Pinnacle West Capital (PNW) 10-K2023 FY Annual report

This document contains forward-looking statements based on current expectations.  These forward-looking statements are often identified by words such as “estimate,” “predict,” “may,” “believe,” “plan,” “expect,” “require,” “intend,” “assume,” “project,” “anticipate,” “goal,” “seek,” “strategy,” “likely,” “should,” “will,” “could,” and similar words.  Because actual results may differ materially from expectations, we caution readers not to place undue reliance on these statements.  A number of factors could cause future results to differ materially from historical results, or from outcomes currently expected or sought by Pinnacle West or APS.  In addition to the Risk Factors described in Item 1A and in Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report, these factors include, but are not limited to:

These and other factors are discussed in the Risk Factors described in Item 1A of this report, and in Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report, which readers should review carefully before placing any reliance on our financial statements or disclosures.  Neither Pinnacle West nor APS assumes any obligation to update these statements, even if our internal estimates change, except as required by law.

Pinnacle West is a holding company that conducts business through its subsidiaries.  We derive essentially all of our revenues and earnings from our wholly-owned subsidiary, APS.  APS is a vertically-integrated electric utility that provides either retail or wholesale electric service to most of Arizona, with the major exceptions of about one-half of the Phoenix metropolitan area, the Tucson metropolitan area and Mohave County in northwestern Arizona.

 

Pinnacle West’s other subsidiaries are El Dorado, PNW Power, and 4CA.  BCE was a subsidiary of Pinnacle West, but was sold in January 2024. Additional information related to these subsidiaries is provided later in this report.

Our reportable business segment is our regulated electricity segment, which consists of traditional regulated retail and wholesale electricity businesses (primarily electric service to Native Load customers) and related activities, and includes electricity generation, transmission, and distribution.

 

APS currently provides electric service to approximately 1.4 million customers.  We own or lease 6,491 MW of regulated generation capacity and we hold a mix of both long-term and short-term purchased power agreements for additional capacity.  During 2023, no single purchaser or user of energy accounted for more than 2.1% of our electric revenues.

To serve its customers, APS obtains power through its various generation stations and through purchased power agreements.  Resource planning is an important function necessary to meet Arizona’s future energy needs.  APS’s sources of energy by type used to supply energy to Native Load customers during 2023 were as follows:

The share of APS’s energy supply being derived from clean resources was approximately 51% in 2023, which includes energy from nuclear, renewables and DSM.

In response to climate change, the entire electric utility industry, as well as the global economy, is in the midst of a profound transition to clean energy and a new low-carbon economy. APS has undertaken a number of initiatives to reduce carbon, including renewable energy procurement and development, and promotion of programs and rates that promote energy conservation, renewable energy use, and energy efficiency. See “Energy Sources and Resource Planning — Current and Future Resources” below for details of these plans and initiatives. APS currently has a diverse portfolio of renewable resources, including solar, wind, geothermal, biogas, and biomass. In addition, in January 2020, APS announced its Clean Energy Commitment, a three-pronged approach aimed at ultimately eliminating carbon-emitting resources from its electric generation resource portfolio.

APS’s Clean Energy Commitment consists of three parts:

Among other strategies, APS intends to achieve these goals through various methods such as relying on Palo Verde, one of the nation’s largest producers of carbon-free energy; increasing clean energy resources, including renewables; developing energy storage; exiting from coal-generated electricity; managing demand with a modern interactive grid; promoting customer technology and energy efficiency; and optimizing regional resources. Management takes into consideration climate change and other environmental risks in its strategy development, business planning, and enterprise risk management processes. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information about APS’s Clean Energy Commitment.

Over this same period of time, APS also intends to harden its infrastructure in order to improve climate resiliency, which involves system and operational improvements aimed at reducing the impact of extreme weather events and other climate-related disruptions upon APS’s operations. Among other resiliency strategies, APS anticipates increasing investments in a modern and more flexible electricity grid with advanced distribution technologies. APS plans to continue its comprehensive forest management programs aimed at reducing wildfires, as those risks become compounded by shorter, drier winters and longer, hotter summers as a result of climate change.

 

APS has ownership interests in or leases the nuclear, gas, oil, coal, and solar generating facilities as well as energy storage facilities described below.  For additional information regarding these facilities, see Item 2.

 

 

 

The Palo Verde participants have contracted for 100% of Palo Verde’s requirements for uranium concentrates through 2028 and 48% through 2029; 100% of Palo Verde’s requirements for conversion services through 2029 and 75% through 2030; 100% of Palo Verde’s requirements for enrichment services through 2026 and 28% for 2027; and 100% of Palo Verde’s requirements for fuel fabrication through 2027 for Unit 2 and Unit 1 and 2028 for Unit 3.

 

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 DOE in the United States Court of Federal Claims. The lawsuit sought to recover damages incurred due to DOE’s breach of the Standard Contract for failing to accept Palo Verde’s spent nuclear fuel and high-level waste from January 1, 2007 through June 30, 2011, pursuant to the terms of the Standard Contract and the NWPA. On August 18, 2014, APS and DOE entered into a settlement agreement, which required DOE to pay 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 provided APS with a method for submitting claims and getting recovery for costs incurred through December 31, 2016, which was extended to December 31, 2025.

Palo Verde has sufficient capacity at its on-site independent spent fuel storage installation (“ISFSI”) to store all of the nuclear fuel that will be irradiated during the initial operating license period, which ends in December 2027. Additionally, Palo Verde has sufficient capacity at its on-site ISFSI to store a portion of the fuel that will be irradiated during the period of extended operation, which ends in November 2047. If uncertainties regarding the United States government’s obligation to accept and store spent fuel are not favorably resolved, APS will evaluate expanding the ISFSI, or alternative storage solutions that may obviate the need to expand the ISFSI, to accommodate all of the fuel that will be irradiated during the period of extended operation.

