 4CA matters. Intercompany accounts and transactions between the consolidated companies have been eliminated.  The unaudited condensed consolidated financial statements for APS include the accounts of APS and the Palo Verde Generating Station ("Palo Verde") sale leaseback variable interest entities ("VIEs") (see Note 6 for further discussion).  Our accounting records are maintained in accordance with accounting principles generally accepted in the United States of America ("GAAP").  The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.
 
Amounts reported in our interim Condensed Consolidated Statements of Income are not necessarily indicative of amounts expected for the respective annual periods, due to the effects of seasonal temperature variations on energy consumption, timing of maintenance on electric generating units, and other factors.
 
Our condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments except as otherwise disclosed in the notes) that we believe are necessary for the fair presentation of our financial position, results of operations, and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in conformity with GAAP have been condensed or omitted pursuant to such regulations, although we believe that the disclosures provided are adequate to make the interim information presented not misleading. The accompanying condensed consolidated financial statements and these notes should be read in conjunction with the audited consolidated financial statements and notes included in our 2018 Form 10-K.


Supplemental Cash Flow Information

The following table summarizes supplemental Pinnacle West cash flow information (dollars in thousands):
 
Nine Months Ended
September 30,
 
2019
 
2018
Cash paid during the period for:
 
 
 
Income taxes, net of refunds
$
12,488

 
$
10,091

Interest, net of amounts capitalized
166,907

 
161,875

Significant non-cash investing and financing activities:
 
 
 
Accrued capital expenditures
$
85,099

 
$
99,405

Right-of-use operating lease assets obtained in exchange for operating lease liabilities
8,759

 

Sale of 4CA's 7% interest in Four Corners

 
68,907



The following table summarizes supplemental APS cash flow information (dollars in thousands):
 
Nine Months Ended
September 30,
 
2019
 
2018
Cash paid during the period for:
 
 
 
Income taxes, net of refunds
$
35,573

 
$
24,746

Interest, net of amounts capitalized
157,593

 
154,788

Significant non-cash investing and financing activities:
 
 
 
Accrued capital expenditures
$
85,099

 
$
99,405

Right-of-use operating lease assets obtained in exchange for operating lease liabilities
8,759

 


v3.19.3
Revenue
9 Months Ended
Sep. 30, 2019
Revenue from Contract with Customer [Abstract]  
Revenue Revenue

Sources of Revenue

The following table provides detail of Pinnacle West's consolidated revenue disaggregated by revenue sources (dollars in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
2018
 
2019
2018
Retail Electric Revenue
 
 
 
 
 
 
Residential
 
$
668,467

$
695,480

 
$
1,452,601

$
1,512,402

Non-Residential
 
465,602

496,809

 
1,194,199

1,275,498

Wholesale energy sales
 
36,775

53,501

 
95,218

80,982

Transmission services for others
 
15,841

15,902

 
46,247

46,235

Other sources
 
4,102

6,342

 
12,553

19,754

Total operating revenues
 
$
1,190,787

$
1,268,034

 
$
2,800,818

$
2,934,871



Retail Electric Revenue. Pinnacle West's retail electric revenue is generated by wholly owned regulated subsidiary APS's sale of electricity to our regulated customers within the authorized service territory at tariff rates approved by the ACC and based on customer kilowatt-hour ("KWh") usage. Revenues related to the sale of electricity are generally recognized when service is rendered or electricity is delivered to customers. The billing of electricity sales to individual customers is based on the reading of their meters. We obtain customers' meter data on a systematic basis throughout the month, and generally bill customers within a month from when service was provided. Customers are generally required to pay for services within 15 days of when the services are billed.

Wholesale Energy Sales and Transmission Services for Others. Revenues from wholesale energy sales and transmission services for others represent energy and transmission sales to wholesale customers. These activities primarily consist of managing fuel and purchased power risks in connection with the cost of serving our retail customers' energy requirements. We may also sell into the wholesale markets generation that is not needed for APS’s retail load. Our wholesale activities and tariff rates are regulated by the United States Federal Energy Regulatory Commission ("FERC").

In the electricity business, some contracts to purchase energy are settled by netting against other contracts to sell electricity. This is referred to as a book-out, and usually occurs in contracts that have the same terms (product type, quantities, and delivery points) and for which power does not flow. We net these book-outs, which reduces both wholesale revenues and fuel and purchased power costs.
 
Revenue Activities

Our revenues primarily consist of activities that are classified as revenues from contracts with customers. We derive our revenues from contracts with customers primarily from sales of electricity to our regulated retail customers. Revenues from contracts with customers also include wholesale and transmission activities. Our revenues from contracts with customers for the three and nine months ended September 30, 2019 were $1,178 million and $2,756 million, respectively, and for the three and nine months ended September 30, 2018 were $1,257 million and $2,897 million, respectively.

We have certain revenues that do not meet the specific accounting criteria to be classified as revenues from contracts with customers. For the three and nine months ended September 30, 2019, our revenues that do not qualify as revenue from contracts with customers were $13 million and $45 million, respectively, and for the three and nine months ended September 30, 2018 were $11 million and $38 million, respectively. This relates primarily to certain regulatory cost recovery mechanisms that are considered alternative revenue programs. We recognize revenue associated with alternative revenue programs when specific events permitting recognition are completed. Certain amounts associated with alternative revenue programs will subsequently be billed to customers; however, we do not reclassify billed amounts into revenue from contracts with customers. See Note 4 for a discussion of our regulatory cost recovery mechanisms.

Contract Assets and Liabilities from Contracts with Customers

There were no material contract assets, contract liabilities, or deferred contract costs recorded on the Condensed Consolidated Balance Sheets as of September 30, 2019 or December 31, 2018.
v3.19.3
Long-Term Debt and Liquidity Matters
9 Months Ended
Sep. 30, 2019
Debt Disclosure [Abstract]  
Long-Term Debt and Liquidity Matters
Long-Term Debt and Liquidity Matters

Pinnacle West and APS maintain committed revolving credit facilities in order to enhance liquidity and provide credit support for their commercial paper programs, to refinance indebtedness, and for other general corporate purposes.
 
Pinnacle West
 
On May 9, 2019, Pinnacle West entered into a $50 million term loan agreement that matures May 7, 2020. Pinnacle West used the proceeds to refinance indebtedness under and terminate a prior $150 million revolving credit facility. Borrowings under the agreement bear interest at London Inter-bank Offered Rate ("LIBOR") plus 0.55% per annum. At September 30, 2019, Pinnacle West had $41 million in outstanding borrowings under the agreement.

At September 30, 2019, Pinnacle West had a $200 million revolving credit facility that matures in July 2023. Pinnacle West has the option to increase the amount of the facility up to a maximum of $300 million upon the satisfaction of certain conditions and with the consent of the lenders. Interest rates are based on Pinnacle West's senior unsecured debt credit ratings. The facility is available to support Pinnacle West's $200 million commercial paper program, for bank borrowings or for issuances of letters of credits. At September 30, 2019, Pinnacle West had no outstanding borrowings under its credit facility, no letters of credit outstanding and $13 million of commercial paper borrowings.

APS

On February 26, 2019, APS entered into a $200 million term loan agreement that matures August 26, 2020. APS used the proceeds to repay existing indebtedness. Borrowings under the agreement bear interest at LIBOR plus 0.50% per annum.

On February 28, 2019, APS issued $300 million of 4.25% unsecured senior notes that mature on March 1, 2049. The net proceeds from the sale, together with funds made available from the term loan described above, were used to repay existing indebtedness.

On March 1, 2019, APS repaid at maturity $500 million aggregate principal amount of its 8.75% senior notes.

