COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. 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 (“EGU”), 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 2020 Form 10-K.
On June 30, 2020, the United States Federal Energy Regulatory Commission (“FERC”) issued an order granting a waiver request related to the existing Allowance for Funds Used During Construction (“AFUDC”) rate calculation beginning March 1, 2020 through February 28, 2021. On February 23, 2021, this waiver was extended until September 30, 2021. The order provides a simplified approach that companies may elect to implement in order to minimize the significant distorted effect on the AFUDC formula resulting from increased short-term debt financing during the COVID-19 pandemic. APS has adopted this simplified approach to computing the AFUDC composite rate by using a simple average of the actual historical short-term debt balances for 2019, instead of current period short-term debt balances, and has left all other aspects of the AFUDC formula composite rate calculation unchanged. This change impacts the AFUDC composite rate in both 2020 and 2021 but does not impact prior years. Furthermore, the change in the composite rate calculation does not impact our accounting treatment for these costs. The change will not have a material impact on our financial statements. See Note 1 in our 2020 Form 10-K for information on the accounting treatment for AFUDC.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Cash Flow Information
The following table summarizes supplemental Pinnacle West cash flow information (dollars in thousands):
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Three Months Ended
March 31,
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2021
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2020
|
|
Cash paid during the period for:
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Income taxes, net of refunds
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$
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(827)
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|
$
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(3,002)
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Interest, net of amounts capitalized
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53,885
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|
53,723
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|
Significant non-cash investing and financing activities:
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|
Accrued capital expenditures
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$
|
79,597
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$
|
100,868
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Right-of-use operating lease assets obtained in exchange for operating lease liabilities
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785
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|
2,311
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The following table summarizes supplemental APS cash flow information (dollars in thousands):
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Three Months Ended
March 31,
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2021
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|
2020
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|
Cash paid during the period for:
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Income taxes, net of refunds
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$
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—
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|
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$
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—
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Interest, net of amounts capitalized
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53,153
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|
|
52,034
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|
|
Significant non-cash investing and financing activities:
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|
|
Accrued capital expenditures
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$
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79,597
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|
$
|
100,868
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|
Right-of-use operating lease assets obtained in exchange for operating lease liabilities
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785
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2,311
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2. Revenue
Sources of Revenue
The following table provides detail of Pinnacle West’s consolidated revenue disaggregated by revenue sources (dollars in thousands):
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Three Months Ended March 31,
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2021
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2020
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Retail Electric Revenue
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Residential
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$
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340,838
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$
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325,073
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Non-Residential
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314,783
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303,351
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Wholesale Energy Sales
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17,597
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14,668
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Transmission Services for Others
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18,993
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15,927
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Other Sources
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4,264
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2,911
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Total operating revenues
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$
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696,475
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$
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661,930
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COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 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. See “Allowance for Doubtful Accounts” discussion below for additional details regarding payment terms.
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 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 months ended March 31, 2021 and 2020 were $682 million and $648 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 months ended March 31, 2021 and 2020, our revenues that do not qualify as revenue from contracts with customers were $14 million and $14 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 March 31, 2021 or December 31, 2020.
Allowance for Doubtful Accounts
The allowance for doubtful accounts represents our best estimate of accounts receivable and accrued unbilled revenues that will ultimately be uncollectible due to credit loss risk. The allowance includes a write-off component that is calculated by applying an estimated write-off factor to retail electric revenues. The write-off factor used to estimate uncollectible accounts is based upon consideration of historical collections experience, the current and forecasted economic environment, changes to our collection policies, and management’s best estimate of future collections success.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On March 13, 2020, due to the COVID-19 pandemic we voluntarily suspended disconnections of customers for nonpayment. The suspension of customer disconnections was extended from March 13, 2020 through December 31, 2020. Our disconnection policies are also impacted by the Summer Disconnection Moratorium. The suspension of disconnection of customers for nonpayment ended on January 1, 2021 and certain customers with past due balances were placed on eight-month payment arrangements. These circumstances and the on-going COVID-19 pandemic have impacted our allowance for doubtful accounts, including our write-off factor. We continue to monitor the impacts of COVID-19, our disconnection policies, payment arrangements, among other considerations impacting our estimated write-off factor and allowance for doubtful accounts. See Note 4 for additional details.
The following table provides a rollforward of Pinnacle West’s allowance for doubtful accounts (dollars in thousands):
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March 31, 2021
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December 31, 2020
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Allowance for doubtful accounts, balance at beginning of period
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$
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19,782
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$
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8,171
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Bad debt expense
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4,151
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20,633
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Actual write-offs
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(3,528)
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(9,022)
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Allowance for doubtful accounts, balance at end of period
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$
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20,405
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$
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19,782
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3. 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 5, 2020, Pinnacle West refinanced its 364-day $50 million term loan agreement with a new 364-day $31 million term loan agreement that would have matured May 4, 2021. Borrowings under the agreement bore interest at Eurodollar Rate plus 1.40% per annum. At March 31, 2021, Pinnacle West had $15 million in outstanding borrowings under the current agreement, all of which was repaid on April 27, 2021.
On December 23, 2020, Pinnacle West entered into a $150 million term loan facility that matures June 2022. The proceeds were received on January 4, 2021 and used for general corporate purposes. We recognized the term loan facility as long-term debt upon settlement on January 4, 2021.
At March 31, 2021, 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 March 31, 2021, Pinnacle West had no outstanding borrowings under its credit facility, no letters of credit outstanding and $0.3 million of outstanding commercial paper borrowings.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APS
At March 31, 2021, 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 $750 million commercial paper program, for bank borrowings or for issuances of letters of credit. At March 31, 2021, APS had no outstanding borrowings under its revolving credit facilities, no letters of credit outstanding, and $199.5 million of outstanding commercial paper borrowings.
On December 17, 2020, the ACC issued a financing order in which, subject to specified parameters and procedures, it approved APS’s short-term debt authorization equal to the sum of (i) 7% of APS’s capitalization, and (ii) $500 million (which is required to be used for costs relating to purchases of natural gas and power) and a long-term debt authorization of $7.5 billion.
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):
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As of March 31, 2021
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As of December 31, 2020
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Carrying
Amount
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Fair Value
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Carrying
Amount
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Fair Value
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Pinnacle West
|
$
|
646,525
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|
|
$
|
653,395
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|
|
$
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496,321
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|
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$
|
509,050
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APS
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5,818,520
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|
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6,436,224
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5,817,945
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|
|
7,103,791
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Total
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$
|
6,465,045
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|
|
$
|
7,089,619
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|
|
$
|
6,314,266
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|
|
$
|
7,612,841
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|
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Regulatory Matters
COVID-19 Pandemic
Due to the COVID-19 pandemic, APS voluntarily suspended disconnections of customers for nonpayment and waived late payment fees beginning March 13, 2020 until December 31, 2020. The suspension of disconnection of customers for nonpayment ended on January 1, 2021 and customers were automatically placed on eight-month payment arrangements if they had past due balances at the end of the disconnection period of $75 or greater. APS will continue to waive late payment fees until October 15, 2021. APS has experienced and is continuing to experience an increase in bad debt expense associated with the COVID-19 pandemic, the Summer Disconnection Moratorium (defined below) and the related write-offs of customer delinquent accounts. Due to COVID-19, APS also delayed the reset of the Environmental Improvement Surcharge (“EIS”) adjustor and suspended the discontinuation of TEAM Phase II to the first billing cycle in May 2020 rather than April 2020. In February 2021, APS delayed the annual reset of the PSA. Rather than the increase being effective February 2021, the PSA reset will be implemented with 50% of the increase effective April 2021 and the remaining 50% increase effective November 2021 (see below for discussion of EIS, TEAM Phase II and PSA).
On April 17, 2020, APS filed an application with the ACC requesting a COVID-19 emergency relief package to provide additional assistance to its customers. On May 5, 2020, the ACC approved APS returning $36 million that had been collected through the Demand Side Management (“DSM”) Adjustor Charge, but not allocated for current DSM programs, directly to customers through a bill credit in June 2020. APS has refunded approximately $43 million to customers. The additional $7 million over the approved amount of $36 million was the result of the kWh credit being based on historic consumption, which was different than actual consumption in the refund period. This difference was recorded to the DSM balancing account and will be addressed in subsequent DSM filings (see below for discussion of the DSM Adjustor Charge).
In 2020, APS spent more than $15 million to assist customers and local non-profits and community organizations to help with the impact of the COVID-19 pandemic, with $12.4 million of these dollars directly committed to bill assistance programs (the “COVID Customer Support Fund”). The COVID Customer Support Fund was comprised of a series of voluntary commitments of funds that are not recoverable through rates throughout 2020 of approximately $8.8 million. An additional $3.6 million in bill credits for limited income customers was ordered by the ACC in December 2020 of which 50%, up to a maximum of $2.5 million, was committed to be funds that are not recoverable through rates with the remaining being deferred for potential future recovery in rates. Included in the COVID Customer Support Fund were programs that assisted customers that had a delinquency of two or more months with a one-time credit of $100, an expanded credit of $300 for limited income customers, programs to assist extra small and small non-residential customers with a one-time credit of $1,000, and other targeted programs allocated to assist with other COVID-19 needs in support of utility bill assistance. The December 2020 ACC order further assisted delinquent limited income customers with an additional bill credit of up to $250 or their delinquent balance, whichever was less. APS has distributed all funds for all COVID Customer Support Fund programs combined. Beyond the COVID Customer Support Fund, APS has also provided $2.7 million to assist local non-profits and community organizations working to mitigate the impacts of the COVID-19 pandemic.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2019 Retail Rate Case Filing with the Arizona Corporation Commission
In accordance with the requirements of the 2019 rate review order described below, APS filed an application with the ACC on October 31, 2019 seeking an increase in annual 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 annual 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 were:
•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:
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Capital Structure
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Cost of Capital
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Long-term debt
|
|
45.3
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%
|
4.10
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%
|
|
Common stock equity
|
|
54.7
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%
|
10.15
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|
%
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|
Weighted-average cost of capital
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|
|
|
7.41
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%
|
•a 1% return on the increment of fair value rate base above APS’s original cost rate base, as provided for by Arizona law;
•a rate of $0.030168 per kWh for the portion of APS’s retail base rates attributable to fuel and purchased power costs (“Base Fuel Rate”);
•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 APS’s 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 discussion below 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).
On October 2, 2020, the ACC Staff, the Residential Utility Consumer Office (“RUCO”) and other intervenors filed their initial written testimony with the ACC in this rate case. The ACC Staff recommends, among other things, a (i) $89.7 million revenue increase, (ii) average annual customer bill increase of 2.7%, (iii) return on equity of 9.4%, (iv) a 0.3% or, as an alternative, a 0% return on the increment of fair value rate base greater than original cost, (v) recovery of the deferral and rate base effects of the construction and operating costs of the Four Corners SCR project and (vi) recovery of the rate base effects of the construction and ongoing consideration of the deferral of the Ocotillo modernization project. RUCO recommends, among other things, a (i) $20.8 million revenue decrease, (ii) average annual customer bill decrease of 0.63%, (iii) return on equity of 8.74%, (iv) a 0% return on the increment of fair value rate base, (v) nonrecovery of the
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
deferral and rate base effects of the construction and operating costs of the Four Corners SCR project pending further consideration, and (vi) recovery of the deferral and rate base effects of the construction and operating costs of the Ocotillo modernization project.
The filed ACC Staff and intervenor testimony include additional recommendations, some of which materially differ from APS’s filed application. On November 6, 2020, APS filed its rebuttal testimony and the principal provisions which differ from its initial application include, among other things, a (i) $169 million revenue increase, (ii) average annual customer bill increase of 5.14%, (iii) return on equity of 10%, (iv) return on the increment of fair value rate base of 0.8%, (v) new cost recovery adjustor mechanism, the Advanced Energy Mechanism (“AEM”), to enable more timely recovery of clean investments as APS pursues its clean energy commitment, (vi) recognition that securitization is a potentially useful financing tool to recover the remaining book value of retiring assets and effectuate a transition to a cleaner energy future that APS intends to pursue, provided legislative hurdles are addressed, and (vii) a Coal Community Transition (“CCT”) plan related to the closure or future closure of coal-fired generation facilities, of which $25 million would be funds that are not recoverable through rates with a proposal that the remainder be funded by customers over 10 years.
The CCT plan includes the following proposed components: (i) $100 million that will be paid over 10 years to the Navajo Nation for a sustainable transition to a post-coal economy, which would be funded by customers, (ii) $1.25 million that will be paid over five years to the Navajo Nation to fund an economic development organization, which would be funds not recoverable through rates, (iii) $10 million to facilitate electrification projects within the Navajo Nation, which would be funded equally by funds not recoverable through rates and by customers, (iv) $2.5 million per year in transmission revenue sharing to be paid to the Navajo Nation beginning after the closure of the Four Corners Power Plant through 2038, which would be funds not recoverable through rates, (v) $12 million that will be paid over five years to the Navajo County Communities surrounding Cholla Power Plant, which would primarily be funded by customers, and (vi) $3.7 million that will be paid over five years to the Hopi Tribe related to APS’s ownership interests in the Navajo Generating Station, which would primarily be funded by customers. The commitment of funds that would not be recoverable through rates of $25 million were recognized in our December 31, 2020 financials.
On December 4, 2020, the ACC Staff and intervenors filed surrebuttal testimony. The ACC Staff reduced its recommended rate increase to $59.8 million, or an average annual customer bill increase of 1.82%. In RUCO’s surrebuttal, the recommended revenue decrease changed to $50.1 million, or an average annual customer bill decrease of 1.52%.
