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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

	
 	
FORM 10-K
 
(Mark One)
 
      x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2014
 
OR
 
o             TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to             

					
Commission
File Number	 	Registrants; State of Incorporation;
Addresses; and Telephone Number	 	IRS Employer
Identification No.	
1-8962	 	PINNACLE WEST CAPITAL CORPORATION
(An Arizona corporation)
400 North Fifth Street, P.O. Box 53999
Phoenix, Arizona 85072-3999
(602) 250-1000	 	86-0512431	
1-4473	 	ARIZONA PUBLIC SERVICE COMPANY
(An Arizona corporation)
400 North Fifth Street, P.O. Box 53999
Phoenix, Arizona 85072-3999
(602) 250-1000	 	86-0011170	
 
Securities registered pursuant to Section 12(b) of the Act:

					
 	 	Title Of Each Class	 	Name Of Each Exchange On Which Registered	
PINNACLE WEST CAPITAL CORPORATION	 	Common Stock,
No Par Value	 	New York Stock Exchange	
ARIZONA PUBLIC SERVICE COMPANY	 	None	 	None	
 
Securities registered pursuant to Section 12(g) of the Act:
ARIZONA PUBLIC SERVICE COMPANY             Common Stock, Par Value $2.50 per share
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act

		
PINNACLE WEST CAPITAL CORPORATION	Yes  x   No  o	
ARIZONA PUBLIC SERVICE COMPANY	Yes  x   No  o	
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

		
PINNACLE WEST CAPITAL CORPORATION	Yes  o   No  x	
ARIZONA PUBLIC SERVICE COMPANY	Yes  o   No  x	
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

		
PINNACLE WEST CAPITAL CORPORATION	Yes  x   No  o	
ARIZONA PUBLIC SERVICE COMPANY	Yes  x   No  o	
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

		
PINNACLE WEST CAPITAL CORPORATION	Yes  x   No  o	
ARIZONA PUBLIC SERVICE COMPANY	Yes  x   No  o	
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or in any amendment to this Form 10-K. x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

	
			
PINNACLE WEST CAPITAL CORPORATION	 	 	
Large accelerated filer  x	 	Accelerated filer  o	
 	 	 	
Non-accelerated filer  o	 	Smaller reporting company  o	
(Do not check if a smaller reporting company)	 	 	

			
ARIZONA PUBLIC SERVICE COMPANY	 	 	
Large accelerated filer  o	 	Accelerated filer  o	
 	 	 	
Non-accelerated filer  x	 	Smaller reporting company  o	
(Do not check if a smaller reporting company)	 	 	
 
Indicate by check mark whether each registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o   No  x
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of each registrant’s most recently completed second fiscal quarter: 

			
PINNACLE WEST CAPITAL CORPORATION	 	$6,356,930,539 as of June 30, 2014	
ARIZONA PUBLIC SERVICE COMPANY	 	$0 as of June 30, 2014	
 
The number of shares outstanding of each registrant’s common stock as of February 13, 2015

			
PINNACLE WEST CAPITAL CORPORATION	 	110,575,187 shares	
ARIZONA PUBLIC SERVICE COMPANY	 	Common Stock, $2.50 par value, 71,264,947 shares. Pinnacle West Capital Corporation is the sole holder of Arizona Public Service Company’s Common Stock.	
 
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Pinnacle West Capital Corporation’s definitive Proxy Statement relating to its Annual Meeting of Shareholders to be held on May 20, 2015 are incorporated by reference into Part III hereof.
 
Arizona Public Service Company meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this form with the reduced disclosure format allowed under that General Instruction.

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TABLE OF CONTENTS

	
			
 	 	Page	
 	 	 	
GLOSSARY OF NAMES AND TECHNICAL TERMS	ii	
 	 	
FORWARD-LOOKING STATEMENTS	2	
 	 	 	
PART I	 	3	
Item 1.	Business	3	
Item 1A.	Risk Factors	26	
Item 1B.	Unresolved Staff Comments	37	
Item 2.	Properties	38	
Item 3.	Legal Proceedings	41	
Item 4.	Mine Safety Disclosures	41	
Executive Officers of Pinnacle West	42	
 	 	 	
PART II	 	43	
Item 5.	Market for Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	43	
Item 6.	Selected Financial Data	45	
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	47	
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	71	
Item 8.	Financial Statements and Supplementary Data	72	
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	164	
Item 9A.	Controls and Procedures	164	
Item 9B.	Other Information	165	
 	 	 	
PART III	 	165	
Item 10.	Directors, Executive Officers and Corporate Governance of Pinnacle West	165	
Item 11.	Executive Compensation	165	
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	165	
Item 13.	Certain Relationships and Related Transactions, and Director Independence	166	
Item 14.	Principal Accountant Fees and Services	167	
 	 	 	
PART IV	 	168	
Item 15.	Exhibits and Financial Statement Schedules	168	
 	 	 	
SIGNATURES	188	
 
This combined Form 10-K is separately filed by Pinnacle West and APS.  Each registrant is filing on its own behalf all of the information contained in this Form 10-K that relates to such registrant and, where required, its subsidiaries.  Except as stated in the preceding sentence, neither registrant is filing any information that does not relate to such registrant, and therefore makes no representation as to any such information.  The information required with respect to each company is set forth within the applicable items.  Item 8 of this report includes Consolidated Financial Statements of Pinnacle West and Consolidated Financial Statements of APS.  Item 8 also includes Notes to Pinnacle West’s Consolidated Financial Statements, the majority of which also relates to APS, and Supplemental Notes, which only relate to APS’s Consolidated Financial Statements.

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GLOSSARY OF NAMES AND TECHNICAL TERMS

	
		
ac	Alternating Current	
ACC	Arizona Corporation Commission	
ADEQ	Arizona Department of Environmental Quality	
AFUDC	Allowance for Funds Used During Construction	
ANPP	Arizona Nuclear Power Project, also known as Palo Verde	
APS	Arizona Public Service Company, a subsidiary of the Company	
APSES	APS Energy Services Company, Inc., a subsidiary of the Company sold on August 19, 2011	
ARO	Asset retirement obligations	
Base Fuel Rate	The portion of APS’s retail base rates attributable to fuel and purchased power costs	
BCE	Bright Canyon Energy Corporation, a subsidiary of the Company	
BHP Billiton	BHP Billiton New Mexico Coal, Inc.	
BNCC	BHP Navajo Coal Company	
CAISO	California Independent System Operator	
Cholla	Cholla Power Plant	
dc	Direct Current	
DOE	United States Department of Energy	
DOI	United States Department of the Interior	
DSM	Demand side management	
DSMAC	Demand side management adjustment charge	
El Dorado	El Dorado Investment Company, a subsidiary of the Company	
El Paso	El Paso Electric Company	
EPA	United States Environmental Protection Agency	
FERC	United States Federal Energy Regulatory Commission	
Four Corners	Four Corners Power Plant	
GWh	Gigawatt-hour, one billion watts per hour	
kV	Kilovolt, one thousand volts	
kWh	Kilowatt-hour, one thousand watts per hour	
LFCR	Lost Fixed Cost Recovery Mechanism	
MMBtu	One million British Thermal Units	
MW	Megawatt, one million watts	
MWh	Megawatt-hour, one million watts per hour	
Native Load	Retail and wholesale sales supplied under traditional cost-based rate regulation	
Navajo Plant	Navajo Generating Station	
NERC	North American Electric Reliability Corporation	
NRC	United States Nuclear Regulatory Commission	
NTEC	Navajo Transitional Energy Company, LLC	
OCI	Other comprehensive income	
Palo Verde	Palo Verde Nuclear Generating Station or PVNGS	
Pinnacle West	Pinnacle West Capital Corporation (any use of the words “Company,” “we,” and “our” refer to Pinnacle West)	
PSA	Power supply adjustor approved by the ACC to provide for recovery or refund of variations in actual fuel and purchased power costs compared with the Base Fuel Rate	
RES	Arizona Renewable Energy Standard and Tariff	
Salt River Project or SRP	Salt River Project Agricultural Improvement and Power District	
SCE	Southern California Edison Company	
SunCor	SunCor Development Company, formerly a subsidiary of the Company	
TCA	Transmission cost adjustor	
VIE	Variable interest entity	

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FORWARD-LOOKING STATEMENTS
 
This document contains forward-looking statements based on current expectations.  These forward-looking statements are often identified by words such as “estimate,” “predict,” “may,” “believe,” “plan,” “expect,” “require,” “intend,” “assume” and similar words.  Because actual results may differ materially from expectations, we caution readers not to place undue reliance on these statements.  A number of factors could cause future results to differ materially from historical results, or from outcomes currently expected or sought by Pinnacle West or APS.  In addition to the Risk Factors described in Item 1A and in Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” these factors include, but are not limited to:

•	our ability to manage capital expenditures and operations and maintenance costs while maintaining reliability and customer service levels;	
		
•	variations in demand for electricity, including those due to weather, the general economy, customer and sales growth (or decline), and the effects of energy conservation measures and distributed generation;	
		
•	power plant and transmission system performance and outages;	
		
•	competition in retail and wholesale power markets;	
		
•	regulatory and judicial decisions, developments and proceedings;	
		
•	new legislation or regulation, including those relating to environmental requirements, nuclear plant operations and potential deregulation of retail electric markets;	
		
•	fuel and water supply availability;	
		
•	our ability to achieve timely and adequate rate recovery of our costs, including returns on debt and equity capital;	
		
•	our ability to meet renewable energy and energy efficiency mandates and recover related costs;	
		
•	risks inherent in the operation of nuclear facilities, including spent fuel disposal uncertainty;	
		
•	current and future economic conditions in Arizona, particularly in real estate markets;	
		
•	the development of new technologies which may affect electric sales or delivery;	
		
•	the cost of debt and equity capital and the ability to access capital markets when required;	
		
•	environmental and other concerns surrounding coal-fired generation;	
		
•	volatile fuel and purchased power costs;	
		
•	the investment performance of the assets of our nuclear decommissioning trust, pension, and other postretirement benefit plans and the resulting impact on future funding requirements;	
		
•	the liquidity of wholesale power markets and the use of derivative contracts in our business;	
		
•	potential shortfalls in insurance coverage;	
		
•	new accounting requirements or new interpretations of existing requirements;	
		
•	generation, transmission and distribution facility and system conditions and operating costs;	
		
•	the ability to meet the anticipated future need for additional baseload generation and associated transmission facilities in our region;	
		
•	the willingness or ability of our counterparties, power plant participants and power plant land owners to meet contractual or other obligations or extend the rights for continued power plant operations; and	
		
•	restrictions on dividends or other provisions in our credit agreements and ACC orders.	

These and other factors are discussed in the Risk Factors described in Item 1A of this report, which readers should review carefully before placing any reliance on our financial statements or disclosures.  Neither Pinnacle West nor APS assumes any obligation to update these statements, even if our internal estimates change, except as required by law.

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PART I

ITEM 1.  BUSINESS
  Pinnacle West
 Pinnacle West is a holding company that conducts business through its subsidiaries.  We derive essentially all of our revenues and earnings from our wholly-owned subsidiary, APS.  APS is a vertically-integrated electric utility that provides either retail or wholesale electric service to most of the State of Arizona, with the major exceptions of about one-half of the Phoenix metropolitan area, the Tucson metropolitan area and Mohave County in northwestern Arizona.
 
Pinnacle West’s other subsidiaries are El Dorado and BCE.  Additional information related to these subsidiaries is provided later in this report.
 
Our reportable business segment is our regulated electricity segment, which consists of traditional regulated retail and wholesale electricity businesses (primarily electric service to Native Load customers) and related activities, and includes electricity generation, transmission and distribution.
 
BUSINESS OF ARIZONA PUBLIC SERVICE COMPANY
 
APS currently provides electric service to approximately 1.2 million customers.  We own or lease 6,426 MW of regulated generation capacity and we hold a mix of both long-term and short-term purchased power agreements for additional capacity, including a variety of agreements for the purchase of renewable energy.  During 2014, no single purchaser or user of energy accounted for more than 1.4% of our electric revenues.

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The following map shows APS’s retail service territory, including the locations of its generating facilities and principal transmission lines.

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Energy Sources and Resource Planning
 To serve its customers, APS obtains power through its various generation stations and through purchased power agreements.  Resource planning is an important function necessary to meet Arizona’s future energy needs.  APS’s sources of energy by type during 2014 were as follows:

Generation Facilities
 
APS has ownership interests in or leases the coal, nuclear, gas, oil and solar generating facilities described below.  For additional information regarding these facilities, see Item 2.
 
Coal-Fueled Generating Facilities
 
Four Corners — Four Corners is a 5-unit coal-fired power plant located in the northwestern corner of New Mexico.  APS operates the plant and owns 100% of Four Corners Units 1, 2 and 3 and 63% of Four Corners Units 4 and 5 following the acquisition of SCE’s interest in Units 4 and 5 described below.  As of December 30, 2013, APS retired Units 1, 2 and 3.  APS has a total entitlement from Four Corners of 970 MW.
 
On November 8, 2010, APS and SCE entered into an asset purchase agreement (the “Asset Purchase Agreement”) providing for the purchase by APS of SCE’s 48% interest in each of Units 4 and 5 of Four Corners, allowing APS to acquire 739 MW from SCE.  On December 30, 2013, APS and SCE closed this transaction.  The final purchase price for SCE’s interest was approximately $182 million, subject to certain minor post-closing adjustments.

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In connection with APS’s most recent retail rate case with the ACC, the ACC reserved the right to review the prudence of the Four Corners transaction for cost recovery purposes upon the closing of the transaction.  On December 23, 2014, the ACC approved rate adjustments related to APS’s acquisition of SCE’s interest in Four Corners resulting in a revenue increase of $57.1 million on an annual basis. 
Concurrently with the closing of the SCE transaction, BHP Billiton, the parent company of BNCC, the coal supplier and operator of the mine that serves Four Corners, transferred its ownership of BNCC to NTEC, a company formed by the Navajo Nation to own the mine and develop other energy projects.  BHP Billiton will be retained by NTEC under contract as the mine manager and operator until July 2016.  Also occurring concurrently with the closing, the Four Corners’ co-owners executed a long-term agreement for the supply of coal to Four Corners from July 2016, when the current coal supply agreement expires, through 2031 (the “2016 Coal Supply Agreement”).  El Paso, a 7% owner in Units 4 and 5 of Four Corners, did not sign the 2016 Coal Supply Agreement.  Under the 2016 Coal Supply Agreement, APS has agreed to assume the 7% shortfall obligation.  On February 17, 2015, APS and El Paso entered into an asset purchase agreement providing for the purchase by APS, or an affiliate of APS, of El Paso’s 7% interest in each of Units 4 and 5 of Four Corners. The cash purchase price, which will be subject to certain adjustments at closing, is immaterial in amount, and the purchaser will assume El Paso's reclamation and decommissioning obligations associated with the 7% interest. Completion of the purchase is subject to the receipt of certain regulatory approvals and is expected to occur in July 2016.
When APS, or an affiliate of APS, ultimately acquires El Paso's interest in Four Corners, NTEC will have an option to purchase the interest within a certain timeframe pursuant to an option granted by APS to NTEC.  The 2016 Coal Supply Agreement contains alternate pricing terms for the 7% shortfall obligations in the event NTEC does not exercise its option.
 
The Four Corners plant site is leased from the Navajo Nation and is also subject to an easement from the federal government.  APS, on behalf of the Four Corners participants, negotiated amendments to an existing facility lease with the Navajo Nation which extends the Four Corners leasehold interest from 2016 to 2041.  The Navajo Nation approved these amendments in March 2011.  The effectiveness of the amendments also requires the approval of the DOI, as does a related federal rights-of-way grant, which the Four Corners participants are pursuing.  A federal environmental review is underway as part of the DOI review process.  In March 2014, APS received a draft of the environmental impact statement ("DEIS") in connection with the DOI review process. As a proponent of Four Corners and the Navajo Mine Energy Project, APS, along with other members of the public, submitted comments on the DEIS. APS cannot predict whether these federal approvals will be granted and, if so, on a timely basis, or whether any conditions that may be attached to them will be acceptable to the Four Corners owners. On December 19, 2014, APS obtained a Prevention of Significant Deterioration (“PSD”) permit from EPA allowing APS to install selective catalytic reduction (“SCR”) control technology at Four Corners, as described below under “Environmental Matters — EPA Environmental Regulation.” 
 
Cholla — Cholla is a 4-unit coal-fired power plant located in northeastern Arizona.  APS operates the plant and owns 100% of Cholla Units 1, 2 and 3.  PacifiCorp owns Cholla Unit 4, and APS operates that unit for PacifiCorp.  APS has a total entitlement from Cholla of 647 MW.  APS purchases all of Cholla’s coal requirements from a coal supplier that mines all of the coal under long-term leases of coal reserves with the federal and state governments and private landholders.  The Cholla coal contract runs through 2024.  In addition, APS has a long-term coal transportation contract that runs through 2017 with plans to extend the contract beyond 2017. See "Current and Future Resources - Future Resources and Resource Plan" below for a discussion of future plans for Cholla.

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Navajo Generating Station — The Navajo Plant is a 3-unit coal-fired power plant located in northern Arizona.  Salt River Project operates the plant and APS owns a 14% interest in Navajo Units 1, 2 and 3.  APS has a total entitlement from the Navajo Plant of 315 MW.  The Navajo Plant’s coal requirements are purchased from a supplier with long-term leases from the Navajo Nation and the Hopi Tribe.  The Navajo Plant is under contract with its coal supplier through 2019, with extension rights through 2026.  The Navajo Plant site is leased from the Navajo Nation and is also subject to an easement from the federal government.  The current lease expires in 2019. See "Environmental Matters - EPA Environmental Regulation - Regional Haze Rules - Navajo Plant" below for a discussion of potential future plans for the Navajo Plant.
 
These coal-fueled plants face uncertainties, including those related to existing and potential legislation and regulation, that could significantly impact their economics and operations.  See “Environmental Matters” below and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview and Capital Expenditures” in Item 7 for developments impacting these coal-fueled facilities.  See Note 10 for information regarding APS’s coal mine reclamation obligations.
Nuclear
  Palo Verde Nuclear Generating Station — Palo Verde is a 3-unit nuclear power plant located approximately 50 miles west of Phoenix, Arizona.  APS operates the plant and owns 29.1% of Palo Verde Units 1 and 3 and approximately 17% of Unit 2.  In addition, APS leases approximately 12.1% of Unit 2, resulting in a 29.1% combined ownership and leasehold interest in that unit.  APS has a total entitlement from Palo Verde of 1,146 MW.
 
Palo Verde Leases — In 1986, APS entered into agreements with three separate lessor trust entities in order to sell and lease back approximately 42% of its share of Palo Verde Unit 2 and certain common facilities.  The agreements expire at the end of 2015 and contain options to renew the leases or to purchase the property for fair market value at the end of the lease terms.  On July 7, 2014, APS notified the lessor trust entities of APS’s intent to exercise the fixed rate lease renewal options.  The length of the renewal options will result in APS retaining the assets through 2023 under one lease and 2033 under the other two leases. At the end of the lease renewal periods, APS will have the option to purchase the leased assets at their fair market value, extend the leases for up to two years, or return the assets to the lessors. See Note 18 for additional information regarding the Palo Verde Unit 2 sale leaseback transactions.
 
Palo Verde Operating Licenses — Operation of each of the three Palo Verde Units requires an operating license from the NRC.  The NRC issued full power operating licenses for Unit 1 in June 1985, Unit 2 in April 1986 and Unit 3 in November 1987, and issued renewed operating licenses for each of the three units in April 2011, which extended the licenses for Units 1, 2 and 3 to June 2045, April 2046 and November 2047, respectively.
 
Palo Verde Fuel Cycle — The Palo Verde participants are continually identifying their future nuclear fuel resource needs and negotiating arrangements to fill those needs.  The fuel cycle for Palo Verde is comprised of the following stages:
• mining and milling of uranium ore to produce uranium concentrates;
• conversion of uranium concentrates to uranium hexafluoride;
• enrichment of uranium hexafluoride;
• fabrication of fuel assemblies;
• utilization of fuel assemblies in reactors; and
• storage and disposal of spent nuclear fuel.
The Palo Verde participants have contracted for 100% of Palo Verde’s requirements for uranium concentrates and conversion services through 2018 and 45% of its requirements in 2019-2020.  The

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participants have also contracted for 100% of Palo Verde’s enrichment services through 2020; and all of Palo Verde’s fuel assembly fabrication services through 2022.

Spent Nuclear Fuel and Waste Disposal — The Nuclear Waste Policy Act of 1982 (“NWPA”) required the DOE to accept, transport, and dispose of spent nuclear fuel and high level waste generated
by the nation’s nuclear power plants by 1998.  The DOE’s obligations are reflected in a contract for Disposal of Spent Nuclear Fuel and/or High-Level Radioactive Waste (the “Standard Contract”) with each nuclear power plant.  The DOE failed to begin accepting spent nuclear fuel by 1998.  APS is directly and indirectly involved in several legal proceedings related to DOE’s failure to meet its statutory and contractual obligations regarding acceptance of spent nuclear fuel and high level waste.
 
APS Lawsuit for Breach of Standard Contract — In December 2003, APS, acting on behalf of itself and the participant owners of Palo Verde, filed a lawsuit against DOE in the U.S. Court of Federal Claims for damages incurred due to DOE’s breach of the Standard Contract.  The Court of Federal Claims ruled in favor of APS and the Palo Verde participants in October 2010 and awarded $30.2 million in damages to APS and the Palo Verde participants for costs incurred through December 2006.
 
On December 19, 2012, APS, acting on behalf of itself and the participant owners of Palo Verde, filed a second breach of contract lawsuit against the DOE. This lawsuit sought to recover damages incurred due to DOE’s failure to accept Palo Verde’s spent nuclear fuel for the period beginning January 1, 2007 through June 30, 2011. On August 18, 2014, APS and DOE entered into a settlement agreement, stipulating to a dismissal of the lawsuit and payment of $57.4 million by DOE to the Palo Verde owners for certain specified costs incurred by Palo Verde during the period January 1, 2007 through June 30, 2011. APS’s share of this amount is $16.7 million. Amounts recovered in the lawsuit and settlement were recorded as adjustments to regulatory liability and had no impact on current income.

The One-Mill Fee — In 2011, the National Association of Regulatory Utility Commissioners and the Nuclear Energy Institute challenged DOE’s 2010 determination of the adequacy of the one tenth of a cent per kWh fee (the “one-mill fee”) paid by the nation’s commercial nuclear power plant owners pursuant to their individual obligations under the Standard Contract.  This fee is recovered by APS in its retail rates.  In June 2012, the U.S. Court of Appeals for the District of Columbia Circuit (the “D.C. Circuit”) held that DOE failed to conduct a sufficient fee analysis in making the 2010 determination.  The D.C. Circuit remanded the 2010 determination to the Secretary of the DOE (“Secretary”) with instructions to conduct a new fee adequacy determination within six months.  In February 2013, upon completion of DOE’s revised one-mill fee adequacy determination, the D.C. Circuit reopened the proceedings.  On November 19, 2013, the D.C. Circuit ordered the Secretary to notify Congress of his intent to suspend collecting annual fees for nuclear waste disposal from nuclear power plant operators, as he is required to do pursuant to the NWPA and the D.C. Circuit’s order.  On January 3, 2014, the Secretary notified Congress of his intention to suspend collection of the one-mill fee, subject to Congress’ disapproval. On May 16, 2014, the DOE notified all commercial nuclear power plant operators who are party to a Standard Contract that it reduced the one-mill fee to zero, thus effectively terminating the one-mill fee.
 
DOE’s Construction Authorization Application for Yucca Mountain — The DOE had planned to meet its NWPA and Standard Contract disposal obligations by designing, licensing, constructing, and operating a permanent geologic repository at Yucca Mountain, Nevada.  In June 2008, the DOE submitted its Yucca Mountain construction authorization application to the NRC, but in March 2010, the DOE filed a motion to dismiss with prejudice the Yucca Mountain construction authorization application.  Several interested parties have also intervened in the NRC proceeding.  Additionally, a number of interested parties filed a variety of lawsuits in different jurisdictions around the country challenging the DOE’s authority to withdraw the Yucca Mountain construction authorization application and NRC’s cessation of its review of the Yucca Mountain

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construction authorization application.  The cases have been consolidated into one matter at the D.C. Circuit.  In August 2013, the D.C. Circuit ordered the NRC to resume its review of the application with available appropriated funds.

On October 16, 2014, the NRC issued Volume 3 of the safety evaluation report developed as part of the Yucca Mountain construction authorization application. This volume addresses repository safety after permanent closure, and its issuance is a key milestone in the Yucca Mountain licensing process. Volume 3 contains the staff’s finding that the DOE’s repository design meets the requirements that apply after the repository is permanently closed, including but not limited to the post-closure performance objectives in NRC’s regulations.

On December 18, 2014, the NRC issued Volume 4 of the safety evaluation report developed as part of the Yucca Mountain construction authorization application. This volume covers administrative and programmatic requirements for the repository. It documents the staff’s evaluation of whether the DOE’s research and development and performance confirmation programs, as well as other administrative controls and systems, meet applicable NRC requirements. Volume 4 contains the staff’s finding that most administrative and programmatic requirements in NRC regulations are met, except for certain requirements relating to ownership of land and water rights.

Publication of Volumes 3 and 4 does not signal whether or when the NRC might authorize construction of the repository.
 
Waste Confidence — On June 8, 2012, the D.C. Circuit issued its decision on a challenge by several states and environmental groups of the NRC’s rulemaking regarding temporary storage and
permanent disposal of high level nuclear waste and spent nuclear fuel.  The petitioners had challenged the NRC’s 2010 update to the agency’s Waste Confidence Decision and temporary storage rule (“Waste Confidence Decision”).
 
The D.C. Circuit found that the agency’s 2010 Waste Confidence Decision update constituted a major federal action, which, consistent with the National Environmental Policy Act (“NEPA”), requires either an environmental impact statement or a finding of no significant impact from the agency’s actions.  The D.C. Circuit found that the NRC’s evaluation of the environmental risks from spent nuclear fuel was deficient, and therefore remanded the 2010 Waste Confidence Decision update for further action consistent with NEPA.
 
On September 6, 2012, the NRC Commissioners issued a directive to the NRC staff to proceed directly with development of a generic environmental impact statement to support an updated Waste Confidence Decision.  The NRC Commissioners also directed the staff to establish a schedule to publish a final rule and environmental impact study within 24 months of September 6, 2012. 

In September 2013, the NRC issued its draft Generic Environmental Impact Statement (“GEIS”) to support an updated Waste Confidence Decision. On August 26, 2014, the NRC approved a final rule on the environmental effects of continued storage of spent nuclear fuel. The continued storage rule adopted the findings of the GEIS regarding the environmental impacts of storing spent fuel at any reactor site after the reactor’s licensed period of operations. As a result, those generic impacts do not need to be re-analyzed in the environmental reviews for individual licenses. Although Palo Verde had not been involved in any licensing actions affected by the D.C. Circuit’s June 8, 2012, decision, the NRC lifted its suspension on final licensing actions on all nuclear power plant licenses and renewals that went into effect when the D.C. Circuit issued its June 2012 decision. The August 26th final rule has been subject to continuing legal challenges before the NRC and the Court of Appeals.

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Palo Verde has sufficient capacity at its on-site independent spent fuel storage installation (“ISFSI”) to store all of the nuclear fuel that will be irradiated during the initial operating license period, which ends in December 2027.  Additionally, Palo Verde has sufficient capacity at its on-site ISFSI to store a portion of the fuel that will be irradiated during the period of extended operation, which ends in November 2047.  If uncertainties regarding the United States government’s obligation to accept and store spent fuel are not favorably resolved, APS will evaluate alternative storage solutions that may obviate the need to expand the ISFSI to accommodate all of the fuel that will be irradiated during the period of extended operation.
 
Nuclear Decommissioning Costs — APS currently relies on an external sinking fund mechanism to meet the NRC financial assurance requirements for decommissioning its interests in Palo Verde Units 1, 2 and 3.  The decommissioning costs of Palo Verde Units 1, 2 and 3 are currently included in APS’s ACC jurisdictional rates.  Decommissioning costs are recoverable through a non-bypassable system benefits charge (paid by all retail customers taking service from the APS system).  See Note 19 for additional information about APS’s nuclear decommissioning trusts.
 
Palo Verde Liability and Insurance Matters — See “Palo Verde Nuclear Generating Station — Nuclear Insurance” in Note 10 for a discussion of the insurance maintained by the Palo Verde participants, including APS, for Palo Verde.
 
Impact of Earthquake and Tsunami in Japan on Nuclear Energy Industry — On March 11, 2011, an earthquake measuring 9.0 on the Richter Scale occurred off the coast of Japan causing a series of seven tsunamis.  As a result, the Fukushima Daiichi Nuclear Power Station experienced damage.

Following the earthquake and tsunamis, the NRC established a task force to conduct a systematic and methodical review of NRC processes and regulations to determine whether the agency should make additional improvements to its regulatory system.  On March 12, 2012, the NRC issued the first regulatory requirements based on the recommendations of the Near Term Task Force.  With respect to Palo Verde, the NRC issued two orders requiring safety enhancements regarding:  (1) mitigation strategies to respond to extreme natural events resulting in the loss of power at the plant; and (2) enhancement of spent fuel pool instrumentation.
 
The NRC has issued a number of guidance documents regarding implementation of these requirements.  Due to the developing nature of these requirements, we cannot predict the ultimate financial or operational impacts on Palo Verde or APS. However, to implement these recommendations, Palo Verde expects to spend approximately $40 million for capital enhancements to the plant over the next two years in addition to the approximate $80 million that has already been spent on capital enhancements as of December 31, 2014 (APS’s share is 29.1%).
 
Natural Gas and Oil Fueled Generating Facilities
 APS has six natural gas power plants located throughout Arizona, consisting of Redhawk, located near Palo Verde; Ocotillo, located in Tempe (discussed below); Sundance, located in Coolidge; West Phoenix, located in southwest Phoenix; Saguaro, located north of Tucson; and Yucca, located near Yuma.  Several of the units at Yucca run on either gas or oil.  APS has one oil-only power plant, Douglas, located in the town of Douglas, Arizona.  APS owns and operates each of these plants with the exception of one oil-only combustion turbine unit and one oil and gas steam unit at Yucca that are operated by APS and owned by the Imperial Irrigation District.  APS has a total entitlement from these plants of 3,179 MW.  Gas for these plants is financially hedged up to three years in advance of purchasing and the gas is generally purchased one month prior to delivery.  APS has long-term gas transportation agreements with three different companies, some of which are effective through 2024.  Fuel oil is acquired under short-term purchases delivered primarily to West Phoenix, where it is distributed to APS’s other oil power plants by truck.

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Ocotillo is a 330 MW 4-unit gas plant.  In early 2014, APS announced a project to modernize the plant, which involves retiring two older 110 MW steam units, adding five 102 MW combustion turbines and maintaining two existing 55 MW combustion turbines.  In total, this increases the capacity of the site by 290 MW, to 620 MW, with completion targeted for summer 2018. The last milestone before construction begins was raised during the ACC's Integrated Resource Planning meeting in the fall of 2014. While there was support for the first 2 units which replace the existing steam units, questions were raised on the cost effectiveness for the additional three units. To address these matters, APS issued a request for proposal in late January 2015 for the incremental capacity, equivalent to 3 of the 5 units.
 
Solar Facilities
 To date, APS has begun operation of 150 MW of utility scale solar through its AZ Sun Program, discussed below.  These facilities are owned by APS and are located in multiple locations throughout Arizona.
 
Additionally, APS owns and operates more than forty small solar systems around the state.  Together they have the capacity to produce approximately 4 MW of renewable energy.  This fleet of solar systems includes a 3 MW facility located at the Prescott Airport and 1 MW of small solar in various locations across Arizona.  APS has also developed solar photovoltaic distributed energy systems installed as part of the Community Power Project in Flagstaff, Arizona.  The Community Power Project, approved by the ACC on April 1, 2010, is a pilot program through which APS owns, operates and receives energy from approximately 1 MW of solar photovoltaic distributed energy systems located within a certain test area in Flagstaff, Arizona.  Additionally, APS owns 12 MW of solar photovoltaic systems installed across Arizona through the ACC-approved Schools and Government Program.

In December 2014, the ACC voted that it had no objection to APS implementing a 10 MWdc (approximately 8.5 MWac) residential rooftop program. The first stage of the residential rooftop solar program is to be 8 MW followed by a 2 MW second stage that will only be deployed if coupled with distributed storage. Under this program, APS will own, operate and maintain approximately 1,500 residential systems. The program will target specific distribution feeders in an effort to maximize potential system benefits, as well as make systems available to limited-income customers who cannot easily install solar through transactions with third parties.
 
Purchased Power Contracts
In addition to its own available generating capacity, APS purchases electricity under various arrangements, including long-term contracts and purchases through short-term markets to supplement its owned or leased generation and hedge its energy requirements.  A portion of APS’s purchased power expense is netted against wholesale sales on the Consolidated Statements of Income.  (See Note 16.)  APS continually assesses its need for additional capacity resources to assure system reliability.
 
Purchased Power Capacity — APS’s purchased power capacity under long-term contracts, including its renewable energy portfolio, is summarized in the table below.  All capacity values are based on net capacity unless otherwise noted.

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Type	 	Dates Available	 	Capacity (MW)	
Purchase Agreement (a)	 	Year-round through June 14, 2020	 	60		
Exchange Agreement (b)	 	May 15 to September 15 annually through 2020	 	480		
Tolling Agreement	 	Year-round through May 2017	 	514		
Tolling Agreement	 	Summer seasons through October 2019	 	560		
Day-Ahead Call Option Agreement	 	Summer seasons through September 2015	 	500		
Day-Ahead Call Option Agreement	 	Summer seasons through summer 2016	 	150		
Demand Response Agreement (c)	 	Summer seasons through 2024	 	25		
Renewable Energy (d)	 	Various	 	629		

(a)	Up to 60 MW of capacity is available; however, the amount of electricity available to APS under this agreement is based in large part on customer demand and is adjusted annually.	
		
(b)	This is a seasonal capacity exchange agreement under which APS receives electricity during the summer peak season (from May 15 to September 15) and APS returns a like amount of electricity during the winter season (from October 15 to February 15).	
		
(c)	The capacity under this agreement may be increased in 5 MW increments in each of 2015 and 2016 and 10 MW increments in years 2017 through 2024, up to a maximum of 50 MW.	
		
(d)	Renewable energy purchased power agreements are described in detail below under “Current and Future Resources — Renewable Energy Standard — Renewable Energy Portfolio.”	
Current and Future Resources
 
Current Demand and Reserve Margin
Electric power demand is generally seasonal.  In Arizona, demand for power peaks during the hot summer months.  APS’s 2014 peak one-hour demand on its electric system was recorded on July 23, 2014 at 7,007 MW, compared to the 2013 peak of 6,927 MW recorded on July 8, 2013.  APS’s reserve margin at the time of the 2014 peak demand, calculated using system load serving capacity, was 34%.  Excluding certain contractual rights to call on additional capacity on short notice, which APS may use in the event of unusual weather or unplanned outages, the 2014 reserve margin was 24%.  APS anticipates the reserve margin for 2015 will be approximately 33% or 23% excluding contractual rights to call on additional capacity.  APS expects that our reserve margins will decrease over the next three years and that additional conventional resources will be needed around 2017.
    
Future Resources and Resource Plan
Under the ACC’s resource planning rule, APS will file by April 1 of each even-numbered year its resource plans for the next fifteen-year period.  The rule requires the ACC to issue an order with its acknowledgment of APS’s resource plan within approximately ten months following its submittal.  The ACC’s acknowledgment of APS’s resource plan will consider factors such as the total cost of electric energy services, demand management, analysis of supply-side options, system reliability and risk management.  APS filed its 2014 resource plan on April 1, 2014 and it will be filing its next resource plan by April 1, 2016. The ACC staff is exploring potential ways to improve the resource plan process.

After considering the costs to comply with environmental regulations, on September 11, 2014, APS announced that it will close Cholla Unit 2 by April 2016 and cease burning coal at the other APS-owned units (Units 1 and 3) at the plant by the mid-2020s, if EPA approves a compromise proposal offered by APS to meet required environmental and emissions standards and rules. APS filed an amendment to its resource plan with the ACC to request approval of the retirement of Cholla Unit 2. The ACC has not yet made a decision on this amendment. Previously, APS estimated Cholla Unit 2’s end of life to be 2033. APS is currently recovering

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depreciation and a return on the net book value of the unit in base rates and plans to seek recovery of all of the unit’s retirement-related costs in its next retail rate case. If APS closes Cholla Unit 2, APS believes it will be allowed recovery of the remaining net book value of Unit 2 ( $128 million as of December 31, 2014), in addition to a return on its investment. In accordance with GAAP, in the third quarter of 2014, Unit 2’s remaining net book value was reclassified from property, plant and equipment to a regulatory asset. If the ACC does not allow full recovery of the remaining net book value of Cholla Unit 2, all or a portion of the regulatory asset will be written off and APS’s net income, cash flows, and financial position will be negatively impacted.
    
Renewable Energy Standard
In 2006, the ACC adopted the RES.  Under the RES, electric utilities that are regulated by the ACC must supply an increasing percentage of their retail electric energy sales from eligible renewable resources, including solar, wind, biomass, biogas and geothermal technologies.  The renewable energy requirement is 5% of retail electric sales in 2015 and increases annually until it reaches 15% in 2025.  In APS’s 2009 retail rate case settlement agreement (the “2009 Settlement Agreement”), APS committed to have 1,700 GWh of new renewable resources in service by year-end 2015 in addition to its 2008 renewable resource commitments.  Taken together, APS’s commitment is estimated to be approximately 12% of retail sales, by year-end 2015, which is more than double the RES target of 5% for that year.  A component of the RES is focused on stimulating development of distributed energy systems (generally speaking, small-scale renewable technologies that are located on customers’ properties, such as rooftop solar systems).  Accordingly, under the RES, an increasing percentage of that requirement must be supplied from distributed energy resources.  This distributed energy requirement is 30% of the overall RES requirement of 5% in 2015.  The following table summarizes the RES requirement standard (not including the additional commitment required by the 2009 Settlement Agreement) and its timing:

	
						
 	2015	 	2020	 	2025	
RES as a % of retail electric sales	5%	 	10%	 	15%	
Percent of RES to be supplied from distributed energy resources	30%	 	30%	 	30%	
Renewable Energy Portfolio.  To date, APS has a diverse portfolio of existing and planned renewable resources totaling 1,253 MW, including solar, wind, geothermal, biomass and biogas.  Of this portfolio, 1,194 MW are currently in operation and 59 MW are under contract for development or are under construction.  Renewable resources in operation include 169 MW of facilities owned by APS, 629 MW of long-term purchased power agreements, and an estimated 396 MW of customer-sited, third-party owned distributed energy resources.
 
APS’s strategy to achieve its RES requirements includes executing purchased power contracts for new facilities, ongoing development of distributed energy resources and procurement of new facilities to be owned by APS.  APS is developing owned solar resources through the AZ Sun Program.  Under this program to date, APS estimates its investment commitment will be approximately $674 million.  See Note 3 for additional details about the AZ Sun Program.

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The following table summarizes APS’s renewable energy sources currently in operation and under development.  Agreements for the development and completion of future resources are subject to various conditions, including successful siting, permitting and interconnection of the projects to the electric grid.

														
 	 	Location	 	Actual/
  Target
Commercial
Operation
Date	 	Term
(Years)	 	Net
  Capacity
  In Operation
(MW AC)	 	Net Capacity
  Planned/Under
Development
(MW AC)	
APS Owned	 	 	 	 	 	 		 	 		 	 		
Solar:	 	 	 	 	 	 		 	 		 	 		
AZ Sun Program:	 	 	 	 	 	 		 	 		 	 		
Paloma	 	Gila Bend, AZ	 	2011	 	 		 	17		 	 		
Cotton Center	 	Gila Bend, AZ	 	2011	 	 		 	17		 	 		
Hyder Phase 1	 	Hyder, AZ	 	2011	 	 		 	11		 	 		
Hyder Phase 2	 	Hyder, AZ	 	2012	 	 		 	5		 	 		
Chino Valley	 	Chino Valley, AZ	 	2012	 	 		 	19		 	 		
Hyder II	 	Hyder, AZ	 	2013	 	 		 	14		 	 		
Foothills	 	Yuma, AZ	 	2013	 	 		 	35		 	 		
Gila Bend	 	Gila Bend, AZ	 	2014	 	 		 	32		 	 	
Luke AFB	 	Glendale, AZ	 	2015	 	 	 	 	 	10		
City of Phoenix	 	Buckeye, AZ	 	2015	 	 	 	 	 	10		
Subtotal AZ Sun Program	 	 	 	 	 	 		 	150		 	20		
Multiple Facilities	 	AZ	 	Various	 	 		 	4		 	 		
Distributed Energy:	 	 	 	 	 	 		 	 		 	 		
APS Owned (a)	 	AZ	 	Various	 	 		 	15		 	9		
Total APS Owned	 	 	 	 	 	 		 	169		 	29		
Purchased Power Agreements	 	 	 	 	 	 		 	 		 	 		
Solar:	 	 	 	 	 	 		 	 		 	 		
Solana	 	Gila Bend, AZ	 	2013	 	30		 	250		 	 		
RE Ajo	 	Ajo, AZ	 	2011	 	25		 	5		 	 		
Sun E AZ 1	 	Prescott, AZ	 	2011	 	30		 	10		 	 		
Saddle Mountain	 	Tonopah, AZ	 	2012	 	30		 	15		 	 		
Badger	 	Tonopah, AZ	 	2013	 	30		 	15		 	 		
Gillespie	 	Maricopa County, AZ	 	2013	 	30		 	15		 	 		
Wind:	 	 	 	 	 	 		 	 		 	 		
Aragonne Mesa	 	Santa Rosa, NM	 	2006	 	20		 	90		 	 		
High Lonesome	 	Mountainair, NM	 	2009	 	30		 	100		 	 		
Perrin Ranch Wind	 	Williams, AZ	 	2012	 	25		 	99		 	 		
Geothermal:	 	 	 	 	 	 		 	 		 	 		
Salton Sea	 	Imperial County, CA	 	2006	 	23		 	10		 	 		
Biomass:	 	 	 	 	 	 		 	 		 	 		
Snowflake	 	Snowflake, AZ	 	2008	 	15		 	14		 	 		
Biogas:	 	 	 	 	 	 		 	 		 	 		
Glendale Landfill	 	Glendale, AZ	 	2010	 	20		 	3		 	 		
NW Regional Landfill	 	Surprise, AZ	 	2012	 	20		 	3		 	 		
Total Purchased Power Agreements	 	 	 	 	 	 		 	629		 	—		
Distributed Energy	 	 	 	 	 	 		 	 		 	 		
Solar  (b)	 	 	 	 	 	 		 	 		 	 		
Third-party Owned	 	AZ	 	Various	 	 		 	363		 	30		
Agreement 1	 	Bagdad, AZ	 	2011	 	25		 	15		 	 		
Agreement 2	 	AZ	 	2011-2012	 	20-21		 	18		 	 		
Total Distributed Energy	 	 	 	 	 	 		 	396		 	30		
Total Renewable Portfolio	 	 	 	 	 	 		 	1,194		 	59		

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(a)	Includes Flagstaff Community Power Project, APS School and Government Program and APS Solar Partner Program.	
		
(b)	Distributed generation is produced in DC and is converted to AC for reporting purposes.	

Demand Side Management
 In December 2009, Arizona regulators placed an increased focus on energy efficiency and other demand side management programs to encourage customers to conserve energy, while incentivizing utilities to aid in these efforts that ultimately reduce the demand for energy.  The ACC initiated its Energy Efficiency rulemaking, with a proposed Energy Efficiency Standard (“EES”) of 22% cumulative annual energy savings by 2020.  This standard was adopted and became effective on January 1, 2011.  This standard will likely impact Arizona’s future energy resource needs.  (See Note 3 for energy efficiency and other demand side management obligations.)
 
Government Awards
 
Through various DOE initiatives, the Federal government made a number of programs available for utilities to develop renewable resources, improve reliability and create jobs.  APS continues its work on a $3 million financial award for a high penetration photovoltaic generation study related to the Community Power Project in Flagstaff, Arizona.  This award will conclude during 2015 and is contingent upon APS meeting certain project milestones, including DOE-established budget parameters.
 
Competitive Environment and Regulatory Oversight
 
Retail
 
The ACC regulates APS’s retail electric rates and its issuance of securities.  The ACC must also approve any significant transfer or encumbrance of APS’s property used to provide retail electric service and approve or receive prior notification of certain transactions between Pinnacle West, APS and their respective affiliates.
 
APS is subject to varying degrees of competition from other investor-owned electric and gas utilities in Arizona (such as Southwest Gas Corporation), as well as cooperatives, municipalities, electrical districts and similar types of governmental or non-profit organizations.  In addition, some customers, particularly industrial and large commercial customers, may own and operate generation facilities to meet some or all of their own energy requirements.  This practice is becoming more popular with customers installing or having installed products such as rooftop solar panels to meet or supplement their energy needs.
 
On April 14, 2010, the ACC issued a decision holding that solar vendors that install and operate solar facilities for non-profit schools and governments pursuant to a specific type of contract that calculates payments based on the energy produced are not “public service corporations” under the Arizona Constitution, and are therefore not regulated by the ACC.  A second matter is pending with the ACC to determine whether that ruling should extend to solar providers who serve a broader customer base under the same business model.  Use of such products by customers within our territory results in an increasing level of competition.  APS cannot predict when, and the extent to which, additional electric service providers will enter or re-enter APS’s service territory.
 
In 1999, the ACC approved rules for the introduction of retail electric competition in Arizona.  As a result, as of January 1, 2001, all of APS’s retail customers were eligible to choose alternate energy suppliers. 

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Although some very limited retail competition existed in APS’s service territory in 1999 and 2000, there are currently no active retail competitors offering unbundled energy or other utility services to APS’s customers.  In 2000, the Arizona Superior Court found that the rules were in part unconstitutional and in other respects unlawful, the latter finding being primarily on procedural grounds, and invalidated all ACC orders authorizing competitive electric services providers to operate in Arizona.  In 2004, the Arizona Court of Appeals invalidated some, but not all of the rules and upheld the invalidation of the orders authorizing competitive electric service providers.  In 2005, the Arizona Supreme Court declined to review the Court of Appeals’ decision.
 
In 2008, the ACC directed the ACC staff to investigate whether such retail competition was in the public interest and what legal impediments remain to competition in light of the Court of Appeals’ decision referenced above.  The ACC staff’s report on the results of its investigation was issued on August 12, 2010.  The report stated that additional analysis, discussion and study of all aspects of the issue are required in order to perform a proper evaluation.  While the report did not make any specific recommendations other than to conduct more workshops, the report did state that the current retail electric competition rules are incomplete and in need of modification.
 
On May 9, 2013, the ACC voted to re-examine the facilitation of a deregulated retail electric market in Arizona.  The ACC subsequently opened a docket for this matter and received comments from a number of interested parties on the considerations involved in establishing retail electric deregulation in the state.  One of these considerations was whether various aspects of a deregulated market, including setting utility rates on a “market” basis, would be consistent with the requirements of the Arizona Constitution.  On September 11, 2013, after receiving legal advice from the ACC staff, the ACC voted 4-1 to close the current docket and await full Arizona Constitutional authority before any further examination of this matter.  The motion approved by the ACC also included opening one or more new dockets in the future to explore options to offer more rate choices to customers and innovative changes within the existing cost-of-service regulatory model that could include elements of competition.  The ACC opened a docket on November 4, 2013 to explore technological advances and innovative changes within the electric utility industry.  A series of workshops in this docket were held in 2014 and another is currently scheduled for February 26, 2015.
 
Wholesale
 
FERC regulates rates for wholesale power sales and transmission services.  (See Note 3 for information regarding APS’s transmission rates.)  During 2014, approximately 7.3% of APS’s electric operating revenues resulted from such sales and services.  APS’s wholesale activity primarily consists of managing fuel and purchased power supplies to serve retail customer energy requirements.  APS also sells, in the wholesale market, its generation output that is not needed for APS’s Native Load and, in doing so, competes with other utilities, power marketers and independent power producers.  Additionally, subject to specified parameters, APS hedges both electricity and fuels.  The majority of these activities are undertaken to mitigate risk in APS’s portfolio.

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Environmental Matters
 
Climate Change
 
Legislative Initiatives. There have been no recent attempts by Congress to pass legislation that would regulate greenhouse gas (“GHG”) emissions, and it is unclear if and when the 114 th Congress will consider a climate change bill. In the event climate change legislation ultimately passes, the actual economic and operational impact of such legislation on APS depends on a variety of factors, none of which can be fully known until a law is enacted and the specifics of the resulting program are established. These factors include the terms of the legislation with regard to allowed GHG emissions; the cost to reduce emissions; in the event a cap-and-trade program is established, whether any permitted emissions allowances will be allocated to source operators free of cost or auctioned (and, if so, the cost of those allowances in the marketplace) and whether offsets and other measures to moderate the costs of compliance will be available; and, in the event of a carbon tax, the amount of the tax per pound of carbon dioxide (“CO 2 ”) equivalent emitted.

In addition to federal legislative initiatives, state-specific initiatives may also impact our business. While Arizona has no pending legislation and no proposed agency rule regulating GHGs in Arizona, the California legislature enacted AB 32 and SB 1368 in 2006 to address GHG emissions. In October 2011, the California Air Resources Board approved final regulations that established a state-wide cap on GHG emissions beginning on January 1, 2013 and established a GHG allowance trading program under that cap. The first phase of the program, which applies to, among other entities, importers of electricity, commenced on January 1, 2013. Under the program, entities selling electricity into California, including APS, must hold carbon allowances to cover GHG emissions associated with electricity sales into California from outside the state. APS is authorized to recover the cost of these carbon allowances through the PSA.

Regulatory Initiatives.  In 2009, EPA determined that GHG emissions endanger public health and welfare. This determination was made in response to a 2007 United States Supreme Court ruling that GHGs fit within the Clean Air Act’s broad definition of “air pollutant” and, as a result, EPA has the authority to regulate GHG emissions of new motor vehicles under the Clean Air Act. As a result of this “endangerment finding,” EPA determined that the Clean Air Act required new regulatory requirements for new and modified major GHG emitting sources, including power plants. EPA issued a rule under the Clean Air Act, known as the “tailoring rule,” establishing new GHG emission thresholds that determine when sources, including power plants, must obtain air operating permits or New Source Review permits. “New Source Review,” or “NSR,” is a pre-construction permitting program under the Clean Air Act that requires analysis of pollution controls prior to building a new stationary source or making major modifications to an existing stationary source. The tailoring rule became applicable to power plants in January 2011 and, as a result, APS will generally be required to consider the impact of GHG emissions as part of its traditional NSR analysis for new sources and major modifications to existing plants.

Consistent with President Obama’s June 2013 Climate Action Plan addressing his plans to reduce GHG emissions in the United States, pursuant to its endangerment finding and its authority under Section 111(b) of the Clean Air Act, on September 20, 2013, EPA issued a proposed rule, which would establish New Source Performance Standards (“NSPS”) for new fossil-fired power plants. Subsequently, on June 2, 2014, EPA issued two additional proposed rules to regulate GHG emissions from modified and reconstructed electric generating units ("EGUs") pursuant to Section 111(b) of the Clean Air Act and existing fossil fuel-fired power plants pursuant to Clean Air Act Section 111(d). On January 7, 2015, EPA announced that its carbon pollution standards for new, modified and reconstructed, and existing power plants would be finalized in summer 2015.

EPA’s proposed rule applicable to modified and reconstructed power plants would require fossil fuel-fired EGUs undergoing modification or reconstruction to meet CO 2 performance standards based on a

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combination of best operating practices and equipment upgrades. The rule would also require existing EGUs that are modified or reconstructed after becoming subject to state or federal standards of performance for existing power plants under Section 111(d) of the Clean Air Act to continue to meet those requirements. We cannot currently predict the shape of any final rules or standards for modified and reconstructed fossil-fired EGUs or assess how they might potentially impact the Company.

With respect to existing power plants, EPA’s proposed “Clean Power Plan” rule proposes state-specific goals or targets to achieve reductions in CO 2 emissions from existing EGUs measured from a 2012 baseline. EPA’s proposed emission rates would not apply directly to specific units, but must be met on a state-wide basis. As proposed, each state’s goal is an emissions rate, which is a single number for the future carbon intensity of that state. The proposed rule provides guidelines to states to help develop their plans for meeting the interim (2020-2029) and final (2030 and beyond) emission rates set forth in the proposal. States would be required to submit their plans to EPA by summer 2016, although states may be eligible for one- or two-year extensions, provided they submit detailed explanations that contain specified information required by EPA in advance of the applicable due date. EPA’s proposal for Arizona would result in in-state coal-fired generation (with the exception of coal-fired generation located in Indian country) shifting to natural gas combined cycle and renewable generation. Such a substantial change in APS’s generation portfolio could require additional capital investments and increased operating costs, and thus have a significant financial impact on the Company. APS will continue to monitor these standards as they are developed.

As for sources in Indian country (which are not subject to state plans), on October 28, 2014, EPA issued a supplemental rule proposing carbon dioxide emission rates for U.S. territories and areas of Indian country with existing fossil fuel-fired EGUs, as well as guidelines for plans to achieve those rates. The supplemental proposal applies to Four Corners and the Navajo Plant, both of which are located on the Navajo Nation. With respect to these two plants, EPA applied the four building blocks described in its June 2, 2014 Clean Air Act Section 111(d) proposal to establish interim and final goals, expressed as CO 2 emission rates. If finalized as proposed, it is unlikely the rule would require additional emission reductions as a result of the plants’ past and future actions to comply with the Best Available Retrofit Technology (“BART”) requirements of EPA’s Clean Air Visibility Rule. (See “EPA Environmental Regulation - Regional Haze Rules” discussion below.)

Company Response to Climate Change Initiatives .  We have undertaken a number of initiatives to address emission concerns, including renewable energy procurement and development, promotion of programs and rates that promote energy conservation, renewable energy use, and energy efficiency. (See “Energy Sources and Resource Planning - Current and Future Resources” above for details of these plans and initiatives.) APS currently has a diverse portfolio of renewable resources, including solar, wind, geothermal, biogas, and biomass, and we expect the percentage of renewable energy in our resource portfolio to increase over the coming years.
APS prepares an inventory of GHG emissions from its operations. This inventory is reported to EPA under the EPA GHG Reporting Program and is voluntarily communicated to the public in Pinnacle West’s annual Corporate Responsibility Report, which is available on our website ( www.pinnaclewest.com ). The report provides information related to the Company and its approach to sustainability and its workplace and environmental performance. The information on Pinnacle West’s website, including the Corporate Responsibility Report, is not incorporated by reference into this report.
  
EPA Environmental Regulation

Regional Haze Rules. In 1999, EPA announced regional haze rules to reduce visibility impairment in national parks and wilderness areas. The rules require states (or, for sources located on tribal land, EPA) to determine what pollution control technologies constitute the BART for certain older major stationary sources,

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including fossil-fired power plants. EPA subsequently issued the Clean Air Visibility Rule, which provides guidelines on how to perform a BART analysis.
The Four Corners and Navajo Plant participants’ obligations to comply with EPA’s final BART determinations (and Cholla’s obligations to comply with ADEQ’s and EPA’s determinations), coupled with the financial impact of potential future climate change legislation, other environmental regulations, and other business considerations, could jeopardize the economic viability of these plants or the ability of individual participants to continue their participation in these plants.
Cholla. In 2007, ADEQ required APS to perform a BART analysis for Cholla pursuant to the Clean Air Visibility Rule. APS completed the BART analysis for Cholla and submitted its BART recommendations to ADEQ in early 2008. The recommendations include the installation of certain pollution control equipment that APS believes constitutes BART. ADEQ reviewed APS’s recommendations and submitted its proposed BART State Implementation Plan (“SIP”) for Cholla and other sources in Arizona in early 2011.

On December 5, 2012, EPA issued a final BART rule applicable to Cholla. EPA approved ADEQ’s BART emissions limits for sulfur dioxide (“SO 2 ”) and emissions of particulate matter (“PM”), but added a SO 2 removal efficiency requirement of 95%. In addition, EPA disapproved ADEQ’s BART determinations for oxides of nitrogen (“NO x ”) and promulgated a Federal Implementation Plan ("FIP") establishing a new, more stringent “bubbled” NO x emission rate applicable to the two BART-eligible Cholla units owned by APS and the other BART-eligible unit owned by PacifiCorp. In order to comply with this new rate, APS will be required to install SCR control technology on all three of the BART-eligible Cholla units. APS’s total costs for these post-combustion NO x controls would be approximately $200 million. This amount is not included in our current estimates for environmental capital expenditures in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Capital Expenditures” in Item 7. Under the FIP, APS has five years from December 2012 to complete installation of the equipment and achieve the BART emission limit for NO x .

APS believes that EPA’s final rule as it applies to Cholla is unsupported and that EPA had no basis for disapproving Arizona’s SIP and promulgating a FIP that is inconsistent with the state’s considered BART determinations under the regional haze program. Accordingly, on February 1, 2013, APS filed a Petition for Review of the final BART rule in the United States Court of Appeals for the Ninth Circuit. Briefing in the case was completed in February 2014, and the court scheduled oral argument for March 9, 2015.

In September 2014, APS met with EPA to propose a compromise BART strategy wherein, pending certain regulatory approvals, APS would permanently close Cholla Unit 2 by April 2016 and cease burning coal at Units 1 and 3 by the mid-2020s. (See Note 3 for details related to the resulting regulatory asset.) APS made the proposal with the understanding that additional emission control equipment to reduce regional haze is unlikely to be required in the future because retiring and converting the units as contemplated in the proposal is more cost-effective than, and will result in increased visibility improvement over, the current BART requirements for NO x imposed on the Cholla units under EPA’s BART FIP. Because APS’s proposal involves state and federal rule-making processes, APS is unable to predict when or whether it may ultimately be approved.
Four Corners . On August 6, 2012, EPA issued its final BART determination for Four Corners, which requires APS to install and operate SCR control technology on Units 4 and 5 by July 31, 2018. (APS retired Four Corners Units 1-3 on December 30, 2013.) APS estimates that its 63% share of the cost of these controls for Four Corners Units 4 and 5 would be at least $350 million. APS expects to incur certain of these costs during the 2015 through 2017 timeframe, which are included in our capital expenditure estimates. (See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Capital Expenditures” in Item 7 for such estimates and for a discussion of the capital expenditures related to the

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agreement to purchase El Paso's 7% interest in Units 4 and 5.) For PM emissions, EPA is requiring Units 4 and 5 to meet an emission limit of 0.015 lb/MMBtu and a 20 percent opacity limit, both of which are achievable through operation of Four Corners' existing baghouses. Although unrelated to BART, the final BART rule also imposes a 20 percent opacity limitation on certain fugitive dust emissions from Four Corners’ coal and material handling operations.
Navajo Plant . On January 18, 2013, EPA issued a proposed BART rule for the Navajo Plant, which would require installation of SCR technology in order to achieve a new, more stringent plant-wide NO x emission limit. In addition, EPA proposed a “better than BART” alternative and solicited comment on other options that could set longer time frames for installing pollution controls if the Navajo Plant can achieve additional emission reductions. On July 26, 2013, a group of stakeholders, including SRP, the operating agent for the Navajo Plant, submitted to EPA two suggested alternatives to BART, which would achieve greater NO x emission reductions and result in greater reasonable progress toward the national visibility goal than EPA’s proposed BART determination. On July 28, 2014, EPA issued a final Navajo Plant BART rule approving the alternative stakeholder plan. Depending on which alternate operating scenario the Navajo Plant participants ultimately select, the required NO x emission reductions could be achieved by either closing one of the three 750 MW units at the plant or curtailing energy production across all three units, such that the emission reductions are commensurate with the closure of approximately one of the Navajo Plant units. APS estimates that its share of costs for upgrades at the Navajo Plant could be up to approximately $200 million. These costs are not included in the capital expenditure estimates described in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Capital Expenditures" in Item 7 since the majority of such costs are expected to be incurred after 2017. In October 2014, a coalition of environmental groups, an Indian tribe, and others filed petitions for review in the United States Court of Appeals for the Ninth Circuit asking the Court to review EPA’s final BART rule for the Navajo Plant. We cannot predict the outcome of this petition.
Mercury and other Hazardous Air Pollutants. On December 16, 2011, EPA issued the final Mercury and Air Toxics Standards (“MATS”) rule, which established maximum achievable control technology (“MACT”) standards to regulate emissions of mercury and other hazardous air pollutants from fossil-fired power plants. Generally, plants will have three years after the effective date of the rule to achieve compliance. In the case of Cholla and Four Corners, APS will have until April 16, 2016, or a total of four years after the MATS rule’s effective date, to comply with the new MACT standards because the respective permitting authorities granted APS’s requests for one-year compliance date extensions. Similarly, SRP will have until April 16, 2016 to comply with MATS at the Navajo Plant, as a result of a one-year extension granted by EPA and the Navajo Nation EPA.

The MATS rule will require APS to install additional pollution control equipment. APS has installed certain of the equipment necessary to meet the anticipated standards. APS estimates that the cost for the remaining equipment necessary to meet these standards is approximately $130 million for Cholla, which would be avoided if EPA approves APS’s compromise proposal discussed under “Regional Haze Rules - Cholla” above. These costs are not included in the capital expenditure estimates described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Capital Expenditures” in Item 7. No additional equipment is needed for Four Corners Units 4 and 5 to comply with these rules. SRP, the operating agent for the Navajo Plant, is still evaluating compliance options under the rules.

Coal Combustion Waste.  On December 19, 2014, EPA issued its final regulations governing the handling and disposal of coal combustion residuals (“CCR”), such as fly ash and bottom ash. The rule regulates CCR as a non-hazardous waste under Subtitle D of the Resource Conservation and Recovery Act (“RCRA”) and establishes national minimum criteria for existing and new CCR landfills and surface impoundments and all lateral expansions consisting of location restrictions, design and operating criteria, groundwater monitoring and corrective action, closure requirements and post closure care, and recordkeeping, notification, and Internet posting requirements. The rule generally requires any existing unlined CCR surface

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impoundment that is contaminating groundwater above a regulated constituent’s groundwater protection standard to stop receiving CCR and either retrofit or close, and further requires the closure of any CCR landfill or surface impoundment that cannot meet the applicable performance criteria for location restrictions or structural integrity.

Because the Subtitle D rule is self-implementing, the CCR standards apply directly to the regulated facility, and facilities are directly responsible for ensuring that their operations comply with the rule’s requirements. While EPA has chosen to regulate the disposal of CCR in landfills and surface impoundments as non-hazardous waste under the final rule, the agency makes clear that it will continue to evaluate any risks associated with CCR disposal and leaves open the possibility that it may regulate CCR as a hazardous waste under RCRA Subtitle C in the future.

APS currently disposes of CCR in ash ponds and dry storage areas at Cholla and Four Corners. APS estimates that its share of incremental costs to comply with the CCR rule for Four Corners is approximately $15 million, and its share of incremental costs for Cholla is approximately $85 million.  APS expects to incur certain of these costs during the 2015-2017 timeframe, which are included in the capital expenditure estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Capital Expenditures” in Item 7. The amount for Cholla contemplates the closure of Unit 2 in 2016. (See “EPA Environmental Regulation - Regional Haze Rules - Cholla” discussion above.) The Navajo Plant currently disposes of CCR in a dry landfill storage area. At this time, SRP, the operating agent for the Navajo Plant, is analyzing the operations that would be covered by the rule and any resulting compliance costs.

Effluent Limitation Guidelines.  On April 19, 2013, EPA proposed revised effluent limitation guidelines establishing technology-based wastewater discharge limitations for fossil-fired EGUs. EPA’s proposal offers numerous options (four of which are “preferred alternatives”) that target metals and other pollutants in wastewater streams originating from fly ash and bottom ash handling activities, scrubber activities, and non-chemical metal cleaning wastes operations. The preferred alternatives differ with respect to the scope of requirements that would be applicable to existing discharges of pollutants found in wastestreams generated at existing power plants. All four alternatives would establish a “zero discharge” effluent limit for all pollutants in fly ash transport water. However, requirements governing bottom ash transport water differ depending on which alternative EPA ultimately chooses and could range from effluent limits based on Best Available Technology Economically Achievable to “zero discharge” effluent limits. Depending on which alternative EPA finalizes, Four Corners may be required to change equipment and operating practices affecting boilers and ash handling systems, as well as change its waste disposal techniques. We cannot currently predict the shape of EPA’s final rule or whether this action will have a material adverse impact on our financial position, results of operations, or cash flows. EPA is currently subject to a consent decree deadline to finalize the revised guidelines by September 30, 2015.

Ozone National Ambient Air Quality Standards. On December 17, 2014, EPA published a proposal to revise the primary ground-level ozone national ambient air quality standards (“NAAQS”) currently set at a level of 75 parts per billion (“ppb”). The rule would set a new, more stringent primary standard (intended to protect human health) within the range of 65 to 70 ppb and revise the secondary standard (intended to protect human welfare) to within the same range. In addition, EPA is soliciting comment on alternative standard levels below 65 ppb, and as low as 60 ppb. EPA is accepting public comment on the proposed new ranges for the standards until March 17, 2015, and is under a court-ordered deadline of October 1, 2015 to finalize the rule. As ozone standards become more stringent, our fossil generation units may come under increasing pressure to reduce emissions of nitrogen oxides and volatile organic compounds and to generate emission offsets for new projects or facility expansions located in ozone nonattainment areas. At this time, APS is unable to predict what impact the adoption of these standards may have on its financial position, results of operations, or cash flows.

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New Source Review . On April 6, 2009, APS received a request from EPA under Section 114 of the Clean Air Act seeking detailed information regarding projects at and operations of Four Corners. This request is part of a national enforcement initiative that EPA has undertaken under the Clean Air Act. EPA has taken the position that many utilities have made certain physical or operational changes at their plants that should have triggered additional regulatory requirements under the NSR provisions of the Clean Air Act. Other electric utilities have received and responded to similar Section 114 requests, and several of them have been the subject of notices of violation and lawsuits filed by EPA. APS responded to EPA’s request in August 2009 and is currently unable to predict any resulting actions the EPA may take, including any potential litigation.

Clean Air Act Citizen Lawsuit .  On October 4, 2011, Earthjustice, on behalf of several environmental organizations, filed a lawsuit in the United States District Court for the District of New Mexico against APS and the other Four Corners participants alleging violations of the NSR provisions of the Clean Air Act.  Subsequent to filing its original Complaint, on January 6, 2012, Earthjustice filed a First Amended Complaint adding claims for violations of the Clean Air Act’s NSPS program.  Among other things, the environmental plaintiffs seek to have the court enjoin operations at Four Corners until APS applies for and obtains any required NSR permits and complies with the NSPS.  The plaintiffs further request the court to order the payment of civil penalties, including a beneficial mitigation project.  On April 2, 2012, APS and the other Four Corners participants filed motions to dismiss.  The case is being held in abeyance while the parties seek to negotiate a settlement.  On March 30, 2013, upon joint motion of the parties, the court issued an order deeming the motions to dismiss withdrawn without prejudice during pendency of the stay.  At such time as the stay is lifted, APS and the other Four Corners participants may reinstate their motions to dismiss.  We are unable to predict the outcome of this matter.

Superfund-Related Matters. The Comprehensive Environmental Response Compensation and Liability Act (“Superfund”) establishes liability for the cleanup of hazardous substances found contaminating the soil, water or air.  Those who generated, transported or disposed of hazardous substances at a contaminated site are among those who are potentially responsible parties (“PRPs”).  PRPs may be strictly, and often are jointly and severally, liable for clean-up.  On September 3, 2003, EPA advised APS that EPA considers APS to be a PRP in the Motorola 52 nd  Street Superfund Site, Operable Unit 3 (“OU3”) in Phoenix, Arizona.  APS has facilities that are within this Superfund site.  APS and Pinnacle West have agreed with EPA to perform certain investigative activities of the APS facilities within OU3.  In addition, on September 23, 2009, APS agreed with EPA and one other PRP to voluntarily assist with the funding and management of the site-wide groundwater remedial investigation and feasibility study work plan.  We estimate that our costs related to this investigation and study will be approximately $2 million.  We anticipate incurring additional expenditures in the future, but because the overall investigation is not complete and ultimate remediation requirements are not yet finalized, at the present time expenditures related to this matter cannot be reasonably estimated.
 
On August 6, 2013, the Roosevelt Irrigation District (“RID”) filed a lawsuit in Arizona District Court against APS and 24 other defendants, alleging that RID’s groundwater wells were contaminated by the release of hazardous substances from facilities owned or operated by the defendants.  The lawsuit also alleges that, under Superfund laws, the defendants are jointly and severally liable to RID.  The allegations against APS arise out of APS’s current and former ownership of facilities in and around OU3.  We are unable to predict the outcome of this matter; however, we do not expect the outcome to have a material impact on our financial position, results of operations or cash flows.

Manufactured Gas Plant Sites. Certain properties which APS now owns or which were previously owned by it or its corporate predecessors were at one time sites of, or sites associated with, manufactured gas plants. APS is taking action to voluntarily remediate these sites. APS does not expect these matters to have a material adverse effect on its financial position, results of operations or cash flows.

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Navajo Nation Environmental Issues

Four Corners and the Navajo Plant are located on the Navajo Reservation and are held under easements granted by the federal government, as well as leases from the Navajo Nation. See “Energy Sources and Resource Planning - Generation Facilities - Coal-Fueled Generating Facilities” above for additional information regarding these plants.
In July 1995, the Navajo Nation enacted the Navajo Nation Air Pollution Prevention and Control Act, the Navajo Nation Safe Drinking Water Act, and the Navajo Nation Pesticide Act (collectively, the “Navajo Acts”). The Navajo Acts purport to give the Navajo Nation Environmental Protection Agency authority to promulgate regulations covering air quality, drinking water, and pesticide activities, including those activities that occur at Four Corners and the Navajo Plant. On October 17, 1995, the Four Corners participants and the Navajo Plant participants each filed a lawsuit in the District Court of the Navajo Nation, Window Rock District, challenging the applicability of the Navajo Acts as to Four Corners and the Navajo Plant. The Court has stayed these proceedings pursuant to a request by the parties, and the parties are seeking to negotiate a settlement.
In April 2000, the Navajo Nation Council approved operating permit regulations under the Navajo Nation Air Pollution Prevention and Control Act. APS believes the Navajo Nation exceeded its authority when it adopted the operating permit regulations. On July 12, 2000, the Four Corners participants and the Navajo Plant participants each filed a petition with the Navajo Supreme Court for review of these regulations. Those proceedings have been stayed, pending the settlement negotiations mentioned above. APS cannot currently predict the outcome of this matter.
On May 18, 2005, APS, Salt River Project, as the operating agent for the Navajo Plant, and the Navajo Nation executed a Voluntary Compliance Agreement to resolve their disputes regarding the Navajo Nation Air Pollution Prevention and Control Act. As a result of this agreement, APS sought, and the courts granted, dismissal of the pending litigation in the Navajo Nation Supreme Court and the Navajo Nation District Court, to the extent the claims relate to the Clean Air Act. The agreement does not address or resolve any dispute relating to other Navajo Acts. APS cannot currently predict the outcome of this matter.
Water Supply
Assured supplies of water are important for APS’s generating plants. At the present time, APS has adequate water to meet its needs. However, the Four Corners region, in which Four Corners is located, has been experiencing drought conditions that may affect the water supply for the plants if adequate moisture is not received in the watershed that supplies the area. APS is continuing to work with area stakeholders to implement agreements to minimize the effect, if any, on future operations of the plant. The effect of the drought cannot be fully assessed at this time, and APS cannot predict the ultimate outcome, if any, of the drought or whether the drought will adversely affect the amount of power available, or the price thereof, from Four Corners.
Conflicting claims to limited amounts of water in the southwestern United States have resulted in numerous court actions, which, in addition to future supply conditions, have the potential to impact APS’s operations.

San Juan River Adjudication. Both groundwater and surface water in areas important to APS’s operations have been the subject of inquiries, claims, and legal proceedings, which will require a number of years to resolve. APS is one of a number of parties in a proceeding, filed March 13, 1975, before the Eleventh Judicial District Court in New Mexico to adjudicate rights to a stream system from which water for Four

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Corners is derived. An agreement reached with the Navajo Nation in 1985, however, provides that if Four Corners loses a portion of its rights in the adjudication, the Navajo Nation will provide, for an agreed upon cost, sufficient water from its allocation to offset the loss. In addition, APS is a party to a water contract that allows the company to secure water for Four Corners in the event of a water shortage and is a party to a shortage sharing agreement, which provides for the apportionment of water supplies to Four Corners in the event of a water shortage in the San Juan River Basin.

Gila River Adjudication. A summons served on APS in early 1986 required all water claimants in the Lower Gila River Watershed in Arizona to assert any claims to water on or before January 20, 1987, in an action pending in Arizona Superior Court. Palo Verde is located within the geographic area subject to the summons. APS’s rights and the rights of the other Palo Verde participants to the use of groundwater and effluent at Palo Verde are potentially at issue in this action. As operating agent of Palo Verde, APS filed claims that dispute the court’s jurisdiction over the Palo Verde participants’ groundwater rights and their contractual rights to effluent relating to Palo Verde. Alternatively, APS seeks confirmation of such rights. Several of APS’s other power plants are also located within the geographic area subject to the summons. APS’s claims dispute the court’s jurisdiction over APS’s groundwater rights with respect to these plants. Alternatively, APS seeks confirmation of such rights. In November 1999, the Arizona Supreme Court issued a decision confirming that certain groundwater rights may be available to the federal government and Indian tribes. In addition, in September 2000, the Arizona Supreme Court issued a decision affirming the lower court’s criteria for resolving groundwater claims. Litigation on both of these issues has continued in the trial court. In December 2005, APS and other parties filed a petition with the Arizona Supreme Court requesting interlocutory review of a September 2005 trial court order regarding procedures for determining whether groundwater pumping is affecting surface water rights. The Arizona Supreme Court denied the petition in May 2007, and the trial court is now proceeding with implementation of its 2005 order. No trial date concerning APS’s water rights claims has been set in this matter.

Little Colorado River Adjudication.  APS has filed claims to water in the Little Colorado River Watershed in Arizona in an action pending in the Apache County, Arizona, Superior Court, which was originally filed on September 5, 1985. APS’s groundwater resource utilized at Cholla is within the geographic area subject to the adjudication and, therefore, is potentially at issue in the case. APS’s claims dispute the court’s jurisdiction over its groundwater rights. Alternatively, APS seeks confirmation of such rights. Other claims have been identified as ready for litigation in motions filed with the court. No trial date concerning APS’s water rights claims has been set in this matter.

Although the above matters remain subject to further evaluation, APS does not expect that the described litigation will have a material adverse impact on its financial position, results of operations, or cash flows.

BUSINESS OF OTHER SUBSIDIARIES

Bright Canyon Energy

On July 31, 2014, Pinnacle West announced its creation of a wholly-owned subsidiary, BCE.  BCE will focus on new growth opportunities that leverage the Company’s core expertise in the electric energy industry.  BCE’s first initiative is a 50/50 joint venture with MidAmerican Transmission, LLC.  The joint venture, named TransCanyon, intends to focus on transmission opportunities within the Western Electricity Coordinating Council, excluding the retail service territories of the venture partners’ utility affiliates.  The joint venture submitted a bid into CAISO's competitive solicitation process to design, build and own a new 500 kV transmission line between Arizona and California, the Delaney to Colorado River Transmission Line.  The winner of the bidding process is expected to be announced in 2015.  This transmission line will connect a

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planned Delaney substation near Palo Verde in Arizona to the existing Colorado River substation located just west of Blythe, California .
El Dorado
 
El Dorado owns minority interests in several energy-related investments and Arizona community-based ventures.  El Dorado’s short-term goal is to prudently realize the value of its existing investments.  As of December 31, 2014, El Dorado had total assets of approximately $9 million. El Dorado is not expected to contribute in any material way to our future financial performance, nor will it require any material amounts of capital over the next three years. 
 
SunCor
 
In February 2012, SunCor filed for protection under the United States Bankruptcy Code to complete an orderly liquidation of its business.  On March 25, 2013, the bankruptcy plan submitted to the court and agreed to by SunCor and its creditors (the “Joint Plan”) became effective.  The Joint Plan provides for the full release of Pinnacle West and its affiliates from any and all claims related to SunCor, SunCor’s subsidiaries, and their respective estates.  SunCor and its subsidiaries have been formally dissolved.
OTHER INFORMATION
 
Pinnacle West, APS and El Dorado are all incorporated in the State of Arizona.  BCE is incorporated in Delaware. Additional information for each of these companies is provided below:

								
 	 	Principal Executive Office
Address	 	Year of
Incorporation	 	Approximate
Number of
Employees at
December 31, 2014	
Pinnacle West	 	400 North Fifth Street
Phoenix, AZ 85004	 	1985	 	83		
APS	 	400 North Fifth Street
P.O. Box 53999
Phoenix, AZ 85072-3999	 	1920	 	6,279		
BCE	 	400 North Fifth Street
Phoenix, AZ 85004	 	2014	 	4		
El Dorado	 	400 North Fifth Street
Phoenix, AZ 85004	 	1983	 	—		
Total	 	 	 	 	 	6,366		
 
The APS number includes employees at jointly-owned generating facilities (approximately 2,830 employees) for which APS serves as the generating facility manager.  Approximately 1,673 APS employees are union employees, represented by the International Brotherhood of Electrical Workers ("IBEW") or the United Security Professionals of America ("USPA").  APS is currently negotiating with IBEW representatives over the collective bargaining agreement that expires on March 31, 2015. The Company concluded negotiations with the USPA over the terms of a new collective bargaining agreement in May of 2014, and the new agreement is in place until May 31, 2017.
WHERE TO FIND MORE INFORMATION
 
We use our website ( www.pinnaclewest.com) as a channel of distribution for material Company information.  The following filings are available free of charge on our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”):  Annual Reports on Form 10-K, definitive proxy statements for our annual shareholder meetings, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports.  Our

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board and committee charters, Code of Ethics for Financial Executives, Code of Ethics and Business Practices and other corporate governance information is also available on the Pinnacle West website.  Pinnacle West will post any amendments to the Code of Ethics for Financial Executives and Code of Ethics and Business Practices, and any waivers that are required to be disclosed by the rules of either the SEC or the New York Stock Exchange, on its website.  The information on Pinnacle West’s website is not incorporated by reference into this report.
 
You can request a copy of these documents, excluding exhibits, by contacting Pinnacle West at the following address:  Pinnacle West Capital Corporation, Office of the Corporate Secretary, Mail Station 8602, P.O. Box 53999, Phoenix, Arizona 85072-3999 (telephone 602-250-4400).

ITEM 1A.  RISK FACTORS
 
In addition to the factors affecting specific business operations identified in the description of these operations contained elsewhere in this report, set forth below are risks and uncertainties that could affect our financial results.  Unless otherwise indicated or the context otherwise requires, the following risks and uncertainties apply to Pinnacle West and its subsidiaries, including APS.
 
REGULATORY RISKS
 
Our financial condition depends upon APS’s ability to recover costs in a timely manner from customers through regulated rates and otherwise execute its business strategy.
 
APS is subject to comprehensive regulation by several federal, state and local regulatory agencies that significantly influence its business, liquidity, results of operations and its ability to fully recover costs from utility customers in a timely manner.  The ACC regulates APS’s retail electric rates and FERC regulates rates for wholesale power sales and transmission services.  The profitability of APS is affected by the rates it may charge and the timeliness of recovering costs incurred through its rates.  Consequently, our financial condition and results of operations are dependent upon the satisfactory resolution of any APS rate proceedings and ancillary matters which may come before the ACC and FERC.  Arizona, like certain other states, has a statute that allows the ACC to reopen prior decisions and modify otherwise final orders under certain circumstances.  The ACC must also approve APS’s issuance of securities and any significant transfer or encumbrance of APS property used to provide retail electric service, and must approve or receive prior notification of certain transactions between us, APS and our respective affiliates.  Decisions made by the ACC or FERC could have a material adverse impact on our financial condition, results of operations or cash flows.
APS’s ability to conduct its business operations and avoid fines and penalties depends upon compliance with federal, state or local statutes, regulations and ACC requirements, and obtaining and maintaining certain regulatory permits, approvals and certificates.
 
APS must comply in good faith with all applicable statutes, regulations, rules, tariffs, and orders of agencies that regulate APS’s business, including FERC, NRC, EPA, the ACC, and state and local governmental agencies.  These agencies regulate many aspects of APS’s utility operations, including safety and performance, emissions, siting and construction of facilities, customer service and the rates that APS can charge retail and wholesale customers.  Failure to comply can subject APS to, among other things, fines and penalties.  For example, under the Energy Policy Act of 2005, FERC can impose penalties (up to one million dollars per day per violation) for failure to comply with mandatory electric reliability standards.  APS is also required to have numerous permits, approvals and certificates from these agencies.  APS believes the necessary permits, approvals and certificates have been obtained for its existing operations and that APS’s business is conducted in accordance with applicable laws in all material respects.  However, changes in regulations or the imposition

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of new or revised laws or regulations could have an adverse impact on our results of operations.  We are also unable to predict the impact on our business and operating results from pending or future regulatory activities of any of these agencies .
 
The operation of APS’s nuclear power plant exposes it to substantial regulatory oversight and potentially significant liabilities and capital expenditures.
 
The NRC has broad authority under federal law to impose safety-related, security-related and other licensing requirements for the operation of nuclear generation facilities.  Events at nuclear facilities of other operators or impacting the industry generally may lead the NRC to impose additional requirements and regulations on all nuclear generation facilities, including Palo Verde.  As a result of the March 2011 earthquake and tsunamis that caused significant damage to the Fukushima Daiichi Nuclear Power Plant in Japan, various industry organizations are working to analyze information from the Japan incident and develop action plans for U.S. nuclear power plants.  Additionally, the NRC has been performing its own independent review of the events at Fukushima Daiichi, including a review of the agency’s processes and regulations in order to determine whether the agency should promulgate additional regulations and possibly make more fundamental changes to the NRC’s system of regulation.  We cannot predict when or if the NRC will complete its formal actions as a result of its review.  As a result of the Fukushima event, however, the NRC has directed nuclear power plants to implement the first tier recommendations of the NRC’s Near Term Task Force.  In response to these recommendations, Palo Verde expects to spend approximately $40 million for capital enhancements to the plant over the next two years in addition to the approximate $80 million that has already been spent on capital enhancements as of December 31, 2014 (APS’s share is 29.1%). We cannot predict whether these amounts will increase or whether additional financial and/or operational requirements on Palo Verde and APS may be imposed.
 
In the event of noncompliance with its requirements, the NRC has the authority to impose a progressively increased inspection regime that could ultimately result in the shut-down of a unit or civil penalties, or both, depending upon the NRC’s assessment of the severity of the situation, until compliance is achieved.  The increased costs resulting from penalties, a heightened level of scrutiny and implementation of plans to achieve compliance with NRC requirements may adversely affect APS’s financial condition, results of operations and cash flows.
APS is subject to numerous environmental laws and regulations, and changes in, or liabilities under, existing or new laws or regulations may increase APS’s cost of operations or impact its business plans.
 
APS is, or may become, subject to numerous environmental laws and regulations affecting many aspects of its present and future operations, including air emissions, water quality, discharges of wastewater and streams originating from fly ash and bottom ash handling facilities, solid waste, hazardous waste, and coal combustion products, which consist of bottom ash, fly ash, and air pollution control wastes.  These laws and regulations can result in increased capital, operating, and other costs, particularly with regard to enforcement efforts focused on power plant emissions obligations.  These laws and regulations generally require APS to obtain and comply with a wide variety of environmental licenses, permits, and other approvals.  If there is a delay or failure to obtain any required environmental regulatory approval, or if APS fails to obtain, maintain, or comply with any such approval, operations at affected facilities could be suspended or subject to additional expenses.  In addition, failure to comply with applicable environmental laws and regulations could result in civil liability as a result of government enforcement actions or private claims or criminal penalties.  Both public officials and private individuals may seek to enforce applicable environmental laws and regulations.  APS cannot predict the outcome (financial or operational) of any related litigation that may arise.
 
Environmental Clean Up.  APS has been named as a PRP for a Superfund site in Phoenix, Arizona, and it could be named a PRP in the future for other environmental clean-up at sites identified by a regulatory body.

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 APS cannot predict with certainty the amount and timing of all future expenditures related to environmental matters because of the difficulty of estimating clean-up costs.  There is also uncertainty in quantifying liabilities under environmental laws that impose joint and several liability on all PRPs.
 
Regional Haze.   APS has received final rulemakings imposing new requirements on Four Corners, Cholla and the Navajo Plant.  Pursuant to these rules, EPA and ADEQ will require these plants to install pollution control equipment that constitutes BART to lessen the impacts of emissions on visibility surrounding the plants.  The financial impact of installing and operating the required pollution control equipment could jeopardize the economic viability of these plants or the ability of individual participants to continue their participation in these plants.
 
Coal Ash. In December 2014, EPA issued final regulations governing the handling and disposal of CCR, which are generated as a result of burning coal and consist of, among other things, fly ash and bottom ash. The rule regulates CCR as a non-hazardous waste. APS currently disposes of CCR in ash ponds and dry storage areas at Cholla and Four Corners and in a dry landfill storage area at the Navajo Plant. To the extent the rule requires the closure or modification of these CCR units or the construction of new CCR units beyond what we currently anticipate, APS could incur significant additional costs for CCR disposal.

Effluent Limitation Guidelines.   EPA is expected to finalize revised effluent limitation guidelines establishing technology-based wastewater discharge limitations for fossil-fired EGUs in 2015.  EPA has indicated that it expects the revised standards to target metals and other pollutants in wastewater streams originating from fly ash and bottom ash handling activities and scrubber-related operations.  APS currently disposes of fly ash waste and bottom ash in ash ponds at Four Corners.  Changes required by the rule could significantly increase ash disposal costs at Four Corners.
 
Ozone National Ambient Air Quality Standards. In December 2014, EPA proposed revisions to the national ambient air quality standards, which would set new, more stringent standards intended to protect human health and human welfare. Depending on the stringency of the final standards and the implementation requirements, APS may be required to invest in new pollution control technologies and to generate emission offsets for new projects or facility expansions located in ozone nonattainment areas.

New Source Review.  EPA has taken the position that many projects electric utilities have performed are major modifications that trigger NSR requirements under the Clean Air Act.  The utilities generally have taken the position that these projects are routine maintenance, repair and replacement and did not result in emissions increases, and thus are not subject to NSR.  In 2009, APS received and responded to a request from EPA regarding projects and operations at Four Corners.  Several environmental non-governmental organizations filed suit against the Four Corners participants for alleged violations of the Clean Air Act's NSR and NSPS programs.  If EPA seeks to impose NSR requirements at Four Corners or any other APS plant, or if the citizens groups prevail in their Clean Air Act lawsuit, capital investments could be required to install new pollution control technologies.  EPA could also seek civil penalties.

APS cannot assure that existing environmental regulations will not be revised or that new regulations seeking to protect the environment will not be adopted or become applicable to it.  Revised or additional regulations that result in increased compliance costs or additional operating restrictions, particularly if those costs incurred by APS are not fully recoverable from APS’s customers, could have a material adverse effect on its financial condition, results of operations or cash flows.  Due to current or potential future regulations or legislation, the economics of continuing to own certain resources, particularly coal facilities, may deteriorate, warranting early retirement of those plants, which may result in asset impairments.  APS would seek recovery in rates for the book value of any remaining investments in the plants as well as other costs related to early retirement, but cannot predict whether it would obtain such recovery.

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APS faces physical and operational risks related to climate effects, and potential financial risks resulting from climate change litigation and legislative and regulatory efforts to limit GHG emissions.

Concern over climate change has led to significant legislative and regulatory efforts to limit CO2, which is a major byproduct of the combustion of fossil fuel, and other GHG emissions.
Financial Risks - Potential Greenhouse Gas Regulation.  In 2014, EPA proposed a rule to limit carbon dioxide emissions from existing power plants. EPA expects to finalize the proposal in summer 2015. EPA’s proposal for Arizona would result in a shift in in-state generation from coal to natural gas and renewable generation. Such a substantial change in APS’s generation portfolio could require additional capital investments and increased operating costs, and thus have a significant financial impact on the Company.
Physical and Operational Risks. Weather extremes such as drought and high temperature variations are common occurrences in the Southwest’s desert area, and these are risks that APS considers in the normal course of business in the engineering and construction of its electric system. Large increases in ambient temperatures could require evaluation of certain materials used within its system and represent a greater challenge.
Deregulation or restructuring of the electric industry may result in increased competition, which could have a significant adverse impact on APS’s business and its results of operations.
 
In 1999, the ACC approved rules for the introduction of retail electric competition in Arizona.  Retail competition could have a significant adverse financial impact on APS due to an impairment of assets, a loss of retail customers, lower profit margins or increased costs of capital.  Although some very limited retail competition existed in APS’s service area in 1999 and 2000, there are currently no active retail competitors offering unbundled energy or other utility services to APS’s customers.  On May 9, 2013, the ACC voted to re-examine the facilitation of a deregulated retail electric market in Arizona.  The ACC subsequently opened a docket for this matter and received comments from a number of interested parties on the considerations involved in establishing retail electric deregulation in the state.  One of these considerations is whether various aspects of a deregulated market, including setting utility rates on a “market” basis, would be consistent with the requirements of the Arizona Constitution.  On September 11, 2013, after receiving legal advice from the ACC staff, the ACC voted 4-1 to close the current docket and await full Arizona Constitutional authority before any further examination of this matter.  The motion approved by the ACC also included opening one or more new dockets in the future to explore options to offer more rate choices to customers and innovative changes within the existing cost-of-service regulatory model that could include elements of competition.  One of these options could be a continuation or expansion of APS’s existing AG (Alternative Generation) — 1 program, which essentially allows up to 200 MW of cumulative load to be served via a buy-through arrangement with competitive suppliers of generation.  We cannot predict future regulatory or legislative action that might result in increased competition.
 
In 2010, the ACC issued a decision holding that solar vendors that install and operate solar facilities for non-profit schools and governments pursuant to a specific type of contract that calculates payments based on the energy produced are not “public service corporations” under the Arizona Constitution, and are therefore not regulated by the ACC.  A second matter is pending with the ACC to determine whether that ruling should extend to solar providers who serve a broader customer base under the same business model.  The use of such products by customers within our territory results in some level of competition.  APS cannot predict whether the ACC will deem these vendors “public service corporations” subject to ACC regulation and when, and the extent to which, additional service providers will enter APS’s service territory, increasing the level of competition in the market.

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OPERATIONAL RISKS
 
APS’s results of operations can be adversely affected by various factors impacting demand for electricity.
 
Weather Conditions.   Weather conditions directly influence the demand for electricity and affect the price of energy commodities.  Electric power demand is generally a seasonal business.  In Arizona, demand for power peaks during the hot summer months, with market prices also peaking at that time.  As a result, APS’s overall operating results fluctuate substantially on a seasonal basis.  In addition, APS has historically sold less power, and consequently earned less income, when weather conditions are milder.  As a result, unusually mild weather could diminish APS’s financial condition, results of operations and cash flows.
 
Higher temperatures may decrease the snowpack, which might result in lowered soil moisture and an increased threat of forest fires.  Forest fires could threaten APS’s communities and electric transmission lines and facilities.  Any damage caused as a result of forest fires could negatively impact APS’s financial condition, results of operations or cash flows.
 