On August 19, 2019, APS issued $300 million of 2.6% unsecured senior notes that mature on August 15, 2029. The net proceeds from the sale were used to repay short-term indebtedness, consisting of commercial paper borrowings, and to replenish cash used to fund capital expenditures.

At September 30, 2019, APS had two revolving credit facilities totaling $1 billion, including a $500 million credit facility that matures in June 2022 and a $500 million facility that matures in July 2023.  APS may increase the amount of each facility up to a maximum of $700 million, for a total of $1.4 billion, upon the satisfaction of certain conditions and with the consent of the lenders.  Interest rates are based on APS’s senior unsecured debt credit ratings. These facilities are available to support APS’s $500 million commercial paper program, for bank borrowings or for issuances of letters of credit.  At September 30, 2019, APS had $3 million of commercial paper outstanding and no outstanding borrowings or letters of credit under its revolving credit facilities.
 
See "Financial Assurances" in Note 8 for a discussion of other outstanding letters of credit.
 
Debt Fair Value
 
Our long-term debt fair value estimates are classified within Level 2 of the fair value hierarchy. The following table presents the estimated fair value of our long-term debt, including current maturities (dollars in thousands):

 
As of September 30, 2019
 
As of December 31, 2018
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Pinnacle West
$
449,268

 
$
449,670

 
$
448,796

 
$
443,955

APS
4,985,728

 
5,617,727

 
4,689,436

 
4,789,608

Total
$
5,434,996

 
$
6,067,397

 
$
5,138,232

 
$
5,233,563


v3.19.3
Regulatory Matters
9 Months Ended
Sep. 30, 2019
Regulated Operations [Abstract]  
Regulatory Matters
Regulatory Matters
 
2019 Retail Rate Case Filing with the Arizona Corporation Commission

On October 31, 2019, APS filed an application with the ACC for an annual increase in retail base rates of $69 million. This amount includes recovery of the deferral and rate base effects of the Four Corners selective catalytic reduction ("SCR") project that is currently the subject of a separate proceeding (see “SCR Cost Recovery” below). It also reflects a net credit to base rates of approximately $115 million primarily due to the prospective inclusion of rate refunds currently provided through the Tax Expense Adjustment Mechanism ("TEAM"). The proposed total revenue increase in APS's application is $184 million. The average annual customer bill impact of APS’s request is an increase of 5.6% (the average annual bill impact for a typical APS residential customer is 5.4%).

The principal provisions of APS's application are:

a test year comprised of twelve months ended June 30, 2019, adjusted as described below;
an original cost rate base of $8.87 billion, which approximates the ACC-jurisdictional portion of the book value of utility assets, net of accumulated depreciation and other credits;
the following proposed capital structure and costs of capital:
 
 
Capital Structure
 
Cost of Capital
 
Long-term debt
 
45.3
%
4.10
%
Common stock equity
 
54.7
%
10.15
%
Weighted-average cost of capital
 
 
 
7.41
%

 
a 1% return on the increment of fair value rate base above APS’s original cost rate base, as provided for by Arizona law;
authorization to defer until APS's next general rate case the increase or decrease in its Arizona property taxes attributable to tax rate changes after the date the rate application is adjudicated;
a number of proposed rate and program changes for residential customers, including:
a super off-peak period during the winter months for APS’s time-of-use with demand rates;
additional $1.25 million in funding for limited-income crisis bill program; and
a flat bill/subscription rate pilot program;
proposed rate design changes for commercial customers, including an experimental program designed to provide access to market pricing for up to 200 MW of medium and large commercial customers;
recovery of the deferral and rate base effects of the construction and operating costs of the Ocotillo modernization project (see below discussion of the 2017 Settlement Agreement); and
continued recovery of the remaining investment and other costs related to the retirement and closure of the Navajo Generating Station (the "Navajo Plant") (see "Navajo Plant" below).

APS requested that the increase become effective December 1, 2020.  APS cannot predict the outcome of its request.

2016 Retail Rate Case Filing with the Arizona Corporation Commission
 
On June 1, 2016, APS filed an application with the ACC for an annual increase in retail base rates. On March 27, 2017, a majority of the stakeholders in the general retail rate case, including the ACC Staff, the Residential Utility Consumer Office, limited income advocates and private rooftop solar organizations signed a settlement agreement (the "2017 Settlement Agreement") and filed it with the ACC. The 2017 Settlement Agreement provides for a net retail base rate increase of $94.6 million, excluding the transfer of adjustor balances, consisting of: (1) a non-fuel, non-depreciation, base rate increase of $87.2 million per year; (2) a base rate decrease of $53.6 million attributable to reduced fuel and purchased power costs; and (3) a base rate increase of $61.0 million due to changes in depreciation schedules. The average annual customer bill impact under the 2017 Settlement Agreement was calculated as an increase of 3.28% (the average annual bill impact for a typical APS residential customer was calculated as an increase of 4.54%).

Other key provisions of the agreement include the following:

an agreement by APS not to file another general retail rate case application before June 1, 2019;
an authorized return on common equity of 10.0%;
a capital structure comprised of 44.2% debt and 55.8% common equity;
a cost deferral order for potential future recovery in APS’s next general retail rate case for the construction and operating costs APS incurs for its Ocotillo modernization project;
a cost deferral and procedure to allow APS to request rate adjustments prior to its next general retail rate case related to its share of the construction costs associated with installing SCR equipment at the Four Corners Power Plant ("Four Corners");
a deferral for future recovery (or credit to customers) of the Arizona property tax expense above or below a specified test year level caused by changes to the applicable Arizona property tax rate;
an expansion of the Power Supply Adjustor (“PSA”) to include certain environmental chemical costs and third-party energy storage costs;
a new AZ Sun II program (now known as "APS Solar Communities") for utility-owned solar distributed generation with the purpose of expanding access to rooftop solar for low and moderate income Arizonans, recoverable through the Arizona Renewable Energy Standard and Tariff ("RES"), to be no less than $10 million per year, and not more than $15 million per year;
an increase to the per kWh cap for the environmental improvement surcharge from $0.00016 to $0.00050 and the addition of a balancing account;
rate design changes, including:
a change in the on-peak time of use period from noon - 7 p.m. to 3 p.m. - 8 p.m. Monday through Friday, excluding holidays;
non-grandfathered distributed generation ("DG") customers would be required to select a rate option that has time of use rates and either a new grid access charge or demand component;
a Resource Comparison Proxy (“RCP”) for exported energy of 12.9 cents per kWh in year one; and
an agreement by APS not to pursue any new self-build generation (with certain exceptions) having an in-service date prior to January 1, 2022 (extended to December 31, 2027 for combined-cycle generating units), unless expressly authorized by the ACC.

Through a separate agreement, APS, industry representatives, and solar advocates committed to stand by the 2017 Settlement Agreement and refrain from seeking to undermine it through ballot initiatives, legislation or advocacy at the ACC.

On August 15, 2017, the ACC approved (by a vote of 4-1), the 2017 Settlement Agreement without material modifications.  On August 18, 2017, the ACC issued a final written Opinion and Order reflecting its decision in APS’s general retail rate case (the "2017 Rate Case Decision"), which is subject to requests for rehearing and potential appeal. The new rates went into effect on August 19, 2017.

On October 17, 2017, Warren Woodward (an intervener in APS's general retail rate case) filed a Notice of Appeal in the Arizona Court of Appeals, Division One. The notice raises a single issue related to the application of certain rate schedules to new APS residential customers after May 1, 2018. Mr. Woodward filed a second notice of appeal on November 13, 2017 challenging APS’s $5 per month automated metering infrastructure opt-out program. Mr. Woodward’s two appeals were consolidated, and APS requested and was granted intervention. The Arizona Court of Appeals issued a Memorandum Decision on December 11, 2018 affirming the ACC decisions challenged by Mr. Woodward. Mr. Woodward filed a petition for review with the Arizona Supreme Court on January 9, 2019. The Arizona Supreme Court denied review.

