| 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 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 13 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. Under the HRA, included in the other postretirement benefit plan, the Company provides a subsidy to retirees to defray the cost of a Medicare supplemental policy. In prior years, we had been assuming a 4.75% escalation of these benefits; however, actual escalation has been significantly less than this assumption. Accordingly, during 2020 and for future periods, the escalation assumption was reduced to 2.00% (see weighted-average assumption table below). This escalation factor assumption change, among other factors, resulted in an increase in the over-funded status of the other postretirement benefit plan as of December 31, 2020. As a result, on January 4, 2021, we initiated the transfer of approximately $106 million of investment assets from the other postretirement benefit plan into the Active Union Employee Medical Account Trust. The Active Union Employee Medical Account is an existing trust account that holds investments restricted for paying active union employee medical costs (see Note 19). The transfer of other postretirement benefit plan investment assets into the Active Union Employee Medical Account permits access to approximately $106 million of assets for the sole purpose of paying active union employee medical benefits. This transfer of investment assets into the Active Union Employee Medical Account is consistent with the terms of a similar 2018 transaction. 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 (see Note 4). 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 2020 2019 2018 2020 2019 2018 Service cost-benefits earned during the period $ 56,233 $ 49,902 $ 56,669 $ 22,236 $ 18,369 $ 21,100 Interest cost on benefit obligation 118,567 136,843 124,689 25,857 29,894 28,147 Expected return on plan assets (187,443) (171,884) (182,853) (40,077) (38,412) (42,082) Amortization of: Prior service credit — — — (37,575) (37,821) (37,842) Net actuarial loss 34,612 42,584 32,082 — — — Net periodic benefit cost/(benefit) $ 21,969 $ 57,445 $ 30,587 $ (29,559) $ (27,970) $ (30,677) Portion of cost/(benefit) charged to expense $ 3,386 $ 30,312 $ 10,120 $ (20,966) $ (19,859) $ (21,426) The following table shows the plans’ changes in the benefit obligations and funded status (dollars in thousands): Pension Plans Other Benefits Plans 2020 2019 2020 2019 Change in Benefit Obligation Benefit obligation at January 1 $ 3,613,114 $ 3,190,626 $ 746,924 $ 676,771 Service cost 56,233 49,902 22,236 18,369 Interest cost 118,567 136,843 25,857 29,894 Benefit payments (191,704) (177,882) (31,511) (32,486) Actuarial (gain) loss 306,657 413,625 (139,472) 54,376 Benefit obligation at December 31 3,902,867 3,613,114 624,034 746,924 Change in Plan Assets Fair value of plan assets at January 1 3,318,351 2,733,476 837,494 723,677 Actual return on plan assets 642,373 602,030 150,076 144,095 Employer contributions 100,000 150,000 — — Benefit payments (174,180) (167,155) (26,405) (30,278) Fair value of plan assets at December 31 3,886,544 3,318,351 961,165 837,494 Funded Status at December 31 $ (16,323) $ (294,763) $ 337,131 $ 90,570 The following table shows information for pension plans with an accumulated obligation in excess of plan assets (dollars in thousands): As of December 31, 2020 2019 Accumulated benefit obligation 171,672 169,091 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, 2020 and December 31, 2019, therefore the only pension plan with an accumulated benefit obligation in excess of plan assets in 2020 and 2019 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, 2020 2019 Projected benefit obligation 182,184 3,613,114 Fair value of plan assets — 3,318,351 The Pinnacle West Capital Corporation Retirement Plan is more than 100% funded on a projected benefit obligation basis at December 31, 2020, therefore the only pension plan with a projected benefit obligation in excess of plan assets in 2020 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 2020 2019 2020 2019 Noncurrent asset $ 165,861 $ — $ 337,131 $ 90,570 Current liability (15,700) (14,578) — — Noncurrent liability (166,484) (280,185) — — Net amount recognized $ (16,323) $ (294,763) $ 337,131 $ 90,570 The following table shows the details related to accumulated other comprehensive loss as of December 31, 2020 and 2019 (dollars in thousands): Pension Plans Other Benefits Plans 2020 2019 2020 2019 Net actuarial loss (gain) $ 552,301 $ 735,186 $ (237,233) $ 12,238 Prior service credit — — (152,337) (189,912) APS’s portion recorded as a regulatory (asset) liability (469,953) (660,223) 387,293 177,209 Income tax expense (benefit) (20,364) (18,546) 1,018 570 Accumulated other comprehensive loss (gain) $ 61,984 $ 56,417 $ (1,259) $ 105 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 Benefit Costs 2020 2019 2020 2019 2018 Discount rate – pension plans 2.53 % 3.30 % 3.30 % 4.34 % 3.65 % Discount rate – other benefits plans 2.63 % 3.42 % 3.42 % 4.39 % 3.71 % Rate of compensation increase 4.00 % 4.00 % 4.00 % 4.00 % 4.00 % Expected long-term return on plan assets - pension plans N/A N/A 5.75 % 6.25 % 6.05 % Expected long-term return on plan assets - other benefit plans N/A N/A 4.85 % 5.40 % 5.40 % Initial healthcare cost trend rate (pre-65 participants) 6.50 % 7.00 % 7.00 % 7.00 % 7.00 % 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 7 8 Initial and ultimate healthcare cost trend rate (post-65 participants) (a) 2.00 % 4.75 % 4.75 % 4.75 % 4.75 % Interest crediting rate – cash balance pension plans 4.50 % 4.50 % 4.50 % 4.50 % 4.50 % (a) See discussion above relating to this assumptions impact on benefit obligations and the January 2021 asset transfer to the Active Union Employee Medical Account. 