The hearing concluded on March 3, 2021 and the post-hearing briefing schedule concluded on April 30, 2021. In May 2021, the ACC will be discussing whether to re-open the evidentiary record in APS’s pending rate case to take additional evidence on topics raised by certain ACC Commissioners, including adjustor cost recovery mechanisms. APS believes that the rate case record is sufficient, and adjustors provide substantial benefits to customers by supporting critical programs and reflecting changes in utility costs that can be promptly passed along to customers. Pending this decision, the next steps in this rate case are that the Administrative Law Judge will issue a Recommended Order and Opinion and then the ACC will review and consider the matter, which is anticipated to be in the third quarter of 2021. Unfavorable ACC Staff and intervenor positions and recommendations, including modifications or elimination of APS's adjustor cost recovery mechanisms could have a material impact on APS’s financial statements if ultimately adopted by the ACC. APS cannot predict the outcome or timing of this proceeding.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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, RUCO, 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 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 in capital costs, and not more than $15 million per year in capital costs;
•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.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 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”). The Complaint was later amended alleging that the rates and charges in the 2017 Rate Case Decision are not just and reasonable. The ACC held a hearing on this matter, and the Administrative Law Judge issued a Recommended Opinion and Order recommending that the Complaint be dismissed. 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 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.
See “Rate Plan Comparison Tool and Investigation” below for information regarding a review and investigation pertaining to the rate plan comparison tool offered to APS customers and other related issues.
ACC Review of APS 2017 Rate Case Decision
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. 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 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.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APS filed its rate case on October 31, 2019 (see “2019 Retail Rate Case Filing with the Arizona Corporation Commission” above for more information). APS does not believe that the implementation of the other key provisions of the amended order regarding the rate review will have a material impact on its financial position, results of operations or cash flows.
On May 19, 2020, the ACC Staff filed a third-party consultant’s report which evaluated the effectiveness of APS’s customer outreach and education program related to the 2017 Rate Case Decision. On May 29, 2020, the Chairman of the ACC filed a letter with the ACC in response to this report and is alleging that APS is out of compliance with the 2017 Rate Case Decision and is over-earning. The Chairman proposed that the current rates should be classified as interim rates and customers held harmless if APS’s activities have caused the rates set in the 2017 Rate Case Decision to not be just and reasonable. Also, on May 29, 2020, a second commissioner filed a letter with the ACC agreeing with the Chairman’s assertions and further asserting that the 2017 Rate Case Decision should be re-opened. On June 18, 2020, at an ACC Open Meeting, the matters raised in these letters were discussed. The ACC did not vote to move forward with any adjustments to APS’s current rates. On November 4, 2020, the ACC voted to administratively close this docket.
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 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, 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 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 including a waiver of the residential distributed energy requirements for the 2019 implementation year.
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. On September 23, 2020, the ACC approved the 2020 RES Implementation Plan including a waiver of the residential distributed energy requirements for the 2020 implementation year. In addition, the ACC approved the implementation of a new pilot program that incentivizes Arizona households to install at-home battery
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
systems. Recovery of the costs associated with the pilot will be addressed in the 2021 Demand Side Management Implementation Plan (“DSM Plan”).
On July 1, 2020, APS filed its 2021 RES Implementation Plan and proposed a budget of approximately $84.7 million. APS’s budget request supports existing approved projects and commitments and requests a permanent waiver of the residential distributed energy requirement for 2021 contained in the RES rules. In the 2021 RES Implementation Plan, APS requested $4.5 million to meet revenue requirements associated with the APS Solar Communities program to complete installations delayed as a result of the COVID-19 pandemic in 2020. The ACC has not yet ruled on the 2021 RES Implementation Plan.
On July 30, 2020, ACC Staff issued final draft rules which, if approved, would require APS to meet certain clean energy standards and technology procurement mandates, obtain approval for its action plan included in its IRP, and seek cost recovery in a rate process. APS cannot predict the outcome of this matter. See “Energy Modernization Plan” below for more information.
Demand Side Management Adjustor Charge. The ACC Electric Energy Efficiency Standards require APS to submit a 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 proposed 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 sought a requested budget of $52.6 million and requested 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.
On December 31, 2018, APS filed its 2019 DSM Plan, which requested a budget of $34.1 million and focused on DSM strategies to better meet system and customer needs, such as peak demand reduction, load shifting, storage and electrification strategies.
On December 31, 2019, APS filed its 2020 DSM Plan, which requested a budget of $51.9 million and continued APS’s focus on DSM strategies such as peak demand reduction, load shifting, storage and electrification strategies. The 2020 DSM Plan addressed all components of the pending 2018 and 2019 DSM plans, which enabled the ACC to review the 2020 DSM Plan only. On May 15, 2020, APS filed an amended 2020 DSM Plan to provide assistance to customers experiencing economic impacts of the COVID-19 pandemic. The amended 2020 DSM Plan requested the same budget amount of $51.9 million. On September 23, 2020, the ACC approved the amended 2020 DSM Plan.
On April 17, 2020, APS filed an application with the ACC requesting a COVID-19 emergency relief package to provide additional assistance to its customers. On May 5, 2020, the ACC approved APS returning $36 million that had been collected through the DSM Adjustor Charge, but not allocated for current DSM programs, directly to customers through a bill credit in June 2020. APS has refunded approximately $43 million to customers. The additional $7 million over the approved amount was the result of the kWh credit being based on historic consumption which was different than actual consumption in the refund period. This difference was recorded to the DSM balancing account and will be addressed in subsequent DSM filings. See “COVID-19 Pandemic” above for more information.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On December 31, 2020, APS filed its 2021 DSM Plan, which requested a budget of $63.7 million and continued APS’s focus on DSM strategies, such as peak demand reduction, load shifting, storage and electrification strategies, as well as enhanced assistance to customers impacted economically by COVID-19. On April 6, 2021, APS filed an amended 2021 DSM Plan that proposed an additional performance incentive for customers participating in the residential energy storage pilot approved in the 2020 RES Implementation Plan. The ACC has not yet ruled on the amended APS 2021 DSM Plan.
On April 20, 2021, APS filed a request to extend the June 1, 2021 deadline to file its 2022 DSM Plan until 120 days after the ACC has taken action on APS's amended 2021 DSM Plan. The ACC has not ruled on 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 2021 and 2020 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2021
|
|
2020
|
|
Beginning balance
|
$
|
175,835
|
|
|
$
|
70,137
|
|
|
Deferred fuel and purchased power costs — current period
|
52,210
|
|
|
5,785
|
|
|
Amounts refunded to customers
|
564
|
|
|
1,808
|
|
|
Ending balance
|
$
|
228,609
|
|
|
$
|
77,730
|
|
The PSA rate for the PSA year beginning February 1, 2019 was $0.001658 per kWh, as compared to the $0.004555 per kWh for the prior year. This rate was comprised of a forward component of $0.000536 per kWh and a historical component of $0.001122 per kWh. This represented a $0.002897 per kWh decrease compared to 2018. These rates went into effect as filed on February 1, 2019.
On November 27, 2019, APS filed its PSA rate for the PSA year beginning February 1, 2020. That rate was $(0.000456) per kWh and consisted of a forward component of $(0.002086) per kWh and a historical component of $0.001630 per kWh. The 2020 PSA rate is a $0.002115 per kWh decrease compared to the 2019 PSA year. These rates went into effect as filed on February 1, 2020.
On November 30, 2020, APS filed its PSA rate for the PSA year beginning February 1, 2021. That rate was $0.003544 per kWh and consisted of a forward component of $0.003434 per kWh and a historical component of $0.000110 per kWh. The 2021 PSA rate is a $0.004 per kWh increase, compared to the 2020 PSA year. These rates were to be effective on February 1, 2021 but APS delayed the effectiveness of these rates until the first billing cycle of April 2021 due to concerns of the impact on customers during COVID-19. In March 2021, the ACC voted to implement the 2021 PSA, with 50% of the rate increase effective in April 2021 and the remaining 50% of the increase effective in November 2021. The PSA rate implemented was $0.001544 per kWh and consisted of a forward component of $(0.004444) per kWh and a historical component of $0.005988 per kWh. As part of this approval, the ACC ordered ACC Staff to conduct a fuel and purchased power procurement audit to better understand the factors that contributed to the increase.
On March 15, 2019, APS filed an application with the ACC requesting approval to recover the costs related to two energy storage power purchase tolling agreements through the PSA. On December 29, 2020, the ACC Staff filed its report and recommended the storage costs be included in the PSA once the systems are in-service. On January 12, 2021, the ACC approved this application.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Environmental Improvement Surcharge. The EIS permits APS to recover the capital carrying costs (rate of return, depreciation and taxes) plus incremental operations and maintenance expenses associated with environmental improvements made outside of a test year to comply with environmental standards set by federal, state, tribal, or local laws and regulations. A filing is made on or before February 1 for qualified environmental improvements made during the prior calendar year, and the new charge becomes effective April 1 unless suspended by the ACC. There is an overall cap of $0.0005 per kWh (approximately $13 million to $14 million per year). APS’s February 1, 2021 application requested an increase in the charge to $10.3 million, or $1.5 million over the prior-period charge and it became effective with the first billing cycle in April 2021.
Transmission Rates, Transmission Cost Adjustor (“TCA”) and Other Transmission Matters. In July 2008, FERC approved a modification to APS’s Open Access Transmission Tariff to allow 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 (“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.
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 Cuts and Jobs Act (“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. On March 17, 2020, APS made a filing to make further modifications to its annual transmission formula to provide additional transparency for excess and deficient Accumulated Deferred Income Taxes resulting from the Tax Act, as well as for future local, state, and federal statutory tax rate changes. This filing is pending with FERC.
Effective June 1, 2019, APS’s annual wholesale transmission rates for all users of its transmission system increased by approximately $25.8 million for the twelve-month period beginning June 1, 2019 in accordance with the FERC-approved formula. Of this amount, retail customer rates increased by approximately $4.7 million. An adjustment to APS’s retail rates to recover FERC approved transmission charges went into effect automatically on June 1, 2019.
Effective June 1, 2020, APS’s annual wholesale transmission rates for all users of its transmission system decreased by approximately $6.1 million for the twelve-month period beginning June 1, 2020 in accordance with the FERC-approved formula. Of this amount, retail customer rates decreased by approximately $10.9 million. An adjustment to APS’s retail rates to recover FERC approved transmission charges went into effect automatically on June 1, 2020.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 are currently 2.5 cents for both lost residential and non-residential kWh as set forth in the 2017 Settlement Agreement. 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.
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. 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. On February 14, 2020, APS filed its 2020 annual LFCR adjustment, requesting that effective May 1, 2020, the annual LFCR recovery amount be reduced to $26.6 million (a $9.6 million decrease from previous levels). On April 14, 2020, the ACC approved the 2020 LFCR adjustment as filed, effective with the first billing cycle in May 2020. On February 15, 2021, APS filed its 2021 annual LFCR adjustment, requesting that effective May 1, 2021, the annual LFCR recovery amount be increased to $38.5 million (an $11.8 million increase from previous levels). On April 13, 2021, the ACC voted not to approve the requested $11.8 million increase to the annual LFCR adjustment, thus the previously approved rates continue to remain intact. The $11.8 million will continue to be maintained in the LFCR regulatory asset balancing account and will be requested as part of APS’s next LFCR application filing in 2022. The ACC has not yet released its order on this matter. APS does not anticipate that the order will have a material impact on its financial position, results of operations and cash flows.
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 through the last billing cycle in March 2020.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On March 19, 2020, due to the COVID-19 pandemic, APS delayed the discontinuation of TEAM Phase II until the first billing cycle in May 2020. Amounts credited to customers after the last billing cycle in March 2020 will be recorded as a part of the balancing account and will be addressed for recovery as part of APS’s 2019 ACC rate case. 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 consistent with IRS normalization rules (“TEAM Phase III”). On October 29, 2019, the ACC approved TEAM Phase III providing both (i) a one-time bill credit of $64 million, which was 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. On November 20, 2020, APS filed an application to continue the TEAM Phase III monthly bill credit through the earlier of December 31, 2021, or at the conclusion of APS’s 2019 pending rate case. On December 9, 2020, the ACC approved this request. Both the timing of the reduction in revenues refunded through the TEAM Phase III monthly bill credit and the offsetting income tax benefit are recognized based upon APS’s seasonal kWh sales pattern.
Net Metering
APS’s 2017 Rate Case 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 third-year export energy price of 10.5 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. APS filed its request for a fourth-year export energy price of 9.4 cents per kWh on May 1, 2020, with a requested effective date of September 1, 2020. This price reflects the 10% annual reduction discussed above. On September 23, 2020, the ACC approved the
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
annual reduction of the export energy price but voted to delay the effectiveness of the reduction in export prices until October 1, 2021. APS’s export energy price will remain at 10.5 cents per kWh until October 1, 2021.
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 Former Arizona Corporation Commissioner Robert Burns
On August 25, 2016, then-Commissioner Robert 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 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, 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, 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, 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 Burns’ suit against APS and Pinnacle West. In response to the motion to dismiss, the court stayed the suit and ordered 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, 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
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Superior Court dismissed Burns’ amended complaint. On March 6, 2018, 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 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. 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, Burns filed a notice of appeal. On July 12, 2019, Burns filed his opening brief in the Arizona Court of Appeals. APS filed its answering brief on October 21, 2019. The Arizona Court of Appeals originally granted the request for oral argument; however, on March 31, 2020, the court vacated the date scheduled for oral argument given the COVID-19 pandemic. The court determined that the matter could be submitted without oral argument and has taken the matter under advisement and will issue a decision without oral argument.