On January 3, 2018, an APS customer filed a petition with the ACC that was determined by the ACC Staff to be a complaint filed pursuant to Arizona Revised Statute §40-246 (the “Complaint”) and not a request for rehearing. Arizona Revised Statute §40-246 requires the ACC to hold a hearing regarding any complaint alleging that a public service corporation is in violation of any commission order or that the rates being charged are not just and reasonable if the complaint is signed by at least twenty-five customers of the public service corporation. The Complaint alleged that APS is “in violation of commission order” [sic]. On February 13, 2018, the complainant filed an amended Complaint alleging that the rates and charges in the 2017 Rate Case Decision are not just and reasonable.  The complainant requested that the ACC hold a hearing on the amended Complaint to determine if the average bill impact on residential customers of the rates and charges approved in the 2017 Rate Case Decision is greater than 4.54% (the average annual bill impact for a typical APS residential customer estimated by APS) and, if so, what effect the alleged greater bill impact has on APS's revenues and the overall reasonableness and justness of APS's rates and charges, in order to determine if there is sufficient evidence to warrant a full-scale rate hearing.  The ACC held a hearing on this matter beginning in September 2018 and the hearing was concluded on October 1, 2018. On April 9, 2019, the Administrative Law Judge issued a Recommended Opinion and Order recommending that the Complaint be dismissed. The ACC considered the matter at its April and May 2019 open meetings, but no decision was issued. On July 3, 2019, the Administrative Law Judge issued an amendment to the Recommended Opinion and Order that incorporated the requirements of the rate review of the 2017 Rate Case Decision (see below discussion regarding the rate review). On July 10, 2019, the ACC reconsidered the matter and adopted the Administrative Law Judge's amended Recommended Opinion and Order along with several ACC Commissioner amendments and an amendment incorporating the results of the rate review and resolved the Complaint.

On December 24, 2018, certain ACC Commissioners filed a letter stating that because the ACC had received a substantial number of complaints that the rate increase authorized by the 2017 Rate Case Decision was much more than anticipated, they believe there is a possibility that APS is earning more than was authorized by the 2017 Rate Case Decision.  Accordingly, the ACC Commissioners requested the ACC Staff to perform a rate review of APS using calendar year 2018 as a test year and file a report by May 3, 2019. The ACC Commissioners also asked the ACC Staff to evaluate APS’s efforts to educate its customers regarding the new rates approved in the 2017 Rate Case Decision. On April 23, 2019, the ACC Staff indicated that they would need additional time beyond May 3, 2019 to file the requested report.

On June 4, 2019, the ACC Staff filed a proposed order regarding the rate review of the 2017 Rate Case Decision. On June 11, 2019, the ACC Commissioners approved the proposed ACC Staff order with amendments. The key provisions of the amended order include the following:

APS must file a rate case no later than October 31, 2019, using a June 30, 2019 test-year;
until the conclusion of the rate case being filed no later than October 31, 2019, APS must provide information on customer bills that shows how much a customer would pay on their most economical rate given their actual usage during each month;
APS customers can switch rate plans during an open enrollment period of six months;
APS must identify customers whose bills have increased by more than 9% and that are not on the most economical rate and provide such customers with targeted education materials and an opportunity to switch rate plans;
APS must provide grandfathered net metering customers on legacy demand rates an opportunity to switch to another legacy rate to enable such customers to fully benefit from legacy net metering rates;
APS must fund and implement a supplemental customer education and outreach program to be developed with and administered by ACC Staff and a third-party consultant; and
APS must fund and organize, along with the third-party consultant, a stakeholder group to suggest better ways to communicate the impact of changes to adjustor cost recovery mechanisms (see below for discussion on cost recovery mechanisms), including more effective ways to educate customers on rate plans and to reduce energy usage.

APS cannot predict the outcome or impact of the rate case filed on October 31, 2019. APS is assessing the impact to its financial statements of the implementation of the other key provisions of the amended order regarding the rate review and cannot predict at this time whether they will have a material impact on its financial position, results of operations or cash flows. 

Cost Recovery Mechanisms
 
APS has received regulatory decisions that allow for more timely recovery of certain costs outside of a general retail rate case through the following recovery mechanisms.
 
Renewable Energy Standard.  In 2006, the ACC approved the RES.  Under the RES, electric utilities that are regulated by the ACC must supply an increasing percentage of their retail electric energy sales from eligible renewable resources, including solar, wind, biomass, biogas and geothermal technologies.  In order to achieve these requirements, the ACC allows APS to include a RES surcharge as part of customer bills to recover the approved amounts for use on renewable energy projects.  Each year APS is required to file a five-year implementation plan with the ACC and seek approval for funding the upcoming year’s RES budget. In 2015, the ACC revised the RES rules to allow the ACC to consider all available information, including the number of rooftop solar arrays in a utility’s service territory, to determine compliance with the RES.

On June 30, 2017, APS filed its 2018 RES Implementation Plan and proposed a budget of approximately $90 million.  APS’s budget request supports existing approved projects and commitments and includes the anticipated transfer of specific revenue requirements into base rates in accordance with the 2017 Settlement Agreement and also requests a permanent waiver of the residential distributed energy requirement for 2018 contained in the RES rules. APS's 2018 RES budget request is lower than the 2017 RES budget due in part to a certain portion of the RES being collected by APS in base rates rather than through the RES adjustor.

On November 20, 2017, APS filed an updated 2018 RES budget to include budget adjustments for APS Solar Communities (formerly known as AZ Sun II), which was approved as part of the 2017 Rate Case Decision. APS Solar Communities is a 3-year program authorizing APS to spend $10 million to $15 million in capital costs each year to install utility-owned DG systems for low to moderate income residential homes, buildings of non-profit entities, Title I schools and rural government facilities. The 2017 Rate Case Decision provided that all operations and maintenance expenses, property taxes, marketing and advertising expenses, and the capital carrying costs for this program will be recovered through the RES. On June 12, 2018, the ACC approved the 2018 RES Implementation Plan including a waiver of the distributed energy requirements for the 2018 implementation year.

On June 29, 2018, APS filed its 2019 RES Implementation Plan and proposed a budget of approximately $89.9 million.  APS’s budget request supports existing approved projects and commitments and requests a permanent waiver of the residential distributed energy requirement for 2019 contained in the RES rules. On October 29, 2019, the ACC approved the 2019 RES Implementation Plan.
    
On July 1, 2019, APS filed its 2020 RES Implementation Plan and proposed a budget of approximately $86.3 million. APS’s budget request supports existing approved projects and commitments and requests a permanent waiver of the residential distributed energy requirement for 2020 contained in the RES rules. The ACC has not yet ruled on the 2020 RES Implementation Plan.

On July 2, 2019, ACC Staff issued draft rules, which propose a RES goal of 45% of retail energy served be renewable by 2035 and a goal of 20% of retail sales during peak demand to be from clean energy resources by 2035.  The draft rules would also require a certain amount of the RES goal to be derived from distributed renewable storage, for which utilities would be required to offer performance-based incentives. Nuclear energy would be considered a clean resource under the draft rules. See "Energy Modernization Plan" below for more information.