 

 

 

APS has six natural gas power plants located throughout Arizona, consisting of Redhawk, located near Palo Verde; Ocotillo, located in Tempe (discussed below); Sundance, located in Coolidge; West Phoenix, located in southwest Phoenix; Saguaro, located north of Tucson; and Yucca, located near Yuma. Several of the units at Yucca run on either gas or oil. APS has two oil-only power plants: Douglas, located in the town of Douglas, Arizona and Yucca GT-4 in Yuma, Arizona. APS owns and operates each of these plants with the exception of one oil-only combustion turbine unit and one oil and gas steam unit at Yucca that are operated by APS and owned by the Imperial Irrigation District. APS has a total entitlement from these plants of 3,573 MW. A portion of the gas for these plants is financially hedged up to three years in advance of purchasing and that position is converted to a physical gas purchase one month prior to delivery. APS has long-term gas transportation agreements with three different companies, some of which are effective through 2052. Fuel oil is acquired under short-term purchases delivered by truck directly to the power plants.

Ocotillo was originally a 330 MW 4-unit gas plant located in Tempe. In early 2014, APS announced a project to modernize the plant, which involved retiring two older 110 MW steam units, adding five 102 MW combustion turbines, and maintaining two existing 55 MW combustion turbines. In total, this increased the capacity of the site by 290 MW to 620 MW. The Ocotillo modernization project was completed in 2019.

NTEC, a company formed by the Navajo Nation to own the mine that serves Four Corners and develop other energy projects, is the coal supplier for Four Corners. The Four Corners co-owners executed a long-term agreement for the supply of coal to Four Corners from July 2016 through 2031 (the “2016 Coal Supply Agreement”).

APS, on behalf of the Four Corners participants, negotiated amendments to an existing facility lease with the Navajo Nation, which extends the Four Corners leasehold interest from 2016 to 2041. The Navajo Nation approved these amendments in March 2011. The effectiveness of the amendments also required the approval of the DOI, as did a related federal rights-of-way grant. A federal environmental review was undertaken as part of the DOI review process and culminated in the issuance by DOI of a record of decision on July 17, 2015, justifying the agency action to extend the life of the plant and the adjacent mine.

APS purchases all of Cholla’s coal requirements from a coal supplier that mines all of the coal under long-term leases of coal reserves with the federal and state governments and private landholders. The Cholla coal contract runs through 2024. In addition, APS has a coal transportation contract that runs through 2024.

The co-owners of the Navajo Plant and the Navajo Nation agreed that the Navajo Plant would remain in operation until December 2019 under the existing plant lease. The co-owners and the Navajo Nation executed a lease extension on November 29, 2017, which allowed for decommissioning activities to begin after the plant ceased operations in November 2019.

APS is currently recovering depreciation and a return on the net book value of its interest in the Navajo Plant over its previously estimated life through 2026. APS will seek continued recovery in rates for the book value of its remaining investment in the plant. See Note 3 for details related to the resulting regulatory asset plus a return on the net book value as well as other costs related to retirement and closure, which are still being assessed and which may be material.

See Note 10 for information regarding APS’s coal mine reclamation obligations related to these coal-fired plants.

APS developed utility scale solar resources through the 180 MW ACC-approved AZ Sun Program, investing approximately $675 million in this program. These facilities are owned by APS and are located in multiple locations throughout Arizona. In addition to the AZ Sun Program, APS developed the 44 MW Red Rock Solar Plant and the 150 MW Agave Solar Plant, each of which it owns and operates. Two of our large customers purchase renewable energy credits from APS that are equivalent to the amount of renewable energy that Red Rock is projected to generate.

APS owns and operates more than thirty small solar systems around the state. Together they have the capacity to produce approximately 4 MW of renewable energy. This fleet of solar systems includes a 3 MW facility located at the Prescott Airport and 1 MW of small solar systems in various locations across Arizona. APS has also developed solar photovoltaic DG systems installed as part of the Community Power Project in Flagstaff, Arizona. The Community Power Project, approved by the ACC on April 1, 2010, was a pilot program through which APS owns, operates, and receives energy from approximately 1 MW of solar photovoltaic DG systems located within a certain test area in Flagstaff, Arizona. The pilot program is now complete and as part of the 2017 Rate Case Decision, the participants have been transferred to the Solar Partner Program described below. Additionally, APS owns 13 MW of solar photovoltaic systems installed across Arizona through the ACC-approved Schools and Government Program.

In December 2014, the ACC voted that it had no objection to APS implementing an APS-owned rooftop solar research and development program aimed at learning how to efficiently enable the integration of rooftop solar and battery storage with the grid. The first stage of the program, called the “Solar Partner Program,” placed 8 MW of residential rooftop solar on strategically selected distribution feeders in an effort to maximize potential system benefits, as well as made systems available to limited-income customers who could not easily install solar through transactions with third parties. The second stage of the program, which included an additional 2 MW of rooftop solar and energy storage, placed two energy storage systems sized at 2 MW on two different high solar penetration feeders to test various grid-related operation improvements and system interoperability, and was in operation by the end of 2016. The costs for this program have been included in APS’s rate base as part of the 2017 Rate Case Decision.

In the 2017 Rate Case Decision, the ACC also approved the “APS Solar Communities” program. APS Solar Communities (formerly AZ Sun II) is a three-year program authorizing APS to spend $10 million to $15 million in capital costs each year to install utility-owned DG systems on 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. Currently, APS has installed 14 MW of DG systems under the APS Solar Communities program. In the 2019 Rate Case decision, the ACC authorized APS to spend $20 million to $30 million in capital costs for the APS Solar Communities program each year for a period of three years from the effective date of the decision.

To date, APS has a diverse portfolio of existing and planned renewable resources totaling 5,010 MW, including solar, wind, geothermal, biomass and biogas. Of this portfolio, 3,072 MW are currently in operation and 1,938 MW are under contract for development or are under construction. Renewable resources in operation include 415 MW of facilities owned by APS, 1,034 MW of long-term purchased power agreements, and an estimated 1,623 MW of customer-sited, third-party owned distributed energy resources.

