Retirement Plans and Other Postretirement Benefits

12 Months Ended

Dec. 31, 2023

Retirement Benefits [Abstract]

Retirement Plans and Other Postretirement Benefits

Retirement Plans and Other Postretirement 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 directly to the plans.  We calculate the benefits based on age, years of service and pay.

Pinnacle West also sponsors other postretirement benefit plans (Pinnacle West Capital Corporation Group Life and Medical Plan and Pinnacle West Capital Corporation Post-65 Retiree Health Reimbursement Arrangement “HRA”) for the employees of Pinnacle West and its subsidiaries.  These plans provide 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 12 for further 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 are recoverable in rates.  Accordingly, these changes are recorded as a regulatory asset or regulatory liability. Our retail rates provide for the inclusion of annual benefit expense, which allows for recovery or return of this regulatory asset/liability. See Note 3.

The following table provides details of the plans’ net periodic benefit costs and the portion of these costs charged to expense (including administrative costs and excluding amounts capitalized as overhead construction or billed to electric plant participants) (dollars in thousands):

	Pension Plans						Other Benefits Plans
	2023		2022		2021		2023		2022		2021
Service cost-benefits earned during the period	$	39,461	$	55,473	$	61,236	$	8,567	$	16,470	$	17,796
Non-service costs (credits):
Interest cost on benefit obligation	153,561		107,492		98,566		22,509		17,491		16,513
Expected return on plan assets	(182,938)		(185,775)		(202,628)		(43,486)		(46,042)		(41,444)
Amortization of:
Prior service credit (a)	—		—		—		(37,789)		(37,789)		(37,705)
Net actuarial (gain)/loss	38,420		17,515		15,948		(9,614)		(12,835)		(10,093)
Net periodic benefit cost/(benefit)	$	48,504	$	(5,295)	$	(26,878)	$	(59,813)	$	(62,705)	$	(54,933)
Portion of cost/(benefit) charged to expense	$	27,029	$	(16,431)	$	(32,743)	$	(43,408)	$	(45,042)	$	(38,657)

(a)    Prior-service costs or credits reflect the impact of modifications to the pension or postretirement plan benefits. The impact of these modifications is amortized over a period which reflects the demographics of the impacted population. In 2014, Pinnacle West made changes to the postretirement benefits offered to Medicare eligible retirees which resulted in prior-service credits. We have been amortizing these prior-serviced credits since 2015 with the last full-year amortization occurring in 2024.

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

	Pension Plans				Other Benefits Plans
	2023		2022		2023		2022
Change in Benefit Obligation
Benefit obligation at January 1	$	2,809,529	$	3,716,824	$	409,461	$	591,841
Service cost	39,461		55,473		8,567		16,470
Interest cost	153,561		107,492		22,509		17,491
Benefit payments	(210,737)		(212,565)		(30,784)		(30,913)
Actuarial (gain) loss	116,249		(857,695)		20,681		(185,428)
Benefit obligation at December 31	2,908,063		2,809,529		430,434		409,461
Change in Plan Assets
Fair value of plan assets at January 1	2,829,485		3,812,041		652,287		872,435
Actual return/(loss) on plan assets	199,098		(787,874)		67,317		(193,807)
Benefit payments	(193,034)		(194,682)		(23,110)		(26,341)
Fair value of plan assets at December 31	2,835,549		2,829,485		696,494		652,287
Funded/(Underfunded) Status at December 31	$	(72,514)	$	19,956	$	266,060	$	242,826

The following table shows information for pension plans with an accumulated obligation in excess of plan assets (dollars in thousands):

	As of December 31,
	2023		2022
Accumulated benefit obligation	$	123,701	$	126,759
Fair value of plan assets	—		—

The Pinnacle West Capital Corporation Retirement Plan is more than 100% funded on an accumulated benefit obligation basis at December 31, 2023, and December 31, 2022, therefore, the only pension plan with an accumulated benefit obligation in excess of plan assets in 2023 and 2022 is a non-qualified supplemental excess benefit retirement plan.