Demand Side Management Adjustor Charge.  The ACC Electric Energy Efficiency Standards require APS to submit a Demand Side Management Implementation Plan ("DSM Plan") annually for review by and approval of the ACC. Verified energy savings from APS's resource savings projects can be counted toward compliance with the Electric Energy Efficiency Standards; however, APS is not allowed to count savings from systems savings projects toward determination of the achievement of performance incentives, nor may APS include savings from these system savings projects in the calculation of its Lost Fixed Cost Recovery (“LFCR”) mechanism (see below for discussion of the LFCR).

On September 1, 2017, APS filed its 2018 DSM Plan, which proposes modifications to the demand side management portfolio to better meet system and customer needs by focusing on peak demand reductions, storage, load shifting and demand response programs in addition to traditional energy savings measures. The 2018 DSM Plan seeks a requested budget of $52.6 million and requests a waiver of the Electric Energy Efficiency Standard for 2018.   On November 14, 2017, APS filed an amended 2018 DSM Plan, which revised
the allocations between budget items to address customer participation levels, but kept the overall budget at $52.6 million. The ACC has not yet ruled on the APS 2018 amended DSM Plan.

On December 31, 2018, APS filed its 2019 DSM Plan, which requests a budget of $34.1 million and continues APS's focus on DSM strategies such as peak demand reduction, load shifting, storage and electrification strategies. The ACC has not yet ruled on the APS 2019 DSM Plan.

On May 7, 2019, APS filed a request for an extension to file its 2020 DSM Plan no later than December 31, 2019. On July 10, 2019, the ACC approved this request.

 Power Supply Adjustor Mechanism and Balance.  The PSA provides for the adjustment of retail rates to reflect variations primarily in retail fuel and purchased power costs.  The following table shows the changes in the deferred fuel and purchased power regulatory asset for 2019 and 2018 (dollars in thousands):
 
 
Nine Months Ended
September 30,
 
2019
 
2018
Beginning balance
$
37,164

 
$
75,637

Deferred fuel and purchased power costs — current period
60,911

 
82,486

Amounts charged to customers
(38,601
)
 
(92,397
)
Ending balance
$
59,474

 
$
65,726


 
The PSA rate for the PSA year beginning February 1, 2017 was $(0.001348) per kWh, as compared to $0.001678 per kWh for the prior year.  This rate was comprised of a forward component of $(0.001027) per kWh and a historical component of $(0.000321) per kWh. On August 19, 2017 the PSA rate was revised to $0.000555 per kWh as part of the 2017 Rate Case Decision. This new rate was comprised of a forward component of $0.000876 per kWh and a historical component of $(0.000321) per kWh.

The PSA rate for the PSA year beginning February 1, 2018 is $0.004555 per kWh, consisting of a forward component of $0.002009 per kWh and a historical component of $0.002546 per kWh. This represented a $0.004 per kWh increase over the August 19, 2017 PSA, the maximum permitted under the Plan of Administration for the PSA. This left $16.4 million of 2017 fuel and purchased power costs above this annual cap. These costs rolled over into the following year and were reflected in the 2019 reset of the PSA.

On November 30, 2018, APS filed its PSA rate for the PSA year beginning February 1, 2019. That rate was $0.001658 per kWh and consisted of a forward component of $0.000536 per kWh and a historical component of $0.001122 per kWh. The 2019 PSA rate is a $0.002897 per kWh decrease compared to 2018. These rates went into effect as filed on February 1, 2019.
 
Transmission Rates, Transmission Cost Adjustor ("TCA") and Other Transmission Matters In July 2008, FERC approved an Open Access Transmission Tariff for APS to move from fixed rates to a formula rate-setting methodology in order to more accurately reflect and recover the costs that APS incurs in providing transmission services.  A large portion of the rate represents charges for transmission services to serve APS's retail customers ("Retail Transmission Charges").  In order to recover the Retail Transmission Charges, APS was previously required to file an application with, and obtain approval from, the ACC to reflect changes in Retail Transmission Charges through the TCA.  Under the terms of the settlement agreement entered into in 2012 regarding APS's rate case (the "2012 Settlement Agreement"), however, an adjustment to rates to recover
the Retail Transmission Charges will be made annually each June 1 and will go into effect automatically unless suspended by the ACC.
 
The formula rate is updated each year effective June 1 on the basis of APS's actual cost of service, as disclosed in APS's FERC Form 1 report for the previous fiscal year.  Items to be updated include actual capital expenditures made as compared with previous projections, transmission revenue credits and other items.  The resolution of proposed adjustments can result in significant volatility in the revenues to be collected.  APS reviews the proposed formula rate filing amounts with the ACC Staff.  Any items or adjustments which are not agreed to by APS and the ACC Staff can remain in dispute until settled or litigated at FERC.  Settlement or litigated resolution of disputed issues could require an extended period of time and could have a significant effect on the Retail Transmission Charges because any adjustment, though applied prospectively, may be calculated to account for previously over- or under-collected amounts.

Effective June 1, 2017, APS's annual wholesale transmission rates for all users of its transmission system increased by approximately $35.1 million for the twelve-month period beginning June 1, 2017 in accordance with the FERC-approved formula.  An adjustment to APS’s retail rates to recover FERC approved transmission charges went into effect automatically on June 1, 2017.

On March 7, 2018, APS made a filing to make modifications to its annual transmission formula to provide transmission customers the benefit of the reduced federal corporate income tax rate resulting from the Tax Act beginning in its 2018 annual transmission formula rate update filing. These modifications were approved by FERC on May 22, 2018 and reduced APS’s transmission rates compared to the rate that would have gone into effect absent these changes.

Effective June 1, 2018, APS's annual wholesale transmission rates for all users of its transmission system decreased by approximately $22.7 million for the twelve-month period beginning June 1, 2018 in accordance with the FERC-approved formula.  An adjustment to APS’s retail rates to recover FERC approved transmission charges went into effect automatically on June 1, 2018.

Effective June 1, 2019, APS's annual wholesale transmission rates for all users of its transmission system increased by approximately $4.9 million for the twelve-month period beginning June 1, 2019 in accordance with the FERC-approved formula. An adjustment to APS’s retail rates to recover FERC approved transmission charges went into effect automatically on June 1, 2019.

 Lost Fixed Cost Recovery Mechanism.  The LFCR mechanism permits APS to recover on an after-the-fact basis a portion of its fixed costs that would otherwise have been collected by APS in the kWh sales lost due to APS energy efficiency programs and to DG such as rooftop solar arrays.  The fixed costs recoverable by the LFCR mechanism were first established in the 2012 Settlement Agreement and amount to approximately 3.1 cents per residential kWh lost and 2.3 cents per non-residential kWh lost. These amounts were revised in the 2017 Settlement Agreement to 2.5 cents for both lost residential and non-residential kWh.  The LFCR adjustment has a year-over-year cap of 1% of retail revenues.  Any amounts left unrecovered in a particular year because of this cap can be carried over for recovery in a future year.  The kWhs lost from energy efficiency are based on a third-party evaluation of APS’s energy efficiency programs.  DG sales losses are determined from the metered output from the DG units.
 
APS filed its 2017 LFCR adjustment on January 13, 2017 requesting an LFCR adjustment of $63.7 million. On April 5, 2017, the ACC approved the 2017 annual LFCR adjustment as filed, effective with the first billing cycle of April 2017. On February 15, 2018, APS filed its 2018 annual LFCR Adjustment, requesting that effective May 1, 2018, the LFCR be adjusted to $60.7 million (a $3 million per year decrease
from 2017 levels). On February 6, 2019, the ACC approved the 2018 annual LFCR adjustment to become effective March 1, 2019. On February 15, 2019, APS filed its 2019 annual LFCR adjustment, requesting that effective May 1, 2019, the annual LFCR recovery amount be reduced to $36.2 million (a $24.5 million decrease from previous levels). On July 10, 2019, the ACC approved APS’s 2019 LFCR adjustment as filed, effective with the next billing cycle of July 2019. Because the LFCR mechanism has a balancing account that trues up any under or over recoveries, the delay in implementation does not have an adverse effect on APS.

