Retirement Plans and Other 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 plan for the employees of Pinnacle West and our subsidiaries. Pinnacle West uses a December 31 measurement date for its pension and other postretirement benefit plans. On September 30, 2014 Pinnacle West announced plan design changes to the other postretirement benefit plan, which required an interim remeasurement of the benefit obligation for the plan (see discussion below). The market-related value of our plan assets is their fair value at the measurement dates.

Certain pension and other postretirement benefit costs in excess of amounts recovered in electric retail rates were deferred in 2011 and 2012 as a regulatory asset for future recovery, pursuant to APS’s 2009 retail rate case settlement. Pursuant to this order, we began amortizing the regulatory asset over three years beginning in July 2012. We amortized approximately $2 million for the three months ended September 30, 2014 and 2013 and $6 million for the nine months ended September 30, 2014 and 2013, respectively. 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 or amortized to the regulatory asset) (dollars in millions):



	Pension Benefits												Other Benefits
	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013			2014			2013			2014			2013
Service cost — benefits earned during the period	$	13		$	16		$	40		$	48		$	5		$	6		$	14		$	18
Interest cost on benefit obligation	32			28			97			84			12			10			35			31
Expected return on plan assets	(39		)	(36		)	(119		)	(110		)	(13		)	(11		)	(38		)	(34		)
Amortization of:
Prior service cost	—			—			—			1			—			—			—			—
Net actuarial loss	3			10			8			30			—			3			—			8
Net periodic benefit cost	$	9		$	18		$	26		$	53		$	4		$	8		$	11		$	23
Portion of cost charged to expense	$	5		$	10		$	16		$	29		$	3		$	5		$	8		$	14

Other Postretirement Benefit Plan Remeasurement

On September 30, 2014 Pinnacle West announced plan design changes to the other postretirement benefit plan, which required an interim remeasurement of the benefit obligation for the plan. Effective January 1, 2015, those eligible retirees and dependents over age 65 and on Medicare can choose to be enrolled in a Health Reimbursement Arrangement (HRA). This will allow post-65 retirees to purchase a Medicare supplement plan on the private exchange network. The remeasurement of the benefit obligation included updating the assumptions listed in the table following and asset values. The remeasurement is expected to reduce net periodic benefit costs in 2014 by $10 million ($5 million of which will reduce expense), which will be recognized during the fourth quarter of 2014. The remeasurement also resulted in a decrease in Pinnacle West’s other postretirement benefit obligation of $316 million which was offset by the related regulatory asset and accumulated other comprehensive income. As a result of this reduction, the other postretirement benefit obligation, and related regulatory asset, have been reduced to the extent that Pinnacle West will now reflect an asset for other postretirement benefits and a related regulatory liability with balances at September 30, 2014 of $181 million and $254 million, respectively.

The following table provides the assumptions used for the remeasurement at September 30, 2014:



Discount rate	4.41	%
Long-term rate of return	4.25	%
Initial healthcare cost trend rate (pre-65 participants)	7.50	%
Ultimate healthcare cost trend rate (pre-65 participants)	5.00	%
Number of years to ultimate trend rate	4
Medical cost subsidy trend rate (post-65 participants)	5.00	%

Because of the plan changes, the Company is currently in the process of seeking IRS and regulatory approval to move approximately $100 million of the other postretirement benefit trust assets into a new account to pay for active union employee medical costs.

Contributions

We have made voluntary contributions of $175 million to our pension plan in 2014. The minimum contributions for the pension plan total $141 million for the next three years under the Moving Ahead for Progress in the 21st Century Act (zero in 2014, $19 million in 2015, and $122 million in 2016). We expect to make contributions to the pension plan up to $100 million in 2015 and up to $25 million in 2016.