Burns’ position as an ACC commissioner ended on January 4, 2021. Nevertheless, Burns filed a motion with the Court of Appeals arguing that the appeal was not mooted by this fact and the court should decide the matter. Both APS and the ACC filed responses opposing the motion and asserting that the matter is moot. Pinnacle West and APS 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. The Company’s CEO, Mr. Guldner, appeared at the ACC’s January 14, 2020 Open Meeting regarding ACC Commissioners’ questions about political spending. Mr. Guldner committed to the ACC that, during his tenure, Pinnacle West and APS, and any of their affiliated companies, will not participate in ACC campaign elections through financial contributions or in-kind contributions.
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 plan (“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
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
generation, baseload security, blockchain technology and other technological developments, retail competition, and other energy-related topics.
On April 25, 2019, the ACC Staff issued an initial set of draft energy rules and held various workshops to incorporate feedback from stakeholders and ACC Commissioners from April 2019 through July 2020. At the March 11-12, 2020 workshop, the ACC Staff committed to filing a final draft of proposed rules by July 2020. On July 30, 2020, the ACC Staff issued final draft energy rules which proposed 100% of retail kWh sales from clean energy resources by the end of 2050. Nuclear is defined as a clean energy resource. The proposed rules also require 50% of retail energy served be renewable by the end of 2035. A new energy efficiency standard was not included in the proposed rules. APS would be required to obtain approval of its action plan included in its IRP and seek recovery of prudently incurred costs in a rate process. If approved by the ACC Commissioners, the rules would require utilities to file a Clean Energy Implementation Plan and Energy Efficiency Report as part of their IRP every three years beginning in 2023. In addition, the ACC Staff proposed changing the IRP planning horizon from 15 years to 10 years.
The ACC has discussed the final draft energy rules at several different meetings in 2020. On October 14, 2020, the ACC passed one amendment to ACC Staff’s final draft energy rules that will require electric utilities to obtain 35% of peak load (as measured in 2020) by 2030 from DSM resources, including traditional energy efficiency, demand response and other programs aimed at reducing energy usage, peak demand management and load shifting. This standard aligns with the proposed rules’ three-year resource planning cycle and allows recovery of costs through existing mechanisms until the ACC issues a decision in a future rate proceeding. On October 29, 2020, the ACC approved an amendment that will require electric utilities to reduce their carbon emissions over 2016-2018 levels by 50% by 2032; 75% by 2040; and 100% by 2050. The ACC also approved an amendment that will require utilities to install energy storage systems with an aggregate capacity equal to 5% of each utility’s 2020 peak demand by 2035, of which 40% must be derived from customer-owned or customer-leased distributed storage. Another approved amendment modifies the resource planning process, including requirements for the ACC to approve a utility’s load forecast and resource plan, and for a utility to perform an all-source request for information to guide its resource plan. On November 13, 2020, the ACC approved a final draft energy rules package. On April 19, 2021, the Administrative Law Judge issued a Recommended Order and Opinion on the final energy rules and the ACC will need to review and approve the Recommended Order and Opinion before the rules will take effect. APS cannot predict the outcome of this matter.
Integrated Resource Planning
ACC rules require utilities to develop 15-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 was originally required to file its next IRP by April 1, 2020. On February 20, 2020, the ACC extended the deadline for all utilities to file their IRP’s from April 1, 2020 to June 26, 2020. On June 26, 2020, APS filed its final IRP. On July 15, 2020, the ACC extended the schedule for final ACC review of utility IRPs to February 2021. In March 2021, the ACC Staff requested additional time to prepare its assessment of utility IRPs. The ACC has taken no action on APS’s IRP. APS cannot predict the outcome of this matter. See “Energy Modernization Plan” above for information regarding proposed changes to the IRP filings.
Public Utility Regulatory Policies Act
Under the Public Utility Regulatory Policies Act of 1978 (“PURPA”), qualifying facilities are provided the right to sell energy and/or capacity to utilities and are granted relief from certain regulatory burdens. On
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 17, 2019, the ACC mandated a minimum contract length of 18 years for qualifying facilities over 100 kW in Arizona, and established that the rate paid to qualifying facilities must be based on the long-term avoided cost. “Avoided cost” is generally defined as the price at which the utility could purchase or produce the same amount of power from sources other than the qualifying facility on a long-term basis. During calendar year 2020, APS entered into two 18-year power purchase agreements with qualified facilities, each for 80 MW solar facilities. In March 2021, the ACC approved these agreements.
On July 16, 2020, FERC issued a final rule revising FERC’s regulations implementing PURPA. The final rule went into effect on December 31, 2020. APS is evaluating how the revised regulations may impact its operations.
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 June 1 through October 15 (“Summer Disconnection Moratorium”). During the Summer Disconnection Moratorium, 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.
In June 2019, 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 and ACC proposed draft amendments to the customer service disconnections rules. ACC stakeholder meetings were held in September 2019, October 2019 and January 2020 regarding the customer service disconnections rules. On April 14, 2021, the ACC voted to send to the formal rulemaking process a draft rules package governing customer disconnections that allows utilities to choose between a temperature threshold (above 95 degrees and below 32 degrees) or calendar threshold (June 1 – October 15) for disconnection moratoriums. During the formal rulemaking process, the public will have an opportunity to provide input on the draft rules, before the draft rules come back to the ACC for a final vote. The Summer Disconnection Moratorium will remain in effect until the ACC formalizes the final rules package.
Due to the COVID-19 pandemic, APS voluntarily suspended disconnections of customers for nonpayment and waived late payment fees beginning March 13, 2020 until December 31, 2020. The suspension of disconnection of customers for nonpayment ended on January 1, 2021 and customers were automatically placed on eight-month payment arrangements if they had past due balances at the end of the disconnection period of $75 or greater. APS will continue to waive late payment fees until October 15, 2021. APS has experienced and is continuing to experience an increase in bad debt expense associated with the COVID-19 pandemic. See “COVID-19 Pandemic” above for more information.
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
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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. On February 10, 2020, two ACC Commissioners filed two sets of draft proposed retail electric competition rules. On February 12, 2020, ACC Staff issued its second report regarding possible modifications to the ACC’s retail electric competition rules. The ACC held a workshop on February 25-26, 2020 on further consideration and discussion of the retail electric competition rules. During a July 15, 2020 ACC Staff meeting, the ACC Commissioners discussed the possible development of a retail competition pilot program, but no action was taken. The ACC Commissioners are continuing to explore the retail electric competition rules. 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.
Rate Plan Comparison Tool and Investigation
On November 14, 2019, APS learned that its rate plan comparison tool was not functioning as intended due to an integration error between the tool and APS’s meter data management system. APS immediately removed the tool from its website and notified the ACC. The purpose of the tool was to provide customers with a rate plan recommendation based upon historical usage data. Upon investigation, APS determined that the error may have affected rate plan recommendations to customers between February 4, 2019 and November 14, 2019. By the middle of May 2020, APS provided refunds to approximately 13,000 potentially impacted customers equal to the difference between what they paid for electricity and the amount they would have paid had they selected their most economical rate, as applicable, and a $25 payment for any inconvenience that the customer may have experienced. The refunds and payment for inconvenience being provided did not have a material impact on APS’s financial statements. APS developed a new tool for comparing customers’ rate plan options. APS had an independent third party verify that the new rate comparison tool works correctly. In February 2020, APS launched the new online rate comparison tool, which is now available for its customers. The ACC hired an outside consultant to evaluate the extent of the error and the overall effectiveness of the tool. On August 20, 2020, ACC Staff filed the outside consultant’s report on APS’s rate comparison tool. The report concluded APS’s new rate comparison tool is working as intended. The report also identified a small population of additional customers that may have been affected by the error and APS has provided refunds and the $25 inconvenience payment to approximately 3,800 additional customers. These additional refunds and payment for inconvenience did not have a material impact on APS’s financial statements. On September 28, 2020, the ACC discussed this report but did not take any action. APS cannot predict if any action will be taken by the ACC at this time.
APS received civil investigative demands from the Office of the Arizona Attorney General, Civil Litigation Division, Consumer Protection & Advocacy Section (“Attorney General”) seeking information pertaining to the rate plan comparison tool offered to APS customers and other related issues including implementation of rates from the 2017 Settlement Agreement and its Customer Education and Outreach Plan associated with the 2017 Settlement Agreement. APS fully cooperated with the Attorney General’s Office in this matter. On February 22, 2021 APS entered into a consent agreement with the Attorney General as a way to settle the matter. The settlement results in APS paying $24.75 million, $24 million of which is being returned to customers as restitution. While this matter has been resolved with the Attorney General, APS cannot predict whether additional inquiries or actions may be taken by the ACC.
Four Corners 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
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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. On March 18, 2020, the ACC agreed to take administrative notice to include in the pending rate case portions of the record in this prior proceeding that are relevant to the SCRs. 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”) approved 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. In December 2019, PacifiCorp notified APS that it planned to retire Cholla Unit 4 by the end of 2020. Cholla Unit 4 was retired on December 24, 2020.
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 ($52.9 million as of March 31, 2021), 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.
Navajo Plant
The Navajo Plant ceased operations in November 2019. The co-owners and the Navajo Nation executed a lease extension on November 29, 2017 that allows for decommissioning activities to begin after the plant ceased operations.
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 ($69.4 million as of March 31, 2021) plus a return on the net book value as well as other costs related to retirement and closure, including the Navajo coal reclamation regulatory asset ($17.8 million as of March 31, 2021). APS believes it will be allowed recovery of the net book value, retirement and closure costs, 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
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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):
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Amortization Through
|
|
March 31, 2021
|
|
December 31, 2020
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|
|
|
Current
|
|
Non-Current
|
|
Current
|
|
Non-Current
|
|
Pension
|
(a)
|
|
$
|
—
|
|
|
$
|
467,423
|
|
|
$
|
—
|
|
|
$
|
469,953
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|
|
Deferred fuel and purchased power (b) (c)
|
2022
|
|
228,609
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|
|
—
|
|
|
175,835
|
|
|
—
|
|
|
Income taxes — allowance for funds used during construction (“AFUDC”) equity
|
2051
|
|
7,169
|
|
|
159,119
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|
|
7,169
|
|
|
158,776
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|
|
Retired power plant costs
|
2033
|
|
28,182
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|
|
107,169
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|
|
28,181
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|
|
114,214
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|
|
Ocotillo deferral
|
N/A
|
|
—
|
|
|
110,820
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|
|
—
|
|
|
95,723
|
|
|
SCR deferral
|
N/A
|
|
—
|
|
|
88,044
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|
|
—
|
|
|
81,307
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|
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Deferred property taxes
|
2027
|
|
8,569
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|
|
47,484
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|
|
8,569
|
|
|
49,626
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|
|
Lost fixed cost recovery (b)
|
2022
|
|
45,905
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|
|
—
|
|
|
41,807
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|
|
—
|
|
|
Deferred compensation
|
2036
|
|
—
|
|
|
35,806
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|
|
—
|
|
|
36,195
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|
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Four Corners cost deferral
|
2024
|
|
8,077
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|
|
22,056
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|
|
8,077
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|
|
24,075
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|
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Income taxes — investment tax credit basis adjustment
|
2049
|
|
1,113
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|
|
24,221
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|
|
1,113
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|
|
24,291
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|
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Palo Verde VIEs (Note 6)
|
2046
|
|
—
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|
|
21,409
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|
|
—
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|
|
21,255
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Coal reclamation
|
2026
|
|
1,068
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|
|
16,732
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|
1,068
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16,999
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Loss on reacquired debt
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2038
|
|
1,703
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|
|
10,486
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|
|
1,689
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|
|
10,877
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|
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Mead-Phoenix transmission line contributions in aid of construction (“CIAC”)
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2050
|
|
332
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|
|
9,297
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|
|
332
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|
|
9,380
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|
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Demand side management (b)
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2021
|
|
—
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|
|
7,268
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|
|
—
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|
|
7,268
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|
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Tax expense adjustor mechanism (b)
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2021
|
|
5,854
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|
|
—
|
|
|
6,226
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|
|
—
|
|
|
Tax expense of Medicare subsidy
|
2024
|
|
1,235
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|
|
3,626
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|
|
1,235
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|
|
3,704
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|
|
Deferred fuel and purchased power — mark-to-market (Note 7)
|
2024
|
|
—
|
|
|
3,728
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|
|
3,341
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|
|
9,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PSA interest
|
2022
|
|
46
|
|
|
—
|
|
|
4,355
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|
|
—
|
|
|
Other
|
Various
|
|
2,018
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|
|
1,169
|
|
|
2,716
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|
|
1,100
|
|
|
Total regulatory assets (d)
|
|
|
$
|
339,880
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|
|
$
|
1,135,857
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|
|
$
|
291,713
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|
|
$
|
1,133,987
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|
(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. See Note 5.
(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.”