Tax Expense Adjustor Mechanism.  As part of the 2017 Settlement Agreement, the parties agreed to a rate adjustment mechanism to address potential federal income tax reform and enable the pass-through of certain income tax effects to customers. The TEAM expressly applies to APS's retail rates with the exception of a small subset of customers taking service under specially-approved tariffs. On December 22, 2017, the Tax Act was enacted.  This legislation made significant changes to the federal income tax laws including a reduction in the corporate tax rate from 35% to 21% effective January 1, 2018.

On January 8, 2018, APS filed an application with the ACC that addressed the change in the marginal federal tax rate from 35% to 21% resulting from the Tax Act and reduced rates by $119.1 million annually through an equal cents per kWh credit ("TEAM Phase I").  On February 22, 2018, the ACC approved the reduction of rates through an equal cents per kWh credit. The rate reduction was effective for the first billing cycle in March 2018.

The impact of the TEAM Phase I, over time, is expected to be earnings neutral. However, on a quarterly basis, there is a difference between the timing and amount of the income tax benefit and the reduction in revenues refunded through the TEAM Phase I related to the lower federal income tax rate. The amount of the benefit of the lower federal income tax rate is based on quarterly pre-tax results, while the reduction in revenues refunded through the TEAM Phase I is based on a per kWh sales credit which follows our seasonal kWh sales pattern and is not impacted by earnings of the Company.

On August 13, 2018, APS filed a second request with the ACC that addressed the return of an additional $86.5 million in tax savings to customers related to the amortization of non-depreciation related excess deferred taxes previously collected from customers ("TEAM Phase II"). The ACC approved this request on March 13, 2019, effective the first billing cycle in April 2019. Both the timing of the reduction in revenues refunded through TEAM Phase II and the offsetting income tax benefit are recognized based upon our seasonal kWh sales pattern.
    
On April 10, 2019, APS filed a third request with the ACC that addressed the amortization of depreciation related excess deferred taxes over a 28.5 year period (“TEAM Phase III”).  On October 29, 2019, the ACC approved TEAM Phase III providing both (i) a one-time bill credit of $64 million to be credited to customers on their December 2019 bills, and (ii) a monthly bill credit effective the first billing cycle in December 2019 which will provide an additional benefit of $39.5 million to customers through December 31, 2020. It is currently anticipated that benefits related to the amortization of depreciation related excess deferred taxes for periods beginning after December 31, 2020 will be fully incorporated into the 2019 rate case filing.

Net Metering

In 2015, the ACC voted to conduct a generic evidentiary hearing on the value and cost of DG to gather information that will inform the ACC on net metering issues and cost of service studies in upcoming utility rate cases.  A hearing was held in April 2016. On October 7, 2016, the Administrative Law Judge issued a recommendation in the docket concerning the value and cost of DG solar installations. On December 20, 2016, the ACC completed its open meeting to consider the recommended opinion and order by the Administrative Law Judge. After making several amendments, the ACC approved the recommended decision by a 4-1 vote. As a result of the ACC’s action, effective with APS’s 2017 Rate Case Decision, the net metering tariff that governs payments for energy exported to the grid from residential rooftop solar systems was replaced by a more formula-driven approach that utilizes inputs from historical wholesale solar power until an avoided cost methodology is developed by the ACC.

As amended, the decision provides that payments by utilities for energy exported to the grid from DG solar facilities will be determined using a RCP methodology, a method that is based on the most recent five-year rolling average price that APS pays for utility-scale solar projects, while a forecasted avoided cost methodology is being developed.  The price established by this RCP method will be updated annually (between general retail rate cases) but will not be decreased by more than 10% per year. Once the avoided cost methodology is developed, the ACC will determine in APS's subsequent rate cases which method (or a combination of methods) is appropriate to determine the actual price to be paid by APS for exported distributed energy.

In addition, the ACC made the following determinations:

Customers who have interconnected a DG system or submitted an application for interconnection for DG systems prior to September 1, 2017, based on APS's 2017 Rate Case Decision, will be grandfathered for a period of 20 years from the date the customer’s interconnection application was accepted by the utility;
Customers with DG solar systems are to be considered a separate class of customers for ratemaking purposes; and
Once an export price is set for APS, no netting or banking of retail credits will be available for new DG customers, and the then-applicable export price will be guaranteed for new customers for a period of 10 years.

This decision of the ACC addresses policy determinations only. The decision states that its principles will be applied in future general retail rate cases, and the policy determinations themselves may be subject to future change, as are all ACC policies. A first-year export energy price of 12.9 cents per kWh was included in the 2017 Settlement Agreement and became effective on September 1, 2017.

In accordance with the 2017 Rate Case Decision, APS filed its request for a second-year export energy price of 11.6 cents per kWh on May 1, 2018.  This price reflected the 10% annual reduction discussed above. The new rate rider became effective on October 1, 2018. APS filed its request for a third-year export energy price of 10.45 cents per kWh on May 1, 2019.  This price also reflects the 10% annual reduction discussed above. The new rate rider became effective on October 1, 2019. The ACC has not yet ruled on this request.

On January 23, 2017, The Alliance for Solar Choice ("TASC") sought rehearing of the ACC's decision regarding the value and cost of DG. TASC asserted that the ACC improperly ignored the Administrative Procedure Act, failed to give adequate notice regarding the scope of the proceedings, and relied on information that was not submitted as evidence, among other alleged defects. TASC filed a Notice of Appeal in the Arizona
Court of Appeals and filed a Complaint and Statutory Appeal in the Maricopa County Superior Court on March 10, 2017. As part of the 2017 Settlement Agreement described above, TASC agreed to withdraw these appeals when the ACC decision implementing the 2017 Settlement Agreement is no longer subject to appellate review.

See "2016 Retail Rate Case Filing with the Arizona Corporation Commission" above for information regarding an ACC order in connection with the rate review of the 2017 Rate Case Decision requiring APS to provide grandfathered net metering customers on legacy demand rates with an opportunity to switch to another legacy rate to enable such customers to benefit from legacy net metering rates.

Subpoena from Arizona Corporation Commissioner Robert Burns

On August 25, 2016, Commissioner Burns, individually and not by action of the ACC as a whole, served subpoenas in APS’s then current retail rate proceeding on APS and Pinnacle West for the production of records and information relating to a range of expenditures from 2011 through 2016. The subpoenas requested information concerning marketing and advertising expenditures, charitable donations, lobbying expenses, contributions to 501(c)(3) and (c)(4) nonprofits and political contributions. The return date for the production of information was set as September 15, 2016. The subpoenas also sought testimony from Company personnel having knowledge of the material, including the Chief Executive Officer.

On September 9, 2016, APS filed with the ACC a motion to quash the subpoenas or, alternatively, to stay APS's obligations to comply with the subpoenas and decline to decide APS's motion pending court proceedings. Contemporaneously with the filing of this motion, APS and Pinnacle West filed a complaint for special action and declaratory judgment in the Superior Court of Arizona for Maricopa County, seeking a declaratory judgment that Commissioner Burns’ subpoenas are contrary to law. On September 15, 2016, APS produced all non-confidential and responsive documents and offered to produce any remaining responsive documents that are confidential after an appropriate confidentiality agreement is signed.