Effects of Energy Conservation Measures and Distributed Energy.   The ACC has enacted rules regarding energy efficiency that mandate a 22% annual energy savings requirement by 2020.  This will likely increase participation by APS customers in energy efficiency and conservation programs and other demand-side management efforts, which in turn will impact the demand for electricity.  The rules also include a requirement for the ACC to review and address financial disincentives, recovery of fixed costs and the recovery of net lost income/revenue that would result from lower sales due to increased energy efficiency requirements.  To that end, the settlement agreement in APS’s most recent retail rate case (the “2012 Settlement Agreement”) includes a mechanism, the LFCR, to address these matters.
 
APS must also meet certain distributed energy requirements.  A portion of APS’s total renewable energy requirement must be met with an increasing percentage of distributed energy resources (generally, small scale renewable technologies located on customers’ properties).  The distributed energy requirement was 25% of the overall RES requirement of 3% in 2011 and increased to 30% of the applicable RES requirement for 2012 and subsequent years.  Customer participation in distributed energy programs would result in lower demand, since customers would be meeting some or all of their own energy needs.  Reduced demand due to these energy efficiency and distributed energy requirements, unless substantially offset through ratemaking mechanisms, could have a material adverse impact on APS’s financial condition, results of operations and cash flows.
 
Customer and Sales Growth.  For the three years 2012 through 2014, APS’s retail customer growth averaged 1.3% per year.  We currently expect annual customer growth to average in the range of 2.0-3.0% for 2015 through 2017 based on our assessment of modestly improving economic conditions in Arizona.  For the three years 2012 through 2014, APS experienced annual decreases in retail electricity sales averaging 0.2%, adjusted to exclude the effects of weather variations.  We currently estimate that annual retail electricity sales in kWh will increase on average in the range of 0.5-1.5% during 2015 through 2017, including the effects of customer conservation and energy efficiency and distributed renewable generation initiatives, but excluding the effects of weather variations.  Actual customer and sales growth may differ from our projections as a result of numerous factors, such as economic conditions, customer growth, usage patterns and energy conservation, impacts of energy efficiency programs and growth in distributed generation, and responses to retail price changes. Additionally, recovery of a substantial portion of our fixed costs of providing service is based upon the volumetric amount of our sales.  If our customer growth rate does not continue to improve as projected, or if it declines, or if the Arizona economy fails to improve, we may be unable to reach our estimated demand level and sales projections, which could have a negative impact on our financial condition, results of operations and cash flows.

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The operation of power generation facilities and transmission systems involves risks that could result in reduced output or unscheduled outages, which could materially affect APS’s results of operations .
 
The operation of power generation, transmission and distribution facilities involves certain risks, including the risk of breakdown or failure of equipment, fuel interruption, and performance below expected levels of output or efficiency.  Unscheduled outages, including extensions of scheduled outages due to mechanical failures or other complications, occur from time to time and are an inherent risk of APS’s business.  Because our transmission facilities are interconnected with those of third parties, the operation of our facilities could be adversely affected by unexpected or uncontrollable events occurring on the larger transmission power grid, and the operation or failure of our facilities could adversely affect the operations of others.  If APS’s facilities operate below expectations, especially during its peak seasons, it may lose revenue or incur additional expenses, including increased purchased power expenses.  Concerns over physical security of these assets is also increasing, which may require us to incur additional capital and operating costs to address. Damage to certain of our facilities due to vandalism or other deliberate acts could lead to outages or other adverse effects.
 
The inability to successfully develop or acquire generation resources to meet reliability requirements, new or evolving standards or regulations could adversely impact our business.
 
Potential changes in regulatory standards, impacts of new and existing laws and regulations, including environmental laws and regulations, and the need to obtain certain regulatory approvals create uncertainty surrounding our generation portfolio.  The current abundance of low, stably priced natural gas, together with environmental and other concerns surrounding coal-fired generation resources, create strategic questions related to the appropriate generation portfolio and fuel diversification mix.  In addition, APS is required by the ACC to meet certain energy resource portfolio requirements such as the EES and the RES.  The development of any generation facility is subject to many risks, including risks related to financing, siting, permitting, technology, the construction of sufficient transmission capacity to support these facilities and stresses to generation and transmission resources from intermittent generation characteristics of renewable resources.  APS’s inability to adequately develop or acquire the necessary generation resources could have a material adverse impact on our business and results of operations.
 
The lack of access to sufficient supplies of water could have a material adverse impact on APS’s business and results of operations.
 
Assured supplies of water are important for APS’s generating plants.  Water in the southwestern United States is limited, and various parties have made conflicting claims regarding the right to access and use such limited supply of water.  Both groundwater and surface water in areas important to APS’s generating plants have been and are the subject of inquiries, claims and legal proceedings.  In addition, the region in which APS’s power plants are located is prone to drought conditions, which could potentially affect the plants’ water supplies.  APS’s inability to access sufficient supplies of water could have a material adverse impact on our business and results of operations.

The ownership and operation of power generation and transmission facilities on Indian lands could result in uncertainty related to continued leases, easements and rights-of-way, which could have a significant impact on our business.
 
Certain APS power plants, including Four Corners, and portions of the transmission lines that carry power from these plants are located on Indian lands pursuant to leases, easements or other rights-of-way that are effective for specified periods.  APS is unable to predict the final outcome of pending and future approvals by applicable governing bodies with respect to renewals of these leases, easements and rights-of-way.

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There are inherent risks in the ownership and operation of nuclear facilities, such as environmental, health, fuel supply, spent fuel disposal, regulatory and financial risks and the risk of terrorist attack.
 
APS has an ownership interest in and operates, on behalf of a group of participants, Palo Verde, which is the largest nuclear electric generating facility in the United States.  Palo Verde constitutes approximately 18% of our owned and leased generation capacity.  Palo Verde is subject to environmental, health and financial risks, such as the ability to obtain adequate supplies of nuclear fuel; the ability to dispose of spent nuclear fuel; the ability to maintain adequate reserves for decommissioning; potential liabilities arising out of the operation of these facilities; the costs of securing the facilities against possible terrorist attacks; and unscheduled outages due to equipment and other problems.  APS maintains nuclear decommissioning trust funds and external insurance coverage to minimize its financial exposure to some of these risks; however, it is possible that damages could exceed the amount of insurance coverage.  In addition, APS may be required under federal law to pay up to $111 million (but not more than $16.5 million per year) of liabilities arising out of a nuclear incident occurring not only at Palo Verde, but at any other nuclear power plant in the United States. Although we have no reason to anticipate a serious nuclear incident at Palo Verde, if an incident did occur, it could materially and adversely affect our results of operations and financial condition.  A major incident at a nuclear facility anywhere in the world could cause the NRC to limit or prohibit the operation or licensing of any domestic nuclear unit and to promulgate new regulations that could require significant capital expenditures and/or increase operating costs.
 
The use of derivative contracts in the normal course of our business could result in financial losses that negatively impact our results of operations.
 
APS’s operations include managing market risks related to commodity prices.  APS is exposed to the impact of market fluctuations in the price and transportation costs of electricity, natural gas and coal to the extent that unhedged positions exist.  We have established procedures to manage risks associated with these market fluctuations by utilizing various commodity derivatives, including exchange traded futures and options and over-the-counter forwards, options, and swaps.  As part of our overall risk management program, we enter into derivative transactions to hedge purchases and sales of electricity and fuels.  The changes in market value of such contracts have a high correlation to price changes in the hedged commodity.  To the extent that commodity markets are illiquid, we may not be able to execute our risk management strategies, which could result in greater unhedged positions than we would prefer at a given time and financial losses that negatively impact our results of operations.
 
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) contains measures aimed at increasing the transparency and stability of the over-the counter, or OTC, derivative markets and preventing excessive speculation. The Dodd-Frank Act could restrict, among other things, trading positions in the energy futures markets, require different collateral or settlement positions, or increase regulatory reporting over derivative positions. Based on the provisions included in the Dodd-Frank Act and the implementation of regulations, these changes could, among other things, impact our ability to hedge commodity price and interest rate risk or increase the costs associated with our hedging programs.
 
We are exposed to losses in the event of nonperformance or nonpayment by counterparties.  We use a risk management process to assess and monitor the financial exposure of all counterparties.  Despite the fact that the majority of APS’s trading counterparties are rated as investment grade by the rating agencies, there is still a possibility that one or more of these companies could default, which could result in a material adverse impact on our earnings for a given period.

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Changes in technology could create challenges for APS’s existing business.
 
Research and development activities are ongoing to develop and commercialize alternative technologies that produce power or reduce power consumption or emissions, including renewable technologies including photovoltaic (solar) cells, customer-sited generation, energy storage (batteries), and efficiency technologies.  Advances in these, or other technologies could reduce the cost of power production, making APS’s existing generating facilities less economical.  In addition, advances in technology and equipment/appliance efficiency could reduce the demand for power supply, which could adversely affect APS’s business.
 
APS has, and continues to pursue and implement, smart grid technologies, including advanced transmission and distribution system technologies, as well as digital meters enabling two-way communications between the utility and its customers.  Many of the products and processes resulting from these and other alternative technologies have not yet been widely used or tested on a long-term basis, and their use on large-scale systems is not as established or mature as APS’s existing technologies and equipment.  Widespread installation and acceptance of these technologies could enable the entry of new market participants, such as technology companies, into the interface between APS and its customers and could have other unpredictable effects on APS’s business.
 
We are subject to employee workforce factors that could adversely affect our business and financial condition.
 
Like most companies in the electric utility industry, our workforce is maturing, with approximately 37% of employees eligible to retire by the end of 2017.  Although we have undertaken efforts to recruit and train new employees, we face increased competition for talent.  We are subject to other employee workforce factors, such as the availability of qualified personnel, the need to negotiate collective bargaining agreements with union employees and potential work stoppages.  These or other employee workforce factors could negatively impact our business, financial condition or results of operations.
 
We are subject to information security risks and risks of unauthorized access to our systems.
 
In the regular course of our business, we handle a range of sensitive security, customer and business systems information. A security breach of our information systems such as theft or the inappropriate release of certain types of information, including confidential customer, employee, financial or system operating information, could have a material adverse impact on our financial condition, results of operations or cash flows. We operate in a highly regulated industry that requires the continued operation of sophisticated information technology systems and network infrastructure.  Despite implementation of security measures, our technology systems are vulnerable to disability, failures or unauthorized access.  Our generation, transmission and distribution facilities, information technology systems and other infrastructure facilities and systems and physical assets could be targets of such unauthorized access.  Failures or breaches of our systems could impact the reliability of our generation, transmission and distribution systems and also subject us to financial harm.  If our technology systems were to fail or be breached and if we are unable to recover in a timely way, we may not be able to fulfill critical business functions and sensitive confidential data could be compromised, which could have a material adverse impact on our financial condition, results of operations or cash flows.

We are subject to laws and rules issued by multiple government agencies concerning safeguarding and maintaining the confidentiality of our security, customer and business information. One of these agencies, NERC, has issued comprehensive regulations and standards surrounding the security of our operating systems, and is continually in the process of developing updated and additional requirements with which the utility industry must comply. The increasing promulgation of NERC rules and standards will increase our compliance costs and our exposure to the potential risk of violations of the standards.

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While we have experienced, and expect to continue to experience, these types of threats and attempted intrusions, none of them to date has been material to the Company. The implementation of additional security measures could increase costs and have a material adverse impact on our financial results. We have obtained cyber insurance to provide coverage for a portion of the losses and damages that may result from a security breach of our information technology systems, but such insurance may not cover the total loss or damage caused by a breach. These types of events could also require significant management attention and resources, and could adversely affect Pinnacle West’s and APS’s reputation with customers and the public. 
 
FINANCIAL RISKS
 
Financial market disruptions or new rules or regulations may increase our financing costs or limit our access to various financial markets, which may adversely affect our liquidity and our ability to implement our financial strategy.
 
Pinnacle West and APS rely on access to credit markets as a significant source of liquidity and the capital markets for capital requirements not satisfied by cash flow from our operations.  We believe that we will maintain sufficient access to these financial markets.  However, certain market disruptions or rules or regulations may cause our cost of borrowing to increase generally, and/or otherwise adversely affect our ability to access these financial markets.
 
In addition, the credit commitments of our lenders under our bank facilities may not be satisfied or continued beyond current commitment periods for a variety of reasons, including new rules and regulations, periods of financial distress or liquidity issues affecting our lenders or financial markets, which could materially adversely affect the adequacy of our liquidity sources and the cost of maintaining these sources.
 
Changes in economic conditions, monetary policy, financial regulation or other factors could result in higher interest rates, which would increase interest expense on our existing variable rate debt and new debt we expect to issue in the future, and thus reduce funds available to us for our current plans.

Additionally, an increase in our leverage, whether as a result of these factors or otherwise, could adversely affect us by:

• causing a downgrade of our credit ratings;
• increasing the cost of future debt financing and refinancing;
• increasing our vulnerability to adverse economic and industry conditions; and
		
•	requiring us to dedicate an increased portion of our cash flow from operations to payments on our debt, which would reduce funds available to us for operations, future investment in our business or other purposes.	
 
A downgrade of our credit ratings could materially and adversely affect our business, financial condition and results of operations.
 
Our current ratings are set forth in “Liquidity and Capital Resources — Credit Ratings” in Item 7.  We cannot be sure that any of our current ratings will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances in the future so warrant.  Any downgrade or withdrawal could adversely affect the market price of Pinnacle West’s and APS’s securities, limit our access to capital and increase our borrowing costs, which would diminish our financial results.  We would be required to pay a higher interest rate for future financings, and our potential pool of investors and funding sources could decrease.  In addition, borrowing costs under our existing credit facilities

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depend on our credit ratings.  A downgrade could also require us to provide additional support in the form of letters of credit or cash or other collateral to various counterparties.  If our short-term ratings were to be lowered, it could severely limit access to the commercial paper market.  We note that the ratings from rating agencies are not recommendations to buy, sell or hold our securities and that each rating should be evaluated independently of any other rating.
 
Investment performance, changing interest rates and other economic factors could decrease the value of our benefit plan assets and nuclear decommissioning trust funds and increase the valuation of our related obligations, resulting in significant additional funding requirements.  We are subject to risks related to the provision of employee healthcare benefits and recent healthcare reform legislation.  Any inability to fully recover these costs in our utility rates would negatively impact our financial condition.
 
We have significant pension plan and other postretirement benefits plan obligations to our employees and retirees, and legal obligations to fund nuclear decommissioning trusts for Palo Verde.  We hold and invest substantial assets in these trusts that are designed to provide funds to pay for certain of these obligations as they arise.  Declines in market values of the fixed income and equity securities held in these trusts may increase our funding requirements into the related trusts.  Additionally, the valuation of liabilities related to our pension plan and other postretirement benefit plans are impacted by a discount rate, which is the interest rate used to discount future pension and other postretirement benefit obligations.  Declining interest rates decrease the discount rate, increase the valuation of the plan liabilities and may result in increases in pension and other postretirement benefit costs, cash contributions, regulatory assets, and charges to OCI.  Changes in demographics, including increased number of retirements or changes in life expectancy and changes in other actuarial assumptions, may also result in similar impacts.  The minimum contributions required under these plans are impacted by federal legislation.  Increasing liabilities or otherwise increasing funding requirements under these plans, resulting from adverse changes in legislation or otherwise, could result in significant cash funding obligations that could have a material impact on our financial position, results of operations or cash flows.
 
We recover most of the pension costs and other postretirement benefit costs and all of the nuclear decommissioning costs in our regulated rates.  Any inability to fully recover these costs in a timely manner would have a material negative impact on our financial condition, results of operations or cash flows.
 
Employee healthcare costs in recent years have continued to rise.  The Patient Protection and Affordable Care Act is expected to result in additional healthcare cost increases.  Costs and other effects of the legislation, which may include the cost of compliance and potentially increased costs of providing for medical insurance for our employees, cannot be determined with certainty at this time. 
 
Our cash flow depends on the performance of APS.
 
We derive essentially all of our revenues and earnings from our wholly owned subsidiary, APS.  Accordingly, our cash flow and our ability to pay dividends on our common stock is dependent upon the earnings and cash flows of APS and its distributions to us.  APS is a separate and distinct legal entity and has no obligation to make distributions to us.
 
APS’s financing agreements may restrict its ability to pay dividends, make distributions or otherwise transfer funds to us.  In addition, an ACC financing order requires APS to maintain a common equity ratio of at least 40% and does not allow APS to pay common dividends if the payment would reduce its common equity below that threshold.  The common equity ratio, as defined in the ACC order, is total shareholder equity divided by the sum of total shareholder equity and long-term debt, including current maturities of long-term debt.

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Pinnacle West’s ability to meet its debt service obligations could be adversely affected because its debt securities are structurally subordinated to the debt securities and other obligations of its subsidiaries.
 
Because Pinnacle West is structured as a holding company, all existing and future debt and other liabilities of our subsidiaries will be effectively senior in right of payment to our debt securities.  The assets and cash flows of our subsidiaries will be available, in the first instance, to service their own debt and other obligations.  Our ability to have the benefit of their cash flows, particularly in the case of any insolvency or financial distress affecting our subsidiaries, would arise only through our equity ownership interests in our subsidiaries and only after their creditors have been satisfied.
 
The market price of our common stock may be volatile.
 
The market price of our common stock could be subject to significant fluctuations in response to factors such as the following, some of which are beyond our control:

•	variations in our quarterly operating results;	
		
•	operating results that vary from the expectations of management, securities analysts and investors;	
		
•	changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;	
		
•	developments generally affecting industries in which we operate;	
		
•	announcements by us or our competitors of significant contracts, acquisitions, joint marketing relationships, joint ventures or capital commitments;	
		
•	announcements by third parties of significant claims or proceedings against us;	
		
•	favorable or adverse regulatory or legislative developments;	
		
•	our dividend policy;	
		
•	future sales by the Company of equity or equity-linked securities; and	
		
•	general domestic and international economic conditions.	

In addition, the stock market in general has experienced volatility that has often been unrelated to the operating performance of a particular company.  These broad market fluctuations may adversely affect the market price of our common stock.
 
Certain provisions of our articles of incorporation and bylaws and of Arizona law make it difficult for shareholders to change the composition of our board and may discourage takeover attempts.
 
These provisions, which could preclude our shareholders from receiving a change of control premium, include the following:
		
•	restrictions on our ability to engage in a wide range of “business combination” transactions with an “interested shareholder” (generally, any person who owns 10% or more of our outstanding voting power or any of our affiliates or associates) or any affiliate or associate of an interested shareholder, unless specific conditions are met;	
		
•	anti-greenmail provisions of Arizona law and our bylaws that prohibit us from purchasing shares of our voting stock from beneficial owners of more than 5% of our outstanding shares unless specified conditions are satisfied;	
		
•	the ability of the Board of Directors to increase the size of the Board of Directors and fill vacancies on the Board of Directors, whether resulting from such increase, or from death, resignation, disqualification or otherwise; and	

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•	the ability of our Board of Directors to issue additional shares of common stock and shares of preferred stock and to determine the price and, with respect to preferred stock, the other terms, including preferences and voting rights, of those shares without shareholder approval.	
 
While these provisions have the effect of encouraging persons seeking to acquire control of us to negotiate with our Board of Directors, they could enable the Board of Directors to hinder or frustrate a transaction that some, or a majority, of our shareholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors.

ITEM 1B.  UNRESOLVED STAFF COMMENTS
 
Neither Pinnacle West nor APS has received written comments regarding its periodic or current reports from the SEC staff that were issued 180 days or more preceding the end of its 2014 fiscal year and that remain unresolved.

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ITEM 2.  PROPERTIES
 
Generation Facilities
 
APS’s portfolio of owned and leased generating facilities is provided in the table below:

													
Name	 	No. of
Units	 	%
Owned (a)	 	Principal
Fuels
Used	 	Primary
Dispatch
Type	 	Owned
Capacity
(MW)	
Nuclear:	 	 	 	 		 	 	 	 	 	 		
Palo Verde (b)	 	3	 	29.1	%	 	Uranium	 	Base Load	 	1,146		
Total Nuclear	 	 	 	 		 	 	 	 	 	1,146		
Steam:	 	 	 	 		 	 	 	 	 	 		
Four Corners 4, 5 (c)	 	2	 	63	%	 	Coal	 	Base Load	 	970		
Cholla	 	3	 	 		 	Coal	 	Base Load	 	647		
Navajo (d)	 	3	 	14	%	 	Coal	 	Base Load	 	315		
Ocotillo	 	2	 	 		 	Gas	 	Peaking	 	220		
Total Steam	 	 	 	 		 	 	 	 	 	2,152		
Combined Cycle:	 	 	 	 		 	 	 	 	 	 		
Redhawk	 	2	 	 		 	Gas	 	Load Following	 	984		
West Phoenix	 	5	 	 		 	Gas	 	Load Following	 	887		
Total Combined Cycle	 	 	 	 		 	 	 	 	 	1,871		
Combustion Turbine:	 	 	 	 		 	 	 	 	 	 		
Ocotillo	 	2	 	 		 	Gas	 	Peaking	 	110		
Saguaro 1, 2	 	2	 	 		 	Gas/Oil	 	Peaking	 	110		
Saguaro 3	 	1	 	 		 	Gas	 	Peaking	 	79		
Douglas	 	1	 	 		 	Oil	 	Peaking	 	16		
Sundance	 	10	 	 		 	Gas	 	Peaking	 	420		
West Phoenix	 	2	 	 		 	Gas	 	Peaking	 	110		
Yucca 1, 2, 3	 	3	 	 		 	Gas/Oil	 	Peaking	 	93		
Yucca 4	 	1	 	 		 	Oil	 	Peaking	 	54		
Yucca 5, 6	 	2	 	 		 	Gas	 	Peaking	 	96		
Total Combustion Turbine	 	 	 	 		 	 	 	 	 	1,088		
Solar:	 	 	 	 		 	 	 	 	 	 		
Cotton Center	 	1	 	 		 	Solar	 	As Available	 	17		
Hyder	 	1	 	 		 	Solar	 	As Available	 	16		
Paloma	 	1	 	 		 	Solar	 	As Available	 	17		
Chino Valley	 	1	 	 		 	Solar	 	As Available	 	19		
Gila Bend	 	1	 	 	 	Solar	 	As Available	 	32		
Hyder II	 	1	 	 		 	Solar	 	As Available	 	14		
Foothills	 	1	 	 		 	Solar	 	As Available	 	35		
APS Owned Distributed Energy	 	 	 	 		 	Solar	 	As Available	 	15		
Multiple facilities	 	 	 	 		 	Solar	 	As Available	 	4		
Total Solar	 	 	 	 		 	 	 	 	 	169		
Total Capacity	 	 	 	 		 	 	 	 	 	6,426		

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(a)	100% unless otherwise noted.	
		
(b)	See “Business of Arizona Public Service Company — Energy Sources and Resource Planning — Generation Facilities — Nuclear” in Item 1 for details regarding leased interests in Palo Verde.  The other participants are Salt River Project (17.49%), SCE (15.8%), El Paso (15.8%), Public Service Company of New Mexico (10.2%), Southern California Public Power Authority (5.91%), and Los Angeles Department of Water & Power (5.7%).  The plant is operated by APS.	
		
(c)	The other participants are Salt River Project (10%), Public Service Company of New Mexico (13%), Tucson Electric Power Company (7%) and El Paso (7%).  The plant is operated by APS.  As discussed under “Business of Arizona Public Service Company — Energy Sources and Resource Planning — Generation Facilities — Coal-Fueled Generating Facilities — Four Corners” in Item 1, in December 2013 APS acquired SCE’s 48% interest in Units 4 and 5, and closed Units 1, 2 and 3.	
		
(d)	The other participants are Salt River Project (21.7%), Nevada Power Company (11.3%), the United States Government (24.3%), Tucson Electric Power Company (7.5%) and Los Angeles Department of Water & Power (21.2%).  The plant is operated by Salt River Project.	
See “Business of Arizona Public Service Company — Environmental Matters” in Item 1 with respect to matters having a possible impact on the operation of certain of APS’s generating facilities.
 
See “Business of Arizona Public Service Company” in Item 1 for a map detailing the location of APS’s major power plants and principal transmission lines.
 
Transmission and Distribution Facilities
 
Current Facilities .   APS’s transmission facilities consist of approximately 5,909 pole miles of overhead lines and approximately 49 miles of underground lines, 5,686 miles of which are located in Arizona.  APS’s distribution facilities consist of approximately 11,071 miles of overhead lines and approximately 17,908 miles of underground primary cable, all of which are located in Arizona. APS distribution facilities reflect an actual net gain of 167 miles in 2014.  APS shares ownership of some of its transmission facilities with other companies.  The following table shows APS’s jointly-owned interests in those transmission facilities recorded on the Consolidated Balance Sheets at December 31, 2014:

	
			
 	Percent Owned
(Weighted-Average)	
Morgan — Pinnacle Peak System	64.4	%	
Palo Verde — Estrella 500kV System	50.0	%	
Round Valley System	50.0	%	
ANPP 500kV System	33.6	%	
Navajo Southern System	22.6	%	
Four Corners Switchyards	47.5	%	
Palo Verde — Yuma 500kV System	18.2	%	
Phoenix — Mead System	17.1	%	
Palo Verde — Morgan System	90.0	%	
Hassayampa — North Gila System	80.0	%	
 
Expansion.   Each year APS prepares and files with the ACC a ten-year transmission plan.  In APS’s 2015 plan, APS projects it will develop 275 miles of new lines over the next ten years.  One significant project currently under development is a new 500kV path that will span from the Palo Verde hub around the western and northern edges of the Phoenix metropolitan area and terminate at a bulk substation in the northeast part of Phoenix.  The project consists of four phases.  The first phase, Morgan to Pinnacle Peak 500kV, is currently in-service. The second and third phases, Delaney to Palo Verde 500kV and Delaney to Sun Valley 500kV, are

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under construction.  The fourth phase, Morgan to Sun Valley 500kV, has been permitted and is in final design and development.  In total, the projects consist of over 100 miles of new 500kV lines, with many of those miles constructed with the capability to string a 230kV line as a second circuit.

APS continues to work with regulators to identify transmission projects necessary to support renewable energy facilities.  Two such projects, which are included in APS’s 2015 transmission plan, are the Delaney to Palo Verde line and the North Gila to Hassayampa line, both of which are intended to support the transmission of renewable energy to Phoenix and California. The North Gila to Hassayampa line is under construction and expected to be in service before the summer of 2015.

Physical Security Standards. On March 7, 2014, FERC issued an order requiring NERC to act within 90 days to develop standards that will require utilities to take steps, or to demonstrate that they have taken steps, to address physical security risks and vulnerabilities related to the reliable operation of the bulk-power system.  On May 23, 2014, NERC filed a petition with FERC for approval of the proposed Physical Security Reliability Standard CIP-014-1.  On November 20, 2014, FERC approved the Physical Security Reliability Standard CIP-014-1, and on January 21, 2015, FERC issued an order granting rehearing for further consideration. The Physical Security Reliability Standard requires transmission owners and operators to protect those critical transmission stations and substations and their associated primary control centers that, if rendered inoperable or damaged as a result of a physical attack, could result in widespread instability, uncontrolled separation or cascading within an interconnection.  As required by the Physical Security Reliability Standard, APS will determine whether it has any critical transmission stations and substations and associated primary control centers that will be required to comply with the standard. Until APS has made such determination, we cannot predict the extent of any financial or operational impacts on APS.
 
Plant and Transmission Line Leases and Rights-of-Way on Indian Lands
 
The Navajo Plant and Four Corners are located on land held under leases from the Navajo Nation and also under rights-of-way from the federal government.  The right-of-way and lease for the Navajo Plant expire in 2019 and the right-of-way and lease for Four Corners expire in 2016.  On March 7, 2011, the Navajo Nation Council signed a resolution approving a 25-year extension to the existing Four Corners lease term and providing Navajo Nation consent to renewal of the related rights-of-way.   APS is filing applications for renewal of these rights-of-way with the DOI.  Before it may approve the Four Corners lease extension and issue the renewed rights-of-way, the United States must complete an analysis under the federal National Environmental Policy Act, the ESA and related statutes.
 
Certain portions of the transmission lines that carry power from several of our power plants are located on Indian lands pursuant to rights-of-way that are effective for specified periods.  Some of these rights-of-way have expired and our renewal applications have not yet been acted upon by the appropriate Indian tribes or federal agencies.  Other rights expire at various times in the future and renewal action by the applicable tribe or federal agencies will be required at that time.  In recent negotiations, certain of the affected Indian tribes have required payments substantially in excess of amounts that we have paid in the past for such rights-of-way.  The ultimate cost of renewal of certain of the rights-of-way for our transmission lines is therefore uncertain.

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ITEM 3.  LEGAL PROCEEDINGS
 
See “Business of Arizona Public Service Company — Environmental Matters” in Item 1 with regard to pending or threatened litigation and other disputes.
 See Note 3 for ACC and FERC-related matters.
See Note 10 for information regarding environmental matters, Superfund–related matters, matters related to a September 2011 power outage and a New Mexico tax matter. 

ITEM 4.  MINE SAFETY DISCLOSURES
 
Not applicable.

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EXECUTIVE OFFICERS OF PINNACLE WEST
 
Pinnacle West’s executive officers are elected no less often than annually and may be removed by the Board of Directors at any time.  The executive officers, their ages at February 20, 2015, current positions and principal occupations for the past five years are as follows:

	
							
Name	 	Age	 	Position	 	Period	
Donald E. Brandt	 	60	 	Chairman of the Board and Chief Executive Officer of Pinnacle West; Chairman of the Board of APS	 	2009-Present	
 	 	 	 	President of APS	 	2013-Present	
 	 	 	 	President of Pinnacle West	 	2008-Present	
 	 	 	 	Chief Executive Officer of APS	 	2008-Present	
Robert S. Bement	 	59	 	Senior Vice President, Site Operations, PVNGS, of APS	 	2010-Present	
 	 	 	 	Vice President, Nuclear Operations of APS	 	2007-2010	
Denise R. Danner	 	59	 	Vice President, Controller and Chief Accounting Officer of Pinnacle West; Chief Accounting Officer of APS	 	2010-Present	
 	 	 	 	Vice President and Controller of APS	 	2009-Present	
Patrick Dinkel	 	51	 	Vice President, Transmission and Distribution Operations of APS	 	2014-Present	
 	 	 	 	Vice President, Resource Management of APS	 	2012-2014	
 	 	 	 	Vice President, Power Marketing, Resource Planning and Acquisition of APS	 	2011-2012	
 	 	 	 	Vice President, Power Marketing and Resource Planning of APS	 	2010-2011	
 	 	 	 	General Manager, Strategic Planning and Resource Acquisition of APS	 	2009-2010	
Randall K. Edington	 	61	 	Executive Vice President and Chief Nuclear Officer, PVNGS, of APS	 	2007-Present	

							
David P. Falck	 	61	 	Executive Vice President and General Counsel of Pinnacle West and APS	 	2009-Present	
 	 	 	 	Secretary of Pinnacle West and APS	 	2009-2012	
Daniel T. Froetscher	 	53	 	Senior Vice President, Transmission, Distribution & Customers of APS	 	2014-Present	
 	 	 	 	Vice President, Energy Delivery of APS	 	2008-2014	
Jeffrey B. Guldner	 	49	 	Senior Vice President, Public Policy of APS	 	2014-Present	
 	 	 	 	Senior Vice President, Customers and Regulation of APS	 	2012-2014	
 	 	 	 	Vice President, Rates and Regulation of APS	 	2007-2012	
James R. Hatfield	 	57	 	Executive Vice President of Pinnacle West and APS	 	2012-Present	
 	 	 	 	Chief Financial Officer of Pinnacle West and APS	 	2008-Present	
 	 	 	 	Senior Vice President of Pinnacle West and APS	 	2008-2012	
 	 	 	 	Treasurer of Pinnacle West and APS	 	2009-2010	
John S. Hatfield	 	49	 	Vice President, Communications of APS	 	2010-Present	
 	 	 	 	Director, Corporate Communications of SCE	 	2004-2010	
Tammy D. McLeod	 	53	 	Vice President, Resource Management of APS	 	2014-Present	
 	 	 	 	Vice President and Chief Customer Officer of APS	 	2007-2014	
Lee R. Nickloy	 	48	 	Vice President and Treasurer of Pinnacle West and APS	 	2010-Present	
 	 	 	 	Assistant Treasurer and Director Corporate Finance of Ameren Corporation	 	2000-2010	
Mark A. Schiavoni	 	59	 	Executive Vice President and Chief Operating Officer of APS	 	2014-Present	
 	 	 	 	Executive Vice President, Operations of APS	 	2012-2014	
 	 	 	 	Senior Vice President, Fossil Operations of APS	 	2009-2012	

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PART II

  ITEM 5.  MARKET FOR REGISTRANTS’ COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Pinnacle West’s common stock is publicly held and is traded on the New York Stock Exchange.  At the close of business on February 13, 2015, Pinnacle West’s common stock was held of record by approximately 21,649 shareholders.
 
QUARTERLY STOCK PRICES AND DIVIDENDS PAID PER SHARE
STOCK SYMBOL: PNW

																	
 	 	 	 	 	 	 	 	Dividends	
2014	 	High	 	Low	 	Close	 	Per Share	
1 st  Quarter	 	$	55.99		 	$	51.15		 	$	54.66		 	$	0.5675		
2 nd  Quarter	 	58.06		 	53.71		 	57.84		 	0.5675		
3 rd  Quarter	 	57.95		 	52.13		 	54.64		 	0.5675		
4 th  Quarter	 	71.11		 	54.59		 	68.31		 	0.595		

	
																	
 	 	 	 	 	 	 	 	Dividends	
2013	 	High	 	Low	 	Close	 	Per Share	
1 st  Quarter	 	$	57.96		 	$	51.50		 	$	57.89		 	$	0.545		
2 nd  Quarter	 	61.89		 	51.56		 	55.47		 	0.545		
3 rd  Quarter	 	60.33		 	52.03		 	54.74		 	0.545		
4 th  Quarter	 	58.70		 	52.32		 	52.92		 	0.5675		
 
APS’s common stock is wholly-owned by Pinnacle West and is not listed for trading on any stock exchange.  As a result, there is no established public trading market for APS’s common stock.
 
The chart below sets forth the dividends paid on APS’s common stock for each of the four quarters for 2014 and 2013.
 
Common Stock Dividends
(Dollars in Thousands)

									
Quarter	 	2014	 	2013	
1 st  Quarter	 	$	62,500		 	$	59,800		
2 nd  Quarter	 	62,600		 	59,900		
3 rd  Quarter	 	62,700		 	59,900		
4 th  Quarter	 	65,800		 	62,500		
 
The sole holder of APS’s common stock, Pinnacle West, is entitled to dividends when and as declared out of legally available funds.  As of December 31, 2014, APS did not have any outstanding preferred stock.

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Issuer Purchases of Equity Securities
 
The following table contains information about our purchases of our common stock during the fourth quarter of 2014.

														
Period	 	Total
Number of
Shares
Purchased
(1)	 	Average
Price Paid
per Share	 	Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs	 	Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs	
October 1 – October 31, 2014	 	56,107		 	$	58.73		 	—		 	—		
November 1 – November 30, 2014	 	—		 	—		 	—		 	—		
December 1 – December 31, 2014	 	—		 	—		 	—		 	—		
Total	 	56,107		 	$	58.73		 	—		 	—		

		
(1)	Represents shares of common stock withheld by Pinnacle West to satisfy tax withholding obligations upon the vesting of performance shares.	

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ITEM 6.  SELECTED FINANCIAL DATA
PINNACLE WEST CAPITAL CORPORATION – CONSOLIDATED

																					
 	 	2014	 	2013	 	2012	 	2011	 	2010	
 	 	(dollars in thousands, except per share amounts)	
OPERATING RESULTS	 	 		 	 		 	 		 	 		 	 		
Operating revenues	 	$	3,491,632		 	$	3,454,628		 	$	3,301,804		 	$	3,241,379		 	$	3,189,199		
Income from continuing operations	 	$	423,696		 	$	439,966		 	$	418,993		 	$	355,634		 	$	344,851		
Income (loss) from discontinued operations – net of income taxes (a)	 	—		 	—		 	(5,829	)	 	11,306		 	25,358		
Net income	 	423,696		 	439,966		 	413,164		 	366,940		 	370,209		
Less: Net income attributable to noncontrolling interests	 	26,101		 	33,892		 	31,622		 	27,467		 	20,156		
Net income attributable to common shareholders	 	$	397,595		 	$	406,074		 	$	381,542		 	$	339,473		 	$	350,053		
COMMON STOCK DATA	 	 		 	 		 	 		 	 		 	 		
Book value per share – year-end	 	$	39.50		 	$	38.07		 	$	36.20		 	$	34.98		 	$	33.86		
Earnings per weighted-average common share outstanding:	 	 		 	 		 	 		 	 		 	 		
Continuing operations attributable to common shareholders – basic	 	$	3.59		 	$	3.69		 	$	3.54		 	$	3.01		 	$	3.05		
Net income attributable to common shareholders – basic	 	$	3.59		 	$	3.69		 	$	3.48		 	$	3.11		 	$	3.28		
Continuing operations attributable to common shareholders – diluted	 	$	3.58		 	$	3.66		 	$	3.50		 	$	2.99		 	$	3.03		
Net income attributable to common shareholders – diluted	 	$	3.58		 	$	3.66		 	$	3.45		 	$	3.09		 	$	3.27		
Dividends declared per share	 	$	2.33		 	$	2.23		 	$	2.67		 	$	2.10		 	$	2.10		
Weighted-average common shares outstanding – basic	 	110,626,101		 	109,984,160		 	109,510,296		 	109,052,840		 	106,573,348		
Weighted-average common shares outstanding – diluted	 	111,178,141		 	110,805,943		 	110,527,311		 	109,864,243		 	107,137,785		
BALANCE SHEET DATA	 	 		 	 		 	 		 	 		 	 		
Total assets	 	$	14,313,532		 	$	13,508,686		 	$	13,379,615		 	$	13,111,018		 	$	12,392,998		
Liabilities and equity:	 	 		 	 		 	 		 	 		 	 		
Current liabilities	 	$	1,559,143		 	$	1,618,644		 	$	1,083,542		 	$	1,342,705		 	$	1,449,704		
Long-term debt less current maturities	 	3,031,215		 	2,796,465		 	3,199,088		 	3,019,054		 	3,045,794		
Deferred credits and other	 	5,204,072		 	4,753,117		 	4,994,696		 	4,818,673		 	4,122,274		
Total liabilities	 	9,794,430		 	9,168,226		 	9,277,326		 	9,180,432		 	8,617,772		
Total equity	 	4,519,102		 	4,340,460		 	4,102,289		 	3,930,586		 	3,775,226		
Total liabilities and equity	 	$	14,313,532		 	$	13,508,686		 	$	13,379,615		 	$	13,111,018		 	$	12,392,998		

		
(a)	Amounts primarily related to SunCor discontinued operations (see Note 1).	

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SELECTED FINANCIAL DATA
ARIZONA PUBLIC SERVICE COMPANY – CONSOLIDATED

																					
 	 	2014	 	2013	 	2012	 	2011	 	2010	
 	 	(dollars in thousands)	
OPERATING RESULTS	 	 		 	 		 	 		 	 		 	 		
Electric operating revenues	 	$	3,488,946		 	$	3,451,251		 	$	3,293,489		 	$	3,237,241		 	$	3,180,807		
Fuel and purchased power costs	 	1,179,829		 	1,095,709		 	994,790		 	1,009,464		 	1,046,815		
Other operating expenses	 	1,716,325		 	1,733,677		 	1,693,170		 	1,673,394		 	1,584,955		
Operating income	 	592,792		 	621,865		 	605,529		 	554,383		 	549,037		
Other income	 	36,358		 	20,797		 	16,358		 	24,974		 	20,138		
Interest expense — net of allowance for borrowed funds	 	181,830		 	183,801		 	194,777		 	215,584		 	213,349		
Net income	 	447,320		 	458,861		 	427,110		 	363,773		 	355,826		
Less: Net income attributable to noncontrolling interests	 	26,101		 	33,892		 	31,613		 	27,524		 	20,163		
Net income attributable to common shareholder	 	$	421,219		 	$	424,969		 	$	395,497		 	$	336,249		 	$	335,663		
BALANCE SHEET DATA	 	 		 	 		 	 		 	 		 	 		
Total assets	 	$	14,215,004		 	$	13,381,377		 	$	13,242,542		 	$	13,032,237		 	$	12,271,877		
Liabilities and equity:	 	 		 	 		 	 		 	 		 	 		
Total equity	 	$	4,629,852		 	$	4,454,874		 	$	4,222,483		 	$	4,051,406		 	$	3,916,037		
Long-term debt less current maturities	 	2,906,215		 	2,671,465		 	3,074,088		 	2,894,054		 	3,045,794		
Total capitalization	 	7,536,067		 	7,126,339		 	7,296,571		 	6,945,460		 	6,961,831		
Current liabilities	 	1,532,464		 	1,580,847		 	1,043,087		 	1,322,714		 	1,234,865		
Deferred credits and other	 	5,146,473		 	4,674,191		 	4,902,884		 	4,764,063		 	4,075,181		
Total liabilities and equity	 	$	14,215,004		 	$	13,381,377		 	$	13,242,542		 	$	13,032,237		 	$	12,271,877		

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ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION
 
The following discussion should be read in conjunction with Pinnacle West’s Consolidated Financial Statements and APS’s Consolidated Financial Statements and the related Notes that appear in Item 8 of this report.  For information on factors that may cause our actual future results to differ from those we currently seek or anticipate, see “Forward-Looking Statements” at the front of this report and “Risk Factors” in Item 1A.

OVERVIEW
 
Pinnacle West owns all of the outstanding common stock of APS.  APS is a vertically-integrated electric utility that provides either retail or wholesale electric service to most of the state of Arizona, with the major exceptions of about one-half of the Phoenix metropolitan area, the Tucson metropolitan area and Mohave County in northwestern Arizona.  APS accounts for essentially all of our revenues and earnings, and is expected to continue to do so.
 
Areas of Business Focus
 
Operational Performance, Reliability and Recent Developments.
 
Nuclear.   APS operates and is a joint owner of Palo Verde.  The March 2011 earthquake and tsunamis in Japan and the resulting accident at Japan’s Fukushima Daiichi nuclear power station had a significant impact on nuclear power operators worldwide.  In the aftermath of the accident, the NRC conducted an independent assessment to consider actions to address lessons learned from the Fukushima events.  The independent assessment, named the Near Term Task Force, recommended a number of proposed enhancements to U.S. commercial nuclear power plant equipment and emergency plans. The NRC has directed nuclear power plants to begin implementing some of the Near Term Task Force’s recommendations. To implement these recommendations, Palo Verde expects to spend approximately $40 million for capital enhancements to the plant over the next two years in addition to the approximate $80 million that has already been spent on capital enhancements as of December 31, 2014 (APS’s share is 29.1%).
 
Coal and Related Environmental Matters and Transactions.   APS is a joint owner of three coal-fired power plants and acts as operating agent for two of the plants.  APS is focused on the impacts on its coal fleet that may result from increased regulation and potential legislation concerning GHG emissions.  On June 2, 2014, EPA proposed a rule to limit carbon dioxide emissions from existing power plants.  EPA expects to finalize the proposal in summer 2015.  EPA’s proposal for Arizona would result in a shift in in-state generation from coal to natural gas and renewable generation.  Such a substantial change in APS’s generation portfolio could require additional capital investments and increased operating costs, and thus have a significant financial impact on the Company.  APS continually analyzes its long-range capital management plans to assess the potential effects of these changes, understanding that any resulting regulation and legislation could impact the economic viability of certain plants, as well as the willingness or ability of power plant participants to continue participation in such plants.

Cholla

On September 11, 2014, APS announced that it will close its 260 MW Unit 2 at Cholla by April 2016 and cease burning coal at the other APS-owned units (Units 1 and 3) at the plant by the mid-2020s if EPA approves a compromise proposal offered by APS to meet required environmental and emissions standards and

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rules. APS will also ask the ACC to approve the plan contemplated by the proposal. (See Note 3 for details related to the resulting regulatory asset and Note 10 for details of the proposal.) APS believes that the environmental benefits of this proposal are greater in the long term than the benefits that would have resulted from adding the emissions control equipment.

Four Corners

Asset Purchase Agreement and Coal Supply Matters.   On December 30, 2013, APS purchased SCE’s 48% interest in each of Units 4 and 5 of Four Corners.  The final purchase price for the interest was approximately $182 million, subject to certain minor post-closing adjustments.  In connection with APS’s most recent retail rate case with the ACC, the ACC reserved the right to review the prudence of the Four Corners transaction for cost recovery purposes upon the closing of the transaction.  On December 23, 2014, the ACC approved rate adjustments related to APS’s acquisition of SCE’s interest in Four Corners resulting in a revenue increase of $57.1 million on an annual basis.

Concurrently with the closing of the SCE transaction, BHP Billiton, the parent company of BNCC, the coal supplier and operator of the mine that serves Four Corners, transferred its ownership of BNCC to NTEC, a company formed by the Navajo Nation to own the mine and develop other energy projects. BHP Billiton will be retained by NTEC under contract as the mine manager and operator until July 2016. Also occurring concurrently with the closing, the Four Corners’ co-owners executed the 2016 Coal Supply Agreement for the supply of coal to Four Corners from July 2016, when the current coal supply agreement expires, through 2031. El Paso, a 7% owner in Units 4 and 5 of Four Corners, did not sign the 2016 Coal Supply Agreement. Under the 2016 Coal Supply Agreement, APS has agreed to assume the 7% shortfall obligation. On February 17, 2015, APS and El Paso entered into an asset purchase agreement providing for the purchase by APS, or an affiliate of APS, of El Paso’s 7% interest in each of Units 4 and 5 of Four Corners. The cash purchase price, which will be subject to certain adjustments at closing, is immaterial in amount, and the purchaser will assume El Paso's reclamation and decommissioning obligations associated with the 7% interest. Completion of the purchase is subject to the receipt of certain regulatory approvals and is expected to occur in July 2016.

When APS, or an affiliate of APS, ultimately acquires El Paso's interest in Four Corners, NTEC will have an option to purchase the interest within a certain timeframe pursuant to an option granted by APS to NTEC. The 2016 Coal Supply Agreement contains alternate pricing terms for the 7% shortfall obligations in the event NTEC does not exercise its option.
 
Pollution Control Investments and Shutdown of Units 1, 2 and 3.    EPA, in its final regional haze rule for Four Corners, required the Four Corners’ owners to elect one of two emissions alternatives to apply to the plant.  On December 30, 2013, APS, on behalf of the co-owners, notified EPA that they chose the alternative BART compliance strategy requiring the permanent closure of Units 1, 2 and 3 by January 1, 2014 and installation and operation of SCR controls on Units 4 and 5 by July 31, 2018.  On December 30, 2013, APS retired Units 1, 2 and 3.
 
Lease Extension.     APS, on behalf of the Four Corners participants, negotiated amendments to an existing facility lease with the Navajo Nation, which extends the Four Corners leasehold interest from 2016 to 2041.  The Navajo Nation approved these amendments in March 2011.  The effectiveness of the amendments also requires the approval of the DOI, as does a related federal rights-of-way grant which the Four Corners participants are pursuing.  A federal environmental review is underway as part of the DOI review process.  In March 2014, APS received a draft of the environmental impact statement in connection with the DOI review process.  As a proponent of Four Corners and the Navajo Mine Energy Project, APS, along with other members of the public, submitted comments on the draft impact statement.  APS cannot predict whether these federal approvals will be granted and, if so, on a timely basis, or whether any conditions that may be attached to them

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will be acceptable to the Four Corners owners. On December 19, 2014, APS obtained a PSD permit from EPA allowing APS to install SCR control technology at Four Corners. 
 
Transmission and Delivery.   APS is working closely with regulators to identify and plan for transmission needs that continue to support system reliability, access to markets and renewable energy development.  The capital expenditures table presented in the “Liquidity and Capital Resources” section below includes new APS transmission projects through 2017, along with other transmission costs for upgrades and replacements.  APS is also working to establish and expand smart grid technologies throughout its service territory to provide long-term benefits both to APS and its customers.  APS is strategically deploying a variety of technologies that are intended to allow customers to better monitor their energy use and needs, minimize system outage durations, as well as the number of customers that experience outages, and facilitate greater cost savings to APS through improved reliability and the automation of certain distribution functions, including remote meter reading and remote connects and disconnects.
 
Renewable Energy .   The ACC approved the RES in 2006.  The renewable energy requirement is 5% of retail electric sales in 2015 and increases annually until it reaches 15% in 2025.  In the 2009 Settlement Agreement, APS agreed to exceed the RES standards, committing to use APS’s best efforts to obtain 1,700 GWh of new renewable resources to be in service by year-end 2015, in addition to its 2008 renewable resource commitments.  Taken together, APS’s commitment is currently estimated to be approximately 12% of APS’s estimated retail energy sales by year-end 2015, which is more than double the existing RES target of 5% for that year.  A component of the RES targets development of distributed energy systems (generally speaking, small-scale renewable technologies that are located on customers’ properties). 

On July 12, 2013, APS filed its annual RES implementation plan, covering the 2014-2018 timeframe and requesting a 2014 RES budget of approximately $143 million.  In a final order dated January 7, 2014, the ACC approved the requested budget.  Also in 2013, the ACC conducted a hearing to consider APS’s proposal to establish compliance with distributed energy requirements by tracking and recording distributed energy, rather than acquiring and retiring renewable energy credits.  On February 6, 2014, the ACC established a proceeding to modify the renewable energy rules to establish a process for compliance with the renewable energy requirement that is not based solely on the use of renewable energy credits.  On September 9, 2014, the ACC authorized a rulemaking process to modify the RES rules. The proposed changes would permit the ACC to find that utilities have complied with the distributed energy requirement in light of all available information.  The ACC adopted these changes on December 18, 2014.  The revised rules are expected to become effective in the second quarter of 2015.

In accordance with the ACC’s decision on the 2014 RES plan, on April 15, 2014, APS filed an application with the ACC requesting permission to build an additional 20 MW of APS-owned utility scale solar under the AZ Sun Program.  In a subsequent filing, APS also offered an alternative proposal to replace the 20 MW of utility scale solar with 10 MW (approximately 1,500 customers) of APS-owned residential solar that will not be under the AZ Sun Program. On December 19, 2014, the ACC voted that it had no objection to APS implementing its residential rooftop solar program. The first stage of the residential rooftop solar program is to be 8 MW followed by a 2 MW second stage that will only be deployed if coupled with distributed storage. The program will target specific distribution feeders in an effort to maximize potential system benefits, as well as make systems available to limited-income customers who cannot easily install solar through transactions with third parties. The ACC expressly reserved that any determination of prudency of the residential rooftop solar program for rate making purposes shall not be made until the project is fully in service and APS requests cost recovery in a future rate case.

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On July 1, 2014, APS filed its 2015 RES implementation plan and proposed a RES budget of approximately $154 million. On December 31, 2014, the ACC issued a decision approving the 2015 RES implementation plan with minor modifications, including reducing the budget to approximately $152 million.
 
Demand Side Management.  In December 2009, Arizona regulators placed an increased focus on energy efficiency and other demand side management programs to encourage customers to conserve energy, while incentivizing utilities to aid in these efforts that ultimately reduce the demand for energy.  The ACC initiated an Energy Efficiency rulemaking, with a proposed EES of 22% cumulative annual energy savings by 2020.  The 22% figure represents the cumulative reduction in future energy usage through 2020 attributable to energy efficiency initiatives.  This standard became effective on January 1, 2011. 

On June 1, 2012, APS filed its 2013 DSM Plan.  In 2013, the standards required APS to achieve cumulative energy savings equal to 5% of its 2012 retail energy sales.  Later in 2012, APS filed a supplement to its plan that included a proposed budget for 2013 of $87.6 million. 

On March 11, 2014, the ACC issued an order approving APS’s 2013 DSM Plan.  The ACC approved a budget of $68.9 million for each of 2013 and 2014.  The ACC also approved a Resource Savings Initiative that allows APS to count towards compliance with the ACC Electric Energy Efficiency Standards, savings for improvements to APS’s transmission and delivery system, generation and facilities that have been approved through a DSM Plan.  Consistent with the ACC’s March 11, 2014 order, APS intends to continue its approved DSM programs in 2015. 

On June 27, 2013, the ACC voted to open a new docket investigating whether the Electric Energy Efficiency Rules should be modified.  The ACC held a series of three workshops in March and April 2014 to investigate methodologies used to determine cost effective energy efficiency programs, cost recovery mechanisms, incentives, and potential changes to the Electric Energy Efficiency and Resource Planning Rules.

On November 4, 2014, the ACC staff issued a request for informal comment on a draft of possible amendments to Arizona’s Electric Utility Energy Efficiency Standards.  The draft proposed substantial changes to the rules and energy efficiency standards.    The ACC accepted written comments and took public comment regarding the possible amendments on December 19, 2014.  A formal rule making has not been initiated and there has been no additional action on the draft to date.
 
Rate Matters.  APS needs timely recovery through rates of its capital and operating expenditures to maintain its financial health.  APS’s retail rates are regulated by the ACC and its wholesale electric rates (primarily for transmission) are regulated by FERC.  On June 1, 2011, APS filed a rate case with the ACC.  APS and other parties to the retail rate case subsequently entered into the 2012 Settlement Agreement detailing the terms upon which the parties have agreed to settle the rate case.  See Note 3 for details regarding the 2012 Settlement Agreement terms and for information on APS’s FERC rates. 

APS has several recovery mechanisms in place that provide more timely recovery to APS of its fuel and transmission costs, and costs associated with the promotion and implementation of its demand side management and renewable energy efforts and customer programs.  These mechanisms are described more fully in Note 3. 

As part of APS’s acquisition of SCE’s interest in Units 4 and 5 of Four Corners, APS and SCE agreed, via a “Transmission Termination Agreement” that, upon closing of the acquisition, the companies would terminate an existing transmission agreement (“Transmission Agreement”) between the parties that provides transmission capacity on a system (the “Arizona Transmission System”) for SCE to transmit its portion of the output from Four Corners to California.  APS previously submitted a request to FERC related to this

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termination, which resulted in a FERC order denying rate recovery of $40 million that APS agreed to pay SCE associated with the termination.  APS and SCE negotiated an alternate arrangement under which SCE would assign its 1,555 MW capacity rights over the Arizona Transmission System to third parties, including 300 MW to APS’s marketing and trading group.  However, this alternative arrangement was not approved by FERC.  In late March 2014, APS and SCE filed requests for rehearing with FERC.  Both requests for rehearing were denied on August 14, 2014. Although APS and SCE continue to evaluate potential paths forward, it is possible that the terms of the Transmission Termination Agreement may again control.  APS believes that the original denial by FERC of rate recovery under the Transmission Termination Agreement constitutes the failure of a condition that relieves APS of its obligations under that agreement.  If APS and SCE were unable to determine a resolution through negotiation, the Transmission Termination Agreement requires that disputes be resolved through arbitration.  APS is unable to predict the outcome of this matter if it proceeds to arbitration.  If the matter proceeds to arbitration and APS is not successful, APS may be required to record a charge to its results of operations.

Deregulation.   On May 9, 2013, the ACC voted to re-examine the facilitation of a deregulated retail electric market in Arizona.  The ACC subsequently opened a docket for this matter and received comments from a number of interested parties on the considerations involved in establishing retail electric deregulation in the state.  One of these considerations is whether various aspects of a deregulated market, including setting utility rates on a “market” basis, would be consistent with the requirements of the Arizona Constitution.  On September 11, 2013, after receiving legal advice from the ACC staff, the ACC voted 4-1 to close the current docket and await full Arizona Constitutional authority before any further examination of this matter.  The motion approved by the ACC also included opening one or more new dockets in the future to explore options to offer more rate choices to customers and innovative changes within the existing cost-of-service regulatory model that could include elements of competition.  The ACC opened a new docket on November 4, 2013 to explore technological advances and innovative changes within the electric utility industry.  A series of workshops in this docket were held in 2014 and another is currently scheduled for February 26, 2015.
 
Net Metering.   On July 12, 2013, APS filed an application with the ACC proposing a solution to address the cost shift brought by the current net metering rules.  On December 3, 2013, the ACC issued its order on APS’s net metering proposal.  The ACC instituted a charge on customers who install rooftop solar panels after December 31, 2013, and directed APS to provide quarterly reports on the pace of rooftop solar adoption to assist the ACC in considering further increases.  The charge of $0.70 per kilowatt became effective on January 1, 2014, and is estimated to collect $4.90 per month from a typical future rooftop solar customer to help pay for their use of the electricity grid. 
 
In making its decision, the ACC determined that the current net metering program creates a cost shift, causing non-solar utility customers to pay higher rates to cover the costs of maintaining the electrical grid.  ACC staff and the state’s Residential Utility Consumer Office, among other organizations, also agreed that a cost shift exists.  The fixed charge does not increase APS’s revenue because it is credited to the LFCR, but it will modestly reduce the impact of the cost shift on non-solar customers.  The ACC acknowledged that the new charge addresses only a portion of the cost shift.  The ACC also required APS to file its next rate case in June 2015, the earliest date contemplated in the 2012 Settlement Agreement.
 
In May 2014, the ACC began conducting a series of workshops to, among other things, evaluate the role and value of the electric grid as it relates to rooftop solar and other issues regarding net metering.
 
On July 22, 2014, the ACC Commissioners voted to reopen the December 2013 net metering decision for the limited purpose of deciding whether to eliminate the requirement that APS file its next rate case in June 2015.  The vote included a request that parties comment in the docket about their thoughts on removing the filing date requirement and on the process for the broader discussion regarding rate design. On August 12,

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2014, the ACC Commissioners voted to lift the requirement that APS file its next general rate case by June 2015. On September 29, 2014, the staff of the ACC filed in a new docket a proposal for permitting a utility to request ACC approval of its proposed rate design outside of and before a general rate case. On October 20, 2014, APS and other interested stakeholders filed comments to this proposal. No further action has been taken in this docket.
 
Financial Strength and Flexibility.   Pinnacle West and APS currently have ample borrowing capacity under their respective credit facilities, and may readily access these facilities ensuring adequate liquidity for each company.  Capital expenditures will be funded with internally generated cash and external financings, which may include issuances of long-term debt and Pinnacle West common stock.
 
Other Subsidiaries.

Bright Canyon Energy.  On July 31, 2014, Pinnacle West announced its creation of a wholly owned subsidiary, BCE.  BCE will focus on new growth opportunities that leverage the Company’s core expertise in the electric energy industry.  BCE’s first initiative is a 50/50 joint venture with MidAmerican Transmission, LLC.  The joint venture, named TransCanyon, intends to focus on transmission opportunities within the Western Electricity Coordinating Council, excluding the retail service territories of the venture partners’ utility affiliates.  The joint venture submitted a bid into CAISO's competitive solicitation process to design, build and own a new 500 kV transmission line between Arizona and California, the Delaney to Colorado River Transmission Line.  The winner of the bidding process is expected to be announced in 2015.  This transmission line will connect a planned Delaney substation near Palo Verde in Arizona to the existing Colorado River substation located just west of Blythe, California.

El Dorado.   The operations of El Dorado are not expected to have any material impact on our financial results, or to require any material amounts of capital, over the next three years.
 
Key Financial Drivers
 
In addition to the continuing impact of the matters described above, many factors influence our financial results and our future financial outlook, including those listed below.  We closely monitor these factors to plan for the Company’s current needs, and to adjust our expectations, financial budgets and forecasts appropriately.
 
Electric Operating Revenues.   For the years 2012 through 2014, retail electric revenues comprised approximately 93% of our total electric operating revenues.  Our electric operating revenues are affected by customer growth or decline, variations in weather from period to period, customer mix, average usage per customer and the impacts of energy efficiency programs, distributed energy additions, electricity rates and tariffs, the recovery of PSA deferrals and the operation of other recovery mechanisms.  These revenue transactions are affected by the availability of excess generation or other energy resources and wholesale market conditions, including competition, demand and prices.
 
Customer and Sales Growth.   Retail customers in APS’s service territory increased 1.4% for the year ended December 31, 2014 compared with the prior-year.  For the three years 2012 through 2014, APS’s customer growth averaged 1.3% per year.  We currently expect annual customer growth to average in the range of 2.0-3.0% for 2015 through 2017 based on our assessment of modestly improving economic conditions in Arizona.  Retail electricity sales in kWh, adjusted to exclude the effects of weather variations, were flat for the year ended December 31, 2014 compared with the prior-year, reflecting the effects of customer conservation and energy efficiency and distributed renewable generation initiatives, partially offset by improving economic conditions and customer growth.  For the three years 2012 through 2014, APS experienced annual decreases in

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retail electricity sales averaging 0.2%, adjusted to exclude the effects of weather variations.  We currently estimate that annual retail electricity sales in kWh will increase on average in the range of 0.5-1.5% during 2015 through 2017, including the effects of customer conservation and energy efficiency and distributed renewable generation initiatives, but excluding the effects of weather variations.  A slower recovery of the Arizona economy could further impact these estimates.
Actual sales growth, excluding weather-related variations, may differ from our projections as a result of numerous factors, such as economic conditions, customer growth, usage patterns and energy conservation, impacts of energy efficiency programs and growth in distributed generation, and responses to retail price changes.  Based on past experience, a reasonable range of variation in our kWh sales projection attributable to such economic factors under normal business conditions can result in increases or decreases in annual net income of up to $10 million.
 
Weather.   In forecasting the retail sales growth numbers provided above, we assume normal weather patterns based on historical data.  Historically, extreme weather variations have resulted in annual variations in net income in excess of $20 million.  However, our experience indicates that the more typical variations from normal weather can result in increases or decreases in annual net income of up to $10 million.
 
Fuel and Purchased Power Costs.   Fuel and purchased power costs included on our Consolidated Statements of Income are impacted by our electricity sales volumes, existing contracts for purchased power and generation fuel, our power plant performance, transmission availability or constraints, prevailing market prices, new generating plants being placed in service in our market areas, changes in our generation resource allocation, our hedging program for managing such costs and PSA deferrals and the related amortization.
 
Operations and Maintenance Expenses .  Operations and maintenance expenses are impacted by customer and sales growth, power plant operations, maintenance of utility plant (including generation, transmission, and distribution facilities), inflation, outages, renewable energy and demand side management related expenses (which are offset by the same amount of operating revenues) and other factors.  In the 2009 Settlement Agreement, APS committed to operational expense reductions from 2010 through 2014. On September 30, 2014, Pinnacle West announced plan design changes to the group life and medical postretirement benefit plan, which required an interim remeasurement of the benefit obligation for the plan. This remeasurement is expected to reduce net periodic benefit costs on a prospective basis. See Note 7. In October 2014, the Society of Actuaries' Retirement Plans Experience Committee issued its final report on mortality tables ("RP-2014 Mortality Tables Report"). At December 31, 2014, we updated our mortality assumptions using a modification of these tables, which better reflects our employees' demographics. See Note 7 for additional details.
 
Depreciation and Amortization Expenses.   Depreciation and amortization expenses are impacted by net additions to utility plant and other property (such as new generation, transmission, and distribution facilities), and changes in depreciation and amortization rates.  See “Capital Expenditures” below for information regarding the planned additions to our facilities.  See Note 3 regarding deferral of certain costs pursuant to an ACC order.
 
Property Taxes.   Taxes other than income taxes consist primarily of property taxes, which are affected by the value of property in-service and under construction, assessment ratios, and tax rates.  The average property tax rate in Arizona for APS, which owns essentially all of our property, was 10.7% of the assessed value for 2014, 10.5% for 2013, and 9.6% for 2012.  We expect property taxes to increase as we add new generating units and continue with improvements and expansions to our existing generating units, transmission and distribution facilities.  (See Note 3 for property tax deferrals contained in the 2012 Settlement Agreement).

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Income Taxes .   Income taxes are affected by the amount of pretax book income, income tax rates, certain deductions and non-taxable items, such as AFUDC.  In addition, income taxes may also be affected by the settlement of issues with taxing authorities.
 
Interest Expense.   Interest expense is affected by the amount of debt outstanding and the interest rates on that debt (see Note 6).  The primary factors affecting borrowing levels are expected to be our capital expenditures, long-term debt maturities, equity issuances and internally generated cash flow.  An allowance for borrowed funds used during construction offsets a portion of interest expense while capital projects are under construction.  We stop accruing AFUDC on a project when it is placed in commercial operation.

RESULTS OF OPERATIONS
 
Pinnacle West’s only reportable business segment is our regulated electricity segment, which consists of traditional regulated retail and wholesale electricity businesses (primarily electric service to Native Load customers) and related activities and includes electricity generation, transmission and distribution.
 
Operating Results – 2014 compared with 2013.

Our consolidated net income attributable to common shareholders for the year ended December 31, 2014 was $398 million, compared with net income of $406 million for the prior year.  The results reflect a decrease of approximately $4 million for the regulated electricity segment primarily due to higher fossil generation costs, lower retail sales due to the effects of weather, higher property taxes, and lower retail transmission revenues. These negative factors were partially offset by lower operations and maintenance expenses related to lower employee benefit costs, higher other income, and increased revenues for lost fixed cost recovery. All other segment's income was lower by $4 million primarily related to El Dorado's investment losses.
 
The following table presents net income attributable to common shareholders by business segment compared with the prior year:

												
 	Year Ended
December 31,	 	 	
 	2014	 	2013	 	Net Change	
 	(dollars in millions)	
Regulated Electricity Segment:	 		 	 		 	 		
Operating revenues less fuel and purchased power expenses	$	2,309		 	$	2,356		 	$	(47	)	
Operations and maintenance	(908	)	 	(925	)	 	17		
Depreciation and amortization	(417	)	 	(416	)	 	(1	)	
Taxes other than income taxes	(172	)	 	(164	)	 	(8	)	
All other income and expenses, net	28		 	11		 	17		
Interest charges, net of allowance for borrowed funds used during construction	(185	)	 	(187	)	 	2		
Income taxes	(224	)	 	(232	)	 	8		
Less income related to noncontrolling interests (Note 18)	(26	)	 	(34	)	 	8		
Regulated electricity segment net income	405		 	409		 	(4	)	
All other	(7	)	 	(3	)	 	(4	)	
Net Income Attributable to Common Shareholders	$	398		 	$	406		 	$	(8	)	

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Operating revenues less fuel and purchased power expenses .  Regulated electricity segment operating revenues less fuel and purchased power expenses were $47 million lower for the year ended December 31, 2014 compared with the prior year.  The following table summarizes the major components of this change:

												
 	Increase (Decrease)	
 	Operating
revenues	 	Fuel and
purchased
power
expenses	 	Net change	
 	(dollars in millions)	
Effects of weather	$	(45	)	 	$	(16	)	 	$	(29	)	
Lower demand side management regulatory surcharges, offset by renewable energy regulatory surcharges and purchased power	—		 	20		 	(20	)	
Lower retail transmission revenues	(7	)	 	—		 	(7	)	
Lower retail sales due to changes in customer usage patterns and related pricing, partially offset by customer growth	(4	)	 	—		 	(4	)	
Higher net fuel and purchased power costs, including related deferrals and higher off-system sales margins	78		 	79		 	(1	)	
Lost fixed cost recovery	12		 	—		 	12		
Miscellaneous items, net	3		 	1		 	2		
Total	$	37		 	$	84		 	$	(47	)	

Operations and maintenance .   Operations and maintenance expenses decreased $17 million for the year ended December 31, 2014 compared with the prior year primarily because of:
		
•	A decrease of $33 million related to costs for demand-side management, renewable energy and similar regulatory programs, which were partially offset in operating revenues and purchased power;	
• A decrease of $20 million related to lower employee benefit costs;
		
•	An increase of $33 million in generation costs, primarily related to an increased ownership share in Four Corners, a portion of which is deferred in depreciation and amortization, and higher fossil maintenance costs; and	
		
•	An increase of $3 million related to miscellaneous other factors.	

Depreciation and amortization.   Depreciation and amortization expenses were $1 million higher for the year ended December 31, 2014 compared with the prior year primarily related to higher plant balances of approximately $23 million , partially offset by higher Four Corners cost deferrals in the current year of approximately $22 million.

Taxes other than income taxes.   Taxes other than income taxes were $8 million higher for the year ended December 31, 2014 compared with the prior year primarily due to higher property tax rates and higher plant balances.
 
All other income and expenses, net.   All other income and expenses, net, were $17 million higher for the year ended December 31, 2014 compared with the prior year due to the debt return on the Four Corners acquisition, an increase in the allowance for equity funds used during construction due to higher balances, and other non-operating income.

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Income taxes.   Income taxes were $8 million lower for the year ended December 31, 2014 compared with the prior year primarily due to the effects of lower pretax income in the current year.

Operating Results – 2013 compared with 2012.
 
Our consolidated net income attributable to common shareholders for the year ended December 31, 2013 was $406 million, compared with net income of $382 million for the prior year.  The results reflect an increase of approximately $21 million for the regulated electricity segment, primarily due to increases related to the retail regulatory settlement effective July 1, 2012 (see Note 3); higher retail transmission revenues; and lower net interest charges due to lower debt balances and lower interest rates in the current-year period.  These positive factors were partially offset by higher operations and maintenance expenses; higher fuel and purchased power costs, net of related deferrals; lower retail sales as a result of changes in customer usage related to energy efficiency, customer conservation and distributed generation, partially offset by customer growth; and higher depreciation and amortization expenses.
The following table presents net income attributable to common shareholders by business segment compared with the prior year:

												
 	Year Ended
December 31,	 	 	
 	2013	 	2012	 	Net Change	
 	(dollars in millions)	
Regulated Electricity Segment:	 		 	 		 	 		
Operating revenues less fuel and purchased power expenses	$	2,356		 	$	2,299		 	$	57		
Operations and maintenance	(925	)	 	(885	)	 	(40	)	
Depreciation and amortization	(416	)	 	(404	)	 	(12	)	
Taxes other than income taxes	(164	)	 	(159	)	 	(5	)	
Other income (expenses), net	11		 	6		 	5		
Interest charges, net of allowance for borrowed funds used during construction	(187	)	 	(200	)	 	13		
Income taxes	(232	)	 	(237	)	 	5		
Less income related to noncontrolling interests (Note 18)	(34	)	 	(32	)	 	(2	)	
Regulated electricity segment net income	409		 	388		 	21		
All other	(3	)	 	—		 	(3	)	
Income from Continuing Operations Attributable to Common Shareholders	406		 	388		 	18		
Loss from Discontinued Operations Attributable to Common Shareholders (a)	—		 	(6	)	 	6		
Net Income Attributable to Common Shareholders	$	406		 	$	382		 	$	24		

 (a)                                  Includes activities related to SunCor.

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Operating revenues less fuel and purchased power expenses .  Regulated electricity segment operating revenues less fuel and purchased power expenses were $57 million higher for the year ended December 31, 2013 compared with the prior year.  The following table summarizes the major components of this change:

												
 	Increase (Decrease)	
 	Operating
revenues	 	Fuel and
purchased
power
expenses	 	Net change	
 	(dollars in millions)	
Impacts of retail regulatory settlement effective July 1, 2012	$	64		 	$	6		 	$	58		
Higher demand-side management, renewable energy and similar regulatory surcharges	34		 	7		 	27		
Higher retail transmission revenues	11		 	—		 	11		
Lower retail sales due to changes in customer usage patterns and related pricing, partially offset by customer growth	(17	)	 	(4	)	 	(13	)	
Higher fuel and purchased power costs, net of related deferrals and off-system sales	74		 	95		 	(21	)	
Miscellaneous items, net	(8	)	 	(3	)	 	(5	)	
Total	$	158		 	$	101		 	$	57		

Operations and maintenance .   Operations and maintenance expenses increased $40 million for the year ended December 31, 2013 compared with the prior year primarily because of:
		
•	An increase of $14 million related to technical analysis, consulting, advertising and communications costs;	
		
•	An increase of $13 million related to costs for demand-side management, renewable energy and similar regulatory programs, which were largely offset in operating revenues;	
		
•	An increase of $9 million related to the closure of Four Corners Units 1, 2, and 3, deferred for regulatory recovery in depreciation;	
		
•	An increase of $6 million in energy delivery and customer service costs;	
		
•	An increase of $6 million in information technology costs;	
		
•	A decrease of $6 million in generation costs primarily related to lower fossil generation outage costs and lower nuclear generation costs; and	
		
•	A decrease of $2 million related to other miscellaneous factors.	
  
Depreciation and amortization .  Depreciation and amortization expenses were $12 million higher for the year ended December 31, 2013 compared with the prior year, primarily because of increased plant in service, partially offset by the regulatory deferral of operating expenses associated with the closure of Four Corners Units 1, 2, and 3.
 
Interest charges, net of allowance for borrowed funds used during construction .   Interest charges, net of allowance for borrowed funds used during construction, decreased $13 million for the year ended December 31, 2013 compared with the prior year, primarily because of lower debt balances and lower interest rates in the current year.

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Income taxes.   Income taxes were $5 million lower for the year ended December 31, 2013 compared with the prior year primarily due to a lower effective tax rate in the current period, partially offset by the effects of higher pretax income in the current year.

LIQUIDITY AND CAPITAL RESOURCES
 
Overview
 
Pinnacle West’s primary cash needs are for dividends to our shareholders and principal and interest payments on our indebtedness.  The level of our common stock dividends and future dividend growth will be dependent on declaration by our Board of Directors and based on a number of factors, including our financial condition, payout ratio, free cash flow and other factors.
 
Our primary sources of cash are dividends from APS and external debt and equity issuances.  An ACC order requires APS to maintain a common equity ratio of at least 40%.  As defined in the related ACC order, the common equity ratio is defined as total shareholder equity divided by the sum of total shareholder equity and long-term debt, including current maturities of long-term debt.  At December 31, 2014, APS’s common equity ratio, as defined, was 56%.  Its total shareholder equity was approximately $4.5 billion, and total capitalization was approximately $8.0 billion.  Under this order, APS would be prohibited from paying dividends if such payment would reduce its total shareholder equity below approximately $3.2 billion, assuming APS’s total capitalization remains the same.  This restriction does not materially affect Pinnacle West’s ability to meet its ongoing cash needs or ability to pay dividends to shareholders.
 
APS’s capital requirements consist primarily of capital expenditures and maturities of long-term debt.  APS funds its capital requirements with cash from operations and, to the extent necessary, external debt financing and equity infusions from Pinnacle West.
Summary of Cash Flows
 
The following tables present net cash provided by (used for) operating, investing and financing activities for the years ended December 31, 2014, 2013 and 2012 (dollars in millions):
 
Pinnacle West Consolidated

												
 	2014	 	2013	 	2012	
Net cash flow provided by operating activities	$	1,100		 	$	1,153		 	$	1,171		
Net cash flow used for investing activities	(923	)	 	(1,009	)	 	(873	)	
Net cash flow used for financing activities	(179	)	 	(161	)	 	(305	)	
Net decrease in cash and cash equivalents	$	(2	)	 	$	(17	)	 	$	(7	)	
 
Arizona Public Service Company

												
 	2014	 	2013	 	2012	
Net cash flow provided by operating activities	$	1,124		 	$	1,194		 	$	1,176		
Net cash flow used for investing activities	(922	)	 	(1,009	)	 	(873	)	
Net cash flow used for financing activities	(201	)	 	(185	)	 	(319	)	
Net increase (decrease) in cash and cash equivalents	$	1		 	$	—		 	$	(16	)	

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Operating Cash Flows
 
2014 Compared with 2013. Pinnacle West’s consolidated net cash provided by operating activities was $1,100 million in 2014 compared to $1,153 million in 2013, a decrease of $53 million in net cash provided.  The decrease is primarily related to $99 million in higher fuel and purchased power costs, a $39 million increase in cash collateral posted, $34 million of higher pension contributions in 2014, and other changes in working capital. The decrease is partially offset by a $121 million increase in income tax refunds net of payments (primarily related to a $135 million income tax refund received in the first quarter of 2014). APS's operating cash flows included income tax refunds of approximately $86 million in 2014 compared with payments of $8 million in 2013.

2013 Compared with 2012.   Pinnacle West’s consolidated net cash provided by operating activities was $1,153 million in 2013, compared to $1,171 million in 2012, a decrease of $18 million in net cash provided.  The decrease is primarily related to a $127 million change in cash collateral posted and $76 million of higher pension contributions made in 2013 compared to 2012 (approximately $18 million of which is reflected in capital expenditures).  The decrease is partially offset by approximately $167 million of higher cash inflows primarily due to higher authorized revenue requirements resulting from the retail regulatory settlement effective July 1, 2012 and other changes in working capital.

Other .   Pinnacle West sponsors a qualified defined benefit pension plan and a non-qualified supplemental excess benefit retirement plan for the employees of Pinnacle West and our subsidiaries.  The requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”) require us to contribute a minimum amount to the qualified plan.  We contribute at least the minimum amount required under ERISA regulations, but no more than the maximum tax-deductible amount.  The minimum required funding takes into consideration the value of plan assets and our pension benefit obligations.  Under ERISA, the qualified pension plan was 118% funded as of January 1, 2014 and is estimated to be approximately 118% funded as of January 1, 2015.  Under GAAP, the qualified pension plan was 90% funded as of January 1, 2014 and is estimated to be approximately 90% funded as of January 1, 2015. The assets in the plan are comprised of fixed-income, equity, real estate, and short-term investments.  Future year contribution amounts are dependent on plan asset performance and plan actuarial assumptions.  We made contributions to our pension plan totaling $175 million in 2014, $141 million in 2013, and $65 million in 2012.  The minimum contributions for the pension plan are zero for the next three years.  We expect to make voluntary contributions totaling up to $300 million for the next three years (up to $100 million each year in 2015, 2016, and 2017).  With regard to contributions to our other postretirement benefit plans, we made a contribution of approximately $1 million in 2014, $14 million in 2013, and $23 million in 2012. We expect to make contributions of approximately $1 million in each of the next three years to our other postretirement benefit plans.

Included in the current income tax receivable on the Consolidated Balance Sheets as of December 31, 2013 was $133 million that represented the anticipated IRS refund related to the finalized examinations of tax years ended December 31, 2008 and 2009. Cash related to this refund was received in the first quarter of 2014.

Investing Cash Flows
 
2014 Compared with 2013. Pinnacle West’s consolidated net cash used for investing activities was $923 million in 2014, compared to $1,009 million in 2013, a decrease of $86 million in net cash used. The decrease in net cash used for investing activities is primarily related to APS's purchase of SCE’s interest in Units 4 and 5 of Four Corners of approximately $209 million in 2013, partially offset by an increase of approximately $123 million in other capital expenditures.

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2013 Compared with 2012.  Pinnacle West’s consolidated net cash used for investing activities was $1,009 million in 2013, compared to $873 million in 2012, an increase of $136 million in net cash used.  The increase in net cash used for investing activities is primarily related to APS’s purchase of SCE’s interest in Units 4 and 5 of Four Corners of approximately $209 million, partially offset by a decrease of approximately $73 million in other capital expenditures.

Capital Expenditures.   The following table summarizes the estimated capital expenditures for the next three years:
 
Capital Expenditures
(dollars in millions)

												
 	Estimated for the Year Ended
December 31,	
 	2015	 	2016	 	2017	
APS	 		 	 		 	 		
Generation:	 		 	 		 	 		
Nuclear Fuel	$	78		 	$	87		 	$	79		
Renewables	86		 	1		 	2		
Environmental	36		 	162		 	161		
New Gas Generation	96		 	235		 	190		
Other Generation	180		 	204		 	198		
Distribution	329		 	362		 	385		
Transmission	203		 	133		 	180		
Other (a)	83		 	81		 	98		
Total APS	$	1,091		 	$	1,265		 	$	1,293		

 (a)          Primarily information systems and facilities projects.
 
Generation capital expenditures are comprised of various improvements to APS’s existing fossil and nuclear plants.  Examples of the types of projects included in this category are additions, upgrades and capital replacements of various power plant equipment, such as turbines, boilers and environmental equipment.  The estimated Renewables expenditures include 20 MW of utility-scale solar projects which were approved by the ACC in the 2014 RES Implementation Plan and the residential rooftop solar program.  We have not included estimated costs for Cholla’s compliance with MATS or EPA’s regional haze rule since we have challenged the regional haze rule judicially and we have proposed a compromise strategy to EPA, which, if approved, would allow us to avoid expenditures related to environmental control equipment. The portion of estimated costs through 2017 for installation of pollution control equipment needed to ensure Four Corners’ compliance with EPA’s regional haze rules have been included in the table above.  The portion of estimated costs through 2017 for incremental costs to comply with the CCR rule for Four Corners and Cholla have also been included in the table above. The table does not include capital expenditures related to El Paso's 7% interest in Four Corners Units 4 and 5 of $24 million in 2016 and $23 million in 2017. The consummation of the purchase of El Paso's interest in Four Corners is not expected to take place until 2016, thus, there are no related capital expenditures in 2015. We are monitoring the status of other environmental matters, which, depending on their final outcome, could require modification to our planned environmental expenditures.
 
Distribution and transmission capital expenditures are comprised of infrastructure additions and upgrades, capital replacements, and new customer construction.  Examples of the types of projects included in

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the forecast include power lines, substations, and line extensions to new residential and commercial developments.
 
Capital expenditures will be funded with internally generated cash and external financings, which may include issuances of long-term debt and Pinnacle West common stock.
 
Financing Cash Flows and Liquidity
 
2014 Compared with 2013. Pinnacle West’s consolidated net cash used for financing activities was $179 million in 2014, compared to $161 million in 2013, an increase of $18 million in net cash used.  The increase in net cash used for financing activities is primarily due to $530 million in higher repayments of long-term debt, a $67 million net reduction in funds received through short-term borrowings, and $11 million in higher dividend payments, partially offset by $595 million in higher issuances of long-term debt (see below).

2013 Compared with 2012.   Pinnacle West’s consolidated net cash used for financing activities was $161 million in 2013, compared to $305 million of net cash used in 2012, a decrease of $144 million in net cash used.  The decrease in net cash used for financing activities is primarily due to $531 million in lower repayments of long-term debt, largely offset by $340 million in lower issuances of long-term debt and a $31 million net change in APS’s commercial paper borrowings, which is classified as short-term borrowings on the Consolidated Balance Sheets.  On December 30, 2013, commercial paper issuances were used to fund the acquisition of SCE’s 48% ownership interest in each of Units 4 and 5 of Four Corners (see below).
 
Significant Financing Activities.   On December 17, 2014, the Pinnacle West Board of Directors declared a quarterly dividend of $0.595 per share of common stock, payable on March 2, 2015, to shareholders of record on February 2, 2015.  During 2014, Pinnacle West increased its indicated annual dividend from $2.27 per share to $2.38 per share.  For the year ended December 31, 2014, Pinnacle West’s total dividends paid per share of common stock were $2.30 per share, which resulted in dividend payments of $247 million.

On July 12, 2013, APS purchased all $33 million of the Coconino County, Arizona Pollution Control Corporation Pollution Control Revenue Refunding Bonds, 1994 Series A, due 2029.  On October 11, 2013, APS purchased all $32 million of the City of Farmington, New Mexico Pollution Control Revenue Bonds, 1994 Series C, due 2024.  On January 15, 2014, both of these series of bonds were canceled and refinanced as described below.
 
On January 10, 2014, APS issued $250 million of 4.70% unsecured senior notes that mature on January 15, 2044.  The proceeds from the sale were used to repay commercial paper which was used to fund the acquisition of SCE’s 48% ownership interest in each of Units 4 and 5 of Four Corners and to replenish cash used in 2013 to re-acquire the two series of tax-exempt indebtedness listed above.
 
On May 1, 2014, APS purchased a total of $100 million of the Maricopa County, Arizona, Pollution Control Corporation Pollution Control Revenue Refunding Bonds, 2009 Series A, D and E due 2029 in connection with the mandatory tender provisions for this indebtedness.  On May 14, 2014, APS remarketed all $36 million of the 2009 Series A Bonds, which are classified as long-term debt on our Consolidated Balance Sheets at December 31, 2014.  We expect to remarket or refinance all $64 million of the 2009 Series D Bonds and 2009 Series E Bonds within the next twelve months.
 
On May 30, 2014, APS purchased all $38 million of the Navajo County, Arizona, Pollution Control Corporation Pollution Control Revenue Refunding Bonds, 2009 Series A, due 2034, and on June 1, 2014, APS purchased a total of $64 million of the Navajo 2009 Series B Bonds and 2009 Series C Bonds, in each case, in connection with the mandatory tender provisions for this indebtedness.  On September 23, 2014, APS remarketed all $38 million of the 2009 Series A Bonds, which are classified as current maturities of long-term

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debt on our Consolidated Balance Sheets at December 31, 2014. On October 1, 2014, APS remarketed all $32 million of the 2009 Series C Bonds, which are classified as long-term debt on our Consolidated Balance Sheets at December 31, 2014. We expect to remarket or refinance all $32 million of the 2009 Series B Bonds within the next twelve months.

On June 1, 2014, APS remarketed all $13 million of the Coconino County, Arizona Pollution Control Corporation Pollution Control Revenue Refunding Bonds, 2009 Series A, due 2034.  These bonds are classified as long-term debt on our Consolidated Balance Sheets at December 31, 2014.

On June 18, 2014, APS issued $250 million of 3.35% unsecured senior notes that mature on June 15, 2024.  The net proceeds from the sale were used along with other funds to repay at maturity APS’s $300 million aggregate principal amount of 5.80% senior notes due June 30, 2014.

On December 31, 2014, Pinnacle West entered into a $125 million term loan facility that matures December 31, 2017. Pinnacle West used the proceeds to repay and refinance the term loan facility that would have matured in November 2015.

On January 12, 2015, APS issued $250 million of 2.20% unsecured senior notes that mature on January 15, 2020. The net proceeds from the sale were used to repay commercial paper borrowings and replenish cash temporarily used to fund capital expenditures.

Available Credit Facilities .  Pinnacle West and APS maintain committed revolving credit facilities in order to enhance liquidity and provide credit support for their commercial paper programs.

On May 9, 2014, Pinnacle West replaced its $200 million revolving credit facility that would have matured in November 2016, with a new $200 million facility that matures in May 2019.  At December 31, 2014, the facility was available to refinance indebtedness of the Company and for other general corporate purposes, including credit support for its $200 million commercial paper program.  Pinnacle West has the option to increase the amount of the facility up to a maximum of $300 million upon the satisfaction of certain conditions and with the consent of the lenders.  At December 31, 2014, Pinnacle West had no outstanding borrowings under its credit facility, no letters of credit outstanding and no commercial paper borrowings.
 
On May 9, 2014, APS replaced its $500 million revolving credit facility that would have matured in November 2016, with a new $500 million facility that matures in May 2019.
 
At December 31, 2014, APS had two credit facilities totaling $1 billion, including a $500 million credit facility that matures in April 2018 and the $500 million facility that matures in May 2019 (see above).  APS may increase the amount of each facility up to a maximum of $700 million upon the satisfaction of certain conditions and with the consent of the lenders.  APS will use these facilities to refinance indebtedness and for other general corporate purposes.  Interest rates are based on APS’s senior unsecured debt credit ratings.
 
The facilities described above are available to support APS’s $250 million commercial paper program, for bank borrowings or for issuances of letters of credit.  At December 31, 2014, APS had $147 million of commercial paper borrowings and no outstanding borrowings or outstanding letters of credit under these credit facilities.
 
See “Financial Assurances” in Note 10 for a discussion of APS’s separate outstanding letters of credit.
Other Financing Matters.   See Note 3 for information regarding the PSA approved by the ACC.
 See Note 16 for information related to the change in our margin and collateral accounts.

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Debt Provisions
 
Pinnacle West’s and APS’s debt covenants related to their respective bank financing arrangements include maximum debt to capitalization ratios.  Pinnacle West and APS comply with this covenant.  For both Pinnacle West and APS, this covenant requires that the ratio of consolidated debt to total consolidated capitalization not exceed 65%.  At December 31, 2014, the ratio was approximately 46% for Pinnacle West and 45% for APS.  Failure to comply with such covenant levels would result in an event of default which, generally speaking, would require the immediate repayment of the debt subject to the covenants and could “cross-default” other debt.  See further discussion of “cross-default” provisions below.
 
Neither Pinnacle West’s nor APS’s financing agreements contain “rating triggers” that would result in an acceleration of the required interest and principal payments in the event of a rating downgrade.  However, our bank credit agreements contain a pricing grid in which the interest rates we pay for borrowings thereunder are determined by our current credit ratings.
 
All of Pinnacle West’s loan agreements contain “cross-default” provisions that would result in defaults and the potential acceleration of payment under these loan agreements if Pinnacle West or APS were to default under certain other material agreements.  All of APS’s bank agreements contain “cross-default” provisions that would result in defaults and the potential acceleration of payment under these bank agreements if APS were to default under certain other material agreements.  Pinnacle West and APS do not have a material adverse change restriction for credit facility borrowings.
 
See Note 6 for further discussions of liquidity matters.
 
Credit Ratings
 
The ratings of securities of Pinnacle West and APS as of February 13, 2015 are shown below.  We are disclosing these credit ratings to enhance understanding of our cost of short-term and long-term capital and our ability to access the markets for liquidity and long-term debt.  The ratings reflect the respective views of the rating agencies, from which an explanation of the significance of their ratings may be obtained.  There is no assurance that these ratings will continue for any given period of time.  The ratings may be revised or withdrawn entirely by the rating agencies if, in their respective judgments, circumstances so warrant.  Any downward revision or withdrawal may adversely affect the market price of Pinnacle West’s or APS’s securities and/or result in an increase in the cost of, or limit access to, capital.  Such revisions may also result in substantial additional cash or other collateral requirements related to certain derivative instruments, insurance policies, natural gas transportation, fuel supply, and other energy-related contracts.  At this time, we believe we have sufficient available liquidity resources to respond to a downward revision to our credit ratings.

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 	Moody’s	 	Standard & 
Poor’s	 	Fitch	
Pinnacle West	 	 	 	 	 	
Corporate credit rating	Baa1	 	A-	 	BBB+	
Commercial paper	P-2	 	A-2	 	F2	
Outlook	Positive	 	Stable	 	Positive	
 	 	 	 	 	 	
APS	 	 	 	 	 	
Corporate credit rating	A3	 	A-	 	BBB+	
Senior unsecured	A3	 	A-	 	A-	
Secured lease obligation bonds	A3	 	A-	 	A-	
Commercial paper	P-2	 	A-2	 	F2	
Outlook	Positive	 	Stable	 	Positive	
Off-Balance Sheet Arrangements
 
See Note 18 for a discussion of the impacts on our financial statements of consolidating certain VIEs.
 
Contractual Obligations
 
The following table summarizes Pinnacle West’s consolidated contractual requirements as of December 31, 2014 (dollars in millions):

																				
 	2015	 	2016-
2017	 	2018-
2019	 	Thereafter	 	Total	
Long-term debt payments, including interest: (a)	 	 	 		 	 		 	 		 	 		
APS	$	551		 	$	686		 	$	788		 	$	3,653		 	$	5,678		
Pinnacle West	2		 	131		 	—		 	—		 	133		
Total long-term debt payments, including interest	553		 	817		 	788		 	3,653		 	5,811		
Short-term debt payments, including interest (b)	147		 	—		 	—		 	—		 	147		
Fuel and purchased power commitments (c)	618		 	1,223		 	1,146		 	7,994		 	10,981		
Renewable energy credits (d)	46		 	84		 	84		 	448		 	662		
Purchase obligations (e)	105		 	154		 	47		 	222		 	528		
Coal reclamation	1		 	32		 	37		 	281		 	351		
Nuclear decommissioning funding requirements	17		 	5		 	5		 	63		 	90		
Noncontrolling interests (f)	35		 	45		 	45		 	250		 	375		
Operating lease payments	18		 	11		 	7		 	63		 	99		
Total contractual commitments	$	1,540		 	$	2,371		 	$	2,159		 	$	12,974		 	$	19,044		

(a)	The long-term debt matures at various dates through 2044 and bears interest principally at fixed rates.  Interest on variable-rate long-term debt is determined by using average rates at December 31, 2014 (see Note 6).	
		
(b)	The short-term debt represents commercial paper borrowings at APS (see Note 5).	

