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Variable Interest Entities | 6 Months Ended
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Jun. 30, 2026
Variable Interest Entities [Abstract] |
Variable Interest Entities | Variable Interest Entities Pinnacle West Captive Insurance Cell VIE To support our overall insurance program, Pinnacle West established a captive insurance cell to insure certain risks of Pinnacle West and our subsidiaries. The Captive is a protected separate cell captive insurance company sponsored by Energy Insurance Services, Inc. (“EISI”). EISI is owned by Energy Insurance Mutual Limited Company and allows participating member sponsoring organizations, such as Pinnacle West, to insure risks using captive entities. Pinnacle West, through its contractual rights, has a controlling financial interest in the separate protected Captive cell’s assets. Pinnacle West obtains all the benefits from the Captive and makes all the primary controlling decisions that economically impact the Captive. As a separate protected cell, Pinnacle West is the Captive’s only participant. The Captive is a VIE for which Pinnacle West is the primary beneficiary. Accordingly, Pinnacle West consolidates the Captive. Under a mutual business program participation agreement between the Captive and EISI, EISI will issue policies, make claim disbursements, claim expenses and other underwriting fees on behalf of the Captive, as necessary. The Captive insures Pinnacle West and its subsidiaries for terrorism coverage, excess liability including certain wildfire coverage, excess property insurance, and excess employment practice liability. The Captive policies exclude nuclear liability at Palo Verde. See Note 11 for details regarding nuclear liability insurance. Claim payments to the insureds can only be made up to the amount of the Captive’s available assets. In the event that claims exceed the Captive’s available assets, Pinnacle West may be required to provide additional funding to the Captive. In addition to policies obtained through the Captive, Pinnacle West also has commercial and mutual insurance policies purchased through third-party insurers that may provide coverage if a loss event occurs. As a result of consolidation, we eliminate intercompany transactions between Pinnacle West and the Captive and record the Captive’s assets, liabilities and third-party operating activities. In consolidation, the Captive’s insurance premium revenues derived from Pinnacle West policies are eliminated against the insurance premium expense recorded by Pinnacle West and our subsidiaries relating to insurance policy coverage provided by the Captive. Consolidation primarily resulted in Pinnacle West reflecting the Captive’s investment holdings on its Condensed Consolidated Balance Sheets, and the Captive’s investment gains and losses reflected through earnings on Pinnacle West’s Condensed Consolidated Statements of Income. Consolidation of the Captive resulted in an increase in Pinnacle West’s net income for the three and six months ended June 30, 2026 of $4.1 million and $4.4 million, respectively, and for the three and six months ended June 30, 2025 of $1.7 million and $2.4 million, respectively. Amounts are fully attributable to Pinnacle West shareholders. Consolidation impacts the Pinnacle West Condensed Consolidated Statements of Income operations and maintenance expense, other income, and other expense line items. Pinnacle West’s Condensed Consolidated Balance Sheets as of June 30, 2026 and December 31, 2025 include $46 million and $40 million, respectively, of assets relating to the Captive that is reported within the other special use funds line item. See Notes 14 and 15 for additional details on these investment holdings. APS’s financial statements are not impacted by Pinnacle West’s consolidation of the Captive VIE. APS Palo Verde Sale Leaseback VIEs In 1986, APS entered into agreements with three separate VIE lessor trust entities in order to sell and lease back interests in Palo Verde Unit 2 and related common facilities. In September 2025, APS purchased two of the three leased interests, the two related lease agreements were terminated and VIE consolidation treatment was discontinued for those two leases. Due to the purchases, APS now owns these previously leased interests, providing APS a total ownership interest in Palo Verde Unit 2 of 23.9%. APS’s remaining leased interest in Palo Verde Unit 2 is approximately 5.2%. See Note 12 in the 2025 Form 10-K for additional details regarding the two purchased leases. As of June 30, 2026, one VIE lease arrangement remains in effect. The VIE lease agreement that was not subject to the purchase agreements is not impacted by the purchase transactions, and APS continues to consolidate this lessor VIE. Under the current remaining lease, in effect through 2033, APS will be required to make payments relating to the lease in total of approximately $9 million annually for the period 2026 through 2033. At the end of the lease period, APS will have the option to purchase the leased asset at its fair market value, extend the lease for up to two years, or return the asset to the lessor. The lease terms give APS the ability to utilize the asset for a significant portion of the asset’s economic life, and therefore provide APS with the power to direct activities of the VIE that most significantly impact the VIE’s economic performance. Predominantly due to the lease terms, APS has been deemed the primary beneficiary of this VIE and therefore consolidates the VIE. As a result of consolidation, we eliminate lease accounting and instead recognize depreciation expense, resulting in an increase in net income for the three and six months ended June 30, 2026 of $2 million and $4 million, respectively, and for the three and six months ended June 30, 2025 of $4 million and $9 million, respectively. The increase in net income is entirely attributable to the noncontrolling interests. Income attributable to Pinnacle West shareholders is not impacted by the consolidation. Our Condensed Consolidated Balance Sheets include the following amounts relating to the VIE (dollars in thousands):
| June 30, 2026 |  | December 31, 2025
Palo Verde sale leaseback property, plant and equipment, net of accumulated depreciation | $ | 31,248 |  |  | $ | 32,035 |
Equity — Noncontrolling interests | 40,333 |  |  | 40,617 |
Assets of the VIE are restricted and may only be used for payment to the noncontrolling interest holders. These assets are reported on our Condensed Consolidated Financial Statements. APS is exposed to losses relating to the VIE upon the occurrence of certain events that APS does not consider to be reasonably likely to occur. Under certain circumstances (for example, NRC issuing specified violation orders with respect to Palo Verde or the occurrence of specified nuclear events), APS would be required to make specified payments to the VIE’s noncontrolling equity participants and take title to the leased Unit 2 interest, which, if appropriate, may be required to be written-down in value. If such an event were to occur during the lease period, APS may be required to pay the noncontrolling equity participant approximately $177 million in 2026 and up to $267 million over the lease term. For regulatory ratemaking purposes, the lease agreement continues to be treated as an operating lease, and as a result, we have recorded a regulatory asset relating to the arrangement.

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- Definition The entire disclosure for a variable interest entity (VIE), including but not limited to, judgments and assumptions in determining whether to consolidate and in identifying the primary beneficiary, gain (loss) recognized on the initial consolidation of the VIE, terms of arrangements, amounts and classification of the VIE's assets and liabilities, and the entity's maximum exposure to loss. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 810 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org/810/tableOfContent + Details
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