On February 7, 2017, Commissioner Burns opened a new ACC docket and indicated that its purpose is to study and rectify problems with transparency and disclosure regarding financial contributions from regulated monopolies or other stakeholders who may appear before the ACC that may directly or indirectly benefit an ACC Commissioner, a candidate for ACC Commissioner, or key ACC Staff.  As part of this docket, Commissioner Burns set March 24, 2017 as a deadline for the production of all information previously requested through the subpoenas. Neither APS nor Pinnacle West produced the information requested and instead objected to the subpoena. On March 10, 2017, Commissioner Burns filed suit against APS and Pinnacle West in the Superior Court of Arizona for Maricopa County in an effort to enforce his subpoenas. On March 30, 2017, APS filed a motion to dismiss Commissioner Burns' suit against APS and Pinnacle West. In response to the motion to dismiss, the court stayed the suit and ordered Commissioner Burns to file a motion to compel the production of the information sought by the subpoenas with the ACC. On June 20, 2017, the ACC denied the motion to compel.

On August 4, 2017, Commissioner Burns amended his complaint to add all of the ACC Commissioners and the ACC itself as defendants. All defendants moved to dismiss the amended complaint. On February 15, 2018, the Superior Court dismissed Commissioner Burns’ amended complaint. On March 6, 2018, Commissioner Burns filed an objection to the proposed final order from the Superior Court and a motion to further amend his complaint. The Superior Court permitted Commissioner Burns to amend his complaint to add a claim regarding his attempted investigation into whether his fellow commissioners should have been disqualified from voting on APS’s 2017 rate case. Commissioner Burns filed his second amended complaint, and all defendants filed responses opposing the second amended complaint and requested that it be dismissed.
Oral argument occurred in November 2018 regarding the motion to dismiss. On December 18, 2018, the trial court granted the defendants’ motions to dismiss and entered final judgment on January 18, 2019. On February 13, 2019, Commissioner Burns filed a notice of appeal. On July 12, 2019, Commissioner Burns filed his opening brief in the Arizona Court of Appeals. APS filed its answering brief on October 21, 2019. APS and Pinnacle West cannot predict the outcome of this matter.

Information Requests from Arizona Corporation Commissioners

On January 14, 2019, ACC Commissioner Kennedy opened a docket to investigate campaign expenditures and political participation of APS and Pinnacle West. In addition, on February 27, 2019, ACC Commissioners Burns and Dunn opened a new docket and requested documents from APS and Pinnacle West related to ACC elections and charitable contributions related to the ACC. On March 1, 2019, ACC Commissioner Kennedy issued a subpoena to APS seeking several categories of information for both Pinnacle West and APS including political contributions, lobbying expenditures, marketing and advertising expenditures, and contributions made to 501(c)(3) and 501(c)(4) entities, for the years 2013-2018. Pinnacle West and APS voluntarily responded to both sets of requests on March 29, 2019. APS also received and responded to various follow-on requests from ACC Commissioners on these matters. Pinnacle West and APS cannot predict the outcome of these matters.

Renewable Energy Ballot Initiative
    
On February 20, 2018, a renewable energy advocacy organization filed with the Arizona Secretary of State a ballot initiative for an Arizona constitutional amendment requiring Arizona public service corporations to provide at least 50% of their annual retail sales of electricity from renewable sources by 2030. For purposes of the proposed amendment, eligible renewable sources would not include nuclear generating facilities. The initiative was placed on the November 2018 Arizona elections ballot. On November 6, 2018, the initiative failed to receive adequate voter support and was defeated.
    
Energy Modernization Plan

On January 30, 2018, former ACC Commissioner Tobin proposed the Energy Modernization Plan, which consisted of a series of energy policies tied to clean energy sources such as energy storage, biomass, energy efficiency, electric vehicles, and expanded energy planning through the integrated resource plans ("IRP") process. In August 2018, the ACC directed ACC Staff to open a new rulemaking docket which will address a wide range of energy issues, including the Energy Modernization Plan proposals. The rulemaking will consider possible modifications to existing ACC rules, such as the RES, Electric and Gas Energy Efficiency Standards, Net Metering, Resource Planning, and the Biennial Transmission Assessment, as well as the development of new rules regarding forest bioenergy, electric vehicles, interconnection of distributed generation, baseload security, blockchain technology and other technological developments, retail competition, and other energy-related topics. On April 25, 2019, the ACC Staff issued a set of draft rules in regards to the Energy Modernization Plan and workshops were held on April 29, 2019 regarding these draft rules. On July 2, 2019, the ACC Staff issued a revised set of draft rules, which propose a RES goal of 45% of retail energy served be renewable by 2035 and a goal of 20% of retail sales during peak demand to be from clean energy resources by 2035.  The draft rules also require a certain amount of the RES goal to be derived from distributed renewable storage, for which utilities would be required to offer performance-based incentives.  Nuclear energy would be considered a clean resource under the draft rules. The ACC held various stakeholder meetings and workshops on ACC Staff’s draft energy rules in July through September 2019. APS cannot predict the outcome of this matter.
    
Integrated Resource Planning

ACC rules require utilities to develop fifteen-year IRPs which describe how the utility plans to serve customer load in the plan timeframe.  The ACC reviews each utility’s IRP to determine if it meets the necessary requirements and whether it should be acknowledged.  In March of 2018, the ACC reviewed the 2017 IRPs of its jurisdictional utilities and voted to not acknowledge any of the plans.  APS does not believe that this lack of acknowledgment will have a material impact on our financial position, results of operations or cash flows.  Based on an ACC decision, APS is required to file a Preliminary Resource Plan by April 1, 2019 and its final IRP by April 1, 2020. APS filed a request to extend the deadline to file its Preliminary IRP, which was granted. On August 1, 2019, APS filed its Preliminary IRP.

Public Utility Regulatory Policies Act

In August 2016, APS filed an application requesting that all of its contracts with qualifying facilities over 100 kW be set at a presumptive maximum 2 year term. A qualifying facility is an eligible energy-producing facility as defined by FERC regulations within a host electric utility’s service territory that has a right to sell to the host utility. Host utilities are required to purchase power from qualifying facilities at an avoided cost as determined by the utility subject to state commission oversight. A hearing was held in August 2019 and briefing on this matter was completed in October 2019 regarding APS’s application. APS cannot predict the outcome of this matter.

Residential Electric Utility Customer Service Disconnections

On June 13, 2019, APS voluntarily suspended electric disconnections for residential customers who had not paid their bills.  On June 20, 2019, the ACC voted to enact emergency rule amendments to prevent residential electric utility customer service disconnections during the period from June 1 through October 15. During the moratorium on disconnections, APS could not charge late fees and interest on amounts that were past due from customers.  Customer deposits must also be used to pay delinquent amounts before disconnection can occur and customers will have four months to pay back their deposit and any remaining delinquent amounts.  In accordance with the emergency rules, APS began putting delinquent customers on a mandatory four-month payment plan beginning on October 16, 2019. The emergency rule changes will be effective for 180 days and may be renewed for one additional 180 day period. During that time, the ACC began a formal regular rulemaking process to allow stakeholder input and time for consideration of permanent rule changes.  The ACC further ordered that each regulated electric utility serving retail customers in Arizona update its service conditions by incorporating the emergency rule amendments, restore power to any customers who were disconnected during the month of June 2019 and credit any fees that were charged for a reconnection. The ACC Staff issued draft amendments to the customer service disconnections rules. Stakeholders submitted initial comments to the draft amendments on September 23, 2019. ACC stakeholder meetings were held in September 2019 and October 2019 regarding the customer service disconnections rules. APS currently estimates that the disconnection moratorium will result in a negative impact to its 2019 operating results of approximately $10 million pre-tax depending on certain assumptions, including customer behaviors. APS is further assessing the impact to its financial statements beyond 2019, which will be affected by the results of final rulemaking related to disconnections.

