Retirement Plans and Other Benefits

12 Months Ended

Dec. 31, 2011

Retirement Plans and Other Benefits

Retirement Plans and Other Benefits

8.Retirement Plans and Other Benefits

Pinnacle West sponsors a qualified defined benefit and account balance pension plan (The Pinnacle West Capital Corporation Retirement Plan) and a non-qualified supplemental excess benefit retirement plan for the employees of Pinnacle West and its subsidiaries.  All new employees participate in the account balance plan.  Defined benefit plans specify the amount of benefits a plan participant is to receive using information about the participant.  The pension plan covers nearly all employees.  The supplemental excess benefit retirement plan covers officers of the Company and highly compensated employees designated for participation by the Board of Directors.  Our employees do not contribute to the plans.  Generally, we calculate the benefits based on age, years of service and pay.

Pinnacle West also sponsors another postretirement benefit plan (Pinnacle West Capital Corporation Group Life and Medical Plan) for the employees of Pinnacle West and its subsidiaries.  This plan provides medical and life insurance benefits to retired employees.  Employees must retire to become eligible for these retirement benefits, which are based on years of service and age.  For the medical insurance plan, retirees make contributions to cover a portion of the plan costs.  For the life insurance plan, retirees do not make contributions.  We retain the right to change or eliminate these benefits.

Pinnacle West uses a December 31 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.  See Note 14 for discussion of how fair values are determined.  Due to subjective and complex judgments, which may be required in determining fair values, actual results could differ from the results estimated through the application of these methods.

A significant portion of the changes in the actuarial gains and losses of our pension and postretirement plans is attributable to APS and therefore is recoverable in rates.  Accordingly, these changes are recorded as a regulatory asset.  In its 2009 retail rate case settlement, APS received approval to defer a portion of pension and other postretirement benefit cost increases incurred in 2011 and 2012.  During 2011, we deferred pension and other postretirement benefit costs of approximately $12 million.

On March 23, 2010, the President signed into law comprehensive health care reform legislation under the Patient Protection and Affordable Care Act (the “Act”).  One feature of the Act is the elimination of the tax deduction for prescription drug costs that are reimbursed as part of the Medicare Part D subsidy.  Although this tax increase does not take effect until 2013, we are required to recognize the full accounting impact in our financial statements in the period in which the Act is signed.  In accordance with accounting for regulated companies, the loss of this deduction is substantially offset by a regulatory asset that will be recovered through future electric revenues.  In the first quarter of 2010, Pinnacle West charged regulatory assets for a total of $42 million, with a corresponding increase in accumulated deferred income tax liabilities, to reflect the impact of this change in tax law.

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, billed to electric plant participants or charged to the regulatory asset) (dollars in thousands):

	Pension									Other Benefits
	2011			2010			2009			2011			2010			2009
Service cost-benefitsearned during theperiod	$	57,605		$	59,064		$	54,288		$	21,856		$	19,236		$	18,285
Interest cost on benefitobligation	124,727			122,724			118,282			46,807			42,428			39,180
Expected return on planassets	(133,678		)	(124,161		)	(116,535		)	(41,536		)	(39,257		)	(34,428		)
Amortization of:
Transitionobligation	—			—			—			452			452			3,005
Prior servicecost (credit)	1,400			1,705			2,080			(179		)	(539		)	(125		)
Net actuarialloss	25,956			18,833			14,216			15,015			10,317			10,320
Net periodic benefitcost	$	76,010		$	78,165		$	72,331		$	42,415		$	32,637		$	36,237
Portion of cost chargedto expense	$	29,312		$	37,933		$	36,484		$	15,208		$	15,839		$	18,278

The following table shows the plans’ changes in the benefit obligations and funded status for the years 2011 and 2010 (dollars in thousands):

	Pension						Other Benefits
	2011			2010			2011			2010
Change in Benefit Obligation
Benefit obligation at January 1	$	2,345,060		$	2,074,131		$	827,897		$	700,535
Service cost	57,605			59,064			21,856			19,236
Interest cost	124,727			122,724			46,807			42,428
Benefit payments	(104,257		)	(93,776		)	(24,877		)	(20,421		)
Actuarial loss	275,991			183,365			171,674			98,094
Plan amendments	—			(448		)	3,737			(11,975		)
Benefit obligation at December 31	2,699,126			2,345,060			1,047,094			827,897
Change in Plan Assets
Fair value of plan assets atJanuary 1	1,775,596			1,461,808			567,410			490,455
Actual return on plan assets	162,042			190,380			58,367			60,255
Employer contributions	—			200,000			18,769			16,700
Benefit payments	(87,088		)	(76,592		)	(35,883		)	—
Fair value of plan assets atDecember 31	1,850,550			1,775,596			608,663			567,410
Funded Status at December 31	$	(848,576	)	$	(569,464	)	$	(438,431	)	$	(260,487	)