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(c)	Our fuel and purchased power commitments include purchases of coal, electricity, natural gas, renewable energy, nuclear fuel, and natural gas transportation (see Notes 3 and 10).  These amounts include commitments incurred from acquiring SCE’s interest in Four Corners and APS assuming an additional 7% in the 2016 Coal Supply Agreement.	
		
(d)	Contracts to purchase renewable energy credits in compliance with the RES (see Note 3).	
		
(e)	These contractual obligations include commitments for capital expenditures and other obligations.	
		
(f)	Payments to the noncontrolling interests relate to the Palo Verde Sale Leaseback (see Note 18).	
 
This table excludes $46 million in unrecognized tax benefits because the timing of the future cash outflows is uncertain.  Estimated minimum pension contributions are zero for 2015, 2016 and 2017, respectively (see Note 7).

CRITICAL ACCOUNTING POLICIES
 
In preparing the financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”), management must often make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period.  Some of those judgments can be subjective and complex, and actual results could differ from those estimates.  We consider the following accounting policies to be our most critical because of the uncertainties, judgments and complexities of the underlying accounting standards and operations involved.
 
Regulatory Accounting
 
Regulatory accounting allows for the actions of regulators, such as the ACC and FERC, to be reflected in our financial statements.  Their actions may cause us to capitalize costs that would otherwise be included as an expense in the current period by unregulated companies.  Regulatory assets represent incurred costs that have been deferred because they are probable of future recovery in customer rates.  Regulatory liabilities generally represent expected future costs that have already been collected from customers.  Management continually assesses whether our regulatory assets are probable of future recovery by considering factors such as applicable regulatory environment changes and recent rate orders to other regulated entities in the same jurisdiction.  This determination reflects the current political and regulatory climate in Arizona and is subject to change in the future.  If future recovery of costs ceases to be probable, the assets would be written off as a charge in current period earnings.  We had $1,191 million of regulatory assets and $1,182 million of regulatory liabilities on the Consolidated Balance Sheets at December 31, 2014.
 
Included in the balance of regulatory assets at December 31, 2014 is a regulatory asset of $485 million for pension benefits.  This regulatory asset represents the future recovery of these costs through retail rates as these amounts are charged to earnings.  If these costs are disallowed by the ACC, this regulatory asset would be charged to OCI and result in lower future earnings.
 
See Notes 1 and 3 for more information.
 
Pensions and Other Postretirement Benefit Accounting
 
Changes in our actuarial assumptions used in calculating our pension and other postretirement benefit liability and expense can have a significant impact on our earnings and financial position.  The most relevant actuarial assumptions are the discount rate used to measure our liability and net periodic cost, the expected long-term rate of return on plan assets used to estimate earnings on invested funds over the long-term, the

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mortality assumptions, and the assumed healthcare cost trend rates.  We review these assumptions on an annual basis and adjust them as necessary.
 
The following chart reflects the sensitivities that a change in certain actuarial assumptions would have had on the December 31, 2014 reported pension liability on the Consolidated Balance Sheets and our 2014 reported pension expense, after consideration of amounts capitalized or billed to electric plant participants, on Pinnacle West’s Consolidated Statements of Income (dollars in millions): 

									
 	 	Increase (Decrease)	
Actuarial Assumption (a)	 	Impact on
Pension
Liability	 	Impact on
Pension
Expense	
Discount rate:	 	 		 	 		
Increase 1%	 	$	(349	)	 	$	(2	)	
Decrease 1%	 	427		 	13		
Expected long-term rate of return on plan assets:	 	 	 	 	
Increase 1%	 	—		 	(11	)	
Decrease 1%	 	—		 	11		

	

		
(a)	Each fluctuation assumes that the other assumptions of the calculation are held constant while the rates are changed by one percentage point.	
 
The following chart reflects the sensitivities that a change in certain actuarial assumptions would have had on the December 31, 2014 other postretirement benefit obligation and our 2014 reported other postretirement benefit expense, after consideration of amounts capitalized or billed to electric plant participants, on Pinnacle West’s Consolidated Statements of Income (dollars in millions): 

									
 	 	Increase (Decrease)	
Actuarial Assumption (a)	 	Impact on Other
Postretirement 
Benefit
Obligation	 	Impact on Other
Postretirement
Benefit Expense	
Discount rate:	 	 		 	 		
Increase 1%	 	$	(93	)	 	$	(1	)	
Decrease 1%	 	120		 	6		
Healthcare cost trend rate (b):	 	 	 	 	
Increase 1%	 	110		 	10		
Decrease 1%	 	(88	)	 	(4	)	
Expected long-term rate of return on plan assets – pretax:	 	 		 	 	
Increase 1%	 	—		 	(4	)	
Decrease 1%	 	—		 	4		

	

		
(a)	Each fluctuation assumes that the other assumptions of the calculation are held constant while the rates are changed by one percentage point.	
		
(b)	This assumes a 1% change in the initial and ultimate healthcare cost trend rate.	
 
See Note 7 for further details about our pension and other postretirement benefit plans.

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Fair Value Measurements
 
We account for derivative instruments, investments held in our nuclear decommissioning trust fund, certain cash equivalents, and plan assets held in our retirement and other benefit plans at fair value on a recurring basis.  Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  We use inputs, or assumptions that market participants would use, to determine fair market value. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.  The significance of a particular input determines how the instrument is classified in a fair value hierarchy.  The determination of fair value sometimes requires subjective and complex judgment.  Our assessment of the inputs and the significance of a particular input to fair value measurement may affect the valuation of the instruments and their placement within a fair value hierarchy.  Actual results could differ from our estimates of fair value.  See Note 1 for a discussion on accounting policies and Note 13 for fair value measurement disclosures.

OTHER ACCOUNTING MATTERS
 
During 2014, we adopted new accounting guidance relating to the balance sheet presentation of certain unrecognized tax benefits.  In addition, we are currently evaluating new revenue recognition guidance that we will be adopting on January 1, 2017.  See Note 2.

MARKET AND CREDIT RISKS
 
Market Risks
 
Our operations include managing market risks related to changes in interest rates, commodity prices and investments held by our nuclear decommissioning trust fund and benefit plan assets.
 
Interest Rate and Equity Risk
 
We have exposure to changing interest rates.  Changing interest rates will affect interest paid on variable-rate debt and the market value of fixed income securities held by our nuclear decommissioning trust fund (see Note 13 and Note 19) and benefit plan assets.  The nuclear decommissioning trust fund and benefit plan assets also have risks associated with the changing market value of their equity and other non-fixed income investments.  Nuclear decommissioning and benefit plan costs are recovered in regulated electricity prices.

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The tables below present contractual balances of our consolidated long-term and short-term debt at the expected maturity dates, as well as the fair value of those instruments on December 31, 2014 and 2013.  The interest rates presented in the tables below represent the weighted-average interest rates as of December 31, 2014 and 2013 (dollars in thousands):
 
Pinnacle West – Consolidated

																						
 	 	Short-Term
Debt	 	Variable-Rate
Long-Term Debt	 	Fixed-Rate
Long-Term Debt	
 	 	Interest	 	 	 	Interest	 	 	 	Interest	 	 	
2014	 	Rates	 	Amount	 	Rates	 	Amount	 	Rates	 	Amount	
2015	 	0.40	%	 	$	147,400		 	0.03	%	 	$	32,000		 	4.32	%	 	$	351,570		
2016	 	—		 	—		 	0.04	%	 	43,580		 	6.15	%	 	314,000		
2017	 	—		 	—		 	0.82	%	 	157,000		 	—		 	—		
2018	 	—		 	—		 	—		 	—		 	1.75	%	 	32,000		
2019	 	—		 	—		 	—		 	—		 	8.75	%	 	500,000		
Years thereafter	 	—		 	—		 	0.27	%	 	48,825		 	4.90	%	 	1,940,150		
Total	 	 		 	$	147,400		 	 	 	$	281,405		 	 		 	$	3,137,720		
Fair value	 	 		 	$	147,400		 	 		 	$	281,405		 	 		 	$	3,557,703		

	
																						
 	 	Short-Term
Debt	 	Variable-Rate
Long-Term Debt	 	Fixed-Rate
Long-Term Debt	
 	 	Interest	 	 	 	Interest	 	 	 	Interest	 	 	
2013	 	Rates	 	Amount	 	Rates	 	Amount	 	Rates	 	Amount	
2014	 	0.23	%	 	$	153,125		 	—		 	$	—		 	5.58	%	 	$	540,424		
2015	 	—		 	—		 	1.02	%	 	157,000		 	4.79	%	 	313,420		
2016	 	—		 	—		 	0.06	%	 	43,580		 	6.15	%	 	314,000		
2017	 	—		 	—		 	—		 	—		 	—		 	—		
2018	 	—		 	—		 	—		 	—		 	1.75	%	 	32,000		
Years thereafter	 	—		 	—		 	—		 	—		 	6.12	%	 	1,940,150		
Total	 	 		 	$	153,125		 	 	 	$	200,580		 	 		 	$	3,139,994		
Fair value	 	 		 	$	153,125		 	 		 	$	200,580		 	 		 	$	3,378,102		

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The tables below present contractual balances of APS’s long-term debt at the expected maturity dates, as well as the fair value of those instruments on December 31, 2014 and 2013.  The interest rates presented in the tables below represent the weighted-average interest rates as of December 31, 2014 and 2013 (dollars in thousands):
 
APS — Consolidated

																						
 	 	Short-Term
Debt	 	Variable-Rate
Long-Term Debt	 	Fixed-Rate
Long-Term Debt	
 	 	Interest	 	 	 	Interest	 	 	 	Interest	 	 	
2014	 	Rates	 	Amount	 	Rates	 	Amount	 	Rates	 	Amount	
2015	 	0.40	%	 	$	147,400		 	0.03	%	 	$	32,000		 	4.32	%	 	$	351,570		
2016	 	—		 	—		 	0.04	%	 	43,580		 	6.15	%	 	314,000		
2017	 	—		 	—		 	0.03	%	 	32,000		 	—		 	—		
2018	 	—		 	—		 	—		 	—		 	1.75	%	 	32,000		
2019	 	—		 	—		 	—		 	—		 	8.75	%	 	500,000		
Years thereafter	 	—		 	—		 	0.27	%	 	48,825		 	4.90	%	 	1,940,150		
Total	 	 		 	$	147,400		 	 	 	$	156,405		 	 	 	$	3,137,720		
Fair value	 	 		 	$	147,400		 	 		 	$	156,405		 	 		 	$	3,557,703		

	
																						
 	 	Short-Term
Debt	 	Variable-Rate
Long-Term Debt	 	Fixed-Rate
Long-Term Debt	
 	 	Interest	 	 	 	Interest	 	 	 	Interest	 	 	
2013	 	Rates	 	Amount	 	Rates	 	Amount	 	Rates	 	Amount	
2014	 	0.23	%	 	$	153,125		 	—		 	$	—		 	5.58	%	 	$	540,424		
2015	 	—		 	—		 	0.03	%	 	32,000		 	4.79	%	 	313,420		
2016	 	—		 	—		 	0.06	%	 	43,580		 	6.15	%	 	314,000		
2017	 	—		 	—		 	—		 	—		 	—		 	—		
2018	 	—		 	—		 	—		 	—		 	1.75	%	 	32,000		
Years thereafter	 	—		 	—		 	—		 	—		 	6.12	%	 	1,940,150		
Total	 	 		 	$	153,125		 	 	 	$	75,580		 	 		 	$	3,139,994		
Fair value	 	 		 	$	153,125		 	 		 	$	75,580		 	 		 	$	3,378,102		
 
Commodity Price Risk
 
We are exposed to the impact of market fluctuations in the commodity price and transportation costs of electricity and natural gas.  Our risk management committee, consisting of officers and key management personnel, oversees company-wide energy risk management activities to ensure compliance with our stated energy risk management policies.  We manage risks associated with these market fluctuations by utilizing various commodity instruments that may qualify as derivatives, including futures, forwards, options and swaps.  As part of our risk management program, we use such instruments to hedge purchases and sales of electricity and fuels.  The changes in market value of such contracts have a high correlation to price changes in the hedged commodities.

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The following table shows the net pretax changes in mark-to-market of our derivative positions in 2014 and 2013 (dollars in millions):

								
 	2014	 	2013	
Mark-to-market of net positions at beginning of year	$	(73	)	 	$	(122	)	
Recognized in earnings (a):	 		 	 		
Change in mark-to-market gains (losses) for future period deliveries	—		 	(1	)	
Decrease in regulatory asset/liability	(64	)	 	6		
Recognized in OCI:	 	 	 		
Mark-to-market losses realized during the period	22		 	44		
Change in valuation techniques	—		 	—		
Mark-to-market of net positions at end of year	$	(115	)	 	$	(73	)	

		
(a)	Represents the amounts reflected in income after the effect of PSA deferrals.	

The table below shows the fair value of maturities of our derivative contracts (dollars in millions) at December 31, 2014 by maturities and by the type of valuation that is performed to calculate the fair values, classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  See Note 1, “Derivative Accounting” and “Fair Value Measurements,” for more discussion of our valuation methods.

																													
Source of Fair Value	 	2015	 	2016	 	2017	 	2018	 	2019	 	Years
there-
after	 	Total 
fair 
value	
Observable prices provided by other external sources	 	$	(40	)	 	$	(22	)	 	$	(11	)	 	$	(1	)	 	$	—		 	$	—		 	$	(74	)	
Prices based on unobservable inputs	 	(16	)	 	(11	)	 	(5	)	 	(4	)	 	(4	)	 	(1	)	 	(41	)	
Total by maturity	 	$	(56	)	 	$	(33	)	 	$	(16	)	 	$	(5	)	 	$	(4	)	 	$	(1	)	 	$	(115	)	

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The table below shows the impact that hypothetical price movements of 10% would have on the market value of our risk management assets and liabilities included on Pinnacle West’s Consolidated Balance Sheets at December 31, 2014 and 2013 (dollars in millions):

																
 	December 31, 2014
Gain (Loss)	 	December 31, 2013
Gain (Loss)	
 	Price Up 10%	 	Price Down 10%	 	Price Up 10%	 	Price Down 10%	
Mark-to-market changes reported in:	 		 	 		 	 		 	 		
Regulatory asset (liability) or OCI (a)	 		 	 		 	 		 	 		
Electricity	3		 	(3	)	 	6		 	(6	)	
Natural gas	29		 	(29	)	 	26		 	(26	)	
Total	$	32		 	$	(32	)	 	$	32		 	$	(32	)	

(a)	These contracts are economic hedges of our forecasted purchases of natural gas and electricity.  The impact of these hypothetical price movements would substantially offset the impact that these same price movements would have on the physical exposures being hedged.  To the extent the amounts are eligible for inclusion in the PSA, the amounts are recorded as either a regulatory asset or liability.	
 
Credit Risk
 
We are exposed to losses in the event of non-performance or non-payment by counterparties.  See Note 16 for a discussion of our credit valuation adjustment policy.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
 
See “Market and Credit Risks” in Item 7 above for a discussion of quantitative and qualitative disclosures about market risks.

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ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES

	
		
 	Page	
 	 	
Management’s Report on Internal Control Over Financial Reporting (Pinnacle West Capital Corporation)	73	
Report of Independent Registered Public Accounting Firm	74	
Pinnacle West Consolidated Statements of Income for 2014, 2013 and 2012	76	
Pinnacle West Consolidated Statements of Comprehensive Income for 2014, 2013, and 2012	77	
Pinnacle West Consolidated Balance Sheets as of December 31, 2014 and 2013	78	
Pinnacle West Consolidated Statements of Cash Flows for 2014, 2013 and 2012	80	
Pinnacle West Consolidated Statements of Changes in Equity for 2014, 2013 and 2012	81	
Notes to Pinnacle West’s Consolidated Financial Statements	82	
 	 	
Management’s Report on Internal Control Over Financial Reporting (Arizona Public Service Company)	143	
Report of Independent Registered Public Accounting Firm	144	
APS Consolidated Statements of Income for 2014, 2013 and 2012	146	
APS Consolidated Statements of Comprehensive Income for 2014, 2013 and 2012	147	
APS Consolidated Balance Sheets as of December 31, 2014 and 2013	148	
APS Consolidated Statements of Cash Flows for 2014, 2013 and 2012	150	
APS Consolidated Statements of Changes in Equity for 2014, 2013 and 2012	151	
Supplemental Notes to APS’s Consolidated Financial Statements	152	
 	 	
Financial Statement Schedules for 2014, 2013 and 2012	 	
Pinnacle West Schedule I – Condensed Statements of Comprehensive Income for 2014, 2013 and 2012	159	
Pinnacle West Schedule I – Condensed Balance Sheets as of December 31, 2014 and 2013	160	
Pinnacle West Schedule I – Condensed Statements of Cash Flows for 2014, 2013 and 2012	161	
Pinnacle West Schedule II – Reserve for Uncollectibles for 2014, 2013 and 2012	162	
APS Schedule II – Reserve for Uncollectibles for 2014, 2013 and 2012	163	
 
See Note 12 and S-2 for the selected quarterly financial data (unaudited) required to be presented in this Item.

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MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
(PINNACLE WEST CAPITAL CORPORATION)

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f), for Pinnacle West.  Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on our evaluation under the framework in Internal Control — Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2014.  The effectiveness of our internal control over financial reporting as of December 31, 2014 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein and also relates to the Company’s consolidated financial statements.
 
February 20, 2015

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of
Pinnacle West Capital Corporation
Phoenix, Arizona
 
We have audited the accompanying consolidated balance sheets of Pinnacle West Capital Corporation and subsidiaries (the “Company”) as of December 31, 2014 and 2013 and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2014.  Our audits also included the financial statement schedules listed in the Index at Item 15.  We also have audited the Company’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.  The Company’s management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting.  Our responsibility is to express an opinion on these financial statements and financial statement schedules and an opinion on the Company’s internal control over financial reporting based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.  Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances.  We believe that our audits provide a reasonable basis for our opinions.
 
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.  Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become

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inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pinnacle West Capital Corporation and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.  Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

	
		
/s/ Deloitte & Touche LLP	 	
 	 	
Phoenix, Arizona	 	
February 20, 2015	 	

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PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(dollars and shares in thousands, except per share amounts)

	
												
 	Year Ended December 31,	
 	2014	 	2013	 	2012	
 	 	 	 	 	 	
OPERATING REVENUES	$	3,491,632		 	$	3,454,628		 	$	3,301,804		
OPERATING EXPENSES	 		 	 		 	 		
Fuel and purchased power	1,179,829		 	1,095,709		 	994,790		
Operations and maintenance	908,025		 	924,727		 	884,769		
Depreciation and amortization	417,358		 	415,708		 	404,336		
Taxes other than income taxes	172,295		 	164,167		 	159,323		
Other expenses	2,883		 	7,994		 	6,831		
Total	2,680,390		 	2,608,305		 	2,450,049		
OPERATING INCOME	811,242		 	846,323		 	851,755		
OTHER INCOME (DEDUCTIONS)	 		 	 		 	 		
Allowance for equity funds used during construction (Note 1)	30,790		 	25,581		 	22,436		
Other income (Note 17)	9,608		 	1,704		 	1,606		
Other expense (Note 17)	(21,746	)	 	(16,024	)	 	(19,842	)	
Total	18,652		 	11,261		 	4,200		
INTEREST EXPENSE	 		 	 		 	 		
Interest charges	200,950		 	201,888		 	214,616		
Allowance for borrowed funds used during construction (Note 1)	(15,457	)	 	(14,861	)	 	(14,971	)	
Total	185,493		 	187,027		 	199,645		
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	644,401		 	670,557		 	656,310		
INCOME TAXES (Note 4)	220,705		 	230,591		 	237,317		
INCOME FROM CONTINUING OPERATIONS	423,696		 	439,966		 	418,993		
LOSS FROM DISCONTINUED OPERATIONS	 		 	 		 	 		
Net of income tax benefit of $(3,813) (Note 1)	—		 	—		 	(5,829	)	
NET INCOME	423,696		 	439,966		 	413,164		
Less: Net income attributable to noncontrolling interests (Note 18)	26,101		 	33,892		 	31,622		
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	397,595		 	$	406,074		 	$	381,542		
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING — BASIC	110,626		 	109,984		 	109,510		
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING — DILUTED	111,178		 	110,806		 	110,527		
EARNINGS PER WEIGHTED-AVERAGE COMMON SHARE OUTSTANDING	 		 	 		 	 		
Income from continuing operations attributable to common shareholders — basic	$	3.59		 	$	3.69		 	$	3.54		
Net income attributable to common shareholders — basic	3.59		 	3.69		 	3.48		
Income from continuing operations attributable to common shareholders — diluted	3.58		 	3.66		 	3.50		
Net income attributable to common shareholders — diluted	3.58		 	3.66		 	3.45		
AMOUNTS ATTRIBUTABLE TO COMMON SHAREHOLDERS:	 		 	 		 	 		
Income from continuing operations, net of tax	$	397,595		 	$	406,074		 	$	387,380		
Discontinued operations, net of tax	—		 	—		 	(5,838	)	
Net income attributable to common shareholders	$	397,595		 	$	406,074		 	$	381,542		
  See Notes to Pinnacle West’s Consolidated Financial Statements.

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PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)

	
												
 	Year Ended December 31,	
 	2014	 	2013	 	2012	
 	 	 	 	 	 	
NET INCOME	$	423,696		 	$	439,966		 	$	413,164		
 	 	 	 	 	 	
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX	 		 	 		 	 		
Derivative instruments:	 		 	 		 	 		
Net unrealized loss, net of tax benefit (expense) of $(438), $140, and $14,900 (Note 16)	(810	)	 	(213	)	 	(22,763	)	
Reclassification of net realized loss, net of tax benefit of $7,932, $17,472, and $39,120 (Note 16)	13,483		 	26,747		 	59,887		
Pension and other postretirement benefits activity, net of tax (expense) benefit of $1,307, $(6,156), and $(651) (Note 7)	(2,761	)	 	9,421		 	1,031		
Total other comprehensive income	9,912		 	35,955		 	38,155		
 	 	 	 	 	 	
COMPREHENSIVE INCOME	433,608		 	475,921		 	451,319		
Less: Comprehensive income attributable to noncontrolling interests	26,101		 	33,892		 	31,622		
 	 	 	 	 	 	
COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	407,507		 	$	442,029		 	$	419,697		
 
See Notes to Pinnacle West’s Consolidated Financial Statements.

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PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)

	
								
 	December 31,	
 	2014	 	2013	
ASSETS	 		 	 		
CURRENT ASSETS	 		 	 		
Cash and cash equivalents	$	7,604		 	$	9,526		
Customer and other receivables	297,740		 	299,904		
Accrued unbilled revenues	100,533		 	96,796		
Allowance for doubtful accounts	(3,094	)	 	(3,203	)	
Materials and supplies (at average cost)	218,889		 	221,682		
Fossil fuel (at average cost)	37,097		 	38,028		
Deferred income taxes (Note 4)	122,232		 	91,152		
Income tax receivable (Note 4)	3,098		 	135,517		
Assets from risk management activities (Note 16)	13,785		 	17,169		
Deferred fuel and purchased power regulatory asset (Note 3)	6,926		 	20,755		
Other regulatory assets (Note 3)	129,808		 	76,388		
Other current assets	38,817		 	39,895		
Total current assets	973,435		 	1,043,609		
INVESTMENTS AND OTHER ASSETS	 		 	 		
Assets from risk management activities (Note 16)	17,620		 	23,815		
Nuclear decommissioning trust (Notes 13 and 19)	713,866		 	642,007		
Other assets	54,047		 	60,875		
Total investments and other assets	785,533		 	726,697		
PROPERTY, PLANT AND EQUIPMENT (Notes 1, 6 and 9)	 		 	 		
Plant in service and held for future use	15,543,063		 	15,200,464		
Accumulated depreciation and amortization	(5,397,751	)	 	(5,300,219	)	
Net	10,145,312		 	9,900,245		
Construction work in progress	682,807		 	581,369		
Palo Verde sale leaseback, net of accumulated depreciation of $229,795 and $225,925 (Note 18)	121,255		 	125,125		
Intangible assets, net of accumulated amortization of $489,538 and $439,703	119,755		 	157,689		
Nuclear fuel, net of accumulated amortization of $143,554 and $146,057	125,201		 	124,557		
Total property, plant and equipment	11,194,330		 	10,888,985		
DEFERRED DEBITS	 		 	 		
Regulatory assets (Notes 1, 3 and 4)	1,054,087		 	711,712		
Assets for other postretirement benefits (Note 7)	152,290		 	—		
Other	153,857		 	137,683		
Total deferred debits	1,360,234		 	849,395		
TOTAL ASSETS	$	14,313,532		 	$	13,508,686		
 
See Notes to Pinnacle West’s Consolidated Financial Statements.

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PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)

	
								
 	December 31,	
 	2014	 	2013	
LIABILITIES AND EQUITY	 		 	 		
CURRENT LIABILITIES	 		 	 		
Accounts payable	$	295,211		 	$	284,516		
Accrued taxes (Note 4)	140,613		 	130,998		
Accrued interest	52,603		 	48,351		
Common dividends payable	65,790		 	62,528		
Short-term borrowings (Note 5)	147,400		 	153,125		
Current maturities of long-term debt (Note 6)	383,570		 	540,424		
Customer deposits	72,307		 	76,101		
Liabilities from risk management activities (Note 16)	59,676		 	31,892		
Liability for asset retirements (Note 11)	32,462		 	32,896		
Regulatory liabilities (Note 3)	130,549		 	99,273		
Other current liabilities	178,962		 	158,540		
Total current liabilities	1,559,143		 	1,618,644		
LONG-TERM DEBT LESS CURRENT MATURITIES (Note 6)	3,031,215		 	2,796,465		
DEFERRED CREDITS AND OTHER	 		 	 		
Deferred income taxes (Note 4)	2,582,636		 	2,351,882		
Regulatory liabilities (Notes 1, 3, 4 and 7)	1,051,196		 	801,297		
Liability for asset retirements (Note 11)	358,288		 	313,833		
Liabilities for pension and other postretirement benefits (Note 7)	453,736		 	513,628		
Liabilities from risk management activities (Note 16)	50,602		 	70,315		
Customer advances	123,052		 	114,480		
Coal mine reclamation	198,292		 	207,453		
Deferred investment tax credit	178,607		 	152,361		
Unrecognized tax benefits (Note 4)	19,377		 	42,209		
Other	188,286		 	185,659		
Total deferred credits and other	5,204,072		 	4,753,117		
COMMITMENTS AND CONTINGENCIES (SEE NOTES)			 			
EQUITY	 		 	 		
Common stock, no par value; authorized 150,000,000 shares, issued 110,649,762 at end of 2014 and 110,280,703 at end of 2013	2,512,970		 	2,491,558		
Treasury stock at cost; 78,400 shares at end of 2014 and 98,944 shares at end of 2013	(3,401	)	 	(4,308	)	
Total common stock	2,509,569		 	2,487,250		
Retained earnings	1,926,065		 	1,785,273		
Accumulated other comprehensive loss:	 		 	 		
Pension and other postretirement benefits (Note 7)	(57,756	)	 	(54,995	)	
Derivative instruments (Note 16)	(10,385	)	 	(23,058	)	
Total accumulated other comprehensive loss	(68,141	)	 	(78,053	)	
Total shareholders’ equity	4,367,493		 	4,194,470		
Noncontrolling interests (Note 18)	151,609		 	145,990		
Total equity	4,519,102		 	4,340,460		
TOTAL LIABILITIES AND EQUITY	$	14,313,532		 	$	13,508,686		
  See Notes to Pinnacle West’s Consolidated Financial Statements.

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PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)

	
												
 	Year Ended December 31,	
 	2014	 	2013	 	2012	
CASH FLOWS FROM OPERATING ACTIVITIES	 		 	 		 	 		
Net Income	$	423,696		 	$	439,966		 	$	413,164		
Adjustments to reconcile net income to net cash provided by operating activities:	 		 	 		 	 		
Depreciation and amortization including nuclear fuel	496,487		 	492,322		 	481,262		
Deferred fuel and purchased power	(26,927	)	 	21,678		 	71,573		
Deferred fuel and purchased power amortization	40,757		 	31,190		 	(116,716	)	
Allowance for equity funds used during construction	(30,790	)	 	(25,581	)	 	(22,436	)	
Deferred income taxes	159,023		 	249,296		 	187,023		
Deferred investment tax credit	26,246		 	52,542		 	41,579		
Change in derivative instruments fair value	339		 	534		 	(749	)	
Changes in current assets and liabilities:	 		 	 		 	 		
Customer and other receivables	(52,672	)	 	(44,991	)	 	14,587		
Accrued unbilled revenues	(3,737	)	 	(1,951	)	 	30,394		
Materials, supplies and fossil fuel	3,724		 	(11,878	)	 	(23,043	)	
Income tax receivable	132,419		 	(133,094	)	 	(4,043	)	
Other current assets	4,384		 	(17,913	)	 	(27,352	)	
Accounts payable	(353	)	 	45,414		 	(96,600	)	
Accrued taxes	9,615		 	6,059		 	12,736		
Other current liabilities	17,892		 	(7,513	)	 	23,869		
Change in margin and collateral accounts — assets	(343	)	 	993		 	2,216		
Change in margin and collateral accounts — liabilities	(24,975	)	 	12,355		 	137,785		
Change in long-term income tax receivable	—		 	137,270		 	(1,756	)	
Change in unrecognized tax benefits	2,778		 	(91,425	)	 	(2,583	)	
Change in long-term regulatory liabilities	59,618		 	64,473		 	13,539		
Change in other long-term assets	(59,344	)	 	(41,757	)	 	6,872		
Change in other long-term liabilities	(78,210	)	 	(24,682	)	 	29,801		
Net cash flow provided by operating activities	1,099,627		 	1,153,307		 	1,171,122		
CASH FLOWS FROM INVESTING ACTIVITIES	 		 	 		 	 		
Capital expenditures	(910,634	)	 	(1,016,322	)	 	(889,551	)	
Contributions in aid of construction	20,325		 	41,090		 	49,876		
Allowance for borrowed funds used during construction	(15,457	)	 	(14,861	)	 	(14,971	)	
Proceeds from nuclear decommissioning trust sales	356,195		 	446,025		 	417,603		
Investment in nuclear decommissioning trust	(373,444	)	 	(463,274	)	 	(434,852	)	
Other	347		 	(2,059	)	 	(1,099	)	
Net cash flow used for investing activities	(922,668	)	 	(1,009,401	)	 	(872,994	)	
CASH FLOWS FROM FINANCING ACTIVITIES	 		 	 		 	 		
Issuance of long-term debt	731,126		 	136,307		 	476,081		
Repayment of long-term debt	(652,578	)	 	(122,828	)	 	(654,286	)	
Short-term borrowings and payments — net	(5,725	)	 	60,950		 	92,175		
Dividends paid on common stock	(246,671	)	 	(235,244	)	 	(225,075	)	
Common stock equity issuance	15,288		 	17,319		 	15,955		
Distributions to noncontrolling interests	(20,482	)	 	(17,385	)	 	(10,529	)	
Other	161		 	299		 	170		
Net cash flow used for financing activities	(178,881	)	 	(160,582	)	 	(305,509	)	
NET DECREASE IN CASH AND CASH EQUIVALENTS	(1,922	)	 	(16,676	)	 	(7,381	)	
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR	9,526		 	26,202		 	33,583		
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	7,604		 	$	9,526		 	$	26,202		

 See Notes to Pinnacle West’s Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(dollars in thousands, except per share amounts)

																														
 	Common Stock	 	Treasury Stock	 	Retained Earnings	 	Accumulated Other Comprehensive Income (Loss)	 	Noncontrolling Interests	 	Total	
 	Shares	 	Amount	 	Shares	 	Amount	 	 	 	 	 	 	 	 	
Balance, December 31, 2011	109,356,974		 	$	2,444,247		 	(111,161	)	 	$	(4,717	)	 	$	1,534,483		 	$	(152,163	)	 	$	108,736		 	$	3,930,586		
Net income	 	 	 	 	 	 	 	 	381,542		 	 	 	31,622		 	413,164		
Other comprehensive income	 	 	 	 	 	 	 	 	 	 	38,155		 	 	 	38,155		
Dividends on common stock ($2.67 per share)	 	 	 	 	 	 	 	 	(291,923	)	 	 	 	 	 	(291,923	)	
Issuance of common stock	480,983		 	22,676		 	 	 	 	 	 	 	 	 	 	 	22,676		
Purchase of treasury stock (a)	 	 	 	 	(89,629	)	 	(4,607	)	 	 	 	 	 	 	 	(4,607	)	
Stock-based compensation and other	 	 	 	 	105,598		 	5,113		 	 	 	 	 	 	 	5,113		
Net capital activities by noncontrolling interests	 	 	 	 	 	 	 	 	 	 	 	 	(10,875	)	 	(10,875	)	
Balance, December 31, 2012	109,837,957		 	2,466,923		 	(95,192	)	 	(4,211	)	 	1,624,102		 	(114,008	)	 	129,483		 	4,102,289		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	 	 	 	 	 	 	 	406,074		 	 	 	33,892		 	439,966		
Other comprehensive income	 	 	 	 	 	 	 	 	 	 	35,955		 	 	 	35,955		
Dividends on common stock ($2.23 per share)	 	 	 	 	 	 	 	 	(244,903	)	 	 	 	 	 	(244,903	)	
Issuance of common stock	442,746		 	24,635		 	 	 	 	 	 	 	 	 	 	 	24,635		
Purchase of treasury stock (a)	 	 	 	 	(174,290	)	 	(9,727	)	 	 	 	 	 	 	 	(9,727	)	
Stock-based compensation and other	 	 	 	 	170,538		 	9,630		 	 	 	 	 	 	 	9,630		
Net capital activities by noncontrolling interests	 	 	 	 	 	 	 	 	 	 	 	 	(17,385	)	 	(17,385	)	
Balance, December 31, 2013	110,280,703		 	2,491,558		 	(98,944	)	 	(4,308	)	 	1,785,273		 	(78,053	)	 	145,990		 	4,340,460		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	 	 	 	 	 	 	 	397,595		 	 	 	26,101		 	423,696		
Other comprehensive income	 	 	 	 	 	 	 	 	 	 	9,912		 	 	 	9,912		
Dividends on common stock ($2.33 per share)	 	 	 	 	 	 	 	 	(256,803	)	 	 	 	 	 	(256,803	)	
Issuance of common stock	369,059		 	21,412		 	 	 	 	 	 	 	 	 	 	 	21,412		
Purchase of treasury stock (a)	 	 	 	 	(139,746	)	 	(7,893	)	 	 	 	 	 	 	 	(7,893	)	
Stock-based compensation and other	 	 	 	 	160,290		 	8,800		 	 	 	 	 	 	 	8,800		
Net capital activities by noncontrolling interests	 	 	 	 	 	 	 	 	 	 	 	 	(20,482	)	 	(20,482	)	
Balance, December 31, 2014	110,649,762		 	$	2,512,970		 	(78,400	)		$	(3,401	)	 	$	1,926,065		 	$	(68,141	)	 	$	151,609		 	$	4,519,102		
(a)    Primarily represents shares of common stock withheld from certain stock awards for tax purposes.

See Notes to Pinnacle West’s Consolidated Financial Statements.

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1.                                       Summary of Significant Accounting Policies
 
Description of Business and Basis of Presentation
 
Pinnacle West is a holding company that conducts business through its subsidiaries, APS, El Dorado, BCE, and formerly SunCor. APS, our wholly-owned subsidiary, is a vertically-integrated electric utility that provides either retail or wholesale electric service to substantially all of the state of Arizona, with the major exceptions of about one-half of the Phoenix metropolitan area, the Tucson metropolitan area and Mohave County in northwestern Arizona.  APS accounts for essentially all of our revenues and earnings, and is expected to continue to do so.  El Dorado is an investment firm. BCE is a new subsidiary formed in 2014 that focuses on growth opportunities that leverage the Company's core expertise in the electric energy industry. BCE is currently pursuing transmission opportunities through a joint venture arrangement. SunCor was a developer of residential, commercial and industrial real estate projects and essentially all of these assets were sold in 2009 and 2010.  In February 2012, SunCor filed for protection under the United States Bankruptcy Code to complete an orderly liquidation of its business.  All activities for SunCor are reported as discontinued operations. 
 
Pinnacle West’s Consolidated Financial Statements include the accounts of Pinnacle West and our subsidiaries:  APS, El Dorado, BCE, and formerly SunCor. APS’s consolidated financial statements include the accounts of APS and certain VIEs relating to the Palo Verde sale leaseback.  Intercompany accounts and transactions between the consolidated companies have been eliminated.
 
We consolidate VIEs for which we are the primary beneficiary.  We determine whether we are the primary beneficiary of a VIE through a qualitative analysis that identifies which variable interest holder has the controlling financial interest in the VIE.  In performing our primary beneficiary analysis, we consider all relevant facts and circumstances, including the design and activities of the VIE, the terms of the contracts the VIE has entered into, and which parties participated significantly in the design or redesign of the entity.  We continually evaluate our primary beneficiary conclusions to determine if changes have occurred which would impact our primary beneficiary assessments.  We have determined that APS is the primary beneficiary of certain VIE lessor trusts relating to the Palo Verde sale leaseback, and therefore APS consolidates these entities (see Note 18).
 
Our 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.
 
Accounting Records and Use of Estimates
 
Our accounting records are maintained in accordance with 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.

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Regulatory Accounting
 
APS is regulated by the ACC and FERC.  The accompanying financial statements reflect the rate-making policies of these commissions.  As a result, we capitalize certain costs that would be included as expense in the current period by unregulated companies.  Regulatory assets represent incurred costs that have been deferred because they are probable of future recovery in customer rates.  Regulatory liabilities generally represent expected future costs that have already been collected from customers.
 
Management continually assesses whether our regulatory assets are probable of future recovery by considering factors such as changes in the applicable regulatory environment and recent rate orders applicable to APS or other regulated entities in the same jurisdiction.  This determination reflects the current political and regulatory climate in Arizona and is subject to change in the future.  If future recovery of costs ceases to be probable, the assets would be written off as a charge in current period earnings.
 
See Note 3 for additional information.
 
Electric Revenues
 
We derive electric revenues primarily from sales of electricity to our regulated Native Load customers.  Revenues related to the sale of electricity are generally recorded when service is rendered or electricity is delivered to customers.  The billing of electricity sales to individual Native Load customers is based on the reading of their meters, which occurs on a systematic basis throughout the month.  Unbilled revenues are estimated by applying an average revenue/kWh by customer class to the number of estimated kWhs delivered but not billed.  Differences historically between the actual and estimated unbilled revenues are immaterial.  We exclude sales taxes and franchise fees on electric revenues from both revenue and taxes other than income taxes.
 
Revenues from our Native Load customers and non-derivative instruments are reported on a gross basis on Pinnacle West’s Consolidated Statements of Income.  In the electricity business, some contracts to purchase energy are netted against other contracts to sell energy.  This is called a “book-out” and usually occurs for contracts that have the same terms (quantities and delivery points) and for which power does not flow.  We net these book-outs, which reduces both revenues and fuel and purchased power costs.
 
For the period January 1, 2010 through June 30, 2012, electric revenues also include proceeds for line extension payments for new or upgraded service in accordance with the 2009 Settlement Agreement (see Note 3).  Effective July 1, 2012, as a result of the 2012 Settlement Agreement, these amounts are now recorded as contributions in aid of construction and are not included in electric revenues.
 
Some of our cost recovery mechanisms are alternative revenue programs.  For alternative revenue programs that meet specified accounting criteria, we recognize revenues when the specific events permitting billing of the additional revenues have been completed.

Allowance for Doubtful Accounts
 
The allowance for doubtful accounts represents our best estimate of existing accounts receivable that will ultimately be uncollectible.  The allowance is calculated by applying estimated write-off factors to various classes of outstanding receivables, including accrued utility revenues.  The write-off factors used to estimate uncollectible accounts are based upon consideration of both historical collections experience and management’s best estimate of future collections success given the existing collections environment.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
Property, Plant and Equipment
 
Utility plant is the term we use to describe the business property and equipment that supports electric service, consisting primarily of generation, transmission and distribution facilities.  We report utility plant at its original cost, which includes:

•	material and labor;	
		
•	contractor costs;	
		
•	capitalized leases;	
		
•	construction overhead costs (where applicable); and	
		
•	allowance for funds used during construction.	

We expense the costs of plant outages, major maintenance and routine maintenance as incurred.  We charge retired utility plant to accumulated depreciation.  Liabilities associated with the retirement of tangible long-lived assets are recognized at fair value as incurred and capitalized as part of the related tangible long-lived assets.  Accretion of the liability due to the passage of time is an operating expense, and the capitalized cost is depreciated over the useful life of the long-lived asset.  See Note 11.
 
APS records a regulatory liability for the difference between the amount that has been recovered in regulated rates and the amount calculated in accordance with guidance on accounting for asset retirement obligations.  APS believes it can recover in regulated rates the costs calculated in accordance with this accounting guidance.
 
We record depreciation on utility plant on a straight-line basis over the remaining useful life of the related assets.  The approximate remaining average useful lives of our utility property at December 31, 2014 were as follows:
 
• Fossil plant — 19 years;
• Nuclear plant — 28 years;
• Other generation — 25 years;
• Transmission — 38 years;
• Distribution — 33 years; and
• Other — 7 years.

Pursuant to an ACC order, we deferred operating costs in 2013 and 2014 related to APS’s acquisition of additional interests in Units 4 and 5 and the related closure of Units 1-3 of Four Corners.  See Note 3 for further discussion.  These costs were deferred and will be amortized on the depreciation line of the Consolidated Statements of Income.
 
For the years 2012 through 2014, the depreciation rates ranged from a low of 0.30% to a high of 12.08% .  The weighted-average rate was 2.77% for 2014, 3.00% for 2013, and 2.71% for 2012.
 
Allowance for Funds Used During Construction
 
AFUDC represents the approximate net composite interest cost of borrowed funds and an allowed return on the equity funds used for construction of regulated utility plant.  Both the debt and equity components of AFUDC are non-cash amounts within the Consolidated Statements of Income.  Plant

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construction costs, including AFUDC, are recovered in authorized rates through depreciation when completed projects are placed into commercial operation.
 
AFUDC was calculated by using a composite rate of 8.47% for 2014, 8.56% for 2013, and 8.60% for 2012.  APS compounds AFUDC semi-annually and ceases to accrue AFUDC when construction work is completed and the property is placed in service.
 
Materials and Supplies
 
APS values materials, supplies and fossil fuel inventory using a weighted-average cost method.  APS materials, supplies and fossil fuel inventories are carried at the lower of weighted-average cost or market, unless evidence indicates that the weighted-average cost (even if in excess of market) will be recovered.
 
Fair Value Measurements
 
We account for derivative instruments, investments held in our nuclear decommissioning trust, certain cash equivalents and plan assets held in our retirement and other benefit plans at fair value on a recurring basis.  Due to the short-term nature of net accounts receivable, accounts payable, and short-term borrowings, the carrying values of these instruments approximate fair value.  Fair value measurements may also be applied on a nonrecurring basis to other assets and liabilities in certain circumstances such as impairments.  We also disclose fair value information for our long-term debt, which is carried at amortized cost (see Note 6).
 
Fair value is the price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market which we can access for the asset or liability in an orderly transaction between willing market participants on the measurement date.  Inputs to fair value may include observable and unobservable data.  We maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
 
We determine fair market value using observable inputs such as actively-quoted prices for identical instruments when available.  When actively quoted prices are not available for the identical instruments, we use other observable inputs, such as prices for similar instruments, other corroborative market information, or prices provided by other external sources.  For options, long-term contracts and other contracts for which observable price data are not available, we use models and other valuation methods, which may incorporate unobservable inputs to determine fair market value.
 
The use of models and other valuation methods to determine fair market value often requires subjective and complex judgment.  Actual results could differ from the results estimated through application of these methods.
 
See Note 13 for additional information about fair value measurements.
 
Derivative Accounting
 
We are exposed to the impact of market fluctuations in the commodity price and transportation costs of electricity, natural gas, coal and in interest rates.  We manage risks associated with market volatility by utilizing various physical and financial instruments including futures, forwards, options and swaps.  As part of our overall risk management program, we may use derivative instruments to hedge purchases and sales of electricity and fuels.  The changes in market value of such contracts have a high correlation to price changes in the hedged transactions.  We also enter into derivative instruments for economic hedging purposes.  Contracts

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that have the same terms (quantities, delivery points and delivery periods) and for which power does not flow are netted, which reduces both revenues and fuel and purchased power expenses in our Consolidated Statements of Income, but does not impact our financial condition, net income or cash flows.
 
We account for our derivative contracts in accordance with derivatives and hedging guidance, which requires all derivatives not qualifying for a scope exception to be measured at fair value on the balance sheet as either assets or liabilities.  Transactions with counterparties that have master netting arrangements are reported net on the balance sheet.  See Note 16 for additional information about our derivative instruments.
 
Loss Contingencies and Environmental Liabilities
 
Pinnacle West and APS are involved in certain legal and environmental matters that arise in the normal course of business.  Contingent losses and environmental liabilities are recorded when it is determined that it is probable that a loss has occurred and the amount of the loss can be reasonably estimated.  When a range of the probable loss exists and no amount within the range is a better estimate than any other amount, Pinnacle West and APS record a loss contingency at the minimum amount in the range.  Unless otherwise required by GAAP, legal fees are expensed as incurred.
 
Retirement Plans and Other Benefits
 
Pinnacle West sponsors a qualified defined benefit and account balance pension plan for the employees of Pinnacle West and its subsidiaries.  We also sponsor an other postretirement benefit plan for the employees of Pinnacle West and its subsidiaries that provides medical and life insurance benefits to retired employees.  Pension and other postretirement benefit expense are determined by actuarial valuations, based on assumptions that are evaluated annually.  See Note 7 for additional information on pension and other postretirement benefits.
 
Nuclear Fuel
 
APS amortizes nuclear fuel by using the unit-of-production method.  The unit-of-production method is based on actual physical usage.  APS divides the cost of the fuel by the estimated number of thermal units it expects to produce with that fuel.  APS then multiplies that rate by the number of thermal units produced within the current period.  This calculation determines the current period nuclear fuel expense.
 
APS also charges nuclear fuel expense for the interim storage and permanent disposal of spent nuclear fuel.  The DOE is responsible for the permanent disposal of spent nuclear fuel and charged APS $0.001 per kWh of nuclear generation through August 2014, at which point the DOE suspended the fee.  In accordance with a settlement agreement with the DOE in August 2014, we will now accrue a receivable for incurred claims and an offsetting regulatory liability through the settlement period ending December of 2016. See Note 10 for information on spent nuclear fuel disposal costs.
 
Income Taxes
 
Income taxes are provided using the asset and liability approach prescribed by guidance relating to accounting for income taxes.  We file our federal income tax return on a consolidated basis, and we file our state income tax returns on a consolidated or unitary basis.  In accordance with our intercompany tax sharing agreement, federal and state income taxes are allocated to each first-tier subsidiary as though each first-tier subsidiary filed a separate income tax return.  Any difference between that method and the consolidated (and unitary) income tax liability is attributed to the parent company.  The income tax accounts reflect the tax and

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interest associated with management’s estimate of the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement for all known and measurable tax exposures (see Note 4).
 
Cash and Cash Equivalents
 
We consider all highly liquid investments with a remaining maturity of three months or less at acquisition to be cash equivalents.
 
The following table summarizes supplemental Pinnacle West cash flow information for each of the last three years (dollars in thousands):

	
												
 	Year ended December 31,	
 	2014	 	2013	 	2012	
Cash paid (received) during the period for:	 		 	 		 	 		
Income taxes, net of refunds	$	(102,154	)	 	$	18,537		 	$	2,543		
Interest, net of amounts capitalized	177,074		 	184,010		 	200,923		
Significant non-cash investing and financing activities:	 		 	 		 	 		
Accrued capital expenditures	$	44,712		 	$	33,184		 	$	26,208		
Dividends declared but not paid	65,790		 	62,528		 	59,789		
Liabilities assumed relating to acquisition of SCE Four Corners’ interest (see Note 3)	—		 	145,609		 	—		

Intangible Assets
 
We have no goodwill recorded and have separately disclosed other intangible assets, primarily APS’s software, on Pinnacle West’s Consolidated Balance Sheets.  The intangible assets are amortized over their finite useful lives.  Amortization expense was $53 million in 2014 , $53 million in 2013 , and $50 million in 2012 .  Estimated amortization expense on existing intangible assets over the next five years is $42 million in 2015, $32 million in 2016, $21 million in 2017, $9 million in 2018, and $3 million in 2019.  At December 31, 2014 , the weighted-average remaining amortization period for intangible assets was 6 years.
 
Investments
 
El Dorado accounts for its investments using either the equity method (if significant influence) or the cost method (if less than 20% ownership and no significant influence).
 
Our investments in the nuclear decommissioning trust fund are accounted for in accordance with guidance on accounting for certain investments in debt and equity securities. See Note 13 and Note 19 for more information on these investments.
 
Business Segments
 
Pinnacle West’s reportable business segment is our regulated electricity segment, which consists of traditional regulated retail and wholesale electricity businesses (primarily electricity service to Native Load customers) and related activities and includes electricity generation, transmission and distribution. All other segment activities are insignificant.

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Preferred Stock

At December 31, 2014 , Pinnacle West had 10 million shares of serial preferred stock authorized with no par value, none of which was outstanding, and APS had 15,535,000 shares of various types of preferred stock authorized with $25 , $50 and $100 par values, none of which was outstanding.
 
2.                                       New Accounting Standards
 
During 2014 , we adopted, on a prospective basis, new guidance relating to the presentation of unrecognized tax benefits.  This guidance generally requires entities to present unrecognized tax benefits as a reduction to any available deferred tax asset for a net operating loss, a similar tax loss, or a tax credit carryforward.  Prior to adopting this guidance, we presented unrecognized tax benefits on a gross basis.  The adoption of this new guidance changed our balance sheet presentation of unrecognized tax benefits, but did not impact our operating results or cash flows.  See Note 4 for details regarding the impacts of adopting this guidance.
 
In May 2014, new revenue recognition guidance was issued.  This guidance provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance.  The new guidance is effective for us on January 1, 2017, and may be adopted using full retrospective application or a simplified transition method that allows entities to record a cumulative effect adjustment in retained earnings at the date of initial application.  We are currently evaluating this new guidance and the impacts it may have on our financial statements.
 
3.                                       Regulatory Matters
 
Retail Rate Case Filing with the Arizona Corporation Commission
 
On June 1, 2011, APS filed an application with the ACC for a net retail base rate increase of $95.5 million .  APS requested that the increase become effective July 1, 2012.  The request would have increased the average retail customer bill by approximately 6.6% .  On January 6, 2012, APS and other parties to the general retail rate case entered into the 2012 Settlement Agreement detailing the terms upon which the parties agreed to settle the rate case.  On May 15, 2012, the ACC approved the 2012 Settlement Agreement without material modifications.
 
Settlement Agreement
 
The 2012 Settlement Agreement provides for a zero net change in base rates, consisting of:  (1) a non-fuel base rate increase of $116.3 million ; (2) a fuel-related base rate decrease of $153.1 million (to be implemented by a change in the Base Fuel Rate from $0.03757 to $0.03207 per kWh); and (3) the transfer of cost recovery for certain renewable energy projects from the RES surcharge to base rates in an estimated amount of $36.8 million .
 
APS also agreed not to file its next general rate case before May 31, 2015, and not to request that its next general retail rate increase be effective prior to July 1, 2016.  The 2012 Settlement Agreement allows APS to request a change to its base rates during the stay-out period in the event of an extraordinary event that, in the ACC’s judgment, requires base rate relief in order to protect the public interest.  Nor is APS precluded from seeking rate relief, or any other party to the 2012 Settlement Agreement precluded from petitioning the ACC to

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examine the reasonableness of APS’s rates, in the event of significant regulatory developments that materially impact the financial results expected under the terms of the 2012 Settlement Agreement.
 
Other key provisions of the 2012 Settlement Agreement include the following:
• An authorized return on common equity of 10.0% ;
• A capital structure comprised of 46.1% debt and 53.9% common equity;

•	A test year ended December 31, 2010, adjusted to include plant that is in service as of March 31, 2012;	

•	Deferral for future recovery or refund of property taxes above or below a specified 2010 test year level caused by changes to the Arizona property tax rate as follows:  	

•	Deferral of increases in property taxes of 25% in 2012, 50% in 2013 and 75% for 2014 and subsequent years if Arizona property tax rates increase; and	
• Deferral of 100% in all years if Arizona property tax rates decrease;

•	A procedure to allow APS to request rate adjustments prior to its next general rate case related to APS’s acquisition of additional interests in Units 4 and 5 and the related closure of Units 1-3 of Four Corners (APS made its filing under this provision on December 30, 2013, see "Four Corners" below);	

•	Implementation of a “Lost Fixed Cost Recovery” rate mechanism to support energy efficiency and distributed renewable generation;	

•	Modifications to the Environmental Improvement Surcharge to allow for the recovery of carrying costs for capital expenditures associated with government-mandated environmental controls, subject to an existing cents per kWh cap on cost recovery that could produce up to approximately $5 million in revenues annually;	
• Modifications to the PSA, including the elimination of the 9 0/10 sharing provision;

•	A limitation on the use of the RES surcharge and the DSMAC to recoup capital expenditures not required under the terms of the 2009 Settlement Agreement discussed below;	

•	Allowing a negative credit that existed in the PSA rate to continue until February 2013, rather than being reset on the anticipated July 1, 2012 rate effective date;	

•	Modification of the TCA to streamline the process for future transmission-related rate changes; and	

•	Implementation of various changes to rate schedules, including the adoption of an experimental “buy-through” rate that could allow certain large commercial and industrial customers to select alternative sources of generation to be supplied by APS.	
The 2012 Settlement Agreement was approved by the ACC on May 15, 2012, with new rates effective on July 1, 2012.  This accomplished a goal set by the parties to the 2009 Settlement Agreement to process subsequent rate cases within twelve months of sufficiency findings from the ACC staff, which generally occurs within 30 days after the filing of a rate case.

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Cost Recovery Mechanisms
 
APS has received regulatory decisions that allow for more timely recovery of certain costs through the following recovery mechanisms.
 
Renewable Energy Standard .   In 2006, the ACC approved the RES.  Under the RES, electric utilities that are regulated by the ACC must supply an increasing percentage of their retail electric energy sales from eligible renewable resources, including solar, wind, biomass, biogas and geothermal technologies.  In order to achieve these requirements, the ACC allows APS to include a RES surcharge as part of customer bills to recover the approved amounts for use on renewable energy projects.  Each year APS is required to file a five -year implementation plan with the ACC and seek approval for funding the upcoming year’s RES budget.
 
On July 12, 2013, APS filed its annual RES implementation plan, covering the 2014-2018 timeframe and requesting a 2014 RES budget of approximately $143 million .  In a final order dated January 7, 2014, the ACC approved the requested budget.  Also in 2013, the ACC conducted a hearing to consider APS’s proposal to establish compliance with distributed energy requirements by tracking and recording distributed energy, rather than acquiring and retiring renewable energy credits.  On February 6, 2014, the ACC established a proceeding to modify the renewable energy rules to establish a process for compliance with the renewable energy requirement that is not based solely on the use of renewable energy credits. On September 9, 2014, the ACC authorized a rulemaking process to modify the RES rules. The proposed changes would permit the ACC to find that utilities have complied with the distributed energy requirement in light of all available information. The ACC adopted these changes on December 18, 2014.  The revised rules are expected to become effective in the second quarter of 2015.

In accordance with the ACC’s decision on the 2014 RES plan, on April 15, 2014, APS filed an application with the ACC requesting permission to build an additional 20 MW of APS-owned utility scale solar under the AZ Sun Program.  In a subsequent filing, APS also offered an alternative proposal to replace the 20 MW of utility scale solar with 10 MW (approximately 1,500 customers) of APS-owned residential solar that will not be under the AZ Sun Program. On December 19, 2014, the ACC voted that it had no objection to APS implementing its residential rooftop solar program. The first stage of the residential rooftop solar program is to be 8 MW followed by a 2 MW second stage that will only be deployed if coupled with distributed storage. The program will target specific distribution feeders in an effort to maximize potential system benefits, as well as make systems available to limited-income customers who cannot easily install solar through transactions with third parties. The ACC expressly reserved that any determination of prudency of the residential rooftop solar program for rate making purposes shall not be made until the project is fully in service and APS requests cost recovery in a future rate case.

On July 1, 2014, APS filed its 2015 RES implementation plan and proposed a RES budget of approximately $154 million . On December 31, 2014, the ACC issued a decision approving the 2015 RES implementation plan with minor modifications, including reducing the budget to approximately $152 million .
 
Demand Side Management Adjustor Charge .   The ACC Electric Energy Efficiency Standards require APS to submit a DSM Plan for review by and approval of the ACC.
 
On June 1, 2012, APS filed its 2013 DSM Plan.  In 2013, the standards required APS to achieve cumulative energy savings equal to 5% of its 2012 retail energy sales.  Later in 2012, APS filed a supplement to its plan that included a proposed budget for 2013 of $87.6 million .

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On March 11, 2014, the ACC issued an order approving APS’s 2013 DSM Plan.  The ACC approved a budget of $68.9 million for each of 2013 and 2014.  The ACC also approved a Resource Savings Initiative that allows APS to count towards compliance with the ACC Electric Energy Efficiency Standards, savings for improvements to APS’s transmission and delivery system, generation and facilities that have been approved through a DSM Plan.  Consistent with the ACC’s March 11, 2014 order, APS intends to continue its approved DSM programs in 2015.
 
On June 27, 2013, the ACC voted to open a new docket investigating whether the Electric Energy Efficiency Rules should be modified.  The ACC held a series of three workshops in March and April 2014 to investigate methodologies used to determine cost effective energy efficiency programs, cost recovery mechanisms, incentives, and potential changes to the Electric Energy Efficiency and Resource Planning Rules.

On November 4, 2014, the ACC staff issued a request for informal comment on a draft of possible amendments to Arizona’s Electric Utility Energy Efficiency Standards.  The draft proposed substantial changes to the rules and energy efficiency standards.    The ACC accepted written comments and took public comment regarding the possible amendments on December 19, 2014.  A formal rule making has not been initiated and there has been no additional action on the draft to date.
 
PSA Mechanism and Balance.  The PSA provides for the adjustment of retail rates to reflect variations in retail fuel and purchased power costs.  The PSA is subject to specified parameters and procedures, including the following:

•	APS records deferrals for recovery or refund to the extent actual retail fuel and purchased power costs vary from the Base Fuel Rate;	

•	an adjustment to the PSA rate is made annually each February 1 (unless otherwise approved by the ACC) and goes into effect automatically unless suspended by the ACC;	

•	the PSA uses a forward-looking estimate of fuel and purchased power costs to set the annual PSA rate, which is reconciled to actual costs experienced for each PSA Year (February 1 through January 31) (see the following bullet point);	

•	the PSA rate includes (a) a “Forward Component,” under which APS recovers or refunds differences between expected fuel and purchased power costs for the upcoming calendar year and those embedded in the Base Fuel Rate; (b) a “Historical Component,” under which differences between actual fuel and purchased power costs and those recovered through the combination of the Base Fuel Rate and the Forward Component are recovered during the next PSA Year; and (c) a “Transition Component,” under which APS may seek mid-year PSA changes due to large variances between actual fuel and purchased power costs and the combination of the Base Fuel Rate and the Forward Component; and	

•	the PSA rate may not be increased or decreased more than $0.004 per kWh in a year without permission of the ACC.	

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The following table shows the changes in the deferred fuel and purchased power regulatory asset for 2014 and 2013 (dollars in millions):

	
								
 	Year Ended December 31,	
 	2014	 	2013	
Beginning balance	$	21		 	$	73		
Deferred fuel and purchased power costs - current period	27		 	(21	)	
Amounts charged to customers	(41	)	 	(31	)	
Ending balance	$	7		 	$	21		
 
The PSA rate for the PSA year beginning February 1, 2015 is $0.000887 per kWh, as compared to $0.001557 per kWh for the prior year.  This new rate is comprised of a forward component of $0.001131 per kWh and a historical component of $(0.000244) per kWh.  Any uncollected (overcollected) deferrals during the 2015 PSA year will be included in the calculation of the PSA rate for the PSA year beginning February 1, 2016.
 
Transmission Rates, Transmission Cost Adjustor and Other Transmission Matters .  In July 2008, FERC approved an Open Access Transmission Tariff for APS to move from fixed rates to a formula rate-setting methodology in order to more accurately reflect and recover the costs that APS incurs in providing transmission services.  A large portion of the rate represents charges for transmission services to serve APS’s retail customers (“Retail Transmission Charges”).  In order to recover the Retail Transmission Charges, APS was previously required to file an application with, and obtain approval from, the ACC to reflect changes in Retail Transmission Charges through the TCA.  Under the terms of the 2012 Settlement Agreement, however, an adjustment to rates to recover the Retail Transmission Charges will be made annually each June 1 and will go into effect automatically unless suspended by the ACC.
 
The formula rate is updated each year effective June 1 on the basis of APS’s actual cost of service, as disclosed in APS’s FERC Form 1 report for the previous fiscal year.  Items to be updated include actual capital expenditures made as compared with previous projections, transmission revenue credits and other items.  The resolution of proposed adjustments can result in significant volatility in the revenues to be collected.  APS reviews the proposed formula rate filing amounts with the ACC staff.  Any items or adjustments which are not agreed to by APS and the ACC staff can remain in dispute until settled or litigated at FERC.  Settlement or litigated resolution of disputed issues could require an extended period of time and could have a significant effect on the Retail Transmission Charge because any adjustment, though applied prospectively, may be calculated to account for previously over- or under-collected amounts.

Effective June 1, 2014, APS’s annual wholesale transmission rates for all users of its transmission system increased by approximately $5.9 million for the twelve-month period beginning June 1, 2014 in accordance with the FERC-approved formula.  An adjustment to APS’s retail rates to recover FERC-approved transmission charges went into effect automatically on June 1, 2014.
 
Lost Fixed Cost Recovery Mechanism .   The LFCR mechanism permits APS to recover on an after-the-fact basis a portion of its fixed costs that would otherwise have been collected by APS in the kWh sales lost due to APS energy efficiency programs and to distributed generation such as rooftop solar arrays.  The fixed costs recoverable by the LFCR mechanism were established in the 2012 Settlement Agreement and amount to approximately 3.1 cents per residential kWh lost and 2.3 cents per non-residential kWh lost.  The LFCR adjustment has a year-over-year cap of 1% of retail revenues.  Any amounts left unrecovered in a particular year because of this cap can be carried over for recovery in a future year.  The kWh’s lost from energy efficiency are based on a third-party evaluation of APS’s energy efficiency programs.  Distributed generation

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sales losses are determined from the metered output from the distributed generation units or if metering is unavailable, through accepted estimating techniques.
 
APS filed its first LFCR adjustment on January 15, 2013 and will file for a LFCR adjustment every January thereafter.  On February 12, 2013, the ACC approved a LFCR adjustment of $5.1 million , representing a pro-rated amount for 2012 since the 2012 Settlement Agreement went into effect on July 1, 2012.  APS filed its 2014 annual LFCR adjustment on January 15, 2014, requesting a LFCR adjustment of $25.3 million , effective March 1, 2014.  The ACC approved APS’s LFCR adjustment without change on March 11, 2014, which became effective April 1, 2014. APS filed its 2015 annual LFCR adjustment on January 15, 2015, requesting an LFCR adjustment of $38.5 million effective March 1, 2015.
 
Deregulation
 
On May 9, 2013, the ACC voted to re-examine the facilitation of a deregulated retail electric market in Arizona.  The ACC subsequently opened a docket for this matter and received comments from a number of interested parties on the considerations involved in establishing retail electric deregulation in the state.  One of these considerations is whether various aspects of a deregulated market, including setting utility rates on a “market” basis, would be consistent with the requirements of the Arizona Constitution.  On September 11, 2013, after receiving legal advice from the ACC staff, the ACC voted 4 -1 to close the current docket and await full Arizona Constitutional authority before any further examination of this matter.  The motion approved by the ACC also included opening one or more new dockets in the future to explore options to offer more rate choices to customers and innovative changes within the existing cost-of-service regulatory model that could include elements of competition.  The ACC opened a new docket on November 4, 2013 to explore technological advances and innovative changes within the electric utility industry.  A series of workshops in this docket were held in 2014 and another is currently scheduled for February 26, 2015.

Net Metering
 
On July 12, 2013, APS filed an application with the ACC proposing a solution to address the cost shift brought by the current net metering rules.  On December 3, 2013, the ACC issued its order on APS’s net metering proposal.  The ACC instituted a charge on customers who install rooftop solar panels after December 31, 2013 , and directed APS to provide quarterly reports on the pace of rooftop solar adoption to assist the ACC in considering further increases.  The charge of $0.70 per kilowatt became effective on January 1, 2014, and is estimated to collect $4.90 per month from a typical future rooftop solar customer to help pay for their use of the electricity grid. 
 
In making its decision, the ACC determined that the current net metering program creates a cost shift, causing non-solar utility customers to pay higher rates to cover the costs of maintaining the electrical grid.  ACC staff and the state’s Residential Utility Consumer Office, among other organizations, also agreed that a cost shift exists.  The fixed charge does not increase APS’s revenue because it is credited to the LFCR, but it will modestly reduce the impact of the cost shift on non-solar customers.  The ACC acknowledged that the new charge addresses only a portion of the cost shift.  The ACC also required APS to file its next rate case in June 2015, the earliest date contemplated in the 2012 Settlement Agreement.
 
In May 2014, the ACC began conducting a series of workshops to, among other things, evaluate the role and value of the electric grid as it relates to rooftop solar and other issues regarding net metering.
 
On July 22, 2014, the ACC Commissioners voted to reopen the December 2013 net metering decision for the limited purpose of deciding whether to eliminate the requirement that APS file its next rate case in June

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2015.  The vote included a request that parties comment in the docket about their thoughts on removing the filing date requirement and on the process for the broader discussion regarding rate design. On August 12, 2014, the ACC Commissioners voted to lift the requirement that APS file its next general rate case by June 2015. On September 29, 2014, the staff of the ACC filed in a new docket a proposal for permitting a utility to request ACC approval of its proposed rate design outside of and before a general rate case. On October 20, 2014, APS and other interested stakeholders filed comments to this proposal. No further action has been taken in this docket.

Four Corners
 
On December 30, 2013, APS purchased SCE’s 48% ownership interest in each of Units 4 and 5 of Four Corners.  The 2012 Settlement Agreement includes a procedure to allow APS to request rate adjustments prior to its next general rate case related to APS’s acquisition of the additional interests in Units 4 and 5 and the related closure of Units 1-3 of Four Corners.  APS made its filing under this provision on December 30, 2013.  On December 23, 2014, the ACC approved rate adjustments resulting in a revenue increase of $57.1 million on an annual basis.  This includes the deferral for future recovery of all non-fuel operating costs for the acquired SCE interest in Four Corners, net of the non-fuel operating costs savings resulting from the closure of Units 1-3 from the date of closing of the purchase through its inclusion in rates.  The 2012 Settlement Agreement also provides for deferral for future recovery of all unrecovered costs incurred in connection with the closure of Units 1-3.  The deferral balance related to the acquisition of SCE’s interest in Units 4 and 5 and the closure of Units 1-3 was $77 million as of December 31, 2014 and is being amortized in rates over 10 years. 

As part of APS’s acquisition of SCE’s interest in Units 4 and 5, APS and SCE agreed, via a “Transmission Termination Agreement” that, upon closing of the acquisition, the companies would terminate an existing transmission agreement (“Transmission Agreement”) between the parties that provides transmission capacity on a system (the “Arizona Transmission System”) for SCE to transmit its portion of the output from Four Corners to California.  APS previously submitted a request to FERC related to this termination, which resulted in a FERC order denying rate recovery of $40 million that APS agreed to pay SCE associated with the termination.  APS and SCE negotiated an alternate arrangement under which SCE would assign its 1,555 MW capacity rights over the Arizona Transmission System to third-parties, including 300 MW to APS’s marketing and trading group. However, this alternative arrangement was not approved by FERC.  In late March 2014, APS and SCE filed requests for rehearing with FERC.  Both requests for rehearing were denied on August 14, 2014. Although APS and SCE continue to evaluate potential paths forward, it is possible that the terms of the Transmission Termination Agreement may again control. As we previously disclosed, APS believes that the original denial by FERC of rate recovery under the Transmission Termination Agreement constitutes the failure of a condition that relieves APS of its obligations under that agreement.  If APS and SCE were unable to determine a resolution through negotiation, the Transmission Termination Agreement requires that disputes be resolved through arbitration.  APS is unable to predict the outcome of this matter if it proceeds to arbitration. If the matter proceeds to arbitration and APS is not successful, APS may be required to record a charge to its results of operations.

Cholla

After considering the costs to comply with environmental regulations, on September 11, 2014, APS announced that it will close Cholla Unit 2 by April 2016 and cease burning coal at the other APS-owned units (Units 1 and 3) at the plant by the mid-2020s, if EPA approves a compromise proposal offered by APS to meet required environmental and emissions standards and rules. Previously, APS estimated Cholla Unit 2’s end of life to be 2033. APS is currently recovering depreciation and a return on the net book value of the unit in base rates and plans to seek recovery of all of the unit’s retirement-related costs in its next retail rate case.

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If APS closes Cholla Unit 2, APS believes it will be allowed recovery of the remaining net book value of Unit 2 ( $128 million as of December 31, 2014), in addition to a return on its investment. In accordance with GAAP, in the third quarter of 2014, Unit 2’s remaining net book value was reclassified from property, plant and equipment to a regulatory asset. If the ACC does not allow full recovery of the remaining net book value of Cholla Unit 2, all or a portion of the regulatory asset will be written off and APS’s net income, cash flows, and financial position will be negatively impacted. 
Regulatory Assets and Liabilities
 
The detail of regulatory assets is as follows (dollars in millions):

																		
 	Remaining
Amortization	 	December 31, 2014	 	December 31, 2013	
 	Period	 	Current	 	Non-Current	 	Current	 	Non-Current	
Pension and other postretirement benefits	(a)	 	$	—		 	$	485		 	$	—		 	$	314		
Income taxes — AFUDC equity	2044	 	5		 	118		 	4		 	105		
Deferred fuel and purchased power — mark-to-market (Note 16)	2017	 	51		 	46		 	5		 	29		
Transmission vegetation management	2016	 	9		 	5		 	9		 	14		
Coal reclamation	2026	 	—		 	7		 	8		 	18		
Palo Verde VIEs (Note 18)	2046	 	—		 	35		 	—		 	41		
Deferred compensation	2036	 	—		 	34		 	—		 	34		
Deferred fuel and purchased power (b) (c)	2015	 	7		 	—		 	21		 	—		
Tax expense of Medicare subsidy	2024	 	2		 	14		 	2		 	15		
Loss on reacquired debt	2034	 	1		 	16		 	1		 	17		
Income taxes — investment tax credit basis adjustment	2044	 	2		 	46		 	1		 	39		
Pension and other postretirement benefits deferral	2015	 	4		 	—		 	8		 	4		
Four Corners cost deferral	2024	 	7		 	70		 	—		 	37		
Lost fixed cost recovery	2015	 	38		 	—		 	25		 	—		
Transmission cost adjustor	2014	 	—		 	—		 	8		 	2		
Retired power plant costs	2033	 	10		 	136		 	3		 	18		
Deferred property taxes	(d)	 	—		 	30		 	—		 	11		
Other	Various	 	2		 	12		 	2		 	14		
Total regulatory assets (e)	 	 	$	138		 	$	1,054		 	$	97		 	$	712		

		
(a)	This asset represents the future recovery of pension and other postretirement benefit obligations through retail rates.  If these costs are disallowed by the ACC, this regulatory asset would be charged to OCI and result in lower future revenues.  See Note 7 for further discussion.	
		
(b)	See “Cost Recovery Mechanisms” discussion above.	
		
(c)	Subject to a carrying charge.	
		
(d)	Per the provision of the 2012 Settlement Agreement.	
		
(e)	There are no regulatory assets for which the ACC has allowed recovery of costs, but not allowed a return by exclusion from rate base.  FERC rates are set using a formula rate as described in “Transmission Rates, Transmission Cost Adjustor and Other Transmission Matters.”	

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The detail of regulatory liabilities is as follows (dollars in millions):

																		
 	Remaining
Amortization	 	December 31, 2014	 	December 31, 2013	
 	Period	 	Current	 	Non-Current	 	Current	 	Non-Current	
Removal costs	(a)	 	$	31		 	$	273		 	$	28		 	$	303		
Asset retirement obligations	2044	 	—		 	296		 	—		 	266		
Renewable energy standard (b)	2017	 	25		 	23		 	33		 	15		
Income taxes — change in rates	2043	 	—		 	72		 	—		 	74		
Spent nuclear fuel	2047	 	5		 	66		 	6		 	36		
Deferred gains on utility property	2019	 	2		 	8		 	2		 	10		
Income taxes — deferred investment tax credit	2043	 	4		 	93		 	3		 	79		
Demand side management (b)	2015	 	31		 	—		 	27		 	—		
Other postretirement benefits	(c)	 	32		 	199		 	—		 	—		
Other	Various	 	1		 	21		 	—		 	18		
Total regulatory liabilities	 	 	$	131		 	$	1,051		 	$	99		 	$	801		

		
(a)	In accordance with regulatory accounting guidance, APS accrues for removal costs for its regulated assets, even if there is no legal obligation for removal (see Note 11).	
		
(b)	See “Cost Recovery Mechanisms” discussion above.	
		
(c)	See Note 7.	
 
4.             Income Taxes
 
Certain assets and liabilities are reported differently for income tax purposes than they are for financial statement purposes.  The tax effect of these differences is recorded as deferred taxes.  We calculate deferred taxes using currently enacted income tax rates.
 
APS has recorded regulatory assets and regulatory liabilities related to income taxes on its Balance Sheets in accordance with accounting guidance for regulated operations.  The regulatory assets are for certain temporary differences, primarily the allowance for equity funds used during construction and pension and other postretirement benefits.  The regulatory liabilities primarily relate to deferred taxes resulting from investment tax credits (“ITC”) and the change in income tax rates.
 
In accordance with regulatory requirements, APS ITCs are deferred and are amortized over the life of the related property with such amortization applied as a credit to reduce current income tax expense in the statement of income.
 
During the year ended December 31, 2013, IRS guidance was released which provided clarification regarding an APS tax accounting method change approved by the IRS in the third quarter of 2009. As a result of this guidance, uncertain tax positions decreased $67 million. Additionally, the IRS finalized the examination of tax returns for the years ended December 31, 2008 and 2009, which further reduced uncertain tax positions by approximately $41 million. These reductions in uncertain tax positions were materially offset by an increase in deferred tax liabilities.

Included in the current income tax receivable on the Consolidated Balance Sheets as of December 31, 2013 was $133 million that represented an anticipated IRS refund related to the finalized examinations of tax years ended December 31, 2008 and 2009. Cash related to this refund was received in the first quarter of 2014.

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On September 13, 2013, the U.S. Treasury Department released final income tax regulations on the deduction and capitalization of expenditures related to tangible property.  These final regulations apply to tax years beginning on or after January 1, 2014.  Several of the provisions within the regulations require a tax accounting method change to be filed with the IRS prior to September 15, 2015, resulting in a tax-effected cumulative effect adjustment of approximately $82 million . The anticipated impact of these final regulations has been accounted for in the Consolidated Balance Sheets as of December 31, 2013 and 2014.
 
Net income associated with the Palo Verde sale leaseback VIEs is not subject to tax (see Note 18).  As a result, there is no income tax expense associated with the VIEs recorded on the Consolidated Statements of Income.
 
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits, excluding interest and penalties, at the beginning and end of the year that are included in accrued taxes and unrecognized tax benefits (dollars in thousands):

												
 	2014	 	2013	 	2012	
Total unrecognized tax benefits, January 1	$	41,997		 	$	133,422		 	$	136,005		
Additions for tax positions of the current year	4,309		 	3,516		 	5,167		
Additions for tax positions of prior years	751		 	13,158		 	—		
Reductions for tax positions of prior years for:	 		 	 		 	 		
Changes in judgment	(2,282	)	 	(108,099	)	 	(7,729	)	
Settlements with taxing authorities	—		 	—		 	—		
Lapses of applicable statute of limitations	—		 	—		 	(21	)	
Total unrecognized tax benefits, December 31	$	44,775		 	$	41,997		 	$	133,422		
 
Included in the balances of unrecognized tax benefits at December 31, 2014 , 2013 and 2012 were approximately $11 million , $10 million and $10 million , respectively, of tax positions that, if recognized, would decrease our effective tax rate.
 
As of the balance sheet date, the tax year ended December 31, 2011 and all subsequent tax years remain subject to examination by the IRS.  With a few exceptions, we are no longer subject to state income tax examinations by tax authorities for years before 2008.
 
In January 2014, we prospectively adopted guidance requiring unrecognized tax benefits to be presented as a reduction to any available deferred income tax asset for a net operating loss, a similar tax loss, or a tax credit carryforward.  As a result of this guidance, $26 million of unrecognized tax benefits were recorded as a reduction to net current deferred income tax assets on the Consolidated Balance Sheets as of December 31, 2014.

We reflect interest and penalties, if any, on unrecognized tax benefits in the Consolidated Statements of Income as income tax expense.  The amount of interest recognized in the Consolidated Statements of Income related to unrecognized tax benefits was a pre-tax expense of $1 million for 2014 , a pre-tax benefit of $4 million for 2013 , and a pre-tax expense of $4 million for 2012 .
 
The total amount of accrued liabilities for interest recognized in the Consolidated Balance Sheets related to unrecognized tax benefits was less than $1 million as of December 31, 2014 and December 31, 2013 and $13 million as of December 31, 2012 .  To the extent that matters are settled favorably, this amount could reverse and decrease our effective tax rate.  Additionally, as of December 31, 2014 , we have recognized less

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than $1 million of interest expense to be paid on the underpayment of income taxes for certain adjustments that we have filed, or will file, with the IRS.
 
The components of income tax expense are as follows (dollars in thousands):

												
 	Year Ended December 31,	
 	2014	 	2013	 	2012	
Current:	 		 	 		 	 		
Federal	$	25,054		 	$	(81,784	)	 	$	(3,493	)	
State	10,382		 	10,537		 	8,395		
Total current	35,436		 	(71,247	)	 	4,902		
Deferred:	 		 	 		 	 		
Federal	167,365		 	279,973		 	200,322		
State	17,904		 	21,865		 	28,280		
Total deferred	185,269		 	301,838		 	228,602		
Total income tax expense	220,705		 	230,591		 	233,504		
Less: income tax benefit on discontinued operations	—		 	—		 	(3,813	)	
Income tax expense — continuing operations	$	220,705		 	$	230,591		 	$	237,317		
 
The following chart compares pretax income from continuing operations at the 35% federal income tax rate to income tax expense — continuing operations (dollars in thousands):

	
												
 	Year Ended December 31,	
 	2014	 	2013	 	2012	
Federal income tax expense at 35% statutory rate	$	225,540		 	$	234,695		 	$	229,709		
Increases (reductions) in tax expense resulting from:	 		 	 		 	 		
State income tax net of federal income tax benefit	18,149		 	21,387		 	23,819		
Credits and favorable adjustments related to prior years resolved in current year	—		 	(3,356	)	 	—		
Medicare Subsidy Part-D	830		 	823		 	483		
Allowance for equity funds used during construction (see Note 1)	(8,523	)	 	(6,997	)	 	(6,158	)	
Palo Verde VIE noncontrolling interest (see Note 18)	(9,135	)	 	(11,862	)	 	(11,065	)	
Investment tax credit amortization	(4,928	)	 	(3,548	)	 	(2,030	)	
Other	(1,228	)	 	(551	)	 	2,559		
Income tax expense — continuing operations	$	220,705		 	$	230,591		 	$	237,317		
 
The following table shows the net deferred income tax liability recognized on the Consolidated Balance Sheets (dollars in thousands): 

								
 	December 31,	
 	2014	 	2013	
Current asset	$	122,232		 	$	91,152		
Long-term liability	(2,582,636	)	 	(2,351,882	)	
Deferred income taxes — net	$	(2,460,404	)	 	$	(2,260,730	)	
 
On February 17, 2011, Arizona enacted legislation (H.B. 2001) that included a four -year phase-in of corporate income tax rate reductions beginning in 2014.  As a result of these tax rate reductions, Pinnacle West has revised the tax rate applicable to reversing temporary items in Arizona.  In accordance with accounting for

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regulated companies, the benefit of this rate reduction is substantially offset by a regulatory liability.  As of December 31, 2014 , APS has recorded a regulatory liability of $74 million , with a corresponding decrease in accumulated deferred income tax liabilities, to reflect the impact of this change in tax law.
 
On April 4, 2013, New Mexico enacted legislation (H.B. 641) that included a five -year phase-in of corporate income tax rate reductions beginning in 2014.  As a result of these tax rate reductions, Pinnacle West has revised the tax rate applicable to reversing temporary items in New Mexico. In accordance with accounting for regulated companies, the benefit of this rate reduction is substantially offset by a regulatory liability.  As of December 31, 2014 , APS has recorded a regulatory liability of $2 million , with a corresponding decrease in accumulated deferred income tax liabilities, to reflect the impact of this change in tax law.
 
The components of the net deferred income tax liability were as follows (dollars in thousands):

	
								
 	December 31,	
 	2014	 	2013	
DEFERRED TAX ASSETS	 		 	 		
Risk management activities	$	57,505		 	$	44,920		
Regulatory liabilities:	 		 	 		
Asset retirement obligation and removal costs	229,772		 	235,959		
Unamortized investment tax credits	96,232		 	82,116		
Other postretirement benefits	90,496		 	—		
Other	60,409		 	42,609		
Pension liabilities	205,227		 	140,773		
Other postretirement liabilities	—		 	57,869		
Renewable energy incentives	65,169		 	65,434		
Credit and loss carryforwards	68,347		 	133,070		
Other	138,729		 	148,492		
Total deferred tax assets	1,011,886		 	951,242		
DEFERRED TAX LIABILITIES	 		 	 		
Plant-related	(2,958,369	)	 	(2,903,730	)	
Risk management activities	(12,171	)	 	(16,191	)	
Other postretirement assets	(59,170	)	 	—		
Regulatory assets:	 		 	 		
Allowance for equity funds used during construction	(48,286	)	 	(43,058	)	
Deferred fuel and purchased power	(2,498	)	 	(8,282	)	
Deferred fuel and purchased power — mark-to-market	(38,187	)	 	(13,343	)	
Pension and other postretirement benefits	(191,747	)	 	(129,250	)	
Retired power plant costs (see Note 3)	(57,255	)	 	(8,199	)	
Other	(99,123	)	 	(85,003	)	
Other	(5,484	)	 	(4,916	)	
Total deferred tax liabilities	(3,472,290	)	 	(3,211,972	)	
Deferred income taxes — net	$	(2,460,404	)	 	$	(2,260,730	)	
 
As of December 31, 2014 , the deferred tax assets for credit and loss carryforwards relate primarily to federal general business credits of approximately $90 million , which first begin to expire in 2031, and other federal and state loss carryforwards of $4 million , which first begin to expire in 2019. The credit and loss

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carryforwards amount above has been reduced by $26 million of unrecognized tax benefits as a result of the guidance adopted in January 2014, as disclosed above.
 
5.                                       Lines of Credit and Short-Term Borrowings
 
Pinnacle West and APS maintain committed revolving credit facilities in order to enhance liquidity and provide credit support for their commercial paper programs.

The table below presents the consolidated credit facilities and the amounts available and outstanding as of December 31, 2014 (dollars in millions):

	
														
Credit Facility	 	Expiration	 	Amount
Committed	 	Unused
Amount (a)	 	Commitment
Fees	
Pinnacle West Revolving Credit Facility	 	May 2019	 	$	200		 	$	200		 	0.175	%	
APS Revolving Credit Facility	 	May 2019	 	500		 	500		 	0.125	%	
APS Revolving Credit Facility	 	April 2018	 	500		 	353		 	0.125	%	
Total	 	 	 	$	1,200		 	$	1,053		 	 		

		
(a)	At December 31, 2014 , APS had $147 million of outstanding commercial paper.  Accordingly, at such date, the total combined amount available under its two $500 million credit facilities was $853 million .	
 
Pinnacle West
 
On May 9, 2014, Pinnacle West replaced its $200 million revolving credit facility that would have matured in November 2016, with a new $200 million facility that matures in May 2019.  At December 31, 2014 , the facility was available to refinance indebtedness of the Company and for other general corporate purposes, including credit support for its $200 million commercial paper program.  Pinnacle West has the option to increase the amount of the facility up to a maximum of $300 million upon the satisfaction of certain conditions and with the consent of the lenders.  At December 31, 2014 , Pinnacle West had no outstanding borrowings under its credit facility, no letters of credit outstanding and no commercial paper borrowings.
 
APS
 
On May 9, 2014, APS refinanced its $500 million revolving credit facility that would have matured in November 2016, with a new $500 million facility that matures in May 2019.
 
At December 31, 2014 , APS had two credit facilities totaling $1 billion , including a $500 million credit facility that matures in April 2018 and a $500 million credit facility that matures in May 2019 (see above).  APS may increase the amount of each facility up to a maximum of $700 million upon the satisfaction of certain conditions and with the consent of the lenders.  APS will use these facilities to refinance indebtedness and for other general corporate purposes.  Interest rates are based on APS’s senior unsecured debt credit ratings.
 
The facilities described above are available to support APS’s $250 million commercial paper program, for bank borrowings or for issuances of letters of credit.  At December 31, 2014 , APS had no outstanding borrowings or letters of credit under its revolving credit facilities.  In addition, APS had commercial paper borrowings of $147 million at December 31, 2014 .

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The table below presents the consolidated credit facilities and the amounts available and outstanding as of December 31, 2013 (dollars in millions):

	
														
Credit Facility	 	Expiration	 	Amount
Committed	 	Unused
Amount (a)	 	Commitment
Fees	
Pinnacle West Revolving Credit Facility	 	November 2016	 	$	200		 	$	200		 	0.175	%	
APS Revolving Credit Facility	 	November 2016	 	500		 	347		 	0.125	%	
APS Revolving Credit Facility	 	April 2018	 	500		 	500		 	0.125	%	
Total	 	 	 	$	1,200		 	$	1,047		 	 		

		
(a)	At December 31, 2013 , APS had $153 million of outstanding commercial paper.  Accordingly, at such date the total combined amount available under its two $500 million credit facilities was $847 million .	
 
Pinnacle West
 
At December 31, 2013 , the Pinnacle West credit facility, which matures in November 2016, was available to refinance indebtedness of the Company and for other general corporate purposes, including credit support for its $200 million commercial paper program.  Pinnacle West has the option to increase the amount of the facility up to a maximum of $300 million upon the satisfaction of certain conditions and with the consent of the lenders.  At December 31, 2013 , Pinnacle West had no outstanding borrowings under its credit facility, no letters of credit and no commercial paper borrowings.
 
APS
 
On April 9, 2013, APS refinanced its $500 million revolving credit facility that would have matured in February 2015, with a new $500 million facility.  The new revolving credit facility matures in April 2018.

At December 31, 2013, APS had two credit facilities totaling $1 billion , including a $500 million credit facility that was refinanced in April 2013 (see above) and a $500 million credit facility that matures in November 2016.  APS may increase the amount of each facility up to a maximum of $700 million upon the satisfaction of certain conditions and with the consent of the lenders.  APS can use these facilities to refinance indebtedness and for other general corporate purposes.  Interest rates are based on APS’s senior unsecured debt credit ratings.

The facilities described above are available to support APS’s $250 million commercial paper program, for bank borrowings or for issuances of letters of credit.  At December 31, 2013 , APS had no outstanding borrowings or letters of credit under its revolving credit facilities.  In addition, APS had commercial paper borrowings of $153 million at December 31, 2013 .
 
See “Financial Assurances” in Note 10 for a discussion of APS’s separate outstanding letters of credit.
 
Debt Provisions
 
Although provisions in APS’s articles of incorporation and ACC financing orders establish maximum amounts of preferred stock and debt that APS may issue, APS does not expect any of these provisions to limit its ability to meet its capital requirements.  On February 6, 2013, the ACC issued a financing order in which, subject to specified parameters and procedures, it (a) approved APS’s short-term debt authorization equal to a

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sum of (i)  7% of APS’s capitalization, and (ii)  $500 million (which is required to be used for costs relating to purchases of natural gas and power), (b) approved an increase in APS’s long-term debt authorization from $4.2 billion to $5.1 billion in light of the projected growth of APS and its customer base and the resulting projected financing needs, and (c) authorized APS to enter into derivative financial instruments for the purpose of managing interest rate risk associated with its long- and short-term debt.  This financing order is set to expire on December 31, 2017.
 
6.                                       Long-Term Debt and Liquidity Matters
 
All of Pinnacle West’s and APS’s debt is unsecured.  The following table presents the components of long-term debt on the Consolidated Balance Sheets outstanding at December 31, 2014 and 2013 (dollars in thousands):

												
 	Maturity	 	Interest	 	December 31,	
 	Dates (a)	 	Rates	 	2014	 	2013	
APS	 	 	 	 	 		 	 		
Pollution Control Bonds:	 	 	 	 	 		 	 		
Variable	2029-2038	 	(b)	 	$	156,405		 	$	75,580		
Fixed	2024-2034	 	0.45%-5.75%	 	249,300		 	426,125		
Total Pollution Control Bonds	 	 	 	 	405,705		 	501,705		
Senior unsecured notes	2015-2044	 	3.35%-8.75%	 	2,875,000		 	2,675,000		
Palo Verde sale leaseback lessor notes	2015	 	8.00%	 	13,420		 	38,869		
Unamortized discount	 	 	 	 	(9,206	)	 	(8,732	)	
Unamortized premium	 	 	 	 	4,866		 	5,047		
Total APS long-term debt	 	 	 	 	3,289,785		 	3,211,889		
Less current maturities	(d)	 	 	 	383,570		 	540,424		
Total APS long-term debt less current maturities	 	 	 	 	2,906,215		 	2,671,465		
Pinnacle West	 	 	 	 	 		 	 		
Term loan	2017	 	(c)	 	125,000		 	125,000		
TOTAL LONG-TERM DEBT   LESS CURRENT MATURITIES	 	 	 	 	$	3,031,215		 	$	2,796,465		

(a)                                  This schedule does not reflect the timing of redemptions that may occur prior to maturities.
(b)                                  The weighted-average rate for the variable rate pollution control bonds was 0.03% - 0.27% at December 31, 2014 and 0.03% - 0.06% at December 31, 2013 .
(c)                                   The weighted-average interest rate was 1.019% at December 31, 2014 and 1.269% at December 31, 2013 .
(d)                                  Current maturities include $70 million of pollution control bonds expected to be remarketed in 2015 and $300 million in senior unsecured notes that mature in 2015.

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The following table shows principal payments due on Pinnacle West’s and APS’s total long-term debt (dollars in millions):

									
Year	 	Consolidated
Pinnacle West	 	Consolidated
APS	
2015	 	$	384		 	$	384		
2016	 	357		 	357		
2017	 	157		 	32		
2018	 	32		 	32		
2019	 	500		 	500		
Thereafter	 	1,989		 	1,989		
Total	 	$	3,419		 	$	3,294		
 
Debt Fair Value
 
Our long-term debt fair value estimates are based on quoted market prices for the same or similar issues, and are classified within Level 2 of the fair value hierarchy.  Certain of our debt instruments contain third-party credit enhancements and, in accordance with GAAP, we do not consider the effect of these credit enhancements when determining fair value.  The following table represents the estimated fair value of our long-term debt, including current maturities (dollars in millions):

	
																
 	As of
December 31, 2014	 	As of
December 31, 2013	
 	Carrying
Amount	 	Fair Value	 	Carrying
Amount	 	Fair Value	
Pinnacle West	$	125		 	$	125		 	$	125		 	$	125		
APS	3,290		 	3,714		 	3,212		 	3,454		
Total	$	3,415		 	$	3,839		 	$	3,337		 	$	3,579		
 
Credit Facilities and Debt Issuances
 
Pinnacle West

On December 31, 2014, Pinnacle West entered into a $125 million term loan facility that matures December 31, 2017. Pinnacle West used the proceeds to repay and refinance the term loan facility that would have matured in November 2015.