Retail Electric Competition Rules

On November 17, 2018, the ACC voted to re-examine the facilitation of a deregulated retail electric market in Arizona. An ACC special open meeting workshop was held on December 3, 2018. No substantive action was taken, but interested parties were asked to submit written comments and respond to a list of questions from ACC Staff. On July 1 and July 2, 2019, ACC Staff issued a report and initial proposed draft rules regarding possible modifications to the ACC’s retail electric competition rules. Interested parties filed comments to the ACC Staff report and a stakeholder meeting and workshop to discuss the retail electric competition rules was held on July 30, 2019. ACC Commissioners submitted additional questions regarding this matter. APS cannot predict whether these efforts will result in any changes and, if changes to the rules results, what impact these rules would have on APS.

Four Corners 

SCE-Related Matters. On December 30, 2013, APS purchased Southern California Edison Company's ("SCE’s") 48% ownership interest in each of Units 4 and 5 of Four Corners.  The 2012 Settlement Agreement includes a procedure to allow APS to request rate adjustments prior to its next general retail rate case related to APS’s acquisition of the additional interests in Units 4 and 5 and the related closure of Units 1-3 of Four Corners.  APS made its filing under this provision on December 30, 2013. On December 23, 2014, the ACC approved rate adjustments resulting in a revenue increase of $57.1 million on an annual basis.  This included the deferral for future recovery of all non-fuel operating costs for the acquired SCE interest in Four Corners, net of the non-fuel operating costs savings resulting from the closure of Units 1-3 from the date of closing of the purchase through its inclusion in rates.  The 2012 Settlement Agreement also provided for deferral for future recovery of all unrecovered costs incurred in connection with the closure of Units 1-3.  The deferral balance related to the acquisition of SCE’s interest in Units 4 and 5 and the closure of Units 1-3 was $42 million as of September 30, 2019 and is being amortized in rates over a total of 10 years.

 As part of APS’s acquisition of SCE’s interest in Units 4 and 5, APS and SCE agreed, via a "Transmission Termination Agreement" that, upon closing of the acquisition, the companies would terminate an existing transmission agreement ("Transmission Agreement") between the parties that provides transmission capacity on a system (the "Arizona Transmission System") for SCE to transmit its portion of the output from Four Corners to California.  APS previously submitted a request to FERC related to this termination, which resulted in a FERC order denying rate recovery of $40 million that APS agreed to pay SCE associated with the termination. On December 22, 2015, APS and SCE agreed to terminate the Transmission Termination Agreement and allow for the Transmission Agreement to expire according to its terms, which includes settling obligations in accordance with the terms of the Transmission Agreement. APS established a regulatory asset of $12 million in 2015 in connection with the payment required under the terms of the Transmission Agreement. On July 1, 2016, FERC issued an order denying APS’s request to recover the regulatory asset through its FERC-jurisdictional rates.  APS and SCE completed the termination of the Transmission Agreement on July 6, 2016. APS made the required payment to SCE and wrote-off the $12 million regulatory asset and charged operating revenues to reflect the effects of this order in the second quarter of 2016.  On July 29, 2016, APS filed a request for rehearing with FERC. In its order denying recovery, FERC also referred to its enforcement division a question of whether the agreement between APS and SCE relating to the settlement of obligations under the Transmission Agreement was a jurisdictional contract that should have been filed with FERC. On October 5, 2017, FERC issued an order denying APS's request for rehearing. FERC also upheld its prior determination that the agreement relating to the settlement was a jurisdictional contract and should have been filed with FERC. APS cannot predict whether or if the enforcement division will take any action. APS filed an appeal of FERC's July 1, 2016 and October 5, 2017 orders with the United States Court of Appeals for the Ninth Circuit on December 4, 2017. On June 14, 2019, the United States Court of Appeals for the Ninth
Circuit issued an unpublished memorandum order denying APS’s petition for review of FERC’s orders that denied APS’s request to recover the regulatory asset through its FERC-jurisdictional rates and granting APS’s petition for review of FERC’s orders finding the agreement to be a jurisdictional contract. The United States Court of Appeals for the Ninth Circuit vacated FERC’s determination that the agreement was required to be filed with FERC and remanded the issue to FERC for additional proceedings. APS cannot predict the outcome of the remand proceeding.

SCR Cost Recovery. On December 29, 2017, in accordance with the 2017 Rate Case Decision, APS filed a Notice of Intent to file its SCR Adjustment to permit recovery of costs associated with the installation of SCR equipment at Four Corners Units 4 and 5.  APS filed the SCR Adjustment request in April 2018.  Consistent with the 2017 Rate Case Decision, the request was narrow in scope and addressed only costs associated with this specific environmental compliance equipment.  The SCR Adjustment request provided that there would be a $67.5 million annual revenue impact that would be applied as a percentage of base rates for all applicable customers.  Also, as provided for in the 2017 Rate Case Decision, APS requested that the adjustment become effective no later than January 1, 2019.  The hearing for this matter occurred in September 2018.  At the hearing, APS accepted ACC Staff's recommendation of a lower annual revenue impact of approximately $58.5 million. The Administrative Law Judge issued a Recommended Opinion and Order finding that the costs for the SCR project were prudently incurred and recommending authorization of the $58.5 million annual revenue requirement related to the installation and operation of the SCRs. Exceptions to the Recommended Opinion and Order were filed by the parties and intervenors on December 7, 2018.  The ACC has not issued a decision on this matter. APS included the costs for the SCR project in the retail rate base in its 2019 retail rate case filing with the ACC. APS cannot predict the outcome or timing of the decision on this matter. APS may be required to record a charge to its results of operations if the ACC issues an unfavorable decision (see SCR deferral in the Regulatory Assets and Liabilities table below).
  
Cholla

On September 11, 2014, APS announced that it would close Unit 2 of the Cholla Power Plant ("Cholla") and cease burning coal at the other APS-owned units (Units 1 and 3) at the plant by the mid-2020s, if the United States Environmental Protection Agency ("EPA") approves a compromise proposal offered by APS to meet required environmental and emissions standards and rules. On April 14, 2015, the ACC approved APS's plan to retire Unit 2, without expressing any view on the future recoverability of APS's remaining investment in the unit. APS closed Unit 2 on October 1, 2015. In early 2017, EPA approved a final rule incorporating APS's compromise proposal, which took effect on April 26, 2017.
Previously, APS estimated Cholla Unit 2’s end of life to be 2033. APS has been recovering a return on and of the net book value of the unit in base rates. Pursuant to the 2017 Settlement Agreement described above, APS will be allowed continued recovery of the net book value of the unit and the unit’s decommissioning and other retirement-related costs ($77 million as of September 30, 2019), in addition to a return on its investment. In accordance with GAAP, in the third quarter of 2014, Unit 2’s remaining net book value was reclassified from property, plant and equipment to a regulatory asset. The 2017 Settlement Agreement also shortened the depreciation lives of Cholla Units 1 and 3 to 2025.
On March 20, 2019, APS announced that it began evaluating the feasibility and cost of converting a unit at Cholla to burn biomass. Biomass is a fuel comprised of forest trimmings, and a converted unit at Cholla could assist in forest thinning, responsible forest management, an improved watershed, and a reduced wildfire risk. APS’s ability to operate a biomass power plant would depend on third-parties procuring forest biomass for fuel. APS reported the results of its evaluation on May 9, 2019 to the ACC. On July 10, 2019, the ACC voted to not require APS to file a request for proposal to convert the unit at Cholla to burn biomass.
Navajo Plant
The co-owners of the Navajo Plant and the Navajo Nation agreed that the Navajo Plant will remain in operation until December 2019 under the existing plant lease. The co-owners and the Navajo Nation executed a lease extension on November 29, 2017 that will allow for decommissioning activities to begin after the plant ceases operations by December 2019.
APS is currently recovering depreciation and a return on the net book value of its interest in the Navajo Plant over its previously estimated life through 2026. APS will seek continued recovery in rates for the book value of its remaining investment in the plant ($80 million as of September 30, 2019) plus a return on the net book value as well as other costs related to retirement and closure, which are still being assessed and may be material. APS believes it will be allowed recovery of the net book value, in addition to a return on its investment. In accordance with GAAP, in the second quarter of 2017, APS's remaining net book value of its interest in the Navajo Plant was reclassified from property, plant and equipment to a regulatory asset. If the ACC does not allow full recovery of the remaining net book value of this interest, all or a portion of the regulatory asset will be written off and APS's net income, cash flows, and financial position will be negatively impacted.    
Regulatory Assets and Liabilities 
The detail of regulatory assets is as follows (dollars in thousands): 
 