On June 30, 2023, APS issued an All-Source Request for Proposal (“RFP”) seeking approximately 1,000 MW of reliable capacity, including at least 700 MW of renewable resources with a focus on in-service dates between 2026 and 2028 (the “2023 RFP”). Bids from the 2023 RFP were received on September 6, 2023, and APS has started negotiations on multiple projects, including a 400 MW wind facility PPA that was signed in December 2023.

 

APS’s strategy to achieve its RES requirements includes executing purchased power contracts for new facilities, ongoing development of distributed energy resources and procurement of new facilities to be owned by APS.  See “Energy Sources and Resource Planning — Generation Facilities — Solar Facilities” above for information regarding APS-owned solar facilities and “Energy Sources and Resource Planning — Generation Facilities — Energy Storage” below for more information regarding APS-owned energy storage facilities.

APS deploys a number of advanced technologies on its system, including energy storage. Energy storage provides capacity, improves power quality, can be utilized for system regulation and, in certain circumstances, be used to defer certain traditional infrastructure investments. Energy storage also aids in integrating renewable generation by storing excess energy when system demand is low and renewable production is high and then releasing the stored energy during peak demand hours later in the day and after sunset. APS is utilizing grid-scale energy storage projects to meet customer reliability requirements, increase renewable utilization, and further our understanding of how storage works with other advanced technologies and the grid.

As noted above, on June 30, 2023, APS issued the 2023 RFP seeking approximately 1,000 MW of reliable capacity, including at least 700 MW of renewable resources, including energy storage, with a focus on in-service dates between 2026 and 2028.

APS currently plans to install more than 2,700 MW of utility scale energy storage by 2026, including through energy storage projects under PPAs and AZ Sun retrofits as well as through resources solicited through current and future RFPs.

In addition to its own available generating capacity, APS purchases electricity under various arrangements, including long-term contracts and purchases through short-term markets to supplement its owned or leased generation and hedge its energy requirements.  A portion of APS’s purchased power expense is netted against wholesale sales on the Consolidated Statements of Income.  See Note 15. APS continually assesses its need for additional capacity resources to assure system reliability. In addition, APS has also entered into several PPAs for energy storage. See “Business of Arizona Public Service Company — Energy Sources and Resource Planning — Energy Storage” above for details on our energy storage PPAs.

Electric power demand is generally seasonal.  In Arizona, demand for power peaks during the hot summer months.  APS’s 2023 peak one-hour demand on its electric system was recorded on July 15, 2023, at 8,162 MW, compared to the 2022 peak of 7,587 MW recorded on July 11, 2022.  APS’s reserve margin at the time of the 2023 peak demand, calculated using system load serving capacity, was 18%.  For 2024, due to expiring purchased power contracts, APS is procuring market resources to maintain its minimum 16% planning reserve criteria.

ACC rules require utilities to develop 15-year Integrated Resource Plans (“IRP”) 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 rule requirements and whether it should be acknowledged. APS was originally required to file its IRP by August 1, 2023. However, on May 1, 2023, APS, Tucson Electric Company, and UNS Electric, Inc., filed a joint request to extend the IRP filing due date to November 1, 2023, which the ACC granted on June 21, 2023. APS filed its 2023 IRP on November 1, 2023. On January 31, 2024, stakeholders filed comments regarding the IRP. APS cannot predict the outcome of this matter. On October 4, 2023, the ACC updated the IRP processing timeline with a due date of August 30, 2024 for the ACC Staff Assessment and Proposed Order and an open meeting decision due date yet to be determined.

See “Business of Arizona Public Service Company — Energy Sources and Resource Planning — Clean Energy Focus Initiatives” and “Business of Arizona Public Service Company �� Energy Sources and Resource Planning — Energy Storage” above for information regarding future plans for energy storage.

In 2016, APS began to participate in the Western Energy Imbalance Market (“WEIM”), a voluntary, real-time optimization market operated by the CAISO. The WEIM allows for rebalancing supply and demand in 15-minute blocks and dispatching generation every five minutes, instead of the traditional one-hour blocks. APS continues to expect that its participation in WEIM will lower its fuel and purchased-power costs, improve situational awareness for system operations in the Western Interconnection power grid, and improve integration of APS’s renewable resources. APS is participating in market design and tariff development of Markets+, a day-ahead and real-time market offering from Southwest Power Pool. APS also participated in the design and drafting of the tariff for the CAISO’s Extended Day-Ahead Market, which was approved by FERC in December 2023. In addition, APS is participating in the Western Resource Adequacy Program administered by Western Power Pool. These efforts are driven by three objectives of reducing customer cost, improving reliability, and incorporating more clean energy on APS’s system.

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 power was defined as a clean energy resource. The proposed rules also required 50% of retail energy served be renewable by the end of 2035. On November 13, 2020, the ACC approved a final draft energy rules package which required additional procedural steps in the rulemaking process. In June 2021, the ACC adopted clean energy rules based on a series of ACC amendments to the final energy rules. The adopted rules require 100% clean energy by 2070 and the following interim standards for carbon reduction from a baseline carbon emissions level: 50% reduction by December 31, 2032; 65% reduction by December 31, 2040; 80% reduction by December 31, 2050, and 95% reduction by December 31, 2060. Since the adopted clean energy rules differed substantially from the original Recommended Order and Opinion, supplemental rulemaking procedures were required before the rules could become effective. On January 26, 2022, the ACC reversed its prior decision and declined to send the final draft energy rules through the rulemaking process. Instead, the ACC opened a new docket to consider All-Source RFP requirements and the IRP process. During the August 2022 ACC Open Meeting, the ACC voted to postpone a decision on the All-Source RFP and IRP rulemaking package until 2023. On May 26, 2023, the ACC opened a new docket to review articles within the Arizona Administrative Code related to Resource Planning, the Renewable Energy Standard and Tariff, and Electric Energy Efficiency Standards. On January 9, 2024, the ACC approved a rulemaking process to begin on this matter. During the ACC Open Meeting on February 6, 2024, the ACC approved motions to direct ACC Staff to include recommendations to repeal the current Electric Energy Efficiency and Renewable Energy Standard rules during the rulemaking process. APS cannot predict the outcome of this matter. See Note 3 for additional information related to these energy rules.

