Consolidation and Nature of Operations

6 Months Ended

Jun. 30, 2011

Consolidation and Nature of Operations

Consolidation and Nature of Operations

1. Consolidation and Nature of Operations

The unaudited condensed consolidated financial statements include the accounts of Pinnacle West and our subsidiaries: APS, SunCor Development Company (“SunCor”), APS Energy Services Company, Inc. (“APSES”), and El Dorado Investment Company (“El Dorado”).  See Note 13 for discussion of discontinued operations of APSES.  Intercompany accounts and transactions between the consolidated companies have been eliminated.  The unaudited condensed consolidated financial statements for APS include the accounts of APS and the Palo Verde Nuclear Generating Station (“Palo Verde”) sale leaseback variable interest entities (“VIEs”) (see Note 7 for further discussion).  Our accounting records are maintained in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Weather conditions cause significant seasonal fluctuations in our revenues; therefore, results for interim periods do not necessarily represent results expected for the year.

In preparing the condensed consolidated financial statements, we have evaluated the events that have occurred after June 30, 2011 through the date the financial statements were issued.

Our condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments except as otherwise disclosed in the notes)  that we believe are necessary for the fair presentation of our financial position, results of operations and cash flows for the periods presented.  These condensed consolidated financial statements and notes have been prepared consistently with the 2010 Form 10-K with the exception of the reclassification of certain prior year amounts on our Condensed Consolidated Statements of Income, Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Cash Flows in accordance with accounting requirements for reporting discontinued operations (see Note 13) and the impacts related to the reclassification of regulatory assets and liabilities for the current portion (see Note 3).

The following tables show the impact of the reclassifications to prior year (previously reported) amounts (dollars in thousands):

Statement of Income for the Three Months Ended June 30, 2010	As previously reported			Reclassifications for discontinued operations			Amount reported after reclassification for discontinued operations
Operating Revenues
Other revenues	$	21,178		$	(17,799	)	$	3,379
Operating Expenses
Operations and maintenance	215,104			(1,495		)	213,609
Depreciation and amortization	103,017			(22		)	102,995
Taxes other than income taxes	31,684			(2		)	31,682
Other expenses	15,716			(14,391		)	1,325
Other
Other income	933			10			943
Other expense	(5,660		)	10			(5,650		)
Interest Expense
Interest charges	60,741			10			60,751
Allowance for borrowed funds used during construction	(3,104		)	32			(3,072		)
Income Taxes	51,829			(641		)	51,188
Income From Continuing Operations	94,584			(1,270		)	93,314
Income From Discontinued Operations	24,982			1,270			26,252

Statement of Income for the Six Months Ended June 30, 2010	As previously reported			Reclassifications for discontinued operations			Amount reported after reclassification for discontinued operations
Operating Revenues
Other revenues	$	30,108		$	(25,892	)	$	4,216
Operating Expenses
Operations and maintenance	422,946			(3,024		)	419,922
Depreciation and amortization	203,670			(41		)	203,629
Taxes other than income taxes	63,408			(3		)	63,405
Other expenses	22,644			(20,241		)	2,403
Other
Other income	1,819			73			1,892
Other expense	(7,134		)	(42		)	(7,176		)
Interest Expense
Interest charges	121,446			72			121,518
Allowance for borrowed funds used during construction	(6,151		)	60			(6,091		)
Income Taxes	44,657			(1,122		)	43,535
Income From Continuing Operations	106,567			(1,562		)	105,005
Income From Discontinued Operations	12,102			1,562			13,664

Balance Sheets - December 31, 2010	As previously reported		Reclassifications for regulatory assets and liabilities and to conform to current year presentation			Amount reported after reclassification for regulatory assets and liabilities and to conform to current year presentation
Current Assets — Regulatory assets	$	—	$	62,286		$	62,286
Current Assets — Deferred income taxes	94,602		30,295			124,897
Current Assets — Assets held for sale	—		2,861			2,861
Current Assets — Other current assets	28,362		(2,861		)	25,501
Deferred Debits — Regulatory assets	1,048,656		(62,286		)	986,370
Current Liabilities — Deferred fuel and purchased power regulatory liability	—		58,442			58,442
Current Liabilities — Other regulatory liabilities	—		80,526			80,526
Deferred Credits and Other — Deferred income taxes	1,833,566		30,295			1,863,861
Deferred Credits and Other — Deferred fuel and purchased power regulatory liability	58,442		(58,442		)	—
Deferred Credits and Other — Regulatory liabilities	694,589		(80,526		)	614,063

Statement of Cash Flows for the Six Months Ended June 30, 2010	As previously reported			Reclassifications for regulatory assets and liabilities and to conform to current year presentation			Amount reported after reclassification for regulatory assets and liabilities and to conform to current year presentation
Cash Flows from Operating Activities
Other current assets	$	(13,796	)	$	5,456		$	(8,340	)
Other current liabilities	(22,719		)	(3,864		)	(26,583		)
Change in other long-term assets	(5,542		)	(5,473		)	(11,015		)
Change in other long-term liabilities	(51,926		)	3,881			(48,045		)