Table of Contents Use of Non-GAAP Financial Measures As required by ASU 2016-01, Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities, changes in the fair value of equity securities are recognized in the Company's Statements of Operations. This standard added the potential for significant volatility to the Company's reported results of operations as changes in the fair value of equity securities may occur. Furthermore, the equity investments included in the NDT are significant and are expected to increase significantly during the remaining life (estimated to be 26 to 29 years) of Palo Verde. Accordingly, the Company has provided the following non-GAAP financial measures to exclude the impact of changes in fair value of equity securities and realized gains (losses) from the sale of both equity and fixed income securities. Reconciliations of both non-GAAP financial measures to the most directly comparable financial information presented in accordance with GAAP are presented in the table below. Non-GAAP adjusted net income is reconciled to GAAP net income, and non-GAAP adjusted basic earnings per share is reconciled to GAAP basic earnings per share. Adjusted net income and adjusted basic earnings per share are not measures of financial performance under GAAP and should not be considered as an alternative to net income and basic earnings per share, respectively. Furthermore, the Company's presentation of any non-GAAP financial measure may not be comparable to similarly titled measures used by other companies. The Company believes adjusted net income and adjusted basic earnings per share are useful financial measures for investors and analysts in understanding the Company's core operating performance because each measure removes the effects of variances reported in the Company's results of operations that are not indicative of fundamental changes in the earnings capacity of the Company. Non-GAAP financial information should be read together with, and is not an alternative or substitute for, the Company's financial results reported in accordance with GAAP. (1) Net income (GAAP) and Adjusted net income (non-GAAP) include a pre-tax charge of $12.1 million, or $0.25 per share, after-tax, of strategic transaction costs. Twelve Months Ended December 31, 2019 (1) 2018 2017 (In thousands except for per share data) Net income (GAAP) $ 123,037 $ 84,315 $ 98,261 Adjusting items before income tax effects Unrealized (gains) losses, net (35,852 ) 18,601 — Realized gains, net (2,662) (5,634) (10,626) Total adjustments before income tax effects (38,514 ) 12,967 (10,626 ) Income taxes on above adjustments 7,703 (2,593) 2,125 Adjusting items, net of income taxes (30,811 ) 10,374 (8,501 ) Adjusted net income (non-GAAP) $ 92,226 $ 94,689 $ 89,760 Basic earnings per share (GAAP) $ 3.02 $ 2.07 $ 2.42 Adjusted basic earnings per share (non-GAAP) $ 2.26 $ 2.33 $ 2.21 31