The following table shows the projected benefit obligation and the accumulated benefit obligation for pension plans with an accumulated obligation in excess of plan assets as of December 31, 2011 and 2010 (dollars in thousands):

	2011		2010
Projected benefit obligation	$	2,699,126	$	2,345,060
Accumulated benefit obligation	2,396,575		2,065,091
Fair value of plan assets	1,850,550		1,775,596

The following table shows the amounts recognized on the Consolidated Balance Sheets as of December 31, 2011 and 2010 (dollars in thousands):

	Pension						Other Benefits
	2011			2010			2011			2010
Current liability	$	(18,097	)	$	(16,830	)	$	—		$	—
Noncurrent liability	(830,479		)	(552,634		)	(438,431		)	(260,487		)
Net amount recognized	$	(848,576	)	$	(569,464	)	$	(438,431	)	$	(260,487	)

The following table shows the details related to accumulated other comprehensive loss as of December 31, 2011 and 2010 (dollars in thousands):

	Pension						Other Benefits
	2011			2010			2011			2010
Net actuarial loss	$	724,605		$	502,938		$	400,892		$	261,071
Prior service cost (credit)	4,312			5,712			(655		)	(4,571		)
Transition obligation	—			—			452			903
APS’s portion recorded as a regulatoryasset	(632,099		)	(419,774		)	(390,521		)	(249,255		)
Income tax benefit	(38,243		)	(35,106		)	(3,296		)	(2,498		)
Accumulated other comprehensive loss	$	58,575		$	53,770		$	6,872		$	5,650

The following table shows the estimated amounts that will be amortized from accumulated other comprehensive loss and regulatory assets into net periodic benefit cost in 2012 (dollars in thousands):

	Pension		Other Benefits
Net actuarial loss	$	43,070	$	23,638
Prior service cost (credit)	1,143		(179		)
Transition obligation	—		452
Total amounts estimated to be amortized from accumulated other comprehensive loss and regulatory assets in 2012	$	44,213	$	23,911

The following table shows the weighted-average assumptions used for both the pension and other benefits to determine benefit obligations and net periodic benefit costs:

	Benefit ObligationsAs of December 31,				Benefit CostsFor the Years Ended December 31,
	2011		2010		2011		2010		2009
Discount rate-pension	4.42	%	5.31	%	5.31	%	5.90	%	6.11	%
Discount rate-other benefits	4.59	%	5.49	%	5.49	%	6.00	%	6.13	%
Rate of compensationincrease	4.00	%	4.00	%	4.00	%	4.00	%	4.00	%
Expected long-term returnon plan assets	N/A		N/A		7.75	%	8.25	%	8.25	%
Initial health care cost trendrate	7.50	%	8.00	%	8.00	%	8.00	%	8.00	%
Ultimate health care costtrend rate	5.00	%	5.00	%	5.00	%	5.00	%	5.00	%
Number of years to ultimatetrend rate	4		4		4		4		4

In selecting the pretax expected long-term rate of return on plan assets we consider past performance and economic forecasts for the types of investments held by the plan.  For the year 2012, we are assuming a 7.75% long-term rate of return on plan assets, which we believe is reasonable given our asset allocation in relation to historical and expected performance.

Assumed health care cost trend rates above have a significant effect on the amounts reported for the health care plans.  In selecting our health care trend rates, we consider past performance and forecasts of health care costs.  A one percentage point change in the assumed initial and ultimate health care cost trend rates would have the following effects (dollars in millions):

	1% Increase		1% Decrease
Effect on other postretirement benefits expense, after consideration of amounts capitalized or billed to electric plant participants	$	11	$	(9	)
Effect on service and interest cost components of net periodic other postretirement benefit costs	14		(11		)
Effect on the accumulated other postretirement benefit obligation	187		(148		)

Plan Assets

The Board of Directors has delegated oversight of the plans’ assets to an Investment Management Committee, which has adopted an investment policy.  The investment policy’s overall strategy is to achieve an adequate level of trust assets relative to the benefit obligations.  To achieve this objective, the plans’ investment policies provide for mixes of investments including long-term fixed income assets and return-generating assets.  Long-term fixed income assets are designed to offset changes in benefit obligations due to changes in discount rates and inflation.  Return-generating assets are intended to provide a reasonable long-term rate of investment return with a prudent level of volatility.  The determination of total allocation between return-generating and long-term fixed income assets is reviewed on at least an annual basis.  Other investment strategies include the external management of the plans’ assets, and the prohibition of investments in Pinnacle West securities.