In 2006, the ACC adopted 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.  The renewable energy requirement is 13% of retail electric sales in 2023 and increases annually until it reaches 15% in 2025. 

A component of the RES is focused on stimulating development of DG systems.  Accordingly, under the RES, an increasing percentage of that requirement must be supplied from distributed energy resources.  This distributed renewable energy requirement, which was waived by the ACC as a part of APS’s 2023 RES Implementation Plan, would have been 30% of the overall RES requirement of 13% in 2023. On June 7, 2021, the ACC approved the 2021 RES Implementation Plan. On July 1, 2021, APS filed its 2022 RES Implementation Plan, which was subsequently amended on December 9, 2021. On May 18, 2022, the ACC approved the 2022 RES Implementation Plan, including an amendment requiring a stakeholder working group convene to develop a community solar program for the ACC’s consideration at a future date. On September 23, 2022, APS filed a community solar proposal in compliance with the ACC order that was informed by a stakeholder working group. APS proposed a small, pilot scale program size of up to 140 MW that would be selected through a competitive RFP. The ACC has not yet ruled on the proposal. However, on November 10, 2022, the ACC approved a bifurcated community solar process, directing ACC Staff to develop a statewide policy through additional stakeholder involvement and establishing a separate evidentiary hearing to define other policy components. On March 23, 2023, the ACC approved a policy statement that included information on how statewide community solar and storage programs should be structured, their location, and inclusion in RFPs. The remainder of the community solar program policy components were deferred to the ACC’s Hearing Division so that a formal evidentiary hearing could be held to consider issues of substance related to community solar. APS cannot predict the outcomes of these future activities.

On June 30, 2023, APS filed its 2024 RES Implementation Plan and proposed a budget of approximately $95.1 million. APS’s budget proposal supports existing approved projects and commitments and requests a waiver of the RES renewable energy credit requirements to demonstrate compliance with the Annual Renewable Energy Requirement for 2023. The ACC has not yet ruled on the 2024 RES Implementation Plan. The following table summarizes the RES requirement standard and its timing:

On April 21, 2015, the RES rules were amended to require utilities to report on all eligible renewable resources in their service territory, irrespective of whether the utility owns renewable energy credits associated with such renewable energy. The rules allow the ACC to consider such information in determining whether APS has satisfied the requirements of the RES.

On January 1, 2011, Arizona regulators adopted an EES of 22% cumulative annual energy savings by 2020 to increase energy efficiency and other DSM programs encouraging customers to conserve energy, while incentivizing utilities to aid in these efforts that ultimately reduce the demand for energy. APS achieved the 22% EES in 2021. See Note 3 for information regarding energy efficiency, other DSM obligations and the Energy Modernization Plan.

The ACC regulates APS’s retail electric rates and its issuance of securities.  The ACC must also approve any significant transfer or encumbrance of APS’s property used to provide retail electric service and approve or receive prior notification of certain transactions between Pinnacle West, APS, and their respective affiliates. See Note 3 for information regarding ACC’s regulation of APS’s retail electric rates.

APS is subject to varying degrees of competition from other investor-owned electric and gas utilities in Arizona (such as Southwest Gas Corporation), as well as cooperatives, municipalities, electrical districts, and similar types of governmental or non-profit organizations.  In addition, some customers, particularly industrial and large commercial customers, may own and operate generation facilities to meet some or all of their own energy requirements.  This practice is becoming more popular with customers installing or having installed products such as rooftop solar panels to meet or supplement their energy needs.

On May 9, 2013, the ACC voted to re-examine the facilitation of a deregulated retail electric market in Arizona.  The ACC subsequently opened a docket for this matter and received comments from a number of interested parties on the considerations involved in establishing retail electric deregulation in the state.  One of these considerations was whether various aspects of a deregulated market, including setting utility rates on a “market” basis, would be consistent with the requirements of the Arizona Constitution.  On September 11, 2013, after receiving legal advice from the ACC Staff, the ACC voted 4-1 to close the current docket and await full Arizona Constitutional authority before any further examination of this matter.  The motion approved by the ACC also included opening one or more new dockets in the future to explore options to offer more rate choices to customers and innovative changes within the existing cost-of-service regulatory model that could include elements of competition. 

On October 28, 2021, an ACC Commissioner docketed a letter directing ACC Staff and interested stakeholders to design a 200 to 300 MW pilot program that would allow residential and small commercial customers of APS to elect a competitive electricity supplier. The letter also states that similar programs should be designed for other Arizona regulated electric utilities. APS cannot predict the outcome of these future activities.

FERC regulates rates for wholesale power sales and transmission services.  See Note 3 for information regarding APS’s transmission rates.  During 2023, approximately 7.4% of APS’s electric operating revenues resulted from such sales and services.  APS’s wholesale activity primarily consists of managing fuel and purchased power supplies to serve retail customer energy requirements.  APS also sells, in the wholesale market, its generation output that is not needed for APS’s Native Load and, in doing so, competes with other utilities, power marketers and independent power producers.  Additionally, subject to specified parameters, APS hedges both electricity and natural gas.  The majority of these activities are undertaken to mitigate risk in APS’s portfolio.

APS continues to work closely with customers, stakeholders, and regulators to identify and plan for transmission needs that support new customers, system reliability, access to markets and clean energy development.  The capital expenditures table presented in the “Liquidity and Capital Resources” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this report includes new APS transmission projects, along with other transmission costs for upgrades and replacements, including those for data center and semi-conductor manufacturing development. To prioritize reliability and meet substantial growth in residential and commercial energy needs, APS has developed a future-focused, strategic transmission plan. This Ten-Year Plan includes five critical transmission projects that comprise the APS strategic transmission portfolio, which represents a significant upgrade to APS’s transmission system. These five projects, along with other projects included in the Ten-Year Plan, are intended to support growing energy needs, strengthen reliability, and allow for the connection of new resources. 