APS
 
On July 12, 2013, APS purchased all $33 million of the Coconino County, Arizona Pollution Control Corporation Pollution Control Revenue Refunding Bonds, 1994 Series A, due 2029.  On October 11, 2013, APS purchased all $32 million of the City of Farmington, New Mexico Pollution Control Revenue Bonds, 1994 Series C, due 2024.  On January 15, 2014, both of these series of bonds were canceled and refinanced.
 
On January 10, 2014, APS issued $250 million of 4.70% unsecured senior notes that mature on January 15, 2044.  The proceeds from the sale were used to repay commercial paper which was used to fund the acquisition of SCE’s 48% ownership interest in each of Units 4 and 5 of Four Corners and to replenish cash used in 2013 to re-acquire the two series of tax-exempt indebtedness.

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On May 1, 2014, APS purchased a total of $100 million of the Maricopa County, Arizona, Pollution Control Corporation Pollution Control Revenue Refunding Bonds, 2009 Series A, D and E, due 2029 in connection with the mandatory tender provisions for this indebtedness.  On May 14, 2014, APS remarketed all $36 million of the 2009 Series A Bonds, which are classified as long-term debt on our Consolidated Balance Sheets at December 31, 2014 .  We expect to remarket or refinance all $64 million of the 2009 Series D Bonds and 2009 Series E Bonds within the next twelve months.
 
On May 30, 2014, APS purchased all $38 million of the Navajo County, Arizona, Pollution Control Corporation Pollution Control Revenue Refunding Bonds, 2009 Series A, due 2034, and on June 1, 2014, APS purchased a total of $64 million of the Navajo 2009 Series B Bonds and 2009 Series C Bonds, in each case, in connection with the mandatory tender provisions for this indebtedness.  On September 23, 2014, APS remarketed all $38 million of the 2009 Series A Bonds, which are classified as current maturities of long-term debt on our Consolidated Balance Sheets at December 31, 2014. On October 1, 2014, APS remarketed all $32 million of the 2009 Series C Bonds, which are classified as long-term debt on our Consolidated Balance Sheets at December 31, 2014. We expect to remarket or refinance all $32 million of the 2009 Series B Bonds within the next twelve months. 
 
On June 1, 2014, APS remarketed all $13 million of the Coconino County, Arizona Pollution Control Corporation Pollution Control Revenue Refunding Bonds, 2009 Series A, due 2034.  These bonds are classified as long-term debt on our Consolidated Balance Sheets at December 31, 2014 .
 
On June 18, 2014, APS issued $250 million of 3.35% unsecured senior notes that mature on June 15, 2024.  The net proceeds from the sale were used along with other funds to repay at maturity APS’s $300 million aggregate principal amount of 5.80% senior notes due June 30, 2014.

On January 12, 2015, APS issued $250 million of 2.20% unsecured senior notes that mature on January 15, 2020. The net proceeds from the sale were used to repay commercial paper borrowings and replenish cash temporarily used to fund capital expenditures.
 
See “Lines of Credit and Short-Term Borrowings” in Note 5 and “Financial Assurances” in Note 10 for discussion of APS’s separate outstanding letters of credit.
 
Debt Provisions
 
Pinnacle West’s and APS’s debt covenants related to their respective bank financing arrangements include maximum debt to capitalization ratios. Pinnacle West and APS comply with this covenant.  For both Pinnacle West and APS, this covenant requires that the ratio of consolidated debt to total consolidated capitalization not exceed 65% .  At December 31, 2014 , the ratio was approximately 46% for Pinnacle West and 45% for APS.  Failure to comply with such covenant levels would result in an event of default which, generally speaking, would require the immediate repayment of the debt subject to the covenants and could cross-default other debt.  See further discussion of “cross-default” provisions below.
 
Neither Pinnacle West’s nor APS’s financing agreements contain “rating triggers” that would result in an acceleration of the required interest and principal payments in the event of a rating downgrade.  However, our bank credit agreements contain a pricing grid in which the interest rates we pay for borrowings thereunder are determined by our current credit ratings.
 
All of Pinnacle West’s loan agreements contain “cross-default” provisions that would result in defaults and the potential acceleration of payment under these loan agreements if Pinnacle West or APS were to default

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under certain other material agreements.  All of APS’s bank agreements contain "cross-default" provisions that would result in defaults and the potential acceleration of payment under these bank agreements if APS were to default under certain other material agreements.  Pinnacle West and APS do not have a material adverse change restriction for credit facility borrowings.
 
An existing ACC order requires APS to maintain a common equity ratio of at least 40% .  As defined in the ACC order, the common equity ratio is total shareholder equity divided by the sum of total shareholder equity and long-term debt, including current maturities of long-term debt.  At December 31, 2014 , APS was in compliance with this common equity ratio requirement.  Its total shareholder equity was approximately $4.5 billion , and total capitalization was approximately $8.0 billion .  APS would be prohibited from paying dividends if the payment would reduce its total shareholder equity below approximately $3.2 billion , assuming APS’s total capitalization remains the same.  Since APS was in compliance with this common equity ratio requirement, this restriction does not materially affect Pinnacle West’s ability to meet its ongoing capital requirements.
 
7.                                       Retirement Plans and Other 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 an other postretirement benefit plan (Pinnacle West Capital Corporation Group Life and Medical Plan) for the employees of Pinnacle West and its subsidiaries.  This plan provides 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.

On September 30, 2014, Pinnacle West announced plan design changes to the other postretirement benefit plan, which required an interim remeasurement of the benefit obligation for the plan. Effective January 1, 2015, those eligible retirees and dependents over age 65 and on Medicare can choose to be enrolled in a Health Reimbursement Arrangement (HRA). The Company will provide a subsidy allowing post- 65 retirees to purchase a Medicare supplement plan on a private exchange network. The remeasurement of the benefit obligation included updating the assumptions. The remeasurement reduced net periodic benefit costs in 2014 by $10 million ( $5 million of which reduced expense), which was recognized during the fourth quarter of 2014. The September 30, 2014 remeasurement also resulted in a decrease in Pinnacle West’s other postretirement benefit obligation of $316 million , which was offset by the related regulatory asset and accumulated other comprehensive income. As a result of this reduction, the other postretirement benefit obligation, and related regulatory asset, have been reduced to the extent that Pinnacle West will now reflect an asset for other postretirement benefits and a related regulatory liability with balances at December 31, 2014 of $152 million and $231 million , respectively.

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Because of the plan changes, the Company is currently in the process of seeking IRS and regulatory approval to move approximately $100 million of the other postretirement benefit trust assets into a new trust account to pay for active union employee medical costs.

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.
 
A significant portion of the changes in the actuarial gains and losses of our pension and postretirement plans is attributable to APS and therefore is recoverable in rates.  Accordingly, these changes are recorded as a regulatory asset or regulatory liability.  In its 2009 retail rate case settlement, APS received approval to defer a portion of pension and other postretirement benefit cost increases incurred in 2011 and 2012.  We deferred pension and other postretirement benefit costs of approximately $14 million in 2012 and $11 million in 2011.  Pursuant to an ACC regulatory order, we began amortizing the regulatory asset over 3 years beginning in July 2012.  We amortized approximately $8 million during 2014 , $8 million during 2013 , and $4 million during 2012.
 
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, billed to electric plant participants or charged to the regulatory asset or liability) (dollars in thousands):

																								
 	Pension	 	Other Benefits	
 	2014	 	2013	 	2012	 	2014	 	2013	 	2012	
Service cost-benefits earned during the period	$	53,080		 	$	64,195		 	$	63,502		 	$	18,139		 	$	23,597		 	$	27,163		
Interest cost on benefit obligation	129,194		 	112,392		 	119,586		 	41,243		 	41,536		 	46,467		
Expected return on plan assets	(158,998	)	 	(146,333	)	 	(140,979	)	 	(46,400	)	 	(45,717	)	 	(45,793	)	
Amortization of:	 		 	 		 	 		 	 		 	 		 	 		
Transition obligation	—		 	—		 	—		 	—		 	—		 	452		
Prior service cost (credit)	869		 	1,097		 	1,143		 	(9,626	)	 	(179	)	 	(179	)	
Net actuarial loss	10,963		 	39,852		 	44,250		 	1,175		 	11,310		 	20,233		
Net periodic benefit cost	$	35,108		 	$	71,203		 	$	87,502		 	$	4,531		 	$	30,547		 	$	48,343		
Portion of cost charged to expense	$	21,985		 	$	38,968		 	$	36,333		 	$	6,000		 	$	18,469		 	$	19,321		

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The following table shows the plans’ changes in the benefit obligations and funded status for the years 2014 and 2013 (dollars in thousands):

																
 	Pension	 	Other Benefits	
 	2014	 	2013	 	2014	 	2013	
Change in Benefit Obligation	 		 	 		 	 		 	 		
Benefit obligation at January 1	$	2,646,530		 	$	2,850,846		 	$	890,418		 	$	990,418		
Service cost	53,080		 	64,195		 	18,139		 	23,597		
Interest cost	129,194		 	112,392		 	41,243		 	41,536		
Benefit payments	(128,550	)	 	(125,269	)	 	(29,054	)	 	(26,675	)	
Actuarial (gain) loss	378,394		 	(255,634	)	 	150,188		 	(138,458	)	
Plan amendments	—		 	—		 	(388,599	)	 	—		
Benefit obligation at December 31	3,078,648		 	2,646,530		 	682,335		 	890,418		
Change in Plan Assets	 		 	 		 	 		 	 		
Fair value of plan assets at January 1	2,264,121		 	2,079,181		 	748,339		 	684,221		
Actual return on plan assets	292,992		 	150,546		 	105,223		 	76,995		
Employer contributions	175,000		 	140,500		 	770		 	14,438		
Benefit payments	(116,709	)	 	(106,106	)	 	(19,707	)	 	(27,315	)	
Fair value of plan assets at December 31	2,615,404		 	2,264,121		 	834,625		 	748,339		
Funded Status at December 31	$	(463,244	)	 	$	(382,409	)	 	$	152,290		 	$	(142,079	)	

The following table shows the projected benefit obligation and the accumulated benefit obligation for pension plans with an accumulated obligation in excess of plan assets as of December 31, 2014 and 2013 (dollars in thousands):

								
 	2014	 	2013	
Projected benefit obligation	$	3,078,648		 	$	2,646,530		
Accumulated benefit obligation	2,873,741		 	2,469,889		
Fair value of plan assets	2,615,404		 	2,264,121		
 
The following table shows the amounts recognized on the Consolidated Balance Sheets as of December 31, 2014 and 2013 (dollars in thousands):

																
 	Pension	 	Other Benefits	
 	2014	 	2013	 	2014	 	2013	
Noncurrent asset	$	—		 	$	—		 	$	152,290		 	$	—		
Current liability	(9,508	)	 	(10,860	)	 	—		 	—		
Noncurrent liability	(453,736	)	 	(371,549	)	 	—		 	(142,079	)	
Net amount recognized	$	(463,244	)	 	$	(382,409	)	 	$	152,290		 	$	(142,079	)	

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The following table shows the details related to accumulated other comprehensive loss as of December 31, 2014 and 2013 (dollars in thousands): 

																
 	Pension	 	Other Benefits	
 	2014	 	2013	 	2014	 	2013	
Net actuarial loss	$	577,976		 	$	344,540		 	$	148,006		 	$	57,816		
Prior service cost (credit)	1,203		 	2,072		 	(379,269	)	 	(296	)	
APS’s portion recorded as a regulatory (asset) liability	(485,037	)	 	(265,107	)	 	230,916		 	(49,298	)	
Income tax expense (benefit)	(36,890	)	 	(32,204	)	 	851		 	(2,528	)	
Accumulated other comprehensive loss	$	57,252		 	$	49,301		 	$	504		 	$	5,694		
 
The following table shows the estimated amounts that will be amortized from accumulated other comprehensive loss and regulatory assets into net periodic benefit cost in 2015 (dollars in thousands):

								
 	Pension	 	Other
Benefits	
Net actuarial loss	$	28,180		 	$	5,651		
Prior service cost (credit)	595		 	(37,968	)	
Total amounts estimated to be amortized from accumulated other comprehensive loss (gain) and regulatory assets (liabilities) in 2014	$	28,775		 	$	(32,317	)	

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
For the Years Ended December 31,	
 	2014	 	2013	 	2014	 	2013	 	2012	
 	 	 	 	 	January - September	October - December	 	 	 	 	
Discount rate – pension	4.02	%	 	4.88	%	 	4.88	%	4.88	%	 	4.01	%	 	4.42	%	
Discount rate – other benefits	4.14	%	 	5.10	%	 	5.10	%	4.41	%	 	4.20	%	 	4.59	%	
Rate of compensation increase	4.00	%	 	4.00	%	 	4.00	%	4.00	%	 	4.00	%	 	4.00	%	
Expected long-term return on plan assets - pension	N/A		 	N/A		 	6.90	%	6.90	%	 	7.00	%	 	7.75	%	
Expected long-term return on plan assets - other benefits	N/A		 	N/A		 	6.80	%	4.25	%	 	7.00	%	 	7.75	%	
Initial healthcare cost trend rate (pre-65 participants)	7.00	%	 	7.50	%	 	7.50	%	7.50	%	 	7.50	%	 	7.50	%	
Initial healthcare cost trend rate (post-65 participants)	5.00	%	 	7.50	%	 	7.50	%	5.00	%	 	7.50	%	 	7.50	%	
Ultimate healthcare cost trend rate	5.00	%	 	5.00	%	 	5.00	%	5.00	%	 	5.00	%	 	5.00	%	
Number of years to ultimate trend rate (pre-65 participants)	4		 	4		 	4		4		 	4		 	4		
Number of years to ultimate trend rate (post-65 participants)	0		 	4		 	4		0		 	4		 	4		
 
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 2015, we are assuming a 6.90% long-term rate of return for pension assets and 4.74% (before tax) for other benefit assets, which we believe is reasonable given our asset allocation in relation to historical and expected performance.

In October 2014, the Society of Actuaries’ Retirement Plans Experience Committee issued its final reports on its recommended mortality basis (“RP-2014 Mortality Tables Report” and "Mortality Improvement

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Scale MP-2014 Report").  At December 31, 2014, we updated our mortality assumptions using the recommended basis with modifications to better reflect our plan experience and additional data regarding mortality trends.  The updated mortality assumptions resulted in a $67 million increase in Pinnacle West’s pension and other postretirement obligations, which was offset by the related regulatory asset, regulatory liability and accumulated other comprehensive income.

In selecting our healthcare trend rates, we consider past performance and forecasts of healthcare costs.  A one percentage point change in the assumed initial and ultimate healthcare cost trend rates would have the following effects (dollars in millions): 

								
 	1% Increase	 	1% Decrease	
Effect on other postretirement benefits expense, after consideration of amounts capitalized or billed to electric plant participants	$	10		 	$	(4	)	
Effect on service and interest cost components of net periodic other postretirement benefit costs	12		 	(9	)	
Effect on the accumulated other postretirement benefit obligation	110		 	(88	)	
 
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.
 
Long-term fixed income assets, also known as liability-hedging assets, are designed 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, other government agencies, and corporations.  Long-term fixed income assets may also include interest rate swaps, U.S. Treasury futures 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 include investments in real estate, private equity and various other strategies.  The plan may hold investments in return-generating assets by holding securities in partnerships and common and collective trusts.
 
Based on the IPS, and given the pension plan’s funded status at year-end 2014, the long-term fixed income assets had a target allocation of 58% with a permissible range of 55% to 61% and the return-generating assets had a target allocation of 42% with a permissible range of 39% to 45% .  The return-generating assets have additional target allocations, as a percent of total plan assets, of 22% equities in U.S. and other developed markets, 6% equities in emerging markets, and 14% in alternative investments.  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

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assets to be investment grade.  As of December 31, 2014 , long-term fixed income assets represented 61% of total pension plan assets, and return-generating assets represented 39% of total pension plan assets.
 
As of December 31, 2014, 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.  As of December 31, 2014 , investment in fixed income assets represented 43% of the other postretirement benefit plan total assets, and non-fixed income assets represented 57% of the other postretirement benefit plan’s assets.  Fixed income assets are primarily invested in corporate bonds of investment-grade U.S. issuers, and U.S. Treasuries.  Non-fixed income assets are primarily invested in large cap U.S. equities in diverse industries, and international equities in both emerging and developed markets.
 
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 and equity securities, in addition to investing indirectly in fixed income securities, equity securities and real estate through the use of 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.  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.
 
The common and collective trusts, which are similar to mutual funds, 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).  Common and collective trusts are valued using the concept of net asset value (“NAV”), which is a value derived from the quoted active market prices of the underlying securities.  The plans’ common and collective real estate trust is valued using NAV, which is derived from the appraised values of the trust’s underlying real estate assets.  As of December 31, 2014 , the plans were able to transact in the common and collective trusts at NAV and accordingly classify these investments as Level 2.  Because the trust’s shares are offered to a limited group of investors, they are not considered to be traded in an active market.

Investments in partnerships are also valued using the concept of NAV, which is derived from the value of the partnerships' underlying assets. The plan's partnerships holdings relate to investments in high-yield fixed income instruments and assets of privately held portfolio companies. Partnerships are classified as Level 2 if the plan is able to transact in the partnership at the NAV. At December 31, 2014, certain partnerships have been classified as Level 3 due to restrictions that limit the plan's ability to transact in these partnerships at the NAV. Certain partnerships also include funding commitments that may require the plan to contribute up to $75 million to these partnerhips; as of December 31, 2014, $30 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.

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The fair value of Pinnacle West’s pension plan and other postretirement benefit plan assets at December 31, 2014 , by asset category, are as follows (dollars in thousands):

	
																				
 	Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)	 	Significant
Other
Observable
Inputs
(Level 2)	 	Significant
Unobservable
Inputs
(Level 3)	 	Other (b)	 	Balance at December 31, 2014	
Pension Plan:	 		 	 		 	 		 	 		 	 		
Assets:	 		 	 		 	 		 	 		 	 		
Cash and cash equivalents	$	387		 	$	—		 	$	—		 	$	—		 	$	387		
Fixed Income Securities:	 		 	 		 	 		 	 		 	 		
Corporate	—		 	1,162,096		 	—		 	—		 	1,162,096		
U.S. Treasury	291,817		 	—		 	—		 	—		 	291,817		
Other (a)	—		 	113,265		 	—		 	—		 	113,265		
Equities:	 		 	 		 	 		 	 		 	 		
U.S. Companies	246,387		 	—		 	—		 	—		 	246,387		
International Companies	18,069		 	—		 	—		 	—		 	18,069		
Common and collective trusts:	 		 	 		 	 		 	 		 	 		
U.S. Equities	—		 	127,336		 	—		 	—		 	127,336		
International Equities	—		 	317,167		 	—		 	—		 	317,167		
Real estate	—		 	129,715		 	—		 	—		 	129,715		
Partnerships	—		 	138,337		 	27,929		 	—		 	166,266		
Short-term investments and other	—		 	26,016		 	—		 	16,883		 	42,899		
Total Pension Plan	$	556,660		 	$	2,013,932		 	$	27,929		 	$	16,883		 	$	2,615,404		
Other Benefits:	 		 	 		 	 		 	 		 	 		
Assets:	 		 	 		 	 		 	 		 	 		
Cash and cash equivalents	$	318		 	$	—		 	$	—		 	$	—		 	$	318		
Fixed Income Securities:	 		 	 		 	 		 	 		 	 		
Corporate	—		 	187,961		 	—		 	—		 	187,961		
U.S. Treasury	130,967		 	—		 	—		 	—		 	130,967		
Other (a)	—		 	35,291		 	—		 	—		 	35,291		
Equities:	 		 	 		 	 		 	 		 	 		
U.S. Companies	265,106		 	—		 	—		 	—		 	265,106		
International Companies	17,813		 	—		 	—		 	—		 	17,813		
Common and collective trusts:	 		 	 		 	 		 	 		 	 		
U.S. Equities	—		 	88,258		 	—		 	—		 	88,258		
International Equities	—		 	85,746		 	—		 	—		 	85,746		
Real Estate	—		 	11,657		 	—		 	—		 	11,657		
Short-term investments and other	—		 	7,408		 	—		 	4,100		 	11,508		
Total Other Benefits	$	414,204		 	$	416,321		 	$	—		 	$	4,100		 	$	834,625		

(a)	This category consists primarily of debt securities issued by municipalities.	
		
(b)	Represents plan receivables and payables.	

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The fair value of Pinnacle West’s pension plan and other postretirement benefit plan assets at December 31, 2013 , by asset category, are as follows (dollars in thousands):

																				
 	Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)	 	Significant
Other
Observable
Inputs
(Level 2)	 	Significant
Unobservable
Inputs
(Level 3)	 	Other (b)	 	Balance at December 31, 2013	
Pension Plan:	 		 	 		 	 		 	 		 	 		
Assets:	 		 	 		 	 		 	 		 	 		
Cash and cash equivalents	$	504		 	$	—		 	$	—		 	$	—		 	$	504		
Fixed Income Securities:	 		 	 		 	 		 	 		 	 		
Corporate	—		 	898,621		 	—		 	—		 	898,621		
U.S. Treasury	231,590		 	—		 	—		 	—		 	231,590		
Other (a)	—		 	84,011		 	—		 	—		 	84,011		
Equities:	 		 	 		 	 		 	 		 	 		
U.S. Companies	239,036		 	—		 	—		 	—		 	239,036		
International Companies	19,429		 	—		 	—		 	—		 	19,429		
Common and collective trusts:	 		 	 		 	 		 	 		 	 		
U.S. Equities	—		 	116,150		 	—		 	—		 	116,150		
International Equities	—		 	367,551		 	—		 	—		 	367,551		
Fixed Income	—		 	137,520		 	—		 	—		 	137,520		
Real estate	—		 	119,739		 	—		 	—		 	119,739		
Partnerships	—		 	—		 	8,660		 	—		 	8,660		
Short-term investments and other	—		 	41,060		 	—		 	250		 	41,310		
Total Pension Plan	$	490,559		 	$	1,764,652		 	$	8,660		 	$	250		 	$	2,264,121		
Other Benefits:	 		 	 		 	 		 	 		 	 		
Assets:	 		 	 		 	 		 	 		 	 		
Cash and cash equivalents	 		 	 		 	 		 	 		 	 		
Fixed Income Securities:	 		 	 		 	 		 	 		 	 		
Corporate	$	—		 	$	153,888		 	$	—		 	$	—		 	$	153,888		
U.S. Treasury	98,704		 	—		 	—		 	—		 	98,704		
Other (a)	—		 	27,936		 	—		 	—		 	27,936		
Equities:	 		 	 		 	 		 	 		 	 		
U.S. Companies	252,181		 	—		 	—		 	—		 	252,181		
International Companies	20,892		 	—		 	—		 	—		 	20,892		
Common and collective trusts:	 		 	 		 	 		 	 		 	 		
U.S. Equities	—		 	80,751		 	—		 	—		 	80,751		
International Equities	—		 	92,382		 	—		 	—		 	92,382		
Real Estate	—		 	10,761		 	—		 	—		 	10,761		
Short-term investments and other	—		 	8,414		 	—		 	2,430		 	10,844		
Total Other Benefits	$	371,777		 	$	374,132		 	$	—		 	$	2,430		 	$	748,339		

(a)	This category consists primarily of debt securities issued by municipalities.	
		
(b)	Represents plan receivables and payables.	

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The following table shows the changes in fair value for assets that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2014 and 2013 (dollars in thousands):

									
 	 	Pension	
Partnerships	 	2014	 	2013	
Beginning balance at January 1	 	$	8,660		 	$	2,419		
Actual return on assets still held at December 31	 	927		 	(498	)	
Purchases	 	19,984		 	7,377		
Sales	 	(1,642	)	 	(638	)	
Transfers in and/or out of Level 3	 	—		 	—		
Ending balance at December 31	 	$	27,929		 	$	8,660		
 
Contributions
 
Future year contribution amounts are dependent on plan asset performance and plan actuarial assumptions.  We made contributions to our pension plan totaling $175 million in 2014 , $141 million in 2013 , and $65 million in 2012 .  The minimum contributions for the pension plan are zero for the next three years.  We expect to make voluntary contributions totaling up to $300 million for the next three years (up to $100 million each year in 2015, 2016, and 2017).  With regard to contributions to our other postretirement benefit plans, we made a contribution of $1 million in 2014 , $14 million in 2013 , and $23 million in 2012 .  We expect to make contributions of approximately $1 million in each of the next three years to our other postretirement benefit plans. APS funds its share of the contributions.  APS’s share of the pension plan contribution was $175 million in 2014 , $140 million in 2013 , and $64 million in 2012 .  APS’s share of the contributions to the other postretirement benefit plan was $1 million in 2014 , $14 million in 2013 , and $22 million in 2012 .
 
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	 	Other Benefits	
2015	 	$	139,013		 	$	25,134		
2016	 	155,968		 	27,311		
2017	 	160,080		 	29,253		
2018	 	167,600		 	31,258		
2019	 	177,470		 	33,190		
Years 2020-2024	 	983,557		 	184,772		
 
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 2014, 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

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future contributions.  Pinnacle West recorded expenses for this plan of approximately $9 million for 2014 , $9 million for 2013 , and $8 million for 2012 .

8.                                       Leases
 
We lease certain vehicles, land, buildings, equipment and miscellaneous other items through operating rental agreements with varying terms, provisions and expiration dates.
 
Total lease expense recognized in the Consolidated Statements of Income was $18 million in 2014 , $18 million in 2013 , and $19 million in 2012 .  APS’s lease expense was $15 million in 2014 , $15 million in 2013 , and $16 million in 2012 .
 
Estimated future minimum lease payments for Pinnacle West’s and APS’s operating leases, excluding purchased power agreements, are approximately as follows (dollars in millions):

									
Year	 	Pinnacle West
Consolidated	 	APS	
2015	 	$	18		 	$	15		
2016	 	6		 	6		
2017	 	5		 	5		
2018	 	4		 	4		
2019	 	3		 	3		
Thereafter	 	63		 	62		
Total future lease commitments	 	$	99		 	$	95		
 
In 1986, APS entered into agreements with three separate lessor trust entities in order to sell and lease back interests in Palo Verde Unit 2 and related common facilities.  These lessor trust entities have been deemed VIEs for which APS is the primary beneficiary.  As the primary beneficiary, APS consolidated these lessor trust entities.  The impacts of these sale leaseback transactions are excluded from our lease disclosures as lease accounting is eliminated upon consolidation.  See Note 18 for a discussion of VIEs.

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9.                                Jointly-Owned Facilities
 
APS shares ownership of some of its generating and transmission facilities with other companies.  We are responsible for our share of operating costs, as well as for providing our own financing.  Our share of operating expenses and utility plant costs related to these facilities is accounted for using proportional consolidation.  The following table shows APS’s interests in those jointly-owned facilities recorded on the Consolidated Balance Sheets at December 31, 2014 (dollars in thousands):

	
																		
 	 	Percent
Owned	 	 	 	Plant in
Service	 	Accumulated
Depreciation	 	Construction
Work in
Progress	
Generating facilities:	 	 		 	 	 	 		 	 		 	 		
Palo Verde Units 1 and 3	 	29.1	%	 		 	$	1,734,918		 	$	1,051,670		 	$	16,955		
Palo Verde Unit 2 (a)	 	16.8	%	 		 	556,472		 	349,960		 	13,710		
Palo Verde Common	 	28.0	%	 	(b)	 	612,190		 	224,208		 	68,896		
Palo Verde Sale Leaseback	 	 		 	(a)	 	351,050		 	229,795		 	—		
Four Corners Generating Station	 	63.0	%	 		 	811,648		 	578,772		 	33,150		
Navajo Generating Station Units 1, 2 and 3	 	14.0	%	 		 	272,208		 	159,198		 	2,716		
Cholla common facilities (c)	 	63.3	%	 	(b)	 	155,856		 	49,954		 	866		
Transmission facilities:	 	 		 	 	 	 		 	 		 	 		
ANPP 500kV System	 	33.6	%	 	 (b)	 	106,369		 	35,035		 	3,731		
Navajo Southern System	 	22.5	%	 	(b)	 	59,994		 	18,119		 	1,113		
Palo Verde — Yuma 500kV System	 	18.2	%	 	(b)	 	12,925		 	4,943		 	12		
Four Corners Switchyards	 	47.5	%	 	 (b)	 	33,034		 	10,035		 	386		
Phoenix — Mead System	 	17.1	%	 	(b)	 	39,777		 	12,843		 	105		
Palo Verde — Estrella 500kV System	 	50.0	%	 	(b)	 	89,572		 	16,491		 	736		
Morgan — Pinnacle Peak System	 	64.4	%	 	 (b)	 	130,840		 	8,970		 	1,690		
Round Valley System	 	50.0	%	 	(b)	 	497		 	276		 	1		
Palo Verde — Morgan System	 	90.0	%	 	(b)	 	—		 	—		 	69,377		
Hassayampa - North Gila System	 	80.0	%	 	(b)	 	8,902		 	3,634		 	142,645		

		
(a)	See Note 18.	
		
(b)	Weighted-average of interests.	
		
(c)	PacifiCorp owns Cholla Unit 4 and APS operates the unit for PacifiCorp.  The common facilities at Cholla are jointly-owned.	
 
10.                                Commitments and Contingencies
 
Palo Verde Nuclear Generating Station
 
Spent Nuclear Fuel and Waste Disposal
 
On December 19, 2012, APS, acting on behalf of itself and the participant owners of Palo Verde, filed a breach of contract lawsuit against the DOE in the United States Court of Federal Claims.  The lawsuit seeks to recover damages incurred due to DOE’s breach of the Standard Contract for failing to accept Palo Verde spent nuclear fuel and high level waste from January 1, 2007 through June 30, 2011, as it was required to do pursuant to the terms of the Standard Contract and the NWPA.  On August 18, 2014, APS and DOE entered into a settlement agreement, stipulating to a dismissal of the lawsuit and payment of $57.4 million by DOE to the Palo Verde owners for certain specified costs incurred by Palo Verde during the period January 1, 2007

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through June 30, 2011. APS’s share of this amount is $16.7 million . Amounts recovered in the lawsuit and settlement were recorded as adjustments to a regulatory liability and had no impact on current income. In addition, the settlement agreement provides APS with a method for submitting claims and getting recovery for costs incurred through 2016.
  
Nuclear Insurance
 
Public liability for incidents at nuclear power plants is governed by the Price-Anderson Nuclear Industries Indemnity Act (“Price-Anderson Act”), which limits the liability of nuclear reactor owners to the amount of insurance available from both commercial sources and an industry retrospective payment plan.  In accordance with the Price-Anderson Act, the Palo Verde participants are insured against public liability for a nuclear incident up to $13.6 billion per occurrence.  Palo Verde maintains the maximum available nuclear liability insurance in the amount of $375 million , which is provided by commercial insurance carriers.  The remaining balance of $13.2 billion of liability coverage is provided through a mandatory industry-wide retrospective assessment program.  If losses at any nuclear power plant covered by the program exceed the accumulated funds, APS could be assessed retrospective premium adjustments.  The maximum retrospective premium assessment per reactor under the program for each nuclear liability incident is approximately $127.3 million , subject to an annual limit of $19 million per incident, to be periodically adjusted for inflation.  Based on APS’s ownership interest in the three Palo Verde units, APS’s maximum potential retrospective premium assessment per incident for all three units is approximately $111 million , with a maximum annual retrospective premium assessment of approximately $16.5 million .

The Palo Verde participants maintain “all risk” (including nuclear hazards) insurance for property damage to, and decontamination of, property at Palo Verde in the aggregate amount of $2.75 billion , a substantial portion of which must first be applied to stabilization and decontamination.  APS has also secured insurance against portions of any increased cost of replacement generation or purchased power and business interruption resulting from a sudden and unforeseen accidental outage of any of the three units.  The property damage, decontamination, and replacement power coverages are provided by Nuclear Electric Insurance Limited (“NEIL”).  APS is subject to retrospective premium assessments under all NEIL policies if NEIL’s losses in any policy year exceed accumulated funds.  The maximum amount APS could incur under the current NEIL policies totals approximately $20 million for each retrospective premium assessment declared by NEIL’s Board of Directors due to losses.  In addition, NEIL policies contain rating triggers that would result in APS providing approximately $53 million of collateral assurance within 20 business days of a rating downgrade to non-investment grade.  The insurance coverage discussed in this and the previous paragraph is subject to certain policy conditions, sublimits and exclusions.
 
Fuel and Purchased Power Commitments and Purchase Obligations
 
APS is party to purchase obligations and various fuel and purchased power contracts with terms expiring between 2015 and 2043 that include required purchase provisions.  APS estimates the contract requirements to be approximately $723 million in 2015 ; $747 million in 2016 ; $630 million in 2017 ; $610 million in 2018 ; $583 million in 2019 ; and $8.2 billion thereafter.  However, these amounts may vary significantly pursuant to certain provisions in such contracts that permit us to decrease required purchases under certain circumstances.
 
Of the various fuel and purchased power contracts mentioned above, some of those contracts for coal supply include take-or-pay provisions.  The current coal contracts with take-or-pay provisions have terms expiring through 2031.

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The following table summarizes our estimated coal take-or-pay commitments (dollars in millions):

	
																								
 	 Years Ended December 31,	
 	2015	 	2016	 	2017	 	2018	 	2019	 	Thereafter	
Coal take-or-pay commitments (a)	$	151		 	$	171		 	$	195		 	$	190		 	$	194		 	$	2,469		

(a)	Total take-or-pay commitments are approximately $3.4 billion .  The total net present value of these commitments is approximately $2.2 billion .	
 
APS may spend more to meet its actual fuel requirements than the minimum purchase obligations in our coal take-or-pay contracts. The following table summarizes actual payments under the coal contracts which include take-or-pay provisions for each of the last three years (dollars in millions):

	
												
 	Year Ended December 31,	
 	2014	 	2013	 	2012	
Total payments	$	237		 	$	188		 	$	196		
 
Renewable Energy Credits
 
APS has entered into contracts to purchase renewable energy credits to comply with the RES.  APS estimates the contract requirements to be approximately $46 million in 2015 ; $42 million in 2016 ; $42 million in 2017 ; $42 million in 2018 ; $42 million in 2019 ; and $448 million thereafter.  These amounts do not include purchases of renewable energy credits that are bundled with energy.  Also, these amounts do not include purchases of renewable energy credits that are associated with purchased power contracts.
 
Coal Mine Reclamation Obligations
 
APS must reimburse certain coal providers for amounts incurred for final and contemporaneous coal mine reclamation.  We account for contemporaneous reclamation costs as part of the cost of the delivered coal.  We utilize site-specific studies of costs expected to be incurred in the future to estimate our final reclamation obligation.  These studies utilize various assumptions to estimate the future costs.  Based on the most recent reclamation studies, APS recorded an obligation for the coal mine final reclamation of approximately $198 million at December 31, 2014 and $207 million at December 31, 2013 .  Under our current coal supply agreements, we expect to make payments to certain coal providers for the final mine reclamation as follows:  $1 million in 2015; $15 million in 2016; $17 million in 2017; $18 million in 2018; $19 million in 2019; and $281 million thereafter.  Any amendments to current coal supply agreements may change the timing of the reimbursement.

Superfund-Related Matters
 
Superfund establishes liability for the cleanup of hazardous substances found contaminating the soil, water or air.  Those who generated, transported or disposed of hazardous substances at a contaminated site are among those who are PRPs.  PRPs may be strictly, and often are jointly and severally, liable for clean-up.  On September 3, 2003, EPA advised APS that EPA considers APS to be a PRP in the Motorola 52 nd  Street Superfund Site, OU3 in Phoenix, Arizona.  APS has facilities that are within this Superfund site.  APS and Pinnacle West have agreed with EPA to perform certain investigative activities of the APS facilities within OU3.  In addition, on September 23, 2009, APS agreed with EPA and one other PRP to voluntarily assist with the funding and management of the site-wide groundwater remedial investigation and feasibility study work

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plan.  We estimate that our costs related to this investigation and study will be approximately $2 million .  We anticipate incurring additional expenditures in the future, but because the overall investigation is not complete and ultimate remediation requirements are not yet finalized, at the present time expenditures related to this matter cannot be reasonably estimated.
 
On August 6, 2013, RID filed a lawsuit in Arizona District Court against APS and 24 other defendants, alleging that RID’s groundwater wells were contaminated by the release of hazardous substances from facilities owned or operated by the defendants.  The lawsuit also alleges that, under Superfund laws, the defendants are jointly and severally liable to RID.  The allegations against APS arise out of APS’s current and former ownership of facilities in and around OU3.  We are unable to predict the outcome of this matter; however, we do not expect the outcome to have a material impact on our financial position, results of operations or cash flows.
 
Southwest Power Outage
 
Regulatory . On September 8, 2011 at approximately 3:30 PM, a 500 kV transmission line running between the Hassayampa and North Gila substations in southwestern Arizona tripped out of service due to a fault that occurred at a switchyard operated by APS.  Approximately ten minutes after the transmission line went off-line, generation and transmission resources for the Yuma area were lost, resulting in approximately 69,700 APS customers losing service.
 
Within the same time period that APS’s Yuma customers lost service, a series of transmission and generation disruptions occurred across the systems of several utilities that resulted in outages affecting portions of southern Arizona, southern California and northern Mexico.  A total of approximately 7,900 MW of firm load and 2.7 million customers were reported to have been affected.  Service to all affected APS customers was restored by 9:15 PM on September 8.  Service to customers affected by the wider regional outages was restored by approximately 3:25 AM on September 9.

FERC and NERC conducted a joint inquiry into the outages and, on May 1, 2012, they issued a report (the “Joint Report”) with their analysis and conclusions as to the causes of the events.  The report included recommendations to help industry operators prevent similar outages in the future, including increased data sharing and coordination among the western utilities and entities responsible for bulk electric system reliability coordination.  The Joint Report did not address potential reliability violations or an assessment of responsibility of the parties involved.
 
On January 22, 2014, following non-public preliminary investigations, FERC Staff issued a Notice of Alleged Violations naming six entities involved in the event, including APS.  FERC Staff alleged that each of the named entities violated varying numbers of NERC Reliability Standards.  APS was alleged to have violated seven Reliability Standard Requirements.  The allegations of violations were preliminary determinations by FERC Staff and did not constitute findings by FERC itself that any violations had occurred.
 
On July 7, 2014, FERC approved a Stipulation and Consent Agreement among FERC’s Office of Enforcement, NERC and APS which resolves all civil and administrative disputes within the jurisdiction of FERC concerning the September 8 event, including FERC’s and NERC’s investigations.  In the settlement, APS neither admitted nor denied alleged violations of four Reliability Standard Requirements.  APS agreed to pay a civil penalty of $3.25 million , of which $2 million is to be paid in equal parts to the Department of the Treasury and NERC and $1.25 million will be credited as a partial civil penalty offset in exchange for APS completing certain reliability enhancements.

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Litigation. On September 6, 2013, a purported consumer class action complaint was filed in Federal District Court in San Diego, California, naming APS and Pinnacle West as defendants and seeking damages for loss of perishable inventory and sales as a result of interruption of electrical service.  APS and Pinnacle West filed a motion to dismiss, which the court granted on December 9, 2013.  On January 13, 2014, the plaintiffs appealed the lower court’s decision.  The appeal is now fully briefed and pending before the Ninth Circuit Court of Appeals.  We are unable to predict the outcome of this matter.
 
Clean Air Act Citizen Lawsuit
 
On October 4, 2011, Earthjustice, on behalf of several environmental organizations, filed a lawsuit in the United States District Court for the District of New Mexico against APS and the other Four Corners participants alleging violations of the NSR provisions of the Clean Air Act.  Subsequent to filing its original Complaint, on January 6, 2012, Earthjustice filed a First Amended Complaint adding claims for violations of the Clean Air Act’s NSPS program.  Among other things, the environmental plaintiffs seek to have the court enjoin operations at Four Corners until APS applies for and obtains any required NSR permits and complies with the NSPS.  The plaintiffs further request the court to order the payment of civil penalties, including a beneficial mitigation project.  On April 2, 2012, APS and the other Four Corners participants filed motions to dismiss.  The case is being held in abeyance while the parties seek to negotiate a settlement.  On March 30, 2013, upon joint motion of the parties, the court issued an order deeming the motions to dismiss withdrawn without prejudice during pendency of the stay.  At such time as the stay is lifted, APS and the other Four Corners participants may reinstate their motions to dismiss.  We are unable to predict the outcome of this matter.
 
Environmental Matters
 
APS is subject to numerous environmental laws and regulations affecting many aspects of its present and future operations, including air emissions, water quality, wastewater discharges, solid waste, hazardous waste, and CCRs.  These laws and regulations can change from time to time, imposing new obligations on APS resulting in increased capital, operating, and other costs.  Associated capital expenditures or operating costs could be material.  APS intends to seek recovery of any such environmental compliance costs through our rates, but cannot predict whether it will obtain such recovery.  The following proposed and final rules involve material compliance costs to APS.
 
Regional Haze Rules.   APS has received the final rulemaking imposing new requirements on Four Corners, Cholla and the Navajo Plant.  EPA and ADEQ will require these plants to install pollution control equipment that constitutes the BART to lessen the impacts of emissions on visibility surrounding the plants.  Based on EPA’s final standards, APS estimates that its 63% share of the cost of these controls for Four Corners Units 4 and 5 would be at least $350 million .  In addition, APS and El Paso entered into an asset purchase agreement providing for the purchase by APS, or an affiliate of APS, of El Paso's 7% interest in Four Corners Units 4 and 5, which would increase our share of the cost of these controls by approximately $40 million. APS estimates that its share of costs for upgrades at the Navajo Plant, based on EPA’s FIP proposal, could be up to approximately $200 million .  In October 2014, a coalition of environmental groups, an Indian tribe and others filed petitions for review in the United States Court of Appeals for the Ninth Circuit asking the Court to review EPA's final BART rule for the Navajo Plant. We cannot predict the outcome of this review process. As described under "Regional Haze Rules - Cholla" below, APS filed a Petition for Review of EPA’s rule as it applies to Cholla, which, if not successful, would require installation of SCR controls with a cost to APS of approximately $200 million . However, in September 2014, APS met with EPA to propose a compromise BART strategy wherein, pending certain regulatory approvals, APS would permanently close Cholla Unit 2 by

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April 2016 and cease burning coal at Units 1 and 3 by the mid-2020s. (See Note 3 for details related to the resulting regulatory asset.) APS made the proposal with the understanding that additional emission control equipment is unlikely to be required in the future because retiring and converting the units as contemplated in the proposal is more cost effective than, and will result in increased visibility improvement over, the current BART requirements for NOx imposed on the Cholla units under EPA's BART FIP. Because APS’s proposal involves state and federal rule-making processes, APS is unable to predict when or whether it may ultimately be approved.
 
Mercury and Air Toxic Standards.   In 2011, EPA issued rules establishing maximum achievable control technology standards to regulate emissions of mercury and other hazardous air pollutants from fossil-fired plants.  APS estimates that the cost for the remaining equipment necessary to meet these standards is approximately $130 million for Cholla, which would be avoided if EPA approves APS's compromise proposal discussed above.  No additional equipment is needed for Four Corners Units 4 and 5 to comply with these rules.  SRP, the operating agent for the Navajo Plant, is still evaluating compliance options under the rules.
 
Coal Combustion Waste. On December 19, 2014, EPA issued its final regulations governing the handling and disposal of CCR, such as fly ash and bottom ash. The rule regulates CCR as a non-hazardous waste under Subtitle D of RCRA and establishes national minimum criteria for existing and new CCR landfills and surface impoundments and all lateral expansions consisting of location restrictions, design and operating criteria, groundwater monitoring and corrective action, closure requirements and post closure care, and recordkeeping, notification, and Internet posting requirements. The rule generally requires any existing unlined CCR surface impoundment that is contaminating groundwater above a regulated constituent’s groundwater protection standard to stop receiving CCR and either retrofit or close, and further requires the closure of any CCR landfill or surface impoundment that cannot meet the applicable performance criteria for location restrictions or structural integrity.

Because the Subtitle D rule is self-implementing, the CCR standards apply directly to the regulated facility, and facilities are directly responsible for ensuring that their operations comply with the rule’s requirements. While EPA has chosen to regulate the disposal of CCR in landfills and surface impoundments as non-hazardous waste under the final rule, the agency makes clear that it will continue to evaluate any risks associated with CCR disposal and leaves open the possibility that it may regulate CCR as a hazardous waste under RCRA Subtitle C in the future.

APS currently disposes of CCR in ash ponds and dry storage areas at Cholla and Four Corners. APS estimates that its share of incremental costs to comply with the CCR rule for Four Corners is approximately $15 million , and its share of incremental costs for Cholla is approximately $85 million .  The Navajo Plant currently disposes of CCR in a dry landfill storage area. At this time, SRP, the operating agent for the Navajo Plant, is analyzing the operations that would be covered by the rule and any resulting compliance costs.

Other future environmental rules that could involve material compliance costs include those related to effluent limitations, the ozone national ambient air quality standard, GHG emissions (such as the EPA’s proposed “Clean Power Plan” rule issued in accordance with President Obama’s Climate Action Plan), and other rules or matters involving the Clean Air Act, Clean Water Act, ESA, the Navajo Nation, and water supplies for our power plants.  The financial impact of complying with these and other future environmental rules could jeopardize the economic viability of our coal plants or the willingness or ability of power plant participants to fund any required equipment upgrades or continue their participation in these plants.  The economics of continuing to own certain resources, particularly our coal plants, may deteriorate, warranting early retirement of those plants, which may result in asset impairments.  APS would seek recovery in rates for

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the book value of any remaining investments in the plants as well as other costs related to early retirement, but cannot predict whether it would obtain such recovery.
 
Regional Haze Rules — Cholla
 
APS believes that EPA’s final rule as it applies to Cholla is unsupported and that EPA had no basis for disapproving Arizona’s SIP and promulgating a FIP that is inconsistent with the state’s considered BART determinations under the regional haze program.  Accordingly, on February 1, 2013, APS filed a Petition for Review of the final BART rule in the United States Court of Appeals for the Ninth Circuit.  Briefing in the case was completed in February 2014; the court scheduled oral argument for March 9, 2015.
 
New Mexico Tax Matter
 
On May 23, 2013, the New Mexico Taxation and Revenue Department issued a notice of assessment for coal severance surtax, penalty, and interest totaling approximately $30 million related to coal supplied under the coal supply agreement for Four Corners (the “Assessment”).  APS’s share of the Assessment is approximately $12 million .  For procedural reasons, on behalf of the Four Corners co-owners, including APS, the coal supplier made a partial payment of the Assessment and immediately filed a refund claim with respect to that partial payment in August 2013.  The New Mexico Taxation and Revenue Department denied the refund claim.  On December 19, 2013, the coal supplier and APS, on its own behalf and as operating agent for Four Corners, filed a complaint with the New Mexico District Court contesting both the validity of the Assessment and the refund claim denial.  We cannot predict the timing or outcome of this litigation; however, we do not expect the outcome to have a material impact on our financial position, results of operations or cash flows.

Financial Assurances
 
APS has entered into various agreements that require letters of credit for financial assurance purposes.  At December 31, 2014 , approximately $109 million of letters of credit were outstanding to support existing pollution control bonds of a similar amount.  The letters of credit are available to fund the payment of principal and interest of such debt obligations.  These letters of credit will expire in 2015, 2016, and 2017. APS has also entered into letters of credit to support certain equity participants in the Palo Verde sale leaseback transactions (see Note 18 for further details on the Palo Verde sale leaseback transactions).  These letters of credit will expire on December 31, 2015, and totaled approximately $23 million at December 31, 2014 .  Additionally, APS has issued letters of credit to support collateral obligations under a natural gas tolling contract entered into with a third party.  At December 31, 2014 , that letter of credit totaled $5 million and will expire in 2015.
 
We enter into agreements that include indemnification provisions relating to liabilities arising from or related to certain of our agreements.  Most significantly, APS has agreed to indemnify the equity participants and other parties in the Palo Verde sale leaseback transactions with respect to certain tax matters.  Generally, a maximum obligation is not explicitly stated in the indemnification provisions and, therefore, the overall maximum amount of the obligation under such indemnification provisions cannot be reasonably estimated.  Based on historical experience and evaluation of the specific indemnities, we do not believe that any material loss related to such indemnification provisions is likely.
 
Pinnacle West has issued parental guarantees and has provided indemnification under certain surety bonds for APS which were not material at December 31, 2014 .

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11.                                Asset Retirement Obligations
 
APS has asset retirement obligations for its Palo Verde nuclear facilities and certain other generation, transmission and distribution assets. 

The Palo Verde asset retirement obligation primarily relates to final plant decommissioning.  This obligation is based on the NRC’s requirements for disposal of radiated property or plant and agreements APS reached with the ACC for final decommissioning of the plant.  The non-nuclear generation asset retirement obligations primarily relate to requirements for removing portions of those plants at the end of the plant life or lease term and coal ash pond closures. Some of APS’s transmission and distribution assets have asset retirement obligations because they are subject to right of way and easement agreements that require final removal.  These agreements have a history of uninterrupted renewal that APS expects to continue.  As a result, APS cannot reasonably estimate the fair value of the asset retirement obligation related to such transmission and distribution assets. Additionally, APS has aquifer protection permits for some of its generation sites that require the closure of certain facilities at those sites.

In 2014, an update to the 2013 decommissioning study was completed for Palo Verde nuclear generation facility to incorporate additional spent fuel related charges resulting in an increase to the ARO in the amount of $20 million . Also in 2014, an updated Four Corners Units 1-3 coal-fired power plant decommissioning study was finalized, which resulted in an increase to the ARO of $24 million . In addition, Four Corners spent $30 million in actual decommissioning costs. Finally, in 2014 APS also recognized an ARO related to a new solar facility on leased property that requires the land to be returned to its original condition upon decommissioning of the plant, which resulted in an increase to the ARO of $6 million .

In 2013, a decommissioning study with updated cash flow estimates was completed for Palo Verde, which resulted in a decrease of $52 million . Also in 2013, APS finalized the transaction to acquire SCE’s interest in Four Corners. As part of that transaction, APS assumed SCE’s asset retirement obligation resulting in an increase to the ARO of $34 million . In addition, on December 30, 2013, APS also retired Four Corners Units 1-3 and began decommissioning activities. Finally, Four Corners spent $12 million in actual decommissioning costs. An update was made to the timing of the Units 1-3 decommissioning cash flows to coincide with the expected decommissioning activities. This update resulted in a decrease to the ARO of $4 million .
 
The following schedule shows the change in our asset retirement obligations for 2014 and 2013 (dollars in millions):

	
								
 	2014	 	2013	
Asset retirement obligations at the beginning of year	$	347		 	$	357		
Changes attributable to:	 		 	 		
Accretion expense	24		 	24		
Settlements	(30	)	 	(12	)	
Assumed SCE’s obligation	—		 	34		
Estimated cash flow revisions	44		 	(56	)	
Newly incurred obligation	6		 	—		
Asset retirement obligations at the end of year	$	391		 	$	347		
 
As mentioned above, decommissioning activities for Four Corners Units 1-3 began in January 2014; and, $32 million of the total ARO at December 31, 2014 , was classified as a current liability on the balance sheet. At December 31, 2013, $33 million of the total ARO of $347 million was classified as a current liability on the balance sheet.

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In accordance with regulatory accounting, APS accrues removal costs for its regulated utility assets, even if there is no legal obligation for removal.  See detail of regulatory liabilities in Note 3.

12.                                Selected Quarterly Financial Data (Unaudited)  

Consolidated quarterly financial information for 2014 and 2013 is provided in the tables below (dollars in thousands, except per share amounts).  Weather conditions cause significant seasonal fluctuations in our revenues; therefore, results for interim periods do not necessarily represent results expected for the year.

	
																				
 	2014 Quarter Ended	 	2014	
 	March 31,	 	June 30,	 	Sept. 30,	 	Dec. 31,	 	Total	
Operating revenues	$	686,251		 	$	906,264		 	$	1,172,667		 	$	726,450		 	$	3,491,632		
Operations and maintenance	212,882		 	211,222		 	223,418		 	260,503		 	908,025		
Operating income	75,170		 	254,113		 	421,775		 	60,184		 	811,242		
Income taxes	6,405		 	74,540		 	134,753		 	5,007		 	220,705		
Income from continuing operations	24,691		 	141,384		 	248,086		 	9,535		 	423,696		
Net income attributable to common shareholders	15,766		 	132,458		 	243,961		 	5,410		 	397,595		
 	 	 	 	 	 	 	 	 	 	
Earnings Per Share:	 		 	 		 	 		 	 		 	 		
Net income attributable to common shareholders — Basic	$	0.14		 	$	1.20		 	$	2.20		 	$	0.05		 	$	3.59		
Net income attributable to common shareholders — Diluted	0.14		 	1.19		 	2.20		 	0.05		 	3.58		

	
																				
 	2013 Quarter Ended	 	2013	
 	March 31,	 	June 30,	 	Sept. 30,	 	Dec. 31,	 	Total	
Operating revenues	$	686,652		 	$	915,822		 	$	1,152,392		 	$	699,762		 	$	3,454,628		
Operations and maintenance	223,250		 	229,300		 	233,323		 	238,854		 	924,727		
Operating income	86,923		 	259,812		 	415,688		 	83,900		 	846,323		
Income taxes	12,469		 	77,043		 	131,912		 	9,167		 	230,591		
Income from continuing operations	32,836		 	139,598		 	234,718		 	32,814		 	439,966		
Net income attributable to common shareholders	24,444		 	131,207		 	226,163		 	24,260		 	406,074		
 	 	 	 	 	 	 	 	 	 	
Earnings Per Share:	 		 	 		 	 		 	 		 	 		
Net income attributable to common shareholders — Basic	$	0.22		 	$	1.19		 	$	2.06		 	$	0.22		 	$	3.69		
Net income attributable to common shareholders — Diluted	0.22		 	1.18		 	2.04		 	0.22		 	3.66		
 
13.                                Fair Value Measurements
 
We classify our assets and liabilities that are carried at fair value within the fair value hierarchy.  This hierarchy ranks the quality and reliability of the inputs used to determine fair values, which are then classified and disclosed in one of three categories.  The three levels of the fair value hierarchy are:

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Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.  Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide information on an ongoing basis.  This category includes exchange traded equities, exchange traded derivative instruments, cash equivalents, and investments in U.S. Treasury securities.

Level 2 — Utilizes quoted prices in active markets for similar assets or liabilities; quoted prices in markets that are not active; and model-derived valuations whose inputs are observable (such as yield curves).  This category includes non-exchange traded contracts such as forwards, options, swaps and certain investments in fixed income securities.  This category also includes investments that are redeemable and valued based on NAV, such as common and collective trusts and commingled funds.
 
Level 3 — Valuation models with significant unobservable inputs that are supported by little or no market activity.  Instruments in this category include long-dated derivative transactions where valuations are unobservable due to the length of the transaction, options, and transactions in locations where observable market data does not exist.  The valuation models we employ utilize spot prices, forward prices, historical market data and other factors to forecast future prices.
 
Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  Thus, a valuation may be classified in Level 3 even though the valuation may include significant inputs that are readily observable.  We maximize the use of observable inputs and minimize the use of unobservable inputs.  We rely primarily on the market approach of using prices and other market information for identical and/or comparable assets and liabilities.  If market data is not readily available, inputs may reflect our own assumptions about the inputs market participants would use.  Our assessment of the inputs and the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities as well as their placement within the fair value hierarchy levels.  We assess whether a market is active by obtaining observable broker quotes, reviewing actual market activity, and assessing the volume of transactions.  We consider broker quotes observable inputs when the quote is binding on the broker, we can validate the quote with market activity, or we can determine that the inputs the broker used to arrive at the quoted price are observable.
 
Recurring Fair Value Measurements
 
We apply recurring fair value measurements to certain cash equivalents, derivative instruments, investments held in our nuclear decommissioning trust and plan assets held in our retirement and other benefit plans.  See Note 7 for the fair value discussion of plan assets held in our retirement and other benefit plans.
 
Cash Equivalents
 
Cash equivalents represent short-term investments with original maturities of three months or less in exchange traded money market funds that are valued using quoted prices in active markets.

Risk Management Activities — Derivative Instruments
 
Exchange traded commodity contracts are valued using unadjusted quoted prices.  For non-exchange traded commodity contracts, we calculate fair value based on the average of the bid and offer price, discounted to reflect net present value.  We maintain certain valuation adjustments for a number of risks associated with the valuation of future commitments.  These include valuation adjustments for liquidity and credit risks.  The liquidity valuation adjustment represents the cost that would be incurred if all unmatched positions were closed

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out or hedged.  The credit valuation adjustment represents estimated credit losses on our net exposure to counterparties, taking into account netting agreements, expected default experience for the credit rating of the counterparties and the overall diversification of the portfolio.  We maintain credit policies that management believes minimize overall credit risk.
 
Certain non-exchange traded commodity contracts are valued based on unobservable inputs due to the long-term nature of contracts, characteristics of the product, or the unique location of the transactions.  Our long-dated energy transactions consist of observable valuations for the near-term portion and unobservable valuations for the long-term portions of the transaction.  We rely primarily on broker quotes to value these instruments.  When our valuations utilize broker quotes, we perform various control procedures to ensure the quote has been developed consistent with fair value accounting guidance.  These controls include assessing the quote for reasonableness by comparison against other broker quotes, reviewing historical price relationships, and assessing market activity.  When broker quotes are not available, the primary valuation technique used to calculate the fair value is the extrapolation of forward pricing curves using observable market data for more liquid delivery points in the same region and actual transactions at more illiquid delivery points.
 
Option contracts are primarily valued using a Black-Scholes option valuation model, which utilizes both observable and unobservable inputs such as broker quotes, interest rates and price volatilities.
 
When the unobservable portion is significant to the overall valuation of the transaction, the entire transaction is classified as Level 3.  Our classification of instruments as Level 3 is primarily reflective of the long-term nature of our energy transactions and the use of option valuation models with significant unobservable inputs.
 
Our energy risk management committee, consisting of officers and key management personnel, oversees our energy risk management activities to ensure compliance with our stated energy risk management policies.  We have a risk control function that is responsible for valuing our derivative commodity instruments in accordance with established policies and procedures.  The risk control function reports to the chief financial officer’s organization.
 
Investments Held in our Nuclear Decommissioning Trust
 
The nuclear decommissioning trust invests in fixed income securities and equity securities. Equity securities are held indirectly through commingled funds.  The commingled funds are valued based on the concept of NAV, which is a value primarily derived from the quoted active market prices of the underlying equity securities.  We may transact in these commingled funds on a semi-monthly basis at the NAV, and accordingly classify these investments as Level 2.  The commingled funds, which are similar to mutual funds, are maintained by a bank and hold investments in accordance with the stated objective of tracking the performance of the S&P 500 Index.  Because the commingled fund shares are offered to a limited group of investors, they are not considered to be traded in an active market.
 
Cash equivalents reported within Level 2 represent investments held in a short-term investment commingled fund, valued using NAV, which invests in U.S. government fixed income securities.  We may transact in this commingled fund on a daily basis at the NAV.
 
Fixed income securities issued by the U.S. Treasury held directly by the nuclear decommissioning trust are valued using quoted active market prices and are classified as Level 1.  Fixed income securities issued by corporations, municipalities, and other agencies, including mortgage-backed instruments, are valued using quoted inactive market prices, quoted active market prices for similar securities, or by utilizing calculations

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which incorporate observable inputs such as yield curves and spreads relative to such yield curves.  These instruments are classified as Level 2.  Whenever possible, multiple market quotes are obtained which enables a cross-check validation.  A primary price source is identified based on asset type, class, or issue of securities.
 
We price securities using information provided by our trustee for our nuclear decommissioning trust assets. Our trustee uses pricing services that utilize the valuation methodologies described to determine fair market value. We have internal control procedures designed 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.  See Note 19 for additional discussion about our nuclear decommissioning trust.
 
Fair Value Tables
 
The following table presents the fair value at December 31, 2014 of our assets and liabilities that are measured at fair value on a recurring basis (dollars in millions):

	
																						
 	Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)	 	Significant
Other
Observable
Inputs
(Level 2)	 	Significant
Unobservable
Inputs (a)
(Level 3)	 	Other	 	 	 	Balance at December 31, 2014	
Assets	 		 	 		 	 		 	 		 	 	 	 		
Risk management activities — derivative instruments:	 		 	 		 	 		 	 		 	 	 	 		
Commodity Contracts	$	—		 	$	21		 	$	33		 	$	(23	)	 	(b)	 	$	31		
Nuclear decommissioning trust:	 		 	 		 	 		 	 		 	 	 	 		
U.S. commingled equity funds	—		 	310		 	—		 	—		 	 	 	310		
Fixed income securities:	 		 	 		 	 		 	 		 	 	 	 		
U.S. Treasury	119		 	—		 	—		 	—		 	 	 	119		
Cash and cash equivalent funds	—		 	11		 	—		 	(7	)	 	(c)	 	4		
Corporate debt	—		 	109		 	—		 	—		 	 	 	109		
Mortgage-backed securities	—		 	89		 	—		 	—		 	 	 	89		
Municipality bonds	—		 	69		 	—		 	—		 	 	 	69		
Other	—		 	14		 	—		 	—		 	 	 	14		
Subtotal nuclear decommissioning trust	119		 	602		 	—		 	(7	)	 		 	714		
Total	$	119		 	$	623		 	$	33		 	$	(30	)	 		 	$	745		
Liabilities	 		 	 		 	 		 	 		 	 	 	 		
Risk management activities — derivative instruments:	 		 	 		 	 		 	 		 	 	 	 		
Commodity contracts	$	—		 	$	(95	)	 	$	(74	)	 	$	59		 	(b)	 	$	(110	)	

		
(a)	Primarily consists of heat rate options and other long-dated electricity contracts.	
		
(b)	Represents counterparty netting, margin and collateral.  See Note 16.	
		
(c)	Represents nuclear decommissioning trust net pending securities sales and purchases.	

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The following table presents the fair value at December 31, 2013 of our assets and liabilities that are measured at fair value on a recurring basis (dollars in millions):

	
																						
 	Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)	 	Significant
Other
Observable
Inputs
(Level 2)	 	Significant
Unobservable
Inputs (a)
(Level 3)	 	Other	 	 	 	Balance at December 31, 2013	
Assets	 		 	 		 	 		 	 		 	 	 	 		
Risk management activities — derivative instruments:	 		 	 		 	 		 	 		 	 	 	 		
Commodity Contracts	$	—		 	$	9		 	$	41		 	$	(9	)	 	(b)	 	$	41		
Nuclear decommissioning trust:	 		 	 		 	 		 	 		 	 	 	 		
U.S. commingled equity funds	—		 	272		 	—		 	—		 	 	 	272		
Fixed income securities:	 		 	 		 	 		 	 		 	 	 	 		
U.S. Treasury	107		 	—		 	—		 	—		 	 	 	107		
Cash and cash equivalent funds	—		 	11		 	—		 	(3	)	 	(c)	 	8		
Corporate debt	—		 	88		 	—		 	—		 	 	 	88		
Mortgage-backed securities	—		 	85		 	—		 	—		 	 	 	85		
Municipality bonds	—		 	71		 	—		 	—		 	 	 	71		
Other	—		 	11		 	—		 	—		 	 	 	11		
Subtotal nuclear decommissioning trust	107		 	538		 	—		 	(3	)	 		 	642		
Total	$	107		 	$	547		 	$	41		 	$	(12	)	 		 	$	683		
Liabilities	 		 	 		 	 		 	 		 	 	 	 		
Risk management activities — derivative instruments:	 		 	 		 	 		 	 		 	 	 	 		
Commodity contracts	$	—		 	$	(33	)	 	$	(90	)	 	$	21		 	(b)	 	$	(102	)	

		
(a)	Primarily consists of heat rate options and other long-dated electricity contracts.	
		
(b)	Represents counterparty netting, margin and collateral.  See Note 16.	
		
(c)	Represents nuclear decommissioning trust net pending securities sales and purchases.	
 
Fair Value Measurements Classified as Level 3
 
The significant unobservable inputs used in the fair value measurement of our energy derivative contracts include broker quotes that cannot be validated as an observable input primarily due to the long-term nature of the quote and option model inputs.  Significant changes in these inputs in isolation would result in significantly higher or lower fair value measurements.  Changes in our derivative contract fair values, including changes relating to unobservable inputs, typically will not impact net income due to regulatory accounting treatment (see Note 3).
 
Because our forward commodity contracts classified as Level 3 are currently in a net purchase position, we would expect price increases of the underlying commodity to result in increases in the net fair value of the related contracts.  Conversely, if the price of the underlying commodity decreases, the net fair value of the related contracts would likely decrease.
 
Our option contracts classified as Level 3 primarily relate to purchase heat rate options.  The significant unobservable inputs for these instruments include electricity prices, gas prices and volatilities.  If

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electricity prices and electricity price volatilities increase, we would expect the fair value of these options to increase, and if these valuation inputs decrease, we would expect the fair value of these options to decrease.  If natural gas prices and natural gas price volatilities increase, we would expect the fair value of these options to decrease, and if these inputs decrease, we would expect the fair value of the options to increase.  The commodity prices and volatilities do not always move in corresponding directions.  The options’ fair values are impacted by the net changes of these various inputs.
 
Other unobservable valuation inputs include credit and liquidity reserves which do not have a material impact on our valuations; however, significant changes in these inputs could also result in higher or lower fair value measurements.
 
The following tables provide information regarding our significant unobservable inputs used to value our risk management derivative Level 3 instruments at December 31, 2014 and December 31, 2013 :

	
																		
 	December 31, 2014
Fair Value (millions)	 	Valuation Technique	 	Significant Unobservable Input	 	Range	 	Weighted-Average	
Commodity Contracts	Assets	 	Liabilities	 								
Electricity:	 		 	 		 	 	 	 	 	 	 	 		
Forward Contracts (a)	$	30		 	$	56		 	Discounted cash flows	 	Electricity forward price (per MWh)	 	$19.51 - $56.72	 	$	35.27		
Option Contracts (b)	—		 	15		 	Option model	 	Electricity forward price (per MWh)	 	$32.14 - $66.09	 	$	45.83		
 	 		 	 		 	 	 	Natural gas forward price (per MMbtu)	 	$3.18 - $3.29	 	$	3.25		
 	 		 	 		 	 	 	Electricity price volatilities	 	23% - 63%	 	41	%	
 	 		 	 		 	 	 	Natural gas price volatilities	 	23% - 41%	 	31	%	
Natural Gas:	 		 	 		 	 	 	 	 	 	 	 		
Forward Contracts (a)	3		 	3		 	Discounted cash flows	 	Natural gas forward price (per MMbtu)	 	$2.98 - $4.13	 	$	3.45		
Total	$	33		 	$	74		 	 	 	 	 	 	 	 		

		
(a)	Includes swaps and physical and financial contracts.	
		
(b)	Electricity and natural gas price volatilities are estimated based on historical forward price movements due to lack of market quotes for implied volatilities.	

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 	December 31, 2013
Fair Value (millions)	 	Valuation Technique	 	Significant Unobservable Input	 	Range	 	Weighted-Average	
Commodity Contracts	Assets	 	Liabilities	 								
Electricity:	 		 	 		 	 	 	 	 	 	 	 		
Forward Contracts (a)	$	40		 	$	66		 	Discounted cash flows	 	Electricity forward price (per MWh)	 	$24.89 - $65.04	 	$	41.09		
Option Contracts (b)	—		 	19		 	Option model	 	Electricity forward price (per MWh)	 	$39.91 - $85.41	 	$	58.70		
 	 		 	 		 	 	 	Natural gas forward price (per MMbtu)	 	$3.57 - $3.80	 	$	3.71		
 	 		 	 		 	 	 	Electricity price volatilities	 	35% - 94%	 	59	%	
 	 		 	 		 	 	 	Natural gas price volatilities	 	22% - 36%	 	27	%	
Natural Gas:	 		 	 		 	 	 	 	 	 	 	 		
Forward Contracts (a)	1		 	5		 	Discounted cash flows	 	Natural gas forward price (per MMbtu)	 	$3.47 - $4.31	 	$	3.87		
Total	$	41		 	$	90		 	 	 	 	 	 	 	 		

		
(a)	Includes swaps and physical and financial contracts.	
		
(b)	Electricity and natural gas price volatilities are estimated based on historical forward price movements due to lack of market quotes for implied volatilities.	
 
The following table shows the changes in fair value for our risk management activities’ assets and liabilities that are measured at fair value on a recurring basis using Level 3 inputs for the years ended December 31, 2014 and 2013 (dollars in millions):

	
									
 	 	Year Ended
December 31,	
Commodity Contracts	 	2014	 	2013	
Net derivative balance at beginning of period	 	$	(49	)	 	$	(48	)	
Total net gains (losses) realized/unrealized:	 	 		 	 		
Included in earnings	 	—		 	—		
Included in OCI	 	—		 	—		
Deferred as a regulatory asset or liability	 	—		 	(10	)	
Settlements	 	12		 	10		
Transfers into Level 3 from Level 2	 	(2	)	 	—		
Transfers from Level 3 into Level 2	 	(2	)	 	(1	)	
Net derivative balance at end of period	 	$	(41	)	 	$	(49	)	
Net unrealized gains included in earnings related to instruments still held at end of period	 	$	—		 	$	—		
 
Amounts included in earnings are recorded in either operating revenues or fuel and purchased power depending on the nature of the underlying contract.

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Transfers reflect the fair market value at the beginning of the period and are triggered by a change in the lowest significant input as of the end of the period.  We had no significant Level 1 transfers to or from any other hierarchy level.  Transfers in or out of Level 3 are typically related to our long-dated energy transactions that extend beyond available quoted periods.
 
Financial Instruments Not Carried at Fair Value
 
The carrying value of our net accounts receivable, accounts payable and short-term borrowings approximate fair value.  Our short-term borrowings are classified within Level 2 of the fair value hierarchy.  See Note 6 for our long-term debt fair values.
 
14.                                Earnings Per Share
 
The following table presents the calculation of Pinnacle West’s basic and diluted earnings per share for continuing operations attributable to common shareholders for the years ended December 31, 2014 , 2013 and 2012 (in thousands, except per share amounts):

												
 	2014	 	2013	 	2012	
Income from continuing operations attributable to common shareholders	$	397,595		 	$	406,074		 	$	387,380		
Weighted average common shares outstanding — basic	110,626		 	109,984		 	109,510		
Net effect of dilutive securities:	 		 	 		 	 		
Contingently issuable performance shares and restricted stock units	552		 	822		 	1,017		
Weighted average common shares outstanding — diluted	111,178		 	110,806		 	110,527		
Earnings per average common share outstanding:	 	 	 	 	 	
Income from continuing operations attributable to common shareholders — basic	$	3.59		 	$	3.69		 	$	3.54		
Income from continuing operations attributable to common shareholders — diluted	$	3.58		 	$	3.66		 	$	3.50		

15.                                Stock-Based Compensation
 
Pinnacle West grants long-term incentive awards under the 2012 Long-Term Incentive Plan (“2012 Plan”) in the form of Stock Grants, Restricted Stock Units, Stock Units and Performance Shares and may grant restricted stock, dividend equivalents, performance share units, performance cash, incentive and non-qualified stock options, and stock appreciation rights.  The 2012 Plan, effective May 16, 2012, provides 4,595,500 common shares to be available for grant to eligible employees and members of the Board of Directors.  Awards made since 2012 were issued under the 2012 Plan, and prior awards from 2007 to 2011 were issued under the 2007 Long-Term Incentive Plan (“2007 Plan”).

Restricted Stock Unit Awards, Stock Unit Awards and Stock Grants
 
Stock grants issued to non-officer members of the Board of Directors in 2014 , 2013 and 2012 provided the members of the Board of Directors the option to elect to receive a stock grant, or to defer receipt until a later date and receive restricted stock units in 2012 and stock units in 2013 and 2014 in lieu of the stock grant.  The members of the Board of Directors who elect to defer may elect to receive payment in either stock, or 50% in cash and 50% in stock.  The members of the Board of Directors may elect to receive payments either as of

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the last business day of the month following the month in which they separate from service on the Board of Directors, or as of a specified date, which must be after December 31 of the year in which the grant was received.  The deferred restricted stock units and stock units accrue dividend rights, equal to the amount of dividends the Directors would have received had they directly owned stock equal to the number of vested restricted stock units or stock units from the date of grant to the date of payment plus interest compounded quarterly.  The dividends and interest are paid, based on the Director’s election, in either stock, or 50% in cash and 50% in stock.
 
Restricted stock units have been granted to officers and key employees in each year since 2008.  From 2008 through 2009, officers and key employees elected to receive payment in either cash or in fully transferable shares of stock, in exchange for each restricted stock unit on pre-established valuation dates.  From 2010 through 2014, officers and key employees elected to receive payment in either stock, or 50% in cash and 50% in stock.
 
Restricted stock unit awards vest and settle over a 4 -year period.  In addition, officers and key employees accrue dividend rights on vested restricted stock units, equal to the amount of dividends that they would have received had they directly owned stock, equal to the number of vested restricted stock units from the date of grant to the date of payment plus interest compounded quarterly.  The dividends and interest for the 2008 and 2009 awards were paid in cash.  The dividends and interest for the 2010 through 2014 awards are paid in the same form as the restricted stock unit payment election.  Restricted stock unit awards are accounted for as a liability award, with compensation cost initially calculated on the date of grant using the Company’s closing stock price, and remeasured at each balance sheet date.  Compensation expense for retirement eligible participants is recognized immediately.
 
In December 2012, the Company granted a retention award of 50,617 restricted stock units to the Chairman of the Board, President, and Chief Executive Officer of Pinnacle West.  The award will vest and will be paid in shares of common stock on December 31, 2016, provided that he remains employed with the Company until the vesting date.  The award will accrue notional dividends equal to the amount of dividends that would have been received if the Chairman of the Board, President and Chief Executive Officer had directly owned one share of Pinnacle West common stock for each restricted stock unit held from the grant date to each dividend payment date.  The award can be increased up to an additional 33,745 restricted stock units payable in stock if certain performance requirements are met.
 
A grant of restricted stock unit awards was made to officers of the company on February 15, 2011, payable solely in shares of common stock upon the officer’s retirement or other separation of employment.  This award vested 50% on February 15, 2013 and 25% on February 15, 2014. The remaining award will vest 25% on February 15, 2015, provided that the officer remains employed on such date.  The officers will also accrue notional dividends equal to the amount of dividends that they would have received if they had directly owned one share of Pinnacle West common stock for each restricted stock unit held from the grant date to each dividend payment date.  Each additional restricted stock unit will proportionally vest on the same remaining vesting schedule that applies to the original restricted stock unit.
 
The following table is a summary of granted restricted stock units, stock units and stock grants and the weighted-average fair value for the 3 years ended 2014 , 2013 and 2012 : 

												
 	2014	 	2013	 	2012	
Units granted	130,273		 	129,620		 	202,278		
Grant date fair value (a) 	$	54.91		 	$	55.21		 	$	49.31		

(a)	Weighted-average grant date fair value.	

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The following table is a summary of the status of restricted stock units, stock units and stock grants, as of December 31, 2014 and changes during the year.  This table represents only the stock portion of restricted stock units and stock units, per the election on payment discussed in the paragraph above:

	
								
Nonvested shares	 	Shares	 	Weighted-Average
Grant Date
Fair Value	
Nonvested at January 1, 2014	 	397,976		 	$	47.74		
Granted	 	130,273		 	54.91		
Vested	 	(161,283	)	 	45.55		
Forfeited	 	(13,067	)	 	51.53		
Nonvested at December 31, 2014	 	353,899		 	51.23		
 
The amount of cash required to settle the payments on restricted stock units is (dollars in millions):

	
													
Year	 	2014	 	2013	 	2012	
2008 Grant	 	$	—		 	$	—		 	$	1.9		
2009 Grant	 	—		 	3.0		 	1.7		
2010 Grant	 	2.3		 	2.3		 	0.6		
2011 Grant	 	2.4		 	2.5		 	0.7		
2012 Grant	 	2.1		 	2.2		 	—		
2013 Grant	 	2.1		 	—		 	—		
 
Performance Share Awards
 
Performance share awards have been granted to officers and key employees under the 2012 Plan since 2012 and under the 2007 Plan from 2009 to 2011.  Performance share awards contain two performance element criteria that affect the number of shares received after the end of a three -year performance period if performance criteria conditions are met.
 
The 2014 , 2013 and 2012 performance share grant criteria is based 50% upon the percentile ranking of Pinnacle West’s total shareholder return at the end of the three-year performance period, as compared with the total shareholder return of all relevant companies in a specified utility index and the other 50% is based upon six non-financial separate performance metrics.  The exact number of shares issued will vary from 0% to 200% of the target award.  Shares received include dividend rights paid in stock equal to the amount of dividends that they would have received had they directly owned stock, equal to the number of vested performance shares from the date of grant to the date of payment plus interest compounded quarterly.
 
Performance share awards are accounted for as liability awards, with compensation cost initially calculated on the date of grant using the Company’s closing stock price, and remeasured at each balance sheet date.  Compensation expense for retirement eligible participants is recognized immediately.  Management also evaluates the probability of meeting the performance criteria at each balance sheet date.  If performance criteria are not achieved, no compensation cost is recognized and any previously recognized compensation cost is reversed.
 
The following table is a summary of the performance shares granted and the weighted-average fair value for the three years ended 2014 , 2013 and 2012 :

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 	2014	 	2013	 	2012	
Units granted (a)	166,244		 	176,332		 	185,878		
Grant date fair value (b)	$	54.86		 	$	55.45		 	$	47.40		

(a)                                  Reflects the target payout level.
(b)                                  Weighted-average grant date fair value.
 
The following table is a summary of the status of performance shares as of December 31, 2014 and changes during the year:

	
								
Nonvested shares (a)	 	Shares	 	Weighted-Average
Grant Date
Fair Value	
Nonvested at January 1, 2014	 	344,396		 	$	51.13		
Granted	 	166,244		 	54.86		
Increase in performance factor	 	86,558		 	47.40		
Vested	 	(258,224	)	 	47.40		
Forfeited	 	(14,744	)	 	53.30		
Nonvested at December 31, 2014	 	324,230		 	54.92		

		
(a)	Nonvested shares are reflected at target payout level.  The increase or decrease in the number of shares from the target level to the estimated actual payout level is included in the increase for performance factor amounts in the year the award vests.	
 
Stock Options
 
The Company has not granted stock options since 2004 and has no stock options outstanding.

As of December 31, 2014 , there was $15 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the plans.  That cost is expected to be recognized over a weighted-average period of 2 years.  The total fair value of shares vested during 2014 , 2013 and 2012 was $20 million , $20 million and $19 million , respectively.
 
The compensation cost that has been charged against Pinnacle West’s income for share-based compensation plans was $33 million in 2014 , $25 million in 2013 , and $32 million in 2012 .  The compensation cost that Pinnacle West has capitalized is immaterial for all years.  Pinnacle West’s total income tax benefit recognized in the Consolidated Statements of Income for share-based compensation arrangements was $13 million in 2014 , $10 million in 2013 , and $13 million in 2012 .  APS’s share of compensation cost that has been charged against income was $33 million in 2014 , $25 million in 2013 , and $32 million in 2012 .
 
Pinnacle West’s current policy is to issue new shares to satisfy share requirements for stock compensation plans, and it does not expect to repurchase any shares except to satisfy tax withholding obligations upon the vesting of restricted stock units and performance shares.

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16.                                Derivative Accounting
 
We are exposed to the impact of market fluctuations in the commodity price and transportation costs of electricity, natural gas, coal, emissions allowances and in interest rates.  We manage risks associated with market volatility by utilizing various physical and financial derivative instruments, including futures, forwards, options and swaps.  As part of our overall risk management program, we may use derivative instruments to hedge purchases and sales of electricity and fuels.  Derivative instruments that meet certain hedge accounting criteria may be designated as cash flow hedges and are used to limit our exposure to cash flow variability on forecasted transactions.  The changes in market value of such instruments have a high correlation to price changes in the hedged transactions.  We also enter into derivative instruments for economic hedging purposes.  While we believe the economic hedges mitigate exposure to fluctuations in commodity prices, these instruments have not been designated as accounting hedges.  Contracts that have the same terms (quantities, delivery points and delivery periods) and for which power does not flow are netted, which reduces both revenues and fuel and purchased power costs in our Consolidated Statements of Income, but does not impact our financial condition, net income or cash flows.
 
On June 1, 2012, we elected to discontinue cash flow hedge accounting treatment for the significant majority of our contracts that had previously been designated as cash flow hedges.  This discontinuation is due to changes in PSA recovery (see Note 3), which now allows for 100% deferral of the unrealized gains and losses relating to these contracts.  For those contracts that were de-designated, all changes in fair value after May 31, 2012 are no longer recorded through OCI, but are deferred through the PSA.  The amounts previously recorded in accumulated OCI relating to these instruments will remain in accumulated OCI, and will transfer to earnings in the same period or periods during which the hedged transaction affects earnings or sooner if we determine it is probable that the forecasted transaction will not occur.  When amounts have been reclassified from accumulated OCI to earnings, they will be subject to deferral in accordance with the PSA.  Cash flow hedge accounting treatment will continue for a limited number of contracts that are not subject to PSA recovery.
 
Our derivative instruments, excluding those qualifying for a scope exception, are recorded on the balance sheet as an asset or liability and are measured at fair value.  See Note 13 for a discussion of fair value measurements.  Derivative instruments may qualify for the normal purchases and normal sales scope exception if they require physical delivery and the quantities represent those transacted in the normal course of business.  Derivative instruments qualifying for the normal purchases and sales scope exception are accounted for under the accrual method of accounting and excluded from our derivative instrument discussion and disclosures below.
 
Hedge effectiveness is the degree to which the derivative instrument contract and the hedged item are correlated and is measured based on the relative changes in fair value of the derivative instrument contract and the hedged item over time.  We assess hedge effectiveness both at inception and on a continuing basis.  These assessments exclude the time value of certain options.  For accounting hedges that are deemed an effective hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of OCI and reclassified into earnings in the same period during which the hedged transaction affects earnings.  We recognize in current earnings, subject to the PSA, the gains and losses representing hedge ineffectiveness, and the gains and losses on any hedge components which are excluded from our effectiveness assessment.  As cash flow hedge accounting has been discontinued for the significant majority of our contracts, after May 31, 2012, effectiveness testing is no longer being performed for these contracts.
 
For its regulated operations, APS defers for future rate treatment 100% of the unrealized gains and losses on derivatives pursuant to the PSA mechanism that would otherwise be recognized in income.  Realized

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gains and losses on derivatives are deferred in accordance with the PSA to the extent the amounts are above or below the Base Fuel Rate (see Note 3).  Gains and losses from derivatives in the following tables represent the amounts reflected in income before the effect of PSA deferrals.

As of December 31, 2014 , we had the following outstanding gross notional volume of derivatives, which represent both purchases and sales (does not reflect net position):

	
						
Commodity	 	Quantity	
Power	 	3,915		 	GWh	
Gas	 	136		 	Bcf (a)	
		
(a)	“Bcf” is Billion Cubic Feet.	
 
Gains and Losses from Derivative Instruments
 
The following table provides information about gains and losses from derivative instruments in designated cash flow accounting hedging relationships during the years ended December 31, 2014 , 2013 and 2012 (dollars in thousands):

	
															
 	 	Financial Statement 	 	Year Ended
December 31,	
Commodity Contracts	 	Location	 	2014	 	2013	 	2012	
Loss Recognized in OCI on Derivative Instruments (Effective Portion)	 	OCI — derivative instruments	 	$	(372	)	 	$	(353	)	 	$	(37,663	)	
Loss Reclassified from Accumulated OCI into Income (Effective Portion Realized) (a)	 	Fuel and purchased power (b)	 	(21,415	)	 	(44,219	)	 	(99,007	)	
Gain Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)	 	Fuel and purchased power (b)	 	—		 	—		 	117		

		
(a)	During the years ended December 31, 2014 , 2013 , and 2012 , we had zero , zero , and $1.8 million of losses reclassified from accumulated OCI to earnings related to discontinued cash flow hedges.	
		
(b)	Amounts are before the effect of PSA deferrals.	
 
During the next twelve months, we estimate that a net loss of $6 million before income taxes will be reclassified from accumulated OCI as an offset to the effect of market price changes for the related hedged transactions.  In accordance with the PSA, substantially all of these amounts will be recorded as either a regulatory asset or liability and have no immediate effect on earnings.

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The following table provides information about gains and losses from derivative instruments not designated as accounting hedging instruments during the years ended December 31, 2014 , 2013 and 2012 (dollars in thousands):

	
															
 	 	Financial Statement 	 	Year Ended
December 31,	
Commodity Contracts	 	Location	 	2014	 	2013	 	2012	
Net Gain Recognized in Income	 	Operating revenues	 	$	324		 	$	289		 	$	103		
Net Loss Recognized in Income	 	Fuel and purchased power (a)	 	(66,367	)	 	(10,449	)	 	(2,747	)	
Total	 	 	 	$	(66,043	)	 	$	(10,160	)	 	$	(2,644	)	

		
(a)	Amounts are before the effect of PSA deferrals.	
 
Derivative Instruments in the Consolidated Balance Sheets
 
Our derivative transactions are typically executed under standardized or customized agreements, which include collateral requirements and, in the event of a default, would allow for the netting of positive and negative exposures associated with a single counterparty.  Agreements that allow for the offsetting of positive and negative exposures associated with a single counterparty are considered master netting arrangements.  Transactions with counterparties that have master netting arrangements are offset and reported net on the Consolidated Balance Sheets.  Transactions that do not allow for offsetting of positive and negative positions are reported gross on the Consolidated Balance Sheets.
 
We do not offset a counterparty’s current derivative contracts with the counterparty’s non-current derivative contracts, although our master netting arrangements would allow current and non-current positions to be offset in the event of a default.  Additionally, in the event of a default, our master netting arrangements would allow for the offsetting of all transactions executed under the master netting arrangement.  These types of transactions may include non-derivative instruments, derivatives qualifying for scope exceptions, trade receivables and trade payables arising from settled positions, and other forms of non-cash collateral (such as letters of credit).  These types of transactions are excluded from the offsetting tables presented below.
 
The significant majority of our derivative instruments are not currently designated as hedging instruments.  The Consolidated Balance Sheets as of December 31, 2014 and December 31, 2013 , include gross liabilities of $4 million and $5 million , respectively, of derivative instruments designated as hedging instruments.

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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables provide information about the fair value of our risk management activities reported on a gross basis, and the impacts of offsetting as of December 31, 2014 and 2013 .  These amounts relate to commodity contracts and are located in the assets and liabilities from risk management activities lines of our Consolidated Balance Sheets.

	
																					
As of December 31, 2014:
(dollars in thousands)	 	Gross 
Recognized 
Derivatives
  (a)	 	Amounts 
Offset
(b)	 	Net
  Recognized
  Derivatives	 	Other
  (c)	 	Amount 
Reported on 
Balance Sheet	
Current Assets	 	$	28,562		 	$	(15,127	)	 	$	13,435		 	$	350		 	$	13,785		
Investments and Other Assets	 	24,810		 	(7,190	)	 	17,620		 	—		 	17,620		
Total Assets	 	53,372		 	(22,317	)	 	31,055		 	350		 	31,405		
 	 	 	 	 	 	 	 	 	 	 	
Current Liabilities	 	(86,062	)	 	33,829		 	(52,233	)	 	(7,443	)	 	(59,676	)	
Deferred Credits and Other	 	(82,990	)	 	32,388		 	(50,602	)	 	—		 	(50,602	)	
Total Liabilities	 	(169,052	)	 	66,217		 	(102,835	)	 	(7,443	)	 	(110,278	)	
Total	 	$	(115,680	)	 	$	43,900		 	$	(71,780	)	 	$	(7,093	)	 	$	(78,873	)	

		
(a)	All of our gross recognized derivative instruments were subject to master netting arrangements.	
		
(b)	Includes cash collateral provided to counterparties of $43,900 .	
		
(c)	Represents cash collateral and margin that is not subject to offsetting.  Amounts relate to non-derivative instruments, derivatives qualifying for scope exceptions, or collateral and margin posted in excess of the recognized derivative instrument.  Includes cash collateral received from counterparties of $7,443 , and cash margin provided to counterparties of $350 .	

	
																					
As of December 31, 2013:
(dollars in thousands)	 	Gross
  Recognized
  Derivatives
  (a)	 	Amounts
Offset 
(b)	 	Net
  Recognized
  Derivatives	 	Other
  (c)	 	Amount
  Reported on
  Balance Sheet	
Current Assets	 	$	24,587		 	$	(7,425	)	 	$	17,162		 	$	7		 	$	17,169		
Investments and Other Assets	 	25,364		 	(1,549	)	 	23,815		 	—		 	23,815		
Total Assets	 	49,951		 	(8,974	)	 	40,977		 	7		 	40,984		
 	 	 	 	 	 	 	 	 	 	 	
Current Liabilities	 	(50,540	)	 	26,166		 	(24,374	)	 	(7,518	)	 	(31,892	)	
Deferred Credits and Other	 	(72,123	)	 	1,808		 	(70,315	)	 	—		 	(70,315	)	
Total Liabilities	 	(122,663	)	 	27,974		 	(94,689	)	 	(7,518	)	 	(102,207	)	
Total	 	$	(72,712	)	 	$	19,000		 	$	(53,712	)	 	$	(7,511	)	 	$	(61,223	)	

		
(a)	All of our gross recognized derivative instruments were subject to master netting arrangements.	
		
(b)	Includes cash collateral provided to counterparties of $19,000 .	
		
(c)	Represents cash collateral and margin that is not subject to offsetting.  Amounts relate to non-derivative instruments, derivatives qualifying for scope exceptions, or collateral and margin posted in excess of the recognized derivative instrument.  Includes cash collateral received from counterparties of $7,518 , and cash margin provided to counterparties of $7 . 	

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Credit Risk and Credit Related Contingent Features
 
We are exposed to losses in the event of nonperformance or nonpayment by counterparties.  We have risk management contracts with many counterparties, including one counterparty for which our exposure represents approximately 90% of Pinnacle West’s $31 million of risk management assets as of December 31, 2014 .  This exposure relates to a long-term traditional wholesale contract with a counterparty that has a high credit quality.  Our risk management process assesses and monitors the financial exposure of all counterparties.  Despite the fact that the great majority of trading counterparties’ debt is rated as investment grade by the credit rating agencies, there is still a possibility that one or more of these companies could default, resulting in a material impact on consolidated earnings for a given period.  Counterparties in the portfolio consist principally of financial institutions, major energy companies, municipalities and local distribution companies.  We maintain credit policies that we believe minimize overall credit risk to within acceptable limits.  Determination of the credit quality of our counterparties is based upon a number of factors, including credit ratings and our evaluation of their financial condition.  To manage credit risk, we employ collateral requirements and standardized agreements that allow for the netting of positive and negative exposures associated with a single counterparty.  Valuation adjustments are established representing our estimated credit losses on our overall exposure to counterparties.
 
Certain of our derivative instrument contracts contain credit-risk-related contingent features including, among other things, investment grade credit rating provisions, credit-related cross-default provisions, and adequate assurance provisions.  Adequate assurance provisions allow a counterparty with reasonable grounds for uncertainty to demand additional collateral based on subjective events and/or conditions.  For those derivative instruments in a net liability position, with investment grade credit contingencies, the counterparties could demand additional collateral if our debt credit rating were to fall below investment grade (below BBB- for Standard & Poor’s or Fitch or Baa3 for Moody’s).
 