Long-term fixed income assets consist primarily of fixed income debt securities issued by the U.S. Treasury, other government agencies, and corporations.  Long-term fixed income assets may also include interest rate swaps, U.S. Treasury futures and other instruments.  The investment policy does not provide for a specific mix of long-term fixed income assets, but does require the average credit rating of such assets to be considered upper medium grade or above.  The 2011 year-end long-term fixed income asset strategy focused on investments in corporate bonds of primarily investment-grade U.S. issuers and long-term treasuries, with total long-term fixed income assets representing 46% of total pension plan assets and 46% of other benefit plans assets.

Return-generating assets in the pension plan and other benefit plans target a mix of approximately 64% U.S. equities, 27% international equities, and 9% alternative investments.  The 2011 year-end U.S. equity holdings were invested primarily in large-cap companies in diverse industries.  International equities include investments in emerging and developing markets.  Return-generating assets also include investments in securities through commingled funds in common and collective trusts.  Alternative investments primarily include investments in real estate.  The 2011 year-end return-generating assets represented 54% of total pension plan assets and 54% of other benefit plans’ assets.

See Note 14 for a discussion on the fair value hierarchy and how fair value methodologies are applied.  The plans invest directly in fixed income and equity securities, in addition to investing indirectly in equity securities and real estate through the use of common and collective  trusts.  Equity securities held directly by the plans are valued using quoted active market prices from the published exchange on which the equity security trades, and are classified as Level 1.  Fixed income securities issued by the U.S. Treasury held directly by the plans are valued using quoted active market prices, and are classified as Level 1.  Fixed income securities issued by corporations, municipalities, and other agencies are primarily valued using quoted inactive market prices, or quoted active market prices for similar securities, or by utilizing calculations which incorporate observable inputs such as yield and interest rate curves.  These instruments are classified as Level 2.

The common and collective trusts, which are similar to mutual funds, are maintained by banks or investment companies and hold certain investments in accordance with a stated set of objectives (such as tracking the performance of the S&P 500 index).  The common and collective equity trusts are valued using net asset value (“NAV”), which is derived from the quoted active market prices of the underlying securities.  The  plans’ common and collective real estate trust is valued using NAV, which is  derived from the appraised values of the trust’s underlying real estate assets.  As of December 31, 2011 the plans were able to transact in the common and collective trusts at NAV and accordingly classify these investments as Level 2. Because the trust’s shares are offered to a limited group of investors, they are not considered to be traded in an active market.

The plans’ trustee provides valuation of our plan assets by using pricing services that utilize methodologies described to determine fair market value.  We assess these valuations and verify that pricing can be supported by actual recent market transactions. Additionally, we obtain and review independent audit reports on the trustee’s internal operating controls and valuation processes.

The fair value of Pinnacle West’s pension plan and other postretirement benefit plan assets at December 31, 2011, by asset category, are as follows (dollars in thousands):

	Quoted Pricesin ActiveMarkets forIdenticalAssets(Level 1)		Significant Other Observable Inputs (Level 2)		Other (a)		Balance at December 31, 2011
Pension Plan:
Assets:
Cash and cash equivalents	$	1,441	$	—	$	—	$	1,441
Fixed Income Securities:
Corporate	—		584,619		—		584,619
U.S. Treasury	207,862		—		—		207,862
Other (b)	—		62,906		—		62,906
Equities:
U.S. Companies	436,393		—		—		436,393
International Companies	118,263		—		—		118,263
Common and collective trusts:
U.S. Equities	—		139,321		—		139,321
International Equities	—		156,407		—		156,407
Real estate	—		106,147		—		106,147
Short-term investments and other	—		29,913		7,278		37,191
Total Pension Plan	$	763,959	$	1,079,313	$	7,278	$	1,850,550
Other Benefits:
Assets:
Cash and cash equivalents	$	160	$	—	$	—	$	160
Fixed Income Securities:
Corporate	—		148,417		—		148,417
U.S. Treasury	103,321		—		—		103,321
Other (b)	—		30,105		—		30,105
Equities:
U.S. Companies	179,235		—		—		179,235
International Companies	22,486		—		—		22,486
Common and collective trusts:
U.S. Equities	—		52,507		—		52,507
International Equities	—		53,504		—		53,504
Real Estate	—		8,446		—		8,446
Short-term investments and other	—		8,516		1,966		10,482
Total Other Benefits	$	305,202	$	301,495	$	1,966	$	608,663

(a)Represents plan receivables and payables.

(b)This category consists primarily of debt securities issued by municipalities.