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The detail of regulatory liabilities is as follows (dollars in thousands):
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization Through
|
|
March 31, 2021
|
|
December 31, 2020
|
|
|
|
Current
|
|
Non-Current
|
|
Current
|
|
Non-Current
|
|
Excess deferred income taxes - ACC - Tax Cuts and Jobs Act (a)
|
2046
|
|
$
|
41,353
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|
|
$
|
1,004,226
|
|
|
$
|
41,330
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|
|
$
|
1,012,583
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|
|
Excess deferred income taxes - FERC - Tax Cuts and Jobs Act (a)
|
2058
|
|
7,240
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|
|
228,690
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|
|
7,240
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|
|
229,147
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|
|
Asset retirement obligations
|
2057
|
|
—
|
|
|
519,015
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|
|
—
|
|
|
506,049
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|
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Other postretirement benefits
|
(d)
|
|
37,705
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|
|
337,853
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|
37,705
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|
349,588
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Removal costs
|
(c)
|
|
55,247
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|
|
89,937
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|
|
52,844
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|
|
103,008
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|
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Income taxes — change in rates
|
2050
|
|
2,839
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|
|
66,374
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|
|
2,839
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|
|
66,553
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|
|
Four Corners coal reclamation
|
2038
|
|
5,461
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|
|
49,703
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|
|
5,460
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|
|
49,435
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|
|
Income taxes — deferred investment tax credit
|
2049
|
|
2,231
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|
|
48,507
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|
|
2,231
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|
|
48,648
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|
|
Spent nuclear fuel
|
2027
|
|
6,831
|
|
|
43,059
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|
|
6,768
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|
|
44,221
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|
|
Renewable energy standard (b)
|
2022
|
|
34,460
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|
|
30
|
|
|
39,442
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|
|
103
|
|
|
Deferred fuel and purchased power — mark-to-market (Note 7)
|
2022
|
|
20,829
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|
|
—
|
|
|
—
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|
|
—
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|
|
Property tax deferral
|
N/A
|
|
—
|
|
|
15,022
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|
|
—
|
|
|
13,856
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|
|
Sundance maintenance
|
2031
|
|
2,867
|
|
|
11,910
|
|
|
2,989
|
|
|
11,508
|
|
|
Demand side management (b)
|
2022
|
|
7,821
|
|
|
5,975
|
|
|
10,819
|
|
|
—
|
|
|
FERC transmission true up
|
2023
|
|
7,630
|
|
|
2,379
|
|
|
6,598
|
|
|
3,008
|
|
|
TCA balancing account (b)
|
2022
|
|
7,315
|
|
|
1,754
|
|
|
2,902
|
|
|
4,672
|
|
|
Tax expense adjustor mechanism (b) (e)
|
2021
|
|
7,452
|
|
|
—
|
|
|
7,089
|
|
|
—
|
|
|
Deferred gains on utility property
|
2022
|
|
2,423
|
|
|
939
|
|
|
2,423
|
|
|
1,544
|
|
|
Active union medical trust
|
N/A
|
|
—
|
|
|
2,337
|
|
|
—
|
|
|
6,057
|
|
|
Other
|
Various
|
|
524
|
|
|
59
|
|
|
409
|
|
|
189
|
|
|
Total regulatory liabilities
|
|
|
$
|
250,228
|
|
|
$
|
2,427,769
|
|
|
$
|
229,088
|
|
|
$
|
2,450,169
|
|
(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.
(e)Pursuant to Decision 77852, the ACC has authorized APS to return to customers up to $7 million of liability recorded to the TEAM balancing account through December 31, 2021. Should new base rates become effective prior to December 31, 2021, any remaining unreturned balance is anticipated to be included in the new base rates.
5. 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 other postretirement benefit plans for the employees of Pinnacle West and our subsidiaries. The other postretirement benefit plans include a group life and medical plan and a post-65 retiree health reimbursement arrangement (“HRA”). Pinnacle West uses a December 31
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
measurement date each year for its pension and other postretirement benefit plans. The market-related value of our plan assets is their fair value at the measurement date.
Under the HRA, included in the other postretirement benefit plan, the Company provides a subsidy to retirees to defray the cost of a Medicare supplemental policy. In prior years, we had been assuming a 4.75% escalation of these benefits; however, actual escalation has been significantly less than this assumption. Accordingly, during 2020 and for future periods, the escalation assumption was reduced to 2.00%. This escalation factor assumption change, among other factors, resulted in an increase in the over-funded status of the other postretirement benefit plan as of December 31, 2020. As a result, on January 4, 2021, we initiated the transfer of approximately $106 million of assets from the other postretirement benefit plan into the Active Union Employee Medical Account. The Active Union Employee Medical Account is an existing trust account that holds assets restricted for paying active union employee medical costs (see Note 12). The transfer of other postretirement benefit plan assets into the Active Union Employee Medical Account permits access to approximately $106 million of assets for the sole purpose of paying active union employee medical benefits. This transfer of assets into the Active Union Employee Medical Account is consistent with the terms of a similar 2018 transaction.
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
March 31,
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
Service cost — benefits earned during the period
|
$
|
15,679
|
|
|
$
|
14,257
|
|
|
|
|
|
|
$
|
4,557
|
|
|
$
|
5,717
|
|
|
|
|
|
|
Non-service costs (credits):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost on benefit obligation
|
24,669
|
|
|
29,761
|
|
|
|
|
|
|
4,162
|
|
|
6,512
|
|
|
|
|
|
|
Expected return on plan assets
|
(50,608)
|
|
|
(46,806)
|
|
|
|
|
|
|
(10,361)
|
|
|
(10,019)
|
|
|
|
|
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service credit
|
—
|
|
|
—
|
|
|
|
|
|
|
(9,427)
|
|
|
(9,394)
|
|
|
|
|
|
|
Net actuarial loss (gain)
|
3,985
|
|
|
9,011
|
|
|
|
|
|
|
(2,405)
|
|
|
—
|
|
|
|
|
|
|
Net periodic benefit cost/(benefit)
|
$
|
(6,275)
|
|
|
$
|
6,223
|
|
|
|
|
|
|
$
|
(13,474)
|
|
|
$
|
(7,184)
|
|
|
|
|
|
|
Portion of cost/(benefit) charged to expense
|
$
|
(8,011)
|
|
|
$
|
1,342
|
|
|
|
|
|
|
$
|
(9,528)
|
|
|
$
|
(5,456)
|
|
|
|
|
|
Contributions
We have not made voluntary contributions to our pension plan year-to-date in 2021. The minimum required contributions for the pension plan are zero for the next three years. We expect to make voluntary contributions up to $100 million in 2021 and zero in 2022 and 2023. We do not expect to make any contributions over this period to our other postretirement benefit plans.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. Palo Verde Sale Leaseback Variable Interest Entities
In 1986, APS entered into agreements with three separate VIE lessor trust entities in order to sell and lease back interests in Palo Verde Unit 2 and related common facilities. Prior to April 1, 2021, the lease terms allowed APS the right to retain the assets through 2023 under one lease and 2033 under the other two leases. On April 1, 2021, APS executed an amended lease agreement with one of the VIE lessor trust entities relating to the lease agreement with the term ending in 2023. The amendment extends the lease term for this lease through 2033 and changes the lease payment. As a result of this amendment, APS will now retain the assets through 2033 under all three lease agreements. APS will be required to make payments relating to the three leases in total of approximately $21 million annually for the period 2021 through 2033. At the end of the lease period, APS will have the option to purchase the leased assets at their fair market value, extend the leases for up to two years, or return the assets to the lessors.
The leases’ terms give APS the ability to utilize the assets for a significant portion of the assets’ economic life, and therefore provide APS with the power to direct activities of the VIEs that most significantly impact the VIEs’ economic performance. Predominantly due to the lease terms, APS has been deemed the primary beneficiary of these VIEs and therefore consolidates the VIEs.
As a result of consolidation, we eliminate lease accounting and instead recognize depreciation expense, resulting in an increase in net income for the three months ended March 31, 2021 and 2020 of $5 million, entirely attributable to the noncontrolling interests. Income attributable to Pinnacle West shareholders is not impacted by the consolidation.
Our Condensed Consolidated Balance Sheets at March 31, 2021 and December 31, 2020 include the following amounts relating to the VIEs (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
December 31, 2020
|
|
Palo Verde sale leaseback property, plant and equipment, net of accumulated depreciation
|
$
|
97,068
|
|
|
$
|
98,036
|
|
|
Equity — Noncontrolling interests
|
124,164
|
|
|
119,290
|
|
Assets of the VIEs are restricted and may only be used for payment to the noncontrolling interest holders. These assets are reported on our condensed consolidated financial statements.
APS is exposed to losses relating to these VIEs upon the occurrence of certain events that APS does not consider to be reasonably likely to occur. Under certain circumstances (for example, the Nuclear Regulatory Commission (“NRC”) issuing specified violation orders with respect to Palo Verde or the occurrence of specified nuclear events), APS would be required to make specified payments to the VIEs’ noncontrolling equity participants and take title to the leased Unit 2 interests, which, if appropriate, may be required to be written down in value. If such an event were to occur during the lease periods, APS may be required to pay the noncontrolling equity participants approximately $307 million beginning in 2021, and up to $501 million over the lease terms.
For regulatory ratemaking purposes, the agreements continue to be treated as operating leases and, as a result, we have recorded a regulatory asset relating to the arrangements.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. Derivative Accounting
Derivative financial instruments are used to manage exposure to commodity price and transportation costs of electricity, natural gas, emissions allowances, and in interest rates. Risks associated with market volatility are managed by utilizing various physical and financial derivative instruments, including futures, forwards, options and swaps. As part of our overall risk management program, we may use derivative instruments to hedge purchases and sales of electricity and natural gas. Derivative instruments that meet certain hedge accounting criteria may be designated as cash flow hedges and are used to limit our exposure to cash flow variability on forecasted transactions. The changes in market value of such instruments have a high correlation to price changes in the hedged transactions. Derivative instruments are also entered into for economic hedging purposes. While economic hedges may mitigate exposure to fluctuations in commodity prices, these instruments have not been designated as accounting hedges. Contracts that have the same terms (quantities, delivery points and delivery periods) and for which power does not flow are netted, which reduces both revenues and fuel and purchased power costs in our Condensed Consolidated Statements of Income, but does not impact our financial condition, net income or cash flows.
Our derivative instruments, excluding those qualifying for a scope exception, are recorded on the balance sheets as an asset or liability and are measured at fair value. See Note 11 for a discussion of fair value measurements. Derivative instruments may qualify for the normal purchases and normal sales scope exception if they require physical delivery and the quantities represent those transacted in the normal course of business. Derivative instruments qualifying for the normal purchases and sales scope exception are accounted for under the accrual method of accounting and excluded from our derivative instrument discussion and disclosures below.
For its regulated operations, APS defers for future rate treatment 100% of the unrealized gains and losses on derivatives pursuant to the PSA mechanism that would otherwise be recognized in income. Realized gains and losses on derivatives are deferred in accordance with the PSA to the extent the amounts are above or below the Base Fuel Rate (see Note 4). Gains and losses from derivatives in the following tables represent the amounts reflected in income before the effect of PSA deferrals.
The following table shows the outstanding gross notional volume of derivatives, which represent both purchases and sales (does not reflect net position):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantity
|
|
Commodity
|
|
Unit of Measure
|
March 31, 2021
|
|
December 31, 2020
|
|
Power
|
|
GWh
|
368
|
|
|
368
|
|
|
Gas
|
|
Billion cubic feet
|
211
|
|
|
205
|
|
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Gains and Losses from Derivative Instruments
The following table provides information about APS’s gains and losses from derivative instruments in designated cash flow accounting hedging relationships (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Statement Location
|
|
Three Months Ended
March 31,
|
|
|
|
Commodity Contracts
|
|
|
2021
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Reclassified from Accumulated OCI into Income (Effective Portion Realized) (a)
|
|
Fuel and purchased power (b)
|
|
$
|
—
|
|
|
$
|
(414)
|
|
|
|
|
|
(a)During the three months ended March 31, 2021 and 2020, we had no gains or losses reclassified from accumulated OCI to earnings related to discontinued cash flow hedges.
(b)Amounts are before the effect of PSA deferrals.
During the next twelve months, we estimate that no amounts will be reclassified from accumulated OCI into income. For APS, the delivery period for all derivative instruments in designated cash flow accounting hedging relationships have lapsed.
The following table provides information about gains and losses from derivative instruments not designated as accounting hedging instruments (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Statement Location
|
|
Three Months Ended
March 31,
|
|
|
Commodity Contracts
|
|
|
2021
|
|
2020
|
|
|
Net Gain (Loss) Recognized in Income
|
|
Fuel and purchased power (a)
|
|
$
|
26,859
|
|
|
$
|
(30,078)
|
|
|
|
|
|
|
|
|
|
|
|
(a)Amounts are before the effect of PSA deferrals.
Derivative Instruments in the Condensed Consolidated Balance Sheets
Our derivative transactions are typically executed under standardized or customized agreements, which include collateral requirements and, in the event of a default, would allow for the netting of positive and negative exposures associated with a single counterparty. Agreements that allow for the offsetting of positive and negative exposures associated with a single counterparty are considered master netting arrangements. Transactions with counterparties that have master netting arrangements are offset and reported net on the Condensed Consolidated Balance Sheets. Transactions that do not allow for offsetting of positive and negative positions are reported gross on the Condensed Consolidated Balance Sheets.
We do not offset a counterparty’s current derivative contracts with the counterparty’s non-current derivative contracts, although our master netting arrangements would allow current and non-current positions to be offset in the event of a default. These types of transactions may include non-derivative instruments, derivatives qualifying for scope exceptions, trade receivables and trade payables arising from settled positions, and other forms of non-cash collateral (such as letters of credit). These types of transactions are excluded from the offsetting tables presented below.
The following tables provide information about the fair value of our risk management activities reported on a gross basis and the impacts of offsetting. These amounts relate to commodity contracts and are located in the assets and liabilities from risk management activities and other assets lines of our Condensed Consolidated Balance Sheets.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2021:
(dollars in thousands)
|
|
Gross
Recognized
Derivatives
(a)
|
|
Amounts
Offset
(b)
|
|
Net
Recognized
Derivatives
|
|
Other
(c)
|
|
Amount Reported on Balance Sheet
|
|
Current assets
|
|
$
|
25,703
|
|
|
$
|
(3,092)
|
|
|
$
|
22,611
|
|
|
$
|
—
|
|
|
$
|
22,611
|
|
|
Investments and other assets
|
|
3,990
|
|
|
(790)
|
|
|
3,200
|
|
|
—
|
|
|
3,200
|
|
|
Total assets
|
|
29,693
|
|
|
(3,882)
|
|
|
25,811
|
|
|
—
|
|
|
25,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
(4,874)
|
|
|
3,092
|
|
|
(1,782)
|
|
|
(1,285)
|
|
|
(3,067)
|
|
|
Deferred credits and other
|
|
(7,718)
|
|
|
790
|
|
|
(6,928)
|
|
|
—
|
|
|
(6,928)
|
|
|
Total liabilities
|
|
(12,592)
|
|
|
3,882
|
|
|
(8,710)
|
|
|
(1,285)
|
|
|
(9,995)
|
|
|
Total
|
|
$
|
17,101
|
|
|
$
|
—
|
|
|
$
|
17,101
|
|
|
$
|
(1,285)
|
|
|
$
|
15,816
|
|
(a)All of our gross recognized derivative instruments were subject to master netting arrangements.