The following table shows information for pension plans with a projected benefit obligation in excess of plan assets (dollars in thousands):

	As of December 31,
	2023		2022
Projected benefit obligation	$	129,891	$	133,818
Fair value of plan assets	—		—

The Pinnacle West Capital Corporation Retirement Plan is more than 100% funded on a projected benefit obligation basis at December 31, 2023, and December 31, 2022, therefore the only pension plan with a projected benefit obligation in excess of plan assets in 2023 and 2022 is a non-qualified supplemental excess benefit retirement plan.

The following table shows the amounts recognized on the Consolidated Balance Sheets (dollars in thousands):

	Pension Plans				Other Benefits Plans
	2023		2022		2023		2022
Noncurrent asset	$	57,378	$	153,773	$	266,060	$	242,826
Current liability	(17,190)		(17,531)		—		—
Noncurrent liability	(112,702)		(116,286)		—		—
Net amount recognized (funded status)	$	(72,514)	$	19,956	$	266,060	$	242,826

The following table shows the details related to accumulated other comprehensive loss (gain) as of December 31, 2023, and 2022 (dollars in thousands): 

	Pension Plans				Other Benefits Plans
	2023		2022		2023		2022
Net actuarial loss (gain)	$	743,003	$	681,335	$	(188,630)	$	(195,095)
Prior service credit	—		—		(39,054)		(76,843)
APS’s portion recorded as a regulatory (asset) liability	(696,476)		(637,656)		226,726		270,604
Income tax expense (benefit)	(11,506)		(10,797)		691		784
Accumulated other comprehensive loss (gain)	$	35,021	$	32,882	$	(267)	$	(550)

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 Obligations As of December 31,				Benefit Costs Year Ended December 31,
	2023		2022		2023		2022		2021
Discount rate – pension plans	5.21	%	5.56	%	5.56	%	2.92	%	2.53	%
Discount rate – other benefits plans	5.23	%	5.58	%	5.58	%	2.98	%	2.63	%
Rate of compensation increase	4.52	%	4.57	%	4.57	%	4.00	%	4.00	%
Expected long-term return on plan assets - pension plans	N/A		N/A		6.70	%	5.00	%	5.30	%
Expected long-term return on plan assets - other benefit plans	N/A		N/A		6.80	%	5.35	%	4.90	%
Initial healthcare cost trend rate (pre-65 participants)	6.25	%	6.50	%	6.50	%	6.00	%	6.50	%
Ultimate healthcare cost trend rate (pre-65 participants)	4.75	%	4.75	%	4.75	%	4.75	%	4.75	%
Number of years to ultimate trend rate (pre-65 participants)	5		6		5		3		4
Initial and ultimate healthcare cost trend rate (post-65 participants)	2.00	%	2.00	%	2.00	%	2.00	%	2.00	%
Interest crediting rate – cash balance pension plans	4.54	%	4.50	%	4.50	%	4.50	%	4.50	%

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 2024, we are assuming a 6.90% long-term rate of return for pension assets and 7.00% (before tax) for other benefit assets, which we believe is reasonable given our asset allocation in relation to historical and expected performance.

In selecting our healthcare trend rates, we consider past performance and forecasts of healthcare costs. 

Plan Assets

The Board of Directors has delegated oversight of the pension and other postretirement benefit plans’ assets to an Investment Management Committee (“Committee”).  The Committee has adopted investment policy statements (“IPS”) for the pension and the other postretirement benefit plans’ assets. The investment strategies for these plans include external management of plan assets.

The overall strategy of the pension plan’s IPS is to achieve an adequate level of trust assets relative to the benefit obligations.  To achieve this objective, the plan’s investment policy provides for mixes of investments including long-term fixed income assets and return-seeking assets.  The target allocation between return-seeking and long-term fixed income assets is defined in the IPS.  The plan’s funded status is reviewed on at least a monthly basis.