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 2021, we are assuming a 5.30% long-term rate of return for pension assets and 5.05% (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, and prohibition of investments in Pinnacle West securities. 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-generating assets. The target allocation between return-generating and long-term fixed income assets is defined in the IPS and is a function of the plan’s funded status. 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-generating assets are intended to provide a reasonable long-term rate of investment return with a prudent level of volatility. Return-generating 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 equity and various other strategies. The plan may also hold investments in return-generating assets by holding securities in partnerships, common and collective trusts and mutual funds. Based on the IPS, and given the pension plan’s funded status at year-end 2020, the target and actual allocation for the pension plan at December 31, 2020 are as follows: Pension Plans Target Allocation Actual Allocation Long-term fixed income assets 72 % 68 % Return-generating assets 28 % 32 % Total 100 % 100 % The permissible range is within +/-3% of the target allocation shown in the above table, and also considers the plan’s funded status. At December 31, 2020, the return-seeking assets were slightly outside the target allocation permissible range and were rebalanced to within the target range during January 2021. The following table presents the additional target allocations, as a percent of total pension plan assets, for the return-generating assets: Asset Class Target Allocation Equities in US and other developed markets 17 % Equities in emerging markets 6 % Alternative investments 5 % Total 28 % 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, 2020, 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. Some of these asset allocation target mixes vary with the plan’s funded status. The following table presents the actual allocations of the investment for the other postretirement benefit plan at December 31, 2020: Other Benefits Plans Actual Allocation Long-term fixed income assets 55 % Return-generating assets 45 % Total 100 % See Note 13 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. As of December 31, 2020, the plans were able to transact in the common and collective trusts at NAV. 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, 2020, 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, 2020, by asset category, are as follows (dollars in thousands): Level 1 Level 2 Other (a) Total Pension Plan: Cash and cash equivalents $ 9,911 $ — $ — $ 9,911 Fixed income securities: Corporate — 1,684,782 — 1,684,782 U.S. Treasury 794,571 — — 794,571 Other (b) — 112,224 — 112,224 Common stock equities (c) 331,058 — — 331,058 Mutual funds (d) 262,765 — — 262,765 Common and collective trusts: Equities — — 407,522 407,522 Real estate — — 191,595 191,595 Partnerships — — 22,420 22,420 Short-term investments and other (e) — — 69,696 69,696 Total $ 1,398,305 $ 1,797,006 $ 691,233 $ 3,886,544 Other Benefits: Cash and cash equivalents $ 1,909 $ — $ — $ 1,909 Fixed income securities: Corporate — 221,488 — 221,488 U.S. Treasury 258,102 — — 258,102 Other (b) — 8,316 — 8,316 Common stock equities (c) 175,605 — — 175,605 Mutual funds (d) 34,310 — — 34,310 Common and collective trusts: Equities — — 94,674 94,674 Real estate — — 19,778 19,778 Short-term investments and other (e) 142,995 — 3,988 146,983 Total $ 612,921 $ 229,804 $ 118,440 $ 961,165 (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 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, 2019, by asset category, are as follows (dollars in thousands): Level 1 Level 2 Other (a) Total Pension Plan: Cash and cash equivalents $ 9,370 $ — $ — $ 9,370 Fixed income securities: Corporate — 1,541,729 — 1,541,729 U.S. Treasury 406,112 — — 406,112 Other (b) — 92,240 — 92,240 Common stock equities (c) 250,829 — — 250,829 Mutual funds (d) 185,928 — — 185,928 Common and collective trusts: Equities — — 392,403 392,403 Real estate — — 171,645 171,645 Fixed Income — — 98,065 98,065 Partnerships — — 103,796 103,796 Short-term investments and other (e) — — 66,234 66,234 Total $ 852,239 $ 1,633,969 $ 832,143 $ 3,318,351 Other Benefits: Cash and cash equivalents $ 2,184 $ — $ — $ 2,184 Fixed income securities: Corporate — 202,640 — 202,640 U.S. Treasury 353,650 — — 353,650 Other (b) — 7,999 — 7,999 Common stock equities (c) 146,316 — — 146,316 Mutual funds (d) 14,351 — — 14,351 Common and collective trusts: Equities — — 83,648 83,648 Real estate — — 19,806 19,806 Short-term investments and other (e) 2,881 — 4,019 6,900 Total $ 519,382 $ 210,639 $ 107,473 $ 837,494 (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. (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. We made contributions to our pension plan totaling $100 million in 2020, $150 million in 2019, and $50 million in 2018. The minimum required contributions for the pension plan are zero for the next three years. We expect to make voluntary contributions up to $100 million in 2021 and zero thereafter. With regard to contributions to our other postretirement benefit plan, we did not make a contribution in 2020 and 2019. We do not expect to make any contributions over the next three years to our other postretirement benefit plans. The Company was reimbursed $26 million in 2020, $30 million in 2019, and $72 million in 2018 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 2021 $ 210,119 $ 31,204 2022 209,593 31,731 2023 215,527 32,196 2024 220,241 31,914 2025 220,787 31,484 Years 2026-2030 1,116,848 153,536 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 2020, 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 $11 million for 2020, $11 million for 2019, and $11 million for 2018. |