(b)No cash collateral has been provided to counterparties, or received from counterparties, that is subject to offsetting.
(c)Represents cash collateral that is not subject to offsetting. Amounts relate to non-derivative instruments, derivatives qualifying for scope exceptions or collateral posted in excess of the recognized derivative instrument. Includes cash collateral received from counterparties of $1,285.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020:
(dollars in thousands)
|
|
Gross
Recognized
Derivatives
(a)
|
|
Amounts
Offset
(b)
|
|
Net
Recognized
Derivatives
|
|
Other
(c)
|
|
Amount
Reported on
Balance Sheet
|
|
Current assets
|
|
$
|
5,870
|
|
|
$
|
(2,939)
|
|
|
$
|
2,931
|
|
|
$
|
—
|
|
|
$
|
2,931
|
|
|
Investments and other assets
|
|
3,150
|
|
|
(1,332)
|
|
|
1,818
|
|
|
—
|
|
|
1,818
|
|
|
Total assets
|
|
9,020
|
|
|
(4,271)
|
|
|
4,749
|
|
|
—
|
|
|
4,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
(9,211)
|
|
|
2,939
|
|
|
(6,272)
|
|
|
(1,285)
|
|
|
(7,557)
|
|
|
Deferred credits and other
|
|
(12,394)
|
|
|
1,332
|
|
|
(11,062)
|
|
|
—
|
|
|
(11,062)
|
|
|
Total liabilities
|
|
(21,605)
|
|
|
4,271
|
|
|
(17,334)
|
|
|
(1,285)
|
|
|
(18,619)
|
|
|
Total
|
|
$
|
(12,585)
|
|
|
$
|
—
|
|
|
$
|
(12,585)
|
|
|
$
|
(1,285)
|
|
|
$
|
(13,870)
|
|
(a)All of our gross recognized derivative instruments were subject to master netting arrangements.
(b)No cash collateral has been provided to counterparties, or received from counterparties, that is subject to offsetting.
(c)Represents cash collateral and cash margin that is not subject to offsetting. Amounts relate to non-derivative instruments, derivatives qualifying for scope exceptions, or collateral and margin posted in excess of the recognized derivative instrument. Includes cash collateral received from counterparties of $1,285.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Credit Risk and Credit Related Contingent Features
We are exposed to losses in the event of nonperformance or nonpayment by counterparties and have risk management contracts with many counterparties. As of March 31, 2021, we have one counterparty for which our exposure represents approximately 59% of Pinnacle West’s $26 million of risk management assets. This exposure relates to a master agreement with a counterparty that is rated as investment grade. Our risk management process assesses and monitors the financial exposure of all counterparties. Despite the fact that the great majority of our trading counterparties’ debt is rated as investment grade by the credit rating agencies, there is still a possibility that one or more of these companies could default, resulting in a material impact on consolidated earnings for a given period. Counterparties in the portfolio consist principally of financial institutions, major energy companies, municipalities and local distribution companies. We maintain credit policies that we believe minimize overall credit risk to within acceptable limits. Determination of the credit quality of our counterparties is based upon a number of factors, including credit ratings and our evaluation of their financial condition. To manage credit risk, we employ collateral requirements and standardized agreements that allow for the netting of positive and negative exposures associated with a single counterparty. Valuation adjustments are established representing our estimated credit losses on our overall exposure to counterparties.
Certain of our derivative instrument contracts contain credit-risk-related contingent features including, among other things, investment grade credit rating provisions, credit-related cross-default provisions, and adequate assurance provisions. Adequate assurance provisions allow a counterparty with reasonable grounds for uncertainty to demand additional collateral based on subjective events and/or conditions. For those derivative instruments in a net liability position, with investment grade credit contingencies, the counterparties could demand additional collateral if our debt credit rating were to fall below investment grade (below BBB- for Standard & Poor’s or Fitch or Baa3 for Moody’s).
The following table provides information about our derivative instruments that have credit-risk-related contingent features (dollars in thousands):
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
Aggregate fair value of derivative instruments in a net liability position
|
$
|
11,520
|
|
|
Cash collateral posted
|
—
|
|
|
Additional cash collateral in the event credit-risk-related contingent features were fully triggered (a)
|
6,674
|
|
(a)This amount is after counterparty netting and includes those contracts which qualify for scope exceptions, which are excluded from the derivative details above.
We also have energy-related non-derivative instrument contracts with investment grade credit-related contingent features, which could also require us to post additional collateral of approximately $86 million if our debt credit ratings were to fall below investment grade.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. Commitments and Contingencies
Palo Verde Generating Station
Spent Nuclear Fuel and Waste Disposal
On December 19, 2012, APS, acting on behalf of itself and the participant owners of Palo Verde, filed a second breach of contract lawsuit against the United States Department of Energy (“DOE”) in the United States Court of Federal Claims (“Court of Federal Claims”). The lawsuit sought to recover damages incurred due to DOE’s breach of the Contract for Disposal of Spent Nuclear Fuel and/or High Level Radioactive Waste (“Standard Contract”) for failing to accept Palo Verde’s spent nuclear fuel and high level waste from January 1, 2007 through June 30, 2011, as it was required to do pursuant to the terms of the Standard Contract and the Nuclear Waste Policy Act. On August 18, 2014, APS and DOE entered into a settlement agreement, stipulating to a dismissal of the lawsuit and payment by DOE to the Palo Verde owners for certain specified costs incurred by Palo Verde during the period January 1, 2007 through June 30, 2011. In addition, the settlement agreement, as amended, provides APS with a method for submitting claims and getting recovery for costs incurred through December 31, 2022.
APS has submitted six claims pursuant to the terms of the August 18, 2014 settlement agreement, for six separate time periods during July 1, 2011 through June 30, 2019. The DOE has approved and paid $99.7 million for these claims (APS’s share is $29.0 million). The amounts recovered were primarily recorded as adjustments to a regulatory liability and had no impact on reported net income. In accordance with the 2017 Rate Case Decision, this regulatory liability is being refunded to customers (see Note 4). On November 2, 2020, APS filed its seventh claim pursuant to the terms of the August 18, 2014 settlement agreement in the amount of $12.2 million (APS’s share is $3.6 million). On March 15, 2021, the DOE approved a payment of $12.1 million (APS’s share is $3.5 million) and on April 16, 2021, APS received this payment.
Nuclear Insurance
Public liability for incidents at nuclear power plants is governed by the Price-Anderson Nuclear Industries Indemnity Act (“Price-Anderson Act”), which limits the liability of nuclear reactor owners to the amount of insurance available from both commercial sources and an industry-wide retrospective payment plan. In accordance with the Price-Anderson Act, the Palo Verde participants are insured against public liability for a nuclear incident of up to approximately $13.7 billion per occurrence. Palo Verde maintains the maximum available nuclear liability insurance in the amount of $450 million, which is provided by American Nuclear Insurers (“ANI”). The remaining balance of approximately $13.2 billion of liability coverage is provided through a mandatory industry-wide retrospective premium program. If losses at any nuclear power plant covered by the program exceed the accumulated funds, APS could be responsible for retrospective premiums. The maximum retrospective premium per reactor under the program for each nuclear liability incident is approximately $137.6 million, subject to a maximum annual premium of approximately $20.5 million per incident. Based on APS’s ownership interest in the three Palo Verde units, APS’s maximum retrospective premium per incident for all three units is approximately $120.1 million, with a maximum annual retrospective premium of approximately $17.9 million.
The Palo Verde participants maintain insurance for property damage to, and decontamination of, property at Palo Verde in the aggregate amount of $2.8 billion. APS has also secured accidental outage insurance for a sudden and unforeseen accidental outage of any of the three units. The property damage, decontamination, and accidental outage insurance are provided by Nuclear Electric Insurance Limited (“NEIL”). APS is subject to retrospective premium adjustments under all NEIL policies if NEIL’s losses in any policy year exceed accumulated funds. The maximum amount APS could incur under the current NEIL
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
policies totals approximately $22.4 million for each retrospective premium assessment declared by NEIL’s Board of Directors due to losses. In addition, NEIL policies contain rating triggers that would result in APS providing approximately $63.3 million of collateral assurance within 20 business days of a rating downgrade to non-investment grade. The insurance coverage discussed in this and the previous paragraph is subject to certain policy conditions, sublimits and exclusions.
Contractual Obligations
As of March 31, 2021, our fuel and purchased power commitments have increased from the information provided in our 2020 Form 10-K. The increase is primarily due to new purchased power and energy storage commitments of approximately $550 million. The majority of the changes relate to 2026 and thereafter.
Other than the item described above, there have been no material changes, as of March 31, 2021, outside the normal course of business in contractual obligations from the information provided in our 2020 Form 10-K. See Note 3 for discussion regarding changes in our short-term and long-term debt obligations.
Superfund-Related Matters
The Comprehensive Environmental Response Compensation and Liability Act (“Superfund” or “CERCLA”) establishes liability for the cleanup of hazardous substances found contaminating the soil, water or air. Those who released, generated, transported to or disposed of hazardous substances at a contaminated site are among the parties who are potentially responsible (“PRPs”). PRPs may be strictly, and often are jointly and severally, liable for clean-up. On September 3, 2003, EPA advised APS that EPA considers APS to be a PRP in the Motorola 52nd Street Superfund Site, Operable Unit 3 (“OU3”) in Phoenix, Arizona. APS has facilities that are within this Superfund site. APS and Pinnacle West have agreed with EPA to perform certain investigative activities of the APS facilities within OU3. In addition, on September 23, 2009, APS agreed with EPA and one other PRP to voluntarily assist with the funding and management of the site-wide groundwater remedial investigation and feasibility study (“RI/FS”). Based upon discussions between the OU3 working group parties and EPA, along with the results of recent technical analyses prepared by the OU3 working group to supplement the RI/FS for OU3, APS anticipates finalizing the RI/FS during the second quarter of 2021. We estimate that our costs related to this investigation and study will be approximately $3 million. We anticipate incurring additional expenditures in the future, but because the overall investigation is not complete and ultimate remediation requirements are not yet finalized, at the present time expenditures related to this matter cannot be reasonably estimated.
On August 6, 2013, the Roosevelt Irrigation District (“RID”) filed a lawsuit in Arizona District Court against APS and 24 other defendants, alleging that RID’s groundwater wells were contaminated by the release of hazardous substances from facilities owned or operated by the defendants. The lawsuit also alleges that, under Superfund laws, the defendants are jointly and severally liable to RID. The allegations against APS arise out of APS’s current and former ownership of facilities in and around OU3. As part of a state governmental investigation into groundwater contamination in this area, on January 25, 2015, the Arizona Department of Environmental Quality (“ADEQ”) sent a letter to APS seeking information concerning the degree to which, if any, APS’s current and former ownership of these facilities may have contributed to groundwater contamination in this area. APS responded to ADEQ on May 4, 2015. On December 16, 2016, two RID environmental and engineering contractors filed an ancillary lawsuit for recovery of costs against APS and the other defendants in the RID litigation. That same day, another RID service provider filed an additional ancillary CERCLA lawsuit against certain of the defendants in the main RID litigation, but excluded APS and certain other parties as named defendants. Because the ancillary lawsuits concern past costs allegedly incurred
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
by these RID vendors, which were ruled unrecoverable directly by RID in November of 2016, the additional lawsuits do not increase APS’s exposure or risk related to these matters.
On April 5, 2018, RID and the defendants in that particular litigation executed a settlement agreement, fully resolving RID’s CERCLA claims concerning both past and future cost recovery. APS’s share of this settlement was immaterial. In addition, the two environmental and engineering vendors voluntarily dismissed their lawsuit against APS and the other named defendants without prejudice. An order to this effect was entered on April 17, 2018. With this disposition of the case, the vendors may file their lawsuit again in the future. On August 16, 2019, Maricopa County, one of the three direct defendants in the service provider lawsuit, filed a third-party complaint seeking contribution for its liability, if any, from APS and 28 other third-party defendants. We are unable to predict the outcome of these matters; however, we do not expect the outcome to have a material impact on our financial position, results of operations or cash flows.
Arizona Attorney General Matter
APS received civil investigative demands from the Attorney General seeking information pertaining to the rate plan comparison tool offered to APS customers and other related issues including implementation of rates from the 2017 Settlement Agreement and its Customer Education and Outreach Plan associated with the 2017 Settlement Agreement. APS fully cooperated with the Attorney General’s Office in this matter. On February 22, 2021 APS entered into a consent agreement with the Attorney General as a way to settle the matter. The settlement results in APS paying $24.75 million, $24 million of which is being returned to customers as restitution.
Environmental Matters
APS is subject to numerous environmental laws and regulations affecting many aspects of its present and future operations, including air emissions of both conventional pollutants and greenhouse gases, water quality, wastewater discharges, solid waste, hazardous waste, and coal combustion residuals (“CCRs”). These laws and regulations can change from time to time, imposing new obligations on APS resulting in increased capital, operating, and other costs. Associated capital expenditures or operating costs could be material. APS intends to seek recovery of any such environmental compliance costs through our rates but cannot predict whether it will obtain such recovery. The following proposed and final rules involve material compliance costs to APS.