APS is also working to establish and expand advanced grid technologies throughout its service territory to provide long-term benefits both to APS and its customers.  APS is strategically deploying a variety of technologies that are intended to allow customers to better manage their energy usage, minimize system outage durations and frequency, enable customer choice for new customer sited technologies, and facilitate greater cost savings to APS through improved reliability and the automation of certain delivery functions.

In addition to federal legislative initiatives, state-specific initiatives may also impact our business. While Arizona has no pending legislation regulating GHGs, the California legislature enacted AB 32 and SB 1368 in 2006 to address GHG emissions. In October 2011, the California Air Resources Board (“CARB”) approved final regulations that established a state-wide cap on GHG emissions beginning on January 1, 2013, and established a GHG allowance trading program under that cap. The first phase of the program, which applies to, among other entities, importers of electricity, commenced on January 1, 2013. Under the program, entities selling electricity into California, including APS, must hold carbon allowances to cover GHG emissions associated with electricity sales into California from outside the state. APS is authorized to recover the cost of these carbon allowances through the PSA.

Other environmental rules that could involve material compliance costs include those related to effluent limitations, the ozone national ambient air quality standards (“NAAQS”) 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 APS’s fossil-fuel powered 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.

    

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,

On March 15, 2023, EPA issued its final Good Neighbor Plan for 23 states in order to ensure that the cross-state transport of ozone forming emissions does not interfere with downwind state compliance with the NAAQS. Power plant emission limitations are a key aspect of these regulations, which involve emission allowance trading for nitrogen oxide emissions. While Arizona was not among the 23 states subject to EPA’s March 2023 final action, EPA announced at this time that it was considering the inclusion of Arizona within a future regulatory action under the “good neighbor” provisions of the Clean Air Act.

Based on a declaration from the U.S. Bureau of Reclamation, as of January 1, 2024, Arizona’s supply of Colorado River water will be subject to a Tier 1 shortage. This shortage will result in a reduction to Arizona’s share of the Colorado River water by 28 percent or 792,000-acre feet. This reduction will largely be felt by central Arizona’s agricultural users, mainly in Pinal County. In light of pre-existing mitigation measures at the state level, the Tier 1 shortage is not expected at this time to materially impact water supplies for customers in APS’s service territory, nor materially impact water supplies used by APS’s fleet of generation resources. As drought conditions across the southwestern U.S. region continue to worsen, APS will monitor water availability necessary for continued Company operations and, as necessary, implement measures to mitigate risks associated with future Colorado River shortage declarations.

Assured supplies of water are important for APS’s generating plants. At the present time, APS has adequate water to meet its operating needs. The Four Corners region, in which Four Corners is located, has historically experienced drought conditions that may affect the water supply for the plants if adequate moisture is not received in the watershed that supplies the area. APS is continuing to work with area stakeholders to implement agreements to minimize the effect, if any, on future drought conditions that could have an impact on operations of its plants.

Conflicting claims to limited amounts of water in the southwestern United States have resulted in numerous court actions, which, in addition to future supply conditions, have the potential to impact APS’s operations.

At this time, the lower court proceedings in the Gila River adjudication are in the process of determining the specific hydro-geologic testing protocols for determining which groundwater wells located outside of the subflow zone of the Gila River should be subject to the adjudication court’s jurisdiction. A hearing to determine this jurisdictional test question was held in March 2018 in front of a special master, and a draft decision based on the evidence heard during that hearing was issued on May 17, 2018. The decision of the special master, which was finalized on November 14, 2018, accepts the proposed hydro-geologic testing protocols supported by APS and other industrial users of groundwater. A further ruling affirming this decision by the trial court judge overseeing the adjudication was issued on July 8, 2022. Further proceedings have been initiated to determine the specific hydro-geologic testing protocols for subflow depletion determinations. The determinations made in this final stage of the proceedings may ultimately govern the adjudication of rights for parties, such as APS, that rely on groundwater extraction to support their industrial operations. APS cannot predict the outcome of these proceedings.

Although the above matters remain subject to further evaluation, APS does not expect that the described litigation will have a material adverse impact on its financial condition, results of operations, or cash flows.

The Company seeks to attract the best employees, retain those employees, and create a safe, inclusive, and productive work environment for all employees. We believe the strength of our employees is one of the significant contributors to our Company’s success. Human capital measures and objectives that the Company focuses on in retaining its talent and managing its business include the safety of our employees, career development, diversity, equity and inclusion, succession planning, hiring, voluntary turnover, compensation, benefits, employee experience, and engagement.

Our efforts to support and empower employees include a commitment to full inclusion of all our people. We have a robust, multi-year strategy for diversity, equity, and inclusion that focuses on eleven key areas, both internally- and externally-facing. In 2021, APS received recognition as winner of the Inclusive Workplace Award from Diversity Leadership Alliance and Arizona Society of Human Resource Management. The award recognizes APS as an Arizona corporation that leads by example, creating an inclusive environment in which employees can be their genuine, authentic selves, and partners on community outreach efforts and support.

Each year since 2020, we have conducted company-wide executive listening sessions to provide employees with opportunities to be heard on their experiences at the Company. In 2019, we signed the UNITY Pledge in support of full inclusion and equality in employment, housing, and public accommodations for all Arizonans, including gay and transgender people. The UNITY Pledge reinforces our commitment to fostering an environment that recognizes our employees’ unique needs and celebrates

Succession planning ensures that our Company is prepared to fill executive and other key leadership roles with capable, experienced employees who can lead us into the future with strong and sustainable performance. We continually revisit and revise succession plans to make certain qualified individuals are in place to move into critical positions. In addition, we provide each business unit of the Company with talent management strategies and development plans to meet its future leadership needs. Effective succession planning helps us identify employees with leadership potential, evaluate any gaps in education, skills and experience, and support employees in preparation for their next leadership roles. Officers and directors review succession plans, leadership opportunities, and retirement projections to ensure business continuity.