The fair value of Pinnacle West’s pension plan and other postretirement benefit plan assets at December 31, 2010, by asset category, are as follows (dollars in thousands):

	Quoted Pricesin ActiveMarkets forIdenticalAssets(Level 1)		Significant Other Observable Inputs (Level 2)		Other (a)		Balance at December 31, 2010
Pension Plan:
Assets:
Cash and cash equivalents	$	2,375	$	—	$	—	$	2,375
Fixed Income Securities:
Corporate	—		508,946		—		508,946
U.S. Treasury	163,313		—		—		163,313
Other (b)	—		53,358		—		53,358
Equities:
U.S. Companies	462,973		—		—		462,973
International Companies	129,094		—		—		129,094
Other investments	—		5,549		8,071		13,620
Common and collective trusts:
U.S. Equities	—		146,705		—		146,705
International Equities	—		177,114		—		177,114
Real estate	—		92,454		—		92,454
Short-term investments	—		25,644		—		25,644
Total Pension Plan	$	757,755	$	1,009,770	$	8,071	$	1,775,596
Other Benefits:
Assets:
Cash and cash equivalents	$	243	$	—	$	—	$	243
Fixed Income Securities:
Corporate	—		118,660		—		118,660
U.S. Treasury	74,049		—		—		74,049
Other (b)	—		24,456		—		24,456
Equities:
U.S. Companies	179,655		—		—		179,655
International Companies	25,121		—		—		25,121
Other investments	—		365		2,034		2,399
Common and collective trusts:
U.S. Equities	—		54,144		—		54,144
International Equities	—		61,455		—		61,455
Real Estate	—		7,357		—		7,357
Short-term investments	—		19,871		—		19,871
Total Other Benefits	$	279,068	$	286,308	$	2,034	$	567,410

(a)Represents plan receivables and payables.

(b)This category consists primarily of municipal debt securities issued by municipalities.

The following table shows the changes in fair value for assets that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2010 (dollars in thousands):

	Year EndedDecember 31, 2010
Common and Collective Trusts — Real Estate	Pension			Other Benefits
Beginning balance at January 1	$	64,212		$	6,504
Actual return on assets still held (a)	(204		)	(23		)
Purchases, sales, and settlements	18,003			45
Transfers in and/or out of Level 3 (b)	(82,011		)	(6,526		)
Ending balance at December 31	$	—		$	—

(a)The return for December 31, 2010 represents the return on assets held as of March 31, 2010, the beginning of the period in which all the assets were transferred out of Level 3.

(b)Transfers into and out of Level 3 are measured at the beginning of the period in which the transfer occurs.  Transfers out of Level 3 during 2010 relate to our Real Estate Common and Collective Trust being transferred to a Level 2 investment.  During 2009 the Real Estate Common and Collective Trust had special redemption restrictions in place, which limited our ability to transact at the trust’s NAV.  During 2010 these special redemption restrictions were lifted, and in 2010 and 2011 we were able to transact at the NAV according to the trust’s contractual redemption policy.

The plans had no investments valued using significant unobservable inputs (Level 3) for the year ended December 31, 2011.

Contributions

The required minimum contribution to our pension plan is approximately $65 million in 2012, approximately $160 million in 2013 and approximately $160 million in 2014.  In 2011, we did not make a contribution to our pension plan.  The contribution to our other postretirement benefit plans in 2011 was approximately $19 million.  The contributions to our other postretirement benefit plans for 2012, 2013 and 2014 are expected to be approximately $20 million each year.  APS and other subsidiaries fund their share of the contributions.  APS’s share of the pension plan contribution was $195 million in 2010.  APS’s share of the contributions to the other postretirement benefit plan were $19 million in 2011, $16 million in 2010, and $15 million in 2009.

Estimated Future Benefit Payments

Benefit payments, which reflect estimated future employee service, for the next five years and the succeeding five years thereafter are estimated to be as follows (dollars in thousands):

Year	Pension		Other Benefits (a)
2012	$	113,075	$	27,610
2013	122,750		30,562
2014	132,302		33,451
2015	141,516		36,489
2016	154,379		39,525
Years 2017-2021	941,377		246,091

(a)The estimated future other benefit payments take into account the Medicare Part D subsidy.

Electric plant participants contribute to the above amounts in accordance with their respective participation agreements.

Employee Savings Plan Benefits

Pinnacle West sponsors a defined contribution savings plan for eligible employees of Pinnacle West and its subsidiaries.  In 2011, costs related to APS’s employees represented 99% of the total cost of this plan.  In a defined contribution savings plan, the benefits a participant receives result from regular contributions participants make to their own individual account, the Company’s matching contributions and earnings or losses on their investments.  Under this plan, the Company matches a percentage of the participants’ contributions in cash which is then invested in the same investment mix as participants elect to invest their own future contributions.  Pinnacle West recorded expenses for this plan of approximately $8 million for 2011, $9 million for 2010 and $9 million for 2009.