Regional Haze Rules. APS has received the final rulemaking imposing pollution control requirements on Four Corners. EPA required the plant to install pollution control equipment that constitutes best available retrofit technology (“BART”) to lessen the impacts of emissions on visibility surrounding the plant. In addition, EPA issued a final rule for Regional Haze compliance at Cholla that does not involve the installation of new pollution controls and that will replace an earlier BART determination for this facility. See below for details of the Cholla BART approval.
Four Corners. Based on EPA’s final standards, APS’s 63% share of the cost of required controls for Four Corners Units 4 and 5 was approximately $400 million, which has been incurred. In addition, APS and El Paso Electric Company (“El Paso”) entered into an asset purchase agreement providing for the purchase by APS, or an affiliate of APS, of El Paso’s 7% interest in Four Corners Units 4 and 5. 4CA purchased the El Paso interest on July 6, 2016. Navajo Transitional Energy Company, LLC (“NTEC”) purchased the interest from 4CA on July 3, 2018. See “Four Corners — 4CA Matter” below for a discussion of the NTEC purchase. The cost of the pollution controls related to the 7% interest is approximately $45 million, which was assumed by NTEC through its purchase of the 7% interest.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Cholla. In early 2017, EPA approved a final rule containing a revision to Arizona’s State Implementation Plan (“SIP”) for Cholla that implemented BART requirements for this facility, which did not require the installation of any new pollution control capital improvements. In conjunction with the closure of Cholla Unit 2 in 2015, APS has committed to ceasing coal combustion within Units 1 and 3 by April 2025. PacifiCorp retired Cholla Unit 4 at the end of 2020. (See “Cholla” in Note 4 for information regarding future plans for Cholla and details related to the resulting regulatory asset).
Coal Combustion Waste. On December 19, 2014, EPA issued its final regulations governing the handling and disposal of CCR, such as fly ash and bottom ash. The rule regulates CCR as a non-hazardous waste under Subtitle D of the Resource Conservation and Recovery Act (“RCRA”) and establishes national minimum criteria for existing and new CCR landfills and surface impoundments and all lateral expansions. These criteria include standards governing location restrictions, design and operating criteria, groundwater monitoring and corrective action, closure requirements and post closure care, and recordkeeping, notification, and internet posting requirements. The rule generally requires any existing unlined CCR surface impoundment to stop receiving CCR and either retrofit or close, and further requires the closure of any CCR landfill or surface impoundment that cannot meet the applicable performance criteria for location restrictions or structural integrity. Such closure requirements are deemed “forced closure” or “closure for cause” of unlined surface impoundments and are the subject of recent regulatory and judicial activities described below.
Since these regulations were finalized, EPA has taken steps to substantially modify the federal rules governing CCR disposal. While certain changes have been prompted by utility industry petitions, others have resulted from judicial review, court-approved settlements with environmental groups, and statutory changes to RCRA. The following lists the pending regulatory changes that, if finalized, could have a material impact as to how APS manages CCR at its coal-fired power plants:
•Following the passage of the Water Infrastructure Improvements for the Nation Act in 2016, EPA possesses authority to either authorize states to develop their own permit programs for CCR management or issue federal permits governing CCR disposal both in states without their own permit programs and on tribal lands. Although ADEQ has taken steps to develop a CCR permitting program, it is not clear when that program will be put into effect. On December 19, 2019, EPA proposed its own set of regulations governing the issuance of CCR management permits.
•On March 1, 2018, as a result of a settlement with certain environmental groups, EPA proposed adding boron to the list of constituents that trigger corrective action requirements to remediate groundwater impacted by CCR disposal activities. Apart from a subsequent proposal issued on August 14, 2019 to add a specific, health-based groundwater protection standard for boron, EPA has yet to take action on this proposal.
•Based on an August 21, 2018 D.C. Circuit decision, which vacated and remanded those provisions of the EPA CCR regulations that allow for the operation of unlined CCR surface impoundments, EPA recently proposed corresponding changes to federal CCR regulations. On July 29, 2020, EPA took final action on new regulations establishing revised deadlines for initiating the closure of unlined CCR surface impoundments; such disposal units were closed as of April 11, 2021.
•On November 4, 2019, EPA also proposed to change the manner by which facilities that have committed to cease burning coal in the near-term may qualify for alternative closure. Such qualification would allow CCR disposal units at these plants to continue operating, even though they would otherwise be subject to forced closure under the federal CCR regulations. EPA’s July 29, 2020 final regulation adopted this proposal and now requires explicit EPA approval for facilities to utilize an alternative closure deadline. With respect to the Cholla facility, APS’s application for alternative closure (which would allow the continued disposal of CCR within the facility’s existing unlined CCR
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
surface impoundments until the required date for ceasing coal-fired boiler operations in April 2025) was submitted to EPA on November 30, 2020 and is currently pending. This application will be subject to public comment and, potentially, judicial review.
We cannot at this time predict the outcome of these regulatory proceedings or when the EPA will take final action on those matters that are still pending. Depending on the eventual outcome, the costs associated with APS’s management of CCR could materially increase, which could affect APS’s financial position, results of operations, or cash flows.
APS currently disposes of CCR in ash ponds and dry storage areas at Cholla and Four Corners. APS estimates that its share of incremental costs to comply with the CCR rule for Four Corners is approximately $27 million and its share of incremental costs to comply with the CCR rule for Cholla is approximately $16 million. The Navajo Plant disposed of CCR only in a dry landfill storage area. To comply with the CCR rule for the Navajo Plant, APS’s share of incremental costs was approximately $1 million, which has been incurred. Additionally, the CCR rule requires ongoing, phased groundwater monitoring.
As of October 2018, APS has completed the statistical analyses for its CCR disposal units that triggered assessment monitoring. APS determined that several of its CCR disposal units at Cholla and Four Corners will need to undergo corrective action. In addition, under the current regulations, all such disposal units must have ceased operating and initiated closure by October 31, 2020. APS initiated an assessment of corrective measures on January 14, 2019 and expects such assessment will continue through mid- to late-2021. As part of this assessment, APS continues to gather additional groundwater data and perform remedial evaluations as to the CCR disposal units at Cholla and Four Corners undergoing corrective action. In addition, APS will solicit input from the public, host public hearings, and select remedies as part of this process. Based on the work performed to date, APS currently estimates that its share of corrective action and monitoring costs at Four Corners will likely range from $10 million to $15 million, which would be incurred over 30 years. The analysis needed to perform a similar cost estimate for Cholla remains ongoing at this time. As APS continues to implement the CCR rule’s corrective action assessment process, the current cost estimates may change. Given uncertainties that may exist until we have fully completed the corrective action assessment process, we cannot predict any ultimate impacts to the Company; however, at this time we do not believe the cost estimates for Cholla and any potential change to the cost estimate for Four Corners would have a material impact on our financial position, results of operations or cash flows.
Clean Power Plan/Affordable Clean Energy Regulations. On June 19, 2019, EPA took final action on its proposals to repeal EPA’s 2015 Clean Power Plan (“CPP”) and replace those regulations with a new rule, the Affordable Clean Energy (“ACE”) regulations. EPA originally finalized the CPP on August 3, 2015, and such rules would have had far broader impact on the electric power sector than the ACE regulations. The ACE regulations had been stayed pending judicial review and on January 19, 2021, the U.S. Court of Appeals for the D.C. Circuit vacated the ACE regulations and remanded them back to EPA to develop new existing power plant carbon regulations consistent with the court’s ruling. That ruling endorsed an expansive view of the federal Clean Air Act consistent with EPA’s 2015 CPP. While the Biden administration has expressed an intent to regulate carbon emissions in this sector more aggressively under the Clean Air Act, we cannot at this time predict the outcome of pending EPA rulemaking proceedings in response to the court’s recent ACE decision.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Other environmental rules that could involve material compliance costs include those related to effluent limitations, the ozone national ambient air quality standard and other rules or matters involving the Clean Air Act, Clean Water Act, Endangered Species Act, RCRA, Superfund, the Navajo Nation, and water supplies for our power plants. The financial impact of complying with current and future environmental rules could jeopardize the economic viability of our coal plants or the willingness or ability of power plant participants to fund any required equipment upgrades or continue their participation in these plants. The economics of continuing to own certain resources, particularly our coal plants, may deteriorate, warranting early retirement of those plants, which may result in asset impairments. APS would seek recovery in rates for the book value of any remaining investments in the plants as well as other costs related to early retirement, but cannot predict whether it would obtain such recovery.
Four Corners National Pollutant Discharge Elimination System (“NPDES”) Permit
On July 16, 2018, several environmental groups filed a petition for review before the EPA Environmental Appeals Board (“EAB”) concerning the NPDES wastewater discharge permit for Four Corners, which was reissued on June 12, 2018. The environmental groups allege that the permit was reissued in contravention of several requirements under the Clean Water Act and did not contain required provisions concerning EPA’s 2015 revised effluent limitation guidelines for steam-electric EGUs, 2014 existing-source regulations governing cooling-water intake structures, and effluent limits for surface seepage and subsurface discharges from coal-ash disposal facilities. To address certain of these issues through a reconsidered permit, EPA took action on December 19, 2018 to withdraw the NPDES permit reissued in June 2018. Withdrawal of the permit moots the EAB appeal, and EPA filed a motion to dismiss on that basis. The EAB thereafter dismissed the environmental group appeal on February 12, 2019. EPA then issued a revised final NPDES permit for Four Corners on September 30, 2019. Based upon a November 1, 2019 filing by several environmental groups, the EAB again took up review of the Four Corners NPDES Permit. Oral argument on this appeal was held on September 3, 2020 and the EAB denied the environmental group petition on September 30, 2020. On January 22, 2021, the environmental groups filed a petition for review of the EAB’s decision with the U.S. Court of Appeals for the Ninth Circuit. We cannot predict the outcome of these appeal proceedings and, if such appeal is successful, whether that outcome will have a material impact on our financial position, results of operations, or cash flows.
Four Corners — 4CA Matter
On July 6, 2016, 4CA purchased El Paso’s 7% interest in Four Corners. NTEC purchased this 7% interest on July 3, 2018 from 4CA. NTEC purchased the 7% interest at 4CA’s book value, approximately $70 million, and is paying 4CA the purchase price over a period of four years pursuant to a secured interest-bearing promissory note. The note is secured by a portion of APS’s payments to be owed to NTEC under the 2016 Coal Supply Agreement. As of March 31, 2021, the note has a remaining balance of $23 million. NTEC continues to make payments in accordance with the terms of the note. Due to its short-remaining term, among other factors, there are no expected credit losses associated with the note.
In connection with the sale, Pinnacle West guaranteed certain obligations that NTEC will have to the other owners of Four Corners, such as NTEC’s 7% share of capital expenditures and operating and maintenance expenses. Pinnacle West’s guarantee is secured by a portion of APS’s payments to be owed to NTEC under the 2016 Coal Supply Agreement.
The 2016 Coal Supply Agreement contained alternate pricing terms for the 7% interest in the event NTEC did not purchase the interest. Until the time that NTEC purchased the 7% interest, the alternate pricing provisions were applicable to 4CA as the holder of the 7% interest. These terms included a formula under which NTEC must make certain payments to 4CA for reimbursement of operations and maintenance costs and
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
a specified rate of return, offset by revenue generated by 4CA’s power sales. The amount under this formula for calendar year 2018 (up to the date that NTEC purchased the 7% interest) was approximately $10 million, which was due to 4CA on December 31, 2019. Such payment was satisfied in January 2020 by NTEC directing to 4CA a prepayment from APS of future coal payment obligations of which the prepayment has been fully utilized as of June 2020.
Financial Assurances
In the normal course of business, we obtain standby letters of credit and surety bonds from financial institutions and other third parties. These instruments guarantee our own future performance and provide third parties with financial and performance assurance in the event we do not perform. These instruments support commodity contract collateral obligations and other transactions. As of March 31, 2021, standby letters of credit totaled $5.2 million and would have expired in 2021, subsequently in April of 2021 an extension was effective that reset the expiration dates to 2022. As of March 31, 2021, surety bonds expiring through 2022 totaled $16 million. The underlying liabilities insured by these instruments are reflected on our balance sheets, where applicable. Therefore, no additional liability is reflected for the letters of credit and surety bonds themselves.
We enter into agreements that include indemnification provisions relating to liabilities arising from or related to certain of our agreements. Most significantly, APS has agreed to indemnify the equity participants and other parties in the Palo Verde sale leaseback transactions with respect to certain tax matters. Generally, a maximum obligation is not explicitly stated in the indemnification provisions and, therefore, the overall maximum amount of the obligation under such indemnification provisions cannot be reasonably estimated. Based on historical experience and evaluation of the specific indemnities, we do not believe that any material loss related to such indemnification provisions is likely.
Pinnacle West has issued parental guarantees and has provided indemnification under certain surety bonds for APS which were not material at March 31, 2021. In connection with the sale of 4CA’s 7% interest to NTEC, Pinnacle West is guaranteeing certain obligations that NTEC will have to the other owners of Four Corners. (See “Four Corners — 4CA Matter” above for information related to this guarantee). Pinnacle West has not needed to perform under this guarantee. A maximum obligation is not explicitly stated in the guarantee and, therefore, the overall maximum amount of the obligation under such guarantee cannot be reasonably estimated; however, we consider the fair value of this guarantee, including expected credit losses, to be immaterial.