Talent pipelines help sustain our skilled workforce needs. Our pipeline strategy is driven by a robust portfolio of programs aimed at attracting early and mid-career talent. With over a dozen programs in effect, our talent pipelines include craft apprenticeships and engineering, rotational, and internship programs. We partner closely with specific colleges and universities, vocational schools, and organizations serving local communities to attract a large pool of qualified, diverse talent. Additionally, 2023 marked the launch of the Department of Defense SkillBridge program, which provides APS early access to transitioning military talent to fill open roles.

During 2023, we hosted 57 summer interns with an overall diversity rate of 67% and also comprised of 35% women. In addition to our summer program, 14 participated as Maintenance Interns, Radiation Protection Interns, and Pre-Apprentice Interns (programs specifically offered at Palo Verde).

In addition to our talent strategy, we place significant focus on our Total Rewards strategy for attracting, developing, and rewarding our highly skilled workforce. Our employees are important to the success and future of our organization and our customers’ experiences. At the Company, our pay and benefits, along with retirement, recognition, time off, career development and well-being, make up our Total Rewards program. It is an important part of the employee experience at the Company and supports

In 2020, the Company launched the APS Promise, anchoring our commitment to our customers, community, and each other. The Promise explains our purpose, vision, and mission and the principles and behaviors that will empower us to achieve our strategic goals. It represents the opportunity to build on our cultural strengths and develop new behaviors to enable our future success. The APS Promise continues to be reinforced and integrated throughout our Company programs and messaging.

On August 4, 2023, Pinnacle West entered into a purchase and sale agreement pursuant to which we agreed to sell all of our equity interest in our wholly-owned subsidiary, BCE, to Ameresco (the “BCE Sale”). The transaction was accounted for as the sale of a business and closed in multiple stages. Certain investments and assets that BCE previously held, including the TransCanyon joint venture and holdings in the two Tenaska wind farm investments, were not included in the BCE Sale and were instead transferred to Pinnacle West Power, LLC (“PNW Power”), a newly-formed, wholly-owned subsidiary of Pinnacle West.

PNW Power’s investments include TransCanyon, a 50/50 joint venture that was formed in 2014 with BHE U.S. Transmission LLC, a subsidiary of Berkshire Hathaway Energy Company. TransCanyon is pursuing independent electric transmission opportunities within the 11 U.S. states that comprise the Western Interconnection, excluding opportunities related to transmission service that would otherwise be provided under the tariffs of the retail service territories of the venture partners’ utility affiliates.

PNW Power’s investments also include minority ownership positions in two wind farms operated by Tenaska Energy, Inc. and Tenaska Energy Holdings, LLC, the 242 MW Clear Creek and the 250 MW Nobles 2 wind farms. Clear Creek achieved commercial operation in May 2020; however, in the fourth quarter of 2022 PNW Power’s equity method investment was fully impaired. Nobles 2 achieved commercial operation in December 2020. Both wind farms deliver power under long-term PPAs. PNW Power indirectly owns 9.9% of Clear Creek and 5.1% of Nobles 2.

El Dorado is a wholly-owned subsidiary of Pinnacle West. El Dorado owns debt investments and minority interests in several energy-related investments and Arizona community-based ventures.  In particular, El Dorado has committed to the following:

Pinnacle West, APS and El Dorado are all incorporated in the State of Arizona.  PNW Power is incorporated in Delaware. Additional information for each of these companies is provided below:

The APS number includes employees at jointly-owned generating facilities (approximately 2,200 employees) for which APS serves as the generating facility manager.  Approximately 1,150 APS employees are union employees, represented by the International Brotherhood of Electrical Workers (“IBEW”). On September 25, 2023, the IBEW membership ratified a new collective bargaining agreement (“CBA”) with APS. The new CBA became effective in October 2023. This new contract has a duration of three years and becomes amendable on April 1, 2026.

 

You can request a copy of these documents, excluding exhibits, by contacting Pinnacle West at the following address:  Pinnacle West Capital Corporation, Office of the Corporate Secretary, Mail Station 8602, P.O. Box 53999, Phoenix, Arizona 85072-3999 (telephone 602-250-3011).

Neither Pinnacle West nor APS has received written comments regarding its periodic or current reports from the SEC staff that were issued 180 days or more preceding the end of its 2023 fiscal year and that remain unresolved.

The Company prioritizes and maintains a high level of commitment to responsible and secure cybersecurity practices given the critical nature of its services and the potential consequences of a successful cyber-attack on the Company and the electric grid. A successful cyber-attack could have far-reaching consequences, from compromising the integrity of sensitive data to disrupting power supply. To that end, the Company implements a robust risk management, strategy, and governance regime aimed at ensuring effective controls are in place to identify, mitigate, remediate, and communicate cyber threats at appropriate levels within the organization.

APS’s cybersecurity group (the “Cybersecurity Group”) is comprised of cybersecurity analysts, engineers, architects, and others, led by the Director of Cybersecurity, who reports to APS’s Vice President, Operations Support. The Director of Cybersecurity has more than twenty years of experience in information technology and cybersecurity roles, with more than ten of those years at the Company. The Director of Cybersecurity also holds cybersecurity certifications from multiple certifying bodies and is active in utility cybersecurity professional organizations. The Cybersecurity Group has day-to-day responsibility for safeguarding the Company’s critical assets and assessing, identifying, and managing material risks from cybersecurity threats.

In fulfilling its responsibility, the Cybersecurity Group manages formal documented internal processes such as risk management and vulnerability scanning, as well as other processes, such as assessing threat intelligence, that include outside partners. Intelligence sharing comes from industry sources such as the Electricity Information Sharing and Analysis Center, government sources, as well as commercially purchased information sources. The Cybersecurity Group also engages third parties for assessments and audits of its systems periodically and as needed. Such assessments and audits may include, among other things, pre-production evaluation of technologies, overall program assessments, and compliance program assessments including audits by our regulators.