Changes in the value of long-term fixed income assets, also known as liability-hedging assets, are intended to offset changes in the benefit obligations due to changes in interest rates.  Long-term fixed income assets consist primarily of fixed income debt securities issued by the U.S. Treasury and other government agencies, U.S. Treasury futures contracts, and fixed income debt securities issued by corporations.  Long-term fixed income assets may also include interest rate swaps, and other instruments.

Return-seeking assets are intended to provide a reasonable long-term rate of investment return with a prudent level of volatility.  Return-seeking assets are composed of U.S. equities, international equities, and alternative investments.  International equities include investments in both developed and emerging markets.  Alternative investments may include investments in real estate, private debt and various other strategies.  The plan may also hold investments in return-seeking assets by holding securities in partnerships, common and collective trusts, and mutual funds.

Based on the IPS, the target and actual allocation for the pension plan at December 31, 2023, are as follows:

	Target Allocation		Actual Allocation
Long-term fixed income assets	80	%	78	%
Return-seeking assets	20	%	22	%
Total	100	%	100	%

The permissible range is within +/-5% of the target allocation shown in the above table, and also considers the plan’s funded status.

The following table presents the additional target allocations, as a percent of total pension plan assets, for the return-seeking assets:

	Target Allocation
Equities in US and other developed markets	12	%
Equities in emerging markets	4	%
Alternative investments	4	%
Total	20	%

The pension plan IPS does not provide for a specific mix of long-term fixed income assets but does expect the average credit quality of such assets to be investment grade. 

As of December 31, 2023, the asset allocation for other postretirement benefit plan assets is governed by the IPS for those plans, which provides for different asset allocation target mixes depending on the characteristics of the liability. The following table presents the actual allocations of the investment for the other postretirement benefit plan at December 31, 2023:

	Actual Allocation
Long-term fixed income assets	62	%
Return-seeking assets	38	%
Total	100	%

See Note 12 for a discussion on the fair value hierarchy and how fair value methodologies are applied.  The plans invest directly in fixed income, U.S. Treasury Futures Contracts, and equity securities, in addition to investing indirectly in fixed income securities, equity securities and real estate through the use of mutual funds, partnerships and 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.  U.S. Treasury Futures Contracts are valued using the quoted active market prices from the exchange on which they trade 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, maturity, and credit quality.  These instruments are classified as Level 2.

Mutual funds, partnerships, and common and collective trusts are valued utilizing a net asset value (“NAV”) concept or its equivalent. Mutual funds, which includes exchange traded funds (“ETFs”), are classified as Level 1, and valued using a NAV that is observable and based on the active market in which the fund trades.

Common and collective trusts 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 trust’s shares are offered to a limited group of investors and are not traded in an active market. Investments in common and collective trusts are valued using NAV as a practical expedient and, accordingly, are not classified in the fair value hierarchy. The NAV for trusts investing in exchange traded equities, and fixed income securities is derived from the market prices of the underlying securities held by the trusts. The NAV for trusts investing in real estate is derived from the appraised values of the trust’s underlying real estate assets. 

Investments in partnerships are also valued using the concept of NAV as a practical expedient and, accordingly, are not classified in the fair value hierarchy. The NAV for these investments is derived from the value of the partnerships’ underlying assets. The plan’s partnerships holdings relate to investments in high-yield fixed income instruments. Certain partnerships also include funding commitments that may require the plan to contribute up to $50 million to these partnerships; as of December 31, 2023, approximately $38 million of these commitments have been funded.

The plans’ trustee provides valuation of our plan assets by using pricing services that utilize methodologies described to determine fair market value.  We have internal control procedures to ensure this information is consistent with fair value accounting guidance.  These procedures include assessing valuations using an independent pricing source, verifying that pricing can be supported by actual recent market transactions, assessing hierarchy classifications, comparing investment returns with benchmarks, and obtaining and reviewing independent audit reports on the 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, 2023, by asset category, are as follows (dollars in thousands):

 