In connection with BCE’s acquisition of minority ownership positions in the Clear Creek and Nobles 2 wind farms, Pinnacle West has issued parental guarantees to guarantee the obligations of BCE subsidiaries to make required equity contributions to fund project construction (the “Equity Contribution Guarantees”) and to make production tax credit funding payments to borrowers of the projects (the “PTC Guarantees”). The amounts guaranteed by Pinnacle West are reduced as payments are made under the respective guarantee agreements. The Equity Contribution Guarantees remaining as of March 31, 2021 are immaterial in amount (approximately $2 million) and the PTC Guarantees (approximately $38 million as of March 31, 2021) are currently expected to be terminated ten years following the commercial operation date of the applicable project.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. Other Income and Other Expense
The following table provides detail of Pinnacle West’s Consolidated other income and other expense (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2021
|
|
2020
|
|
Other income:
|
|
|
|
|
Interest income
|
$
|
1,948
|
|
|
$
|
3,277
|
|
|
|
|
|
|
|
Debt return on Four Corners SCR deferrals (Note 4)
|
4,086
|
|
|
3,140
|
|
|
Debt return on Ocotillo modernization project (Note 4)
|
6,392
|
|
|
6,144
|
|
|
Miscellaneous
|
3
|
|
|
8
|
|
|
Total other income
|
$
|
12,429
|
|
|
$
|
12,569
|
|
|
Other expense:
|
|
|
|
|
Non-operating costs
|
(1,937)
|
|
|
(2,658)
|
|
|
Investment gains (losses) — net
|
(343)
|
|
|
60
|
|
|
Miscellaneous
|
(1,573)
|
|
|
(2,186)
|
|
|
Total other expense
|
$
|
(3,853)
|
|
|
$
|
(4,784)
|
|
The following table provides detail of APS’s other income and other expense (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2021
|
|
2020
|
|
Other income:
|
|
|
|
|
Interest income
|
$
|
1,481
|
|
|
$
|
2,341
|
|
|
Debt return on Four Corners SCR deferrals (Note 4)
|
4,086
|
|
|
3,140
|
|
|
Debt return on Ocotillo modernization project (Note 4)
|
6,392
|
|
|
6,144
|
|
|
Miscellaneous
|
1
|
|
|
8
|
|
|
Total other income
|
$
|
11,960
|
|
|
$
|
11,633
|
|
|
Other expense:
|
|
|
|
|
Non-operating costs
|
(1,778)
|
|
|
(2,482)
|
|
|
Miscellaneous
|
(1,572)
|
|
|
(2,186)
|
|
|
Total other expense
|
$
|
(3,350)
|
|
|
$
|
(4,668)
|
|
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. Earnings Per Share
The following table presents the calculation of Pinnacle West’s basic and diluted earnings per share (in thousands, except per share amounts):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
Net income attributable to common shareholders
|
|
|
$
|
35,641
|
|
|
$
|
29,993
|
|
|
|
|
|
|
Weighted average common shares outstanding — basic
|
|
|
112,829
|
|
|
112,594
|
|
|
|
|
|
|
Net effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Contingently issuable performance shares and restricted stock units
|
|
|
264
|
|
|
268
|
|
|
|
|
|
|
Weighted average common shares outstanding — diluted
|
|
|
113,093
|
|
|
112,862
|
|
|
|
|
|
|
Earnings per weighted-average common share outstanding
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders — basic
|
|
|
$
|
0.32
|
|
|
$
|
0.27
|
|
|
|
|
|
|
Net income attributable to common shareholders — diluted
|
|
|
$
|
0.32
|
|
|
$
|
0.27
|
|
|
|
|
|
11. Fair Value Measurements
We classify our assets and liabilities that are carried at fair value within the fair value hierarchy. This hierarchy ranks the quality and reliability of the inputs used to determine fair values, which are then classified and disclosed in one of three categories. The three levels of the fair value hierarchy are:
Level 1 — Inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2 — Other significant observable inputs, including quoted prices in active markets for similar assets or liabilities; quoted prices in markets that are not active, and model-derived valuations whose inputs are observable (such as yield curves).
Level 3 — Valuation models with significant unobservable inputs that are supported by little or no market activity. Instruments in this category may include long-dated derivative transactions where valuations are unobservable due to the length of the transaction, options, and transactions in locations where observable market data does not exist. The valuation models we employ utilize spot prices, forward prices, historical market data and other factors to forecast future prices.
Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Thus, a valuation may be classified in Level 3 even though the valuation may include significant inputs that are readily observable. We maximize the use of observable inputs and minimize the use of unobservable inputs. We rely primarily on the market approach of using prices and other market information for identical and/or comparable assets and liabilities. If market data is not readily available, inputs may reflect our own assumptions about the inputs market participants would use. Our assessment of the inputs and the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities as well as their placement within the fair value hierarchy levels. We assess whether a market is active by obtaining observable broker quotes, reviewing actual market activity, and assessing the volume of transactions. We consider broker quotes observable inputs when the quote is binding on the broker, we can validate the quote with market activity, or we can determine that the inputs the broker used to arrive at the quoted price are observable.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Certain instruments have been valued using the concept of Net Asset Value (“NAV”) as a practical expedient. These instruments are typically structured as investment companies offering shares or units to multiple investors for the purpose of providing a return. These instruments are similar to mutual funds; however, their NAV is generally not published and publicly available, nor are these instruments traded on an exchange. Instruments valued using NAV as a practical expedient are included in our fair value disclosures; however, in accordance with GAAP are not classified within the fair value hierarchy levels.
Recurring Fair Value Measurements
We apply recurring fair value measurements to cash equivalents, derivative instruments, and investments held in the nuclear decommissioning trusts and other special use funds. On an annual basis, we apply fair value measurements to plan assets held in our retirement and other benefit plans. See Note 8 in the 2020 Form 10-K for fair value discussion of plan assets held in our retirement and other benefit plans.
Cash Equivalents
Cash equivalents represent certain investments in money market funds that are valued using quoted prices in active markets.
Risk Management Activities — Derivative Instruments
Exchange traded commodity contracts are valued using unadjusted quoted prices. For non-exchange traded commodity contracts, we calculate fair value based on the average of the bid and offer price, discounted to reflect net present value. We maintain certain valuation adjustments for a number of risks associated with the valuation of future commitments. These include valuation adjustments for liquidity and credit risks. The liquidity valuation adjustment represents the cost that would be incurred if all unmatched positions were closed out or hedged. The credit valuation adjustment represents estimated credit losses on our net exposure to counterparties, taking into account netting agreements, expected default experience for the credit rating of the counterparties and the overall diversification of the portfolio. We maintain credit policies that management believes minimize overall credit risk.
Certain non-exchange traded commodity contracts are valued based on unobservable inputs due to the long-term nature of contracts, characteristics of the product, or the unique location of the transactions. Our long-dated energy transactions consist of observable valuations for the near-term portion and unobservable valuations for the long-term portions of the transaction. We rely primarily on broker quotes to value these instruments. When our valuations utilize broker quotes, we perform various control procedures to ensure the quote has been developed consistent with fair value accounting guidance. These controls include assessing the quote for reasonableness by comparison against other broker quotes, reviewing historical price relationships, and assessing market activity. When broker quotes are not available, the primary valuation technique used to calculate the fair value is the extrapolation of forward pricing curves using observable market data for more liquid delivery points in the same region and actual transactions at more illiquid delivery points.
When the unobservable portion is significant to the overall valuation of the transaction, the entire transaction is classified as Level 3.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Investments Held in Nuclear Decommissioning Trusts and Other Special Use Funds
The nuclear decommissioning trusts and other special use funds invest in fixed income and equity securities. Other special use funds include the coal reclamation escrow account and the active union employee medical account. See Note 12 for additional discussion about our investment accounts.
We value investments in fixed income and equity securities using information provided by our trustees and escrow agent. Our trustees and escrow agent use pricing services that utilize the valuation methodologies described below to determine fair market value. We have internal control procedures designed to ensure this information is consistent with fair value accounting guidance. These procedures include assessing valuations using an independent pricing source, verifying that pricing can be supported by actual recent market transactions, assessing hierarchy classifications, comparing investment returns with benchmarks, and obtaining and reviewing independent audit reports on the trustees’ and escrow agent’s internal operating controls and valuation processes.
Fixed Income Securities
Fixed income securities issued by the U.S. Treasury are valued using quoted active market prices and are typically classified as Level 1. Fixed income securities issued by corporations, municipalities, and other agencies, including mortgage-backed instruments, are valued using quoted inactive market prices, quoted active market prices for similar securities, or by utilizing calculations which incorporate observable inputs such as yield curves and spreads relative to such yield curves. These fixed income instruments are classified as Level 2. Whenever possible, multiple market quotes are obtained which enables a cross-check validation. A primary price source is identified based on asset type, class, or issue of securities.
Fixed income securities may also include short-term investments in certificates of deposit, variable rate notes, time deposit accounts, U.S. Treasury and Agency obligations, U.S. Treasury repurchase agreements, commercial paper, and other short-term instruments. These instruments are valued using active market prices or utilizing observable inputs described above.
Equity Securities
The Nuclear Decommissioning Trusts's equity security investments are held indirectly through commingled funds. The commingled funds are valued using the funds’ NAV as a practical expedient. The funds’ NAV is primarily derived from the quoted active market prices of the underlying equity securities held by the funds. We may transact in these commingled funds on a semi-monthly basis at the NAV. The commingled funds are maintained by a bank and hold investments in accordance with the stated objective of tracking the performance of the S&P 500 Index. Because the commingled funds’ shares are offered to a limited group of investors, they are not considered to be traded in an active market. As these instruments are valued using NAV, as a practical expedient, they have not been classified within the fair value hierarchy.
The Nuclear Decommissioning Trusts and other special use funds may also hold equity securities that include exchange traded mutual funds and money market accounts for short-term liquidity purposes. These short-term, highly-liquid, investments are valued using active market prices.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Tables
The following table presents the fair value at March 31, 2021 of our assets and liabilities that are measured at fair value on a recurring basis (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Other
|
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk management activities — derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
$
|
—
|
|
|
$
|
14,353
|
|
|
$
|
15,340
|
|
|
$
|
(3,882)
|
|
|
(a)
|
|
$
|
25,811
|
|
|
Nuclear decommissioning trust:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
22,160
|
|
|
—
|
|
|
—
|
|
|
(15,538)
|
|
|
(b)
|
|
6,622
|
|
|
U.S. commingled equity funds
|
—
|
|
|
—
|
|
|
—
|
|
|
648,199
|
|
|
(c)
|
|
648,199
|
|
|
U.S. Treasury debt
|
175,707
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
175,707
|
|
|
Corporate debt
|
—
|
|
|
143,876
|
|
|
—
|
|
|
—
|
|
|
|
|
143,876
|
|
|
Mortgage-backed securities
|
—
|
|
|
110,073
|
|
|
—
|
|
|
—
|
|
|
|
|
110,073
|
|
|
Municipal bonds
|
—
|
|
|
64,479
|
|
|
—
|
|
|
—
|
|
|
|
|
64,479
|
|
|
Other fixed income
|
—
|
|
|
10,743
|
|
|
—
|
|
|
—
|
|
|
|
|
10,743
|
|
|
Subtotal nuclear decommissioning trust
|
197,867
|
|
|
329,171
|
|
|
—
|
|
|
632,661
|
|
|
|
|
1,159,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other special use funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
19,211
|
|
|
—
|
|
|
—
|
|
|
1,401
|
|
|
(b)
|
|
20,612
|
|
|
U.S. Treasury debt
|
323,589
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
323,589
|
|
|
Municipal bonds
|
—
|
|
|
13,305
|
|
|
—
|
|
|
—
|
|
|
|
|
13,305
|
|
|
Subtotal other special use funds
|
342,800
|
|
|
13,305
|
|
|
—
|
|
|
1,401
|
|
|
|
|
357,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
540,667
|
|
|
$
|
356,829
|
|
|
$
|
15,340
|
|
|
$
|
630,180
|
|
|
|
|
$
|
1,543,016
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk management activities — derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
$
|
—
|
|
|
$
|
(11,668)
|
|
|
$
|
(924)
|
|
|
$
|
2,597
|
|
|
(a)
|
|
$
|
(9,995)
|
|
(a)Represents counterparty netting, margin, and collateral. See Note 7.
(b)Represents net pending securities sales and purchases.
(c)Valued using NAV as a practical expedient and, therefore, are not classified in the fair value hierarchy.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the fair value at December 31, 2020 of our assets and liabilities that are measured at fair value on a recurring basis (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Other
|
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk management activities — derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
$
|
—
|
|
|
$
|
9,016
|
|
|
$
|
4
|
|
|
$
|
(4,271)
|
|
|
(a)
|
|
$
|
4,749
|
|
|
Nuclear decommissioning trust:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
29,796
|
|
|
—
|
|
|
—
|
|
|
(17,828)
|
|
|
(b)
|
|
11,968
|
|
|
U.S. commingled equity funds
|
—
|
|
|
—
|
|
|
—
|
|
|
610,055
|
|
|
(c)
|
|
610,055
|
|
|
U.S. Treasury debt
|
164,514
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
164,514
|
|
|
Corporate debt
|
—
|
|
|
149,509
|
|
|
—
|
|
|
—
|
|
|
|
|
149,509
|
|
|
Mortgage-backed securities
|
—
|
|
|
99,623
|
|
|
—
|
|
|
—
|
|
|
|
|
99,623
|
|
|
Municipal bonds
|
—
|
|
|
89,705
|
|
|
—
|
|
|
—
|
|
|
|
|
89,705
|
|
|
Other fixed income
|
—
|
|
|
13,061
|
|
|
—
|
|
|
—
|
|
|
|
|
13,061
|
|
|
Subtotal nuclear decommissioning trust
|
194,310
|
|
|
351,898
|
|
|
—
|
|
|
592,227
|
|
|
|
|
1,138,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other special use funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
37,337
|
|
|
—
|
|
|
—
|
|
|
504
|
|
|
(b)
|
|
37,841
|
|
|
U.S. Treasury debt
|
203,220
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
203,220
|
|
|
Municipal bonds
|
—
|
|
|
13,448
|
|
|
—
|
|
|
—
|
|
|
|
|
13,448
|
|
|
Subtotal other special use funds
|
240,557
|
|
|
13,448
|
|
|
—
|
|
|
504
|
|
|
|
|
254,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
434,867
|
|
|
$
|
374,362
|
|
|
$
|
4
|
|
|
$
|
588,460
|
|
|
|
|
$
|
1,397,693
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk management activities — derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
$
|
—
|
|
|
$
|
(20,498)
|
|
|
$
|
(1,107)
|
|
|
$
|
2,986
|
|
|
(a)
|
|
$
|
(18,619)
|
|
(a)Represents counterparty netting, margin, and collateral. See Note 7.