Depending on the products and services provided and the potential for data exchange and technology risk, we may require vendors and service providers to pass APS’s vendor risk management program, which sets forth security and data protection requirements, as a condition to doing or continuing to do business with us. For contracts with vendors that will handle or have access to certain sensitive data, APS requires contractual provisions setting forth cybersecurity controls, vulnerability management, secure development practices, and other security and data protection requirements. A subset of vendors that meet a predetermined risk profile due to strategic relationships, technology risk, or other factors is continually monitored by a third-party risk management service, and the Company annually reviews independent assessments of these vendors.

The Cybersecurity Group also has documented processes for identifying, responding to, and internally escalating cybersecurity incidents. Once an incident meets certain criteria, the Company’s Cybersecurity Incident Command or, in the most severe cases that impact the entire Company, the Corporate Emergency Operations Center is activated and formal response procedures are followed to address the incident. The Cybersecurity Group has a formal incident response plan that details response and escalation procedures, including activation of a Cybersecurity Disclosure Committee, consisting of the Chief Financial Officer and the General Counsel, to assess an incident’s materiality with input as needed from the Director of Cybersecurity, Chief Accounting Officer, Chief Information Officer, and others, including outside advisors.

Cybersecurity risk management has been integrated into the Company’s overall enterprise risk management program (the “Enterprise Risk Management Program”) through policies and processes that implement a risk management framework designed to identify, manage, and monitor business unit risks throughout the organization. The Enterprise Risk Management Program is overseen by an executive committee (the “Executive Risk Committee”), which meets at least quarterly and is comprised of members holding executive leadership positions in the Company, including the Chairman and Chief Executive Officer, President, and other Executive and Senior Vice Presidents, and is chaired and sponsored by the Chief Financial Officer. Every year, as a part of the Enterprise Risk Management Program, the top risks affecting the Company are identified. For 2023, cybersecurity was identified as a top risk. The applicable subject matter experts brief the Company’s Board of Directors on the status of all top enterprise risks at least once per year. Finally, the Nuclear and Operating Committee of the Company’s Board of Directors provides ultimate oversight of cybersecurity risk and also receives briefings at least twice per year from the Cybersecurity Group, and notable audit findings relating to cybersecurity are aggregated and provided to the Board of Directors’ Audit Committee.

To date, we do not believe there have been risks from cybersecurity threats, including as a result of any previous cybersecurity incidents, that have materially affected or are reasonably likely to materially affect Pinnacle West or APS. However, there is no assurance that will continue to be the case. If a significant cybersecurity event or incident were to occur, our ability to fulfill our critical business functions and our business strategy, results of operations, and financial condition could all be materially impacted. See the risk factor entitled, “We are subject to cybersecurity risks and risks of unauthorized access to our systems that could adversely affect our business and financial condition” in Item 1A—Risk Factors for more information.

See “Business of Arizona Public Service Company — Environmental Matters” in Item 1 with respect to matters having a possible impact on the operation of certain of APS’s generating facilities.

 

See “Business of Arizona Public Service Company” in Item 1 for a map detailing the location of APS’s major power plants and principal transmission lines.

The following table shows APS’s jointly-owned interests in those transmission facilities recorded on the Consolidated Balance Sheets at December 31, 2023:

 

The Navajo Plant and Four Corners are located on land held under leases from the Navajo Nation and also under rights-of-way from the federal government.  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, on behalf of the Four Corners participants, negotiated amendments to the Four Corners facility lease with the Navajo Nation, which extends the Four Corners leasehold interest from 2016 to 2041.  See “Business of Arizona Public Service Company — Energy Sources and Resource Planning — Generation Facilities — Coal-Fueled Generating Facilities — Four Corners” in Item 1 for additional information about the Four Corners right-of-way and lease matters.

Certain portions of our transmission lines are located on Indian lands pursuant to rights-of-way that are effective for specified periods.  Some of these rights-of-way have expired and our renewal applications have not yet been acted upon by the appropriate Indian tribes or federal agencies.  Other rights expire at various times in the future and renewal action by the applicable tribe or federal agencies will be required at that time.  In recent negotiations, certain of the affected Indian tribes have required payments substantially in excess of amounts that we have paid in the past for such rights-of-way.  The ultimate cost of renewal of certain of the rights-of-way for our transmission lines is therefore uncertain.

See “Business of Arizona Public Service Company — Environmental Matters” in Item 1 with regard to pending or threatened litigation and other disputes.

See Note 3 for ACC and FERC-related matters.

See Note 10 for information regarding environmental matters, Superfund–related matters and other disputes. 

Not applicable.

Pinnacle West’s common stock is publicly held and is traded on the New York Stock Exchange under stock symbol PNW.  At the close of business on February 21, 2024, Pinnacle West’s common stock was held of record by approximately 14,476 shareholders.

APS’s common stock is wholly-owned by Pinnacle West and is not listed for trading on any stock exchange.  The sole holder of APS’s common stock, Pinnacle West, is entitled to dividends when and as declared out of legally available funds.  At December 31, 2023, APS did not have any outstanding preferred stock.

This graph compares the cumulative total shareholder return on Pinnacle West’s common stock during the five years ended December 31, 2023, to the cumulative total returns on the S&P 500 Index and the Edison Electric Index. The comparison assumes that $100 was invested on December 31, 2018, in Pinnacle West’s common stock and in each of the indices shown and that all of the dividends were reinvested.

The following discussion should be read in conjunction with Pinnacle West’s Consolidated

Our strategy is to create a sustainable energy future for Arizona that delivers shareholder value and shared value by serving our customers with reliable, affordable, and clean energy.

Planned investments will support operating and maintaining the grid, updating technology, accommodating customer growth, and enabling more renewable energy resources. To prioritize reliability and meet substantial growth in residential and commercial energy needs, APS has developed a future-focused, strategic transmission plan. This Ten-Year Plan includes five critical transmission projects that comprise the APS strategic transmission portfolio, which represents a significant upgrade to APS’s transmission system. These five projects, along with other projects included in the Ten-Year Plan, are intended to support growing energy needs, strengthen reliability, and allow for the connection of new resources.