The following table provides information about our derivative instruments that have credit-risk-related contingent features at December 31, 2014 (dollars in millions):

	
				
 	December 31, 2014	
Aggregate Fair Value of Derivative Instruments in a Net Liability Position	$	169		
Cash Collateral Posted	44		
Additional Cash Collateral in the Event Credit-Risk Related Contingent Features were Fully Triggered (a)	80		

		
(a)	This amount is after counterparty netting and includes those contracts which qualify for scope exceptions, which are excluded from the derivative details above.	
 
We also have energy related non-derivative instrument contracts with investment grade credit-related contingent features, which could also require us to post additional collateral of approximately $175 million if our debt credit ratings were to fall below investment grade.

17.                                Other Income and Other Expense
 
The following table provides detail of other income and other expense for 2014 , 2013 and 2012 (dollars in thousands):

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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	
												
 	2014	 	2013	 	2012	
Other income:	 		 	 		 	 		
Interest income	$	1,010		 	$	1,629		 	$	1,239		
Debt return on the purchase of Four Corners units 4 & 5	8,386		 	—		 	—		
Miscellaneous	212		 	75		 	367		
Total other income	$	9,608		 	$	1,704		 	$	1,606		
Other expense:	 		 	 		 	 		
Non-operating costs	$	(9,657	)	 	$	(8,207	)	 	$	(7,777	)	
Investment loss — net	(9,426	)	 	(3,711	)	 	(2,453	)	
Miscellaneous	(2,663	)	 	(4,106	)	 	(9,612	)	
Total other expense	$	(21,746	)	 	$	(16,024	)	 	$	(19,842	)	
 
18.                                Palo Verde Sale Leaseback Variable Interest Entities
 
In 1986, APS entered into agreements with three separate VIE lessor trusts in order to sell and lease back interests in Palo Verde Unit 2 and related common facilities.  APS will pay approximately $49 million in 2015 related to these leases.  The lease agreements include fixed rate renewal periods, which give APS the ability to utilize the assets for a significant portion of the asset’s economic life, and therefore provide APS with the power to direct activities of the VIEs that most significantly impact the VIEs’ economic performance.  Predominately due to the fixed rate renewal periods, APS has been deemed the primary beneficiary of these VIEs and therefore consolidates the VIEs.
 
On July 7, 2014, APS notified the lessor trust entities of APS’s intent to exercise the fixed rate lease renewal options.  The length of the renewal options will result in APS retaining the assets through 2023 under one lease and 2033 under the other two leases. APS will be required to make lease payments of approximately $23 million annually for the period 2016 through 2023, and about $16 million annually for the period 2024 through 2033. At the end of the lease renewal periods, APS will have the option to purchase the leased assets at their fair market value, extend the leases for up to two years , or return the assets to the lessors.
 
As a result of consolidation, we eliminate lease accounting and instead recognize depreciation and interest expense, resulting in an increase in net income for 2014 , 2013 and 2012 of $26 million , $34 million and $32 million , respectively, entirely attributable to the noncontrolling interests.  Income attributable to Pinnacle West shareholders remains the same.  The July 7, 2014 lease extension results in the VIEs accounting for the transaction as a new lease agreement. Consolidation of these VIEs also results in changes to our Consolidated Statements of Cash Flows, but does not impact net cash flows.

Our Consolidated Balance Sheets at December 31, 2014 and December 31, 2013 include the following amounts relating to the VIEs (in millions):

	
								
 	December 31, 2014	 	December 31, 2013	
Palo Verde sale leaseback property plant and equipment, net of accumulated depreciation	$	121		 	$	125		
Current maturities of long-term debt	13		 	26		
Long-term debt excluding current maturities	—		 	13		
Equity-Noncontrolling interests	152		 	146		
 
Assets of the VIEs are restricted and may only be used to settle the VIEs’ debt obligations and for payment to the noncontrolling interest holders.  Other than the VIEs’ assets reported on our consolidated

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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

financial statements, the creditors of the VIEs have no other recourse to the assets of APS or Pinnacle West, except in certain circumstances, such as a default by APS under the lease.
 
APS is exposed to losses relating to these VIEs upon the occurrence of certain events that APS does not consider reasonably likely to occur.  Under certain circumstances (for example, the 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 VIEs’ noncontrolling equity participants, assume the VIEs’ debt, and take title to the leased Palo Verde Unit 2 interests which, if appropriate, may be required to be written down in value.  If such an event had occurred as of December 31, 2014 , APS would have been required to pay the noncontrolling equity participants approximately $123 million and assume $13 million of debt.  Since APS consolidates these VIEs, the debt APS would be required to assume is already reflected in our Consolidated Balance Sheets.
 
For regulatory ratemaking purposes, the leases are treated as operating leases and, as a result, we have recorded a regulatory asset relating to the arrangements.
 
19.                                Nuclear Decommissioning Trusts
 
To fund the costs APS expects to incur to decommission Palo Verde, APS established external decommissioning trusts in accordance with NRC regulations.  Third-party investment managers are authorized to buy and sell securities per stated investment guidelines.  The trust funds are invested in fixed income securities and equity securities.  APS classifies investments in decommissioning trust funds as available for sale.  As a result, we record the decommissioning trust funds at their fair value on our Consolidated Balance Sheets.  See Note 13 for a discussion of how fair value is determined and the classification of the nuclear decommissioning trust investments within the fair value hierarchy.  Because of the ability of APS to recover decommissioning costs in rates and in accordance with the regulatory treatment for decommissioning trust funds, we have deferred realized and unrealized gains and losses (including other-than-temporary impairments on investment securities) in other regulatory liabilities .  The following table includes the unrealized gains and losses based on the original cost of the investment and summarizes the fair value of APS’s nuclear decommissioning trust fund assets at December 31, 2014 and December 31, 2013 (dollars in millions):

	
												
 	Fair Value	 	Total 
Unrealized 
Gains	 	Total 
Unrealized 
Losses	
December 31, 2014	 		 	 		 	 		
Equity securities	$	310		 	$	159		 	$	—		
Fixed income securities	411		 	17		 	(1	)	
Net payables (a)	(7	)	 	—		 	—		
Total	$	714		 	$	176		 	$	(1	)	

	
												
 	Fair Value	 	Total 
Unrealized 
Gains	 	Total 
Unrealized 
Losses	
December 31, 2013	 		 	 		 	 		
Equity securities	$	272		 	$	129		 	$	—		
Fixed income securities	373		 	11		 	(6	)	
Net payables (a)	(3	)	 	—		 	—		
Total	$	642		 	$	140		 	$	(6	)	

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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

		
(a)	Net payables relate to pending purchases and sales of securities.	
 
The costs of securities sold are determined on the basis of specific identification.  The following table sets forth approximate gains and losses and proceeds from the sale of securities by the nuclear decommissioning trust funds (dollars in millions):

	
												
 	Year Ended December 31,	
 	2014	 	2013	 	2012	
Realized gains	$	5		 	$	6		 	$	7		
Realized losses	(5	)	 	(7	)	 	(4	)	
Proceeds from the sale of securities (a)	356		 	446		 	418		

		
(a)	Proceeds are reinvested in the trust.	
 
The fair value of fixed income securities, summarized by contractual maturities, at December 31, 2014 is as follows (dollars in millions):

	
				
 	Fair Value	
Less than one year	$	14		
1 year – 5 years	116		
5 years – 10 years	122		
Greater than 10 years	159		
Total	$	411		

20.                                Changes in Accumulated Other Comprehensive Loss
 
The following table shows the changes in accumulated other comprehensive loss, including reclassification adjustments, net of tax, by component for the year ended December 31, 2014 (dollars in thousands): 

																
 	Year Ended December 31, 2014	
 	Derivative 
Instruments	 	 	 	Pension and 
Other 
Postretirement 
Benefits	 	 	 	Total	
Beginning balance	$	(23,058	)	 	 	 	$	(54,995	)	 	 	 	$	(78,053	)	
OCI (loss) before reclassifications	(810	)	 	 	 	(5,419	)	 	 	 	(6,229	)	
Amounts reclassified from accumulated other comprehensive loss	13,483		 	(a)	 	2,658		 	(b)	 	16,141		
Net current period OCI (loss)	12,673		 	 	 	(2,761	)	 	 	 	9,912		
Ending balance	$	(10,385	)	 	 	 	$	(57,756	)	 	 	 	$	(68,141	)	

(a)	These amounts represent realized gains and losses and are included in the computation of fuel and purchased power costs and are subject to the PSA.  See Note 16.	
		
(b)	These amounts primarily represent amortization of actuarial loss, and are included in the computation of net periodic pension cost.  See Note 7.	

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The following table shows the changes in accumulated other comprehensive loss, including reclassification adjustments, net of tax, by component for the year ended December 31, 2013 (dollars in thousands): 

																
 	Year Ended December 31, 2013	
 	Derivative 
Instruments	 	 	 	Pension and 
Other 
Postretirement 
Benefits	 	 	 	Total	
Beginning balance	$	(49,592	)	 	 	 	$	(64,416	)	 	 	 	$	(114,008	)	
OCI (loss) before reclassifications	(213	)	 	 	 	5,594		 	 	 	5,381		
Amounts reclassified from accumulated other comprehensive loss	26,747		 	(a)	 	3,827		 	(b)	 	30,574		
Net current period OCI	26,534		 	 	 	9,421		 	 	 	35,955		
Ending balance	$	(23,058	)	 	 	 	$	(54,995	)	 	 	 	$	(78,053	)	

(a)	These amounts represent realized gains and losses and are included in the computation of fuel and purchased power costs and are subject to the PSA.  See Note 16.	
		
(b)	These amounts primarily represent amortization of actuarial loss, and are included in the computation of net periodic pension cost.  See Note 7.	

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MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
(ARIZONA PUBLIC SERVICE COMPANY)

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f), for APS.  Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on our evaluation under the framework in Internal Control — Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2014.  The effectiveness of our internal control over financial reporting as of December 31, 2014 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein and also relates to the Company’s financial statements.
 
February 20, 2015

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholder of
Arizona Public Service Company
Phoenix, Arizona
 
We have audited the accompanying consolidated balance sheets of Arizona Public Service Company and subsidiary (the “Company”) as of December 31, 2014 and 2013 , and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2014 .  Our audits also included the financial statement schedule listed in the Index at Item 15.  We also have audited the Company’s internal control over financial reporting as of December 31, 2014 , based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.  The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting.  Our responsibility is to express an opinion on these financial statements and financial statement schedule and an opinion on the Company’s internal control over financial reporting based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.  Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
 
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.  Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become

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inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Arizona Public Service Company and subsidiary as of December 31, 2014 and 2013 , and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 , in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.  Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014 , based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

	
		
/s/ Deloitte & Touche LLP	 	
 	 	
Phoenix, Arizona	 	
February 20, 2015	 	

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ARIZONA PUBLIC SERVICE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands)

	
												
 	Year Ended December 31,	
 	2014	 	2013	 	2012	
 	 	 	 	 	 	
ELECTRIC OPERATING REVENUES	$	3,488,946		 	$	3,451,251		 	$	3,293,489		
 	 	 	 	 	 	
OPERATING EXPENSES	 		 	 		 	 		
Fuel and purchased power	1,179,829		 	1,095,709		 	994,790		
Operations and maintenance	882,442		 	897,824		 	873,916		
Depreciation and amortization	417,264		 	415,612		 	404,242		
Income taxes (Notes 4 and S-1)	245,036		 	256,864		 	256,600		
Taxes other than income taxes	171,583		 	163,377		 	158,412		
Total	2,896,154		 	2,829,386		 	2,687,960		
OPERATING INCOME	592,792		 	621,865		 	605,529		
 	 	 	 	 	 	
OTHER INCOME (DEDUCTIONS)	 		 	 		 	 		
Income taxes (Notes 4 and S-1)	7,676		 	11,769		 	12,204		
Allowance for equity funds used during construction (Note 1)	30,790		 	25,581		 	22,436		
Other income (Note S-3)	11,295		 	3,896		 	2,868		
Other expense (Note S-3)	(13,403	)	 	(20,449	)	 	(21,150	)	
Total	36,358		 	20,797		 	16,358		
 	 	 	 	 	 	
INTEREST EXPENSE	 		 	 		 	 		
Interest on long-term debt	186,323		 	188,011		 	198,398		
Interest on short-term borrowings	6,796		 	6,605		 	7,135		
Debt discount, premium and expense	4,168		 	4,046		 	4,215		
Allowance for borrowed funds used during construction (Note 1)	(15,457	)	 	(14,861	)	 	(14,971	)	
Total	181,830		 	183,801		 	194,777		
 	 	 	 	 	 	
NET INCOME	447,320		 	458,861		 	427,110		
 	 	 	 	 	 	
Less: Net income attributable to noncontrolling interests (Note 18)	26,101		 	33,892		 	31,613		
 	 	 	 	 	 	
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDER	$	421,219		 	$	424,969		 	$	395,497		
 
See Notes to Pinnacle West’s Consolidated Financial Statements and Supplemental Notes to Arizona Public Service Company’s Consolidated Financial Statements.

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ARIZONA PUBLIC SERVICE COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)

	
												
 	Year Ended December 31,	
 	2014	 	2013	 	2012	
NET INCOME	$	447,320		 	$	458,861		 	$	427,110		
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX	 		 	 		 	 		
Derivative instruments:	 		 	 		 	 		
Net unrealized loss, net of tax benefit (expense) of $(438), $140, and $14,888 (Note 16)	(809	)	 	(214	)	 	(22,775	)	
Reclassification of net realized loss, net of tax benefit of $7,932, $17,472, and $39,119 (Note 16)	13,483		 	26,747		 	59,888		
Pension and other postretirement benefits activity, net of tax (expense) benefit of $4,655, $(6,003), and $408 (Note 7)	(7,635	)	 	9,190		 	(617	)	
Total other comprehensive income	5,039		 	35,723		 	36,496		
COMPREHENSIVE INCOME	452,359		 	494,584		 	463,606		
Less: Comprehensive income attributable to noncontrolling interests	26,101		 	33,892		 	31,613		
COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON SHAREHOLDER	$	426,258		 	$	460,692		 	$	431,993		
 
See Notes to Pinnacle West’s Consolidated Financial Statements and Supplemental Notes to APS’s Consolidated Financial Statements.

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ARIZONA PUBLIC SERVICE COMPANY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)

	
								
 	December 31,	
 	2014	 	2013	
ASSETS	 		 	 		
PROPERTY, PLANT AND EQUIPMENT (Notes 1, 6 and 9)	 		 	 		
Plant in service and held for future use	$	15,539,811		 	$	15,196,598		
Accumulated depreciation and amortization	(5,394,650	)	 	(5,296,501	)	
Net	10,145,161		 	9,900,097		
Construction work in progress	682,807		 	581,369		
Palo Verde sale leaseback, net of accumulated depreciation of $229,795 and $225,925 (Note 18)	121,255		 	125,125		
Intangible assets, net of accumulated amortization of $489,538 and $439,703	119,600		 	157,534		
Nuclear fuel, net of accumulated amortization of $143,554 and $146,057	125,201		 	124,557		
Total property, plant and equipment	11,194,024		 	10,888,682		
INVESTMENTS AND OTHER ASSETS	 		 	 		
Nuclear decommissioning trust (Notes 13 and 19)	713,866		 	642,007		
Assets from risk management activities (Note 16)	17,620		 	23,815		
Other assets	33,362		 	33,709		
Total investments and other assets	764,848		 	699,531		
CURRENT ASSETS	 		 	 		
Cash and cash equivalents	4,515		 	3,725		
Customer and other receivables	297,712		 	299,055		
Accrued unbilled revenues	100,533		 	96,796		
Allowance for doubtful accounts	(3,094	)	 	(3,203	)	
Materials and supplies (at average cost)	218,889		 	221,682		
Fossil fuel (at average cost)	37,097		 	38,028		
Income tax receivable	—		 	135,179		
Assets from risk management activities (Note 16)	13,785		 	17,169		
Deferred fuel and purchased power regulatory asset (Note 3)	6,926		 	20,755		
Other regulatory assets (Note 3)	129,808		 	76,388		
Deferred income taxes (Notes 4 and S-1)	55,253		 	—		
Other current assets	38,693		 	39,153		
Total current assets	900,117		 	944,727		
DEFERRED DEBITS	 		 	 		
Regulatory assets (Notes 1, 3, 4 and S-1)	1,054,087		 	711,712		
Assets for other postretirement benefits (Note 7)	149,260		 	—		
Unamortized debt issue costs	24,642		 	21,860		
Other	128,026		 	114,865		
Total deferred debits	1,356,015		 	848,437		
TOTAL ASSETS	$	14,215,004		 	$	13,381,377		
 
See Notes to Pinnacle West’s Consolidated Financial Statements and Supplemental Notes to APS’s Consolidated Financial Statements.

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ARIZONA PUBLIC SERVICE COMPANY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)

	
								
 	December 31,	
 	2014	 	2013	
LIABILITIES AND EQUITY	 		 	 		
CAPITALIZATION	 		 	 		
Common stock	$	178,162		 	$	178,162		
Additional paid-in capital	2,379,696		 	2,379,696		
Retained earnings	1,968,718		 	1,804,398		
Accumulated other comprehensive (loss):	 		 	 		
Pension and other postretirement benefits (Note 7)	(37,948	)	 	(30,313	)	
Derivative instruments (Note 16)	(10,385	)	 	(23,059	)	
Total shareholder equity	4,478,243		 	4,308,884		
Noncontrolling interests (Note 18)	151,609		 	145,990		
Total equity	4,629,852		 	4,454,874		
Long-term debt less current maturities (Note 6)	2,906,215		 	2,671,465		
Total capitalization	7,536,067		 	7,126,339		
CURRENT LIABILITIES	 		 	 		
Short-term borrowings (Note 5)	147,400		 	153,125		
Current maturities of long-term debt (Note 6)	383,570		 	540,424		
Accounts payable	289,930		 	281,237		
Accrued taxes (Notes 4 and S-1)	131,110		 	122,460		
Accrued interest	52,358		 	48,132		
Common dividends payable	65,800		 	62,500		
Customer deposits	72,307		 	76,101		
Deferred income taxes	—		 	2,033		
Liabilities from risk management activities (Note 16)	59,676		 	31,892		
Liabilities for asset retirements (Note 11)	32,462		 	32,896		
Regulatory liabilities (Note 3)	130,549		 	99,273		
Other current liabilities	167,302		 	130,774		
Total current liabilities	1,532,464		 	1,580,847		
DEFERRED CREDITS AND OTHER	 		 	 		
Deferred income taxes (Notes 4 and S-1)	2,571,365		 	2,347,724		
Regulatory liabilities (Notes 1, 3, 4, and S-1)	1,051,196		 	801,297		
Liability for asset retirements (Note 11)	358,288		 	313,833		
Liabilities for pension and other postretirement benefits (Note 7)	424,508		 	476,017		
Liabilities from risk management activities (Note 16)	50,602		 	70,315		
Customer advances	123,052		 	114,480		
Coal mine reclamation	198,292		 	207,453		
Deferred investment tax credit	178,607		 	152,361		
Unrecognized tax benefits (Notes 4 and S-1)	45,740		 	42,209		
Other	144,823		 	148,502		
Total deferred credits and other	5,146,473		 	4,674,191		
COMMITMENTS AND CONTINGENCIES (SEE NOTES)	 		 	 		
TOTAL LIABILITIES AND EQUITY	$	14,215,004		 	$	13,381,377		
 
See Notes to Pinnacle West’s Consolidated Financial Statements and Supplemental Notes to APS’s Consolidated Financial Statements.

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ARIZONA PUBLIC SERVICE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)

												
 	Year Ended December 31,	
 	2014	 	2013	 	2012	
CASH FLOWS FROM OPERATING ACTIVITIES	 		 	 		 	 		
Net income	$	447,320		 	$	458,861		 	$	427,110		
Adjustments to reconcile net income to net cash provided by operating activities:	 		 	 		 	 		
Depreciation and amortization including nuclear fuel	496,393		 	492,226		 	481,168		
Deferred fuel and purchased power	(26,927	)	 	21,678		 	71,573		
Deferred fuel and purchased power amortization	40,757		 	31,190		 	(116,716	)	
Allowance for equity funds used during construction	(30,790	)	 	(25,581	)	 	(22,436	)	
Deferred income taxes	155,401		 	278,101		 	202,159		
Deferred investment tax credit	26,246		 	52,542		 	41,579		
Change in derivative instruments fair value	339		 	534		 	(749	)	
Changes in current assets and liabilities:	 		 	 		 	 		
Customer and other receivables	(52,466	)	 	(46,552	)	 	12,914		
Accrued unbilled revenues	(3,737	)	 	(1,951	)	 	30,394		
Materials, supplies and fossil fuel	3,724		 	(11,878	)	 	(23,043	)	
Income tax receivable	135,179		 	(134,590	)	 	(2,280	)	
Other current assets	3,766		 	(17,112	)	 	(27,745	)	
Accounts payable	(2,355	)	 	47,870		 	(97,395	)	
Accrued taxes	8,650		 	5,760		 	7,330		
Other current liabilities	33,970		 	(9,005	)	 	6,070		
Change in margin and collateral accounts — assets	(343	)	 	993		 	2,216		
Change in margin and collateral accounts — liabilities	(24,975	)	 	12,355		 	137,785		
Change in long-term regulatory liabilities	59,618		 	64,473		 	13,539		
Change in long-term income tax receivable	—		 	137,665		 	(1,756	)	
Change in unrecognized tax benefits	2,778		 	(91,244	)	 	(2,583	)	
Change in other long-term assets	(65,521	)	 	(46,043	)	 	1,391		
Change in other long-term liabilities	(82,860	)	 	(25,601	)	 	34,854		
Net cash flow provided by operating activities	1,124,167		 	1,194,691		 	1,175,379		
CASH FLOWS FROM INVESTING ACTIVITIES	 		 	 		 	 		
Capital expenditures	(910,084	)	 	(1,016,322	)	 	(889,551	)	
Contributions in aid of construction	20,325		 	41,090		 	49,876		
Allowance for borrowed funds used during construction	(15,457	)	 	(14,861	)	 	(14,971	)	
Proceeds from nuclear decommissioning trust sales	356,195		 	446,025		 	417,603		
Investment in nuclear decommissioning trust	(373,444	)	 	(463,274	)	 	(434,852	)	
Other	347		 	(2,067	)	 	(1,099	)	
Net cash flow used for investing activities	(922,118	)	 	(1,009,409	)	 	(872,994	)	
CASH FLOWS FROM FINANCING ACTIVITIES	 		 	 		 	 		
Issuance of long-term debt	606,126		 	136,307		 	351,081		
Repayment of long-term debt	(527,578	)	 	(122,828	)	 	(529,286	)	
Short-term borrowings and payments — net	(5,725	)	 	60,950		 	92,175		
Dividends paid on common stock	(253,600	)	 	(242,100	)	 	(222,200	)	
Noncontrolling interests	(20,482	)	 	(17,385	)	 	(10,529	)	
Net cash flow used for financing activities	(201,259	)	 	(185,056	)	 	(318,759	)	
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	790		 	226		 	(16,374	)	
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR	3,725		 	3,499		 	19,873		
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	4,515		 	$	3,725		 	$	3,499		
Supplemental disclosure of cash flow information:	 		 	 		 	 		
Cash paid (received) during the year for:	 		 	 		 	 		
Income taxes, net of refunds	$	(86,054	)	 	$	7,524		 	$	1,196		
Interest, net of amounts capitalized	$	173,436		 	$	180,757		 	$	196,038		
Significant non-cash investing and financing activities:	 		 	 		 	 		
Accrued capital expenditures	$	44,712		 	$	33,184		 	$	26,208		
Dividends declared but not paid	$	65,800		 	$	62,500		 	$	59,800		
Liabilities assumed related to acquisition of SCE’s Four Corners’ interest	$	—		 	$	145,609		 	$	—		
 
See Notes to Pinnacle West’s Consolidated Financial Statements and Supplemental Notes to APS’s Consolidated Financial Statements.

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ARIZONA PUBLIC SERVICE COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(dollars in thousands)

																											
 	Common Stock	 	Additional Paid-In Capital	 	Retained Earnings	 	Accumulated Other Comprehensive Income (Loss)	 	Noncontrolling Interests	 	Total	
 	Shares	 	Amount	 	 	 	 	 	 	 	 	 	 	
Balance, December 31, 2011	71,264,947		 	$	178,162		 	$	2,379,696		 	$	1,510,740		 	$	(125,591	)	 	$	108,399		 	$	4,051,406		
Net income	 	 	 	 	 	 	395,497		 	 	 	31,613		 	427,110		
Other comprehensive income	 	 	 	 	 	 	 	 	36,496		 	 	 	36,496		
Dividends on common stock	 	 	 	 	 	 	(282,000	)	 	 	 	 	 	(282,000	)	
Net capital activities by noncontrolling interests	 	 	 	 	 	 	 	 	 	 	(10,529	)	 	(10,529	)	
Balance, December 31, 2012	71,264,947		 	178,162		 	2,379,696		 	1,624,237		 	(89,095	)	 	129,483		 	4,222,483		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	 	 	 	 	 	424,969		 	 	 	33,892		 	458,861		
Other comprehensive income	 	 	 	 	 	 	 	 	35,723		 	 	 	35,723		
Dividends on common stock	 	 	 	 	 	 	(244,800	)	 	 	 	 	 	(244,800	)	
Other	 	 	 	 	 	 	(8	)	 	 	 	 	 	(8	)	
Net capital activities by noncontrolling interests	 	 	 	 	 	 	 	 	 	 	(17,385	)	 	(17,385	)	
Balance, December 31, 2013	71,264,947		 	178,162		 	2,379,696		 	1,804,398		 	(53,372	)	 	145,990		 	4,454,874		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	 	 	 	 	 	421,219		 	 	 	26,101		 	447,320		
Other comprehensive income	 	 	 	 	 	 	 	 	5,039		 	 	 	5,039		
Dividends on common stock	 	 	 	 	 	 	(256,900	)	 	 	 	 	 	(256,900	)	
Other	 	 	 	 	 	 	1		 	 	 	 	 	1		
Net capital activities by noncontrolling interests	 	 	 	 	 	 	 	 	 	 	(20,482	)	 	(20,482	)	
Balance, December 31, 2014	71,264,947		 	$	178,162		 	$	2,379,696		 	$	1,968,718		 	$	(48,333	)	 	$	151,609		 	$	4,629,852		

See Notes to Pinnacle West’s Consolidated Financial Statements and Supplemental Notes to APS’s Consolidated Financial Statements.

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Certain notes to APS’s consolidated financial statements are combined with the notes to Pinnacle West’s consolidated financial statements.  Listed below are the consolidated notes to Pinnacle West’s consolidated financial statements, the majority of which also relate to APS’s consolidated financial statements.  In addition, listed below are the supplemental notes which are required disclosures for APS and should be read in conjunction with Pinnacle West’s Consolidated Notes.

	
				
 	Consolidated
Note
Reference	 	APS’s
Supplemental
Note
Reference	
Summary of Significant Accounting Policies	Note 1	 	—	
New Accounting Standards	Note 2	 	—	
Regulatory Matters	Note 3	 	—	
Income Taxes	Note 4	 	Note S-1	
Lines of Credit and Short-Term Borrowings	Note 5	 	—	
Long-Term Debt and Liquidity Matters	Note 6	 	—	
Retirement Plans and Other Benefits	Note 7	 	—	
Leases	Note 8	 	—	
Jointly-Owned Facilities	Note 9	 	—	
Commitments and Contingencies	Note 10	 	—	
Asset Retirement Obligations	Note 11	 	—	
Selected Quarterly Financial Data (Unaudited)	Note 12	 	Note S-2	
Fair Value Measurements	Note 13	 	—	
Earnings Per Share	Note 14	 	—	
Stock-Based Compensation	Note 15	 	—	
Derivative Accounting	Note 16	 	—	
Other Income and Other Expense	Note 17	 	Note S-3	
Palo Verde Sale Leaseback Variable Interest Entities	Note 18	 	—	
Nuclear Decommissioning Trusts	Note 19	 	—	
Changes in Accumulated Other Comprehensive Loss	Note 20	 	Note S-4	

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ARIZONA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

S-1.                            Income Taxes
 
APS is included in Pinnacle West’s consolidated tax return.  However, when Pinnacle West allocates income taxes to APS, it is done based upon APS’s taxable income computed on a stand-alone basis, in accordance with the tax sharing agreement.
 
Certain assets and liabilities are reported differently for income tax purposes than they are for financial statements purposes.  The tax effect of these differences is recorded as deferred taxes.  We calculate deferred taxes using currently enacted tax rates.
 
APS has recorded regulatory assets and regulatory liabilities related to income taxes on its Balance Sheets in accordance with accounting guidance for regulated operations.  The regulatory assets are for certain temporary differences, primarily the allowance for equity funds used during construction and pension and other postretirement benefits.  The regulatory liabilities primarily relate to deferred taxes resulting from investment tax credits ("ITCs") and the change in income tax rates.
 
In accordance with regulatory requirements, APS ITCs are deferred and are amortized over the life of the related property, with such amortization applied as a credit to reduce current income tax expense in the statement of income.
 
During the year ended December 31, 2013, IRS guidance was released which provided clarification regarding an APS tax accounting method change approved by the IRS in the third quarter of 2009. As a result of this guidance, uncertain tax positions decreased $67 million . Additionally, the IRS finalized the examination of tax returns for the years ended December 31, 2008 and 2009, which further reduced uncertain tax positions by approximately $41 million . These reductions in uncertain tax positions were materially offset by an increase in deferred tax liabilities.

The $135 million current income tax receivable on APS’s Consolidated Balance Sheets as of December 31, 2013 represented an anticipated IRS refund related to the finalized examinations of tax years ended December 31, 2008 and 2009. Cash related to this refund was received in the first quarter of 2014.

On September 13, 2013, the U.S. Treasury Department released final income tax regulations on the deduction and capitalization of expenditures related to tangible property.  These final regulations apply to tax years beginning on or after January 1, 2014.  Several of the provisions within the regulations require a tax accounting method change to be filed with the IRS prior to September 15, 2015 resulting in a tax-effected cumulative effect adjustment of approximately $82 million . The anticipated impact of these final regulations has been accounted for in APS's Consolidated Balance Sheets as of December 31, 2013 and 2014.

Net income associated with the Palo Verde sale leaseback VIEs is not subject to tax (see Note 18).  As a result, there is no income tax expense associated with the VIEs recorded on APS’s Consolidated Statements of Income.

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ARIZONA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits, excluding interest and penalties, at the beginning and end of the year that are included in accrued taxes and unrecognized tax benefits (dollars in thousands):

	
												
 	2014	 	2013	 	2012	
Total unrecognized tax benefits, January 1	$	41,997		 	$	133,241		 	$	135,824		
Additions for tax positions of the current year	4,309		 	3,516		 	5,167		
Additions for tax positions of prior years	751		 	13,158		 	—		
Reductions for tax positions of prior years for:	 		 	 		 	 		
Changes in judgment	(2,282	)	 	(107,918	)	 	(7,729	)	
Settlements with taxing authorities	—		 	—		 	—		
Lapses of applicable statute of limitations	—		 	—		 	(21	)	
Total unrecognized tax benefits, December 31	$	44,775		 	$	41,997		 	$	133,241		
 
Included in the balance of unrecognized tax benefits at December 31, 2014 , 2013 and 2012 were approximately $11 million , $10 million and $10 million , respectively, of tax positions that, if recognized, would decrease our effective tax rate.
 
As of the balance sheet date, the tax year ended December 31, 2011 and all subsequent tax years remain subject to examination by the IRS.  With a few exceptions, we are no longer subject to state income tax examinations by tax authorities for years before 2008.
 
In January 2014, we prospectively adopted guidance requiring unrecognized tax benefits to be presented as a reduction to any available deferred income tax asset for a net operating loss, a similar tax loss, or a tax credit carryforward.  The adoption of this guidance did not have any impact on APS's Consolidated Balance Sheets as of December 31, 2014.

We reflect interest and penalties, if any, on unrecognized tax benefits in the Statements of Income as income tax expense.  The amount of interest recognized in the Statements of Income related to unrecognized tax benefits was a pre-tax expense of $1 million for 2014 , a pre-tax benefit of $4 million for 2013 and a pre-tax expense of $4 million for 2012 .
 
The total amount of accrued liabilities for interest recognized in the Consolidated Balance Sheets related to unrecognized tax benefits was $1 million as of December 31, 2014 , less than $1 million as of December 31, 2013 and $13 million as of December 31, 2012 .  To the extent that matters are settled favorably, this amount could be reversed and decrease our effective tax rate.  Additionally, as of December 31, 2014 , we have recognized less than $1 million of interest expense to be paid on the underpayment of income taxes for certain adjustments that we have filed, or will file, with the IRS.

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ARIZONA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The components of APS’s income tax expense are as follows (dollars in thousands): 

												
 	Year Ended December 31,	
 	2014	 	2013	 	2012	
Current:	 		 	 		 	 		
Federal	$	40,115		 	$	(97,531	)	 	$	(11,650	)	
State	15,598		 	11,983		 	12,308		
Total current	55,713		 	(85,548	)	 	658		
Deferred:	 		 	 		 	 		
Federal	165,027		 	305,389		 	216,367		
State	16,620		 	25,254		 	27,371		
Total deferred	181,647		 	330,643		 	243,738		
Total income tax expense	$	237,360		 	$	245,095		 	$	244,396		
 
On the APS Statements of Income, federal and state income taxes are allocated between operating income and other income.
 
The following chart compares APS’s pretax income at the 35% federal income tax rate to income tax expense (dollars in thousands): 

												
 	Year Ended December 31,	
 	2014	 	2013	 	2012	
Federal income tax expense at 35% statutory rate	$	239,638		 	$	246,384		 	$	235,027		
Increases (reductions) in tax expense resulting from:	 		 	 		 	 		
State income tax net of federal income tax benefit	21,148		 	23,970		 	25,379		
Credits and favorable adjustments related to prior years resolved in current year	—		 	(3,231	)	 	—		
Medicare Subsidy Part-D	830		 	823		 	483		
Allowance for equity funds used during construction (see Note 1)	(8,523	)	 	(6,997	)	 	(6,158	)	
Palo Verde VIE noncontrolling interest (see Note 18)	(9,135	)	 	(11,862	)	 	(11,065	)	
Investment tax credit amortization	(4,928	)	 	(3,548	)	 	(2,030	)	
Other	(1,670	)	 	(444	)	 	2,760		
Income tax expense	$	237,360		 	$	245,095		 	$	244,396		
 
The following table shows the net deferred income tax liability recognized on the APS Balance Sheets (dollars in thousands): 

								
 	December 31,	
 	2014	 	2013	
Current asset (liability)	$	55,253		 	$	(2,033	)	
Long-term liability	(2,571,365	)	 	(2,347,724	)	
Deferred income taxes — net	$	(2,516,112	)	 	$	(2,349,757	)	
 
On February 17, 2011, Arizona enacted legislation (H.B. 2001) that included a four-year phase-in of corporate income tax rate reductions beginning in 2014.  As a result of these tax rate reductions, Pinnacle West has revised the tax rate applicable to reversing temporary items in Arizona.  In accordance with accounting for regulated companies, the benefit of this rate reduction is substantially offset by a regulatory liability.  As of December 31, 2014 , APS has recorded a regulatory liability of $74 million , with a corresponding decrease in accumulated deferred income tax liabilities, to reflect the impact of this change in tax law.

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ARIZONA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On April 4, 2013, New Mexico enacted legislation (H.B. 641) that included a five-year phase-in of corporate income tax rate reductions beginning in 2014.  As a result of these tax rate reductions, Pinnacle West has revised the tax rate applicable to reversing temporary items in New Mexico.  In accordance with accounting for regulated companies, the benefit of this rate reduction is substantially offset by a regulatory liability.  As of December 31, 2014 , APS has recorded a regulatory liability of $2 million , with a corresponding decrease in accumulated deferred income tax liabilities, to reflect the impact of this change in tax law.
 
The components of the net deferred income tax liability were as follows (dollars in thousands):

	
								
 	December 31,	
 	2014	 	2013	
DEFERRED TAX ASSETS	 		 	 		
Regulatory liabilities:	 		 	 		
Asset retirement obligation and removal costs	$	229,772		 	$	235,959		
Unamortized investment tax credits	96,232		 	82,116		
Other postretirement benefits	90,496		 	—		
Other	60,409		 	42,609		
Risk management activities	57,505		 	44,920		
Pension liabilities	194,541		 	132,263		
Other postretirement liabilities	—		 	53,950		
Renewable energy incentives	65,169		 	65,434		
Credit and loss carryforwards	—		 	38,183		
Other	161,379		 	166,781		
Total deferred tax assets	955,503		 	862,215		
DEFERRED TAX LIABILITIES	 		 	 		
Plant-related	(2,958,369	)	 	(2,903,730	)	
Risk management activities	(12,171	)	 	(16,191	)	
Other postretirement benefit assets	(58,495	)	 	—		
Regulatory assets:	 		 	 		
Allowance for equity funds used during construction	(48,286	)	 	(43,058	)	
Deferred fuel and purchased power	(2,498	)	 	(8,282	)	
Deferred fuel and purchased power — mark-to-market	(38,187	)	 	(13,343	)	
Pension and other postretirement benefits	(191,747	)	 	(129,250	)	
Retired power plant costs (see Note 3)	(57,255	)	 	(8,199	)	
Other	(99,123	)	 	(85,003	)	
Other	(5,484	)	 	(4,916	)	
Total deferred tax liabilities	(3,471,615	)	 	(3,211,972	)	
Deferred income taxes — net	$	(2,516,112	)	 	$	(2,349,757	)	

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ARIZONA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

S-2.                            Selected Quarterly Financial Data (Unaudited)
 
Quarterly financial information for 2014 and 2013 is as follows (dollars in thousands):

	
																				
 	2014 Quarter Ended,	 	2014	
 	March 31,	 	June 30,	 	September 30,	 	December 31,	 	Total	
Operating revenues	$	685,545		 	$	905,578		 	$	1,172,190		 	$	725,633		 	$	3,488,946		
Operations and maintenance	208,285		 	208,059		 	212,430		 	253,668		 	882,442		
Operating income	69,635		 	180,394		 	287,928		 	54,835		 	592,792		
Net income attributable to common shareholder	19,518		 	134,916		 	251,047		 	15,738		 	421,219		

	
																				
 	2013 Quarter Ended,	 	2013	
 	March 31,	 	June 30,	 	September 30,	 	December 31,	 	Total	
Operating revenues	$	685,827		 	$	915,065		 	$	1,151,535		 	$	698,824		 	$	3,451,251		
Operations and maintenance	220,752		 	224,950		 	222,617		 	229,505		 	897,824		
Operating income	74,862		 	183,728		 	284,251		 	79,024		 	621,865		
Net income attributable to common shareholder	26,042		 	133,949		 	234,954		 	30,024		 	424,969		
 
S-3.                            Other Income and Other Expense
 
The following table provides detail of APS’s other income and other expense for 2014 , 2013 and 2012 (dollars in thousands):

	
												
 	2014	 	2013	 	2012	
Other income:	 		 	 		 	 		
Interest income	$	689		 	$	1,234		 	$	310		
Debt return on the purchase of Four Corners units 4 & 5	8,386		 	—		 	—		
Miscellaneous	2,220		 	2,662		 	2,558		
Total other income	$	11,295		 	$	3,896		 	$	2,868		
Other expense:	 		 	 		 	 		
Non-operating costs (a)	$	(10,397	)	 	$	(9,626	)	 	$	(8,706	)	
Asset dispositions	(615	)	 	(4,992	)	 	(1,511	)	
Miscellaneous	(2,391	)	 	(5,831	)	 	(10,933	)	
Total other expense	$	(13,403	)	 	$	(20,449	)	 	$	(21,150	)	

(a) As defined by FERC, includes non-operating utility income and expense (items excluded from utility rate recovery).

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ARIZONA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

S-4.                            Changes in Accumulated Other Comprehensive Loss
 
The following table shows the changes in accumulated other comprehensive loss, including reclassification adjustments, net of tax, by component for the year ended December 31, 2014 (dollars in thousands): 

																
 	Year Ended December 31, 2014	
 	Derivative 
Instruments	 	 	 	Pension and 
Other 
Postretirement 
Benefits	 	 	 	Total	
Beginning balance	$	(23,059	)	 	 	 	$	(30,313	)	 	 	 	$	(53,372	)	
OCI (loss) before reclassifications	(809	)	 	 	 	(10,415	)	 	 	 	(11,224	)	
Amounts reclassified from accumulated other comprehensive loss	13,483		 	(a)	 	2,780		 	(b)	 	16,263		
Net current period OCI (loss)	12,674		 	 	 	(7,635	)	 	 	 	5,039		
Ending balance	$	(10,385	)	 	 	 	$	(37,948	)	 	 	 	$	(48,333	)	

		
(a)	These amounts represent realized gains and losses and are included in the computation of fuel and purchased power costs and are subject to the PSA.  See Note 16.	
		
(b)	These amounts primarily represent amortization of actuarial loss, and are included in the computation of net periodic pension cost.  See Note 7.	

The following table shows the changes in accumulated other comprehensive loss, including reclassification adjustments, net of tax, by component for the year ended December 31, 2013 (dollars in thousands): 

																
 	Year Ended December 31, 2013	
 	Derivative 
Instruments	 	 	 	Pension and 
Other 
Postretirement 
Benefits	 	 	 	Total	
Beginning balance	$	(49,592	)	 	 	 	$	(39,503	)	 	 	 	$	(89,095	)	
OCI (loss) before reclassifications	(214	)	 	 	 	5,387		 	 	 	5,173		
Amounts reclassified from accumulated other comprehensive loss	26,747		 	(a)	 	3,803		 	(b)	 	30,550		
Net current period OCI	26,533		 	 	 	9,190		 	 	 	35,723		
Ending balance	$	(23,059	)	 	 	 	$	(30,313	)	 	 	 	$	(53,372	)	

		
(a)	These amounts represent realized gains and losses and are included in the computation of fuel and purchased power costs and are subject to the PSA.  See Note 16.	
		
(b)	These amounts primarily represent amortization of actuarial loss, and are included in the computation of net periodic pension cost.  See Note 7.	

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PINNACLE WEST CAPITAL CORPORATION HOLDING COMPANY
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)

	
												
 	Year Ended December 31,	
 	2014	 	2013	 	2012	
Operating revenues	$	642		 	$	799		 	$	6,133		
Operating expenses	23,507		 	24,930		 	12,125		
Operating loss	(22,865	)	 	(24,131	)	 	(5,992	)	
Other	 		 	 		 	 		
Equity in earnings of subsidiaries	411,528		 	420,926		 	391,528		
Other expense	(3,276	)	 	(1,999	)	 	(2,001	)	
Total	408,252		 	418,927		 	389,527		
Interest expense	3,663		 	3,226		 	4,868		
Income from continuing operations	381,724		 	391,570		 	378,667		
Income tax benefit	(15,871	)	 	(14,504	)	 	(7,079	)	
Income from continuing operations — net of income taxes	397,595		 	406,074		 	385,746		
Loss from discontinued operations — net of income taxes	—		 	—		 	(4,204	)	
Net income attributable to common shareholders	397,595		 	406,074		 	381,542		
Other comprehensive income — attributable to common shareholders	9,912		 	35,955		 	38,155		
Total comprehensive income — attributable to common shareholders	$	407,507		 	$	442,029		 	$	419,697		
 
See Notes to Pinnacle West’s Consolidated Financial Statements.

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PINNACLE WEST CAPITAL CORPORATION HOLDING COMPANY
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(in thousands)

	
								
 	December 31,	
 	2014	 	2013	
ASSETS	 		 	 		
Current assets	 		 	 		
Cash and cash equivalents	$	3,088		 	$	5,798		
Accounts receivable	99,958		 	80,108		
Current deferred income taxes	66,979		 	93,185		
Income tax receivable	7,329		 	1,853		
Other current assets	124		 	242		
Total current assets	177,478		 	181,186		
Investments and other assets	 		 	 		
Investments in subsidiaries	4,630,570		 	4,455,049		
Other assets	43,051		 	13,789		
Total investments and other assets	4,673,621		 	4,468,838		
Total Assets	$	4,851,099		 	$	4,650,024		
LIABILITIES AND EQUITY	 		 	 		
Current liabilities	 		 	 		
Accounts payable	$	5,250		 	$	3,279		
Accrued taxes	12,220		 	8,538		
Common dividends payable	65,790		 	62,528		
Other current liabilities	38,992		 	31,295		
Total current liabilities	122,252		 	105,640		
Long-term debt less current maturities	125,000		 	125,000		
Deferred credits and other	 		 	 		
Deferred income taxes	12,055		 	4,158		
Pension and other postretirement liabilities	29,228		 	37,611		
Other	43,462		 	37,155		
Total deferred credits and other	84,745		 	78,924		
Common stock equity	 	 	 		
Common stock	2,509,569		 	2,487,250		
Accumulated other comprehensive loss	(68,141	)	 	(78,053	)	
Retained earnings	1,926,065		 	1,785,273		
Total Pinnacle West Shareholders’ equity	4,367,493		 	4,194,470		
Noncontrolling interests	151,609		 	145,990		
Total Equity	4,519,102		 	4,340,460		
Total Liabilities and Equity	$	4,851,099		 	$	4,650,024		
 
See Notes to Pinnacle West’s Consolidated Financial Statements.

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PINNACLE WEST CAPITAL CORPORATION HOLDING COMPANY
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)

	
												
 	Year Ended December 31,	
 	2014	 	2013	 	2012	
Cash flows from operating activities	 		 	 		 	 		
Net income	$	397,595		 	$	406,074		 	$	381,542		
Adjustments to reconcile net income to net cash provided by operating activities:	 	 	 		 	 		
Equity in earnings of subsidiaries — net	(411,528	)	 	(420,926	)	 	(391,528	)	
Depreciation and amortization	94		 	95		 	94		
Deferred income taxes	4,406		 	(28,806	)	 	(15,135	)	
Accounts receivable	(22,945	)	 	21,671		 	28,763		
Accounts payable	2,017		 	(2,449	)	 	879		
Accrued taxes and income tax receivables — net	(1,795	)	 	1,402		 	(3,103	)	
Dividends received from subsidiaries	253,600		 	242,100		 	222,200		
Other	18,432		 	(15,065	)	 	(4,589	)	
Net cash flow provided by operating activities	239,876		 	204,096		 	219,123		
Cash flows from investing activities	 		 	 		 	 		
Investments in subsidiaries	(10,236	)	 	(3,400	)	 	—		
Repayments of loans from subsidiaries	322		 	2,149		 	996		
Advances of loans to subsidiaries	(1,450	)	 	(2,099	)	 	(1,200	)	
Net cash flow used for investing activities	(11,364	)	 	(3,350	)	 	(204	)	
Cash flows from financing activities	 		 	 		 	 		
Issuance of long-term debt	125,000		 	—		 	125,000		
Dividends paid on common stock	(246,671	)	 	(235,244	)	 	(225,075	)	
Repayment of long-term debt	(125,000	)	 	—		 	(125,000	)	
Common stock equity issuance	15,288		 	17,319		 	15,955		
Other	161		 	298		 	170		
Net cash flow used for financing activities	(231,222	)	 	(217,627	)	 	(208,950	)	
Net increase (decrease) in cash and cash equivalents	(2,710	)	 	(16,881	)	 	9,969		
Cash and cash equivalents at beginning of year	5,798		 	22,679		 	12,710		
Cash and cash equivalents at end of year	$	3,088		 	$	5,798		 	$	22,679		
 
See Notes to Pinnacle West’s Consolidated Financial Statements.

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PINNACLE WEST CAPITAL CORPORATION
SCHEDULE II — RESERVE FOR UNCOLLECTIBLES
(dollars in thousands)

	
																				
Column A	Column B	 	Column C	 	Column D	 	Column E	
 	 	 	Additions	 	 	 	 	
Description	Balance at
beginning
of period	 	Charged to
cost and
expenses	 	Charged
to other
accounts	 	Deductions	 	Balance
at end of
period	
Reserve for uncollectibles:	 		 	 		 	 		 	 		 	 		
2014	$	3,203		 	$	3,942		 	$	—		 	$	4,051		 	$	3,094		
2013	3,340		 	4,923		 	—		 	5,060		 	3,203		
2012	3,748		 	5,290		 	—		 	5,698		 	3,340		

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ARIZONA PUBLIC SERVICE COMPANY
SCHEDULE II — RESERVE FOR UNCOLLECTIBLES
(dollars in thousands)

	
																					
Column A	 	Column B	 	Column C	 	Column D	 	Column E	
 	 	 	 	Additions	 	 	 	 	
Description	 	Balance at
beginning
of period	 	Charged to
cost and
expenses	 	Charged
to other
accounts	 	Deductions	 	Balance
at end of
period	
Reserve for uncollectibles:	 	 		 	 		 	 		 	 		 	 		
2014	 	$	3,203		 	$	3,942		 	$	—		 	$	4,051		 	$	3,094		
2013	 	3,340		 	4,923		 	—		 	5,060		 	3,203		
2012	 	3,748		 	5,290		 	—		 	5,698		 	3,340		

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ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None. 
ITEM 9A.  CONTROLS AND PROCEDURES
 
(a) Disclosure Controls and Procedures
 
The term “disclosure controls and procedures” means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) (15 U.S.C. 78a et seq .) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to a company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
 
Pinnacle West’s management, with the participation of Pinnacle West’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of Pinnacle West’s disclosure controls and procedures as of December 31, 2014.  Based on that evaluation, Pinnacle West’s Chief Executive Officer and Chief Financial Officer have concluded that, as of that date, Pinnacle West’s disclosure controls and procedures were effective.
 
APS’s management, with the participation of APS’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of APS’s disclosure controls and procedures as of December 31, 2014.  Based on that evaluation, APS’s Chief Executive Officer and Chief Financial Officer have concluded that, as of that date, APS’s disclosure controls and procedures were effective.
 
(b) Management’s Annual Reports on Internal Control Over Financial Reporting
 
Reference is made to “Management’s Report on Internal Control Over Financial Reporting (Pinnacle West Capital Corporation)” on page 73 of this report and “Management’s Report on Internal Control Over Financial Reporting (Arizona Public Service Company)” on page 143 of this report.
 
(c) Attestation Reports of the Registered Public Accounting Firm
 
Reference is made to “Report of Independent Registered Public Accounting Firm” on page 74 of this report and “Report of Independent Registered Public Accounting Firm” on page 144 of this report on the internal control over financial reporting of Pinnacle West and APS, respectively.
 
(d) Changes In Internal Control Over Financial Reporting
 
No change in Pinnacle West’s or APS’s internal control over financial reporting occurred during the fiscal quarter ended December 31, 2014 that materially affected, or is reasonably likely to materially affect, Pinnacle West’s or APS’s internal control over financial reporting.

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ITEM 9B.  OTHER INFORMATION

None.

PART III

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS
AND CORPORATE GOVERNANCE OF PINNACLE WEST
 
Reference is hereby made to “Information About Our Board and Corporate Governance,” “Proposal 1 — Election of Directors” and to “Section 16(a) Beneficial Ownership Reporting Compliance” in the Pinnacle West Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 20, 2015 (the “2015 Proxy Statement”) and to the “Executive Officers of Pinnacle West” section in Part I of this report.
 
Pinnacle West has adopted a Code of Ethics for Financial Executives that applies to financial executives including Pinnacle West’s Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, Controller, Treasurer, and General Counsel, the President and Chief Operating Officer of APS and other persons designated as financial executives by the Chair of the Audit Committee.  The Code of Ethics for Financial Executives is posted on Pinnacle West’s website ( www.pinnaclewest.com) .  Pinnacle West intends to satisfy the requirements under Item 5.05 of Form 8-K regarding disclosure of amendments to, or waivers from, provisions of the Code of Ethics for Financial Executives by posting such information on Pinnacle West’s website.
 
ITEM 11.  EXECUTIVE COMPENSATION
 
Reference is hereby made to “Directors’ Compensation,” “Report of the Human Resources Committee,” “Executive Compensation,” and “Human Resources Committee Interlocks and Insider Participation” in the 2015 Proxy Statement.
 
ITEM 12.  SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
 
Reference is hereby made to “Ownership of Pinnacle West Stock” in the 2015 Proxy Statement.
 
Securities Authorized for Issuance Under Equity Compensation Plans
 
The following table sets forth information as of December 31, 2014 with respect to the 2012 Plan and the 2007 Plan, under which our equity securities are outstanding or currently authorized for issuance.

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Equity Compensation Plan Information 

									
Plan Category	Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
  (a)	 	Weighted-
average exercise price
of outstanding
options,
warrants and
rights
  (b)	 	Number of
securities remaining
available for future
issuance under
equity
compensation plans
(excluding
securities reflected
in column (a))
  (c)	
Equity compensation plans approved by security holders	1,661,797		 	—		 	3,103,760		
Equity compensation plans not approved by security holders	—		 	—		 	—		
Total	1,661,797		 	—		 	3,103,760		

(a)                                  This amount includes shares subject to outstanding performance share awards and restricted stock unit awards at the maximum amount of shares issuable under such awards.  However, payout of the performance share awards is contingent on the Company reaching certain levels of performance during a three-year performance period.  If the performance criteria for these awards are not fully satisfied, the award recipient will receive less than the maximum number of shares available under these grants and may receive nothing from these grants.
(b)                                  The weighted-average exercise price in this column does not take performance share awards or restricted stock unit awards into account, as those awards have no exercise price.
(c)                                   Awards under the 2012 Plan can take the form of options, stock appreciation rights, restricted stock, performance shares, performance share units, performance cash, stock grants, stock units, dividend equivalents, and restricted stock units.  Additional shares cannot be awarded under the 2007 Plan.  However, if an award under the 2012 Plan or an award that was outstanding under the 2007 Plan on or after December 31, 2011 is forfeited, terminated or cancelled or expires, the shares subject to such award, to the extent of the forfeiture, termination, cancellation or expiration, may be added back to the shares available for issuance under the 2012 Plan.
 
Equity Compensation Plans Approved By Security Holders
 
Amounts in column (a) in the table above include shares subject to awards outstanding under two equity compensation plans that were previously approved by our shareholders:  (a) the 2007 Plan, which was approved by our shareholders at our 2007 annual meeting of shareholders and under which no new stock awards may be granted; and (b) the 2012 Plan, which was approved by our shareholders at our 2012 annual meeting of shareholders.  See Note 15 of the Notes to Consolidated Financial Statements for additional information regarding these plans.
 
Equity Compensation Plans Not Approved by Security Holders
 
The Company does not have any equity compensation plans under which shares can be issued that have not been approved by the shareholders.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
Reference is hereby made to “Information About Our Board and Corporate Governance” and “Related Party Transactions” in the 2015 Proxy Statement.

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ITEM 14.  PRINCIPAL ACCOUNTANT
FEES AND SERVICES
 
Pinnacle West
 
Reference is hereby made to “Accounting and Auditing Matters — Audit Fees and — Pre-Approval Policies” in the 2015 Proxy Statement.
 
APS
 
The following fees were paid to APS’s independent registered public accountants, Deloitte & Touche LLP, for the last two fiscal years:

	
									
Type of Service	 	2013	 	2014	
Audit Fees (1)	 	$	1,859,270		 	$	2,062,685		
Audit-Related Fees (2)	 	189,990		 	212,600		
Tax Fees (3)	 	28,000		 	8,857		
 
(1)                                  The aggregate fees billed for services rendered for the audit of annual financial statements and for review of financial statements included in Reports on Form 10-Q.
(2)                                  The aggregate fees billed for assurance services that are reasonably related to the performance of the audit or review of the financial statements that are not included in Audit Fees reported above, which primarily consist of fees for employee benefit plan audits performed in 2014 and 2013.
(3)                                  The aggregate fees billed primarily related to tax compliance and tax planning.
 
Pinnacle West’s Audit Committee pre-approves each audit service and non-audit service to be provided by APS’s registered public accounting firm.  The Audit Committee has delegated to the Chair of the Audit Committee the authority to pre-approve audit and non-audit services to be performed by the independent public accountants if the services are not expected to cost more than $50,000.  The Chair must report any pre-approval decisions to the Audit Committee at its next scheduled meeting.  All of the services performed by Deloitte & Touche LLP for APS in 2014 were pre-approved by the Audit Committee or the Chair of the Audit Committee consistent with the pre-approval policy.

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PART IV

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
Financial Statements and Financial Statement Schedules
 
See the Index to Financial Statements and Financial Statement Schedule in Part II, Item 8.
 
Exhibits Filed
 
The documents listed below are being filed or have previously been filed on behalf of Pinnacle West or APS and are incorporated herein by reference from the documents indicated and made a part hereof.  Exhibits not identified as previously filed are filed herewith.

	
									
Exhibit
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit:  a	 	Date Filed	
 	 	 	 	 	 	 	 	 	
3.1	 	Pinnacle West	 	Articles of Incorporation, restated as of May 21, 2008	 	3.1 to Pinnacle West/APS June 30, 2008 Form 10-Q Report, File No. 1-8962	 	8/7/2008	
 	 	 	 	 	 	 	 	 	
3.2	 	Pinnacle West	 	Pinnacle West Capital Corporation Bylaws, amended as of May 19, 2010	 	3.1 to Pinnacle West/APS June 30, 2010 Form 10-Q Report, File No. 1-8962	 	8/3/2010	
 	 	 	 	 	 	 	 	 	
3.3	 	APS	 	Articles of Incorporation, restated as of May 25, 1988	 	4.2 to APS’s Form 18 Registration Nos. 33-33910 and 33-55248 by means of September 24, 1993 Form 8-K Report, File No. 1-4473	 	9/29/1993	
 	 	 	 	 	 	 	 	 	
3.3.1	 	APS	 	Amendment to the Articles of Incorporation of Arizona Public Service Company, amended May 16, 2012	 	3.1 to Pinnacle West/APS May 22, 2012 Form 8-K Report, File Nos. 1-8962 and 1-4473	 	5/22/2012	
 	 	 	 	 	 	 	 	 	
3.4	 	APS	 	Arizona Public Service Company Bylaws, amended as of December 16, 2008	 	3.4 to Pinnacle West/APS December 31, 2008 Form 10-K, File No. 1-4473	 	2/20/2009	
 	 	 	 	 	 	 	 	 	
4.1	 	Pinnacle West	 	Specimen Certificate of Pinnacle West Capital Corporation Common Stock, no par value	 	4.1 to Pinnacle West June 28, 2011 Form 8-K Report, File No. 1-8962	 	6/28/2011	
 	 	 	 	 	 	 	 	 	
4.2	 	Pinnacle West
APS	 	Indenture dated as of January 1, 1995 among APS and The Bank of New York Mellon, as Trustee	 	4.6 to APS’s Registration Statement Nos. 33-61228 and 33-55473 by means of January 1, 1995 Form 8-K Report, File No. 1-4473	 	1/11/1995	
 	 	 	 	 	 	 	 	 	
4.2a	 	Pinnacle West
APS	 	First Supplemental Indenture dated as of January 1, 1995	 	4.4 to APS’s Registration Statement Nos. 33-61228 and 33-55473 by means of January 1, 1995 Form 8-K Report, File No. 1-4473	 	1/11/1995	
 	 	 	 	 	 	 	 	 	
4.3	 	Pinnacle West
APS	 	Indenture dated as of November 15, 1996 between APS and The Bank of New York, as Trustee	 	4.5 to APS’s Registration Statements Nos. 33-61228, 33-55473, 33-64455 and 333- 15379 by means of November 19, 1996 Form 8-K Report, File No. 1-4473	 	11/22/1996	

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Exhibit
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit:  a	 	Date Filed	
4.3a	 	Pinnacle West
APS	 	First Supplemental Indenture dated as of November 15, 1996	 	4.6 to APS’s Registration Statements Nos. 33-61228, 33-55473, 33-64455 and 333-15379 by means of November 19, 1996 Form 8-K Report, File No. 1-4473	 	11/22/1996	
 	 	 	 	 	 	 	 	 	
4.3b	 	Pinnacle West
APS	 	Second Supplemental Indenture dated as of April 1, 1997	 	4.10 to APS’s Registration Statement Nos. 33-55473, 33-64455 and 333-15379 by means of April 7, 1997 Form 8-K Report, File No. 1-4473	 	4/9/1997	
 	 	 	 	 	 	 	 	 	
4.3c	 	Pinnacle West
APS	 	Third Supplemental Indenture dated as of November 1, 2002	 	10.2 to Pinnacle West’s March 31, 2003 Form 10-Q Report, File No. 1-8962	 	5/15/2003	
 	 	 	 	 	 	 	 	 	
4.4	 	Pinnacle West	 	Indenture dated as of December 1, 2000 between the Company and The Bank of New York, as Trustee, relating to Senior Unsecured Debt Securities	 	4.1 to Pinnacle West’s Registration Statement No. 333-52476	 	12/21/2000	
 	 	 	 	 	 	 	 	 	
4.5	 	Pinnacle West	 	Indenture dated as of December 1, 2000 between the Company and The Bank of New York, as Trustee, relating to Subordinated Unsecured Debt Securities	 	4.2 to Pinnacle West’s Registration Statement No. 333-52476	 	12/21/2000	
 	 	 	 	 	 	 	 	 	
4.6	 	Pinnacle West
APS	 	Indenture dated as of January 15, 1998 between APS and The Bank of New York Mellon Trust Company N.A. (successor to JPMorgan Chase Bank, N.A., formerly known as The Chase Manhattan Bank), as Trustee	 	4.10 to APS’s Registration Statement Nos. 333-15379 and 333-27551 by means of January 13, 1998 Form 8-K Report, File No. 1-4473	 	1/16/1998	
 	 	 	 	 	 	 	 	 	
4.6a	 	Pinnacle West
APS	 	Seventh Supplemental Indenture dated as of May 1, 2003	 	4.1 to APS’s Registration Statement No. 333-90824 by means of May 7, 2003 Form 8-K Report, File No. 1-4473	 	5/9/2003	
 	 	 	 	 	 	 	 	 	
4.6b	 	Pinnacle West
APS	 	Eighth Supplemental Indenture dated as of June 15, 2004	 	4.1 to APS’s Registration Statement No. 333-106772 by means of June 24, 2004 Form 8-K Report, File No. 1-4473	 	6/28/2004	
 	 	 	 	 	 	 	 	 	
4.6c	 	Pinnacle West
APS	 	Ninth Supplemental Indenture dated as of August 15, 2005	 	4.1 to APS’s Registration Statements Nos. 333-106772 and 333-121512 by means of August 17, 2005 Form 8-K Report, File No. 1-4473	 	8/22/2005	
 	 	 	 	 	 	 	 	 	
4.6d	 	APS	 	Tenth Supplemental Indenture dated as of August 1, 2006	 	4.1 to APS’s July 31, 2006 Form 8-K Report, File No. 1-4473	 	8/3/2006	
 	 	 	 	 	 	 	 	 	
4.6e	 	Pinnacle West
APS	 	Eleventh Supplemental Indenture dated as of February 26, 2009	 	 	 	 	
 	 	 	 	 	 	 	 	 	
4.6f	 	Pinnacle West
APS	 	Twelfth Supplemental Indenture dated as of August 25, 2011	 	 	 	 	
 	 	 	 	 	 	 	 	 	
4.6g	 	Pinnacle West
APS	 	Thirteenth Supplemental Indenture dated as of January 13, 2012	 	 	 	 	
 	 	 	 	 	 	 	 	 	
4.6h	 	Pinnacle West
APS	 	Fourteenth Supplemental Indenture dated as of January 10, 2014	 	 	 	 	

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Exhibit
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit:  a	 	Date Filed	
 	 	 	 	 	 	 	 	 	
4.6i	 	Pinnacle West
APS	 	Fifteenth Supplemental Indenture dated as of June 18, 2014	 	 	 	 	
 	 	 	 	 	 	 	 	 	
4.6j	 	Pinnacle West
APS	 	Sixteenth Supplemental Indenture dated as of January 12, 2015	 	 	 	 	
 	 	 	 	 	 	 	 	 	
4.7	 	Pinnacle West	 	Second Amended and Restated Pinnacle West Capital Corporation Investors Advantage Plan dated as of June 23, 2004	 	4.4 to Pinnacle West’s June 23, 2004 Form 8-K Report, File No. 1-8962	 	8/9/2004	
 	 	 	 	 	 	 	 	 	
4.7a	 	Pinnacle West	 	Third Amended and Restated Pinnacle West Capital Corporation Investors Advantage Plan dated as of November 25, 2008	 	4.1 to Pinnacle West’s Form S-3 Registration Statement No. 333-155641, File No. 1-8962	 	11/25/2008	
 	 	 	 	 	 	 	 	 	
4.8	 	Pinnacle West	 	Agreement, dated March 29, 1988, relating to the filing of instruments defining the rights of holders of long-term debt not in excess of 10% of the Company’s total assets	 	4.1 to Pinnacle West’s 1987 Form 10-K Report, File No. 1-8962	 	3/30/1988	
 	 	 	 	 	 	 	 	 	
4.8a	 	Pinnacle West
APS	 	Agreement, dated March 21, 1994, relating to the filing of instruments defining the rights of holders of APS long-term debt not in excess of 10% of APS’s total assets	 	4.1 to APS’s 1993 Form 10-K Report, File No. 1-4473	 	3/30/1994	
 	 	 	 	 	 	 	 	 	
10.1.1	 	Pinnacle West
APS	 	Two separate Decommissioning Trust Agreements (relating to PVNGS Units 1 and 3, respectively), each dated July 1, 1991, between APS and Mellon Bank, N.A., as Decommissioning Trustee	 	10.2 to APS’s September 30, 1991 Form 10-Q Report, File No. 1-4473	 	11/14/1991	
 	 	 	 	 	 	 	 	 	
10.1.1a	 	Pinnacle West
APS	 	Amendment No. 1 to Decommissioning Trust Agreement (PVNGS Unit 1), dated as of December 1, 1994	 	10.1 to APS’s 1994 Form 10-K Report, File No. 1-4473	 	3/30/1995	
 	 	 	 	 	 	 	 	 	
10.1.1b	 	Pinnacle West
APS	 	Amendment No. 1 to Decommissioning Trust Agreement (PVNGS Unit 3), dated as of December 1, 1994	 	10.2 to APS’s 1994 Form 10-K Report, File No. 1-4473	 	3/30/1995	
 	 	 	 	 	 	 	 	 	
10.1.1c	 	Pinnacle West
APS	 	Amendment No. 2 to APS Decommissioning Trust Agreement (PVNGS Unit 1) dated as of July 1, 1991	 	10.4 to APS’s 1996 Form 10-K Report , File No. 1-4473	 	3/28/1997	
 	 	 	 	 	 	 	 	 	
10.1.1d	 	Pinnacle West
APS	 	Amendment No. 2 to APS Decommissioning Trust Agreement (PVNGS Unit 3) dated as of July 1, 1991	 	10.6 to APS’s 1996 Form 10-K Report, File No. 1-4473	 	3/28/1997	
 	 	 	 	 	 	 	 	 	
10.1.1e	 	Pinnacle West
APS	 	Amendment No. 3 to the Decommissioning Trust Agreement (PVNGS Unit 1), dated as of March 18, 2002	 	10.2 to Pinnacle West’s March 31, 2002 Form 10-Q Report, File No. 1-8962	 	5/15/2002	
 	 	 	 	 	 	 	 	 	
10.1.1f	 	Pinnacle West
APS	 	Amendment No. 3 to the Decommissioning Trust Agreement (PVNGS Unit 3), dated as of March 18, 2002	 	10.4 to Pinnacle West’s March 2002 Form 10-Q Report, File No. 1-8962	 	5/15/2002	

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Exhibit
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit:  a	 	Date Filed	
10.1.1g	 	Pinnacle West
APS	 	Amendment No. 4 to the Decommissioning Trust Agreement (PVNGS Unit 1), dated as of December 19, 2003	 	10.3 to Pinnacle West’s 2003 Form 10-K Report, File No. 1-8962	 	3/15/2004	
 	 	 	 	 	 	 	 	 	
10.1.1h	 	Pinnacle West
APS	 	Amendment No. 4 to the Decommissioning Trust Agreement (PVNGS Unit 3), dated as of December 19, 2003	 	10.5 to Pinnacle West’s 2003 Form 10-K Report, File No. 1-8962	 	3/15/2004	
 	 	 	 	 	 	 	 	 	
10.1.1i	 	Pinnacle West
APS	 	Amendment No. 5 to the Decommissioning Trust Agreement (PVNGS Unit 1), dated as of May 1, 2007	 	10.1 to Pinnacle West/APS March 31, 2007 Form 10-Q Report, File Nos. 1-8962 and 1-4473	 	5/9/2007	
 	 	 	 	 	 	 	 	 	
10.1.1j	 	Pinnacle West
APS	 	Amendment No. 5 to the Decommissioning Trust Agreement (PVNGS Unit 3), dated as of May 1, 2007	 	10.2 to Pinnacle West/APS March 31, 2007 Form 10-Q Report, File Nos. 1-8962 and 104473	 	5/9/2007	
 	 	 	 	 	 	 	 	 	
10.1.2	 	Pinnacle West
APS	 	Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2) dated as of January 31, 1992, among APS, Mellon Bank, N.A., as Decommissioning Trustee, and State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee under two separate Trust Agreements, each with a separate Equity Participant, and as Lessor under two separate Facility Leases, each relating to an undivided interest in PVNGS Unit 2	 	10.1 to Pinnacle West’s 1991 Form 10-K Report, File No. 1-8962	 	3/26/1992	
 	 	 	 	 	 	 	 	 	
10.1.2a	 	Pinnacle West
APS	 	First Amendment to Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2), dated as of November 1, 1992	 	10.2 to APS’s 1992 Form 10-K Report, File No. 1-4473	 	3/30/1993	
 	 	 	 	 	 	 	 	 	
10.1.2b	 	Pinnacle West
APS	 	Amendment No. 2 to Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2), dated as of November 1, 1994	 	10.3 to APS’s 1994 Form 10-K Report, File No. 1-4473	 	3/30/1995	
 	 	 	 	 	 	 	 	 	
10.1.2c	 	Pinnacle West
APS	 	Amendment No. 3 to Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2), dated as of June 20, 1996	 	10.1 to APS’s June 30, 1996 Form 10-Q Report, File No. 1-4473	 	8/9/1996	
 	 	 	 	 	 	 	 	 	
10.1.2d	 	Pinnacle West
APS	 	Amendment No. 4 to Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2) dated as of December 16, 1996	 	APS 10.5 to APS’s 1996 Form 10-K Report, File No. 1-4473	 	3/28/1997	
 	 	 	 	 	 	 	 	 	
10.1.2e	 	Pinnacle West
APS	 	Amendment No. 5 to the Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2), dated as of June 30, 2000	 	10.1 to Pinnacle West’s March 31, 2002 Form 10-Q Report, File No. 1-8962	 	5/15/2002	
 	 	 	 	 	 	 	 	 	
10.1.2f	 	Pinnacle West
APS	 	Amendment No. 6 to the Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2), dated as of March 18, 2002	 	10.3 to Pinnacle West’s March 31, 2002 Form 10-Q Report, File No. 1-8962	 	5/15/2002	

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Exhibit
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit:  a	 	Date Filed	
10.1.2g	 	Pinnacle West
APS	 	Amendment No. 7 to the Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2), dated as of December 19, 2003	 	10.4 to Pinnacle West’s 2003 Form 10-K Report, File No. 1-8962	 	3/15/2004	
 	 	 	 	 	 	 	 	 	
10.1.2h	 	Pinnacle West
APS	 	Amendment No. 8 to the Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2), dated as of April 1, 2007	 	10.1.2h to Pinnacle West’s 2007 Form 10-K Report, File No. 1-8962	 	2/27/2008	
 	 	 	 	 	 	 	 	 	
10.2.1 b	 	Pinnacle West
APS	 	Arizona Public Service Company Deferred Compensation Plan, as restated, effective January 1, 1984, and the second and third amendments thereto, dated December 22, 1986, and December 23, 1987, respectively	 	10.4 to APS’s 1988 Form 10-K Report, File No. 1-4473	 	3/8/1989	
 	 	 	 	 	 	 	 	 	
10.2.1a b	 	Pinnacle West
APS	 	Third Amendment to the Arizona Public Service Company Deferred Compensation Plan, effective as of January 1, 1993	 	10.3A to APS’s 1993 Form 10-K Report, File No. 1-4473	 	3/30/1994	
 	 	 	 	 	 	 	 	 	
10.2.1b b	 	Pinnacle West
APS	 	Fourth Amendment to the Arizona Public Service Company Deferred Compensation Plan effective as of May 1, 1993	 	10.2 to APS’s September 30, 1994 Form 10-Q Report, File No. 1-4473	 	11/10/1994	
 	 	 	 	 	 	 	 	 	
10.2.1c b	 	Pinnacle West
APS	 	Fifth Amendment to the Arizona Public Service Company Deferred Compensation Plan effective January 1, 1997	 	10.3A to APS’s 1996 Form 10-K Report, File No. 1-4473	 	3/28/1997	
 	 	 	 	 	 	 	 	 	
10.2.1d b	 	Pinnacle West
APS	 	Sixth Amendment to the Arizona Public Service Company Deferred Compensation Plan effective January 1, 2001	 	10.8A to Pinnacle West’s 2000 Form 10-K Report, File No. 1-8962	 	3/14/2001	
 	 	 	 	 	 	 	 	 	
10.2.2 b	 	Pinnacle West
APS	 	Arizona Public Service Company Directors’ Deferred Compensation Plan, as restated, effective January 1, 1986	 	10.1 to APS’s June 30, 1986 Form 10-Q Report, File No. 1-4473	 	8/13/1986	
 	 	 	 	 	 	 	 	 	
10.2.2a b	 	Pinnacle West
APS	 	Second Amendment to the Arizona Public Service Company Directors’ Deferred Compensation Plan, effective as of January 1, 1993	 	10.2A to APS’s 1993 Form 10-K Report, File No. 1-4473	 	3/30/1994	
 	 	 	 	 	 	 	 	 	
10.2.2b b	 	Pinnacle West
APS	 	Third Amendment to the Arizona Public Service Company Directors’ Deferred Compensation Plan, effective as of May 1, 1993	 	10.1 to APS’s September 30, 1994 Form 10-Q Report, File No. 1-4473	 	11/10/1994	
 	 	 	 	 	 	 	 	 	
10.2.2c b	 	Pinnacle West
APS	 	Fourth Amendment to the Arizona Public Service Company Directors Deferred Compensation Plan, effective as of January 1, 1999	 	10.8A to Pinnacle West’s 1999 Form 10-K Report, File No. 1-8962	 	3/30/2000	
 	 	 	 	 	 	 	 	 	
10.2.3 b	 	Pinnacle West
APS	 	Trust for the Pinnacle West Capital Corporation, Arizona Public Service Company and SunCor Development Company Deferred Compensation Plans dated August 1, 1996	 	10.14A to Pinnacle West’s 1999 Form 10-K Report, File No. 1-8962	 	3/30/2000	

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Exhibit
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit:  a	 	Date Filed	
10.2.3a b	 	Pinnacle West
APS	 	First Amendment dated December 7, 1999 to the Trust for the Pinnacle West Capital Corporation, Arizona Public Service Company and SunCor Development Company Deferred Compensation Plans	 	10.15A to Pinnacle West’s 1999 Form 10-K Report, File No. 1-8962	 	3/30/2000	
 	 	 	 	 	 	 	 	 	
10.2.4 b	 	Pinnacle West
APS	 	Pinnacle West Capital Corporation, Arizona Public Service Company, SunCor Development Company and El Dorado Investment Company Deferred Compensation Plan as amended and restated effective January 1, 1996	 	10.10A to APS’s 1995 Form  10-K Report, File No. 1-4473	 	3/29/1996	
 	 	 	 	 	 	 	 	 	
10.2.4a b	 	Pinnacle West
APS	 	First Amendment effective as of January 1, 1999, to the Pinnacle West Capital Corporation, Arizona Public Service Company, SunCor Development Company and El Dorado Investment Company Deferred Compensation Plan	 	10.7A to Pinnacle West’s 1999 Form 10-K Report, File No. 1-8962	 	3/30/2000	
 	 	 	 	 	 	 	 	 	
10.2.4b b	 	Pinnacle West
APS	 	Second Amendment effective January 1, 2000 to the Pinnacle West Capital Corporation, Arizona Public Service Company, SunCor Development Company and El Dorado Investment Company Deferred Compensation Plan	 	10.10A to Pinnacle West’s 1999 Form 10-K Report, File No. 1-8962	 	3/30/2000	
 	 	 	 	 	 	 	 	 	
10.2.4c b	 	Pinnacle West
APS	 	Third Amendment to the Pinnacle West Capital Corporation, Arizona Public Service Company, SunCor Development Company and El Dorado Investment Company Deferred Compensation Plan, effective as of January 1, 2002	 	10.3 to Pinnacle West’s March 31, 2003 Form 10-Q Report, File No. 1-8962	 	5/15/2003	
 	 	 	 	 	 	 	 	 	
10.2.4d b	 	Pinnacle West
APS	 	Fourth Amendment to the Pinnacle West Capital Corporation, Arizona Public Service Company, SunCor Development Company and El Dorado Investment Company Deferred Compensation Plan, effective January 1, 2003	 	10.64 to Pinnacle West/APS 2005 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	3/13/2006	
 	 	 	 	 	 	 	 	 	
10.2.5 b	 	Pinnacle West
APS	 	Deferred Compensation Plan of 2005 for Employees of Pinnacle West Capital Corporation and Affiliates	 	10.2.6 to Pinnacle West/APS 2008 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	2/20/2009	
 	 	 	 	 	 	 	 	 	
10.2.5a b	 	Pinnacle West
APS	 	First Amendment to the Deferred Compensation Plan of 2005 for Employees of Pinnacle West Capital Corporation and Affiliates	 	10.2.6a to Pinnacle West/APS 2009 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	2/19/2010	
 	 	 	 	 	 	 	 	 	
10.2.5b b	 	Pinnacle West
APS	 	Second Amendment to the Deferred Compensation Plan of 2005 for Employees of Pinnacle West Capital Corporation and Affiliates	 	10.2.5b to Pinnacle West/APS 2011 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	2/24/2012	
 	 	 	 	 	 	 	 	 	
10.2.5c b	 	Pinnacle West
APS	 	Third Amendment to the Deferred Compensation Plan of 2005 for Employees of Pinnacle West Capital Corporation and Affiliates	 	10.2.5c to Pinnacle West/APS 2013 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	2/21/2014	

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Exhibit
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit:  a	 	Date Filed	
10.3.1 b	 	Pinnacle West
APS	 	Pinnacle West Capital Corporation Supplement Excess Benefit Retirement Plan, amended and restated as of January 1, 2003	 	10.7A to Pinnacle West’s 2003 Form 10-K Report, File No. 1-8962	 	3/15/2004	
 	 	 	 	 	 	 	 	 	
10.3.1a b	 	Pinnacle West
APS	 	Pinnacle West Capital Corporation Supplemental Excess Benefit Retirement Plan, as amended and restated, dated December 18, 2003	 	10.48b to Pinnacle West/APS 2005 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	3/13/2006	
 	 	 	 	 	 	 	 	 	
10.3.2 b	 	Pinnacle West
APS	 	Pinnacle West Capital Corporation Supplemental Excess Benefit Retirement Plan of 2005	 	10.3.2 to Pinnacle West/APS 2008 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	2/20/2009	
 	 	 	 	 	 	 	 	 	
10.3.2a b	 	Pinnacle West
APS	 	First Amendment to the Pinnacle West Capital Corporation Supplemental Excess Benefit Retirement Plan of 2005	 	 	 	 	
 	 	 	 	 	 	 	 	 	
10.3.2b b	 	Pinnacle West
APS	 	Second Amendment to the Pinnacle West Capital Corporation Supplemental Excess Benefit Retirement Plan of 2005	 	10.1 to Pinnacle West/APS March 31, 2014 Form 10-Q Report, File Nos. 1-8962 and 1-4473	 	5/2/2014	
 	 	 	 	 	 	 	 	 	
10.4.1 b	 	APS	 	Letter Agreement dated December 20, 2006 between APS and Randall K. Edington	 	10.78 to Pinnacle West/APS 2006 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	2/28/2007	
 	 	 	 	 	 	 	 	 	
10.4.2 b	 	APS	 	Letter Agreement dated July 22, 2008 between APS and Randall K. Edington	 	10.3 to Pinnacle West/APS June 30, 2008 Form 10-Q Report, File No. 1-4473	 	8/7/2008	
 	 	 	 	 	 	 	 	 	
10.4.3 b	 	Pinnacle West
APS	 	Letter Agreement dated June 17, 2008 between Pinnacle West/APS and James R. Hatfield	 	10.1 to Pinnacle West/APS June 30, 2008 Form 10-Q Report, File Nos. 1-8962 and 1-4473	 	8/7/2008	
 	 	 	 	 	 	 	 	 	
10.4.4 b	 	APS	 	Supplemental Agreement dated December 26, 2008 between APS and Randall K. Edington	 	10.4.10 to Pinnacle West/APS 2008 Form 10-K Report, File No. 1-4473	 	2/20/2009	
 	 	 	 	 	 	 	 	 	
10.4.5 b	 	APS	 	Description of 2010 Palo Verde Specific Compensation Opportunity for Randall K. Edington	 	10.4.13 to Pinnacle West/APS 2009 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	2/19/2010	
 	 	 	 	 	 	 	 	 	
10.4.6 b	 	Pinnacle West	 	Letter Agreement dated May 21, 2009, between Pinnacle West and David P. Falck	 	10.4 to Pinnacle West/APS March 31, 2010 Form 10-Q Report, File No. 1-8962	 	5/6/2010	
 	 	 	 	 	 	 	 	 	
10.4.7 b	 	APS	 	Supplemental Agreement dated June 19, 2012 between APS and Randall K. Edington	 	10.1 to Pinnacle West/APS June 30, 2012 Form 10-Q Report File Nos. 1-8962 and 1-4473	 	8/2/2012	
 	 	 	 	 	 	 	 	 	
10.4.8 b	 	APS	 	Description of 2013 Palo Verde Specific Compensation Opportunity for Randall K. Edington	 	Pinnacle West/APS December 24, 2012 Form 8-K Report, File No. 1-4473	 	12/26/2012	
 	 	 	 	 	 	 	 	 	
10.4.9 b	 	APS	 	Supplemental Agreement dated December 14, 2014 between APS and Randall K. Edington	 	 	 	 	
 	 	 	 	 	 	 	 	 	
10.5.1 bd	 	Pinnacle West
APS	 	Key Executive Employment and Severance Agreement between Pinnacle West and certain executive officers of Pinnacle West and its subsidiaries	 	10.77 to Pinnacle West/APS 2005 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	3/13/2006	

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Exhibit
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit:  a	 	Date Filed	
10.5.1a bd	 	Pinnacle West
APS	 	Form of Amended and Restated Key Executive Employment and Severance Agreement between Pinnacle West and certain officers of Pinnacle West and its subsidiaries	 	10.4 to Pinnacle West/APS September 30, 2007 Form 10-Q Report, File Nos. 1-8962 and 1-4473	 	11/6/2007	
 	 	 	 	 	 	 	 	 	
10.5.2 bd	 	Pinnacle West
APS	 	Form of Key Executive Employment and Severance Agreement between Pinnacle West and certain officers of Pinnacle West and its subsidiaries	 	10.3 to Pinnacle West/APS September 30, 2007 Form 10-Q Report, File Nos. 1-8962 and 1-4473	 	11/6/2007	
 	 	 	 	 	 	 	 	 	
10.5.3 bd	 	Pinnacle West
APS	 	Form of Key Executive Employment and Severance Agreement between Pinnacle West and certain officers of Pinnacle West and its subsidiaries	 	10.5.3 to Pinnacle West/APS 2009 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	2/19/2010	
 	 	 	 	 	 	 	 	 	
10.5.4 bd	 	Pinnacle West
APS	 	Form of Key Executive Employment and Severance Agreement between Pinnacle West and certain officers of Pinnacle West and its subsidiaries	 	10.5.4 to Pinnacle West/APS 2012 Form 10-K, File Nos. 1-8962 and 1-4473	 	2/22/2013	
 	 	 	 	 	 	 	 	 	
10.6.1 b	 	Pinnacle West
APS	 	Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan	 	10.5A to Pinnacle West’s 2002 Form 10-K Report	 	3/31/2003	
 	 	 	 	 	 	 	 	 	
10.6.1a bd	 	Pinnacle West
APS	 	Performance Share Agreement under the Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan	 	10.1 to Pinnacle West/APS December 9, 2005 Form 8-K Report, File Nos. 1-8962 and 1-4473	 	12/15/2005	
 	 	 	 	 	 	 	 	 	
10.6.1b bd	 	Pinnacle West
APS	 	Performance Share Agreement under the Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan	 	10.1 to Pinnacle West/APS December 31, 2005 Form 8-K Report, File Nos. 1-8962 and 1-4473	 	2/1/2006	
 	 	 	 	 	 	 	 	 	
10.6.1c bd	 	Pinnacle West
APS	 	Performance Accelerated Stock Option Agreement under Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan	 	10.98 to Pinnacle West/APS 2004 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	3/16/2005	
 	 	 	 	 	 	 	 	 	
10.6.1d bd	 	Pinnacle West
APS	 	Performance Share Agreement under the Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan	 	10.91 to Pinnacle West/APS 2005 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	3/13/2006	
 	 	 	 	 	 	 	 	 	
10.6.2 b	 	Pinnacle West	 	Pinnacle West Capital Corporation 2007 Long-Term Incentive Plan	 	Appendix B to the Proxy Statement for Pinnacle West’s 2007 Annual Meeting of Shareholders, File No. 1-8962	 	4/20/2007	
 	 	 	 	 	 	 	 	 	
10.6.2a b	 	Pinnacle West	 	First Amendment to the Pinnacle West Capital Corporation 2007 Long-Term Incentive Plan	 	10.2 to Pinnacle West/APS April 18, 2007 Form 8-K Report, File No. 1-8962	 	4/20/2007	
 	 	 	 	 	 	 	 	 	
10.6.2b bd	 	Pinnacle West
APS	 	Performance Share Agreement under the Pinnacle West Capital Corporation 2007 Long-Term Incentive Plan	 	10.3 to Pinnacle West/APS March 31, 2009 Form 10-Q Report, File Nos. 1-8962 and 1-4473	 	5/5/2009	
 	 	 	 	 	 	 	 	 	
10.6.2c bd	 	Pinnacle West	 	Form of Performance Share Agreement under the Pinnacle West Capital Corporation 2007 Long-Term Incentive Plan	 	10.1 to Pinnacle West/APS June 30, 2010 Form 10-Q Report, File No. 1-8962	 	8/3/2010	
 	 	 	 	 	 	 	 	 	
10.6.2d bd	 	Pinnacle West	 	Form of Restricted Stock Unit Agreement under the Pinnacle West Capital Corporation 2007 Long-Term Incentive Plan	 	10.2 to Pinnacle West/APS June 30, 2010 Form 10-Q Report, File No. 1-8962	 	8/3/2010	

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Exhibit
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit:  a	 	Date Filed	
10.6.2e bd	 	Pinnacle West	 	Form of Performance Share Agreement under the Pinnacle West Capital Corporation 2007 Long-Term Incentive Plan	 	10.4 to Pinnacle West/APS March 31, 2011 Form 10-Q Report, File No. 1-8962	 	4/29/2011	
 	 	 	 	 	 	 	 	 	
10.6.2f bd	 	Pinnacle West	 	Form of Restricted Stock Unit Agreement under the Pinnacle West Capital Corporation 2007 Long-Term Incentive Plan	 	10.5 to Pinnacle West/APS March 31, 2011 Form 10-Q Report, File No. 1-8962	 	4/29/2011	
 	 	 	 	 	 	 	 	 	
10.6.2g bd	 	Pinnacle West	 	Form of Restricted Stock Unit Agreement under the Pinnacle West Capital Corporation 2007 Long-Term Incentive Plan (Supplemental 2010 Award)	 	10.6 to Pinnacle West/APS March 31, 2011 Form 10-Q Report, File No. 1-8962	 	4/29/2011	
 	 	 	 	 	 	 	 	 	
10.6.3 b	 	Pinnacle West	 	Description of Annual Stock Grants to Non-Employee Directors	 	10.1 to Pinnacle West/APS September 30, 2007 Form 10-Q Report, File No. 1-8962	 	11/6/2007	
 	 	 	 	 	 	 	 	 	
10.6.4 b	 	Pinnacle West	 	Description of Stock Grant to W. Douglas Parker	 	10.2 to Pinnacle West/APS September 30, 2007 Form 10-Q Report, File No. 1-8962	 	11/6/2007	
 	 	 	 	 	 	 	 	 	
10.6.5 b	 	Pinnacle West	 	Description of Annual Stock Grants to Non-Employee Directors	 	10.2 to Pinnacle West/APS June 30, 2008 Form 10-Q Report, File No. 1-8962	 	8/7/2008	
 	 	 	 	 	 	 	 	 	
10.6.6 bd	 	Pinnacle West
APS	 	Summary of 2015 CEO Variable Incentive Plan and Officer Variable Incentive Plan	 	 	 	 	
 	 	 	 	 	 	 	 	 	
10.6.7	 	Pinnacle West	 	Description of Restricted Stock Unit Grant to Donald E. Brandt	 	Pinnacle West/APS December 24, 2012 Form 8-K Report, File No. 1-8962	 	12/26/2012	
 	 	 	 	 	 	 	 	 	
10.6.8 b	 	Pinnacle West
APS	 	Pinnacle West Capital Corporation 2012 Long-Term Incentive Plan	 	Appendix A to the Proxy Statement for Pinnacle West’s 2012 Annual Meeting of Shareholders, File No. 1-8962	 	3/29/2012	
 	 	 	 	 	 	 	 	 	
10.6.8a bd	 	Pinnacle West	 	Form of Performance Share Award Agreement under the Pinnacle West Capital Corporation 2012 Long-Term Incentive Plan	 	10.1 to Pinnacle West/APS March 31, 2012 Form 10-Q Report, File Nos. 1-8962 and 1-4473	 	5/3/2012	
 	 	 	 	 	 	 	 	 	
10.6.8b bd	 	Pinnacle West	 	Form of Restricted Stock Unit Award Agreement under the Pinnacle West Capital Corporation 2012 Long-Term Incentive Plan	 	10.2 to Pinnacle West/APS March 31, 2012 Form 10-Q Report, File Nos. 1-8962 and 1-4473	 	5/3/2012	
 	 	 	 	 	 	 	 	 	
10.6.8c bd	 	Pinnacle West	 	Form of Performance Share Award Agreement under the Pinnacle West Capital Corporation 2012 Long-Term Incentive Plan	 	10.6.8c to Pinnacle West/APS 2013 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	2/21/2014	
 	 	 	 	 	 	 	 	 	
10.6.8d bd	 	Pinnacle West	 	Form of Restricted Stock Unit Award Agreement under the Pinnacle West Capital Corporation 2012 Long-Term Incentive Plan	 	10.6.8d to Pinnacle West/APS 2013 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	2/21/2014	
 	 	 	 	 	 	 	 	 	
10.6.8e bd	 	Pinnacle West	 	Master Amendment to Performance Share Agreements	 	10.3 to Pinnacle West/APS March 31, 2012 Form 10-Q Report, File Nos. 1-8962 and 1-4473	 	5/3/2012	
 	 	 	 	 	 	 	 	 	
10.6.8f bd	 	Pinnacle West	 	Master Amendment to Restricted Stock Unit Agreements	 	10.4 to Pinnacle West/APS March 31, 2012 Form 10-Q Report, File Nos. 1-8962 and 1-4473	 	5/3/2012	

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Exhibit
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit:  a	 	Date Filed	
 	 	 	 	 	 	 	 	 	