	Level 1		Level 2		Other (a)		Total
Pension Plan:
Fixed income securities:
Corporate	$	—	$	1,415,346	$	—	$	1,415,346
U.S. Treasury	622,273		—		—		622,273
Other (b)	—		135,184		—		135,184
Common stock equities (c)	150,657		—		—		150,657
Mutual funds (d)	112,791		—		—		112,791
Common and collective trusts:
Equities	—		—		192,945		192,945
Real estate	—		—		140,613		140,613
Short-term investments and other (e)	—		—		65,740		65,740
Total	$	885,721	$	1,550,530	$	399,298	$	2,835,549
Other Benefits:
Fixed income securities:
Corporate	$	—	$	189,902	$	—	$	189,902
U.S. Treasury	207,665		—		—		207,665
Other (b)	—		8,372		—		8,372
Common stock equities (c)	139,952		—		—		139,952
Mutual funds (d)	22,256		—		—		22,256
Common and collective trusts:
Equities	—		—		81,724		81,724
Real estate	—		—		20,001		20,001
Short-term investments and other (e)	21,146		—		5,476		26,622
Total	$	391,019	$	198,274	$	107,201	$	696,494

(a)These investments primarily represent assets valued using NAV as a practical expedient and have not been classified in the fair value hierarchy.

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

(c)This category primarily consists of U.S. common stock equities.

(d)These funds invest in international common stock equities.

(e)This category includes plan receivables and payables.

The fair value of Pinnacle West’s pension plan and other postretirement benefit plan assets at December 31, 2022, by asset category, are as follows (dollars in thousands):

	Level 1		Level 2		Other (a)		Total
Pension Plan:
Cash and cash equivalents	$	1,252	$	—	$	—	$	1,252
Fixed income securities:
Corporate	—		1,374,810		—		1,374,810
U.S. Treasury	635,245		—		—		635,245
Other (b)	—		131,999		—		131,999
Common stock equities (c)	155,231		—		—		155,231
Mutual funds (d)	101,557		—		—		101,557
Common and collective trusts:
Equities	—		—		181,912		181,912
Real estate	—		—		174,228		174,228
Partnerships	—		—		13,359		13,359
Short-term investments and other (e)	—		—		59,892		59,892
Total	$	893,285	$	1,506,809	$	429,391	$	2,829,485
Other Benefits:
Cash and cash equivalents	$	204	$	—	$	—	$	204
Fixed income securities:
Corporate	—		166,879		—		166,879
U.S. Treasury	221,936		—		—		221,936
Other (b)	—		7,321		—		7,321
Common stock equities (c)	127,493		—		—		127,493
Mutual funds (d)	18,824		—		—		18,824
Common and collective trusts:
Equities	—		—		73,956		73,956
Real estate	—		—		23,541		23,541
Short-term investments and other (e)	3,274		—		8,859		12,133
Total	$	371,731	$	174,200	$	106,356	$	652,287

(a)These investments primarily represent assets valued using NAV as a practical expedient and have not been classified in the fair value hierarchy.

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

(c)This category primarily consists of U.S. common stock equities.

(d)These funds invest in U.S. and international common stock equities.

(e)This category includes plan receivables and payables.

Contributions

Future year contribution amounts are dependent on plan asset performance and plan actuarial assumptions.  In 2023 and 2022, we did not make any contributions to our pension plan. In 2021, we made contributions to our pension plan totaling $100 million.  The minimum required contributions for the pension plan are zero for the next three years and we do not expect to make any voluntary contributions in 2024, 2025, or 2026.  With regard to contributions to our other postretirement benefit plan, we did not make a contribution in 2023 or 2022 and do not expect to make any contributions in 2024, 2025 or 2026.

The Company was reimbursed $23 million in 2023, $26 million in 2022, and $24 million in 2021 for prior years retiree medical claims from the other postretirement benefit plan trust assets.

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 Plans		Other Benefits Plans
2024	$	244,772	$	31,024
2025	226,748		30,446
2026	229,322		30,396
2027	226,906		30,024
2028	229,397		29,741
Years 2029-2033	1,136,944		149,312

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 2023, 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 $12 million for 2023, $12 million for 2022, and $12 million for 2021.