Amortization Through
 
September 30, 2019
 
December 31, 2018
 
 
Current
 
Non-Current
 
Current
 
Non-Current
Pension
(a)
 
$

 
$
703,460

 
$

 
$
733,351

Retired power plant costs
2033
 
28,182

 
146,076

 
28,182

 
167,164

Income taxes — allowance for funds used during construction ("AFUDC") equity
2049
 
6,457

 
154,269

 
6,457

 
151,467

Deferred fuel and purchased power — mark-to-market (Note 7)
2023
 
41,643

 
27,305

 
31,728

 
23,768

Deferred property taxes
2027
 
8,569

 
60,338

 
8,569

 
66,356

Deferred fuel and purchased power (b) (c)
2020
 
59,474

 

 
37,164

 

SCR deferral
N/A
 

 
45,296

 

 
23,276

Four Corners cost deferral
2024
 
8,077

 
34,171

 
8,077

 
40,228

Deferred compensation
2036
 

 
37,589

 

 
36,523

Lost fixed cost recovery (b)
2020
 
25,775

 

 
32,435

 

Income taxes — investment tax credit basis adjustment
2047
 
1,079

 
24,555

 
1,079

 
25,522

Ocotillo deferral
N/A
 

 
23,643

 

 

Palo Verde VIEs (Note 6)
2046
 

 
20,480

 

 
20,015

Coal reclamation
2026
 
1,546

 
18,821

 
1,546

 
15,607

Loss on reacquired debt
2038
 
1,637

 
12,441

 
1,637

 
13,668

Mead-Phoenix transmission line CIAC
2050
 
332

 
9,795

 
332

 
10,044

TCA balancing account (b)
2021
 
5,016

 
2,721

 
3,860

 
772

Tax expense of Medicare subsidy
2024
 
1,235

 
5,073

 
1,235

 
6,176

AG-1 deferral
2022
 
2,787

 
3,413

 
2,654

 
5,819

Tax expense adjuster mechanism (b)
2019
 
2,916

 

 

 

Other
Various
 
2,782

 

 
1,947

 
3,185

Total regulatory assets (d)
 
 
$
197,507

 
$
1,329,446

 
$
166,902

 
$
1,342,941


(a)
This asset represents the future recovery of pension benefit obligations through retail rates.  If these costs are disallowed by the ACC, this regulatory asset would be charged to other comprehensive income ("OCI") and result in lower future revenues.
(b)
See "Cost Recovery Mechanisms" discussion above.
(c)
Subject to a carrying charge.
(d)
There are no regulatory assets for which the ACC has allowed recovery of costs, but not allowed a return by exclusion from rate base.  FERC rates are set using a formula rate as described in "Transmission Rates, Transmission Cost Adjustor and Other Transmission Matters."


The detail of regulatory liabilities is as follows (dollars in thousands):
 
 
Amortization Through
 
September 30, 2019
 
December 31, 2018
 
 
Current
 
Non-Current
 
Current
 
Non-Current
Excess deferred income taxes - ACC - Tax Cuts and Jobs Act (a)
(b)
 
$
38,529

 
$
1,178,216

 
$

 
$
1,272,709

Excess deferred income taxes - FERC - Tax Cuts and Jobs Act (a)
2058
 
6,302

 
238,064

 
6,302

 
243,691

Asset retirement obligations
2057
 

 
367,930

 

 
278,585

Removal costs
(c)
 
47,459

 
151,535

 
39,866

 
177,533

Other postretirement benefits
(d)
 
37,821

 
95,789

 
37,864

 
125,903

Income taxes — change in rates
2048
 
2,764

 
67,605

 
2,769

 
70,069

Spent nuclear fuel
2027
 
5,746

 
53,229

 
6,503

 
57,002

Income taxes — deferred investment tax credit
2047
 
2,164

 
49,182

 
2,164

 
51,120

Four Corners coal reclamation
2038
 
1,858

 
49,194

 
1,858

 
17,871

Renewable energy standard (b)
2021
 
42,146

 
5,675

 
44,966

 
20

Demand side management (b)
2021
 
14,300

 
24,146

 
14,604

 
4,123

Sundance maintenance
2031
 
4,640

 
13,393

 
1,278

 
17,228

Deferred gains on utility property
2022
 
2,923

 
4,766

 
4,423

 
6,581

Property tax deferral
N/A
 

 
6,288

 

 
2,611

FERC transmission true up
2021
 

 
2,586

 

 

Other
Various
 
1,370

 
2,533

 
3,279

 
930

Total regulatory liabilities
 
 
$
208,022

 
$
2,310,131

 
$
165,876

 
$
2,325,976


(a)
For purposes of presentation on the Statement of Cash Flows, amortization of the regulatory liabilities for excess deferred income taxes are reflected as "Deferred income taxes" under Cash Flows From Operating Activities.
(b)
See “Cost Recovery Mechanisms” discussion above.
(c)
In accordance with regulatory accounting guidance, APS accrues removal costs for its regulated assets, even if there is no legal obligation for removal.
(d)
See Note 5.
v3.19.3
Retirement Plans and Other Postretirement Benefits
9 Months Ended
Sep. 30, 2019
Retirement Benefits [Abstract]  
Retirement Plans and Other Postretirement Benefits
Retirement Plans and Other Postretirement Benefits
 
Pinnacle West sponsors a qualified defined benefit and account balance pension plan, a non-qualified supplemental excess benefit retirement plan, and an other postretirement benefit plan for the employees of Pinnacle West and our subsidiaries.  Pinnacle West uses a December 31 measurement date for its pension and other postretirement benefit plans.  The market-related value of our plan assets is their fair value at the measurement dates.

The following table provides details of the plans’ net periodic benefit costs and the portion of these costs charged to expense (including administrative costs and excluding amounts capitalized as overhead construction or billed to electric plant participants) (dollars in thousands):

 
Pension Benefits
 
Other Benefits
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Service cost — benefits earned during the period
$
12,476

 
$
14,167

 
$
37,427

 
$
42,501

 
$
4,593

 
$
5,275

 
$
13,777

 
$
15,825

Non-service costs (credits):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest cost on benefit obligation
34,211

 
31,172

 
102,632

 
93,517

 
7,473

 
7,037

 
22,420

 
21,111

Expected return on plan assets
(42,971
)
 
(45,713
)
 
(128,913
)
 
(137,140
)
 
(9,603
)
 
(10,520
)
 
(28,809
)
 
(31,561
)
  Amortization of:
 

 
 
 
 

 
 

 
 

 
 

 
 

 
 

  Prior service credit