10.7.1	 	Pinnacle West
APS	 	Indenture of Lease with Navajo Tribe of Indians, Four Corners Plant	 	5.01 to APS’s Form S-7 Registration Statement, File No. 2-59644	 	9/1/1977	
 	 	 	 	 	 	 	 	 	
10.7.1a	 	Pinnacle West
APS	 	Supplemental and Additional Indenture of Lease, including amendments and supplements to original lease with Navajo Tribe of Indians, Four Corners Plant	 	5.02 to APS’s Form S-7 Registration Statement, File No. 2-59644	 	9/1/1977	
 	 	 	 	 	 	 	 	 	
10.7.1b	 	Pinnacle West
APS	 	Amendment and Supplement No. 1 to Supplemental and Additional Indenture of Lease Four Corners, dated April 25, 1985	 	10.36 to Pinnacle West’s Registration Statement on Form  8-B Report, File No. 1-8962	 	7/25/1985	
 	 	 	 	 	 	 	 	 	
10.7.1c	 	Pinnacle West
APS	 	Amendment and Supplement No. 2 to Supplemental and Additional Indenture of Lease with the Navajo Nation dated March 7, 2011	 	10.1 to Pinnacle West/APS March 31, 2011 Form 10-Q Report, File Nos. 1-8962 and 1-4473	 	4/29/2011	
 	 	 	 	 	 	 	 	 	
10.7.1d	 	Pinnacle West
APS	 	Amendment and Supplement No. 3 to Supplemental and Additional Indenture of Lease with the Navajo Nation dated March 7, 2011	 	10.2 to Pinnacle West/APS March 31, 2011 Form 10-Q Report, File Nos. 1-8962 and 1-4473	 	4/29/2011	
 	 	 	 	 	 	 	 	 	
10.7.2	 	Pinnacle West
APS	 	Application and Grant of multi-party rights-of-way and easements, Four Corners Plant Site	 	5.04 to APS’s Form S-7 Registration Statement, File No. 2-59644	 	9/1/1977	
 	 	 	 	 	 	 	 	 	
10.7.2a	 	Pinnacle West
APS	 	Application and Amendment No. 1 to Grant of multi-party rights-of-way and easements, Four Corners Site dated April 25, 1985	 	10.37 to Pinnacle West’s Registration Statement on Form 8-B, File No. 1-8962	 	7/25/1985	
 	 	 	 	 	 	 	 	 	
10.7.3	 	Pinnacle West
APS	 	Application and Grant of APS rights- of-way and easements, Four Corners Site	 	5.05 to APS’s Form S-7 Registration Statement, File No. 2-59644	 	9/1/1977	
 	 	 	 	 	 	 	 	 	
10.7.3a	 	Pinnacle West
APS	 	Application and Amendment No. 1 to Grant of APS rights-of-way and easements, Four Corners Site dated April 25, 1985	 	10.38 to Pinnacle West’s Registration Statement on Form 8-B, File No. 1-8962	 	7/25/1985	
 	 	 	 	 	 	 	 	 	
10.7.4a	 	Pinnacle West
APS	 	Four Corners Project Co-Tenancy Agreement Amendment No. 6	 	10.7 to Pinnacle West’s 2000 Form 10-K Report, File No. 1-8962	 	3/14/2001	
 	 	 	 	 	 	 	 	 	
10.7.4b	 	Pinnacle West
APS	 	Four Corners Project Co-Tenancy Agreement Amendment No. 7, dated December 30, 2013, among APS, El Paso Electric Company, Public Service Company of New Mexico, SRP, SCE, and Tucson Electric Power Company	 	10.3 to Pinnacle West/APS March 31, 2014 Form 10-Q Report, File Nos. 1-8962 and 1-4473	 	5/2/2014	
 	 	 	 	 	 	 	 	 	
10.8.1	 	Pinnacle West
APS	 	Indenture of Lease, Navajo Units 1, 2, and 3	 	5(g) to APS’s Form S-7 Registration Statement, File No. 2-36505	 	3/23/1970	
 	 	 	 	 	 	 	 	 	
10.8.2	 	Pinnacle West
APS	 	Application of Grant of rights-of-way and easements, Navajo Plant	 	5(h) to APS Form S-7 Registration Statement, File No. 2-36505	 	3/23/1970	
 	 	 	 	 	 	 	 	 	
10.8.3	 	Pinnacle West
APS	 	Water Service Contract Assignment with the United States Department of Interior, Bureau of Reclamation, Navajo Plant	 	5(l) to APS’s Form S-7 Registration Statement, File No. 2-394442	 	3/16/1971	

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Exhibit
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit:  a	 	Date Filed	
10.8.4	 	Pinnacle West
APS	 	Navajo Project Co-Tenancy Agreement dated as of March 23, 1976, and Supplement No. 1 thereto dated as of October 18, 1976, Amendment No. 1 dated as of July 5, 1988, and Amendment No. 2 dated as of June 14, 1996; Amendment No. 3 dated as of February 11, 1997; Amendment No. 4 dated as of January 21, 1997; Amendment No. 5 dated as of January 23, 1998; Amendment No. 6 dated as of July 31, 1998	 	10.107 to Pinnacle West/APS 2005 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	3/13/2006	
 	 	 	 	 	 	 	 	 	
10.8.5	 	Pinnacle West
APS	 	Navajo Project Participation Agreement dated as of September 30, 1969, and Amendment and Supplement No. 1 dated as of January 16, 1970, and Coordinating Committee Agreement No. 1 dated as of September 30, 1971	 	10.108 to Pinnacle West/APS 2005 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	3/13/2006	
 	 	 	 	 	 	 	 	 	
10.9.1	 	Pinnacle West
APS	 	ANPP Participation Agreement, dated August 23, 1973, among APS, SRP, SCE, Public Service Company of New Mexico, El Paso, Southern California Public Power Authority, and Department of Water and Power of the City of Los Angeles, and amendments 1-12 thereto	 	10. 1 to APS’s 1988 Form 10-K Report, File No. 1-4473	 	3/8/1989	
 	 	 	 	 	 	 	 	 	
10.9.1a	 	Pinnacle West
APS	 	Amendment No. 13, dated as of April 22, 1991, to ANPP Participation Agreement, dated August 23, 1973, among APS, SRP, SCE, Public Service Company of New Mexico, El Paso, Southern California Public Power Authority, and Department of Water and Power of the City of Los Angeles	 	10.1 to APS’s March 31, 1991 Form 10-Q Report, File No. 1-4473	 	5/15/1991	
 	 	 	 	 	 	 	 	 	
10.9.1b	 	Pinnacle West
APS	 	Amendment No. 14 to ANPP Participation Agreement, dated August 23, 1973, among APS, SRP, SCE, Public Service Company of New Mexico, El Paso, Southern California Public Power Authority, and Department of Water and Power of the City of Los Angeles	 	99.1 to Pinnacle West’s June 30, 2000 Form 10-Q Report, File No. 1-8962	 	8/14/2000	
 	 	 	 	 	 	 	 	 	
10.9.1c	 	Pinnacle West
APS	 	Amendment No. 15, dated November 29, 2010, to ANPP Participation Agreement, dated August 23, 1973, among APS, SRP, SCE, Public Service Company of New Mexico, El Paso, Southern California Public Power Authority, and Department of Water and Power of the City of Los Angeles	 	10.9.1c to Pinnacle West/APS 2010 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	2/18/2011	

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Exhibit
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit:  a	 	Date Filed	
10.9.1d	 	Pinnacle West
APS	 	Amendment No. 16, dated April 28, 2014, to ANPP Participation Agreement, dated August 23, 1973, among APS, SRP, SCE, Public Service Company of New Mexico, El Paso, Southern California Public Power Authority, and Department of Water and Power of the City of Los Angeles	 	10.2 to Pinnacle West/APS March 31, 2014 Form 10-Q Report, File Nos. 1-8962 and 1-4473	 	5/2/2014	
 	 	 	 	 	 	 	 	 	
10.10.1	 	Pinnacle West
APS	 	Asset Purchase and Power Exchange Agreement dated September 21, 1990 between APS and PacifiCorp, as amended as of October 11, 1990 and as of July 18, 1991	 	10.1 to APS’s June 30, 1991 Form 10-Q Report, File No. 1-4473	 	8/8/1991	
 	 	 	 	 	 	 	 	 	
10.10.2	 	Pinnacle West
APS	 	Long-Term Power Transaction Agreement dated September 21, 1990 between APS and PacifiCorp, as amended as of October 11, 1990, and as of July 8, 1991	 	10.2 to APS’s June 30, 1991 Form 10-Q Report, File No. 1-4473	 	8/8/1991	
 	 	 	 	 	 	 	 	 	
10.10.2a	 	Pinnacle West
APS	 	Amendment No. 1 dated April 5, 1995 to the Long-Term Power Transaction Agreement and Asset Purchase and Power Exchange Agreement between PacifiCorp and APS	 	10.3 to APS’s 1995 Form 10-K Report, File No. 1-4473	 	3/29/1996	
 	 	 	 	 	 	 	 	 	
10.10.3	 	Pinnacle West
APS	 	Restated Transmission Agreement between PacifiCorp and APS dated April 5, 1995	 	10.4 to APS’s 1995 Form 10-K Report, File No. 1-4473	 	3/29/1996	
 	 	 	 	 	 	 	 	 	
10.10.4	 	Pinnacle West
APS	 	Contract among PacifiCorp, APS and DOE Western Area Power Administration, Salt Lake Area Integrated Projects for Firm Transmission Service dated May 5, 1995	 	10.5 to APS’s 1995 Form 10-K Report, File No. 1-4473	 	3/29/1996	
 	 	 	 	 	 	 	 	 	
10.10.5	 	Pinnacle West
APS	 	Reciprocal Transmission Service Agreement between APS and PacifiCorp dated as of March 2, 1994	 	10.6 to APS’s 1995 Form 10-K Report, File No. 1-4473	 	3/29/1996	
 	 	 	 	 	 	 	 	 	
10.11.1	 	Pinnacle West
APS	 	Five-Year Credit Agreement dated as of May 9, 2014, among APS, as Borrower, Barclays Bank PLC, as Agent and Issuing Bank, and the lenders and other parties thereto	 	10.3 to Pinnacle West/APS June 30, 2014 Form 10-Q Report, File Nos. 1-8962 and 1-4473	 	7/31/2014	
 	 	 	 	 	 	 	 	 	
10.11.2	 	Pinnacle West	 	Term Loan Agreement dated as of December 31, 2014 among Pinnacle West, as Borrower,  JPMorgan Chase Bank, N.A., as Agent, U.S. Bank Association, as Syndication Agent, TD Bank, N.A., The Bank of Nova Scotia and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Co-Documentation Agents, and such institutions compromising the lenders party thereto	 	 	 	 	

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Exhibit
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit:  a	 	Date Filed	
10.11.3	 	Pinnacle West	 	Five-Year Credit Agreement, dated as of May 9, 2014, among Pinnacle West, as Borrower, Barclays Bank PLC, as Agent and Issuing Bank, and the lenders and other parties thereto	 	10.4 to Pinnacle West/APS June 30, 2014 Form 10-Q Report, File Nos. 1-8962 and 1-4473	 	7/31/2014	
 	 	 	 	 	 	 	 	 	
10.11.4	 	Pinnacle West
APS	 	Reimbursement Agreement among APS, the Banks party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent and Issuing Bank, dated as of April 16, 2010	 	10.2 to Pinnacle West/APS March 31, 2010 Form 10-Q Report, File Nos. 1-8962 and 1-4473	 	5/6/2010	
 	 	 	 	 	 	 	 	 	
10.11.4a	 	Pinnacle West
APS	 	Amendment No. 1 to the Reimbursement Agreement among APS, the Banks party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent and Issuing Bank, dated December 22, 2011	 	10.11.5a to Pinnacle West/APS 2011 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	2/24/2012	
 	 	 	 	 	 	 	 	 	
10.11.5	 	Pinnacle West
APS	 	Reimbursement Agreement among APS, the Banks party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent and Issuing Bank, dated as of April 16, 2010	 	10.3 to Pinnacle West/APS March 31, 2010 Form 10-Q Report, File Nos. 1-8962 and 1-4473	 	5/6/2010	
 	 	 	 	 	 	 	 	 	
10.11.5a	 	Pinnacle West
APS	 	Amendment No. 1 to the Reimbursement Agreement among APS, the Banks party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent and Issuing Bank, dated December 22, 2011	 	10.11.6a to Pinnacle West/APS 2011 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	2/24/2012	
 	 	 	 	 	 	 	 	 	
10.11.6	 	APS	 	Five-Year Credit Agreement dated as of April 9, 2013 among APS, as Borrower, Barclays Bank PLC, as Agent and the lenders and other parties thereto	 	10.1 to Pinnacle West/APS March 31, 2013 Form 10-Q Report, File Nos. 1-8962 and 1-4473	 	5/3/2013	
 	 	 	 	 	 	 	 	 	
10.12.1 c	 	Pinnacle West
APS	 	Facility Lease, dated as of August 1, 1986, between U.S. Bank National Association, successor to State Street Bank and Trust Company, as successor to The First National Bank of Boston, in its capacity as Owner Trustee, as Lessor, and APS, as Lessee	 	4.3 to APS’s Form 18 Registration Statement, File No. 33-9480	 	10/24/1986	
 	 	 	 	 	 	 	 	 	
10.12.1a c	 	Pinnacle West
APS	 	Amendment No. 1, dated as of November 1, 1986, to Facility Lease, dated as of August 1, 1986, between U.S. Bank National Association, successor to State Street Bank and Trust Company, as successor to The First National Bank of Boston, in its capacity as Owner Trustee, as Lessor, and APS, as Lessee	 	10.5 to APS’s September 30, 1986 Form 10-Q Report by means of Amendment No. 1 on December 3, 1986 Form 8, File No. 1-4473	 	12/4/1986	
 	 	 	 	 	 	 	 	 	
10.12.1b c	 	Pinnacle West
APS	 	Amendment No. 2 dated as of June 1, 1987 to Facility Lease dated as of August 1, 1986 between U.S. Bank National Association, successor to State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Lessor, and APS, as Lessee	 	10.3 to APS’s 1988 Form 10-K Report, File No. 1-4473	 	3/8/1989	

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Exhibit
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit:  a	 	Date Filed	
10.12.1c c	 	Pinnacle West
APS	 	Amendment No. 3, dated as of March 17, 1993, to Facility Lease, dated as of August 1, 1986, between U.S. Bank National Association, successor to State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Lessor, and APS, as Lessee	 	10.3 to APS’s 1992 Form 10-K Report, File No. 1-4473	 	3/30/1993	
 	 	 	 	 	 	 	 	 	
10.12.2	 	Pinnacle West
APS	 	Facility Lease, dated as of December 15, 1986, between U.S. Bank National Association, successor to State Street Bank and Trust Company, as successor to The First National Bank of Boston, in its capacity as Owner Trustee, as Lessor, and APS, as Lessee	 	10.1 to APS’s November 18, 1986 Form 8-K Report, File No. 1-4473	 	1/20/1987	
 	 	 	 	 	 	 	 	 	
10.12.2a	 	Pinnacle West
APS	 	Amendment No. 1, dated as of August 1, 1987, to Facility Lease, dated as of December 15, 1986, between U.S. Bank National Association, successor to State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Lessor, and APS, as Lessee	 	4.13 to APS’s Form 18 Registration Statement No.  33-9480 by means of August 1, 1987 Form 8-K Report, File No. 1-4473	 	8/24/1987	
 	 	 	 	 	 	 	 	 	
10.12.2b	 	Pinnacle West
APS	 	Amendment No. 2, dated as of March 17, 1993, to Facility Lease, dated as of December 15, 1986, between U.S. Bank National Association, successor to State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Lessor, and APS, as Lessee	 	10.4 to APS’s 1992 Form 10-K Report, File No. 1-4473	 	3/30/1993	
 	 	 	 	 	 	 	 	 	
10.12.2c	 	Pinnacle West
APS	 	Amendment No. 3, dated July 10, 2014, to Facility Lease, dated as of December 15, 1986, between U.S. Bank National Association, successor to State Street Bank and Trust Company, as successor to the First National Bank of Boston, as Lessor, and APS, as Lessee	 	10.2 to Pinnacle West/APS June 30, 2014 Form 10-Q Report, File Nos. 1-8962 and 1-4473	 	7/31/2014	
 	 	 	 	 	 	 	 	 	
10.13.1	 	Pinnacle West
APS	 	Agreement between Pinnacle West Energy Corporation and APS for Transportation and Treatment of Effluent by and between Pinnacle West Energy Corporation and APS dated as of the 10 th  day of April, 2001	 	10.102 to Pinnacle West/APS 2004 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	3/16/2005	
 	 	 	 	 	 	 	 	 	
10.13.2	 	Pinnacle West
APS	 	Agreement for the Transfer and Use of Wastewater and Effluent by and between APS, SRP and PWE dated June 1, 2001	 	10.103 to Pinnacle West/APS 2004 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	3/16/2005	
 	 	 	 	 	 	 	 	 	
10.13.3	 	Pinnacle West
APS	 	Agreement for the Sale and Purchase of Wastewater Effluent dated November 13, 2000, by and between the City of Tolleson, Arizona, APS and SRP	 	10.104 to Pinnacle West/APS 2004 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	3/16/2005	

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Exhibit
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit:  a	 	Date Filed	
10.13.4	 	Pinnacle West
APS	 	Operating Agreement for the Co-Ownership of Wastewater Effluent dated November 16, 2000 by and between APS and SRP	 	10.105 to Pinnacle West/APS 2004 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	3/16/2005	
 	 	 	 	 	 	 	 	 	
10.13.5	 	Pinnacle West
APS	 	Municipal Effluent Purchase and Sale Agreement dated April 29, 2010, by and between City of Phoenix, City of Mesa, City of Tempe, City of Scottsdale, City of Glendale, APS and SRP	 	10.1 to Pinnacle West/APS March 31, 2010 Form 10-Q Report, File Nos. 1-8962 and 1-4473	 	5/6/2010	
 	 	 	 	 	 	 	 	 	
10.14.1	 	Pinnacle West
APS	 	Contract, dated July 21, 1984, with DOE providing for the disposal of nuclear fuel and/or high-level radioactive waste, ANPP	 	10.31 to Pinnacle West’s Form S-14 Registration Statement, File No. 2-96386	 	3/13/1985	
 	 	 	 	 	 	 	 	 	
10.15.1	 	Pinnacle West
APS	 	Territorial Agreement between APS and SRP	 	10.1 to APS’s March 31, 1998 Form 10-Q Report, File No. 1-4473	 	5/15/1998	
 	 	 	 	 	 	 	 	 	
10.15.2	 	Pinnacle West
APS	 	Power Coordination Agreement between APS and SRP	 	10.2 to APS’s March 31, 1998 Form 10-Q Report, File No. 1-4473	 	5/15/1998	
 	 	 	 	 	 	 	 	 	
10.15.3	 	Pinnacle West
APS	 	Memorandum of Agreement between APS and SRP	 	10.3 to APS’s March 31, 1998 Form 10-Q Report, File No. 1-4473	 	5/15/1998	
 	 	 	 	 	 	 	 	 	
10.15.3a	 	Pinnacle West
APS	 	Addendum to Memorandum of Agreement between APS and SRP dated as of May 19, 1998	 	10.2 to APS’s May 19, 1998 Form 8-K Report, File No. 1-4473	 	6/26/1998	
 	 	 	 	 	 	 	 	 	
10.16	 	Pinnacle West
APS	 	Purchase and Sale Agreement dated November 8, 2010 by and between SCE and APS	 	10.1 to Pinnacle West/APS November 8, 2010 Form 8-K Report, File Nos. 1-8962 and 1-4473	 	11/8/2010	
 	 	 	 	 	 	 	 	 	
10.17	 	Pinnacle West
APS	 	Proposed Settlement Agreement dated January 6, 2012 by and among APS and certain parties to its retail rate case (approved by ACC Order No. 73183)	 	10.17 to Pinnacle West/APS 2011 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	2/24/2012	
 	 	 	 	 	 	 	 	 	
12.1	 	Pinnacle West	 	Ratio of Earnings to Fixed Charges	 	 	 	 	
 	 	 	 	 	 	 	 	 	
12.2	 	APS	 	Ratio of Earnings to Fixed Charges	 	 	 	 	
 	 	 	 	 	 	 	 	 	
12.3	 	Pinnacle West	 	Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements	 	 	 	 	
 	 	 	 	 	 	 	 	 	
21.1	 	Pinnacle West	 	Subsidiaries of Pinnacle West	 	 	 	 	
 	 	 	 	 	 	 	 	 	
23.1	 	Pinnacle West	 	Consent of Deloitte & Touche LLP	 	 	 	 	
 	 	 	 	 	 	 	 	 	
23.2	 	APS	 	Consent of Deloitte & Touche LLP	 	 	 	 	
 	 	 	 	 	 	 	 	 	
31.1	 	Pinnacle West	 	Certificate of Donald E. Brandt, Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended	 	 	 	 	
 	 	 	 	 	 	 	 	 	
31.2	 	Pinnacle West	 	Certificate of James R. Hatfield, Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended	 	 	 	 	

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Exhibit
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit:  a	 	Date Filed	
31.3	 	APS	 	Certificate of Donald E. Brandt, Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended	 	 	 	 	
 	 	 	 	 	 	 	 	 	
31.4	 	APS	 	Certificate of James R. Hatfield, Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended	 	 	 	 	
 	 	 	 	 	 	 	 	 	
32.1 e	 	Pinnacle West	 	Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	 	 	 	 	
 	 	 	 	 	 	 	 	 	
32.2 e	 	APS	 	Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	 	 	 	 	
 	 	 	 	 	 	 	 	 	
99.1	 	Pinnacle West
APS	 	Collateral Trust Indenture among PVNGS II Funding Corp., Inc., APS and Chemical Bank, as Trustee	 	4.2 to APS’s 1992 Form 10-K Report, File No. 1-4473	 	3/30/1993	
 	 	 	 	 	 	 	 	 	
99.1a	 	Pinnacle West
APS	 	Supplemental Indenture to Collateral Trust Indenture among PVNGS II Funding Corp., Inc., APS and Chemical Bank, as Trustee	 	4.3 to APS’s 1992 Form 10-K Report, File No. 1-4473	 	3/30/1993	
 	 	 	 	 	 	 	 	 	
99.2 c	 	Pinnacle West
APS	 	Participation Agreement, dated as of August 1, 1986, among PVNGS Funding Corp., Inc., Bank of America National Trust and Savings Association, State Street Bank and Trust Company, as successor to The First National Bank of Boston, in its individual capacity and as Owner Trustee, Chemical Bank, in its individual capacity and as Indenture Trustee, APS, and the Equity Participant named therein	 	28.1 to APS’s September 30, 1992 Form 10-Q Report, File No. 1-4473	 	11/9/1992	
 	 	 	 	 	 	 	 	 	
99.2a c	 	Pinnacle West
APS	 	Amendment No. 1 dated as of November 1, 1986, to Participation Agreement, dated as of August 1, 1986, among PVNGS Funding Corp., Inc., Bank of America National Trust and Savings Association, State Street Bank and Trust Company, as successor to The First National Bank of Boston, in its individual capacity and as Owner Trustee, Chemical Bank, in its individual capacity and as Indenture Trustee, APS, and the Equity Participant named therein	 	10.8 to APS’s September 30, 1986 Form 10-Q Report by means of Amendment No. 1, on December 3, 1986 Form 8, File No. 1-4473	 	12/4/1986	

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Exhibit
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit:  a	 	Date Filed	
99.2b c	 	Pinnacle West
APS	 	Amendment No. 2, dated as of March 17, 1993, to Participation Agreement, dated as of August 1, 1986, among PVNGS Funding Corp., Inc., PVNGS II Funding Corp., Inc., State Street Bank and Trust Company, as successor to The First National Bank of Boston, in its individual capacity and as Owner Trustee, Chemical Bank, in its individual capacity and as Indenture Trustee, APS, and the Equity Participant named therein	 	28.4 to APS’s 1992 Form 10-K Report, File No. 1-4473	 	3/30/1993	
 	 	 	 	 	 	 	 	 	
99.3 c	 	Pinnacle West
APS	 	Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease, dated as of August 1, 1986, between State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee, and Chemical Bank, as Indenture Trustee	 	4.5 to APS’s Form 18 Registration Statement, File No. 33-9480	 	10/24/1986	
 	 	 	 	 	 	 	 	 	
99.3a c	 	Pinnacle West
APS	 	Supplemental Indenture No. 1, dated as of November 1, 1986 to Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease, dated as of August 1, 1986, between State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee, and Chemical Bank, as Indenture Trustee	 	10.6 to APS’s September 30, 1986 Form 10-Q Report by means of Amendment No. 1 on December  3, 1986 Form 8, File No. 1-4473	 	12/4/1986	
 	 	 	 	 	 	 	 	 	
99.3b c	 	Pinnacle West
APS	 	Supplemental Indenture No. 2 to Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease, dated as of August 1, 1986, between State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee, and Chemical Bank, as Lease Indenture Trustee	 	4.4 to APS’s 1992 Form 10-K Report, File No. 1-4473	 	3/30/1993	
 	 	 	 	 	 	 	 	 	
99.4 c	 	Pinnacle West
APS	 	Assignment, Assumption and Further Agreement, dated as of August 1, 1986, between APS and State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee	 	28.3 to APS’s Form 18 Registration Statement, File No. 33-9480	 	10/24/1986	
 	 	 	 	 	 	 	 	 	
99.4a c	 	Pinnacle West
APS	 	Amendment No. 1, dated as of November 1, 1986, to Assignment, Assumption and Further Agreement, dated as of August 1, 1986, between APS and State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee	 	10.10 to APS’s September 30, 1986 Form 10-Q Report by means of Amendment No. l on December  3, 1986 Form 8, File No. 1-4473	 	12/4/1986	

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Exhibit
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit:  a	 	Date Filed	
99.4b c	 	Pinnacle West
APS	 	Amendment No. 2, dated as of March 17, 1993, to Assignment, Assumption and Further Agreement, dated as of August 1, 1986, between APS and State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee	 	28.6 to APS’s 1992 Form 10-K Report, File No. 1-4473	 	3/30/1993	
 	 	 	 	 	 	 	 	 	
99.5	 	Pinnacle West
APS	 	Participation Agreement, dated as of December 15, 1986, among PVNGS Funding Report Corp., Inc., State Street Bank and Trust Company, as successor to The First National Bank of Boston, in its individual capacity and as Owner Trustee, Chemical Bank, in its individual capacity and as Indenture Trustee under a Trust Indenture, APS, and the Owner Participant named therein	 	28.2 to APS’s September 30, 1992 Form 10-Q Report, File No. 1-4473	 	11/9/1992	
 	 	 	 	 	 	 	 	 	
99.5a	 	Pinnacle West
APS	 	Amendment No. 1, dated as of August 1, 1987, to Participation Agreement, dated as of December 15, 1986, among PVNGS Funding Corp., Inc. as Funding Corporation, State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee, Chemical Bank, as Indenture Trustee, APS, and the Owner Participant named therein	 	28.20 to APS’s Form 18 Registration Statement No. 33-9480 by means of a November 6, 1986 Form 8-K Report, File No. 1-4473	 	8/10/1987	
 	 	 	 	 	 	 	 	 	
99.5b	 	Pinnacle West
APS	 	Amendment No. 2, dated as of March 17, 1993, to Participation Agreement, dated as of December 15, 1986, among PVNGS Funding Corp., Inc., PVNGS II Funding Corp., Inc., State Street Bank and Trust Company, as successor to The First National Bank of Boston, in its individual capacity and as Owner Trustee, Chemical Bank, in its individual capacity and as Indenture Trustee, APS, and the Owner Participant named therein	 	28.5 to APS’s 1992 Form 10-K Report, File No. 1-4473	 	3/30/1993	
 	 	 	 	 	 	 	 	 	
99.6	 	Pinnacle West
APS	 	Trust Indenture, Mortgage Security Agreement and Assignment of Facility Lease, dated as of December 15, 1986, between State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee, and Chemical Bank, as Indenture Trustee	 	10.2 to APS’s November 18, 1986 Form 10-K Report, File No. 1-4473	 	1/20/1987	
 	 	 	 	 	 	 	 	 	
99.6a	 	Pinnacle West
APS	 	Supplemental Indenture No. 1, dated as of August 1, 1987, to Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease, dated as of December 15, 1986, between State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee, and Chemical Bank, as Indenture Trustee	 	4.13 to APS’s Form 18 Registration Statement No. 33-9480 by means of August 1, 1987 Form 8-K Report, File No. 1-4473	 	8/24/1987	

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Exhibit
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit:  a	 	Date Filed	
99.6b	 	Pinnacle West
APS	 	Supplemental Indenture No. 2 to Trust Indenture Mortgage, Security Agreement and Assignment of Facility Lease, dated as of December 15, 1986, between State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee, and Chemical Bank, as Lease Indenture Trustee	 	4.5 to APS’s 1992 Form 10-K Report, File No. 1-4473	 	3/30/1993	
 	 	 	 	 	 	 	 	 	
99.7	 	Pinnacle West
APS	 	Assignment, Assumption and Further Agreement, dated as of December 15, 1986, between APS and State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee	 	10.5 to APS’s November 18, 1986 Form 8-K Report, File No. 1-4473	 	1/20/1987	
 	 	 	 	 	 	 	 	 	
99.7a	 	Pinnacle West
APS	 	Amendment No. 1, dated as of March 17, 1993, to Assignment, Assumption and Further Agreement, dated as of December 15, 1986, between APS and State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee	 	28.7 to APS’s 1992 Form 10-K Report, File No. 1-4473	 	3/30/1993	
 	 	 	 	 	 	 	 	 	
99.8 c	 	Pinnacle West
APS	 	Indemnity Agreement dated as of March 17, 1993 by APS	 	28.3 to APS’s 1992 Form 10-K Report, File No. 1-4473	 	3/30/1993	
 	 	 	 	 	 	 	 	 	
99.9	 	Pinnacle West
APS	 	Extension Letter, dated as of August 13, 1987, from the signatories of the Participation Agreement to Chemical Bank	 	28.20 to APS’s Form 18 Registration Statement No. 33-9480 by means of a November 6, 1986 Form 8-K Report, File No. 1-4473	 	8/10/1987	
 	 	 	 	 	 	 	 	 	
99.10	 	Pinnacle West
APS	 	ACC Order, Decision No. 61969, dated September 29, 1999, including the Retail Electric Competition Rules	 	10.2 to APS’s September 30, 1999 Form 10-Q Report, File No. 1-4473	 	11/15/1999	
 	 	 	 	 	 	 	 	 	
99.11	 	Pinnacle West	 	Purchase Agreement by and among Pinnacle West Energy Corporation and GenWest, L.L.C. and Nevada Power Company, dated June 21, 2005	 	99.5 to Pinnacle West/APS June 30, 2005 Form 10-Q Report, File Nos. 1-8962 and 1-4473	 	8/9/2005	
 	 	 	 	 	 	 	 	 	
101.INS	 	Pinnacle West
APS	 	XBRL Instance Document	 	 	 	 	
 	 	 	 	 	 	 	 	 	
101.SCH	 	Pinnacle West
APS	 	XBRL Taxonomy Extension Schema Document	 	 	 	 	
 	 	 	 	 	 	 	 	 	
101.CAL	 	Pinnacle West
APS	 	XBRL Taxonomy Extension Calculation Linkbase Document	 	 	 	 	
 	 	 	 	 	 	 	 	 	
101.LAB	 	Pinnacle West
APS	 	XBRL Taxonomy Extension Label Linkbase Document	 	 	 	 	
 	 	 	 	 	 	 	 	 	
101.PRE	 	Pinnacle West
APS	 	XBRL Taxonomy Extension Presentation Linkbase Document	 	 	 	 	
 	 	 	 	 	 	 	 	 	
101.DEF	 	Pinnacle West
APS	 	XBRL Taxonomy Definition Linkbase Document	 	 	 	 	

	
 	
a Reports filed under File No. 1-4473 and 1-8962 were filed in the office of the Securities and Exchange Commission located in Washington, D.C.

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b Management contract or compensatory plan or arrangement to be filed as an exhibit pursuant to Item 15(b) of Form 10-K.
 
c An additional document, substantially identical in all material respects to this Exhibit, has been entered into, relating to an additional Equity Participant.  Although such additional document may differ in other respects (such as dollar amounts, percentages, tax indemnity matters, and dates of execution), there are no material details in which such document differs from this Exhibit.
 
d Additional agreements, substantially identical in all material respects to this Exhibit have been entered into with additional persons.  Although such additional documents may differ in other respects (such as dollar amounts and dates of execution), there are no material details in which such agreements differ from this Exhibit.
 
e Furnished herewith as an Exhibit.

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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	
		
 	PINNACLE WEST CAPITAL CORPORATION	
 	(Registrant)	

Date: February 20, 2015	/s/ Donald E. Brandt	
 	(Donald E. Brandt, Chairman of
the Board of Directors, President and
Chief Executive Officer)	
 
Power of Attorney
 
We, the undersigned directors and executive officers of Pinnacle West Capital Corporation, hereby severally appoint James R. Hatfield and David P. Falck, and each of them, our true and lawful attorneys with full power to them and each of them to sign for us, and in our names in the capacities indicated below, any and all amendments to this Annual Report on Form 10-K filed with the Securities and Exchange Commission.
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

	
					
Signature	 	Title	 	Date	

/s/ Donald E. Brandt	 	Principal Executive Officer	 	February 20, 2015	
(Donald E. Brandt, Chairman	 	and Director	 	 	
of the Board of Directors, President	 	 	 	 	
and Chief Executive Officer)	 	 	 	 	

/s/ James R. Hatfield	 	Principal Financial Officer	 	February 20, 2015	
(James R. Hatfield,	 	 	 	 	
Executive Vice President and	 	 	 	 	
Chief Financial Officer)	 	 	 	 	

/s/ Denise R. Danner	 	Principal Accounting Officer	 	February 20, 2015	
(Denise R. Danner,	 	 	 	 	
Vice President, Controller and	 	 	 	 	
Chief Accounting Officer)	 	 	 	 	

188

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/s/ Denis A. Cortese	 	Director	 	February 20, 2015	
(Denis A. Cortese, M.D.)	 	 	 	 	

/s/ Richard P. Fox	 	Director	 	February 20, 2015	
(Richard P. Fox)	 	 	 	 	

/s/ Michael L. Gallagher	 	Director	 	February 20, 2015	
(Michael L. Gallagher)	 	 	 	 	

/s/ Roy A. Herberger	 	Director	 	February 20, 2015	
(Roy A. Herberger, Jr., Ph.D.)	 	 	 	 	

/s/ Dale E. Klein	 	Director	 	February 20, 2015	
(Dale E. Klein, Ph.D.)	 	 	 	 	

/s/ Humberto S. Lopez	 	Director	 	February 20, 2015	
(Humberto S. Lopez)	 	 	 	 	

/s/ Kathryn L. Munro	 	Director	 	February 20, 2015	
(Kathryn L. Munro)	 	 	 	 	

/s/ Bruce J. Nordstrom	 	Director	 	February 20, 2015	
(Bruce J. Nordstrom)	 	 	 	 	

/s/ David P. Wagener	 	Director	 	February 20, 2015	
(David P. Wagener)	 	 	 	 	

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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	
		
 	ARIZONA PUBLIC SERVICE COMPANY	
 	(Registrant)	

  Date: February 20, 2015	/s/ Donald E. Brandt	
 	(Donald E. Brandt, Chairman of
the Board of Directors, President and Chief
Executive Officer)	
 
Power of Attorney
 
We, the undersigned directors and executive officers of Arizona Public Service Company, hereby severally appoint James R. Hatfield and David P. Falck, and each of them, our true and lawful attorneys with full power to them and each of them to sign for us, and in our names in the capacities indicated below, any and all amendments to this Annual Report on Form 10-K filed with the Securities and Exchange Commission.
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

	
					
Signature	 	Title	 	Date	

/s/ Donald E. Brandt	 	Principal Executive Officer	 	February 20, 2015	
(Donald E. Brandt, Chairman	 	and Director	 	 	
of the Board of Directors, President and	 	 	 	 	
Chief Executive Officer)	 	 	 	 	

/s/ James R. Hatfield	 	Principal Financial Officer	 	February 20, 2015	
(James R. Hatfield,	 	 	 	 	
Executive Vice President and	 	 	 	 	
Chief Financial Officer)	 	 	 	 	

/s/ Denise R. Danner	 	Principal Accounting Officer	 	February 20, 2015	
(Denise R. Danner,	 	 	 	 	
Vice President, Controller and	 	 	 	 	
Chief Accounting Officer)	 	 	 	 	

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/s/ Denis A. Cortese	 	Director	 	February 20, 2015	
(Denis A. Cortese, M.D.)	 	 	 	 	

/s/ Richard P. Fox	 	Director	 	February 20, 2015	
(Richard P. Fox)	 	 	 	 	

/s/ Michael L. Gallagher	 	Director	 	February 20, 2015	
(Michael L. Gallagher)	 	 	 	 	

/s/ Roy A. Herberger	 	Director	 	February 20, 2015	
(Roy A. Herberger, Jr., Ph.D.)	 	 	 	 	

/s/ Dale E. Klein	 	Director	 	February 20, 2015	
(Dale E. Klein, Ph.D.)	 	 	 	 	

/s/ Humberto S. Lopez	 	Director	 	February 20, 2015	
(Humberto S. Lopez)	 	 	 	 	

/s/ Kathryn L. Munro	 	Director	 	February 20, 2015	
(Kathryn L. Munro)	 	 	 	 	

/s/ Bruce J. Nordstrom	 	Director	 	February 20, 2015	
(Bruce J. Nordstrom)	 	 	 	 	

/s/ David P. Wagener	 	Director	 	February 20, 2015	
(David P. Wagener)	 	 	 	 	

191

Exhibit 4.6e

ARIZONA PUBLIC SERVICE COMPANY

TO

THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A.

As Trustee under Arizona Public Service Company’s Indenture dated as of January 15, 1998

Eleventh Supplemental Indenture

Dated as of February 26, 2009

8.750% Notes due 2019

This ELEVENTH SUPPLEMENTAL INDENTURE, dated as of February 26, 2009, is between Arizona Public Service Company, a corporation duly organized and existing under the laws of the State of Arizona (herein called the “Company”), having its principal office at 400 North Fifth Street, Phoenix, Arizona 85004, and The Bank of New York Mellon Trust Company, N.A., successor to JPMorgan Chase Bank, N.A. (formerly known as The Chase Manhattan Bank), a national banking association, as Trustee (herein called the “Trustee”) under the Indenture dated as of January 15, 1998 between the Company and the Trustee (the “Indenture”).
RECITALS OF THE COMPANY
The Company has executed and delivered the Indenture to the Trustee to provide for the issuance from time to time of its unsecured debentures, notes or other evidences of indebtedness (the “Securities”), said Securities to be issued in one or more series as provided in the Indenture.
Section 901(7) of the Indenture provides that, without the consent of any Holders, the Company and the Trustee may enter into one or more indentures supplemental to the Indenture for the purpose of establishing the form or terms of Securities of any series.
Pursuant to the terms of the Indenture, the Company desires to provide for the establishment of a new series of its Securities to be known as its 8.750% Notes due 2019 (herein called the “Notes”), the forms and substance of such Notes and the terms, provisions, and conditions thereof to be set forth as provided in the Indenture and this Eleventh Supplemental Indenture.
All things necessary to make this Eleventh Supplemental Indenture a valid agreement of the Company, and to make the Notes described herein, when executed by the Company and authenticated and delivered by the Trustee, the valid obligations of the Company, have been done.
NOW, THEREFORE, THIS ELEVENTH SUPPLEMENTAL INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Notes by the Holders thereof, and for the purpose of setting forth, as provided in the Indenture, the form and substance of each of the Notes and the terms, provisions, and conditions thereof, it is mutually agreed, for the equal and proportionate benefit of all Holders of the Notes, as applicable, as follows:
ARTICLE ONE 
GENERAL TERMS AND CONDITIONS OF THE NOTES

SECTION 101.      Authentication and Delivery . There shall be and is hereby authorized a series of Securities designated the “8.750% Notes due 2019” initially limited in aggregate principal amount to $500,000,000, which amount shall be as set forth in any Company Order for the authentication and delivery of Notes. The Notes shall mature and the principal shall be due and

1
9519017.11

payable together with all accrued and unpaid interest thereon on March 1, 2019, and the Notes shall be issued in the form of registered Securities without coupons.
The foregoing principal amount of the Notes may be increased from time to time as permitted by Section 301 of the Indenture. All Notes need not be issued at the same time and such series may be reopened at any time, without notice to, or the consent of, the then existing Holders, for issuance of additional Notes. Any such additional Notes will be equal in rank and have the same respective maturity, payment terms, redemption features, and other terms as the Notes initially issued, except for the issue date, public offering price, payment of interest accruing prior to the issue date, and first payment of interest following the issue date of the additional Notes.
SECTION 102.      Global Security . The Notes shall be issued in certificated form, except that the Notes shall be issued initially as a Global Security to and registered in the name of Cede & Co., as nominee of The Depository Trust Company, as Depositary therefor. Any Notes to be issued or transferred to, or to be held by, Cede & Co. (or any successor thereof) for such purpose shall bear the depositary legend in substantially the form set forth at the top of the form of Note in Section 301 hereof (in lieu of that set forth in Section 204 of the Indenture), unless otherwise agreed by the Company, such agreement to be confirmed in writing to the Trustee. Each such Global Security may be exchanged in whole or in part for Notes registered, and any transfer of such Global Security in whole or in part may be registered, in the name(s) of Persons other than such Depositary or a nominee thereof only under the circumstances set forth in clause (2) of the last paragraph of Section 305 of the Indenture, or such other circumstances in addition to or in lieu of those set forth in clause (2) of the last paragraph of Section 305 of the Indenture as to which the Company shall agree, such agreement to be confirmed in writing to the Trustee. Upon the occurrence of any such event, the Notes will be issued in such names as the Depositary shall instruct the Trustee.
SECTION 103.      Place of Payment and Place for Registration of Transfers and Exchange . Principal of, and premium, if any, and interest on, the Notes will be payable, the transfer of Notes will be registrable and the Notes will be exchangeable for Notes bearing identical terms and provisions, at the office or agency of the Company in the Borough of Manhattan, The City and State of New York; provided , however , that payment of interest may be made at the option of the Company by wire transfer to any Holder or by deposit to the account of the Holder of any such Notes if such account is maintained with the Trustee, in each case according to the written instructions given by such Holder on or prior to the applicable record date to the Trustee, which written instructions shall remain in effect until revised by such Holder by an instrument in writing delivered to the Trustee.
SECTION 104.      Payment of Interest . The Notes will bear interest at the rate of 8.750% per annum from February 26, 2009 or from the most recent Interest Payment Date (as hereinafter defined) to which interest has been paid or duly provided for until the principal thereof is paid or made available for payment, payable on March 1 and September 1 of each year (each, an “Interest Payment Date”), commencing on September 1, 2009, to the person in whose name such Note or any Predecessor Security is registered, at the close of business on February 15 and August 15, as the case may be, whether or not a Business Day, immediately preceding the Interest Payment Date. Any such interest installment not punctually paid or duly provided for shall forthwith cease to be

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payable to the Holders on such Regular Record Date, and may be paid to the Person in whose name such Note (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date to be fixed by the Trustee for the payment of such Defaulted Interest, notice whereof shall be given to the Holders of the Notes not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may be listed, and upon such notice as may be required by such exchange, all as more fully described in the Indenture.
The amount of interest payable for any period will be computed on the basis of a 360-day year of twelve 30-day months. Interest will accrue from February 26, 2009 or from the most recent Interest Payment Date to which interest has been paid or duly provided for to, but not including, the relevant payment date. In the event that any date on which interest is payable on the Notes is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), in each case with the same force and effect as if made on such date. A “Business Day” shall mean any day except a Saturday, a Sunday or a legal holiday in The City of New York on which banking institutions are authorized or required by law, regulation or executive order to close.
SECTION 105.      Redemption of the Notes . The Company may redeem all or any portion of the Notes, at its option, at any time or from time to time, upon notice as provided in the Indenture. The Redemption Price for any of the Notes to be redeemed on any Redemption Date will be equal to the greater of the following amounts:
(a)      100% of the principal amount of the Notes being redeemed on the Redemption Date; or
(b)      the sum of the present values of the remaining scheduled payments of principal and interest on the Notes being redeemed on that Redemption Date (not including any portion of any payments of interest accrued to the Redemption Date) discounted to the Redemption Date on a semiannual basis at the Adjusted Treasury Rate plus 50 basis points as determined by a Reference Treasury Dealer appointed by the Company for such purpose;
plus, in each case, accrued and unpaid interest thereon to the Redemption Date. Notwithstanding the foregoing, installments of interest on the Notes that are due and payable on Interest Payment Dates falling on or prior to a Redemption Date will be payable on the Interest Payment Date to the Holders as of the close of business on the relevant record date in accordance with the terms of such Notes and the Indenture. The Redemption Price will be calculated on the basis of a 360-day year consisting of twelve 30-day months.
For purposes of this Section 105, the following terms shall have the following meanings:
“ Adjusted Treasury Rate ” means, with respect to any Redemption Date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date.

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“ Comparable Treasury Issue ” means the U.S. Treasury security selected by a Reference Treasury Dealer appointed by the Company for such purpose as having a maturity comparable to the remaining term of the Notes to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of such Notes.
“ Comparable Treasury Price ” means, with respect to any Redemption Date, (A) if the Company obtains three or more Reference Treasury Dealer Quotations, the average of such Reference Treasury Dealer Quotations for such Redemption Date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations, (B) if the Company obtains two such Reference Treasury Dealer Quotations, the average of such quotations, or (C) if only one Reference Treasury Dealer Quotation is received, such quotation.
“Primary Treasury Dealer” means a primary U.S. government securities dealer in the United States.
“ Reference Treasury Dealer ” means (A) Barclays Capital Inc., BNY Mellon Capital Markets, LLC and Credit Suisse Securities (USA) LLC (or their respective affiliates that are Primary Treasury Dealers), and their respective successors; provided, however, that if any of the foregoing shall cease to be a Primary Treasury Dealer, the Company will substitute therefor another Primary Treasury Dealer; and (B) any other Primary Treasury Dealer(s) selected by the Company.
“ Reference Treasury Dealer Quotations ” means, with respect to each Reference Treasury Dealer and any Redemption Date, the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. (New York City time) on the third Business Day preceding such Redemption Date.
The Company shall give the Trustee written notice of the Redemption Price, promptly after the calculation thereof.
The Trustee shall be under no duty to inquire into, may conclusively presume the correctness of, and shall be fully protected in acting upon, the Company’s calculation of any Redemption Price.
No Notes of $1,000 principal amount or less can be redeemed in part.     
Notwithstanding Section 1104 of the Indenture, any notice of redemption given pursuant to said Section with respect to the foregoing redemption need not set forth the Redemption Price but only the manner of calculation thereof.
SECTION 106.      Defeasance of the Notes . The Notes shall be defeasible pursuant to Section 1302 or 1303 of the Indenture.

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 ARTICLE TWO
 
ADDITIONAL COVENANT
SECTION 201.      Negative Lien Covenant . (a)    So long as any of the Notes are Outstanding, the Company will not issue, assume, guarantee or permit to exist any Debt secured by any mortgage, security interest, pledge or lien (herein referred to as a “Mortgage”) of or upon any Operating Property of the Company, whether owned at the date of this Eleventh Supplemental Indenture or hereafter acquired, without effectively securing the Notes (together with, if the Company shall so determine, any other indebtedness or obligations of the Company ranking senior to, or equally with, the Notes) equally and ratably with such Debt (but only so long as such Debt is so secured); provided, however, that the foregoing restriction shall not apply to Debt secured by any of the following:

(1)	Mortgages on any property existing at the time of acquisition thereof (which Mortgages may also extend to subsequent repairs, alterations and improvements to that property);	

(2)	Mortgages on property of a corporation existing at the time such corporation is merged into or consolidated with the Company or at the time of a sale, lease or other disposition of the properties of such corporation or a division thereof as an entirety or substantially as an entirety to the Company;	

(3)	Mortgages on property to secure all or part of the cost of acquiring, constructing, developing or substantially repairing, altering or improving such property or to secure indebtedness incurred to provide funds for any such purpose or for reimbursement of funds previously expended for any such purpose, provided such Mortgages are created or assumed contemporaneously with, or within eighteen (18) months after, such acquisition or completion of construction, development or substantial repair, alteration or improvement;	

(4)	Mortgages in favor of the United States of America or any State thereof, or any department, agency, instrumentality or political subdivision of the United States of America or any State thereof, or for the benefit of holders of securities issued by any such entity (or providers of credit enhancement with respect to those securities), to secure any Debt (including the Company’s obligations with respect to industrial development, pollution control or similar revenue bonds) incurred for the purpose of financing or refinancing all or any part of the purchase price or the cost of constructing, developing or substantially repairing, altering or improving the property of the Company;	

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(5)	Mortgages to compensate the Trustee as provided in the Indenture; or	

(6)	any extension, renewal or replacement (or successive extensions, renewals or replacements), in whole or in part, of any Mortgage referred to in the foregoing clauses (1) to (5), inclusive; provided, however, that the principal amount of Debt secured thereby and not otherwise authorized by said clauses (1) to (5), inclusive, shall not exceed the principal amount of Debt, plus any premium or fee payable in connection with any such extension, renewal or replacement, so secured at the time of such extension, renewal or replacement.	
(b)    Notwithstanding the provisions of Section 201(a) , the Company may issue, assume or guarantee or permit to exist Debt, secured by Mortgages that would otherwise be subject to the restrictions of Section 201(a) : (x) in connection with the Company’s existing sale and lease-back transactions relating to Unit 2 of the Palo Verde Nuclear Generating Station (the “Unit 2 Sale and Lease-Back Transactions”), including but not limited to Mortgages on the leased interests in Unit 2 of the Palo Verde Nuclear Generating Station and related rights if the Company reacquires ownership in any of those interests or acquires any of the equity or owner participants’ interests in the trusts that hold title to such leased interests, whether or not it also directly assumes the Sale Leaseback Obligation Bonds, and Mortgages on the Company’s interests in the trusts that hold title to such leased interests and related rights in the event that the Company acquires any of the equity or owner participants’ interests in such trusts pursuant to a “special transfer” under the Unit 2 Sale and Lease-Back Transactions; and, in addition, (y) up to an aggregate principal amount that, together with the principal amount of all other Debt of the Company secured by Mortgages, does not at the time exceed ten percent (10%) of Tangible Assets.
(c)    For purposes of this Section 201 , the following terms shall have the following meanings:
“Debt” means any outstanding debt of the Company for money borrowed evidenced by notes, debentures, bonds or other securities, or guarantees of any thereof.
“Operating Property” means (i) any interest in real property owned by the Company and (ii) any asset owned by the Company that is depreciable in accordance with generally accepted accounting principles, excluding in any case any interest of the Company as lessee under any lease.
“Sale Leaseback Obligation Bonds” means PVNGS II Funding Corp.’s: (i) 8.00% Secured Lease Obligation Bonds, Series 1993, due 2015; (ii) any other bonds issued in connection with the Unit 2 Sale and Lease-Back Transactions; and (iii) any refinancing or refunding of the obligations specified in subclauses (i) and (ii) above.
“Tangible Assets” means the amount shown as total assets on the most recent balance sheet of the Company, less: (i) intangible assets, including, but without limitation, goodwill, trademarks, trade names, patents and unamortized debt discount and expense and (ii) appropriate adjustments, if any, on account of minority interests; provided, however, that if, subsequent to the date of the

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most recent balance sheet of the Company, the Company acquires any property, whether by acquisition (including by way of capital lease) from a third party, through merger or consolidation, through construction, development or substantial repair, alteration or improvement of property, or by any other means, and such property is or becomes subject to any Mortgage securing Debt, the Company may prepare a pro forma balance sheet to include the value of such property in any calculation of Tangible Assets hereunder. Subject to the foregoing, Tangible Assets shall be determined in accordance with generally accepted accounting principles and practices applicable to the type of business in which the Company is engaged and that are approved by the independent accountants regularly retained by the Company, and may be determined as of a date not more than 60 days prior to the happening of the event for which such determination is being made.
ARTICLE THREE

FORM OF NOTES
SECTION 301.      Form of Notes . The Notes and the Trustee’s certificate of authentication thereon shall be substantially in the following forms:
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (“DTC”), TO ARIZONA PUBLIC SERVICE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

ARIZONA PUBLIC SERVICE COMPANY 
8.750% Note due 2019

		
No. __	$500,000,000	
 	CUSIP No. 040555CL6	
Arizona Public Service Company, a corporation duly organized and existing under the laws of the State of Arizona (the “Company”, which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to Cede & Co., or registered assigns, the principal sum of Five Hundred Million Dollars ($500,000,000) on March 1, 2019, and to pay interest thereon and on any overdue interest from February 26, 2009 or from the

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most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually in arrears on March 1 and September 1 of each year, commencing September 1, 2009, at the rate of 8.750% per annum, until the principal hereof is paid or made available for payment. The amount of interest payable for any period will be computed on the basis of a 360-day year of twelve 30-day months.
The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be February 15 or August 15, as the case may be, immediately preceding the Interest Payment Date (whether or not a Business Day). Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities of this series not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture.
Payment of the principal of (and premium, if any) and any interest on this Security will be made at the office or agency of the Company maintained for that purpose through the corporate trust office of the Trustee, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided , however , that payment of interest may be made at the option of the Company by wire transfer to any Holder or by deposit to the account of the Holder of any such Securities if such account is maintained with the Trustee, in each case according to the written instructions given by such Holder on or prior to the applicable record date to the Trustee, which written instructions shall remain in effect until revised by such Holder by an instrument in writing delivered to the Trustee.
Reference is hereby made to the further provisions of this Security set forth following the Company’s signature hereto, which further provisions shall for all purposes have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by the Trustee referred to following the Company’s signature hereto by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal.

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ARIZONA PUBLIC SERVICE COMPANY	 	 	

By                         	 	 	
 	 	 	
Attest:	 	 	

 	 	 	

This Security is one of a duly authorized issue of securities of the Company (herein called the “Securities”), issued and to be issued in one or more series under an Indenture, dated as of January 15, 1998 (such instrument as originally executed and delivered and as supplemented or amended from time to time, the “Indenture”), between the Company and The Bank of New York Mellon Trust Company, N.A., successor to JPMorgan Chase Bank, N.A. (formerly known as The Chase Manhattan Bank), as Trustee (the “Trustee,” which term includes any successor trustee under the Indenture), and reference is hereby made to the Indenture for a description of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. This Security is one of the series designated on the face hereof.
The Company may redeem all or any portion of the Securities of this series, at its option, at any time or from time to time, at a Redemption Price equal to the greater of (a) 100% of the principal amount of the Securities of this series being redeemed on the Redemption Date or (b) the sum of the present values of the remaining scheduled payments of principal and interest on the Securities of this series being redeemed on that Redemption Date (not including the portion of any payments of interest accrued to the Redemption Date) discounted to the Redemption Date on a semiannual basis at the Adjusted Treasury Rate plus 50 basis points, as determined by a Reference Treasury Dealer appointed by the Company for such purpose; plus, in each case, accrued and unpaid interest thereon to the Redemption Date. Notwithstanding the foregoing, installments of interest on Securities of this series that are due and payable on Interest Payment Dates falling on or prior to a Redemption Date will be payable on the Interest Payment Date to the Holders as of the close of business on the relevant record date in accordance with the terms of the Securities of this series and the Indenture. The Redemption Price will be calculated on the basis of a 360-day year consisting of twelve 30-day months.
If notice has been given as provided in the Indenture and funds for the redemption of any Securities of this series (or any portion thereof) called for redemption shall have been made available on the Redemption Date referred to in such notice, such Securities (or any portion thereof) will cease to bear interest on the date fixed for such redemption specified in such notice and the only right of the Holders of such Securities will be to receive payment of the Redemption Price.

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Notice of any optional redemption of Securities of this series (or any portion thereof) will be given to Holders at their addresses, as shown in the Security Register for such Securities, not more than 60 nor less than 30 days prior to the date fixed for redemption. The notice of redemption will specify, among other items, the manner of calculation of the Redemption Price and the principal amount of the Securities of this series held by such Holder to be redeemed if less than all of such Securities. If less than all of the Securities of this series are to be redeemed at the option of the Company, the Trustee shall select, in such manner as it shall deem appropriate, the portion of such Securities to be redeemed.

As used herein:
“ Adjusted Treasury Rate ” means, with respect to any Redemption Date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date.
“ Comparable Treasury Issue ” means the U.S. Treasury security selected by a Reference Treasury Dealer appointed by the Company for such purpose as having a maturity comparable to the remaining term of this Security to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of such Security.
“ Comparable Treasury Price ” means, with respect to any Redemption Date, (A) if the Company obtains three or more Reference Treasury Dealer Quotations, the average of such Reference Treasury Dealer Quotations for such Redemption Date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations, (B) if the Company obtains two such Reference Treasury Dealer Quotations, the average of such quotations, or (C) if only one Reference Treasury Dealer Quotation is received, such quotation.
“Primary Treasury Dealer” means a primary U.S. government securities dealer in the United States.
“ Reference Treasury Dealer ” means (A) Barclays Capital Inc., BNY Mellon Capital Markets, LLC and Credit Suisse Securities (USA) LLC (or their respective affiliates that are Primary Treasury Dealers), and their respective successors; provided, however, that if any of the foregoing shall cease to be a Primary Treasury Dealer, the Company will substitute therefor another Primary Treasury Dealer; and (B) any other Primary Treasury Dealer(s) selected by the Company.
“ Reference Treasury Dealer Quotations ” means, with respect to each Reference Treasury Dealer and any Redemption Date, the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. (New York City time) on the third Business Day preceding such Redemption Date.

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The Securities of this series will not be subject to any sinking fund.
In the event of redemption of this Security in part only, a new Security or Securities of this series and of like tenor for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof.
The Indenture contains provisions for defeasance at any time of the entire indebtedness of this Security and certain restrictive covenants and Events of Default with respect to this Security, in each case upon compliance with certain conditions set forth in the Indenture.
The Indenture contains provisions limiting the Company’s ability to issue, assume, guarantee or permit to exist any Debt secured by any mortgage, security interest, pledge or lien upon any of its Operating Property, subject to the exceptions and qualifications set forth in the Indenture.
If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture.
The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee without the consent of such Holders in certain circumstances, or with the consent of the Holders of 66-2/3% in principal amount of the affected Securities at the time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the affected Securities at the time Outstanding, on behalf of the Holders of all such Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security.
As provided in and subject to the provisions of the Indenture, the Holder of this Security shall not have the right to institute any proceeding with respect to the Indenture or for the appointment of a receiver or trustee or for any other remedy under the Indenture, unless such Holder shall have previously given the Trustee written notice of a continuing Event of Default with respect to the Securities of this series, the Holders of not less than 25% in principal amount of the Securities of this series at the time Outstanding shall have made written request to the Trustee to institute proceedings in respect of such Event of Default as Trustee and offered the Trustee reasonable indemnity, and the Trustee shall not have received from the Holders of a majority in principal amount of Securities of this series at the time Outstanding a direction inconsistent with such request, and shall have failed to institute any such proceeding, for 60 days after receipt of such notice, request and offer of indemnity. The foregoing shall not apply to any suit instituted by the Holder of this Security for the enforcement of any payment of principal hereof or any premium or interest hereon on or after the respective due dates expressed herein.

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No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in any place where the principal of and any premium and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his or her attorney duly authorized in writing, and thereupon one or more new Securities of this series and of like tenor, of authorized denominations and for the same aggregate principal amount will be issued to the designated transferee or transferees.
The Securities of this series are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities of this series are exchangeable for a like aggregate principal amount of Securities of this series and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same.
No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the absolute owner hereof for all purposes, whether or not this Security be overdue, and none of the Company, the Trustee or any such agent shall be affected by notice to the contrary.
All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture.
Form of Trustee’s Certificate of Authentication.

CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture.

		
Dated:	THE BANK OF NEW YORK MELLON	
 	TRUST COMPANY, N.A.,	
 	As Trustee	

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 	By	 	
 	 	Authorized Officer	

SECTION 302.      General Provisions.  The Notes may have notations, legends or endorsements required by law, stock exchange rule or usage. The terms and provisions contained in the Notes shall constitute, and are hereby expressly made, a part of this Eleventh Supplemental Indenture, and the Company, by its execution and delivery of this Eleventh Supplemental Indenture, expressly agrees to such terms and provisions and to be bound thereby. However, to the extent any provision of the Notes conflicts with the express provisions of this Eleventh Supplemental Indenture or the Indenture, the provisions of this Eleventh Supplemental Indenture or the Indenture, as applicable, shall govern and be controlling.
ARTICLE FOUR

ORIGINAL ISSUE OF NOTES
SECTION 401.      Issuance of Notes . Subject to Section 101, Notes in the aggregate principal amount of $500,000,000 may, upon execution of this Eleventh Supplemental Indenture, or from time to time thereafter, be executed by the Company and delivered to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver said Notes, in accordance with a Company Order delivered to the Trustee by the Company, without any further action by the Company.
ARTICLE FIVE
     
PAYING AGENT AND REGISTRAR
SECTION 501.      Appointment of Paying Agent and Registrar . The Bank of New York Mellon Trust Company, N.A. will be the Paying Agent and Security Registrar for the Notes.
ARTICLE SIX 
SUNDRY PROVISIONS
SECTION 601.      Associate Secretary . For all purposes relating to this Eleventh Supplemental Indenture and the Notes, the term “Assistant Secretary” when used in the Indenture with respect to the Company will include an Associate Secretary of the Company.
SECTION 602.      Defined Terms . Except as otherwise expressly provided in this Eleventh Supplemental Indenture or in the form of the Notes, or otherwise clearly required by the

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context hereof or thereof, all terms used herein or in said form of the Notes that are defined in the Indenture shall have the several meanings respectively assigned to them thereby.
SECTION 603.      Ratification of Indenture . The Indenture, as heretofore supplemented and amended, and as supplemented by this Eleventh Supplemental Indenture, is in all respects ratified and confirmed, and this Eleventh Supplemental Indenture shall be deemed part of the Indenture in the manner and to the extent herein and therein provided.
SECTION 604.      About the Trustee . The Trustee hereby accepts the trusts herein declared, provided, created, supplemented or amended and agrees to perform the same upon the terms and conditions herein and in the Indenture, as heretofore supplemented and amended, set forth and upon the following terms and conditions:
The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Eleventh Supplemental Indenture or for or in respect of the recitals contained herein, all of which recitals are made by the Company solely. Each and every term and condition contained in Article Six of the Indenture shall apply to and form a part of this Eleventh Supplemental Indenture with the same force and effect as if the same were herein set forth in full with such omissions, variations and insertions, if any, as may be appropriate to make the same conform to the provisions of this Eleventh Supplemental Indenture.
The Trustee agrees to accept and act upon instructions or directions pursuant to this Eleventh Supplemental Indenture sent by unsecured e-mail, pdf, facsimile transmission or other similar unsecured electronic methods; provided, however, that (a) the party providing such written instructions, subsequent to such transmission of written instructions, shall provide the originally executed instructions or directions to the Trustee in a timely manner, and (b) such originally executed instructions or directions shall be signed by an authorized representative of the party providing such instructions or directions. If the party elects to give the Trustee e-mail or facsimile instructions (or instructions by a similar electronic method) and the Trustee in its discretion elects to act upon such instructions, the Trustee’s understanding of such instructions shall be deemed controlling. The Trustee shall not be liable for any losses, costs or expenses arising directly or indirectly from the Trustee’s reliance upon and compliance with such instructions notwithstanding such instructions conflict or are inconsistent with a subsequent written instruction. The party providing electronic instructions agrees to assume all risks arising out of the use of such electronic methods to submit instructions and directions to the Trustee, including without limitation the risk of the Trustee acting on unauthorized instructions, and the risk or interception and misuse by third parties.

SECTION 605.      Counterparts . This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument.

[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

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9519017.11

IN WITNESS WHEREOF, the parties hereto have caused this Eleventh Supplemental Indenture to be duly executed as of the day and year first above written.

		
 	ARIZONA PUBLIC SERVICE COMPANY	
 	 	
 	By: /s/ Chris N. Froggatt                	
 	Chris N. Froggatt	
 	Vice President and Treasurer	

	
	
Attest:	
 	
/s/ Diane Wood	
Diane Wood	
Associate Secretary	

	
		
 	THE BANK OF NEW YORK MELLON TRUST	
 	COMPANY, N.A., as Trustee	
 	 	
 	By: /s/ Melonee Young            	
 	Name: Melonee Young	
 	Title: Vice President	

 

[Signature Page to Eleventh Supplemental Indenture]
9519017

	
		
STATE OF ARIZONA    	)	
 	) ss.:	
COUNTY OF MARICOPA	)	
On the 25th day of February, 2009, before me personally came Chris N. Froggatt, to me known, who, being by me duly sworn, did depose and say that he is the Vice President and Treasurer of Arizona Public Service Company, one of the corporations described in and which executed the foregoing instrument and that he signed his name thereto by authority of the Board of Directors of said corporation.

/s/ Barbara J. Dubishar        

 Notary Public
My Commission Expires

	

	
		
STATE OF CALIFORNIA    	)	
 	) ss.:	
COUNTY OF Los Angeles	)	

On the February 25, 2009, before me, April Iniguez, a notary public, personally appeared Melonee Young, who proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.
I certify under PENALTY OF PERJURY under the laws of the State of California that the forgoing paragraph is true and correct.
WITNESS my hand and official seal.

Signature /s/ April Iniguez             (seal) 

9519017.11

Exhibit 4.6f

ARIZONA PUBLIC SERVICE COMPANY

TO

THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A.

As Trustee under Arizona Public Service Company’s Indenture dated as of January 15, 1998

Twelfth Supplemental Indenture

Dated as of August 25, 2011

5.05% Notes due 2041

13602893.1

This TWELFTH SUPPLEMENTAL INDENTURE, dated as of August 25, 2011, is between Arizona Public Service Company, a corporation duly organized and existing under the laws of the State of Arizona (herein called the “Company”), having its principal office at 400 North Fifth Street, Phoenix, Arizona 85004, and The Bank of New York Mellon Trust Company, N.A., successor to JPMorgan Chase Bank, N.A. (formerly known as The Chase Manhattan Bank), a national banking association, as Trustee (herein called the “Trustee”) under the Indenture dated as of January 15, 1998 between the Company and the Trustee (the “Indenture”).
RECITALS OF THE COMPANY
The Company has executed and delivered the Indenture to the Trustee to provide for the issuance from time to time of its unsecured debentures, notes or other evidences of indebtedness (the “Securities”), said Securities to be issued in one or more series as provided in the Indenture.
Section 901(7) of the Indenture provides that, without the consent of any Holders, the Company and the Trustee may enter into one or more indentures supplemental to the Indenture for the purpose of establishing the form or terms of Securities of any series.
Pursuant to the terms of the Indenture, the Company desires to provide for the establishment of a new series of its Securities to be known as its 5.05% Notes due 2041 (herein called the “Notes”), the forms and substance of such Notes and the terms, provisions, and conditions thereof to be set forth as provided in the Indenture and this Twelfth Supplemental Indenture.
All things necessary to make this Twelfth Supplemental Indenture a valid agreement of the Company, and to make the Notes described herein, when executed by the Company and authenticated and delivered by the Trustee, the valid obligations of the Company, have been done.
NOW, THEREFORE, THIS TWELFTH SUPPLEMENTAL INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Notes by the Holders thereof, and for the purpose of setting forth, as provided in the Indenture, the form and substance of each of the Notes and the terms, provisions, and conditions thereof, it is mutually agreed, for the equal and proportionate benefit of all Holders of the Notes, as applicable, as follows:
ARTICLE ONE

GENERAL TERMS AND CONDITIONS OF THE NOTES

SECTION 101.      Authentication and Delivery . There shall be and is hereby authorized a series of Securities designated the “5.05% Notes due 2041” initially limited in aggregate principal amount to $300,000,000, which amount shall be as set forth in any Company Order for the authentication and delivery of Notes. The Notes shall mature and the principal shall be due and payable together with all accrued and unpaid interest thereon on September 1, 2041, and the Notes shall be issued in the form of registered Securities without coupons.

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The foregoing principal amount of the Notes may be increased from time to time as permitted by Section 301 of the Indenture. All Notes need not be issued at the same time and such series may be reopened at any time, without notice to, or the consent of, the then existing Holders, for issuance of additional Notes. Any such additional Notes will be equal in rank and have the same respective maturity, payment terms, redemption features, and other terms as the Notes initially issued, except for the issue date, public offering price, payment of interest accruing prior to the issue date, and first payment of interest following the issue date of the additional Notes.
SECTION 102.      Global Security . The Notes shall be issued in certificated form, except that the Notes shall be issued initially as a Global Security to and registered in the name of Cede & Co., as nominee of The Depository Trust Company, as Depositary therefor. Any Notes to be issued or transferred to, or to be held by, Cede & Co. (or any successor thereof) for such purpose shall bear the depositary legend in substantially the form set forth at the top of the form of Note in Section 301 hereof (in lieu of that set forth in Section 204 of the Indenture), unless otherwise agreed by the Company, such agreement to be confirmed in writing to the Trustee. Each such Global Security may be exchanged in whole or in part for Notes registered, and any transfer of such Global Security in whole or in part may be registered, in the name(s) of Persons other than such Depositary or a nominee thereof only under the circumstances set forth in clause (2) of the last paragraph of Section 305 of the Indenture, or such other circumstances in addition to or in lieu of those set forth in clause (2) of the last paragraph of Section 305 of the Indenture as to which the Company shall agree, such agreement to be confirmed in writing to the Trustee. Upon the occurrence of any such event, the Notes will be issued in such names as the Depositary shall instruct the Trustee.
SECTION 103.      Place of Payment and Place for Registration of Transfers and Exchange . Principal of, and premium, if any, and interest on, the Notes will be payable, the transfer of Notes will be registrable and the Notes will be exchangeable for Notes bearing identical terms and provisions, at the office or agency of the Company in the Borough of Manhattan, The City and State of New York; provided , however , that payment of interest may be made at the option of the Company by wire transfer to any Holder or by deposit to the account of the Holder of any such Notes if such account is maintained with the Trustee, in each case according to the written instructions given by such Holder on or prior to the applicable record date to the Trustee, which written instructions shall remain in effect until revised by such Holder by an instrument in writing delivered to the Trustee.
SECTION 104.      Payment of Interest . The Notes will bear interest at the rate of 5.05% per annum from August 25, 2011 or from the most recent Interest Payment Date (as hereinafter defined) to which interest has been paid or duly provided for until the principal thereof is paid or made available for payment, payable on March 1 and September 1 of each year (each, an “Interest Payment Date”), commencing on March 1, 2012, to the person in whose name such Note or any Predecessor Security is registered, at the close of business on February 15 and August 15, as the case may be, whether or not a Business Day, immediately preceding the Interest Payment Date. Any such interest installment not punctually paid or duly provided for shall forthwith cease to be payable to the Holders on such Regular Record Date, and may be paid to the Person in whose name such Note (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date to be fixed by the Trustee for the payment of such Defaulted Interest, notice whereof

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shall be given to the Holders of the Notes not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may be listed, and upon such notice as may be required by such exchange, all as more fully described in the Indenture.
The amount of interest payable for any period will be computed on the basis of a 360-day year of twelve 30-day months. Interest will accrue from August 25, 2011 or from the most recent Interest Payment Date to which interest has been paid or duly provided for to, but not including, the relevant payment date. In the event that any date on which interest is payable on the Notes is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), in each case with the same force and effect as if made on such date. A “Business Day” shall mean any day except a Saturday, a Sunday or a legal holiday in The City of New York on which banking institutions are authorized or required by law, regulation or executive order to close.
SECTION 105.      Redemption of the Notes . The Company may redeem all or any portion of the Notes, at its option, at any time or from time to time, upon notice as provided in the Indenture. The Redemption Price for any of the Notes to be redeemed on any Redemption Date prior to March 1, 2041 will be equal to the greater of the following amounts:
(a)      100% of the principal amount of the Notes being redeemed on the Redemption Date; or
(b)      the sum of the present values of the remaining scheduled payments of principal and interest on the Notes being redeemed on that Redemption Date (not including any portion of any payments of interest accrued to the Redemption Date) discounted to the Redemption Date on a semiannual basis at the Adjusted Treasury Rate plus 25 basis points as determined by a Reference Treasury Dealer appointed by the Company for such purpose;
plus, in each case, accrued and unpaid interest thereon to the Redemption Date. The Redemption Price for any of the Notes to be redeemed on any Redemption Date on or after March 1, 2041 will be equal to 100% of the principal amount of the Notes being redeemed on the Redemption Date plus accrued and unpaid interest thereon to the Redemption Date.
Notwithstanding the foregoing, installments of interest on the Notes that are due and payable on Interest Payment Dates falling on or prior to a Redemption Date will be payable on the Interest Payment Date to the Holders as of the close of business on the relevant record date in accordance with the terms of such Notes and the Indenture. The Redemption Price will be calculated on the basis of a 360-day year consisting of twelve 30-day months.
For purposes of this Section 105, the following terms shall have the following meanings:
“ Adjusted Treasury Rate ” means, with respect to any applicable Redemption Date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date.

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13602893.1

“ Comparable Treasury Issue ” means the U.S. Treasury security selected by a Reference Treasury Dealer appointed by the Company for such purpose as having a maturity comparable to the remaining term of the Notes to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of such Notes.
“ Comparable Treasury Price ” means, with respect to any applicable Redemption Date, (A) if the Company obtains three or more Reference Treasury Dealer Quotations, the average of such Reference Treasury Dealer Quotations for such Redemption Date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations, (B) if the Company obtains two such Reference Treasury Dealer Quotations, the average of such quotations, or (C) if only one Reference Treasury Dealer Quotation is received, such quotation.
“Primary Treasury Dealer” means a primary U.S. government securities dealer in the United States.
“ Reference Treasury Dealer ” means (A) Deutsche Bank Securities Inc., J.P. Morgan Securities LLC and UBS Securities LLC (or their respective affiliates that are Primary Treasury Dealers) and a Primary Treasury Dealer selected by Wells Fargo Securities, LLC, and their respective successors; provided, however, that if any of the foregoing shall cease to be a Primary Treasury Dealer, the Company will substitute therefor another Primary Treasury Dealer; and (B) any other Primary Treasury Dealer(s) selected by the Company.
“ Reference Treasury Dealer Quotations ” means, with respect to each Reference Treasury Dealer and any applicable Redemption Date, the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. (New York City time) on the third Business Day preceding such Redemption Date.
The Company shall give the Trustee written notice of the Redemption Price, promptly after the calculation thereof.
The Trustee shall be under no duty to inquire into, may conclusively presume the correctness of, and shall be fully protected in acting upon, the Company’s calculation of any Redemption Price.
No Notes of $2,000 principal amount or less can be redeemed in part.     
Notwithstanding Section 1104 of the Indenture, any notice of redemption given pursuant to said Section with respect to the foregoing redemption need not set forth the Redemption Price but only the manner of calculation thereof.
SECTION 106.      Defeasance of the Notes . The Notes shall be defeasible pursuant to Section 1302 or 1303 of the Indenture.
SECTION 107.      Minimum Denominations . The Notes shall be issuable in denominations of $2,000 and any integral multiple of $1,000 in excess thereof.

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13602893.1

ARTICLE TWO

ADDITIONAL COVENANT
SECTION 201.      Negative Lien Covenant . (a)    So long as any of the Notes are Outstanding, the Company will not issue, assume, guarantee or permit to exist any Debt secured by any mortgage, security interest, pledge or lien (herein referred to as a “Mortgage”) of or upon any Operating Property of the Company, whether owned at the date of this Twelfth Supplemental Indenture or hereafter acquired, without effectively securing the Notes (together with, if the Company shall so determine, any other indebtedness or obligations of the Company ranking senior to, or equally with, the Notes) equally and ratably with such Debt (but only so long as such Debt is so secured); provided, however, that the foregoing restriction shall not apply to Debt secured by any of the following:

(1)	Mortgages on any property existing at the time of acquisition thereof (which Mortgages may also extend to subsequent repairs, alterations and improvements to that property);	

(2)	Mortgages on property of a corporation existing at the time such corporation is merged into or consolidated with the Company or at the time of a sale, lease or other disposition of the properties of such corporation or a division thereof as an entirety or substantially as an entirety to the Company;	

(3)	Mortgages on property to secure all or part of the cost of acquiring, constructing, developing or substantially repairing, altering or improving such property or to secure indebtedness incurred to provide funds for any such purpose or for reimbursement of funds previously expended for any such purpose, provided such Mortgages are created or assumed contemporaneously with, or within eighteen (18) months after, such acquisition or completion of construction, development or substantial repair, alteration or improvement;	

(4)	Mortgages in favor of the United States of America or any State thereof, or any department, agency, instrumentality or political subdivision of the United States of America or any State thereof, or for the benefit of holders of securities issued by any such entity (or providers of credit enhancement with respect to those securities), to secure any Debt (including the Company’s obligations with respect to industrial development, pollution control or similar revenue bonds) incurred for the purpose of financing or refinancing all or any part of the purchase price or the cost of constructing, developing or substantially repairing, altering or improving the property of the Company;	

(5)	Mortgages to compensate the Trustee as provided in the Indenture; or	

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13602893.1

		
(6)	any extension, renewal or replacement (or successive extensions, renewals or replacements), in whole or in part, of any Mortgage referred to in the foregoing clauses (1) to (5), inclusive; provided, however, that the principal amount of Debt secured thereby and not otherwise authorized by said clauses (1) to (5), inclusive, shall not exceed the principal amount of Debt, plus any premium or fee payable in connection with any such extension, renewal or replacement, so secured at the time of such extension, renewal or replacement.	
(b)    Notwithstanding the provisions of Section 201(a) , the Company may issue, assume or guarantee or permit to exist Debt, secured by Mortgages that would otherwise be subject to the restrictions set forth above in connection with the Company’s existing sale and lease-back transactions relating to Unit 2 of the Palo Verde Nuclear Generating Station (the “Unit 2 Sale and Lease-Back Transactions”), including but not limited to Mortgages on the leased interests in Unit 2 of the Palo Verde Nuclear Generating Station and related rights if the Company reacquires ownership in any of those interests or acquires any of the equity or owner participants’ interests in the trusts that hold title to such leased interests, whether or not it also directly assumes the Sale Leaseback Obligation Bonds, and Mortgages on the Company’s interests in the trusts that hold title to such leased interests and related rights in the event that the Company acquires any of the equity or owner participants’ interests in such trusts pursuant to a “special transfer” under the Unit 2 Sale and Lease-Back Transactions. In addition, the Company may issue, assume or guarantee or permit to exist Debt that is secured by Mortgages that would otherwise be subject to the restrictions set forth above up to an aggregate principal amount that, together with the principal amount of all other Debt of the Company secured by such Mortgages, does not at the time exceed ten percent (10%) of Tangible Assets.
(c)    For purposes of this Section 201 , the following terms shall have the following meanings:
“Debt” means any outstanding debt of the Company for money borrowed evidenced by notes, debentures, bonds or other securities, or guarantees of any thereof.
“Operating Property” means (i) any interest in real property owned by the Company and (ii) any asset owned by the Company that is depreciable in accordance with generally accepted accounting principles, excluding in any case any interest of the Company as lessee under any lease.
“Sale Leaseback Obligation Bonds” means PVNGS II Funding Corp.’s: (i) 8.00% Secured Lease Obligation Bonds, Series 1993, due 2015; (ii) any other bonds issued in connection with the Unit 2 Sale and Lease-Back Transactions; and (iii) any refinancing or refunding of the obligations specified in subclauses (i) and (ii) above.
“Tangible Assets” means the amount shown as total assets on the most recent balance sheet of the Company, less: (i) intangible assets, including, but without limitation, goodwill, trademarks, trade names, patents and unamortized debt discount and expense and (ii) appropriate adjustments, if any, on account of minority interests; provided, however, that if, subsequent to the date of the most recent balance sheet of the Company, the Company acquires any property, whether by

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13602893.1

acquisition (including by way of capital lease) from a third party, through merger or consolidation, through construction, development or substantial repair, alteration or improvement of property, or by any other means, and such property is or becomes subject to any Mortgage securing Debt, the Company may prepare a pro forma balance sheet to include the value of such property in any calculation of Tangible Assets hereunder. Subject to the foregoing, Tangible Assets shall be determined in accordance with generally accepted accounting principles and practices applicable to the type of business in which the Company is engaged and that are approved by the independent accountants regularly retained by the Company, and may be determined as of a date not more than 60 days prior to the happening of the event for which such determination is being made.
ARTICLE THREE
FORM OF NOTES
SECTION 301.      Form of Notes . The Notes and the Trustee’s certificate of authentication thereon shall be substantially in the following forms:
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (“DTC”), TO ARIZONA PUBLIC SERVICE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

ARIZONA PUBLIC SERVICE COMPANY 
5.05% Note due 2041

		
No. __	$300,000,000
	
 	CUSIP No. 040555CM4	
Arizona Public Service Company, a corporation duly organized and existing under the laws of the State of Arizona (the “Company”, which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to Cede & Co., or registered assigns, the principal sum of Three Hundred Million Dollars ($300,000,000) on September 1, 2041, and to pay interest thereon and on any overdue interest from August 25, 2011 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually in arrears on March 1 and September 1 of each year, commencing March 1, 2012,

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13602893.1

at the rate of 5.05% per annum, until the principal hereof is paid or made available for payment. The amount of interest payable for any period will be computed on the basis of a 360-day year of twelve 30-day months.
The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be February 15 or August 15, as the case may be, immediately preceding the Interest Payment Date (whether or not a Business Day). Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities of this series not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture.
Payment of the principal of (and premium, if any) and any interest on this Security will be made at the office or agency of the Company maintained for that purpose through the corporate trust office of the Trustee, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided , however , that payment of interest may be made at the option of the Company by wire transfer to any Holder or by deposit to the account of the Holder of any such Securities if such account is maintained with the Trustee, in each case according to the written instructions given by such Holder on or prior to the applicable record date to the Trustee, which written instructions shall remain in effect until revised by such Holder by an instrument in writing delivered to the Trustee.
Reference is hereby made to the further provisions of this Security set forth following the Company’s signature hereto, which further provisions shall for all purposes have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by the Trustee referred to following the Company’s signature hereto by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal.

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ARIZONA PUBLIC SERVICE COMPANY	 	 	

By                         	 	 	
 	 	 	
Attest:	 	 	

 	 	 	
 	 	 	
This Security is one of a duly authorized issue of securities of the Company (herein called the “Securities”), issued and to be issued in one or more series under an Indenture, dated as of January 15, 1998 (such instrument as originally executed and delivered and as supplemented or amended from time to time, the “Indenture”), between the Company and The Bank of New York Mellon Trust Company, N.A., successor to JPMorgan Chase Bank, N.A. (formerly known as The Chase Manhattan Bank), as Trustee (the “Trustee,” which term includes any successor trustee under the Indenture), and reference is hereby made to the Indenture for a description of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. This Security is one of the series designated on the face hereof.
The Company may redeem all or any portion of the Securities of this series, at its option, at any time or from time to time, (A) prior to March 1, 2041, at a Redemption Price equal to the greater of (a) 100% of the principal amount of the Securities of this series being redeemed on the Redemption Date or (b) the sum of the present values of the remaining scheduled payments of principal and interest on the Securities of this series being redeemed on that Redemption Date (not including the portion of any payments of interest accrued to the Redemption Date) discounted to the Redemption Date on a semiannual basis at the Adjusted Treasury Rate plus 25 basis points, as determined by a Reference Treasury Dealer appointed by the Company for such purpose; and (B) on or after March 1, 2041, at a Redemption Price equal to 100% of the principal amount of the Securities of this series being redeemed on the Redemption Date; plus, in each case, accrued and unpaid interest thereon to the Redemption Date. Notwithstanding the foregoing, installments of interest on Securities of this series that are due and payable on Interest Payment Dates falling on or prior to a Redemption Date will be payable on the Interest Payment Date to the Holders as of the close of business on the relevant record date in accordance with the terms of the Securities of this series and the Indenture. The Redemption Price will be calculated on the basis of a 360-day year consisting of twelve 30-day months.
If notice has been given as provided in the Indenture and funds for the redemption of any Securities of this series (or any portion thereof) called for redemption shall have been made available on the Redemption Date referred to in such notice, such Securities (or any portion thereof) will cease to bear interest on the date fixed for such redemption specified in such notice and the only right of the Holders of such Securities will be to receive payment of the Redemption Price.

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Notice of any optional redemption of Securities of this series (or any portion thereof) will be given to Holders at their addresses, as shown in the Security Register for such Securities, not more than 60 nor less than 30 days prior to the date fixed for redemption. The notice of redemption will specify, among other items, (i) the Redemption Price or the manner of calculation of the Redemption Price and (ii) the principal amount of the Securities of this series held by such Holder to be redeemed if less than all of such Securities. If less than all of the Securities of this series are to be redeemed at the option of the Company, the Trustee shall select, in such manner as it shall deem appropriate, the portion of such Securities to be redeemed.
As used herein:
“ Adjusted Treasury Rate ” means, with respect to any applicable Redemption Date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date.
“ Comparable Treasury Issue ” means the U.S. Treasury security selected by a Reference Treasury Dealer appointed by the Company for such purpose as having a maturity comparable to the remaining term of this Security to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of such Security.
“ Comparable Treasury Price ” means, with respect to any applicable Redemption Date, (A) if the Company obtains three or more Reference Treasury Dealer Quotations, the average of such Reference Treasury Dealer Quotations for such Redemption Date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations, (B) if the Company obtains two such Reference Treasury Dealer Quotations, the average of such quotations, or (C) if only one Reference Treasury Dealer Quotation is received, such quotation.
“Primary Treasury Dealer” means a primary U.S. government securities dealer in the United States.
“ Reference Treasury Dealer ” means (A) Deutsche Bank Securities Inc., J.P. Morgan Securities LLC and UBS Securities LLC (or their respective affiliates that are Primary Treasury Dealers) and a Primary Treasury Dealer selected by Wells Fargo Securities, LLC, and their respective successors; provided, however, that if any of the foregoing shall cease to be a Primary Treasury Dealer, the Company will substitute therefor another Primary Treasury Dealer; and (B) any other Primary Treasury Dealer(s) selected by the Company.
“ Reference Treasury Dealer Quotations ” means, with respect to each Reference Treasury Dealer and any applicable Redemption Date, the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. (New York City time) on the third Business Day preceding such Redemption Date.
The Securities of this series will not be subject to any sinking fund.

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In the event of redemption of this Security in part only, a new Security or Securities of this series and of like tenor for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof.
The Indenture contains provisions for defeasance at any time of the entire indebtedness of this Security and certain restrictive covenants and Events of Default with respect to this Security, in each case upon compliance with certain conditions set forth in the Indenture.
The Indenture contains provisions limiting the Company’s ability to issue, assume, guarantee or permit to exist any Debt secured by any mortgage, security interest, pledge or lien upon any of its Operating Property, subject to the exceptions and qualifications set forth in the Indenture.
If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture.
The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee without the consent of such Holders in certain circumstances, or with the consent of the Holders of 66-2/3% in principal amount of the affected Securities at the time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the affected Securities at the time Outstanding, on behalf of the Holders of all such Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security.
As provided in and subject to the provisions of the Indenture, the Holder of this Security shall not have the right to institute any proceeding with respect to the Indenture or for the appointment of a receiver or trustee or for any other remedy under the Indenture, unless such Holder shall have previously given the Trustee written notice of a continuing Event of Default with respect to the Securities of this series, the Holders of not less than 25% in principal amount of the Securities of this series at the time Outstanding shall have made written request to the Trustee to institute proceedings in respect of such Event of Default as Trustee and offered the Trustee reasonable indemnity, and the Trustee shall not have received from the Holders of a majority in principal amount of Securities of this series at the time Outstanding a direction inconsistent with such request, and shall have failed to institute any such proceeding, for 60 days after receipt of such notice, request and offer of indemnity. The foregoing shall not apply to any suit instituted by the Holder of this Security for the enforcement of any payment of principal hereof or any premium or interest hereon on or after the respective due dates expressed herein.
No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the

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13602893.1

principal of and any premium and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in any place where the principal of and any premium and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his or her attorney duly authorized in writing, and thereupon one or more new Securities of this series and of like tenor, of authorized denominations and for the same aggregate principal amount will be issued to the designated transferee or transferees.
The Securities of this series are issuable only in registered form without coupons in denominations of $2,000 and integral multiples of $1,000 in excess thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities of this series are exchangeable for a like aggregate principal amount of Securities of this series and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same.
No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the absolute owner hereof for all purposes, whether or not this Security be overdue, and none of the Company, the Trustee or any such agent shall be affected by notice to the contrary.
All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture.
Form of Trustee’s Certificate of Authentication.

CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture.

			
Dated:	 	THE BANK OF NEW YORK MELLON	
 	 	TRUST COMPANY, N.A.,	
 	 	As Trustee	
 	By	 	
 	 	Authorized Officer	

			

12
13602893.1

SECTION 302.      General Provisions.  The Notes may have notations, legends or endorsements required by law, stock exchange rule or usage. The terms and provisions contained in the Notes shall constitute, and are hereby expressly made, a part of this Twelfth Supplemental Indenture, and the Company, by its execution and delivery of this Twelfth Supplemental Indenture, expressly agrees to such terms and provisions and to be bound thereby. However, to the extent any provision of the Notes conflicts with the express provisions of this Twelfth Supplemental Indenture or the Indenture, the provisions of this Twelfth Supplemental Indenture or the Indenture, as applicable, shall govern and be controlling.
ARTICLE FOUR

ORIGINAL ISSUE OF NOTES
SECTION 401.      Issuance of Notes . Subject to Section 101, Notes in the aggregate principal amount of $300,000,000 may, upon execution of this Twelfth Supplemental Indenture, or from time to time thereafter, be executed by the Company and delivered to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver said Notes, in accordance with a Company Order delivered to the Trustee by the Company, without any further action by the Company.
ARTICLE FIVE
PAYING AGENT AND REGISTRAR
SECTION 501.      Appointment of Paying Agent and Registrar . The Bank of New York Mellon Trust Company, N.A. will be the Paying Agent and Security Registrar for the Notes.
ARTICLE SIX
SUNDRY PROVISIONS
SECTION 601.      Associate Secretary . For all purposes relating to this Twelfth Supplemental Indenture and the Notes, the term “Assistant Secretary” when used in the Indenture with respect to the Company will include an Associate Secretary of the Company.
SECTION 602.      Defined Terms . Except as otherwise expressly provided in this Twelfth Supplemental Indenture or in the form of the Notes, or otherwise clearly required by the context hereof or thereof, all terms used herein or in said form of the Notes that are defined in the Indenture shall have the several meanings respectively assigned to them thereby.
SECTION 603.      Ratification of Indenture . The Indenture, as heretofore supplemented and amended, and as supplemented by this Twelfth Supplemental Indenture, is in all respects ratified and confirmed, and this Twelfth Supplemental Indenture shall be deemed part of the Indenture in the manner and to the extent herein and therein provided.