Maintaining reliability and affordability for our customers during the clean energy transition is fundamental to our strategy. As a critical partner to the large quantity of renewables and energy storage we are adding to our system, natural gas generation will play an important role in maintaining reliability for our customers. One example is the 2019 addition of new natural gas units at the modernized Ocotillo Power Plant to provide cleaner-running and more efficient units. Additionally, efficiency improvements to gas units at the Redhawk and Sundance Power Plants are planned for completion prior to the summer of 2024.

As part of a balanced energy portfolio, these flexible resource additions support reliability by responding quickly to the variability of solar generation and delivering energy in the late afternoon and early evening when solar production declines as the sun sets and customer demand peaks. Complementary to and in support of the transition to renewable resources, APS continues to evaluate options to meet growing energy demand and ensure grid reliability, including through upgrades to and/or modernization of additional existing natural gas facilities.

In October 2021, APS announced plans to evaluate regional market solutions as part of the informal Western Markets Exploratory Group (“WMEG”). As a member of WMEG, APS is exploring the potential for a staged approach to new market services, including day-ahead energy sales, transmission system expansion, and other power supply and grid solutions consistent with existing state regulations. WMEG hopes to identify market solutions that can help achieve carbon reduction goals while supporting reliable, affordable service for customers. APS is unable to predict the outcome of these discussions.

APS will go live with a new Energy Management System (“EMS”) in March of 2024. The new EMS will better allow for integration of the renewable and energy storage assets into the APS’s generation resources. This integration will allow APS to maximize the flexibility of our resources and fully engage in the Energy Imbalance Market. It also better positions APS to participate in market opportunities that may develop through the next decade.

APS continues to focus on mitigating the cost pressures related to the current inflationary environment. Overall inflation grew by 2.7% in Phoenix and 3.4% nationally during 2023. In 2022, overall inflation grew by 9.5% in Phoenix and 6.5% nationally. The impacts from inflation have varied across separate categories of APS’s spending, including increases of up to 15% in 2023. APS has seen inflationary impacts in supply constrained categories related to electrical equipment, such as transformers,

APS’s customer affordability initiative includes internal opportunities, such as training and mentoring employees on identifying efficiency opportunities; maintaining an inventory to take advantage of lower pricing and avoid expediting fees; entering into long-term contracts to hedge against price volatility, which has allowed APS to mitigate against procurement spend areas such as transformers; and implementing automation technologies to enhance efficiencies and increase data-oriented decision making.

There are also external opportunities under APS’s customer affordability initiative, such as APS’s participation in the Western Energy Imbalance Market (“WEIM”). WEIM continues to be a tool for creating savings for APS’s customers from the real-time, voluntary market. APS continues to expect that its participation in WEIM will lower its fuel and purchased-power costs, improve situational awareness for system operations in the Western Interconnection power grid, and improve integration of APS’s renewable resources. APS is participating in market design and tariff development of Markets+, a day-ahead and real-time market offering from Southwest Power Pool. APS also participated in the design and drafting of the tariff for the CAISO’s Extended Day-Ahead Market, which was approved by FERC in December 2023. In addition, APS is participating in the Western Resource Adequacy Program administered by Western Power Pool. These efforts are driven by three objectives of reducing customer cost, improving reliability, and incorporating more clean energy on APS’s system.

In terms of generation affordability, every three years, APS performs a comprehensive study, called an Integrated Resource Plan, to identify how much energy our customers will need over the next 15 years and what resources will be used to meet those needs. In developing the IRP, APS considers factors that include how much economic growth is expected, what new technologies might be available and how weather can impact the demand for energy. These inputs are then used to develop a plan that prioritizes reliability, affordability, and a clean, balanced energy mix.

APS’s clean energy commitment consists of three parts:

APS’s ability to successfully execute its clean energy commitment depends upon a number of important external factors, including a supportive regulatory environment, sales and customer growth, development of clean energy technologies, and continued access to capital markets among others.

APS has a diverse portfolio of existing and planned renewable resources, including solar, wind, geothermal, biomass and biogas, that supports our commitment to clean energy. This commitment is already strengthened by Palo Verde, one of the nation’s largest carbon-free, clean energy resource, which provides the foundation for reliable and affordable service for APS customers. APS’s longer-term clean energy strategy includes pursuing the right mix of purchased power contracts for new facilities, procurement of new facilities to be owned by APS, and the ongoing development of distributed energy resources. This balance will ensure an appropriately diverse portfolio designed to achieve the same operational reliability and customer affordability as APS’s near-term strategies. In addition, APS is actively seeking to include future facility purchase options in its PPAs that will enable investments with greater financial flexibility.

As noted above, on June 30, 2023, APS issued the 2023 RFP seeking approximately 1,000 MW of reliable capacity, including at least 700 MW of renewable resources, including energy storage, with a focus on in-service dates between 2026 and 2028.

APS currently plans to install more than 2,700 MW of utility scale energy storage by 2026, including through energy storage projects under PPAs and AZ Sun retrofits as well as through resources solicited through current and future RFPs.

The following table summarizes the resources in APS’s energy storage portfolio that are in operation and under development as of December 31, 2023. Agreements for the development and completion of future resources are subject to various conditions.

On May 12, 2022, Arizona’s three public universities, along with four Arizona energy providers, including APS, announced the formation of a new, interdisciplinary coalition, called the Arizona Center for a Carbon Neutral Economy (“AzCaNE”), with the goal of achieving a carbon neutral economy in Arizona. AzCaNE’s first action was to pursue an Arizona-led approach to securing regional clean hydrogen hub

To address the emergence of artificial intelligence technology risk and opportunities, APS has developed a cross functional governance structure with leadership and experts from our information technology, cybersecurity, human resources, ethics, supply chain, legal, and nuclear generation teams. This cross functional structure will assess both the opportunities and risks during the technology intake process to ensure compliance with data security and reliability requirements, while observing market trends in this rapidly evolving area.

The principal provisions of APS’s application were: