UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to          

Commission File Number	Exact Name of Each Registrant as specified in its charter; State of Incorporation; Address; and Telephone Number			IRS Employer Identification No.
1-8962	PINNACLE WEST CAPITAL CORPORATION			86-0512431
	(an Arizona corporation)
	400 North Fifth Street, P.O. Box 53999
	Phoenix	Arizona	85072-3999
	(602)	250-1000
1-4473	ARIZONA PUBLIC SERVICE COMPANY			86-0011170
	(an Arizona corporation)
	400 North Fifth Street, P.O. Box 53999
	Phoenix	Arizona	85072-3999
	(602)	250-1000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	PNW	The New York Stock Exchange

Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

PINNACLE WEST CAPITAL CORPORATION	Yes	☒	No	☐
ARIZONA PUBLIC SERVICE COMPANY	Yes	☒	No	☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

PINNACLE WEST CAPITAL CORPORATION	Yes	☒	No	☐
ARIZONA PUBLIC SERVICE COMPANY	Yes	☒	No	☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 PINNACLE WEST CAPITAL CORPORATION

Large accelerated filer	☒	Accelerated filer	☐	Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

ARIZONA PUBLIC SERVICE COMPANY

Large accelerated filer	☐	Accelerated filer	☐	Non-accelerated filer	☒	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether each registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

PINNACLE WEST CAPITAL CORPORATION	Yes	☐	No	☒
ARIZONA PUBLIC SERVICE COMPANY	Yes	☐	No	☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

PINNACLE WEST CAPITAL CORPORATION	Number of shares of common stock, no par value, outstanding as of October 31, 2019:	112,410,824
ARIZONA PUBLIC SERVICE COMPANY	Number of shares of common stock, $2.50 par value, outstanding as of October 31, 2019:	71,264,947

Arizona Public Service Company meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format allowed under that General Instruction.

TABLE OF CONTENTS

		Page
Forward-Looking Statements		2
Part I		3
Item 1.	Financial Statements	3
	Pinnacle West Capital Corporation	4
	Arizona Public Service Company	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	72
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	98
Item 4.	Controls and Procedures	98
Part II		100
Item 1.	Legal Proceedings	100
Item 1A.	Risk Factors	100
Item 5.	Other Information	100
Item 6.	Exhibits	102
Signatures		104

This combined Form 10-Q is separately provided by Pinnacle West Capital Corporation ("Pinnacle West") and Arizona Public Service Company ("APS").  Any use of the words "Company," "we," and "our" refer to Pinnacle West.  Each registrant is providing on its own behalf all of the information contained in this Form 10-Q that relates to such registrant and, where required, its subsidiaries.  Except as stated in the preceding sentence, neither registrant is providing any information that does not relate to such registrant, and therefore makes no representation as to any such information.  The information required with respect to each company is set forth within the applicable items.  Item 1 of this report includes Condensed Consolidated Financial Statements of Pinnacle West and Condensed Consolidated Financial Statements of APS.  Item 1 also includes Combined Notes to Condensed Consolidated Financial Statements.

1

FORWARD-LOOKING STATEMENTS

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" 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 Part I, Item 1A of the Pinnacle West/APS Annual Report on Form 10-K for the fiscal year ended December 31, 2018 ("2018 Form 10-K"), Part II, Item 1A of this report and in Part I, Item 2 — "Management’s Discussion and Analysis of Financial Condition and Results of Operations" of this report, these factors include, but are not limited to:

• our ability to manage capital expenditures and operations and maintenance costs while maintaining reliability and customer service levels;

• variations in demand for electricity, including those due to weather, seasonality, the general economy, customer and sales growth (or decline), the effects of energy conservation measures and distributed generation, and technological advancements;

• power plant and transmission system performance and outages;

• competition in retail and wholesale power markets;

• regulatory and judicial decisions, developments and proceedings;

• new legislation, ballot initiatives and regulation, including those relating to environmental requirements, regulatory policy, nuclear plant operations and potential deregulation of retail electric markets;

• fuel and water supply availability;

• our ability to achieve timely and adequate rate recovery of our costs, including returns on and of debt and equity capital investment;

• our ability to meet renewable energy and energy efficiency mandates and recover related costs;

• risks inherent in the operation of nuclear facilities, including spent fuel disposal uncertainty;

• current and future economic conditions in Arizona, including in real estate markets;

• the direct or indirect effect on our facilities or business from cybersecurity threats or intrusions, data security breaches, terrorist attack, physical attack, severe storms, droughts, or other catastrophic events, such as fires, explosions, pandemic health events or similar occurrences;

• the development of new technologies which may affect electric sales or delivery;

• the cost of debt and equity capital and the ability to access capital markets when required;

• environmental, economic and other concerns surrounding coal-fired generation, including regulation of greenhouse gas emissions;

• volatile fuel and purchased power costs;

• the investment performance of the assets of our nuclear decommissioning trust, pension, and other postretirement benefit plans and the resulting impact on future funding requirements;

• the liquidity of wholesale power markets and the use of derivative contracts in our business;

• potential shortfalls in insurance coverage;

• new accounting requirements or new interpretations of existing requirements;

• generation, transmission and distribution facility and system conditions and operating costs;

• the ability to meet the anticipated future need for additional generation and associated transmission facilities in our region;

• the willingness or ability of our counterparties, power plant participants and power plant land owners to meet contractual or other obligations or extend the rights for continued power plant operations; and

• restrictions on dividends or other provisions in our credit agreements and Arizona Corporation Commission ("ACC") orders. 

These and other factors are discussed in the Risk Factors described in Part I, Item 1A of our 2018 Form 10-K, in Part II, Item 1A of this report, and in Part I, Item 2 — "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.

2

PART I — FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

	Page
Pinnacle West Condensed Consolidated Statements of Income for Three and Nine Months Ended September 30, 2019 and 2018	4
Pinnacle West Condensed Consolidated Statements of Comprehensive Income for Three and Nine Months Ended September 30, 2019 and 2018	5
Pinnacle West Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018	6
Pinnacle West Condensed Consolidated Statements of Cash Flows for Nine Months Ended September 30, 2019 and 2018	8
Pinnacle West Condensed Consolidated Statements of Changes in Equity for Three and Nine Months Ended September 30, 2019 and 2018	9
APS Condensed Consolidated Statements of Income for Three and Nine Months Ended September 30, 2019 and 2018	11
APS Condensed Consolidated Statements of Comprehensive Income for Three and Nine Months Ended September 30, 2019 and 2018	12
APS Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018	13
APS Condensed Consolidated Statements of Cash Flows for Nine Months Ended September 30, 2019 and 2018	15
APS Condensed Consolidated Statements of Changes in Equity for Three and Nine Months Ended September 30, 2019 and 2018	16
Combined Notes to Condensed Consolidated Financial Statements	18
Note 1. Consolidation and Nature of Operations	18
Note 2. Revenue	19
Note 3. Long-Term Debt and Liquidity Matters	20
Note 4. Regulatory Matters	22
Note 5. Retirement Plans and Other Postretirement Benefits	38
Note 6. Palo Verde Sale Leaseback Variable Interest Entities	39
Note 7. Derivative Accounting	40
Note 8. Commitments and Contingencies	45
Note 9. Other Income and Other Expense	53
Note 10. Earnings Per Share	54
Note 11. Fair Value Measurements	54
Note 12. Investment in Nuclear Decommissioning Trust and Other Special Use Funds	60
Note 13. New Accounting Standards	64
Note 14. Changes in Accumulated Other Comprehensive Loss	65
Note 15. Income Taxes	67
Note 16. Leases	68

3

PINNACLE WEST CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

(dollars and shares in thousands, except per share amounts)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
OPERATING REVENUES (NOTE 2)	$	1,190,787		$	1,268,034		$	2,800,818		$	2,934,871
OPERATING EXPENSES
Fuel and purchased power	344,862			389,936			817,672			844,133
Operations and maintenance	238,582			246,545			711,759			780,624
Depreciation and amortization	149,450			145,971			445,531			436,232
Taxes other than income taxes	53,809			51,375			163,989			158,582
Other expenses	794			900			1,904			8,497
Total	787,497			834,727			2,140,855			2,228,068
OPERATING INCOME	403,290			433,307			659,963			706,803
OTHER INCOME (DEDUCTIONS)
Allowance for equity funds used during construction	5,917			12,259			24,677			39,411
Pension and other postretirement non-service credits - net	5,752			12,449			17,240			37,314
Other income (Note 9)	15,191			6,958			35,245			17,541
Other expense (Note 9)	(5,740		)	(5,063		)	(14,448		)	(12,063		)
Total	21,120			26,603			62,714			82,203
INTEREST EXPENSE
Interest charges	57,481			61,605			175,599			181,267
Allowance for borrowed funds used during construction	(3,486		)	(5,913		)	(14,645		)	(18,959		)
Total	53,995			55,692			160,954			162,308
INCOME BEFORE INCOME TAXES	370,415			404,218			561,723			626,698
INCOME TAXES	53,266			84,333			72,764			127,107
NET INCOME	317,149			319,885			488,959			499,591
Less: Net income attributable to noncontrolling interests (Note 6)	4,873			4,873			14,620			14,620
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	312,276		$	315,012		$	474,339		$	484,971
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING — BASIC	112,463			112,148			112,408			112,094
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING — DILUTED	112,746			112,533			112,739			112,499
EARNINGS PER WEIGHTED-AVERAGE COMMON SHARE OUTSTANDING
Net income attributable to common shareholders — basic	$	2.78		$	2.81		$	4.22		$	4.33
Net income attributable to common shareholders — diluted	$	2.77		$	2.80		$	4.21		$	4.31

The accompanying notes are an integral part of the financial statements.

4

PINNACLE WEST CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(dollars in thousands)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
NET INCOME	$	317,149	$	319,885	$	488,959	$	499,591
OTHER COMPREHENSIVE INCOME, NET OF TAX
Derivative instruments:
Net unrealized loss, net of tax expense of $0, $0, $0 and $96 for the respective periods	—		—		—		(96		)
Reclassification of net realized loss, net of tax benefit of $71, $149, $313 and $381 for the respective periods	218		451		950		1,316
Pension and other postretirement benefits activity, net of tax expense (benefit) of $290, $361, $72 and ($754) for the respective periods	880		1,099		220		(2,740		)
Total other comprehensive income (loss)	1,098		1,550		1,170		(1,520		)
COMPREHENSIVE INCOME	318,247		321,435		490,129		498,071
Less: Comprehensive income attributable to noncontrolling interests	4,873		4,873		14,620		14,620
COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	313,374	$	316,562	$	475,509	$	483,451

The accompanying notes are an integral part of the financial statements.

5

PINNACLE WEST CAPITAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(dollars in thousands)

	September 30, 2019			December 31, 2018
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	29,852		$	5,766
Customer and other receivables	361,951			267,887
Accrued unbilled revenues	155,836			137,170
Allowance for doubtful accounts	(7,282		)	(4,069		)
Materials and supplies (at average cost)	293,899			269,065
Fossil fuel (at average cost)	18,527			25,029
Income tax receivable	14,063			—
Assets from risk management activities (Note 7)	817			1,113
Deferred fuel and purchased power regulatory asset (Note 4)	59,474			37,164
Other regulatory assets (Note 4)	138,033			129,738
Other current assets	67,985			56,128
Total current assets	1,133,155			924,991
INVESTMENTS AND OTHER ASSETS
Nuclear decommissioning trust (Notes 11 and 12)	967,673			851,134
Other special use funds (Notes 11 and 12)	243,982			236,101
Other assets	102,116			103,247
Total investments and other assets	1,313,771			1,190,482
PROPERTY, PLANT AND EQUIPMENT
Plant in service and held for future use	19,677,773			18,736,628
Accumulated depreciation and amortization	(6,552,177		)	(6,366,014		)
Net	13,125,596			12,370,614
Construction work in progress	738,492			1,170,062
Palo Verde sale leaseback, net of accumulated depreciation (Note 6)	102,873			105,775
Intangible assets, net of accumulated amortization	266,587			262,902
Nuclear fuel, net of accumulated amortization	141,903			120,217
Total property, plant and equipment	14,375,451			14,029,570
DEFERRED DEBITS
Regulatory assets (Note 4)	1,329,446			1,342,941
Operating lease right-of-use assets (Note 16)	156,050			—
Assets for other postretirement benefits (Note 5)	31,717			46,906
Other	37,976			129,312
Total deferred debits	1,555,189			1,519,159
TOTAL ASSETS	$	18,377,566		$	17,664,202

The accompanying notes are an integral part of the financial statements.

6

PINNACLE WEST CAPITAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(dollars in thousands)

	September 30, 2019			December 31, 2018
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable	$	276,117		$	277,336
Accrued taxes	220,930			154,819
Accrued interest	50,993			61,107
Common dividends payable	—			82,675
Short-term borrowings (Note 3)	57,375			76,400
Current maturities of long-term debt (Note 3)	450,000			500,000
Customer deposits	78,173			91,174
Liabilities from risk management activities (Note 7)	44,349			35,506
Liabilities for asset retirements	12,850			19,842
Operating lease liabilities (Note 16)	26,221			—
Regulatory liabilities (Note 4)	208,022			165,876
Other current liabilities	161,716			184,229
Total current liabilities	1,586,746			1,648,964
LONG-TERM DEBT LESS CURRENT MATURITIES (Note 3)	4,984,996			4,638,232
DEFERRED CREDITS AND OTHER
Deferred income taxes	1,975,989			1,807,421
Regulatory liabilities (Note 4)	2,310,131			2,325,976
Liabilities for asset retirements	736,079			706,703
Liabilities for pension benefits (Note 5)	297,843			443,170
Liabilities from risk management activities (Note 7)	27,305			24,531
Customer advances	192,374			137,153
Coal mine reclamation	165,695			212,785
Deferred investment tax credit	193,118			200,405
Unrecognized tax benefits	6,341			22,517
Operating lease liabilities (Note 16)	52,472			—
Other	166,772			147,640
Total deferred credits and other	6,124,119			6,028,301
COMMITMENTS AND CONTINGENCIES (SEE NOTE 8)
EQUITY
Common stock, no par value; authorized 150,000,000 shares, 112,403,751 and 112,159,896 issued at respective dates	2,654,430			2,634,265
Treasury stock at cost; 57,947 and 58,135 shares at respective dates	(5,117		)	(4,825		)
Total common stock	2,649,313			2,629,440
Retained earnings	2,949,891			2,641,183
Accumulated other comprehensive loss	(46,538		)	(47,708		)
Total shareholders’ equity	5,552,666			5,222,915
Noncontrolling interests (Note 6)	129,039			125,790
Total equity	5,681,705			5,348,705
TOTAL LIABILITIES AND EQUITY	$	18,377,566		$	17,664,202

The accompanying notes are an integral part of the financial statements.

7

PINNACLE WEST CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(dollars in thousands)

	Nine Months Ended September 30,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	488,959		$	499,591
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization including nuclear fuel	500,801			489,861
Deferred fuel and purchased power	(60,911		)	(82,486		)
Deferred fuel and purchased power amortization	38,601			92,397
Allowance for equity funds used during construction	(24,677		)	(39,411		)
Deferred income taxes	83,703			117,571
Deferred investment tax credit	(7,288		)	(7,397		)
Stock compensation	16,486			16,140
Changes in current assets and liabilities:
Customer and other receivables	(91,506		)	(65,203		)
Accrued unbilled revenues	(18,666		)	(83,939		)
Materials, supplies and fossil fuel	(18,332		)	(20,591		)
Income tax receivable	(14,063		)	—
Other current assets	(10,104		)	23,661
Accounts payable	33,899			(11,399		)
Accrued taxes	66,111			78,624
Other current liabilities	(68,927		)	12,852
Change in other long-term assets	(52,276		)	14,120
Change in other long-term liabilities	(27,049		)	(74,628		)
Net cash flow provided by operating activities	834,761			959,763
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures	(857,883		)	(898,455		)
Contributions in aid of construction	34,121			22,611
Allowance for borrowed funds used during construction	(14,645		)	(18,959		)
Proceeds from nuclear decommissioning trust sales and other special use funds	520,996			443,215
Investment in nuclear decommissioning trust and other special use funds	(523,573		)	(461,777		)
Other	8,971			49
Net cash flow used for investing activities	(832,013		)	(913,316		)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt	794,981			295,245
Short-term borrowing and payments — net	(6,025		)	19,800
Short-term debt borrowings	49,000			45,000
Short-term debt repayments	(62,000		)	(32,000		)
Dividends paid on common stock	(243,116		)	(228,037		)
Repayment of long-term debt	(500,000		)	(82,000		)
Common stock equity issuance - net of purchases	(130		)	(1,984		)
Distributions to noncontrolling interests	(11,372		)	(11,372		)
Net cash flow provided by financing activities	21,338			4,652
NET INCREASE IN CASH AND CASH EQUIVALENTS	24,086			51,099
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	5,766			13,892
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	29,852		$	64,991

The accompanying notes are an integral part of the financial statements.

8

PINNACLE WEST CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(unaudited)

(dollars in thousands)

	Three Months Ended September 30, 2019
	Common Stock			Treasury Stock					Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interests		Total
	Shares	Amount		Shares		Amount
Balance, July 1, 2019	112,361,595	$	2,648,234	(58,219	)	$	(5,140	)	$	2,637,620		$	(47,636	)	$	124,165	$	5,357,243
Net income		—				—			312,276			—			4,873		317,149
Other comprehensive income		—				—			—			1,098			—		1,098
Dividends on common stock		—				—			(5		)	—			—		(5		)
Issuance of common stock	42,156	6,196				—			—			—			—		6,196
Purchase of treasury stock (a)		—		(103	)	(10		)	—			—			—		(10		)
Reissuance of treasury stock for stock-based compensation and other		—		375		33			—			—			—		33
Other		—				—			—			—			1		1
Balance, September 30, 2019	112,403,751	$	2,654,430	(57,947	)	$	(5,117	)	$	2,949,891		$	(46,538	)	$	129,039	$	5,681,705

	Three Months Ended September 30, 2018
	Common Stock			Treasury Stock					Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interests		Total
	Shares	Amount		Shares		Amount
Balance, July 1, 2018	111,990,222	$	2,624,672	(17,633	)	$	(1,431	)	$	2,465,402	$	(56,624	)	$	127,415	$	5,159,434
Net income		—				—			315,012		—			4,873		319,885
Other comprehensive income		—				—			—		1,550			—		1,550
Dividends on common stock		—				—			14		—			—		14
Issuance of common stock