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13602893.1

SECTION 604.      About the Trustee . The Trustee hereby accepts the trusts herein declared, provided, created, supplemented or amended and agrees to perform the same upon the terms and conditions herein and in the Indenture, as heretofore supplemented and amended, set forth and upon the following terms and conditions:
The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Twelfth Supplemental Indenture or for or in respect of the recitals contained herein, all of which recitals are made by the Company solely. Each and every term and condition contained in Article Six of the Indenture shall apply to and form a part of this Twelfth Supplemental Indenture with the same force and effect as if the same were herein set forth in full with such omissions, variations and insertions, if any, as may be appropriate to make the same conform to the provisions of this Twelfth Supplemental Indenture.
The Trustee agrees to accept and act upon instructions or directions pursuant to this Twelfth Supplemental Indenture sent by unsecured e-mail, pdf, facsimile transmission or other similar unsecured electronic methods; provided, however, that (a) the party providing such written instructions, subsequent to such transmission of written instructions, shall provide the originally executed instructions or directions to the Trustee in a timely manner, and (b) such originally executed instructions or directions shall be signed by an authorized representative of the party providing such instructions or directions. If the party elects to give the Trustee e-mail or facsimile instructions (or instructions by a similar electronic method) and the Trustee in its discretion elects to act upon such instructions, the Trustee’s understanding of such instructions shall be deemed controlling. The Trustee shall not be liable for any losses, costs or expenses arising directly or indirectly from the Trustee’s reliance upon and compliance with such instructions notwithstanding such instructions conflict or are inconsistent with a subsequent written instruction. The party providing electronic instructions agrees to assume all risks arising out of the use of such electronic methods to submit instructions and directions to the Trustee, including without limitation the risk of the Trustee acting on unauthorized instructions, and the risk or interception and misuse by third parties.

SECTION 605.      Counterparts . This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

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13602893.1

IN WITNESS WHEREOF, the parties hereto have caused this Twelfth Supplemental Indenture to be duly executed as of the day and year first above written.

		
 	ARIZONA PUBLIC SERVICE COMPANY	
 	 	
 	/s/ Lee R. Nickloy                	
 	Lee R. Nickloy	
 	Vice President and Treasurer	

	
	
Attest:	
 	
/s/ Shirley A. Baum	
Shirley A. Baum	
Associate Secretary	

	
		
 	THE BANK OF NEW YORK MELLON TRUST	
 	COMPANY, N.A., as Trustee	
 	 	
 	By: /s/ Melonee Young            	
 	Name: Melonee Young	
 	Title: Vice President	

[Signature Page to Twelfth Supplemental Indenture]
13602893.1

	
		
STATE OF ARIZONA    	)	
 	) ss.:	
COUNTY OF MARICOPA	)	
On the 22nd day of August, 2011, before me personally came Lee R. Nickloy, to me known, who, being by me duly sworn, did depose and say that he is the Vice President and Treasurer of Arizona Public Service Company, one of the corporations described in and which executed the foregoing instrument and that he signed his name thereto by authority of the Board of Directors of said corporation.

/s/ Norann Asciutto                    

 Notary Public
My Commission Expires

	

	
		
STATE OF CALIFORNIA    	)	
 	) ss.:	
COUNTY OF Los Angeles	)	

On August 23, 2011, before me, David A. Rivas, a notary public, personally appeared Melonee Young, who proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.
I certify under PENALTY OF PERJURY under the laws of the State of California that the forgoing paragraph is true and correct.
WITNESS my hand and official seal.

Signature /s/ David A. Rivas             (seal) 

13602893.1

Exhibit 4.6g

ARIZONA PUBLIC SERVICE COMPANY

TO

THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A.

As Trustee under Arizona Public Service Company’s Indenture dated as of January 15, 1998

Thirteenth Supplemental Indenture

Dated as of January 13, 2012

4.50% Notes due 2042

This THIRTEENTH SUPPLEMENTAL INDENTURE, dated as of January 13, 2012, is between Arizona Public Service Company, a corporation duly organized and existing under the laws of the State of Arizona (herein called the “Company”), having its principal office at 400 North Fifth Street, Phoenix, Arizona 85004, and The Bank of New York Mellon Trust Company, N.A., successor to JPMorgan Chase Bank, N.A. (formerly known as The Chase Manhattan Bank), a national banking association, as Trustee (herein called the “Trustee”) under the Indenture dated as of January 15, 1998 between the Company and the Trustee (the “Indenture”).
RECITALS OF THE COMPANY
The Company has executed and delivered the Indenture to the Trustee to provide for the issuance from time to time of its unsecured debentures, notes or other evidences of indebtedness (the “Securities”), said Securities to be issued in one or more series as provided in the Indenture.
Section 901(7) of the Indenture provides that, without the consent of any Holders, the Company and the Trustee may enter into one or more indentures supplemental to the Indenture for the purpose of establishing the form or terms of Securities of any series.
Pursuant to the terms of the Indenture, the Company desires to provide for the establishment of a new series of its Securities to be known as its 4.50% Notes due 2042 (herein called the “Notes”), the forms and substance of such Notes and the terms, provisions, and conditions thereof to be set forth as provided in the Indenture and this Thirteenth Supplemental Indenture.
All things necessary to make this Thirteenth Supplemental Indenture a valid agreement of the Company, and to make the Notes described herein, when executed by the Company and authenticated and delivered by the Trustee, the valid obligations of the Company, have been done.
NOW, THEREFORE, THIS THIRTEENTH SUPPLEMENTAL INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Notes by the Holders thereof, and for the purpose of setting forth, as provided in the Indenture, the form and substance of each of the Notes and the terms, provisions, and conditions thereof, it is mutually agreed, for the equal and proportionate benefit of all Holders of the Notes, as applicable, as follows:
ARTICLE ONE

GENERAL TERMS AND CONDITIONS OF THE NOTES

SECTION 101.      Authentication and Delivery . There shall be and is hereby authorized a series of Securities designated the “4.50% Notes due 2042” initially limited in aggregate principal amount to $325,000,000, which amount shall be as set forth in any Company Order for the authentication and delivery of Notes. The Notes shall mature and the principal shall be due and

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payable together with all accrued and unpaid interest thereon on April 1, 2042, and the Notes shall be issued in the form of registered Securities without coupons.
The foregoing principal amount of the Notes may be increased from time to time as permitted by Section 301 of the Indenture. All Notes need not be issued at the same time and such series may be reopened at any time, without notice to, or the consent of, the then existing Holders, for issuance of additional Notes. Any such additional Notes will be equal in rank and have the same respective maturity, payment terms, redemption features, and other terms as the Notes initially issued, except for the issue date, public offering price, payment of interest accruing prior to the issue date, and first payment of interest following the issue date of the additional Notes.
SECTION 102.      Global Security . The Notes shall be issued in certificated form, except that the Notes shall be issued initially as a Global Security to and registered in the name of Cede & Co., as nominee of The Depository Trust Company, as Depositary therefor. Any Notes to be issued or transferred to, or to be held by, Cede & Co. (or any successor thereof) for such purpose shall bear the depositary legend in substantially the form set forth at the top of the form of Note in Section 301 hereof (in lieu of that set forth in Section 204 of the Indenture), unless otherwise agreed by the Company, such agreement to be confirmed in writing to the Trustee. Each such Global Security may be exchanged in whole or in part for Notes registered, and any transfer of such Global Security in whole or in part may be registered, in the name(s) of Persons other than such Depositary or a nominee thereof only under the circumstances set forth in clause (2) of the last paragraph of Section 305 of the Indenture, or such other circumstances in addition to or in lieu of those set forth in clause (2) of the last paragraph of Section 305 of the Indenture as to which the Company shall agree, such agreement to be confirmed in writing to the Trustee. Upon the occurrence of any such event, the Notes will be issued in such names as the Depositary shall instruct the Trustee.
SECTION 103.      Place of Payment and Place for Registration of Transfers and Exchange . Principal of, and premium, if any, and interest on, the Notes will be payable, the transfer of Notes will be registrable and the Notes will be exchangeable for Notes bearing identical terms and provisions, at the office or agency of the Company in the Borough of Manhattan, The City and State of New York; provided , however , that payment of interest may be made at the option of the Company by wire transfer to any Holder or by deposit to the account of the Holder of any such Notes if such account is maintained with the Trustee, in each case according to the written instructions given by such Holder on or prior to the applicable record date to the Trustee, which written instructions shall remain in effect until revised by such Holder by an instrument in writing delivered to the Trustee.
SECTION 104.      Payment of Interest . The Notes will bear interest at the rate of 4.50% per annum from January 13, 2012 or from the most recent Interest Payment Date (as hereinafter defined) to which interest has been paid or duly provided for until the principal thereof is paid or made available for payment, payable on April 1 and October 1 of each year (each, an “Interest Payment Date”), commencing on October 1, 2012, to the person in whose name such Note or any Predecessor Security is registered, at the close of business on March 15 and September 15, as the case may be, whether or not a Business Day, immediately preceding the Interest Payment Date. Any such interest installment not punctually paid or duly provided for shall forthwith cease to be

2

payable to the Holders on such Regular Record Date, and may be paid to the Person in whose name such Note (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date to be fixed by the Trustee for the payment of such Defaulted Interest, notice whereof shall be given to the Holders of the Notes not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may be listed, and upon such notice as may be required by such exchange, all as more fully described in the Indenture.
The amount of interest payable for any period will be computed on the basis of a 360-day year of twelve 30-day months. Interest will accrue from January 13, 2012 or from the most recent Interest Payment Date to which interest has been paid or duly provided for to, but not including, the relevant payment date. In the event that any date on which interest is payable on the Notes is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), in each case with the same force and effect as if made on such date. A “Business Day” shall mean any day except a Saturday, a Sunday or a legal holiday in The City of New York on which banking institutions are authorized or required by law, regulation or executive order to close.
SECTION 105.      Redemption of the Notes . The Company may redeem all or any portion of the Notes, at its option, at any time or from time to time, upon notice as provided in the Indenture. The Redemption Price for any of the Notes to be redeemed on any Redemption Date prior to October 1, 2041 will be equal to the greater of the following amounts:
(a)      100% of the principal amount of the Notes being redeemed on the Redemption Date; or
(b)      the sum of the present values of the remaining scheduled payments of principal and interest on the Notes being redeemed on that Redemption Date (not including any portion of any payments of interest accrued to the Redemption Date) discounted to the Redemption Date on a semiannual basis at the Adjusted Treasury Rate plus 25 basis points as determined by a Reference Treasury Dealer appointed by the Company for such purpose;
plus, in each case, accrued and unpaid interest thereon to the Redemption Date. The Redemption Price for any of the Notes to be redeemed on any Redemption Date on or after October 1, 2041 will be equal to 100% of the principal amount of the Notes being redeemed on the Redemption Date plus accrued and unpaid interest thereon to the Redemption Date.
Notwithstanding the foregoing, installments of interest on the Notes that are due and payable on Interest Payment Dates falling on or prior to a Redemption Date will be payable on the Interest Payment Date to the Holders as of the close of business on the relevant record date in accordance with the terms of such Notes and the Indenture. The Redemption Price will be calculated on the basis of a 360-day year consisting of twelve 30-day months.
For purposes of this Section 105, the following terms shall have the following meanings:

3

“ Adjusted Treasury Rate ” means, with respect to any applicable Redemption Date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date.
“ Comparable Treasury Issue ” means the U.S. Treasury security selected by a Reference Treasury Dealer appointed by the Company for such purpose as having a maturity comparable to the remaining term of the Notes to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of such Notes.
“ Comparable Treasury Price ” means, with respect to any applicable Redemption Date, (A) if the Company obtains three or more Reference Treasury Dealer Quotations, the average of such Reference Treasury Dealer Quotations for such Redemption Date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations, (B) if the Company obtains two such Reference Treasury Dealer Quotations, the average of such quotations, or (C) if only one Reference Treasury Dealer Quotation is received, such quotation.
“Primary Treasury Dealer” means a primary U.S. government securities dealer in the United States.
“ Reference Treasury Dealer ” means (A) Barclays Capital Inc., BNP Paribas Securities Corp., BNY Mellon Capital Markets, LLC, Credit Suisse Securities (USA) LLC, and their respective successors; provided, however, that if any of the foregoing shall cease to be a Primary Treasury Dealer, the Company will substitute therefor another Primary Treasury Dealer; and (B) any other Primary Treasury Dealer(s) selected by the Company.
“ Reference Treasury Dealer Quotations ” means, with respect to each Reference Treasury Dealer and any applicable Redemption Date, the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. (New York City time) on the third Business Day preceding such Redemption Date.
The Company shall give the Trustee written notice of the Redemption Price, promptly after the calculation thereof.
The Trustee shall be under no duty to inquire into, may conclusively presume the correctness of, and shall be fully protected in acting upon, the Company’s calculation of any Redemption Price.
No Notes of $2,000 principal amount or less can be redeemed in part.     
Notwithstanding Section 1104 of the Indenture, any notice of redemption given pursuant to said Section with respect to the foregoing redemption need not set forth the Redemption Price but only the manner of calculation thereof.

4

SECTION 106.      Defeasance of the Notes . The Notes shall be defeasible pursuant to Section 1302 or 1303 of the Indenture.
SECTION 107.      Minimum Denominations . The Notes shall be issuable in denominations of $2,000 and any integral multiple of $1,000 in excess thereof.
ARTICLE TWO
ADDITIONAL COVENANT
SECTION 201.      Negative Lien Covenant . (a)    So long as any of the Notes are Outstanding, the Company will not issue, assume, guarantee or permit to exist any Debt secured by any mortgage, security interest, pledge or lien (herein referred to as a “Mortgage”) of or upon any Operating Property of the Company, whether owned at the date of this Thirteenth Supplemental Indenture or hereafter acquired, without effectively securing the Notes (together with, if the Company shall so determine, any other indebtedness or obligations of the Company ranking senior to, or equally with, the Notes) equally and ratably with such Debt (but only so long as such Debt is so secured); provided, however, that the foregoing restriction shall not apply to Debt secured by any of the following:

(1)	Mortgages on any property existing at the time of acquisition thereof (which Mortgages may also extend to subsequent repairs, alterations and improvements to that property);	

(2)	Mortgages on property of a corporation existing at the time such corporation is merged into or consolidated with the Company or at the time of a sale, lease or other disposition of the properties of such corporation or a division thereof as an entirety or substantially as an entirety to the Company;	

(3)	Mortgages on property to secure all or part of the cost of acquiring, constructing, developing or substantially repairing, altering or improving such property or to secure indebtedness incurred to provide funds for any such purpose or for reimbursement of funds previously expended for any such purpose, provided such Mortgages are created or assumed contemporaneously with, or within eighteen (18) months after, such acquisition or completion of construction, development or substantial repair, alteration or improvement;	

(4)	Mortgages in favor of the United States of America or any State thereof, or any department, agency, instrumentality or political subdivision of the United States of America or any State thereof, or for the benefit of holders of securities issued by any such entity (or providers of credit enhancement with respect to those securities), to secure any Debt (including the Company’s obligations with respect to industrial development, pollution control or similar revenue bonds)	

5

incurred for the purpose of financing or refinancing all or any part of the purchase price or the cost of constructing, developing or substantially repairing, altering or improving the property of the Company;

(5)	Mortgages to compensate the Trustee as provided in the Indenture; or	

(6)	any extension, renewal or replacement (or successive extensions, renewals or replacements), in whole or in part, of any Mortgage referred to in the foregoing clauses (1) to (5), inclusive; provided, however, that the principal amount of Debt secured thereby and not otherwise authorized by said clauses (1) to (5), inclusive, shall not exceed the principal amount of Debt, plus any premium or fee payable in connection with any such extension, renewal or replacement, so secured at the time of such extension, renewal or replacement.	
(b)    Notwithstanding the provisions of Section 201(a) , the Company may issue, assume or guarantee or permit to exist Debt, secured by Mortgages that would otherwise be subject to the restrictions set forth above in connection with the Company’s existing sale and lease-back transactions relating to Unit 2 of the Palo Verde Nuclear Generating Station (the “Unit 2 Sale and Lease-Back Transactions”), including but not limited to Mortgages on the leased interests in Unit 2 of the Palo Verde Nuclear Generating Station and related rights if the Company reacquires ownership in any of those interests or acquires any of the equity or owner participants’ interests in the trusts that hold title to such leased interests, whether or not it also directly assumes the Sale Leaseback Obligation Bonds, and Mortgages on the Company’s interests in the trusts that hold title to such leased interests and related rights in the event that the Company acquires any of the equity or owner participants’ interests in such trusts pursuant to a “special transfer” under the Unit 2 Sale and Lease-Back Transactions. In addition, the Company may issue, assume or guarantee or permit to exist Debt that is secured by Mortgages that would otherwise be subject to the restrictions set forth above up to an aggregate principal amount that, together with the principal amount of all other Debt of the Company secured by such Mortgages, does not at the time exceed ten percent (10%) of Tangible Assets.
(c)    For purposes of this Section 201 , the following terms shall have the following meanings:
“Debt” means any outstanding debt of the Company for money borrowed evidenced by notes, debentures, bonds or other securities, or guarantees of any thereof.
“Operating Property” means (i) any interest in real property owned by the Company and (ii) any asset owned by the Company that is depreciable in accordance with generally accepted accounting principles, excluding in any case any interest of the Company as lessee under any lease.
“Sale Leaseback Obligation Bonds” means PVNGS II Funding Corp.’s: (i) 8.00% Secured Lease Obligation Bonds, Series 1993, due 2015; (ii) any other bonds issued in connection with the

6

Unit 2 Sale and Lease-Back Transactions; and (iii) any refinancing or refunding of the obligations specified in subclauses (i) and (ii) above.
“Tangible Assets” means the amount shown as total assets on the most recent balance sheet of the Company, less: (i) intangible assets, including, but without limitation, goodwill, trademarks, trade names, patents and unamortized debt discount and expense and (ii) appropriate adjustments, if any, on account of minority interests; provided, however, that if, subsequent to the date of the most recent balance sheet of the Company, the Company acquires any property, whether by acquisition (including by way of capital lease) from a third party, through merger or consolidation, through construction, development or substantial repair, alteration or improvement of property, or by any other means, and such property is or becomes subject to any Mortgage securing Debt, the Company may prepare a pro forma balance sheet to include the value of such property in any calculation of Tangible Assets hereunder. Subject to the foregoing, Tangible Assets shall be determined in accordance with generally accepted accounting principles and practices applicable to the type of business in which the Company is engaged and that are approved by the independent accountants regularly retained by the Company, and may be determined as of a date not more than 60 days prior to the happening of the event for which such determination is being made.
ARTICLE THREE
FORM OF NOTES
SECTION 301.      Form of Notes . The Notes and the Trustee’s certificate of authentication thereon shall be substantially in the following forms:
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (“DTC”), TO ARIZONA PUBLIC SERVICE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
ARIZONA PUBLIC SERVICE COMPANY 
4.50% Note due 2042

		
No. __	$325,000,000	
 	CUSIP No. 040555CN2

                                

7

Arizona Public Service Company, a corporation duly organized and existing under the laws of the State of Arizona (the “Company”, which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to Cede & Co., or registered assigns, the principal sum of Three Hundred Twenty-Five Million Dollars ($325,000,000) on April 1, 2042, and to pay interest thereon and on any overdue interest from January 13, 2012 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually in arrears on April 1 and October 1 of each year, commencing October 1, 2012, at the rate of 4.50% per annum, until the principal hereof is paid or made available for payment. The amount of interest payable for any period will be computed on the basis of a 360-day year of twelve 30-day months.
The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be March 15 or September 15, as the case may be, immediately preceding the Interest Payment Date (whether or not a Business Day). Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities of this series not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture.
Payment of the principal of (and premium, if any) and any interest on this Security will be made at the office or agency of the Company maintained for that purpose through the corporate trust office of the Trustee, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided , however , that payment of interest may be made at the option of the Company by wire transfer to any Holder or by deposit to the account of the Holder of any such Securities if such account is maintained with the Trustee, in each case according to the written instructions given by such Holder on or prior to the applicable record date to the Trustee, which written instructions shall remain in effect until revised by such Holder by an instrument in writing delivered to the Trustee.
Reference is hereby made to the further provisions of this Security set forth following the Company’s signature hereto, which further provisions shall for all purposes have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by the Trustee referred to following the Company’s signature hereto by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal.

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ARIZONA PUBLIC SERVICE COMPANY	 	 	

By                         	 	 	
 	 	 	
Attest:	 	 	

 	 	 	
 	 	 	
This Security is one of a duly authorized issue of securities of the Company (herein called the “Securities”), issued and to be issued in one or more series under an Indenture, dated as of January 15, 1998 (such instrument as originally executed and delivered and as supplemented or amended from time to time, the “Indenture”), between the Company and The Bank of New York Mellon Trust Company, N.A., successor to JPMorgan Chase Bank, N.A. (formerly known as The Chase Manhattan Bank), as Trustee (the “Trustee,” which term includes any successor trustee under the Indenture), and reference is hereby made to the Indenture for a description of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. This Security is one of the series designated on the face hereof.
The Company may redeem all or any portion of the Securities of this series, at its option, at any time or from time to time, (A) prior to October 1, 2041, at a Redemption Price equal to the greater of (a) 100% of the principal amount of the Securities of this series being redeemed on the Redemption Date or (b) the sum of the present values of the remaining scheduled payments of principal and interest on the Securities of this series being redeemed on that Redemption Date (not including the portion of any payments of interest accrued to the Redemption Date) discounted to the Redemption Date on a semiannual basis at the Adjusted Treasury Rate plus 25 basis points, as determined by a Reference Treasury Dealer appointed by the Company for such purpose; and (B) on or after October 1, 2041, at a Redemption Price equal to 100% of the principal amount of the Securities of this series being redeemed on the Redemption Date; plus, in each case, accrued and unpaid interest thereon to the Redemption Date. Notwithstanding the foregoing, installments of interest on Securities of this series that are due and payable on Interest Payment Dates falling on or prior to a Redemption Date will be payable on the Interest Payment Date to the Holders as of the close of business on the relevant record date in accordance with the terms of the Securities of this series and the Indenture. The Redemption Price will be calculated on the basis of a 360-day year consisting of twelve 30-day months.
If notice has been given as provided in the Indenture and funds for the redemption of any Securities of this series (or any portion thereof) called for redemption shall have been made available on the Redemption Date referred to in such notice, such Securities (or any portion thereof) will cease to bear interest on the date fixed for such redemption specified in such notice and the only right of the Holders of such Securities will be to receive payment of the Redemption Price.

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Notice of any optional redemption of Securities of this series (or any portion thereof) will be given to Holders at their addresses, as shown in the Security Register for such Securities, not more than 60 nor less than 30 days prior to the date fixed for redemption. The notice of redemption will specify, among other items, (i) the Redemption Price or the manner of calculation of the Redemption Price and (ii) the principal amount of the Securities of this series held by such Holder to be redeemed if less than all of such Securities. If less than all of the Securities of this series are to be redeemed at the option of the Company, the Trustee shall select, in such manner as it shall deem appropriate, the portion of such Securities to be redeemed.
As used herein:
“ Adjusted Treasury Rate ” means, with respect to any applicable Redemption Date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date.
“ Comparable Treasury Issue ” means the U.S. Treasury security selected by a Reference Treasury Dealer appointed by the Company for such purpose as having a maturity comparable to the remaining term of this Security to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of such Security.
“ Comparable Treasury Price ” means, with respect to any applicable Redemption Date, (A) if the Company obtains three or more Reference Treasury Dealer Quotations, the average of such Reference Treasury Dealer Quotations for such Redemption Date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations, (B) if the Company obtains two such Reference Treasury Dealer Quotations, the average of such quotations, or (C) if only one Reference Treasury Dealer Quotation is received, such quotation.
“Primary Treasury Dealer” means a primary U.S. government securities dealer in the United States.
“ Reference Treasury Dealer ” means (A) Barclays Capital Inc., BNP Paribas Securities Corp., BNY Mellon Capital Markets, LLC, Credit Suisse Securities (USA) LLC, and their respective successors; provided, however, that if any of the foregoing shall cease to be a Primary Treasury Dealer, the Company will substitute therefor another Primary Treasury Dealer; and (B) any other Primary Treasury Dealer(s) selected by the Company.
“ Reference Treasury Dealer Quotations ” means, with respect to each Reference Treasury Dealer and any applicable Redemption Date, the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. (New York City time) on the third Business Day preceding such Redemption Date.
The Securities of this series will not be subject to any sinking fund.

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In the event of redemption of this Security in part only, a new Security or Securities of this series and of like tenor for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof.
The Indenture contains provisions for defeasance at any time of the entire indebtedness of this Security and certain restrictive covenants and Events of Default with respect to this Security, in each case upon compliance with certain conditions set forth in the Indenture.
The Indenture contains provisions limiting the Company’s ability to issue, assume, guarantee or permit to exist any Debt secured by any mortgage, security interest, pledge or lien upon any of its Operating Property, subject to the exceptions and qualifications set forth in the Indenture.
If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture.
The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee without the consent of such Holders in certain circumstances, or with the consent of the Holders of 66-2/3% in principal amount of the affected Securities at the time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the affected Securities at the time Outstanding, on behalf of the Holders of all such Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security.
As provided in and subject to the provisions of the Indenture, the Holder of this Security shall not have the right to institute any proceeding with respect to the Indenture or for the appointment of a receiver or trustee or for any other remedy under the Indenture, unless such Holder shall have previously given the Trustee written notice of a continuing Event of Default with respect to the Securities of this series, the Holders of not less than 25% in principal amount of the Securities of this series at the time Outstanding shall have made written request to the Trustee to institute proceedings in respect of such Event of Default as Trustee and offered the Trustee reasonable indemnity, and the Trustee shall not have received from the Holders of a majority in principal amount of Securities of this series at the time Outstanding a direction inconsistent with such request, and shall have failed to institute any such proceeding, for 60 days after receipt of such notice, request and offer of indemnity. The foregoing shall not apply to any suit instituted by the Holder of this Security for the enforcement of any payment of principal hereof or any premium or interest hereon on or after the respective due dates expressed herein.
No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the

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principal of and any premium and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in any place where the principal of and any premium and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his or her attorney duly authorized in writing, and thereupon one or more new Securities of this series and of like tenor, of authorized denominations and for the same aggregate principal amount will be issued to the designated transferee or transferees.
The Securities of this series are issuable only in registered form without coupons in denominations of $2,000 and integral multiples of $1,000 in excess thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities of this series are exchangeable for a like aggregate principal amount of Securities of this series and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same.
No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the absolute owner hereof for all purposes, whether or not this Security be overdue, and none of the Company, the Trustee or any such agent shall be affected by notice to the contrary.
All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture.
Form of Trustee’s Certificate of Authentication.

CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture.

			
Dated:	 	THE BANK OF NEW YORK MELLON	
 	 	TRUST COMPANY, N.A.,	
 	 	As Trustee	
 	By	 	
 	 	Authorized Officer	

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SECTION 302.      General Provisions.  The Notes may have notations, legends or endorsements required by law, stock exchange rule or usage. The terms and provisions contained in the Notes shall constitute, and are hereby expressly made, a part of this Thirteenth Supplemental Indenture, and the Company, by its execution and delivery of this Thirteenth Supplemental Indenture, expressly agrees to such terms and provisions and to be bound thereby. However, to the extent any provision of the Notes conflicts with the express provisions of this Thirteenth Supplemental Indenture or the Indenture, the provisions of this Thirteenth Supplemental Indenture or the Indenture, as applicable, shall govern and be controlling.
ARTICLE FOUR
ORIGINAL ISSUE OF NOTES
SECTION 401.      Issuance of Notes . Subject to Section 101, Notes in the aggregate principal amount of $325,000,000 may, upon execution of this Thirteenth Supplemental Indenture, or from time to time thereafter, be executed by the Company and delivered to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver said Notes, in accordance with a Company Order delivered to the Trustee by the Company, without any further action by the Company.
ARTICLE FIVE
PAYING AGENT AND REGISTRAR
SECTION 501.      Appointment of Paying Agent and Registrar . The Bank of New York Mellon Trust Company, N.A. will be the Paying Agent and Security Registrar for the Notes.
ARTICLE SIX
SUNDRY PROVISIONS
SECTION 601.      Associate Secretary . For all purposes relating to this Thirteenth Supplemental Indenture and the Notes, the term “Assistant Secretary” when used in the Indenture with respect to the Company will include an Associate Secretary of the Company.
SECTION 602.      Defined Terms . Except as otherwise expressly provided in this Thirteenth Supplemental Indenture or in the form of the Notes, or otherwise clearly required by the context hereof or thereof, all terms used herein or in said form of the Notes that are defined in the Indenture shall have the several meanings respectively assigned to them thereby.
SECTION 603.      Ratification of Indenture . The Indenture, as heretofore supplemented and amended, and as supplemented by this Thirteenth Supplemental Indenture, is in all respects ratified and confirmed, and this Thirteenth Supplemental Indenture shall be deemed part of the Indenture in the manner and to the extent herein and therein provided.
SECTION 604.      About the Trustee . The Trustee hereby accepts the trusts herein declared, provided, created, supplemented or amended and agrees to perform the same upon the

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terms and conditions herein and in the Indenture, as heretofore supplemented and amended, set forth and upon the following terms and conditions:
The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Thirteenth Supplemental Indenture or for or in respect of the recitals contained herein, all of which recitals are made by the Company solely. Each and every term and condition contained in Article Six of the Indenture shall apply to and form a part of this Thirteenth Supplemental Indenture with the same force and effect as if the same were herein set forth in full with such omissions, variations and insertions, if any, as may be appropriate to make the same conform to the provisions of this Thirteenth Supplemental Indenture.
The Trustee agrees to accept and act upon instructions or directions pursuant to this Thirteenth Supplemental Indenture sent by unsecured e-mail, pdf, facsimile transmission or other similar unsecured electronic methods; provided, however, that (a) the party providing such written instructions, subsequent to such transmission of written instructions, shall provide the originally executed instructions or directions to the Trustee in a timely manner, and (b) such originally executed instructions or directions shall be signed by an authorized representative of the party providing such instructions or directions. If the party elects to give the Trustee e-mail or facsimile instructions (or instructions by a similar electronic method) and the Trustee in its discretion elects to act upon such instructions, the Trustee’s understanding of such instructions shall be deemed controlling. The Trustee shall not be liable for any losses, costs or expenses arising directly or indirectly from the Trustee’s reliance upon and compliance with such instructions notwithstanding such instructions conflict or are inconsistent with a subsequent written instruction. The party providing electronic instructions agrees to assume all risks arising out of the use of such electronic methods to submit instructions and directions to the Trustee, including without limitation the risk of the Trustee acting on unauthorized instructions, and the risk or interception and misuse by third parties.
In no event shall the Trustee be responsible or liable for special, indirect, or consequential loss or damage of any kind whatsoever (including, but not limited to, loss of profit) irrespective of whether the Trustee has been advised of the likelihood of such loss or damage and regardless of the form of action. Delivery of reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates).
SECTION 605.      Counterparts . This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

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IN WITNESS WHEREOF, the parties hereto have caused this Thirteenth Supplemental Indenture to be duly executed as of the day and year first above written.

		
 	ARIZONA PUBLIC SERVICE COMPANY	
 	 	
 	/s/ Lee R. Nickloy                	
 	Lee R. Nickloy	
 	Vice President and Treasurer	

	
	
Attest:	
 	
/s/ Shirley A. Baum	
Shirley A. Baum	
Associate Secretary	

	
		
 	THE BANK OF NEW YORK MELLON TRUST	
 	COMPANY, N.A., as Trustee	
 	 	
 	By: /s/ Raymond Torres        	
 	Name: Raymond Torres	
 	Title: Senior Associate	

[Signature Page to Thirteenth Supplemental Indenture]

	
		
STATE OF ARIZONA    	)	
 	) ss.:	
COUNTY OF MARICOPA	)	
On the 11th day of January, 2012, before me personally came Lee R. Nickloy, to me known, who, being by me duly sworn, did depose and say that he is the Vice President and Treasurer of Arizona Public Service Company, one of the corporations described in and which executed the foregoing instrument and that he signed his name thereto by authority of the Board of Directors of said corporation.

/s/ Barbara J. Dubishar        

 Notary Public
My Commission Expires

	

	
		
STATE OF CALIFORNIA    	)	
 	) ss.:	
COUNTY OF Los Angeles	)	
On Los Angeles, before me, David A Rivas, a notary public, personally appeared Raymond Torres, who proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.
I certify under PENALTY OF PERJURY under the laws of the State of California that the forgoing paragraph is true and correct.
WITNESS my hand and official seal.

Signature /s/ David A Rivas             (seal) 

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Exhibit 4.6h

ARIZONA PUBLIC SERVICE COMPANY

TO

THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A.

As Trustee under Arizona Public Service Company’s Indenture dated as of January 15, 1998

Fourteenth Supplemental Indenture

Dated as of January 10, 2014

4.70% Notes due 2044

This FOURTEENTH SUPPLEMENTAL INDENTURE, dated as of January 10, 2014, is between Arizona Public Service Company, a corporation duly organized and existing under the laws of the State of Arizona (herein called the “Company”), having its principal office at 400 North Fifth Street, Phoenix, Arizona 85004, and The Bank of New York Mellon Trust Company, N.A., successor to JPMorgan Chase Bank, N.A. (formerly known as The Chase Manhattan Bank), a national banking association, as Trustee (herein called the “Trustee”) under the Indenture dated as of January 15, 1998 between the Company and the Trustee (the “Indenture”).
RECITALS OF THE COMPANY
The Company has executed and delivered the Indenture to the Trustee to provide for the issuance from time to time of its unsecured debentures, notes or other evidences of indebtedness (the “Securities”), said Securities to be issued in one or more series as provided in the Indenture.
Section 901(7) of the Indenture provides that, without the consent of any Holders, the Company and the Trustee may enter into one or more indentures supplemental to the Indenture for the purpose of establishing the form or terms of Securities of any series.
Pursuant to the terms of the Indenture, the Company desires to provide for the establishment of a new series of its Securities to be known as its 4.70% Notes due 2044 (herein called the “Notes”), the forms and substance of such Notes and the terms, provisions, and conditions thereof to be set forth as provided in the Indenture and this Fourteenth Supplemental Indenture.
All things necessary to make this Fourteenth Supplemental Indenture a valid agreement of the Company, and to make the Notes described herein, when executed by the Company and authenticated and delivered by the Trustee, the valid obligations of the Company, have been done.
NOW, THEREFORE, THIS FOURTEENTH SUPPLEMENTAL INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Notes by the Holders thereof, and for the purpose of setting forth, as provided in the Indenture, the form and substance of each of the Notes and the terms, provisions, and conditions thereof, it is mutually agreed, for the equal and proportionate benefit of all Holders of the Notes, as applicable, as follows:
ARTICLE ONE
GENERAL TERMS AND CONDITIONS OF THE NOTES

SECTION 101.      Authentication and Delivery . There shall be and is hereby authorized a series of Securities designated the “4.70% Notes due 2044” initially limited in aggregate principal amount to $250,000,000, which amount shall be as set forth in any Company Order for the authentication and delivery of Notes. The Notes shall mature and the principal shall be due and payable together with all accrued and unpaid interest thereon on January 15, 2044, and the Notes shall be issued in the form of registered Securities without coupons.

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The foregoing principal amount of the Notes may be increased from time to time as permitted by Section 301 of the Indenture. All Notes need not be issued at the same time and such series may be reopened at any time, without notice to, or the consent of, the then existing Holders, for issuance of additional Notes. Any such additional Notes will be equal in rank and have the same respective maturity, payment terms, redemption features, and other terms as the Notes initially issued, except for the issue date, public offering price, payment of interest accruing prior to the issue date, and first payment of interest following the issue date of the additional Notes, but the Company will not issue such additional Notes unless the additional Notes are fungible with the previously issued Notes for U.S. federal income tax purposes or are issued with a separate CUSIP number.
SECTION 102.      Global Security . The Notes shall be issued in certificated form, except that the Notes shall be issued initially as a Global Security to and registered in the name of Cede & Co., as nominee of The Depository Trust Company, as Depositary therefor. Any Notes to be issued or transferred to, or to be held by, Cede & Co. (or any successor thereof) for such purpose shall bear the depositary legend in substantially the form set forth at the top of the form of Note in Section 301 hereof (in lieu of that set forth in Section 204 of the Indenture), unless otherwise agreed by the Company, such agreement to be confirmed in writing to the Trustee. Each such Global Security may be exchanged in whole or in part for Notes registered, and any transfer of such Global Security in whole or in part may be registered, in the name(s) of Persons other than such Depositary or a nominee thereof only under the circumstances set forth in clause (2) of the last paragraph of Section 305 of the Indenture, or such other circumstances in addition to or in lieu of those set forth in clause (2) of the last paragraph of Section 305 of the Indenture as to which the Company shall agree, such agreement to be confirmed in writing to the Trustee. Upon the occurrence of any such event, the Notes will be issued in such names as the Depositary shall instruct the Trustee.
SECTION 103.      Place of Payment and Place for Registration of Transfers and Exchange . Principal of, and premium, if any, and interest on, the Notes will be payable, the transfer of Notes will be registrable and the Notes will be exchangeable for Notes bearing identical terms and provisions, at the office or agency of the Company in the Borough of Manhattan, The City and State of New York; provided , however , that payment of interest may be made at the option of the Company by wire transfer to any Holder or by deposit to the account of the Holder of any such Notes if such account is maintained with the Trustee, in each case according to the written instructions given by such Holder on or prior to the applicable record date to the Trustee, which written instructions shall remain in effect until revised by such Holder by an instrument in writing delivered to the Trustee.
SECTION 104.      Payment of Interest . The Notes will bear interest at the rate of 4.70% per annum from January 10, 2014 or from the most recent Interest Payment Date (as hereinafter defined) to which interest has been paid or duly provided for until the principal thereof is paid or made available for payment, payable on January 15 and July 15 of each year (each, an “Interest Payment Date”), commencing on July 15, 2014, to the person in whose name such Note or any Predecessor Security is registered, at the close of business on January 1 and July 1, as the case may be, whether or not a Business Day, immediately preceding the Interest Payment Date. Any such interest installment not punctually paid or duly provided for shall forthwith cease to be payable to the Holders on such Regular Record Date, and may be paid to the Person in whose name such Note

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(or one or more Predecessor Securities) is registered at the close of business on a Special Record Date to be fixed by the Trustee for the payment of such Defaulted Interest, notice whereof shall be given to the Holders of the Notes not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may be listed, and upon such notice as may be required by such exchange, all as more fully described in the Indenture.
The amount of interest payable for any period will be computed on the basis of a 360-day year of twelve 30-day months. Interest will accrue from January 10, 2014 or from the most recent Interest Payment Date to which interest has been paid or duly provided for to, but not including, the relevant payment date. In the event that any date on which interest is payable on the Notes is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), in each case with the same force and effect as if made on such date. A “Business Day” shall mean any day except a Saturday, a Sunday or a legal holiday in The City of New York on which banking institutions are authorized or required by law, regulation or executive order to close.
SECTION 105.      Redemption of the Notes . The Company may redeem all or any portion of the Notes, at its option, at any time or from time to time, upon notice as provided in the Indenture. The Redemption Price for any of the Notes to be redeemed on any Redemption Date prior to July 15, 2043 will be equal to the greater of the following amounts:
(a)      100% of the principal amount of the Notes being redeemed on the Redemption Date; or
(b)      the sum of the present values of the remaining scheduled payments of principal and interest on the Notes being redeemed on that Redemption Date (not including any portion of any payments of interest accrued to the Redemption Date) discounted to the Redemption Date on a semiannual basis at the Adjusted Treasury Rate plus 15 basis points as determined by a Reference Treasury Dealer appointed by the Company for such purpose;
plus, in each case, accrued and unpaid interest thereon to the Redemption Date. The Redemption Price for any of the Notes to be redeemed on any Redemption Date on or after July 15, 2043 will be equal to 100% of the principal amount of the Notes being redeemed on the Redemption Date plus accrued and unpaid interest thereon to the Redemption Date.
Notwithstanding the foregoing, installments of interest on the Notes that are due and payable on Interest Payment Dates falling on or prior to a Redemption Date will be payable on the Interest Payment Date to the Holders as of the close of business on the relevant record date in accordance with the terms of such Notes and the Indenture. The Redemption Price will be calculated on the basis of a 360-day year consisting of twelve 30-day months.
For purposes of this Section 105, the following terms shall have the following meanings:
“ Adjusted Treasury Rate ” means, with respect to any applicable Redemption Date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury

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Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date.
“ Comparable Treasury Issue ” means the U.S. Treasury security selected by a Reference Treasury Dealer appointed by the Company for such purpose as having a maturity comparable to the remaining term of the Notes to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of such Notes.
“ Comparable Treasury Price ” means, with respect to any applicable Redemption Date, (A) if the Company obtains three or more Reference Treasury Dealer Quotations, the average of such Reference Treasury Dealer Quotations for such Redemption Date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations, (B) if the Company obtains two such Reference Treasury Dealer Quotations, the average of such quotations, or (C) if only one Reference Treasury Dealer Quotation is received, such quotation.
“Primary Treasury Dealer” means a primary U.S. government securities dealer in the United States.
“ Reference Treasury Dealer ” means (A) Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, UBS Securities LLC and a Primary Treasury Dealer selected by U.S. Bancorp Investments, Inc.; provided, however, that if any of the foregoing shall cease to be a Primary Treasury Dealer, the Company will substitute therefor another Primary Treasury Dealer; and (B) any other Primary Treasury Dealer(s) selected by the Company.

“ Reference Treasury Dealer Quotations ” means, with respect to each Reference Treasury Dealer and any applicable Redemption Date, the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Company by such Reference Treasury Dealer at 5:00 p.m. (New York City time) on the third Business Day preceding such Redemption Date. The Company shall give the Trustee written notice of the Redemption Price, promptly after the calculation thereof.
The Trustee shall be under no duty to inquire into, may conclusively presume the correctness of, and shall be fully protected in acting upon, the Company’s calculation of any Redemption Price.
No Notes of $2,000 principal amount or less can be redeemed in part.     
Notwithstanding Section 1104 of the Indenture, any notice of redemption given pursuant to said Section with respect to the foregoing redemption need not set forth the Redemption Price but only the manner of calculation thereof.
SECTION 106.      Defeasance of the Notes . The Notes shall be defeasible pursuant to Section 1302 or 1303 of the Indenture.
SECTION 107.      Minimum Denominations . The Notes shall be issuable in denominations of $2,000 and any integral multiple of $1,000 in excess thereof.

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ARTICLE TWO
ADDITIONAL COVENANT
SECTION 201.      Negative Lien Covenant . (a)    So long as any of the Notes are Outstanding, the Company will not issue, assume, guarantee or permit to exist any Debt secured by any mortgage, security interest, pledge or lien (herein referred to as a “Mortgage”) of or upon any Operating Property of the Company, whether owned at the date of this Fourteenth Supplemental Indenture or hereafter acquired, without effectively securing the Notes (together with, if the Company shall so determine, any other indebtedness or obligations of the Company ranking senior to, or equally with, the Notes) equally and ratably with such Debt (but only so long as such Debt is so secured); provided, however, that the foregoing restriction shall not apply to Debt secured by any of the following:

(1)	Mortgages on any property existing at the time of acquisition thereof (which Mortgages may also extend to subsequent repairs, alterations and improvements to that property);	

(2)	Mortgages on property of a corporation existing at the time such corporation is merged into or consolidated with the Company or at the time of a sale, lease or other disposition of the properties of such corporation or a division thereof as an entirety or substantially as an entirety to the Company;	

(3)	Mortgages on property to secure all or part of the cost of acquiring, constructing, developing or substantially repairing, altering or improving such property or to secure indebtedness incurred to provide funds for any such purpose or for reimbursement of funds previously expended for any such purpose, provided such Mortgages are created or assumed contemporaneously with, or within eighteen (18) months after, such acquisition or completion of construction, development or substantial repair, alteration or improvement;	

(4)	Mortgages in favor of the United States of America or any State thereof, or any department, agency, instrumentality or political subdivision of the United States of America or any State thereof, or for the benefit of holders of securities issued by any such entity (or providers of credit enhancement with respect to those securities), to secure any Debt (including the Company’s obligations with respect to industrial development, pollution control or similar revenue bonds) incurred for the purpose of financing or refinancing all or any part of the purchase price or the cost of constructing, developing or substantially repairing, altering or improving the property of the Company;	

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(5)	Mortgages to compensate the Trustee as provided in the Indenture; or	

(6)	any extension, renewal or replacement (or successive extensions, renewals or replacements), in whole or in part, of any Mortgage referred to in the foregoing clauses (1) to (5), inclusive; provided, however, that the principal amount of Debt secured thereby and not otherwise authorized by said clauses (1) to (5), inclusive, shall not exceed the principal amount of Debt, plus any premium or fee payable in connection with any such extension, renewal or replacement, so secured at the time of such extension, renewal or replacement.	
(b)    Notwithstanding the provisions of Section 201(a) , the Company may issue, assume or guarantee or permit to exist Debt, secured by Mortgages that would otherwise be subject to the restrictions set forth above in connection with the Company’s existing sale and lease-back transactions relating to Unit 2 of the Palo Verde Nuclear Generating Station (the “Unit 2 Sale and Lease-Back Transactions”), including but not limited to Mortgages on the leased interests in Unit 2 of the Palo Verde Nuclear Generating Station and related rights if the Company reacquires ownership in any of those interests or acquires any of the equity or owner participants’ interests in the trusts that hold title to such leased interests, whether or not it also directly assumes the Sale Leaseback Obligation Bonds, and Mortgages on the Company’s interests in the trusts that hold title to such leased interests and related rights in the event that the Company acquires any of the equity or owner participants’ interests in such trusts pursuant to a “special transfer” under the Unit 2 Sale and Lease-Back Transactions. In addition, the Company may issue, assume or guarantee or permit to exist Debt that is secured by Mortgages that would otherwise be subject to the restrictions set forth above up to an aggregate principal amount that, together with the principal amount of all other Debt of the Company secured by such Mortgages, does not at the time exceed ten percent (10%) of Tangible Assets.
(c)    For purposes of this Section 201 , the following terms shall have the following meanings:
“Debt” means any outstanding debt of the Company for money borrowed evidenced by notes, debentures, bonds or other securities, or guarantees of any thereof.
“Operating Property” means (i) any interest in real property owned by the Company and (ii) any asset owned by the Company that is depreciable in accordance with generally accepted accounting principles, excluding in any case any interest of the Company as lessee under any lease.
“Sale Leaseback Obligation Bonds” means PVNGS II Funding Corp.’s: (i) 8.00% Secured Lease Obligation Bonds, Series 1993, due 2015; (ii) any other bonds issued in connection with the Unit 2 Sale and Lease-Back Transactions; and (iii) any refinancing or refunding of the obligations specified in subclauses (i) and (ii) above.
“Tangible Assets” means the amount shown as total assets on the most recent balance sheet of the Company, less: (i) intangible assets, including, but without limitation, goodwill, trademarks,

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trade names, patents and unamortized debt discount and expense and (ii) appropriate adjustments, if any, on account of minority interests; provided, however, that if, subsequent to the date of the most recent balance sheet of the Company, the Company acquires any property, whether by acquisition (including by way of capital lease) from a third party, through merger or consolidation, through construction, development or substantial repair, alteration or improvement of property, or by any other means, and such property is or becomes subject to any Mortgage securing Debt, the Company may prepare a pro forma balance sheet to include the value of such property in any calculation of Tangible Assets hereunder. Subject to the foregoing, Tangible Assets shall be determined in accordance with generally accepted accounting principles and practices applicable to the type of business in which the Company is engaged and that are approved by the independent accountants regularly retained by the Company, and may be determined as of a date not more than 60 days prior to the happening of the event for which such determination is being made.
ARTICLE THREE

FORM OF NOTES
SECTION 301.      Form of Notes . The Notes and the Trustee’s certificate of authentication thereon shall be substantially in the following forms:
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (“DTC”), TO ARIZONA PUBLIC SERVICE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

ARIZONA PUBLIC SERVICE COMPANY 
4.70% Note due 2044

		
No. 1	$250,000,000	
 	CUSIP No. 040555 CP7	
Arizona Public Service Company, a corporation duly organized and existing under the laws of the State of Arizona (the “Company”, which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to Cede & Co., or

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registered assigns, the principal sum of Two Hundred Fifty Million Dollars ($250,000,000) on January 15, 2044, and to pay interest thereon and on any overdue interest from January 10, 2014 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually in arrears on January 15 and July 15 of each year, commencing July 15, 2014 at the rate of 4.70% per annum, until the principal hereof is paid or made available for payment. The amount of interest payable for any period will be computed on the basis of a 360-day year of twelve 30-day months.
The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be January 1 or July 1, as the case may be, immediately preceding the Interest Payment Date (whether or not a Business Day). Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities of this series not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture.
Payment of the principal of (and premium, if any) and any interest on this Security will be made at the office or agency of the Company maintained for that purpose through the corporate trust office of the Trustee, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided , however , that payment of interest may be made at the option of the Company by wire transfer to any Holder or by deposit to the account of the Holder of any such Securities if such account is maintained with the Trustee, in each case according to the written instructions given by such Holder on or prior to the applicable record date to the Trustee, which written instructions shall remain in effect until revised by such Holder by an instrument in writing delivered to the Trustee.
Reference is hereby made to the further provisions of this Security set forth following the Company’s signature hereto, which further provisions shall for all purposes have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by the Trustee referred to following the Company’s signature hereto by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal.

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ARIZONA PUBLIC SERVICE COMPANY	 	 	

By                         	 	 	
 	 	 	
Attest:	 	 	

 	 	 	

This Security is one of a duly authorized issue of securities of the Company (herein called the “Securities”), issued and to be issued in one or more series under an Indenture, dated as of January 15, 1998 (such instrument as originally executed and delivered and as supplemented or amended from time to time, the “Indenture”), between the Company and The Bank of New York Mellon Trust Company, N.A., successor to JPMorgan Chase Bank, N.A. (formerly known as The Chase Manhattan Bank), as Trustee (the “Trustee,” which term includes any successor trustee under the Indenture), and reference is hereby made to the Indenture for a description of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. This Security is one of the series designated on the face hereof.
The Company may redeem all or any portion of the Securities of this series, at its option, at any time or from time to time, (A) prior to July 15, 2043, at a Redemption Price equal to the greater of (a) 100% of the principal amount of the Securities of this series being redeemed on the Redemption Date or (b) the sum of the present values of the remaining scheduled payments of principal and interest on the Securities of this series being redeemed on that Redemption Date (not including the portion of any payments of interest accrued to the Redemption Date) discounted to the Redemption Date on a semiannual basis at the Adjusted Treasury Rate plus 15 basis points, as determined by a Reference Treasury Dealer appointed by the Company for such purpose; and (B) on or after July 15, 2043, at a Redemption Price equal to 100% of the principal amount of the Securities of this series being redeemed on the Redemption Date; plus, in each case, accrued and unpaid interest thereon to the Redemption Date. Notwithstanding the foregoing, installments of interest on Securities of this series that are due and payable on Interest Payment Dates falling on or prior to a Redemption Date will be payable on the Interest Payment Date to the Holders as of the close of business on the relevant record date in accordance with the terms of the Securities of this series and the Indenture. The Redemption Price will be calculated on the basis of a 360-day year consisting of twelve 30-day months.
If notice has been given as provided in the Indenture and funds for the redemption of any Securities of this series (or any portion thereof) called for redemption shall have been made available on the Redemption Date referred to in such notice, such Securities (or any portion thereof) will cease to bear interest on the date fixed for such redemption specified in such notice and the only right of the Holders of such Securities will be to receive payment of the Redemption Price.

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Notice of any optional redemption of Securities of this series (or any portion thereof) will be given to Holders at their addresses, as shown in the Security Register for such Securities, not more than 60 nor less than 30 days prior to the date fixed for redemption. The notice of redemption will specify, among other items, (i) the Redemption Price or the manner of calculation of the Redemption Price and (ii) the principal amount of the Securities of this series held by such Holder to be redeemed if less than all of such Securities. If less than all of the Securities of this series are to be redeemed at the option of the Company, the Securities to be redeemed will be selected in accordance with the procedures of the Depositary.
As used herein:
“ Adjusted Treasury Rate ” means, with respect to any applicable Redemption Date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date.
“ Comparable Treasury Issue ” means the U.S. Treasury security selected by a Reference Treasury Dealer appointed by the Company for such purpose as having a maturity comparable to the remaining term of this Security to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of such Security.
“ Comparable Treasury Price ” means, with respect to any applicable Redemption Date, (A) if the Company obtains three or more Reference Treasury Dealer Quotations, the average of such Reference Treasury Dealer Quotations for such Redemption Date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations, (B) if the Company obtains two such Reference Treasury Dealer Quotations, the average of such quotations, or (C) if only one Reference Treasury Dealer Quotation is received, such quotation.
“Primary Treasury Dealer” means a primary U.S. government securities dealer in the United States.
“ Reference Treasury Dealer ” means (A) Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, UBS Securities LLC and a Primary Treasury Dealer selected by U.S. Bancorp Investments, Inc.; provided, however, that if any of the foregoing shall cease to be a Primary Treasury Dealer, the Company will substitute therefor another Primary Treasury Dealer; and (B) any other Primary Treasury Dealer(s) selected by the Company.
“ Reference Treasury Dealer Quotations ” means, with respect to each Reference Treasury Dealer and any applicable Redemption Date, the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Company by such Reference Treasury Dealer at 5:00 p.m. (New York City time) on the third Business Day preceding such Redemption Date.
The Securities of this series will not be subject to any sinking fund.

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In the event of redemption of this Security in part only, a new Security or Securities of this series and of like tenor for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof.
The Indenture contains provisions for defeasance at any time of the entire indebtedness of this Security and certain restrictive covenants and Events of Default with respect to this Security, in each case upon compliance with certain conditions set forth in the Indenture.
The Indenture contains provisions limiting the Company’s ability to issue, assume, guarantee or permit to exist any Debt secured by any mortgage, security interest, pledge or lien upon any of its Operating Property, subject to the exceptions and qualifications set forth in the Indenture.
If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture.
The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee without the consent of such Holders in certain circumstances, or with the consent of the Holders of 66-2/3% in principal amount of the affected Securities at the time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the affected Securities at the time Outstanding, on behalf of the Holders of all such Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security.
As provided in and subject to the provisions of the Indenture, the Holder of this Security shall not have the right to institute any proceeding with respect to the Indenture or for the appointment of a receiver or trustee or for any other remedy under the Indenture, unless such Holder shall have previously given the Trustee written notice of a continuing Event of Default with respect to the Securities of this series, the Holders of not less than 25% in principal amount of the Securities of this series at the time Outstanding shall have made written request to the Trustee to institute proceedings in respect of such Event of Default as Trustee and offered the Trustee reasonable indemnity, and the Trustee shall not have received from the Holders of a majority in principal amount of Securities of this series at the time Outstanding a direction inconsistent with such request, and shall have failed to institute any such proceeding, for 60 days after receipt of such notice, request and offer of indemnity. The foregoing shall not apply to any suit instituted by the Holder of this Security for the enforcement of any payment of principal hereof or any premium or interest hereon on or after the respective due dates expressed herein.
No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the

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principal of and any premium and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in any place where the principal of and any premium and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his or her attorney duly authorized in writing, and thereupon one or more new Securities of this series and of like tenor, of authorized denominations and for the same aggregate principal amount will be issued to the designated transferee or transferees.
The Securities of this series are issuable only in registered form without coupons in denominations of $2,000 and integral multiples of $1,000 in excess thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities of this series are exchangeable for a like aggregate principal amount of Securities of this series and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same.
No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the absolute owner hereof for all purposes, whether or not this Security be overdue, and none of the Company, the Trustee or any such agent shall be affected by notice to the contrary.
All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture.
Form of Trustee’s Certificate of Authentication.

CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture.

			
Dated:	 	THE BANK OF NEW YORK MELLON	
 	 	TRUST COMPANY, N.A.,	
 	 	As Trustee	
 	By	 	
 	 	Authorized Officer	

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SECTION 302.      General Provisions.  The Notes may have notations, legends or endorsements required by law, stock exchange rule or usage. The terms and provisions contained in the Notes shall constitute, and are hereby expressly made, a part of this Fourteenth Supplemental Indenture, and the Company, by its execution and delivery of this Fourteenth Supplemental Indenture, expressly agrees to such terms and provisions and to be bound thereby. However, to the extent any provision of the Notes conflicts with the express provisions of this Fourteenth Supplemental Indenture or the Indenture, the provisions of this Fourteenth Supplemental Indenture or the Indenture, as applicable, shall govern and be controlling.
ARTICLE FOUR

ORIGINAL ISSUE OF NOTES
SECTION 401.      Issuance of Notes . Subject to Section 101, Notes in the aggregate principal amount of $250,000,000 may, upon execution of this Fourteenth Supplemental Indenture, or from time to time thereafter, be executed by the Company and delivered to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver said Notes, in accordance with a Company Order delivered to the Trustee by the Company, without any further action by the Company.
ARTICLE FIVE
PAYING AGENT AND REGISTRAR
SECTION 501.      Appointment of Paying Agent and Registrar . The Bank of New York Mellon Trust Company, N.A. will be the Paying Agent and Security Registrar for the Notes.
ARTICLE SIX
SUNDRY PROVISIONS
SECTION 601.      Associate Secretary . For all purposes relating to this Fourteenth Supplemental Indenture and the Notes, the term “Assistant Secretary” when used in the Indenture with respect to the Company will include an Associate Secretary of the Company.
SECTION 602.      Defined Terms . Except as otherwise expressly provided in this Fourteenth Supplemental Indenture or in the form of the Notes, or otherwise clearly required by the context hereof or thereof, all terms used herein or in said form of the Notes that are defined in the Indenture shall have the several meanings respectively assigned to them thereby.
SECTION 603.      Ratification of Indenture . The Indenture, as heretofore supplemented and amended, and as supplemented by this Fourteenth Supplemental Indenture, is in all respects

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ratified and confirmed, and this Fourteenth Supplemental Indenture shall be deemed part of the Indenture in the manner and to the extent herein and therein provided.
SECTION 604.      About the Trustee . The Trustee hereby accepts the trusts herein declared, provided, created, supplemented or amended and agrees to perform the same upon the terms and conditions herein and in the Indenture, as heretofore supplemented and amended, set forth and upon the following terms and conditions:
The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Fourteenth Supplemental Indenture or for or in respect of the recitals contained herein, all of which recitals are made by the Company solely. Each and every term and condition contained in Article Six of the Indenture shall apply to and form a part of this Fourteenth Supplemental Indenture with the same force and effect as if the same were herein set forth in full with such omissions, variations and insertions, if any, as may be appropriate to make the same conform to the provisions of this Fourteenth Supplemental Indenture.
The Trustee agrees to accept and act upon instructions or directions pursuant to this Fourteenth Supplemental Indenture sent by unsecured e-mail, pdf, facsimile transmission or other similar unsecured electronic methods; provided, however, that (a) the party providing such written instructions, subsequent to such transmission of written instructions, shall provide the originally executed instructions or directions to the Trustee in a timely manner, and (b) such originally executed instructions or directions shall be signed by an authorized representative of the party providing such instructions or directions. If the party elects to give the Trustee e-mail or facsimile instructions (or instructions by a similar electronic method) and the Trustee in its discretion elects to act upon such instructions, the Trustee’s understanding of such instructions shall be deemed controlling. The Trustee shall not be liable for any losses, costs or expenses arising directly or indirectly from the Trustee’s reliance upon and compliance with such instructions notwithstanding such instructions conflict or are inconsistent with a subsequent written instruction. The party providing electronic instructions agrees to assume all risks arising out of the use of such electronic methods to submit instructions and directions to the Trustee, including without limitation the risk of the Trustee acting on unauthorized instructions, and the risk or interception and misuse by third parties.
In no event shall the Trustee be responsible or liable for special, indirect, or consequential loss or damage of any kind whatsoever (including, but not limited to, loss of profit) irrespective of whether the Trustee has been advised of the likelihood of such loss or damage and regardless of the form of action. Delivery of reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates).
SECTION 605.      Counterparts . This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

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IN WITNESS WHEREOF, the parties hereto have caused this Fourteenth Supplemental Indenture to be duly executed as of the day and year first above written.

		
 	ARIZONA PUBLIC SERVICE COMPANY	
 	 	
 	/s/ Lee R. Nickloy                	
 	Lee R. Nickloy	
 	Vice President and Treasurer	

	
	
Attest:	
 	
/s/ Shirley A. Baum	
Shirley A. Baum	
Associate Secretary	

	
		
 	THE BANK OF NEW YORK MELLON TRUST	
 	COMPANY, N.A., as Trustee	
 	 	
 	By: /s/ Melonee Young        	
 	Name: Melonee Young	
 	Title: Vice President	

[Signature Page to Fourteenth Supplemental Indenture]

	
		
STATE OF ARIZONA    	)	
 	) ss.:	
COUNTY OF MARICOPA	)	
On 9th day of January, 2014, before me personally came Lee R. Nickloy, to me known, who, being by me duly sworn, did depose and say that he is the Vice President and Treasurer of Arizona Public Service Company, one of the corporations described in and which executed the foregoing instrument and that he signed his name thereto by authority of the Board of Directors of said corporation.

/s/ Barbara J. Dubishar        

 Notary Public
My Commission Expires

	

	
		
STATE OF CALIFORNIA    	)	
 	) ss.:	
COUNTY OF Los Angeles	)	
On January 8, 2014, before me, Marvin G. Cuenca, a notary public, personally appeared Melonee Young, who proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.
I certify under PENALTY OF PERJURY under the laws of the State of California that the forgoing paragraph is true and correct.
WITNESS my hand and official seal.

Signature /s/ Marvin G. Cuenca             (seal) 

3

Exhibit 4.6i

ARIZONA PUBLIC SERVICE COMPANY

TO

THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A.

As Trustee under Arizona Public Service Company’s Indenture dated as of January 15, 1998

Fifteenth Supplemental Indenture

Dated as of June 18, 2014

3.350% Notes due 2024

This FIFTEENTH SUPPLEMENTAL INDENTURE, dated as of June 18, 2014, is between Arizona Public Service Company, a corporation duly organized and existing under the laws of the State of Arizona (herein called the “Company”), having its principal office at 400 North Fifth Street, Phoenix, Arizona 85004, and The Bank of New York Mellon Trust Company, N.A., successor to JPMorgan Chase Bank, N.A. (formerly known as The Chase Manhattan Bank), a national banking association, as Trustee (herein called the “Trustee”) under the Indenture dated as of January 15, 1998 between the Company and the Trustee (the “Indenture”).
RECITALS OF THE COMPANY
The Company has executed and delivered the Indenture to the Trustee to provide for the issuance from time to time of its unsecured debentures, notes or other evidences of indebtedness (the “Securities”), said Securities to be issued in one or more series as provided in the Indenture.
Section 901(7) of the Indenture provides that, without the consent of any Holders, the Company and the Trustee may enter into one or more indentures supplemental to the Indenture for the purpose of establishing the form or terms of Securities of any series.
Pursuant to the terms of the Indenture, the Company desires to provide for the establishment of a new series of its Securities to be known as its 3.350% Notes due 2024 (herein called the “Notes”), the forms and substance of such Notes and the terms, provisions, and conditions thereof to be set forth as provided in the Indenture and this Fifteenth Supplemental Indenture.
All things necessary to make this Fifteenth Supplemental Indenture a valid agreement of the Company, and to make the Notes described herein, when executed by the Company and authenticated and delivered by the Trustee, the valid obligations of the Company, have been done.
NOW, THEREFORE, THIS FIFTEENTH SUPPLEMENTAL INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Notes by the Holders thereof, and for the purpose of setting forth, as provided in the Indenture, the form and substance of each of the Notes and the terms, provisions, and conditions thereof, it is mutually agreed, for the equal and proportionate benefit of all Holders of the Notes, as applicable, as follows:
ARTICLE ONE
GENERAL TERMS AND CONDITIONS OF THE NOTES

SECTION 101.      Authentication and Delivery . There shall be and is hereby authorized a series of Securities designated the “3.350% Notes due 2024” initially limited in aggregate principal amount to $250,000,000, which amount shall be as set forth in any Company Order for the authentication and delivery of Notes. The Notes shall mature and the principal shall be due and payable together with all accrued and unpaid interest thereon on June 15, 2024, and the Notes shall be issued in the form of registered Securities without coupons.

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The foregoing principal amount of the Notes may be increased from time to time as permitted by Section 301 of the Indenture. All Notes need not be issued at the same time and such series may be reopened at any time, without notice to, or the consent of, the then existing Holders, for issuance of additional Notes. Any such additional Notes will be equal in rank and have the same respective maturity, payment terms, redemption features, and other terms as the Notes initially issued, except for the issue date, public offering price, payment of interest accruing prior to the issue date, and first payment of interest following the issue date of the additional Notes, but the Company will not issue such additional Notes unless the additional Notes are fungible with the previously issued Notes for U.S. federal income tax purposes or are issued with a separate CUSIP number.
SECTION 102.      Global Security . The Notes shall be issued in certificated form, except that the Notes shall be issued initially as a Global Security to and registered in the name of Cede & Co., as nominee of The Depository Trust Company, as Depositary therefor. Any Notes to be issued or transferred to, or to be held by, Cede & Co. (or any successor thereof) for such purpose shall bear the depositary legend in substantially the form set forth at the top of the form of Note in Section 301 hereof (in lieu of that set forth in Section 204 of the Indenture), unless otherwise agreed by the Company, such agreement to be confirmed in writing to the Trustee. Each such Global Security may be exchanged in whole or in part for Notes registered, and any transfer of such Global Security in whole or in part may be registered, in the name(s) of Persons other than such Depositary or a nominee thereof only under the circumstances set forth in clause (2) of the last paragraph of Section 305 of the Indenture, or such other circumstances in addition to or in lieu of those set forth in clause (2) of the last paragraph of Section 305 of the Indenture as to which the Company shall agree, such agreement to be confirmed in writing to the Trustee. Upon the occurrence of any such event, the Notes will be issued in such names as the Depositary shall instruct the Trustee.
SECTION 103.      Place of Payment and Place for Registration of Transfers and Exchange . Principal of, and premium, if any, and interest on, the Notes will be payable, the transfer of Notes will be registrable and the Notes will be exchangeable for Notes bearing identical terms and provisions, at the office or agency of the Company in the Borough of Manhattan, The City and State of New York; provided , however , that payment of interest may be made at the option of the Company by wire transfer to any Holder or by deposit to the account of the Holder of any such Notes if such account is maintained with the Trustee, in each case according to the written instructions given by such Holder on or prior to the applicable record date to the Trustee, which written instructions shall remain in effect until revised by such Holder by an instrument in writing delivered to the Trustee.
SECTION 104.      Payment of Interest . The Notes will bear interest at the rate of 3.350% per annum from June 18, 2014 or from the most recent Interest Payment Date (as hereinafter defined) to which interest has been paid or duly provided for until the principal thereof is paid or made available for payment, payable on June 15 and December 15 of each year (each, an “Interest Payment Date”), commencing on December 15, 2014, to the person in whose name such Note or any Predecessor Security is registered, at the close of business on June 1 and December 1, as the case may be, whether or not a Business Day, immediately preceding the Interest Payment Date. Any such interest installment not punctually paid or duly provided for shall forthwith cease to be payable to the Holders on such Regular Record Date, and may be paid to the Person in whose name such

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Note (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date to be fixed by the Trustee for the payment of such Defaulted Interest, notice whereof shall be given to the Holders of the Notes not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may be listed, and upon such notice as may be required by such exchange, all as more fully described in the Indenture.
The amount of interest payable for any period will be computed on the basis of a 360-day year of twelve 30-day months. Interest will accrue from June 18, 2014 or from the most recent Interest Payment Date to which interest has been paid or duly provided for to, but not including, the relevant payment date. In the event that any date on which interest is payable on the Notes is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), in each case with the same force and effect as if made on such date. A “Business Day” shall mean any day except a Saturday, a Sunday or a legal holiday in The City of New York on which banking institutions are authorized or required by law, regulation or executive order to close.
SECTION 105.      Redemption of the Notes . The Company may redeem all or any portion of the Notes, at its option, at any time or from time to time, upon notice as provided in the Indenture. The Redemption Price for any of the Notes to be redeemed on any Redemption Date prior to March 15, 2024 will be equal to the greater of the following amounts:
(a)      100% of the principal amount of the Notes being redeemed on the Redemption Date; or
(b)      the sum of the present values of the remaining scheduled payments of principal and interest on the Notes being redeemed on that Redemption Date (not including any portion of any payments of interest accrued to the Redemption Date) discounted to the Redemption Date on a semiannual basis at the Adjusted Treasury Rate plus 15 basis points as determined by a Reference Treasury Dealer appointed by the Company for such purpose;
plus, in each case, accrued and unpaid interest thereon to the Redemption Date. The Redemption Price for any of the Notes to be redeemed on any Redemption Date on or after March 15, 2024 will be equal to 100% of the principal amount of the Notes being redeemed on the Redemption Date plus accrued and unpaid interest thereon to the Redemption Date.
Notwithstanding the foregoing, installments of interest on the Notes that are due and payable on Interest Payment Dates falling on or prior to a Redemption Date will be payable on the Interest Payment Date to the Holders as of the close of business on the relevant record date in accordance with the terms of such Notes and the Indenture. The Redemption Price will be calculated on the basis of a 360-day year consisting of twelve 30-day months.
For purposes of this Section 105, the following terms shall have the following meanings:
“ Adjusted Treasury Rate ” means, with respect to any applicable Redemption Date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury

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Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date.
“ Comparable Treasury Issue ” means the U.S. Treasury security selected by a Reference Treasury Dealer appointed by the Company for such purpose as having a maturity comparable to the remaining term of the Notes to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of such Notes.
“ Comparable Treasury Price ” means, with respect to any applicable Redemption Date, (A) if the Company obtains three or more Reference Treasury Dealer Quotations, the average of such Reference Treasury Dealer Quotations for such Redemption Date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations, (B) if the Company obtains two such Reference Treasury Dealer Quotations, the average of such quotations, or (C) if only one Reference Treasury Dealer Quotation is received, such quotation.
“Primary Treasury Dealer” means a primary U.S. government securities dealer in the United States.
“ Reference Treasury Dealer ” means (A) BNP Paribas Securities Corp., a Primary Treasury Dealer selected by BNY Mellon Capital Markets, LLC, J.P. Morgan Securities LLC and an affiliate of Scotia Capital (USA) Inc.; provided, however, that if any of the foregoing shall cease to be a Primary Treasury Dealer, the Company will substitute therefor another Primary Treasury Dealer; and (B) any other Primary Treasury Dealer(s) selected by the Company.

“ Reference Treasury Dealer Quotations ” means, with respect to each Reference Treasury Dealer and any applicable Redemption Date, the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Company by such Reference Treasury Dealer at 5:00 p.m. (New York City time) on the third Business Day preceding such Redemption Date. The Company shall give the Trustee written notice of the Redemption Price, promptly after the calculation thereof.
The Trustee shall be under no duty to inquire into, may conclusively presume the correctness of, and shall be fully protected in acting upon, the Company’s calculation of any Redemption Price.
No Notes of $2,000 principal amount or less can be redeemed in part.     
Notwithstanding Section 1104 of the Indenture, any notice of redemption given pursuant to said Section with respect to the foregoing redemption need not set forth the Redemption Price but only the manner of calculation thereof.
SECTION 106.      Defeasance of the Notes . The Notes shall be defeasible pursuant to Section 1302 or 1303 of the Indenture.
SECTION 107.      Minimum Denominations . The Notes shall be issuable in denominations of $2,000 and any integral multiple of $1,000 in excess thereof.

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ARTICLE TWO
ADDITIONAL COVENANT
SECTION 201.      Negative Lien Covenant . (a)    So long as any of the Notes are Outstanding, the Company will not issue, assume, guarantee or permit to exist any Debt secured by any mortgage, security interest, pledge or lien (herein referred to as a “Mortgage”) of or upon any Operating Property of the Company, whether owned at the date of this Fifteenth Supplemental Indenture or hereafter acquired, without effectively securing the Notes (together with, if the Company shall so determine, any other indebtedness or obligations of the Company ranking senior to, or equally with, the Notes) equally and ratably with such Debt (but only so long as such Debt is so secured); provided, however, that the foregoing restriction shall not apply to Debt secured by any of the following:

(1)	Mortgages on any property existing at the time of acquisition thereof (which Mortgages may also extend to subsequent repairs, alterations and improvements to that property);	

(2)	Mortgages on property of a corporation existing at the time such corporation is merged into or consolidated with the Company or at the time of a sale, lease or other disposition of the properties of such corporation or a division thereof as an entirety or substantially as an entirety to the Company;	

(3)	Mortgages on property to secure all or part of the cost of acquiring, constructing, developing or substantially repairing, altering or improving such property or to secure indebtedness incurred to provide funds for any such purpose or for reimbursement of funds previously expended for any such purpose, provided such Mortgages are created or assumed contemporaneously with, or within eighteen (18) months after, such acquisition or completion of construction, development or substantial repair, alteration or improvement;	

(4)	Mortgages in favor of the United States of America or any State thereof, or any department, agency, instrumentality or political subdivision of the United States of America or any State thereof, or for the benefit of holders of securities issued by any such entity (or providers of credit enhancement with respect to those securities), to secure any Debt (including the Company’s obligations with respect to industrial development, pollution control or similar revenue bonds) incurred for the purpose of financing or refinancing all or any part of the purchase price or the cost of constructing, developing or substantially repairing, altering or improving the property of the Company;	

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(5)	Mortgages to compensate the Trustee as provided in the Indenture; or	

(6)	any extension, renewal or replacement (or successive extensions, renewals or replacements), in whole or in part, of any Mortgage referred to in the foregoing clauses (1) to (5), inclusive; provided, however, that the principal amount of Debt secured thereby and not otherwise authorized by said clauses (1) to (5), inclusive, shall not exceed the principal amount of Debt, plus any premium or fee payable in connection with any such extension, renewal or replacement, so secured at the time of such extension, renewal or replacement.	
(b)    Notwithstanding the provisions of Section 201(a) , the Company may issue, assume or guarantee or permit to exist Debt, secured by Mortgages that would otherwise be subject to the restrictions set forth above in connection with the Company’s existing sale and lease-back transactions relating to Unit 2 of the Palo Verde Nuclear Generating Station (the “Unit 2 Sale and Lease-Back Transactions”), including but not limited to Mortgages on the leased interests in Unit 2 of the Palo Verde Nuclear Generating Station and related rights if the Company reacquires ownership in any of those interests or acquires any of the equity or owner participants’ interests in the trusts that hold title to such leased interests, whether or not it also directly assumes the Sale Leaseback Obligation Bonds, and Mortgages on the Company’s interests in the trusts that hold title to such leased interests and related rights in the event that the Company acquires any of the equity or owner participants’ interests in such trusts pursuant to a “special transfer” under the Unit 2 Sale and Lease-Back Transactions. In addition, the Company may issue, assume or guarantee or permit to exist Debt that is secured by Mortgages that would otherwise be subject to the restrictions set forth above up to an aggregate principal amount that, together with the principal amount of all other Debt of the Company secured by such Mortgages, does not at the time exceed ten percent (10%) of Tangible Assets.
(c)    For purposes of this Section 201 , the following terms shall have the following meanings:
“Debt” means any outstanding debt of the Company for money borrowed evidenced by notes, debentures, bonds or other securities, or guarantees of any thereof.
“Operating Property” means (i) any interest in real property owned by the Company and (ii) any asset owned by the Company that is depreciable in accordance with generally accepted accounting principles, excluding in any case any interest of the Company as lessee under any lease.
“Sale Leaseback Obligation Bonds” means PVNGS II Funding Corp.’s: (i) 8.00% Secured Lease Obligation Bonds, Series 1993, due 2015; (ii) any other bonds issued in connection with the Unit 2 Sale and Lease-Back Transactions; and (iii) any refinancing or refunding of the obligations specified in subclauses (i) and (ii) above.
“Tangible Assets” means the amount shown as total assets on the most recent balance sheet of the Company, less: (i) intangible assets, including, but without limitation, goodwill, trademarks,

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trade names, patents and unamortized debt discount and expense and (ii) appropriate adjustments, if any, on account of minority interests; provided, however, that if, subsequent to the date of the most recent balance sheet of the Company, the Company acquires any property, whether by acquisition (including by way of capital lease) from a third party, through merger or consolidation, through construction, development or substantial repair, alteration or improvement of property, or by any other means, and such property is or becomes subject to any Mortgage securing Debt, the Company may prepare a pro forma balance sheet to include the value of such property in any calculation of Tangible Assets hereunder. Subject to the foregoing, Tangible Assets shall be determined in accordance with generally accepted accounting principles and practices applicable to the type of business in which the Company is engaged and that are approved by the independent accountants regularly retained by the Company, and may be determined as of a date not more than 60 days prior to the happening of the event for which such determination is being made.
ARTICLE THREE
FORM OF NOTES
SECTION 301.      Form of Notes . The Notes and the Trustee’s certificate of authentication thereon shall be substantially in the following forms:
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (“DTC”), TO ARIZONA PUBLIC SERVICE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

ARIZONA PUBLIC SERVICE COMPANY 
3.350% Note due 2024

		
No. 1	$250,000,000	
 	CUSIP No. 040555 CQ5	
Arizona Public Service Company, a corporation duly organized and existing under the laws of the State of Arizona (the “Company”, which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to Cede & Co., or registered assigns, the principal sum of Two Hundred Fifty Million Dollars ($250,000,000) on June

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15, 2024, and to pay interest thereon and on any overdue interest from June 18, 2014 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually in arrears on June 15 and December 15 of each year, commencing December 15, 2014 at the rate of 3.350% per annum, until the principal hereof is paid or made available for payment. The amount of interest payable for any period will be computed on the basis of a 360-day year of twelve 30-day months.
The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be June 1 or December 1, as the case may be, immediately preceding the Interest Payment Date (whether or not a Business Day). Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities of this series not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture.
Payment of the principal of (and premium, if any) and any interest on this Security will be made at the office or agency of the Company maintained for that purpose through the corporate trust office of the Trustee, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided , however , that payment of interest may be made at the option of the Company by wire transfer to any Holder or by deposit to the account of the Holder of any such Securities if such account is maintained with the Trustee, in each case according to the written instructions given by such Holder on or prior to the applicable record date to the Trustee, which written instructions shall remain in effect until revised by such Holder by an instrument in writing delivered to the Trustee.
Reference is hereby made to the further provisions of this Security set forth following the Company’s signature hereto, which further provisions shall for all purposes have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by the Trustee referred to following the Company’s signature hereto by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal.

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ARIZONA PUBLIC SERVICE COMPANY	 	 	

By                         	 	 	
 	 	 	
Attest:	 	 	

 	 	 	
 	 	 	
This Security is one of a duly authorized issue of securities of the Company (herein called the “Securities”), issued and to be issued in one or more series under an Indenture, dated as of January 15, 1998 (such instrument as originally executed and delivered and as supplemented or amended from time to time, the “Indenture”), between the Company and The Bank of New York Mellon Trust Company, N.A., successor to JPMorgan Chase Bank, N.A. (formerly known as The Chase Manhattan Bank), as Trustee (the “Trustee,” which term includes any successor trustee under the Indenture), and reference is hereby made to the Indenture for a description of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. This Security is one of the series designated on the face hereof.
The Company may redeem all or any portion of the Securities of this series, at its option, at any time or from time to time, (A) prior to March 15, 2024, at a Redemption Price equal to the greater of (a) 100% of the principal amount of the Securities of this series being redeemed on the Redemption Date or (b) the sum of the present values of the remaining scheduled payments of principal and interest on the Securities of this series being redeemed on that Redemption Date (not including the portion of any payments of interest accrued to the Redemption Date) discounted to the Redemption Date on a semiannual basis at the Adjusted Treasury Rate plus 15 basis points, as determined by a Reference Treasury Dealer appointed by the Company for such purpose; and (B) on or after March 15, 2024, at a Redemption Price equal to 100% of the principal amount of the Securities of this series being redeemed on the Redemption Date; plus, in each case, accrued and unpaid interest thereon to the Redemption Date. Notwithstanding the foregoing, installments of interest on Securities of this series that are due and payable on Interest Payment Dates falling on or prior to a Redemption Date will be payable on the Interest Payment Date to the Holders as of the close of business on the relevant record date in accordance with the terms of the Securities of this series and the Indenture. The Redemption Price will be calculated on the basis of a 360-day year consisting of twelve 30-day months.
If notice has been given as provided in the Indenture and funds for the redemption of any Securities of this series (or any portion thereof) called for redemption shall have been made available on the Redemption Date referred to in such notice, such Securities (or any portion thereof) will cease to bear interest on the date fixed for such redemption specified in such notice and the only right of the Holders of such Securities will be to receive payment of the Redemption Price.

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Notice of any optional redemption of Securities of this series (or any portion thereof) will be given to Holders at their addresses, as shown in the Security Register for such Securities, not more than 60 nor less than 30 days prior to the date fixed for redemption. The notice of redemption will specify, among other items, (i) the Redemption Price or the manner of calculation of the Redemption Price and (ii) the principal amount of the Securities of this series held by such Holder to be redeemed if less than all of such Securities. If less than all of the Securities of this series are to be redeemed at the option of the Company, the Securities to be redeemed will be selected in accordance with the procedures of the Depositary.
As used herein:
“ Adjusted Treasury Rate ” means, with respect to any applicable Redemption Date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date.
“ Comparable Treasury Issue ” means the U.S. Treasury security selected by a Reference Treasury Dealer appointed by the Company for such purpose as having a maturity comparable to the remaining term of this Security to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of such Security.
“ Comparable Treasury Price ” means, with respect to any applicable Redemption Date, (A) if the Company obtains three or more Reference Treasury Dealer Quotations, the average of such Reference Treasury Dealer Quotations for such Redemption Date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations, (B) if the Company obtains two such Reference Treasury Dealer Quotations, the average of such quotations, or (C) if only one Reference Treasury Dealer Quotation is received, such quotation.
“Primary Treasury Dealer” means a primary U.S. government securities dealer in the United States.
“ Reference Treasury Dealer ” means (A) BNP Paribas Securities Corp., a Primary Treasury Dealer selected by BNY Mellon Capital Markets, LLC, J.P. Morgan Securities LLC and an affiliate of Scotia Capital (USA) Inc.; provided, however, that if any of the foregoing shall cease to be a Primary Treasury Dealer, the Company will substitute therefor another Primary Treasury Dealer; and (B) any other Primary Treasury Dealer(s) selected by the Company.
“ Reference Treasury Dealer Quotations ” means, with respect to each Reference Treasury Dealer and any applicable Redemption Date, the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Company by such Reference Treasury Dealer at 5:00 p.m. (New York City time) on the third Business Day preceding such Redemption Date.
The Securities of this series will not be subject to any sinking fund.

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In the event of redemption of this Security in part only, a new Security or Securities of this series and of like tenor for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof.
The Indenture contains provisions for defeasance at any time of the entire indebtedness of this Security and certain restrictive covenants and Events of Default with respect to this Security, in each case upon compliance with certain conditions set forth in the Indenture.
The Indenture contains provisions limiting the Company’s ability to issue, assume, guarantee or permit to exist any Debt secured by any mortgage, security interest, pledge or lien upon any of its Operating Property, subject to the exceptions and qualifications set forth in the Indenture.
If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture.
The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee without the consent of such Holders in certain circumstances, or with the consent of the Holders of 66-2/3% in principal amount of the affected Securities at the time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the affected Securities at the time Outstanding, on behalf of the Holders of all such Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security.
As provided in and subject to the provisions of the Indenture, the Holder of this Security shall not have the right to institute any proceeding with respect to the Indenture or for the appointment of a receiver or trustee or for any other remedy under the Indenture, unless such Holder shall have previously given the Trustee written notice of a continuing Event of Default with respect to the Securities of this series, the Holders of not less than 25% in principal amount of the Securities of this series at the time Outstanding shall have made written request to the Trustee to institute proceedings in respect of such Event of Default as Trustee and offered the Trustee reasonable indemnity, and the Trustee shall not have received from the Holders of a majority in principal amount of Securities of this series at the time Outstanding a direction inconsistent with such request, and shall have failed to institute any such proceeding, for 60 days after receipt of such notice, request and offer of indemnity. The foregoing shall not apply to any suit instituted by the Holder of this Security for the enforcement of any payment of principal hereof or any premium or interest hereon on or after the respective due dates expressed herein.
No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the

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principal of and any premium and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in any place where the principal of and any premium and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his or her attorney duly authorized in writing, and thereupon one or more new Securities of this series and of like tenor, of authorized denominations and for the same aggregate principal amount will be issued to the designated transferee or transferees.
The Securities of this series are issuable only in registered form without coupons in denominations of $2,000 and integral multiples of $1,000 in excess thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities of this series are exchangeable for a like aggregate principal amount of Securities of this series and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same.
No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the absolute owner hereof for all purposes, whether or not this Security be overdue, and none of the Company, the Trustee or any such agent shall be affected by notice to the contrary.
All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture.
Form of Trustee’s Certificate of Authentication.

CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture.

			
Dated:	 	THE BANK OF NEW YORK MELLON	
 	 	TRUST COMPANY, N.A.,	
 	 	As Trustee	
 	By	 	
 	 	Authorized Officer	

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SECTION 302.      General Provisions.  The Notes may have notations, legends or endorsements required by law, stock exchange rule or usage. The terms and provisions contained in the Notes shall constitute, and are hereby expressly made, a part of this Fifteenth Supplemental Indenture, and the Company, by its execution and delivery of this Fifteenth Supplemental Indenture, expressly agrees to such terms and provisions and to be bound thereby. However, to the extent any provision of the Notes conflicts with the express provisions of this Fifteenth Supplemental Indenture or the Indenture, the provisions of this Fifteenth Supplemental Indenture or the Indenture, as applicable, shall govern and be controlling.
ARTICLE FOUR

ORIGINAL ISSUE OF NOTES
SECTION 401.      Issuance of Notes . Subject to Section 101, Notes in the aggregate principal amount of $250,000,000 may, upon execution of this Fifteenth Supplemental Indenture, or from time to time thereafter, be executed by the Company and delivered to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver said Notes, in accordance with a Company Order delivered to the Trustee by the Company, without any further action by the Company.
ARTICLE FIVE
PAYING AGENT AND REGISTRAR
SECTION 501.      Appointment of Paying Agent and Registrar . The Bank of New York Mellon Trust Company, N.A. will be the Paying Agent and Security Registrar for the Notes.
ARTICLE SIX
SUNDRY PROVISIONS
SECTION 601.      Associate Secretary . For all purposes relating to this Fifteenth Supplemental Indenture and the Notes, the term “Assistant Secretary” when used in the Indenture with respect to the Company will include an Associate Secretary of the Company.
SECTION 602.      Defined Terms . Except as otherwise expressly provided in this Fifteenth Supplemental Indenture or in the form of the Notes, or otherwise clearly required by the context hereof or thereof, all terms used herein or in said form of the Notes that are defined in the Indenture shall have the several meanings respectively assigned to them thereby.
SECTION 603.      Ratification of Indenture . The Indenture, as heretofore supplemented and amended, and as supplemented by this Fifteenth Supplemental Indenture, is in all respects ratified and confirmed, and this Fifteenth Supplemental Indenture shall be deemed part of the Indenture in the manner and to the extent herein and therein provided.

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SECTION 604.      About the Trustee . The Trustee hereby accepts the trusts herein declared, provided, created, supplemented or amended and agrees to perform the same upon the terms and conditions herein and in the Indenture, as heretofore supplemented and amended, set forth and upon the following terms and conditions:
The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Fifteenth Supplemental Indenture or for or in respect of the recitals contained herein, all of which recitals are made by the Company solely. Each and every term and condition contained in Article Six of the Indenture shall apply to and form a part of this Fifteenth Supplemental Indenture with the same force and effect as if the same were herein set forth in full with such omissions, variations and insertions, if any, as may be appropriate to make the same conform to the provisions of this Fifteenth Supplemental Indenture.
The Trustee agrees to accept and act upon instructions or directions pursuant to this Fifteenth Supplemental Indenture sent by unsecured e-mail, pdf, facsimile transmission or other similar unsecured electronic methods; provided, however, that (a) the party providing such written instructions, subsequent to such transmission of written instructions, shall provide the originally executed instructions or directions to the Trustee in a timely manner, and (b) such originally executed instructions or directions shall be signed by an authorized representative of the party providing such instructions or directions. If the party elects to give the Trustee e-mail or facsimile instructions (or instructions by a similar electronic method) and the Trustee in its discretion elects to act upon such instructions, the Trustee’s understanding of such instructions shall be deemed controlling. The Trustee shall not be liable for any losses, costs or expenses arising directly or indirectly from the Trustee’s reliance upon and compliance with such instructions notwithstanding such instructions conflict or are inconsistent with a subsequent written instruction. The party providing electronic instructions agrees to assume all risks arising out of the use of such electronic methods to submit instructions and directions to the Trustee, including without limitation the risk of the Trustee acting on unauthorized instructions, and the risk or interception and misuse by third parties.
In no event shall the Trustee be responsible or liable for special, indirect, or consequential loss or damage of any kind whatsoever (including, but not limited to, loss of profit) irrespective of whether the Trustee has been advised of the likelihood of such loss or damage and regardless of the form of action. Delivery of reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates).

SECTION 605.      Counterparts . This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Fifteenth Supplemental Indenture to be duly executed as of the day and year first above written.

		
 	ARIZONA PUBLIC SERVICE COMPANY	
 	 	
 	/s/ Lee R. Nickloy                	
 	Lee R. Nickloy	
 	Vice President and Treasurer	

	
	
Attest:	
 	
/s/ Shirley A. Baum	
Shirley A. Baum	
Associate Secretary	

	
		
 	THE BANK OF NEW YORK MELLON TRUST	
 	COMPANY, N.A., as Trustee	
 	 	
 	By: /s/ Melonee Young        	
 	Name: Melonee Young	
 	Title: Vice President	

[Signature Page to Fifteenth Supplemental Indenture]

	
		
STATE OF ARIZONA    	)	
 	) ss.:	
COUNTY OF MARICOPA	)	
On 16th day of June, 2014, before me personally came Lee R. Nickloy, to me known, who, being by me duly sworn, did depose and say that he is the Vice President and Treasurer of Arizona Public Service Company, one of the corporations described in and which executed the foregoing instrument and that he signed his name thereto by authority of the Board of Directors of said corporation.

/s/ Charisee Jicha                    

 Notary Public
My Commission Expires

	

	
		
STATE OF CALIFORNIA    	)	
 	) ss.:	
COUNTY OF Los Angeles	)	
On June 16, 2014, before me, Marvin G. Cuenca, a notary public, personally appeared Melonee Young, who proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.
I certify under PENALTY OF PERJURY under the laws of the State of California that the forgoing paragraph is true and correct.
WITNESS my hand and official seal.

Signature /s/ Marvin G. Cuenca             (seal) 

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Exhibit 4.6j

ARIZONA PUBLIC SERVICE COMPANY

TO

THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A.