(b)Represents net pending securities sales and purchases.
(c)Valued using NAV as a practical expedient and, therefore, are not classified in the fair value hierarchy.
Fair Value Measurements Classified as Level 3
The significant unobservable inputs used in the fair value measurement of our energy derivative contracts include broker quotes that cannot be validated as an observable input primarily due to the long-term nature of the quote or other characteristics of the product. Significant changes in these inputs in isolation would result in significantly higher or lower fair value measurements. Changes in our derivative contract fair values, including changes relating to unobservable inputs, typically will not impact net income due to regulatory accounting treatment (see Note 4).
Because our forward commodity contracts classified as Level 3 are currently in a net purchase position, we would expect price increases of the underlying commodity to result in increases in the net fair value of the related contracts. Conversely, if the price of the underlying commodity decreases, the net fair value of the related contracts would likely decrease.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Other unobservable valuation inputs include credit and liquidity reserves which do not have a material impact on our valuations; however, significant changes in these inputs could also result in higher or lower fair value measurements.
Financial Instruments Not Carried at Fair Value
The carrying value of our short-term borrowings approximate fair value and are classified within Level 2 of the fair value hierarchy. See Note 3 for our long-term debt fair values. The NTEC note receivable related to the sale of 4CA’s interest in Four Corners bears interest at 3.9% per annum and has a book value of $22.7 million as of March 31, 2021 and $27.1 million as of December 31, 2020, as presented on the Condensed Consolidated Balance Sheets. The carrying amount is not materially different from the fair value of the note receivable and is classified within Level 3 of the fair value hierarchy. See Note 8 for more information on 4CA matters.
12. Investments in Nuclear Decommissioning Trusts and Other Special Use Funds
We have investments in debt and equity securities held in Nuclear Decommissioning Trusts, Coal Reclamation Escrow Account, and an Active Union Employee Medical Account. Investments in debt securities are classified as available-for-sale securities. We record both debt and equity security investments at their fair value on our Condensed Consolidated Balance Sheets. See Note 11 for a discussion of how fair value is determined and the classification of the investments within the fair value hierarchy. The investments in each trust or account are restricted for use and are intended to fund specified costs and activities as further described for each fund below.
Nuclear Decommissioning Trusts — APS established external decommissioning trusts in accordance with NRC regulations to fund the future costs APS expects to incur to decommission Palo Verde. Third-party investment managers are authorized to buy and sell securities per stated investment guidelines. The trust funds are invested in fixed income securities and equity securities. Earnings and proceeds from sales and maturities of securities are reinvested in the trusts. Because of the ability of APS to recover decommissioning costs in rates, and in accordance with the regulatory treatment, APS has deferred realized and unrealized gains and losses (including credit losses) in other regulatory liabilities.
Coal Reclamation Escrow Account — APS has investments restricted for the future coal mine reclamation funding related to Four Corners. This escrow account is primarily invested in fixed income securities. Earnings and proceeds from sales of securities are reinvested in the escrow account. Because of the ability of APS to recover coal mine reclamation costs in rates, and in accordance with the regulatory treatment, APS has deferred realized and unrealized gains and losses (including credit losses) in other regulatory liabilities. Activities relating to APS coal mine reclamation escrow account investments are included within the other special use funds in the table below.
Active Union Employee Medical Account — APS has investments restricted for paying active union employee medical costs. These investments may be used to pay active union employee medical costs incurred in the current and future periods. In 2020 and 2019, APS was reimbursed $14 million and $15 million, respectively, for prior year active union employee medical claims from the active union employee medical account. The account is invested primarily in fixed income securities. In accordance with the ratemaking treatment, APS has deferred the unrealized gains and losses (including credit losses) in other regulatory liabilities. Activities relating to active union employee medical account investments are included within the other special use funds in the table below. On January 4, 2021, an additional $106 million of investments were transferred from APS other postretirement benefit trust assets into the active union employee medical account (see Note 5).
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APS
The following tables present the unrealized gains and losses based on the original cost of the investment and summarizes the fair value of APS’s nuclear decommissioning trusts and other special use fund assets (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
|
Fair Value
|
|
Total
Unrealized
Gains
|
|
Total
Unrealized
Losses
|
|
Investment Type:
|
Nuclear Decommissioning Trusts
|
|
Other Special Use Funds
|
|
Total
|
|
|
|
Equity securities
|
$
|
670,359
|
|
|
$
|
19,211
|
|
|
$
|
689,570
|
|
|
$
|
457,442
|
|
|
$
|
—
|
|
|
Available for sale-fixed income securities
|
504,878
|
|
|
336,894
|
|
|
841,772
|
|
(a)
|
27,338
|
|
|
(3,203)
|
|
|
Other
|
(15,538)
|
|
|
1,401
|
|
|
(14,137)
|
|
(b)
|
—
|
|
|
—
|
|
|
Total
|
$
|
1,159,699
|
|
|
$
|
357,506
|
|
|
$
|
1,517,205
|
|
|
$
|
484,780
|
|
|
$
|
(3,203)
|
|
(a)As of March 31, 2021, the amortized cost basis of these available-for-sale investments is $818 million.
(b)Represents net pending securities sales and purchases.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
Fair Value
|
|
Total
Unrealized
Gains
|
|
Total
Unrealized
Losses
|
|
Investment Type:
|
Nuclear Decommissioning Trusts
|
|
Other Special Use Funds
|
|
Total
|
|
|
|
Equity securities
|
$
|
639,851
|
|
|
$
|
37,337
|
|
|
$
|
677,188
|
|
|
$
|
421,666
|
|
|
$
|
—
|
|
|
Available for sale-fixed income securities
|
516,412
|
|
|
216,668
|
|
|
733,080
|
|
(a)
|
46,581
|
|
|
(398)
|
|
|
Other
|
(17,828)
|
|
|
504
|
|
|
(17,324)
|
|
(b)
|
—
|
|
|
—
|
|
|
Total
|
$
|
1,138,435
|
|
|
$
|
254,509
|
|
|
$
|
1,392,944
|
|
|
$
|
468,247
|
|
|
$
|
(398)
|
|
(a)As of December 31, 2020, the amortized cost basis of these available-for-sale investments is $687 million.
(b)Represents net pending securities sales and purchases.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth APS’s realized gains and losses relating to the sale and maturity of available-for-sale debt securities and equity securities, and the proceeds from the sale and maturity of these investment securities (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
Nuclear Decommissioning Trusts
|
|
Other Special Use Funds
|
|
Total
|
|
2021
|
|
|
|
|
|
|
Realized gains
|
$
|
2,968
|
|
|
$
|
—
|
|
|
$
|
2,968
|
|
|
Realized losses
|
(4,148)
|
|
|
—
|
|
|
(4,148)
|
|
|
Proceeds from the sale of securities (a)
|
234,728
|
|
|
145,250
|
|
|
379,978
|
|
|
2020
|
|
|
|
|
|
|
Realized gains
|
$
|
3,313
|
|
|
$
|
—
|
|
|
$
|
3,313
|
|
|
Realized losses
|
(2,227)
|
|
|
—
|
|
|
(2,227)
|
|
|
Proceeds from the sale of securities (a)
|
178,196
|
|
|
16,891
|
|
|
195,087
|
|
(a) Proceeds are reinvested in the nuclear decommissioning trusts and other special use funds, excluding amounts reimbursed to the Company for active union employee medical claims from the active union employee medical account.
Fixed Income Securities Contractual Maturities
The fair value of APS’s fixed income securities, summarized by contractual maturities, at March 31, 2021, is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nuclear Decommissioning Trust
|
|
Coal Reclamation Escrow Account
|
|
Active Union Employee Medical Account
|
|
Total
|
|
Less than one year
|
$
|
25,048
|
|
|
$
|
26,259
|
|
|
$
|
40,469
|
|
|
$
|
91,776
|
|
|
1 year – 5 years
|
147,347
|
|
|
34,936
|
|
|
160,324
|
|
|
342,607
|
|
|
5 years – 10 years
|
137,479
|
|
|
2,708
|
|
|
63,477
|
|
|
203,664
|
|
|
Greater than 10 years
|
195,004
|
|
|
8,721
|
|
|
—
|
|
|
203,725
|
|
|
Total
|
$
|
504,878
|
|
|
$
|
72,624
|
|
|
$
|
264,270
|
|
|
$
|
841,772
|
|
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
13. Changes in Accumulated Other Comprehensive Loss
The following table shows the changes in Pinnacle West’s consolidated accumulated other comprehensive loss, including reclassification adjustments, net of tax, by component (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and Other Postretirement Benefits
|
|
|
|
Derivative Instruments
|
|
|
|
Total
|
|
Three Months Ended March 31
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2020
|
$
|
(60,725)
|
|
|
|
|
$
|
(2,071)
|
|
|
|
|
$
|
(62,796)
|
|
|
OCI (loss) before reclassifications
|
—
|
|
|
|
|
262
|
|
|
|
|
262
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
1,022
|
|
|
(a)
|
|
—
|
|
|
|
|
1,022
|
|
|
Balance March 31, 2021
|
$
|
(59,703)
|
|
|
|
|
$
|
(1,809)
|
|
|
|
|
$
|
(61,512)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2019
|
$
|
(56,522)
|
|
|
|
|
$
|
(574)
|
|
|
|
|
$
|
(57,096)
|
|
|
OCI (loss) before reclassifications
|
—
|
|
|
|
|
292
|
|
|
|
|
292
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
1,205
|
|
|
(a)
|
|
20
|
|
|
(b)
|
|
1,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2020
|
$
|
(55,317)
|
|
|
|
|
$
|
(262)
|
|
|
|
|
$
|
(55,579)
|
|
(a) These amounts primarily represent amortization of actuarial loss and are included in the computation of net periodic pension cost. See Note 5.
(b) These amounts primarily represent realized gains and losses and are included in the computation of fuel and purchased power costs and are subject to the PSA. See Note 7.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the changes in APS’s consolidated accumulated other comprehensive loss, including reclassification adjustments, net of tax, by component for the three months ended March 31, 2021 and 2020 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and Other Postretirement Benefits
|
|
|
|
Derivative Instruments
|
|
|
|
Total
|
|
Three Months Ended March 31
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2020
|
$
|
(40,918)
|
|
|
|
|
$
|
—
|
|
|
|
|
$
|
(40,918)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
927
|
|
|
(a)
|
|
—
|
|
|
|
|
927
|
|
|
Balance March 31, 2021
|
$
|
(39,991)
|
|
|
|
|
$
|
—
|
|
|
|
|
$
|
(39,991)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2019
|
$
|
(34,948)
|
|
|
|
|
$
|
(574)
|
|
|
|
|
$
|
(35,522)
|
|
|
OCI (loss) before reclassifications
|
—
|
|
|
|
|
292
|
|
|
|
|
292
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
1,013
|
|
|
(a)
|
|
20
|
|
|
(b)
|
|
1,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2020
|
$
|
(33,935)
|
|
|
|
|
$
|
(262)
|
|
|
|
|
$
|
(34,197)
|
|
(a) These amounts primarily represent amortization of actuarial loss and are included in the computation of net periodic pension cost. See Note 5.
(b) These amounts primarily represent realized gains and losses and are included in the computation of fuel and purchased power costs and are subject to the PSA. See Note 7.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
14. Income Taxes
The Tax Act reduced the corporate tax rate to 21% effective January 1, 2018. As a result of this rate reduction, the Company recognized a $1.14 billion reduction in its net deferred income tax liabilities as of December 31, 2017. In accordance with accounting for regulated companies, the effect of this rate reduction was substantially offset by a net regulatory liability.
Federal income tax laws require the amortization of a majority of the balance over the remaining regulatory life of the related property. As a result of the modifications made to the annual transmission formula rate during the second quarter of 2018, the Company began amortization of FERC jurisdictional net excess deferred tax liabilities in 2018. On March 13, 2019, the ACC approved the Company’s proposal to amortize non-depreciation related net excess deferred tax liabilities subject to its jurisdiction over a twelve-month period. As a result, the Company began amortization in March 2019. The Company recorded $14 million of income tax benefit related to the amortization of these non-depreciation related net excess deferred tax liabilities as of March 31, 2020, with these non-depreciation related net excess deferred tax liabilities being fully amortized as of March 31, 2020. On October 29, 2019, the ACC approved the Company’s proposal to amortize depreciation related net excess deferred tax liabilities subject to its jurisdiction over a 28.5-year period with amortization to retroactively begin as of January 1, 2018. The Company recorded $6 million and $6 million of income tax benefit related to amortization of these depreciation related net excess deferred tax liabilities as of March 31, 2021 and March 31, 2020, respectively. See Note 4 for more details.
Net income associated with the Palo Verde sale leaseback VIEs is not subject to tax. As a result, there is no income tax expense associated with the VIEs recorded on the Pinnacle West Consolidated and APS Consolidated Statements of Income. See Note 6 for additional details related to the Palo Verde sale leaseback VIEs.
As of the balance sheet date, the tax year ended December 31, 2017 and all subsequent tax years remain subject to examination by the IRS. With a few exceptions, the Company is no longer subject to state income tax examinations by tax authorities for years before 2016.