As Trustee under Arizona Public Service Company’s Indenture dated as of January 15, 1998

Sixteenth Supplemental Indenture

Dated as of January 12, 2015

2.200% Notes due 2020

This SIXTEENTH SUPPLEMENTAL INDENTURE, dated as of January 12, 2015, is between Arizona Public Service Company, a corporation duly organized and existing under the laws of the State of Arizona (herein called the “Company”), having its principal office at 400 North Fifth Street, Phoenix, Arizona 85004, and The Bank of New York Mellon Trust Company, N.A., successor to JPMorgan Chase Bank, N.A. (formerly known as The Chase Manhattan Bank), a national banking association, as Trustee (herein called the “Trustee”) under the Indenture dated as of January 15, 1998 between the Company and the Trustee (the “Indenture”).
RECITALS OF THE COMPANY
The Company has executed and delivered the Indenture to the Trustee to provide for the issuance from time to time of its unsecured debentures, notes or other evidences of indebtedness (the “Securities”), said Securities to be issued in one or more series as provided in the Indenture.
Section 901(7) of the Indenture provides that, without the consent of any Holders, the Company and the Trustee may enter into one or more indentures supplemental to the Indenture for the purpose of establishing the form or terms of Securities of any series.
Pursuant to the terms of the Indenture, the Company desires to provide for the establishment of a new series of its Securities to be known as its 2.200% Notes due 2020 (herein called the “Notes”), the forms and substance of such Notes and the terms, provisions, and conditions thereof to be set forth as provided in the Indenture and this Sixteenth Supplemental Indenture.
All things necessary to make this Sixteenth Supplemental Indenture a valid agreement of the Company, and to make the Notes described herein, when executed by the Company and authenticated and delivered by the Trustee, the valid obligations of the Company, have been done.
NOW, THEREFORE, THIS SIXTEENTH SUPPLEMENTAL INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Notes by the Holders thereof, and for the purpose of setting forth, as provided in the Indenture, the form and substance of each of the Notes and the terms, provisions, and conditions thereof, it is mutually agreed, for the equal and proportionate benefit of all Holders of the Notes, as applicable, as follows:
ARTICLE ONE

GENERAL TERMS AND CONDITIONS OF THE NOTES

SECTION 101.      Authentication and Delivery . There shall be and is hereby authorized a series of Securities designated the “2.200% Notes due 2020” initially limited in aggregate principal amount to $250,000,000, which amount shall be as set forth in any Company Order for the authentication and delivery of Notes. The Notes shall mature and the principal shall be due and

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payable together with all accrued and unpaid interest thereon on January 15, 2020, and the Notes shall be issued in the form of registered Securities without coupons.
The foregoing principal amount of the Notes may be increased from time to time as permitted by Section 301 of the Indenture. All Notes need not be issued at the same time and such series may be reopened at any time, without notice to, or the consent of, the then existing Holders, for issuance of additional Notes. Any such additional Notes will be equal in rank and have the same respective maturity, payment terms, redemption features, and other terms as the Notes initially issued, except for the issue date, public offering price, payment of interest accruing prior to the issue date, and first payment of interest following the issue date of the additional Notes, but the Company will not issue such additional Notes unless the additional Notes are fungible with the previously issued Notes for U.S. federal income tax purposes or are issued with a separate CUSIP number.
SECTION 102.      Global Security . The Notes shall be issued in certificated form, except that the Notes shall be issued initially as a Global Security to and registered in the name of Cede & Co., as nominee of The Depository Trust Company, as Depositary therefor. Any Notes to be issued or transferred to, or to be held by, Cede & Co. (or any successor thereof) for such purpose shall bear the depositary legend in substantially the form set forth at the top of the form of Note in Section 301 hereof (in lieu of that set forth in Section 204 of the Indenture), unless otherwise agreed by the Company, such agreement to be confirmed in writing to the Trustee. Each such Global Security may be exchanged in whole or in part for Notes registered, and any transfer of such Global Security in whole or in part may be registered, in the name(s) of Persons other than such Depositary or a nominee thereof only under the circumstances set forth in clause (2) of the last paragraph of Section 305 of the Indenture, or such other circumstances in addition to or in lieu of those set forth in clause (2) of the last paragraph of Section 305 of the Indenture as to which the Company shall agree, such agreement to be confirmed in writing to the Trustee. Upon the occurrence of any such event, the Notes will be issued in such names as the Depositary shall instruct the Trustee.
SECTION 103.      Place of Payment and Place for Registration of Transfers and Exchange . Principal of, and premium, if any, and interest on, the Notes will be payable, the transfer of Notes will be registrable and the Notes will be exchangeable for Notes bearing identical terms and provisions, at the office or agency of the Company in the Borough of Manhattan, The City and State of New York; provided , however , that payment of interest may be made at the option of the Company by wire transfer to any Holder or by deposit to the account of the Holder of any such Notes if such account is maintained with the Trustee, in each case according to the written instructions given by such Holder on or prior to the applicable record date to the Trustee, which written instructions shall remain in effect until revised by such Holder by an instrument in writing delivered to the Trustee.
SECTION 104.      Payment of Interest . The Notes will bear interest at the rate of 2.200% per annum from January 12, 2015 or from the most recent Interest Payment Date (as hereinafter defined) to which interest has been paid or duly provided for until the principal thereof is paid or made available for payment, payable on January 15 and July 15 of each year (each, an “Interest Payment Date”), commencing on July 15, 2015, to the person in whose name such Note or any Predecessor Security is registered, at the close of business on January 1 and July 1, as the case may

2

be, whether or not a Business Day, immediately preceding the Interest Payment Date. Any such interest installment not punctually paid or duly provided for shall forthwith cease to be payable to the Holders on such Regular Record Date, and may be paid to the Person in whose name such Note (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date to be fixed by the Trustee for the payment of such Defaulted Interest, notice whereof shall be given to the Holders of the Notes not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may be listed, and upon such notice as may be required by such exchange, all as more fully described in the Indenture.
The amount of interest payable for any period will be computed on the basis of a 360-day year of twelve 30-day months. Interest will accrue from January 12, 2015 or from the most recent Interest Payment Date to which interest has been paid or duly provided for to, but not including, the relevant payment date. In the event that any date on which interest is payable on the Notes is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), in each case with the same force and effect as if made on such date. A “Business Day” shall mean any day except a Saturday, a Sunday or a legal holiday in The City of New York on which banking institutions are authorized or required by law, regulation or executive order to close.
SECTION 105.      Redemption of the Notes . The Company may redeem all or any portion of the Notes, at its option, at any time or from time to time, upon notice as provided in the Indenture. The Redemption Price for any of the Notes to be redeemed on any Redemption Date prior to December 15, 2019 will be equal to the greater of the following amounts:
(a)      100% of the principal amount of the Notes being redeemed on the Redemption Date; or
(b)      the sum of the present values of the remaining scheduled payments of principal and interest on the Notes being redeemed on that Redemption Date (not including any portion of any payments of interest accrued to the Redemption Date) discounted to the Redemption Date on a semiannual basis at the Adjusted Treasury Rate plus 12.5 basis points as determined by a Reference Treasury Dealer appointed by the Company for such purpose;
plus, in each case, accrued and unpaid interest thereon to the Redemption Date. The Redemption Price for any of the Notes to be redeemed on any Redemption Date on or after December 15, 2019 will be equal to 100% of the principal amount of the Notes being redeemed on the Redemption Date plus accrued and unpaid interest thereon to the Redemption Date.
Notwithstanding the foregoing, installments of interest on the Notes that are due and payable on Interest Payment Dates falling on or prior to a Redemption Date will be payable on the Interest Payment Date to the Holders as of the close of business on the relevant record date in accordance with the terms of such Notes and the Indenture. The Redemption Price will be calculated on the basis of a 360-day year consisting of twelve 30-day months.
For purposes of this Section 105, the following terms shall have the following meanings:

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“ Adjusted Treasury Rate ” means, with respect to any applicable Redemption Date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date.
“ Comparable Treasury Issue ” means the U.S. Treasury security selected by a Reference Treasury Dealer appointed by the Company for such purpose as having a maturity comparable to the remaining term of the Notes to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of such Notes.
“ Comparable Treasury Price ” means, with respect to any applicable Redemption Date, (A) if the Company obtains three or more Reference Treasury Dealer Quotations, the average of such Reference Treasury Dealer Quotations for such Redemption Date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations, (B) if the Company obtains two such Reference Treasury Dealer Quotations, the average of such quotations, or (C) if only one Reference Treasury Dealer Quotation is received, such quotation.
“Primary Treasury Dealer” means a primary U.S. government securities dealer in the United States.
“ Reference Treasury Dealer ” means (A) Barclays Capital Inc., a Primary Treasury Dealer selected by SunTrust Robinson Humphrey, Inc., TD Securities (USA) LLC and a Primary Treasury Dealer selected by Wells Fargo Securities, LLC; provided, however, that if any of the foregoing shall cease to be a Primary Treasury Dealer, the Company will substitute therefor another Primary Treasury Dealer; and (B) any other Primary Treasury Dealer(s) selected by the Company.

“ Reference Treasury Dealer Quotations ” means, with respect to each Reference Treasury Dealer and any applicable Redemption Date, the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Company by such Reference Treasury Dealer at 5:00 p.m. (New York City time) on the third Business Day preceding such Redemption Date. The Company shall give the Trustee written notice of the Redemption Price, promptly after the calculation thereof.
The Trustee shall be under no duty to inquire into, may conclusively presume the correctness of, and shall be fully protected in acting upon, the Company’s calculation of any Redemption Price.
No Notes of $2,000 principal amount or less can be redeemed in part.     
Notwithstanding Section 1104 of the Indenture, any notice of redemption given pursuant to said Section with respect to the foregoing redemption need not set forth the Redemption Price but only the manner of calculation thereof.
SECTION 106.      Defeasance of the Notes . The Notes shall be defeasible pursuant to Section 1302 or 1303 of the Indenture.

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SECTION 107.      Minimum Denominations . The Notes shall be issuable in denominations of $2,000 and any integral multiple of $1,000 in excess thereof.
ARTICLE TWO
ADDITIONAL COVENANT
SECTION 201.      Negative Lien Covenant . (a)    So long as any of the Notes are Outstanding, the Company will not issue, assume, guarantee or permit to exist any Debt secured by any mortgage, security interest, pledge or lien (herein referred to as a “Mortgage”) of or upon any Operating Property of the Company, whether owned at the date of this Sixteenth Supplemental Indenture or hereafter acquired, without effectively securing the Notes (together with, if the Company shall so determine, any other indebtedness or obligations of the Company ranking senior to, or equally with, the Notes) equally and ratably with such Debt (but only so long as such Debt is so secured); provided, however, that the foregoing restriction shall not apply to Debt secured by any of the following:

(1)	Mortgages on any property existing at the time of acquisition thereof (which Mortgages may also extend to subsequent repairs, alterations and improvements to that property);	

(2)	Mortgages on property of a corporation existing at the time such corporation is merged into or consolidated with the Company or at the time of a sale, lease or other disposition of the properties of such corporation or a division thereof as an entirety or substantially as an entirety to the Company;	

(3)	Mortgages on property to secure all or part of the cost of acquiring, constructing, developing or substantially repairing, altering or improving such property or to secure indebtedness incurred to provide funds for any such purpose or for reimbursement of funds previously expended for any such purpose, provided such Mortgages are created or assumed contemporaneously with, or within eighteen (18) months after, such acquisition or completion of construction, development or substantial repair, alteration or improvement;	

(4)	Mortgages in favor of the United States of America or any State thereof, or any department, agency, instrumentality or political subdivision of the United States of America or any State thereof, or for the benefit of holders of securities issued by any such entity (or providers of credit enhancement with respect to those securities), to secure any Debt (including the Company’s obligations with respect to industrial development, pollution control or similar revenue bonds) incurred for the purpose of financing or refinancing all or any part of the purchase price or the cost of constructing, developing or	

5

substantially repairing, altering or improving the property of the Company;

(5)	Mortgages to compensate the Trustee as provided in the Indenture; or	

(6)	any extension, renewal or replacement (or successive extensions, renewals or replacements), in whole or in part, of any Mortgage referred to in the foregoing clauses (1) to (5), inclusive; provided, however, that the principal amount of Debt secured thereby and not otherwise authorized by said clauses (1) to (5), inclusive, shall not exceed the principal amount of Debt, plus any premium or fee payable in connection with any such extension, renewal or replacement, so secured at the time of such extension, renewal or replacement.	
(b)    Notwithstanding the provisions of Section 201(a) , the Company may issue, assume or guarantee or permit to exist Debt, secured by Mortgages that would otherwise be subject to the restrictions set forth above in connection with the Company’s existing sale and lease-back transactions relating to Unit 2 of the Palo Verde Nuclear Generating Station (the “Unit 2 Sale and Lease-Back Transactions”), including but not limited to Mortgages on the leased interests in Unit 2 of the Palo Verde Nuclear Generating Station and related rights if the Company reacquires ownership in any of those interests or acquires any of the equity or owner participants’ interests in the trusts that hold title to such leased interests, whether or not it also directly assumes the Sale Leaseback Obligation Bonds, and Mortgages on the Company’s interests in the trusts that hold title to such leased interests and related rights in the event that the Company acquires any of the equity or owner participants’ interests in such trusts pursuant to a “special transfer” under the Unit 2 Sale and Lease-Back Transactions. In addition, the Company may issue, assume or guarantee or permit to exist Debt that is secured by Mortgages that would otherwise be subject to the restrictions set forth above up to an aggregate principal amount that, together with the principal amount of all other Debt of the Company secured by such Mortgages, does not at the time exceed ten percent (10%) of Tangible Assets.
(c)    For purposes of this Section 201 , the following terms shall have the following meanings:
“Debt” means any outstanding debt of the Company for money borrowed evidenced by notes, debentures, bonds or other securities, or guarantees of any thereof.
“Operating Property” means (i) any interest in real property owned by the Company and (ii) any asset owned by the Company that is depreciable in accordance with generally accepted accounting principles, excluding in any case any interest of the Company as lessee under any lease.
“Sale Leaseback Obligation Bonds” means PVNGS II Funding Corp.’s: (i) 8.00% Secured Lease Obligation Bonds, Series 1993, due 2015; (ii) any other bonds issued in connection with the Unit 2 Sale and Lease-Back Transactions; and (iii) any refinancing or refunding of the obligations specified in subclauses (i) and (ii) above.

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“Tangible Assets” means the amount shown as total assets on the most recent balance sheet of the Company, less: (i) intangible assets, including, but without limitation, goodwill, trademarks, trade names, patents and unamortized debt discount and expense and (ii) appropriate adjustments, if any, on account of minority interests; provided, however, that if, subsequent to the date of the most recent balance sheet of the Company, the Company acquires any property, whether by acquisition (including by way of capital lease) from a third party, through merger or consolidation, through construction, development or substantial repair, alteration or improvement of property, or by any other means, and such property is or becomes subject to any Mortgage securing Debt, the Company may prepare a pro forma balance sheet to include the value of such property in any calculation of Tangible Assets hereunder. Subject to the foregoing, Tangible Assets shall be determined in accordance with generally accepted accounting principles and practices applicable to the type of business in which the Company is engaged and that are approved by the independent accountants regularly retained by the Company, and may be determined as of a date not more than 60 days prior to the happening of the event for which such determination is being made.
ARTICLE THREE
FORM OF NOTES
SECTION 301.      Form of Notes . The Notes and the Trustee’s certificate of authentication thereon shall be substantially in the following forms:
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (“DTC”), TO ARIZONA PUBLIC SERVICE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

ARIZONA PUBLIC SERVICE COMPANY 
2.200% Note due 2020

		
No. 1	$250,000,000	
 	CUSIP No. 040555 CR3	
Arizona Public Service Company, a corporation duly organized and existing under the laws of the State of Arizona (the “Company”, which term includes any successor Person under the

7

Indenture hereinafter referred to), for value received, hereby promises to pay to Cede & Co., or registered assigns, the principal sum of Two Hundred Fifty Million Dollars ($250,000,000) on January 15, 2020, and to pay interest thereon and on any overdue interest from January 12, 2015 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually in arrears on January 15 and July 15 of each year, commencing July 15, 2015, at the rate of 2.200% per annum, until the principal hereof is paid or made available for payment. The amount of interest payable for any period will be computed on the basis of a 360-day year of twelve 30-day months.
The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be January 1 or July 1, as the case may be, immediately preceding the Interest Payment Date (whether or not a Business Day). Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities of this series not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture.
Payment of the principal of (and premium, if any) and any interest on this Security will be made at the office or agency of the Company maintained for that purpose through the corporate trust office of the Trustee, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided , however , that payment of interest may be made at the option of the Company by wire transfer to any Holder or by deposit to the account of the Holder of any such Securities if such account is maintained with the Trustee, in each case according to the written instructions given by such Holder on or prior to the applicable record date to the Trustee, which written instructions shall remain in effect until revised by such Holder by an instrument in writing delivered to the Trustee.
Reference is hereby made to the further provisions of this Security set forth following the Company’s signature hereto, which further provisions shall for all purposes have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by the Trustee referred to following the Company’s signature hereto by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal.

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ARIZONA PUBLIC SERVICE COMPANY	 	 	

By                         	 	 	
 	 	 	
Attest:	 	 	

 	 	 	

This Security is one of a duly authorized issue of securities of the Company (herein called the “Securities”), issued and to be issued in one or more series under an Indenture, dated as of January 15, 1998 (such instrument as originally executed and delivered and as supplemented or amended from time to time, the “Indenture”), between the Company and The Bank of New York Mellon Trust Company, N.A., successor to JPMorgan Chase Bank, N.A. (formerly known as The Chase Manhattan Bank), as Trustee (the “Trustee,” which term includes any successor trustee under the Indenture), and reference is hereby made to the Indenture for a description of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. This Security is one of the series designated on the face hereof.

The Company may redeem all or any portion of the Securities of this series, at its option, at any time or from time to time, (A) prior to December 15, 2019, at a Redemption Price equal to the greater of (a) 100% of the principal amount of the Securities of this series being redeemed on the Redemption Date or (b) the sum of the present values of the remaining scheduled payments of principal and interest on the Securities of this series being redeemed on that Redemption Date (not including the portion of any payments of interest accrued to the Redemption Date) discounted to the Redemption Date on a semiannual basis at the Adjusted Treasury Rate plus 12.5 basis points, as determined by a Reference Treasury Dealer appointed by the Company for such purpose; and (B) on or after December 15, 2019, at a Redemption Price equal to 100% of the principal amount of the Securities of this series being redeemed on the Redemption Date; plus, in each case, accrued and unpaid interest thereon to the Redemption Date. Notwithstanding the foregoing, installments of interest on Securities of this series that are due and payable on Interest Payment Dates falling on or prior to a Redemption Date will be payable on the Interest Payment Date to the Holders as of the close of business on the relevant record date in accordance with the terms of the Securities of this series and the Indenture. The Redemption Price will be calculated on the basis of a 360-day year consisting of twelve 30-day months.
If notice has been given as provided in the Indenture and funds for the redemption of any Securities of this series (or any portion thereof) called for redemption shall have been made available on the Redemption Date referred to in such notice, such Securities (or any portion thereof) will cease to bear interest on the date fixed for such redemption specified in such notice and the only right of the Holders of such Securities will be to receive payment of the Redemption Price.

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Notice of any optional redemption of Securities of this series (or any portion thereof) will be given to Holders at their addresses, as shown in the Security Register for such Securities, not more than 60 nor less than 30 days prior to the date fixed for redemption. The notice of redemption will specify, among other items, (i) the Redemption Price or the manner of calculation of the Redemption Price and (ii) the principal amount of the Securities of this series held by such Holder to be redeemed if less than all of such Securities. If less than all of the Securities of this series are to be redeemed at the option of the Company, the Securities to be redeemed will be selected in accordance with the procedures of the Depositary.
As used herein:
“ Adjusted Treasury Rate ” means, with respect to any applicable Redemption Date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date.
“ Comparable Treasury Issue ” means the U.S. Treasury security selected by a Reference Treasury Dealer appointed by the Company for such purpose as having a maturity comparable to the remaining term of this Security to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of such Security.
“ Comparable Treasury Price ” means, with respect to any applicable Redemption Date, (A) if the Company obtains three or more Reference Treasury Dealer Quotations, the average of such Reference Treasury Dealer Quotations for such Redemption Date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations, (B) if the Company obtains two such Reference Treasury Dealer Quotations, the average of such quotations, or (C) if only one Reference Treasury Dealer Quotation is received, such quotation.
“Primary Treasury Dealer” means a primary U.S. government securities dealer in the United States.
“ Reference Treasury Dealer ” means (A) Barclays Capital Inc., a Primary Treasury Dealer selected by SunTrust Robinson Humphrey, Inc., TD Securities (USA) LLC and a Primary Treasury Dealer selected by Wells Fargo Securities, LLC; provided, however, that if any of the foregoing shall cease to be a Primary Treasury Dealer, the Company will substitute therefor another Primary Treasury Dealer; and (B) any other Primary Treasury Dealer(s) selected by the Company.
“ Reference Treasury Dealer Quotations ” means, with respect to each Reference Treasury Dealer and any applicable Redemption Date, the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Company by such Reference Treasury Dealer at 5:00 p.m. (New York City time) on the third Business Day preceding such Redemption Date.
The Securities of this series will not be subject to any sinking fund.

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In the event of redemption of this Security in part only, a new Security or Securities of this series and of like tenor for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof.
The Indenture contains provisions for defeasance at any time of the entire indebtedness of this Security and certain restrictive covenants and Events of Default with respect to this Security, in each case upon compliance with certain conditions set forth in the Indenture.
The Indenture contains provisions limiting the Company’s ability to issue, assume, guarantee or permit to exist any Debt secured by any mortgage, security interest, pledge or lien upon any of its Operating Property, subject to the exceptions and qualifications set forth in the Indenture.
If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture.
The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee without the consent of such Holders in certain circumstances, or with the consent of the Holders of 66-2/3% in principal amount of the affected Securities at the time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the affected Securities at the time Outstanding, on behalf of the Holders of all such Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security.
As provided in and subject to the provisions of the Indenture, the Holder of this Security shall not have the right to institute any proceeding with respect to the Indenture or for the appointment of a receiver or trustee or for any other remedy under the Indenture, unless such Holder shall have previously given the Trustee written notice of a continuing Event of Default with respect to the Securities of this series, the Holders of not less than 25% in principal amount of the Securities of this series at the time Outstanding shall have made written request to the Trustee to institute proceedings in respect of such Event of Default as Trustee and offered the Trustee reasonable indemnity, and the Trustee shall not have received from the Holders of a majority in principal amount of Securities of this series at the time Outstanding a direction inconsistent with such request, and shall have failed to institute any such proceeding, for 60 days after receipt of such notice, request and offer of indemnity. The foregoing shall not apply to any suit instituted by the Holder of this Security for the enforcement of any payment of principal hereof or any premium or interest hereon on or after the respective due dates expressed herein.
No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the

11

principal of and any premium and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in any place where the principal of and any premium and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his or her attorney duly authorized in writing, and thereupon one or more new Securities of this series and of like tenor, of authorized denominations and for the same aggregate principal amount will be issued to the designated transferee or transferees.
The Securities of this series are issuable only in registered form without coupons in denominations of $2,000 and integral multiples of $1,000 in excess thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities of this series are exchangeable for a like aggregate principal amount of Securities of this series and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same.
No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the absolute owner hereof for all purposes, whether or not this Security be overdue, and none of the Company, the Trustee or any such agent shall be affected by notice to the contrary.
All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture.
Form of Trustee’s Certificate of Authentication.

CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture.

			
Dated:	 	THE BANK OF NEW YORK MELLON	
 	 	TRUST COMPANY, N.A.,	
 	 	As Trustee	
 	By	 	
 	 	Authorized Officer	

12

SECTION 302.      General Provisions.  The Notes may have notations, legends or endorsements required by law, stock exchange rule or usage. The terms and provisions contained in the Notes shall constitute, and are hereby expressly made, a part of this Sixteenth Supplemental Indenture, and the Company, by its execution and delivery of this Sixteenth Supplemental Indenture, expressly agrees to such terms and provisions and to be bound thereby. However, to the extent any provision of the Notes conflicts with the express provisions of this Sixteenth Supplemental Indenture or the Indenture, the provisions of this Sixteenth Supplemental Indenture or the Indenture, as applicable, shall govern and be controlling.
ARTICLE FOUR

ORIGINAL ISSUE OF NOTES
SECTION 401.      Issuance of Notes . Subject to Section 101, Notes in the aggregate principal amount of $250,000,000 may, upon execution of this Sixteenth Supplemental Indenture, or from time to time thereafter, be executed by the Company and delivered to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver said Notes, in accordance with a Company Order delivered to the Trustee by the Company, without any further action by the Company.
ARTICLE FIVE
PAYING AGENT AND REGISTRAR
SECTION 501.      Appointment of Paying Agent and Registrar . The Bank of New York Mellon Trust Company, N.A. will be the Paying Agent and Security Registrar for the Notes.
ARTICLE SIX
SUNDRY PROVISIONS
SECTION 601.      Associate Secretary . For all purposes relating to this Sixteenth Supplemental Indenture and the Notes, the term “Assistant Secretary” when used in the Indenture with respect to the Company will include an Associate Secretary of the Company.
SECTION 602.      Defined Terms . Except as otherwise expressly provided in this Sixteenth Supplemental Indenture or in the form of the Notes, or otherwise clearly required by the context hereof or thereof, all terms used herein or in said form of the Notes that are defined in the Indenture shall have the several meanings respectively assigned to them thereby.
SECTION 603.      Ratification of Indenture . The Indenture, as heretofore supplemented and amended, and as supplemented by this Sixteenth Supplemental Indenture, is in all respects ratified and confirmed, and this Sixteenth Supplemental Indenture shall be deemed part of the Indenture in the manner and to the extent herein and therein provided.

13

SECTION 604.      About the Trustee . The Trustee hereby accepts the trusts herein declared, provided, created, supplemented or amended and agrees to perform the same upon the terms and conditions herein and in the Indenture, as heretofore supplemented and amended, set forth and upon the following terms and conditions:
The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Sixteenth Supplemental Indenture or for or in respect of the recitals contained herein, all of which recitals are made by the Company solely. Each and every term and condition contained in Article Six of the Indenture shall apply to and form a part of this Sixteenth Supplemental Indenture with the same force and effect as if the same were herein set forth in full with such omissions, variations and insertions, if any, as may be appropriate to make the same conform to the provisions of this Sixteenth Supplemental Indenture.
The Trustee agrees to accept and act upon instructions or directions pursuant to this Sixteenth Supplemental Indenture sent by unsecured e-mail, pdf, facsimile transmission or other similar unsecured electronic methods; provided, however, that (a) the party providing such written instructions, subsequent to such transmission of written instructions, shall provide the originally executed instructions or directions to the Trustee in a timely manner, and (b) such originally executed instructions or directions shall be signed by an authorized representative of the party providing such instructions or directions. If the party elects to give the Trustee e-mail or facsimile instructions (or instructions by a similar electronic method) and the Trustee in its discretion elects to act upon such instructions, the Trustee’s understanding of such instructions shall be deemed controlling. The Trustee shall not be liable for any losses, costs or expenses arising directly or indirectly from the Trustee’s reliance upon and compliance with such instructions notwithstanding such instructions conflict or are inconsistent with a subsequent written instruction. The party providing electronic instructions agrees to assume all risks arising out of the use of such electronic methods to submit instructions and directions to the Trustee, including without limitation the risk of the Trustee acting on unauthorized instructions, and the risk or interception and misuse by third parties.
In no event shall the Trustee be responsible or liable for special, indirect, or consequential loss or damage of any kind whatsoever (including, but not limited to, loss of profit) irrespective of whether the Trustee has been advised of the likelihood of such loss or damage and regardless of the form of action. Delivery of reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates).
SECTION 605.      Counterparts . This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

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IN WITNESS WHEREOF, the parties hereto have caused this Sixteenth Supplemental Indenture to be duly executed as of the day and year first above written.

		
 	ARIZONA PUBLIC SERVICE COMPANY	
 	 	
 	/s/ Lee R. Nickloy                	
 	Lee R. Nickloy	
 	Vice President and Treasurer	

	
	
Attest:	
 	
/s/ Shirley A. Baum	
Shirley A. Baum	
Associate Secretary	

	
		
 	THE BANK OF NEW YORK MELLON TRUST	
 	COMPANY, N.A., as Trustee	
 	 	
 	By: /s/ Teresa Petta        	
 	Name: Teresa Petta	
 	Title: Vice President	

[Signature Page to Sixteenth Supplemental Indenture]

	
		
STATE OF ARIZONA    	)	
 	) ss.:	
COUNTY OF MARICOPA	)	
On 9th day of January, 2015, before me personally came Lee R. Nickloy, to me known, who, being by me duly sworn, did depose and say that he is the Vice President and Treasurer of Arizona Public Service Company, one of the corporations described in and which executed the foregoing instrument and that he signed his name thereto by authority of the Board of Directors of said corporation.

/s/ Lisa D. Hattrup                    

 Notary Public
My Commission Expires

	

	
		
STATE OF CALIFORNIA    	)	
 	) ss.:	
COUNTY OF Los Angeles	)	
On 9 day of January, 2015, before me, Cynthia Cerda, a notary public, personally appeared Teresa Petta, who proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.
I certify under PENALTY OF PERJURY under the laws of the State of California that the forgoing paragraph is true and correct.
WITNESS my hand and official seal.

Signature /s/ Cynthia Cerda             (seal) 

3

Exhibit 10.3.2a

FIRST AMENDMENT TO THE
PINNACLE WEST CAPITAL CORPORATION
SUPPLEMENTAL EXCESS BENEFIT RETIREMENT PLAN OF 2005

Effective as of January 1, 2005, Pinnacle West Capital Corporation (the "Company") adopted the Pinnacle West Capital Corporation Supplemental Excess Benefit Retirement Plan of 2005 (the "Plan").     By this instrument, the Company amends the Plan as described below. Defined terms used in this First Amendment shall have the meanings specified in the Plan.
1. This First Amendment shall be effective as of January 1, 2011.
2. This First Amendment amends the provisions of the Plan noted below. This First Amendment also supersedes other provisions of the Plan to the extent those provisions are inconsistent with the provisions and intent of this First Amendment.
3. Section 3(b) of the Plan is hereby amended by changing the caption thereof to read " Other Approved Participants " and by adding the following sentence to the end thereof:

Such Eligible Employees shall consist of Director level employees unless approved by the Committee.

4. Section 4(a)(3) of the Plan is hereby amended by changing the caption thereof to read " Group C Participants -- General Rule ."
5. The title of the first column in the chart contained in Section 4(a)(3) is hereby amended by changing the title to read "Age at End of Plan Year."
6. Section 4(a) of the Plan is hereby amended by adding the following new Section 4(a)(3A) immediately following Section 4(a)(3):

(3A) Group C Participants -- Individuals Becoming Participants on or after January 1, 2011.  The provisions of this Section 4(a)(3A), rather than Section 4(a)(3), shall apply to an individual who becomes an Officer on or after January 1, 2011. Subject to ARTICLE SEVEN, such an individual who is a participant who is eligible under Section 3(a) and who is a Group C Participant under the Retirement Plan shall be entitled to a monthly benefit for life commencing at age 65 equal to the Actuarial Equivalent of a lump sum benefit equal to (i) reduced by (ii), where

(i)     Equals     the     participant's     Supplemental     Retirement     Account Balance, and

(ii)     Equals the participant's Retirement Account Balance under the Retirement Plan.

A Participant's Supplemental Retirement Account Balance shall be a notional account credited with Monthly Retirement Account Balance Credits and Interest Credits. For purposes of this Plan, Monthly Retirement Account Balance Credits shall be determined under the general methodology set forth in the Retirement Plan based on the participant's Monthly Compensation for the month but using the following chart:

	
		
Age at End of Plan Year	Percent of Monthly
Compensation Contribution Rate	
Less than 35	8%	
35-39	9%	
40-44	10%	
45-49	12%	
50-54	15%	
55 and over	18%	

7. Section 4(a)(5) is hereby amended by adding the following sentence to the end thereof:

The provisions of this Section 4(a)(5) shall not apply to any individual who is promoted into Officer status on or after January 1, 2011.

8. Section 4(a) of the Plan is hereby amended by adding the following new Section 4(a)(6):

(6). Promotion or Re-Hire into Officer Status On or After January 1, 2011. For individuals who are promoted into Officer status on or after January 1, 2011 or were an Officer and whose employment terminated and are re-hired as an Officer on or after January 1, 2011, his or her Retirement Account Balance Benefit shall be prospectively calculated as of the date he or she is promoted or re-hired to Officer status and then reduced by the Retirement Plan for service after the date of promotion or re-hire.

9.    Section 4(b) of the Plan is hereby amended by changing the caption thereof to read " Other Approved Participants. "
10.    Section 4(b)(i) is hereby amended by changing the reference to "Section 2.1(n)" of the Retirement Plan to "Section 2.l(o)" and by changing the reference to "Section 5.13" of the Retirement Plan to "Section 5.12."

11.    Section 5(a)(2) is hereby amended by changing the last sentence thereof to read as follows:

A participant may not elect to receive such benefits in any form not described in this Section, such as a ten-year certain form described in Section 6.6 of the Retirement Plan or the over-and-under payment method described m Section 6.7 of the Retirement Plan (the "Over-and-Under Payment Method").
12.    Section 5(a)(3) is hereby amended by changing the caption thereof to read "Actuarial Adjustments-- General Rule."
13.    Section 5(a) is hereby amended by adding the following new Section 5(a)(4) to the end thereof:

(4) Actuarial Adjustments -- Individuals Becoming Participants on or after January 1,  2011.  The provisions of this Section 5(a)(4) rather than Section 5(a)(3), shall apply to an individual who becomes an Officer on or after January 1, 2011. For such an individual, the joint and 50% survivor annuity form shall not be fully subsidized. In addition, all alternate payment forms shall be actuarially equivalent to a life annuity for the life of the participant alone, with the actuarial equivalency to be determined using the same actuarial adjustments as provided under the Retirement Plan. The five-year installment form shall be actuarially equivalent to the life annuity, but using a discount rate assumption of 6.25% and the mortality table used by the Company for year-end financial reporting purposes for the calendar year preceding the year in which the five-year installment benefit commences.

14.    Section 5(c)(2) of the Plan is hereby amended by changing the caption thereof to read " Actuarial Adjustments-- General Rule. "
15.    Section 5(c) is hereby amended by adding the following new Section 5(c)(2A)immediately following Section 5(c)(2):

(2A)     Actuarial Adjustments -- Individuals Becoming Participants on or after January 1, 2011.  The provisions of this Section 5(c)(2A), rather than Section 5(c)(2), shall apply to an individual who becomes an Officer on or after January 1, 2011. For such an individual, the joint and 50% survivor annuity form shall not be fully subsidized. In addition, the life annuity form of benefit shall be actuarially equivalent to the participant's Retirement Account Balance, using the actuarial factors set forth in the Retirement Plan. Any joint and survivor annuity forms shall be actuarially equivalent to the life annuity form, using the actuarial factors set forth in the Retirement Plan. The five-year installment form shall be actuarially equivalent to the lump sum benefit, but using a discount rate assumption of 6.25% and the mortality table used by the Company for year-end financial reporting purposes for the calendar year preceding the year in which the five-year installment benefit commences.

16.    Section 5(d) of the Plan is hereby amended by changing the caption thereof to read " Other Approved Participants' Traditional and Retirement Account Balance Benefits Described in Section 4(b) ."
17.    Section 5(d)(l) is hereby amended by changing the first sentence to read:
This section governs the election of the form of payment of Other Approved Participants' benefits which supplement benefits described in Sections 5.1(a) and 5.1(b) of the Retirement Plan ("Traditional Benefits").
18.    Article Nine is hereby amended by changing the references to "Sections 10.4 and 12.2" of the Retirement Plan to "Sections 10.3 and 10.4."
19.     Except as otherwise amended by this First Amendment, the Plan shall continue in full force and effect.
IN WITNESS WHEREOF, Pinnacle West Capital Corporation has caused this First Amendment to be executed as of this 17th day of December, 2010.

	
		
 	Pinnacle West Capital Corporation	
 	 	
 	By: /s/ Donald E. Brandt                	
 	Its: Chairman of the Board, President and CEO,	
 	PNW, Chairman of the Board and CEO APS	

 	 	

Exhibit 10.4.9

SUPPLEMENTAL AGREEMENT BETWEEN
ARIZONA PUBLIC SERVICE COMPANY AND RANDALL K. EDINGTON
This Supplemental Agreement (the “ Agreement ”) is entered into by and between Arizona Public Service Company (the “ Company ”) and Randall K. Edington (“ Executive ”).
1. Background . The Company previously entered into a Supplemental Agreement dated December 26, 2008 (the “ 2008 Agreement ”) with Executive and that 2008 Agreement was supplemented on June 20, 2012 (the “ Supplemental Agreement ”). The purpose of this Agreement is to provide additional supplemental benefits to Executive as described below.
2.      Effective Date . Except as otherwise noted below, this Agreement shall be effective as of the date on which it is executed.
3.      Salary Increases . Effective as of September 30, 2014, Executive’s base salary shall be increased to $1,000,000. Effective as of January 1, 2015, Executive’s base salary shall be increased to $1,050,000, and effective as of January 1, 2016, Executive’s base salary shall be increased to $1,100,000.
4.      Supplemental Pension Benefit . In addition to the pension benefit set forth in the 2008 Agreement, as increased by the Supplemental Agreement, if Executive is actively employed by the Company on June 30, 2016, the supplemental pension benefit amount calculated in accordance with Section 4 of the Supplemental Agreement shall be increased by an amount equal to 5% of the benefit that would have otherwise been payable.
5.      Supplemental Deferred Compensation Arrangement . The Company shall provide Executive with a deferred compensation benefit that will be credited in four installments to accounts established for the benefit of Executive and will vest in accordance with the terms and conditions described in the attached Exhibit A .
6.      Annual Incentive Target . In addition to the Executive’s previously approved award opportunity target under the Company’s 2014 Annual Incentive Award Plan for Palo Verde Employees (“ 2014 Palo Verde Incentive Plan ”) (50% of base salary), the Executive shall be granted an additional supplemental incentive award opportunity target of 15% of his base salary for a total award opportunity target of 65% of the Executive’s base salary under the 2014 Palo Verde Incentive Plan, and by this Agreement, the 2014 Palo Verde Incentive Plan is hereby amended to increase the award opportunity target to 65% of the Executive’s base salary.   Subject to the normal approval process by the Human Resources Committee of the Company’s Board of Directors, the award opportunity target shall be 65% of the Executive’s base salary under the Company’s Annual Incentive Award Plan for Palo Verde Employees for each of 2015 and 2016.
7.      Equity Awards . The equity awards that are expected to be granted by the Company to the Executive under the Pinnacle West Capital Corporation 2012 Long-Term Incentive Plan in

February 2015 and February 2016 shall have a grant date fair value of $600,000 for each year, subject to the normal approval process by the Human Resources Committee of the Company’s Board of Directors.
8.      Impact on 2008 Agreement and Supplemental Agreement . This Agreement supplements the 2008 Agreement and the Supplemental Agreement which otherwise remain in full force and effect.
9.      Status of Exhibit. Exhibit A is deemed to be a part of this Agreement as if fully set forth herein.
IN WITNESS WHEREOF, the Company and Executive have caused this Agreement to be executed as of the date set forth below.

	
		
 	ARIZONA PUBLIC SERVICE COMPANY	
 	 	
 	By: /s/ Donald E. Brandt                	
 	Its: Chief Executive Officer	
 	 	
 	December 14, 2014	
 	Date	

 	EXECUTIVE	
 	 	
 	/s/ Randall K. Edington            	
 	Randall K. Edington	
 	 	
 	December 14, 2014                    	
 	Date	

Exhibit A
SUPPLEMENTAL DEFERRED COMPENSATION PROGRAM
FOR RANDALL K. EDINGTON
1.     Purpose . By an Agreement executed on December 14, 2014 between Arizona Public Service Company (the “ Company ”) and Randall K. Edington (“ Executive ”), the Company agreed to establish a supplemental deferred compensation arrangement for the benefit of Executive (the “ Supplemental Deferred Compensation Benefit ”). The purpose of this document is to establish this arrangement through Discretionary Credits to accounts established for the benefit of Executive pursuant to the Deferred Compensation Plan of 2005 for Employees of Pinnacle West Capital Corporation and Affiliates (the “ Deferred Compensation Plan ”).
2.     Definitions . Defined terms used herein shall have the respective meanings ascribed to them in the Deferred Compensation Plan.
3.     Discretionary Credits . Four Discretionary Credits in the aggregate amount of $1,300,000 will be allocated to four Discretionary Credit Accounts (“ Discretionary Credit Account A ,” “ Discretionary Credit Account B ”, “ Discretionary Credit Account C ” and “ Discretionary Credit Account D ”) established for the benefit of Executive pursuant to Section 3.9 of the Deferred Compensation Plan. Discretionary Credit Account A shall be credited with $200,000 as of July 1, 2014. Discretionary Credit Account B shall be credited with $300,000 on January 1, 2015 and Discretionary Credit Account C shall be credited with $300,000 on January 1, 2016. Discretionary Credit Account D shall be credited with $500,000 as of September 30, 2014.
4.     Interest . The Discretionary Credit Accounts shall be credited with interest in accordance with Sections 3.5 and 3.7(a) of the Deferred Compensation Plan. Discretionary Credit Account A shall be credited with interest from July 1, 2014. Discretionary Credit Account B shall be credited with interest from January 1, 2015 and Discretionary Credit Account C shall be credited with interest from January 1, 2016. Discretionary Credit Account D shall be credited with interest from September 30, 2014.
5.     Vesting .
(a) Discretionary Credit Account A, Discretionary Credit Account B and Discretionary Credit Account C vest on June 30, 2016. If Executive Separates from Service prior to June 30, 2016, the amounts allocated to Discretionary Credit Account A, Discretionary Credit Account B and Discretionary Credit Account C will be forfeited; provided, however, that if Executive’s employment with the Company is involuntarily terminated by the Company without cause, Executive dies or Executive becomes Disabled prior to June 30, 2016, all amounts previously credited to Discretionary Credit Account A, Discretionary Credit Account B and Discretionary Credit Account C will be fully vested as of the date of the termination by the Company without cause, death or Disability as applicable.

A-1    

(b) Discretionary Credit Account D shall vest 180 days after the “ Executive Termination Date ,” provided that Palo Verde’s key regulatory and oversight evaluations and assessments have not declined during the period beginning September 30, 2014 and ending as of 180 days after the Executive Termination Date (the “ Assessments Condition ”). If (i) the Assessments Condition is not met, (ii) Executive’s employment is terminated for cause or (iii) the Executive Termination Date is prior to June 30, 2016, the amounts allocated to Discretionary Credit Account D will be forfeited; provided, however, that if Executive’s employment with the Company is involuntarily terminated by the Company without cause, Executive dies or Executive becomes Disabled, and the Assessments Condition is met, all amounts previously credited to Discretionary Credit Account D will be fully vested 180 days after the date of the Executive’s termination of employment due to any of such events.  For this purpose, the “ Executive Termination Date ” is the date on which Executive’s employment with the Company ceases, voluntarily or involuntarily.
For purposes of this document, “Disability” shall have the meaning ascribed to it in the Pinnacle West Capital Corporation Long-Term Disability Plan.
6.     Payment of Discretionary Credits . Executive’s vested interest in his Discretionary Credit Accounts will be paid to Executive (or to the Beneficiary designated by Executive pursuant to the Deferred Compensation Plan in the event of Executive’s death)  in installments over a period of 10 years following Executive’s Separation from Service in accordance with Sections 3.7 and 5.1 of the Deferred Compensation Plan.  As provided in the Deferred Compensation Plan, the first installment payment generally shall be made within 30 days following Executive’s Separation from Service, unless Executive is a Specified Employee on the date of his Separation from Service.  If Executive is a Specified Employee on the date of his Separation from Service, the payment of Executive’s vested interest in his Discretionary Credit Accounts may not commence prior to the first day of the seventh month following Executive’s Separation from Service.  In addition, if Executive is not a Specified Employee on the date of his Separation form Service, the first installment payment from Discretionary Credit Account D shall be made within 30 days following the date on which Discretionary Credit Account D vests in accordance with Section 5(b) of this document.  The Discretionary Credit Accounts may not be distributed as a Short‑Term Payout or due to an Unforeseeable Financial Emergency.
7.     Executive’s Plan Status . Regardless of whether Executive makes an Annual Deferral pursuant to the terms of the Deferred Compensation Plan for the relevant Plan Year, Executive shall be deemed to be a Participant in the Deferred Compensation Plan and to have elected to participate in the Deferred Compensation Plan for the limited purpose of receiving the Discretionary Credits described in this document. This document shall be deemed to be Executive’s Election Form with respect to the Discretionary Credits for purposes of Section 2.2 and Section 3.3 of the Deferred Compensation Plan.
8.     Relationship to Other Benefits . The Discretionary Credits allocated to Executive pursuant to this document shall not be taken into account as compensation or for purposes of determining any benefits due to Executive pursuant to the terms of any pension, retirement, savings, profit sharing, incentive, group insurance or other tax qualified or nonqualified benefit plan sponsored by the Company, Pinnacle West Capital Corporation or any affiliate of either. In addition,

A-2    

the amounts payable to Executive attributable to the Discretionary Credit Accounts established for Executive pursuant to the Deferred Compensation Plan shall be disregarded for purposes of the benefit plans referred to in the preceding sentence.
9.     Plan Document . As provided above, this document is entered into pursuant to the provisions of Section 3.9 of the Deferred Compensation Plan. Accordingly, except as otherwise set forth in this document, the provisions of the Deferred Compensation Plan shall apply in determining the rights of Executive as well as the administration of Executive’s Discretionary Credit Accounts. In cases of conflict, this document controls over any conflicting provisions of the Deferred Compensation Plan, except as may be required by Section 409A of the Internal Revenue Code or the provisions of any other applicable law or regulation.
10.     Amendments . This document may not be modified, altered or changed, except by a written agreement signed by the Company and Executive.
11.     Entire Agreement . This document and the Deferred Compensation Plan constitute the entire agreement between the Company and Executive regarding this Supplemental Deferred Compensation Arrangement.
12.     Severability . If any provision of this document is held to be invalid, the remaining provisions shall remain in full force and effect.

A-3    

Exhibit 10.6.6
 
Summary of 2015 Incentive Plans

On December 16, 2014, the Human Resources Committee (the “Committee”) of the Pinnacle West Capital Corporation (“Pinnacle West” or the “Company”) Board of Directors (the “Board”) approved the Pinnacle West 2015 CEO Annual Incentive Award Plan (the “PNW Plan”), which provides an incentive award opportunity for Donald E. Brandt, the Chairman of the Board, President, and Chief Executive Officer of Pinnacle West and the Chairman of the Board, President and Chief Executive Officer of Arizona Public Service Company (“APS”).  On December 17, 2014, the Board, acting on the recommendation of the Committee, approved the APS 2015 Annual Incentive Award Plan (the “APS Plan”), which includes an incentive award opportunity for Mark A. Schiavoni, Executive Vice President and Chief Operating Officer, James R. Hatfield, Executive Vice President and Chief Financial Officer and David P. Falck, Executive Vice President and General Counsel and the APS 2015 Annual Incentive Award Plan for Palo Verde Employees (the “Palo Verde Plan”), which includes an incentive award opportunity for Randall K. Edington, Executive Vice President and Chief Nuclear Officer.  The PNW Plan, the APS Plan and the Palo Verde Plan are referred to collectively herein as the “2015 Plans.”
 
No incentive payments will be awarded under the PNW Plan or the APS Plan unless Pinnacle West, with respect to Mr. Brandt, or APS, with respect to Messrs. Schiavoni, Hatfield and Falck, each achieves a specified threshold earnings level.  No incentive payment will be awarded under the earnings portion of the Palo Verde Plan with respect to Mr. Edington unless the Palo Verde Nuclear Generating Station (“Palo Verde”) achieves specified business unit performance goals.  The Committee will evaluate the impacts of unusual or nonrecurring adjustments to earnings in determining whether any earnings level has been met for purposes of the 2015 Plans.  Arizona Corporation Commission rate-related impacts are excluded.
 
  Mr. Brandt’s incentive award opportunity is based 62.5% on Pinnacle West’s 2015 earnings, and 37.5% on the achievement of performance goals established for all business units of the Company. Mr. Brandt has an award opportunity of 50% of his base salary if the threshold earnings level is met. If Pinnacle West earnings exceed the threshold level, Mr. Brandt’s award opportunity increases proportionately by up to an additional 75% of his base salary. To the extent certain business unit performance goals are met, Mr. Brandt has a further award opportunity of up to 75% of base salary. In no event may Mr. Brandt’s award exceed 200% of his base salary.
 
The award opportunities for Messrs. Schiavoni, Hatfield and Falck under the APS Plan and for Mr. Edington under the Palo Verde Plan are based on the achievement of specified 2015 APS earnings levels and specified business unit performance goals.  Mr. Schiavoni has a target award opportunity of up to 70% of his base salary and Messrs. Hatfield and Falck have a target award opportunity of up to 60% of their base salaries.  Messrs. Schiavoni, Hatfield and Falck may earn less or more than the target amount, up to a maximum award opportunity of up to 140% for Mr. Schiavoni and up to 120% for Messrs. Hatfield and Falck of their base salaries, depending on the achievement of the earnings and business unit performance goals separately or in combination, and before adjustment for individual performance.  Mr. Edington has a threshold award opportunity of 16.3% of his base salary, a target of 65% of his base salary, and up to a maximum of 130% of his base salary, depending on the achievement of the earnings and business unit performance goals, separately or in combination, and before adjustment for individual performance.  In no event may the award to each of Messrs. Schiavoni, Hatfield, Falck and Edington exceed two times their respective target amounts.  The business unit performance indicators that will be considered for Messrs. Schiavoni, Hatfield and Falck are derived from the APS critical areas of focus, as provided in its Strategic Framework, of employees, operational excellence, environmental stewardship, customers & communities and shareholder value.  The business unit performance indicators for Mr. Edington are based on employees, operational excellence, performance improvement and shareholder value.  In assessing each officer’s individual performance, the Committee may consider additional factors such as shareholder value creation, customer service, financial strength, operating performance, safety, and the Chief Executive Officer’s assessment of the officer’s individual performance during the year.
 
In addition, consistent with Mr. Edington’s letter agreement regarding his employment, the Board approved a separate compensation opportunity for Mr. Edington of up to $125,000 upon the achievement of specific performance measures tied to Palo Verde operations performance and regulatory evaluations.

 

Exhibit 10.11.2

U.S. $125,000,000
TERM LOAN AGREEMENT
Dated as of December 31, 2014
among
PINNACLE WEST CAPITAL CORPORATION,
as Borrower ,

THE LENDERS PARTY HERETO,

JPMORGAN CHASE BANK, N.A.,
as Agent ,

U.S. BANK NATIONAL ASSOCIATION,
as Syndication Agent ,

TD BANK, N.A.,
THE BANK OF NOVA SCOTIA
and
THE BANK OF TOKYO-MITSUBISHI UFJ, LTD.
as Co-Documentation Agents ,

_______________________________________________________________________

J.P. MORGAN SECURITIES LLC,
U.S. BANK NATIONAL ASSOCIATION,
TD BANK, N.A.,
THE BANK OF NOVA SCOTIA
and
THE BANK OF TOKYO-MITSUBISHI UFJ, LTD.
as Joint Lead Arrangers and as Joint Bookrunners

TABLE OF CONTENTS

	
				
ARTICLE I DEFINITIONS AND ACCOUNTING TERMS	 	1		
 	 	 	
Section 1.01      Certain Defined Terms .	 	1		
Section 1.02      Other Interpretive Provisions .	 	15		
Section 1.03      Accounting Terms .	 	16		
Section 1.04      Rounding .	 	16		
Section 1.05      Times of Day .	 	16		
 	 	 	
ARTICLE II AMOUNTS AND TERMS OF THE LOANS	 	16		
 	 	 	
Section 2.01      The Loans .	 	16		
Section 2.02      Making the Loans .	 	17		
Section 2.03      Agent’s Fees .	 	18		
Section 2.04      Repayment of Loans .	 	18		
Section 2.05      Interest on Loans .	 	18		
Section 2.06      Interest Rate Determination .	 	19		
Section 2.07      Optional Conversion of Loans .	 	20		
Section 2.08      Prepayments of Loans .	 	20		
Section 2.09      Increased Costs .	 	21		
Section 2.10      Illegality .	 	22		
Section 2.11      Payments and Computations .	 	23		
Section 2.12      Taxes .	 	24		
Section 2.13      Sharing of Payments, Etc .	 	28		
Section 2.14      Evidence of Debt .	 	28		
Section 2.15      Use of Proceeds .	 	29		
Section 2.16      Affected Lenders .	 	29		
Section 2.17      Replacement of Lenders .	 	29		
 	 	 	
ARTICLE III CONDITIONS PRECEDENT	 	30		
 	 	 	
Section 3.01      Conditions Precedent to Effectiveness .	 	30		
Section 3.02      Determinations Under Section 3.01 .	 	32		
 	 	 	
ARTICLE IV REPRESENTATIONS AND WARRANTIES	 	32		
 	 	 	
Section 4.01      Representations and Warranties of the Borrower .	 	32		
 	 	 	
ARTICLE V COVENANTS OF THE BORROWER	 	36		
 	 	 	
Section 5.01      Affirmative Covenants .	 	36		

i

	
				
Section 5.02      Negative Covenants .	 	40		
Section 5.03      Financial Covenant .	 	41		
 	 	 	
ARTICLE VI EVENTS OF DEFAULT	 	41		
 	 	 	
Section 6.01      Events of Default .	 	41		
 	 	 	
ARTICLE VII THE AGENT	 	43		
 	 	 	
Section 7.01      Appointment and Authority .	 	43		
Section 7.02      Rights as a Lender .	 	43		
Section 7.03      Exculpatory Provisions .	 	44		
Section 7.04      Reliance by Agent .	 	44		
Section 7.05      Delegation of Duties .	 	45		
Section 7.06      Resignation of Agent .	 	45		
Section 7.07      Non-Reliance on Agent and Other Lenders .	 	46		
Section 7.08      No Other Duties, Etc .	 	46		
 	 	 	
ARTICLE VIII MISCELLANEOUS	 	46		
 	 	 	
Section 8.01      Amendments, Etc .	 	46		
Section 8.02      Notices, Etc .	 	47		
Section 8.03      No Waiver; Cumulative Remedies; Enforcement .	 	49		
Section 8.04      Costs and Expenses; Indemnity; Damage Waiver .	 	50		
Section 8.05      Right of Set-off .	 	51		
Section 8.06      Effectiveness; Binding Effect .	 	52		
Section 8.07      Successors and Assigns .	 	52		
Section 8.08      Confidentiality .	 	55		
Section 8.09      Governing Law .	 	56		
Section 8.10      Counterparts; Integration .	 	56		
Section 8.11      Jurisdiction, Etc .	 	56		
Section 8.12      Payments Set Aside .	 	57		
Section 8.13      Patriot Act .	 	57		
Section 8.14      Waiver of Jury Trial .	 	57		
Section 8.15      No Advisory or Fiduciary Responsibility .	 	57		
Section 8.16      Survival of Representations and Warranties .	 	58		
Section 8.17      Severability .	 	58		
 	 	 	
Schedules	 	 	
 	 	 	
Schedule 1.01         Commitments and Ratable Shares	 	 	
Schedule 4.01(j)     Subsidiaries	 	 	

ii

	
				
Schedule 4.01(k)     Existing Indebtedness	 	 	
Schedule 8.02         Certain Addresses for Notices	 	 	
 	 	 	
Exhibits	 	 	
Exhibit A         Form of Note	 	 	
Exhibit B         Form of Notice of Initial Borrowing	 	 	
Exhibit C         Form of Assignment and Assumption	 	 	
Exhibit D        Form of Interest Election Request	 	 	

iii

TERM LOAN AGREEMENT 
 
Dated as of December 31, 2014
PINNACLE WEST CAPITAL CORPORATION, an Arizona corporation (the “ Borrower ”), the banks, financial institutions and other institutional lenders (the “ Initial Lenders ”) listed on the signature pages hereof, U.S. BANK NATIONAL ASSOCIATION, as Syndication Agent, TD BANK, N.A., THE BANK OF NOVA SCOTIA and THE BANK OF TOKYO-MITSUBISHI UFJ, LTD. as Co-Documentation Agents, and JPMORGAN CHASE BANK, N.A., as Agent for the Lenders (as hereinafter defined), agree as follows:
The Borrower has requested that the Lenders provide a $125,000,000 term loan facility for the purposes set forth herein, and the Lenders are willing to do so on the terms and conditions set forth herein.
In consideration of the mutual covenants and agreements herein contained, the parties hereto covenant and agree as follows:
Article I 

 DEFINITIONS AND ACCOUNTING TERMS
Section 1.01      Certain Defined Terms . As used in this Agreement, the following terms shall have the following meanings:
“ Administrative Questionnaire ” means an Administrative Questionnaire in a form supplied by the Agent.
“ Affected Lender ” means any Lender, as reasonably determined by the Agent or, if the Agent is the Affected Lender, by the Required Lenders, that (a) has failed to (i) fund all or any portion of its Loans or (ii) pay to the Agent or any other Lender any other amount required to be paid by it under this Agreement, (b) has notified the Borrower, the Agent or any Lender in writing of its intention not to fund a Loan or any of its other funding obligations under this Agreement, (c) has failed, within three Business Days after written request by the Agent, or, if the Agent is the Affected Lender, by the Required Lenders, to confirm that it will comply with the terms of this Agreement relating to its obligations to fund a Loan or (d) shall (or whose parent company shall) generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or shall have had any proceeding instituted by or against such Lender (or its parent company) seeking to adjudicate it as bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, administrator, assignee for the benefit of creditors or similar Person charged with reorganization or liquidation of its business or custodian for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it), either such proceeding shall remain undismissed or unstayed for a period of 30 days, or any of the actions

sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, administrator, assignee for the benefit of creditors or similar Person charged with reorganization or liquidation of its business or custodian for, it or for any substantial part of its property) shall occur, or shall take (or whose parent company shall take) any corporate action to authorize any of the actions set forth above in this subsection (d), provided that a Lender shall not be deemed to be an Affected Lender solely by virtue of the ownership or acquisition of any equity interest in such Lender or any Person that directly or indirectly controls such Lender by a Governmental Authority or an instrumentality thereof.
“ Affiliate ” means, as to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with such Person or is a director or officer of such Person. For purposes of this definition, the term “control” (including the terms “controlling”, “controlled by” and “under common control with”) of a Person means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of Voting Stock, by contract or otherwise.
“ Agent ” means JPMorgan Chase Bank, N.A., (including its branches and Affiliates as may be required to administer its duties) in its capacity as administrative agent under any of the Loan Documents, or any successor administrative agent.
“ Agent’s Account ” means the account of the Agent designated as such by the Agent to the Lenders and the Borrower from time to time.
“ Agent’s Office ” means the Agent’s address specified in Section 8.02(a) and, as appropriate, the Agent’s Account, or such other address or account as the Agent may from time to time notify to the Borrower and the Lenders.
“ Agreement ” means this Term Loan Agreement, dated as of December 31, 2014, among the Borrower, the Lenders named herein and from time to time party hereto, the Syndication Agent, the Co-Documentation Agents and the Agent, together with all schedules and exhibits hereto.
“ Anti-Corruption Laws ” means all laws, rules, and regulations of any jurisdiction applicable to the Borrower or its Subsidiaries from time to time concerning or relating to bribery, corruption or money laundering.
“ Applicable Lending Office ” means, with respect to each Lender, such Lender’s Domestic Lending Office in the case of a Base Rate Loan and such Lender’s Eurodollar Lending Office in the case of a Eurodollar Rate Loan.
“ Applicable Rate ” means, from time to time, the following percentages per annum determined by reference to the Public Debt Rating as set forth below:

	
					
Public Debt Rating  S&P/Moody’s	Base Rate Loan	Eurodollar Rate Loan	
Level 1
≥ A/A2	0.000	%	0.650	%	
Level 2
< Level 1 but
 ≥ A-/A3	0.000	%	0.750	%	
Level 3
< Level 2 but
≥ BBB+/Baa1	0.000	%	0.850	%	
Level 4
< Level 3 but
>  BBB/Baa2	0.000	%	1.000	%	
Level 5
< Level 4	0.150	%	1.150	%	
“ Approved Fund ” means any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of any entity that administers or manages a Lender.
“ APS ” means Arizona Public Service Company, an Arizona corporation.
“ Arrangers ” means each of J.P. Morgan Securities LLC, U.S. Bank National Association, TD Bank, N.A., The Bank of Nova Scotia and The Bank of Tokyo-Mitsubishi UFJ, Ltd., together with their successors and assigns.
“ Assignment and Assumption ” means an assignment and assumption entered into by a Lender and an Eligible Assignee, and accepted by the Agent, in substantially the form of Exhibit C hereto.
“ Authorized Officer ” means the chairman of the board, chief executive officer, chief operating officer, chief financial officer, chief accounting officer, president, any vice president, treasurer, controller or any assistant treasurer of the Borrower.
“ Base Rate ” means for any day a rate per annum equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Rate in effect on such day plus ½ of 1.00% and (c) the Eurodollar Rate for a one month Interest Period on such day (or if such day is not a Business Day, the immediately preceding Business Day) plus 1.00%, provided that, for the avoidance of doubt, the Eurodollar Rate for any day shall be based on the Eurodollar Rate at approximately 11:00 a.m. London time on such day, subject to the interest rate floors set forth therein. Any change in the Base Rate due to a change in the Prime Rate, the Federal Funds Rate or the Eurodollar Rate shall be effective from and including the effective date of such change in the Prime Rate, the Federal Funds Rate or the Eurodollar Rate, respectively.
“ Base Rate Loan ” means a Loan that bears interest as provided in Section 2.05(a)(i).
“ Borrower ” has the meaning given to such term in the introductory paragraph hereof.

“ Borrower Information ” has the meaning specified in Section 8.08.
“ Borrowing ” means Loans of the same Type that are made, Converted or continued on the same date and, in the case of Eurodollar Rate Loans, as to which a single Interest Period is in effect.
“ Business Day ” means a day of the year on which banks are not required or authorized by Law to close in New York, New York or Phoenix, Arizona and, if the applicable Business Day relates to any Loan in which interest is calculated by reference to the Eurodollar Rate, on which dealings are carried on in the London interbank market.
“ Capital Lease ” means, at any time, a lease with respect to which the lessee is required concurrently to recognize the acquisition of an asset and the incurrence of a liability in accordance with GAAP.
“ Capital Lease Obligations ” means as to any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real and/or personal property, which obligations are required to be classified and accounted for as a Capital Lease on the balance sheet of such Person under GAAP and, for the purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP.
“ Change in Law ” means the occurrence, after the date of this Agreement, of any of the following: (a) the adoption of any Law, (b) any change in any Law or in the administration, interpretation or application thereof by any Governmental Authority or (c) the making or issuance of any request, rules, guideline, requirement or directive (whether or not having the force of law) by any Governmental Authority; provided, however, that notwithstanding anything herein to the contrary, (i) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines, requirements and directives thereunder, issued in connection therewith or in implementation thereof, and (ii) all requests, rules, guidelines, requirements and directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States or foreign regulatory authorities, in each case pursuant to Basel III, shall in each case be deemed a “Change in Law” regardless of the date enacted, adopted, issued or implemented.
“ Co-Documentation Agent ” means each of TD Bank, N.A., The Bank of Nova Scotia and The Bank of Tokyo-Mitsubishi UFJ, Ltd., in its capacity as a co-documentation agent for the Lenders.
“ Commitment ” means, as to any Lender, its obligation to make a Loan to the Borrower pursuant to Section 2.01, in an aggregate principal amount not to exceed the amount set forth opposite such Lender’s name on Schedule 1.01 under the column “Commitment”. “ Commitments ” means the total of the Lenders’ Commitments hereunder. The Commitments shall in no event exceed $125,000,000.
“ Consolidated ” refers to the consolidation of accounts in accordance with GAAP.

“ Consolidated Indebtedness ” means, at any date, the Indebtedness of the Borrower and its Consolidated Subsidiaries determined on a Consolidated basis as of such date; provided , however , that so long as the creditors of the VIE Lessor Trusts have no recourse to the assets of APS, “Consolidated Indebtedness” shall not include any Indebtedness or other obligations of the VIE Lessor Trusts.
“ Consolidated Net Worth ” means, at any date, the sum as of such date of (a) the par value (or value stated on the books of the Borrower) of all classes of capital stock of the Borrower and its Subsidiaries, excluding the Borrower’s capital stock owned by the Borrower and/or its Subsidiaries, plus (or minus in the case of a surplus deficit) (b) the amount of the Consolidated surplus, whether capital or earned, of the Borrower, determined in accordance with GAAP as of the end of the most recent calendar month (excluding the effect on the Borrower’s accumulated other comprehensive income/loss of the ongoing application of Accounting Standards Codification Topic 815).
“ Consolidated Subsidiary ” means, at any date, any Subsidiary or other entity the accounts of which would be Consolidated with those of the Borrower on its Consolidated financial statements if such financial statements were prepared as of such date; provided that in no event will Consolidated Subsidiaries include the VIE Lessor Trusts.
“ Controlled Affiliate ” has the meaning specified in Section 4.01(n).
“ Convert ”, “ Conversion ” and “ Converted ” each refers to a conversion of Loans of one Type into Loans of the other Type pursuant to Section 2.06, Section 2.07 or Section 2.10.
“ Debtor Relief Laws ” means the Bankruptcy Code of the United States of America, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief Laws of the United States of America or other applicable jurisdictions from time to time in effect and affecting the rights of creditors generally.
“ Default ” means any Event of Default or any event that would constitute an Event of Default but for the requirement that notice be given or time elapse or both.
“ Dollars ” or “ $ ” means dollars of the United States of America.
“ Domestic Lending Office ” means, with respect to any Lender, the office of such Lender described as such in such Lender’s Administrative Questionnaire, or such other office or offices as a Lender may from time to time notify the Borrower and the Agent.
“ Effective Date ” has the meaning specified in Section 3.01.
“ Eligible Assignee ” means any Person that meets the requirements to be an assignee under Section 8.07(b)(iii) and (v), (subject to such consents, if any, as may be required under Section 8.07(b)(iii)).

“ Environmental Action ” means any action, suit, demand, demand letter, claim, notice of non-compliance or violation, notice of liability or potential liability, investigation, proceeding, consent order or consent agreement relating in any way to any Environmental Law, Environmental Permit or Hazardous Materials or arising from alleged injury or threat of injury to health, safety or the environment and relating to any Environmental Law, including, without limitation, (a) by any Governmental Authority for enforcement, cleanup, removal, response, remedial or other actions or damages and (b) by any Governmental Authority or any third party for damages, contribution, indemnification, cost recovery, compensation or injunctive relief.
“ Environmental Law ” means any federal, state, local or foreign statute, law, ordinance, rule, regulation, code, order, judgment, decree or judicial or agency interpretation, policy or guidance relating to pollution or protection of the environment, natural resources or, to the extent relating to exposure to Hazardous Materials, human health or safety, including, without limitation, those relating to the use, handling, transportation, treatment, storage, disposal, release or discharge of Hazardous Materials.
“ Environmental Permit ” means any permit, approval, identification number, license or other authorization required under any Environmental Law.
“ ERISA ” means the Employee Retirement Income Security Act of 1974.
“ ERISA Affiliate ” means any trade or business (whether or not incorporated) under common control with the Borrower within the meaning of Section 414(b) or (c) of the Internal Revenue Code (and Sections 414(m) and (o) of the Internal Revenue Code for purposes of provisions relating to Section 412 of the Internal Revenue Code).
“ ERISA Event ” means (a) a Reportable Event with respect to a Pension Plan; (b) a withdrawal by the Borrower or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation of operations that is treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete or partial withdrawal by the Borrower or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization; (d) the filing of a notice of intent to terminate, the treatment of a Plan amendment as a termination under Section 4041 or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (e) an event or condition which constitutes grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer Plan; or (f) the imposition of any liability under Title IV of ERISA, other than for PBGC premiums due but not delinquent under Section 4007 of ERISA, upon the Borrower or any ERISA Affiliate.
“ Eurodollar Lending Office ” means, with respect to any Lender, the office of such Lender described as such in such Lender’s Administrative Questionnaire, or such other office or offices as a Lender may from time to time notify the Borrower and the Agent.
“ Eurodollar Rate ” means, with respect to any Eurodollar Rate Loan for any applicable Interest Period, the London interbank offered rate as administered by ICE Benchmark

Administration (or any other Person that takes over the administration of such rate) for Dollars for a period equal in length to such Interest Period as displayed on pages LIBOR01 or LIBOR02 of the Reuters screen, or in the event such rate does not appear on either of such Reuters pages, on any successor or substitute page on such screen that displays such rate, or on the appropriate page of such other information service that publishes such rate as shall be selected by the Agent from time to time in its reasonable discretion (in each case the “LIBOR Screen Rate”) at approximately 11:00 a.m., London time, two (2) Business Days prior to the commencement of such Interest Period; provided that, if the LIBOR Screen Rate shall be less than zero, such rate shall be deemed to be zero for the purposes of this Agreement; provided, further, that if a LIBOR Screen Rate shall not be available at such time for such Interest Period (the “Impacted Interest Period”), then the Eurodollar Rate for such Interest Period shall be the Interpolated Rate; provided, that, if any Interpolated Rate shall be less than zero, such rate shall be deemed to be zero for the purposes of this Agreement. It is understood and agreed that all of the terms and conditions of this definition of “Eurodollar Rate” shall be subject to Section 2.06.
“ Eurodollar Rate Loan ” means a Loan that bears interest at a rate based on the Eurodollar Rate (other than a Base Rate Loan bearing interest at a rate based on the Eurodollar Rate).
“ Events of Default ” has the meaning specified in Section 6.01.
“ Excluded Taxes ” means, with respect to the Agent, any Lender or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder, (a) Taxes imposed on or measured by its overall net income (however denominated), and franchise Taxes imposed on it (in lieu of net income Taxes), by the United States of America or the jurisdiction (or any political subdivision thereof) under the Laws of which such recipient is organized or does business or in which its principal office is located or, in the case of any Lender, in which its Applicable Lending Office is located, (b) any branch profits Taxes imposed by the United States of America or any similar Tax imposed by any other jurisdiction in which the Borrower is located, (c) any backup withholding Tax that is required by the Internal Revenue Code to be withheld from amounts payable to a Lender that has failed to comply with clause (A) of Section 2.12(e)(ii), (d) in the case of a Foreign Lender (other than as agreed to between any assignee and the Borrower pursuant to a request by the Borrower under Section 2.17), any United States of America withholding Tax that (i) is required to be imposed on amounts payable to such Foreign Lender pursuant to the Laws in force at the time such Foreign Lender becomes a party hereto (or designates a new Applicable Lending Office) or (ii) is attributable to such Foreign Lender’s failure or inability (other than as a result of a Change in Law) to comply with clause (B) of Section 2.12(e)(ii), except to the extent that such Foreign Lender (or its assignor, if any) was entitled, at the time of designation of a new Applicable Lending Office (or assignment), to receive additional amounts from the Borrower with respect to such withholding Tax pursuant to Section 2.12(a)(i) or (ii); and (e) any United States withholding Tax imposed by FATCA.
“ Executive Order ” has the meaning specified in Section 4.01 (p).
“ Existing Term Loan Agreement ” shall have the meaning specified in Section 3.01(e)(x).

“ FATCA ” means Sections 1471 through 1474 of the Internal Revenue Code, as of the date of this Agreement (or any amended or successor version that is substantively comparable and not materially more onerous to comply with), any current or future regulations or official interpretations thereof and any agreement entered into pursuant to Section 1471(b)(1) of the Internal Revenue Code.
“ Federal Funds Rate ” means, for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for such day for such transactions received by the Agent from three Federal funds brokers of recognized standing selected by the Agent; provided that if the Federal Funds Rate shall be less than zero, such rate shall be deemed to be zero for purposes of this Agreement.
“ Fee Letter ” means that certain Administrative Agent Fee Letter dated as of December 31, 2014, between the Agent and the Borrower, as amended, modified, restated or supplemented from time to time.
“ Foreign Lender ” means any Lender that is organized under the Laws of a jurisdiction other than that in which the Borrower is resident for tax purposes. For purposes of this definition, the United States of America, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction.
“ Four Corners Acquisition ” means the acquisition by APS from Southern California Edison Company (“ SCE ”) of SCE’s interests in Units 4 and 5 of the Four Corners Power Plant near Farmington, New Mexico, pursuant to the Purchase and Sale Agreement, dated as of November 8, 2010, by and between SCE and APS.
“ Fund ” means any Person (other than a natural person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business.
“ GAAP ” has the meaning specified in Section 1.03.
“ Governmental Authority ” means the government of the United States of America or any other nation, or of any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government (including any supra-national bodies such as the European Union or the European Central Bank) and any group or body charged with setting financial accounting or regulatory capital rules or standards (including, without limitation, the Financial Accounting Standards Board, the Bank for International Settlements or the Basel Committee on Banking Supervision or any successor or similar authority to any of the foregoing).

“ Government Official ” shall mean (a) an executive, official, employee or agent of a governmental department, agency or instrumentality, (b) a director, officer, employee or agent of a wholly or partially government owned or controlled company or business, (c) a political party or official thereof, or candidate for political office or (d) an executive, official, employee or agent of a public international organization (e.g., the International Monetary Fund or the World Bank).
“ Guarantee ” means as to any Person, any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Indebtedness of any other Person or in any manner providing for the payment of any Indebtedness of any other Person or otherwise protecting the holder of such Indebtedness against loss (whether by virtue of partnership arrangements, agreements to keep well, to purchase assets, goods, securities or services, or to take-or-pay or otherwise), provided that the term “Guarantee” shall not include endorsements for collection or deposit in the ordinary course of business. The term “ Guarantee ” used as a verb has a corresponding meaning.
“ Hazardous Materials ” means (a) petroleum and petroleum products, byproducts or breakdown products, radioactive materials, asbestos-containing materials, polychlorinated biphenyls and radon gas and (b) any other chemicals, materials or substances designated, classified or regulated as hazardous or toxic or as a pollutant or contaminant under any Environmental Law.
“ Hedge Agreement ” means any interest rate swap, cap or collar agreement, interest rate future or option contract, currency swap agreement, currency future or option contract, commodity future or option contract, commodity forward contract or other similar agreement.
“ Impacted Interest Period ” has the meaning assigned to such term in the definition of “Eurodollar Rate”.
“ Indebtedness ” means as to any Person at any date (without duplication): (a) indebtedness created, issued, incurred or assumed by such Person for borrowed money or evidenced by bonds, debentures, notes or similar instruments; (b) all obligations of such Person to pay the deferred purchase price of property or services, excluding, however, trade accounts payable (other than for borrowed money) arising in, and accrued expenses incurred in, the ordinary course of business of such Person so long as such trade accounts payable are paid within 180 days of the date incurred (unless subject to a good faith dispute); (c) all Indebtedness secured by a Lien on any asset of such Person, to the extent such Indebtedness has been assumed by, or is a recourse obligation of, such Person; (d) all Guarantees by such Person; (e) all Capital Lease Obligations of such Person; and (f) the amount of all reimbursement obligations of such Person (whether contingent or otherwise) in respect of letters of credit, bankers’ acceptances, surety or other bonds and similar instruments in support of Indebtedness.
 
“ Indemnified Taxes ” means Taxes other than Excluded Taxes.
“ Ineligible Institution ” means (a) a natural person, (b) an Affected Lender or any of its Subsidiaries, (c) the Borrower, any of its Subsidiaries or any of its Affiliates, or (d) a company,

investment vehicle or trust for, or owned and operated for the primary benefit of, a natural person or relative(s) thereof.
“ Initial Borrowing ” means the Loans made by the Initial Lenders on the Effective Date pursuant to Section 2.01 hereof.
“ Initial Lenders ” has the meaning given to such term in the introductory paragraph hereof.
“ Interest Election Request ” means a written request by the Borrower to Convert or continue a Borrowing in accordance with the definition of “ Interest Period ” contained in this Section 1.01 and/or Section 2.07, as applicable, in each case in substantially the form of Exhibit D hereto.
“ Interest Period ” means, for each Eurodollar Rate Loan comprising part of the same Borrowing, the period commencing on (i) the date such Eurodollar Rate Loan is disbursed, (ii) the date of the Conversion of any Base Rate Loan into such Eurodollar Rate Loan or (iii) the effective date of the most recent continuation of such Eurodollar Rate Loan, as the case may be, and ending on the last day of the period selected by the Borrower pursuant to the provisions below and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by the Borrower pursuant to the provisions below. The duration of each such Interest Period shall be one, two, three or six months, as the Borrower may, upon notice (in the form of an Interest Election Request duly completed and executed by the Borrower) received by the Agent not later than 12:00 noon on the third Business Day prior to the first day of such Interest Period, select; provided , however , that:
(a)    the Borrower may not select any Interest Period that ends after the Maturity Date;
(b)    Interest Periods commencing on the same date for Eurodollar Rate Loans comprising part of the same Borrowing shall be of the same duration;
(c)    whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided , however , that, if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day; and
(d)    whenever the first day of any Interest Period occurs on a day of an initial calendar month for which there is no numerically corresponding day in the calendar month that succeeds such initial calendar month by the number of months equal to the number of months in such Interest Period, such Interest Period shall end on the last Business Day of such succeeding calendar month.
“ Internal Revenue Code ” means the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder.

“ Interpolated Rate ” means, at any time, the rate per annum determined by the Agent (which determination shall be conclusive and binding absent manifest error) to be equal to the rate that results from interpolating on a linear basis between: (a) the LIBOR Screen Rate for the longest period (for which the LIBOR Screen Rate is available) that is shorter than the Impacted Interest Period and (b) the LIBOR Screen Rate for the shortest period (for which the LIBOR Screen Rate is available) that exceeds the Impacted Interest Period, in each case, at such time.
“ Laws ” means, collectively, all international, foreign, Federal, state and local statutes, treaties, rules, guidelines, regulations, ordinances, codes and administrative or judicial precedents or authorities, including the interpretation or administration thereof by any Governmental Authority charged with the enforcement, interpretation or administration thereof, and all applicable administrative orders, directed duties, licenses, authorizations and permits of, and agreements with, any Governmental Authority.
“ Lenders ” means the Initial Lenders and each Person that shall become a party hereto pursuant to Section 8.07.
“ Lien ” means any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or otherwise), charge or other security interest or preferential arrangement that has the practical effect of creating a security interest, including, without limitation, the lien or retained security title of a conditional vendor and any easement, right of way or other encumbrance on title to real property, and any Capital Lease having substantially the same economic effect as any of the foregoing.
“ LIBOR Screen Rate ” has the meaning assigned to such term in the definition of “Eurodollar Rate”.
“ Loans ” has the meaning specified in Section 2.01.
“ Loan Documents ” mean this Agreement, each Note and the Fee Letter.
“ Material Adverse Effect ” means a material adverse effect on (a) the financial condition, operations, business or properties of the Borrower and its Subsidiaries (excluding SunCor Development Company and its Subsidiaries) taken as a whole, (b) the rights and remedies of the Agent or any Lender under this Agreement or any Note or (c) the ability of the Borrower to perform its obligations under this Agreement or any Note.
“ Material Subsidiary ” means APS and, at any time, each other Subsidiary of the Borrower which as of such time meets the definition of a “significant subsidiary” included as of the date hereof in Regulation S-X of the Securities and Exchange Commission or whose assets at such time exceed 10% of the assets of the Borrower and the Subsidiaries (on a Consolidated basis).
“ Maturity Date ” means December 31, 2017.
“ Moody’s ” means Moody’s Investors Service, Inc.

“ Multiemployer Plan ” means any employee benefit plan of the type described in Section 4001(a)(3) of ERISA, to which the Borrower or any ERISA Affiliate makes or is obligated to make contributions, or during the preceding five plan years, has made or been obligated to make contributions.
“ Note ” means a promissory note of the Borrower payable to the order of any Lender, delivered pursuant to a request made under Section 2.14, in substantially the form of Exhibit A hereto.
“ Notice of Initial Borrowing ” has the meaning specified in Section 2.02(a).
“ Obligations ” means all loans to, and debts, liabilities, obligations, covenants and duties of, the Borrower arising under any Loan Document or otherwise with respect to any Loan, whether direct or indirect (including those acquired by assumption), absolute or contingent, due or to become due, now existing or hereafter arising and including interest and fees that accrue under any Loan Document after the commencement by or against the Borrower of any proceeding under any Debtor Relief Laws naming such Person as the debtor in such proceeding, regardless of whether such interest and fees are allowed claims in such proceeding.
“ OFAC ” means Office of Foreign Assets Control of the United States Department of the Treasury.
“ Other Taxes ” means all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or under any other Loan Document or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement or any other Loan Document.

“ Participant ” has the meaning specified in Section 8.07(d).
“ Participant Register ” has the meaning specified in Section 8.07(d).
“ PATRIOT Act ” means the USA PATRIOT Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)), as amended.
“ PBGC ” means the Pension Benefit Guaranty Corporation.
“ Pension Plan ” means any “employee pension benefit plan” (as such term is defined in Section 3(2) of ERISA), other than a Multiemployer Plan, that is subject to Title IV of ERISA and is sponsored or maintained by the Borrower or any ERISA Affiliate or to which the Borrower or any ERISA Affiliate contributes or has an obligation to contribute, or in the case of a multiple employer or other plan described in Section 4064(a) of ERISA, has made contributions at any time during the immediately preceding five plan years.
“ Percentage ” means, with respect to any Lender at any time, a fraction the numerator of which is the outstanding principal amount of such Lender’s Loans at such time and the denominator of which is the aggregate outstanding principal amount of all Loans at such time; provided , that (i) the initial Percentage of each Lender shall be the percentage set forth opposite such Lender’s name

on Schedule 1.01 under the column “Ratable Share” and (ii) if the outstanding principal amount of all Loans has been repaid in full, the Percentage of each Lender shall be such Lender’s Percentage as in effect immediately prior to such repayment.
“ Person ” means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture, limited liability company or other entity, or a government or any political subdivision or agency thereof.
“ Plan ” means any “employee benefit plan” (as such term is defined in Section 3(3) of ERISA) established by the Borrower or, with respect to any such plan that is subject to Section 412 of the Internal Revenue Code or Title IV of ERISA, any ERISA Affiliate.
“ Prohibited Person ” means any Person (a) listed in the Annex to the Executive Order or identified pursuant to Section 1 of the Executive Order; (b) that is owned or controlled by, or acting for or on behalf of, any Person listed in the Annex to the Executive Order or identified pursuant to the provisions of Section 1 of the Executive Order; (c) with whom a Lender is prohibited from dealing or otherwise engaging in any transaction by any terrorism or anti-laundering law, including the Executive Order; (d) who commits, threatens, conspires to commit, or support “terrorism” as defined in the Executive Order; (e) who is named as a “Specially designated national or blocked person” on the most current list published by the OFAC at its official website, at http://www.treas.gov/offices/enforcement/ofac/sdn/t11sdn.pdf or any replacement website or other replacement official publication of such list; or (f) who is owned or controlled by a Person listed above in clause (c) or (e).
“ Prime Rate ” means the rate of interest per annum publicly announced from time to time by JPMorgan Chase Bank, N.A. as its prime rate in effect at its principal office in New York, New York; each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective.
“ Public Debt Rating ” means, as of any date, (i) the rating that has been most recently announced by either S&P or Moody’s, as the case may be, applicable to any outstanding class of non-credit enhanced long-term senior unsecured debt issued by the Borrower, including any bank facility rating (or, if any such rating agency shall have issued more than one such rating, the lowest such rating issued by such rating agency) or (ii) if neither S&P nor Moody’s has in effect any rating for any class of non-credit enhanced long-term senior unsecured debt issued by the Borrower and outstanding on such date, including any bank facility rating, the rating that is one level below APS’ non-credit enhanced long-term senior unsecured debt rating that has been most recently announced by either S&P or Moody’s, as the case may be. For purposes of the foregoing, (a) if only one of S&P and Moody’s shall have in effect a Public Debt Rating, the Applicable Rate shall be determined by reference to the available rating; (b) except as set forth in the proviso at the end of this definition, if neither S&P nor Moody’s shall have in effect a Public Debt Rating, the Applicable Rate will be set in accordance with Level 5 under the definition of “ Applicable Rate ”; (c) if the ratings established by S&P and Moody’s shall fall within different levels, the Applicable Rate shall be based upon the higher rating unless such ratings differ by two or more levels, in which case the applicable level will be deemed to be one level below the higher of such levels; and (d) if any rating established by S&P or Moody’s shall be changed (other than as a result of a change in the basis on which ratings

are established), such change shall be effective as of the date on which such change is first announced publicly by the rating agency making such change; provided that if the Public Debt Rating system of S&P or Moody’s shall change, or if either such rating agency shall cease to be in the business of rating corporate debt obligations, the Borrower and the Lenders shall negotiate in good faith to amend the definition of “ Applicable Rate ” to reflect such changed rating system or the unavailability of ratings from such rating agency and, pending the effectiveness of any such amendment, the Applicable Rate will be set in accordance with the level most recently in effect under the definition of ” Applicable Rate ” prior to such change or cessation.
“ PVNGS ” means the Palo Verde Nuclear Generating Station.
“ Ratable Share ” of any amount means, with respect to any Lender at any time, the product of such amount times such Lender’s Percentage.
“ Register ” has the meaning specified in Section 8.07(c).
“ Related Parties ” means, with respect to any Person, such Person’s Affiliates and the partners, directors, officers, employees, agents, trustees and advisors of such Person and of such Person’s Affiliates.
“ Reportable Event ” means any of the events set forth in Section 4043(c) of ERISA, other than events for which the 30-day notice period has been waived under the final regulations issued under Section 4043, as in effect as of the date of this Agreement (the “Section 4043 Regulations”). Any changes made to the Section 4043 Regulations that become effective after the Effective Date shall have no impact on the definition of Reportable Event as used herein unless otherwise amended by the Borrower and the Required Lenders.
“ Required Lenders ” means, as of any date of determination, but subject to Section 2.16, Lenders holding in the aggregate more than 50% of the aggregate outstanding principal amount of all Loans (or, if all Loans have been repaid in full, more than 50% of the aggregate amount of all outstanding Obligations).
“ S&P ” means Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc.
“ Sanctions ” means economic or financial sanctions or trade embargoes imposed, administered or enforced from time to time by OFAC and any similar economic or financial sanctions or trade embargoes of the type described in Sections 4.01(n) through (q) and imposed, administered or enforced from time to time by the U.S. government, including the U.S. Department of State.
“ SEC Reports ” means the Borrower’s (i) Form 10-K Report for the fiscal year ended December 31, 2013, (ii) Form 10-Q Reports for the quarters ended March 31, 2014, June 30, 2014 and September 30, 2014 and (iii) Form 8-K Reports filed on January 9, 2014, January 24, 2014, February 21, 2014, May 9, 2014, May 28, 2014, June 24, 2014, July 7, 2014, July 9, 2104, August 13, 2014 and October 29, 2014 in each case, as filed with the Securities and Exchange Commission.

“ Subsidiary ” of any Person means any corporation, partnership, joint venture, limited liability company, trust or estate of which (or in which) more than 50% of (a) the issued and outstanding Voting Stock, (b) the interest in the capital or profits of such limited liability company, partnership or joint venture or (c) the beneficial interest in such trust or estate, is at the time directly or indirectly owned or controlled by such Person, by such Person and one or more of its other Subsidiaries or by one or more of such Person’s other Subsidiaries; provided that in no event will Subsidiaries include the VIE Lessor Trusts.
“ Syndication Agent ” means U.S. Bank National Association, in its capacity as syndication agent for the Lenders.
“ Taxes ” means all present or future taxes, levies, imposts, duties, deductions, withholdings (including backup withholding), assessments, fees or other charges imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable thereto.
“ Type ”, when used in reference to any Loan or Borrowing, refers to whether the rate of interest on such Loan, or on the Loans comprising such Borrowing, is determined by reference to the Eurodollar Rate or the Base Rate.
“ VIE Lessor Trusts ” means the three (3) separate variable-interest entity lessor trusts that purchased from, and leased back to, APS certain interests in the PVNGS Unit 2 and related common facilities, as described in Note 6 of Notes to Condensed Consolidated Financial Statements in Borrower’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2014.
“ Voting Stock ” means capital stock issued by a corporation, or equivalent interests in any other Person, the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or persons performing similar functions) of such Person, even if the right so to vote has been suspended by the happening of such a contingency.
Section 1.02      Other Interpretive Provisions . With reference to this Agreement and each other Loan Document, unless otherwise specified herein or in such other Loan Document:
(a)      The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words “include,” “includes” and “including” shall be deemed to be followed by the phrase “without limitation.” The word “will” shall be construed to have the same meaning and effect as the word “shall.” Unless the context requires otherwise, (i) any definition of or reference to any agreement, instrument or other document shall be construed as referring to such agreement, instrument or other document as from time to time amended, restated, supplemented or otherwise modified (subject to any restrictions on such amendments, restatements, supplements or modifications set forth herein or in any other Loan Document), (ii) any reference herein to any Person shall be construed to include such Person’s permitted successors and permitted assigns, (iii) the words “herein,” “hereof” and “hereunder,” and words of similar import when used in any Loan Document, shall be construed to refer to such Loan Document in its entirety and not to any particular provision thereof, (iv) all references in a Loan Document to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and

Sections of, and Exhibits and Schedules to, the Loan Document in which such references appear, (v) any reference to any law shall include all statutory and regulatory provisions consolidating, amending, replacing or interpreting such law and any reference to any law or regulation shall, unless otherwise specified, refer to such law or regulation as amended, modified or supplemented from time to time, and (vi) the words “asset” and “property” shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights.
(b)      In the computation of periods of time from a specified date to a later specified date, the word “from” means “from and including;” the words “to” and “until” each mean “to but excluding;” and the word “through” means “to and including.”
(c)      Section headings herein and in the other Loan Documents are included for convenience of reference only and shall not affect the interpretation of this Agreement or any other Loan Document.
Section 1.03      Accounting Terms . Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared, in accordance with generally accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes concurred in by the Borrower’s independent public accountants) with the most recent audited Consolidated financial statements of the Borrower delivered to the Agent (“ GAAP ”). If at any time any change in GAAP or in the interpretation thereof would affect the computation of any financial ratio or requirement set forth in any Loan Document, and either the Borrower or the Required Lenders shall so request, the Agent, the Lenders and the Borrower shall negotiate in good faith to amend such ratio or requirement to preserve the original intent thereof in light of such change in GAAP or in the interpretation thereof (subject to the approval of the Required Lenders); provided that , unless and until so amended, such ratio or requirement shall continue to be computed in accordance with GAAP prior to such change therein.
Section 1.04      Rounding . Any financial ratios required to be maintained by the Borrower pursuant to this Agreement shall be calculated by dividing the appropriate component by the other component, carrying the result to one place more than the number of places by which such ratio is expressed herein and rounding the result up or down to the nearest number (with a rounding-up if there is no nearest number).
Section 1.05      Times of Day . Unless otherwise specified, all references herein to times of day shall be references to Eastern time (daylight or standard, as applicable).
ARTICLE II     

 AMOUNTS AND TERMS OF THE LOANS

Section 2.01      The Loans .
Subject to the terms and conditions hereof (including, without limitation, Section 3.01), each Lender, by its acceptance hereof, severally agrees to make a one-time loan (individually, a “ Loan ” and, collectively, the “ Loans ”) to the Borrower on the Effective Date in Dollars in an aggregate principal amount equal to such Lender’s Commitment.  As provided in Section 2.05, the Borrower may elect that each Borrowing of Loans be either Base Rate Loans or Eurodollar Rate Loans. Amounts borrowed by the Borrower hereunder and prepaid or otherwise repaid may not be reborrowed. Unless an earlier maturity is provided for hereunder, all Loans shall mature and be due and payable on the Maturity Date. The Commitments shall immediately and automatically terminate upon the earlier of (i) 5:00 p.m. on the Effective Date and (ii) the making of the Loans pursuant to this Section 2.01.
Section 2.02      Making the Loans .
(a)      The Initial Borrowing shall be made on notice, given not later than (x) 12:00 noon on the third Business Day prior to the Effective Date in the case of an Initial Borrowing consisting of Eurodollar Rate Loans or (y) 12:00 noon on the Business Day prior to the Effective Date in the case of an Initial Borrowing consisting of Base Rate Loans, by the Borrower to the Agent, which shall give to each Lender prompt notice thereof by facsimile. Such notice of the Initial Borrowing (the “ Notice of Initial Borrowing ”) shall be in writing or by facsimile in substantially the form of Exhibit B hereto, specifying therein the requested (i) date of the Initial Borrowing (which shall be the Effective Date and a Business Day), (ii) Type of Loans comprising the Initial Borrowing, (iii) aggregate amount of the Initial Borrowing, and (iv) in the case of an Initial Borrowing consisting of Eurodollar Rate Loans, initial Interest Period for each such Loan. Each Lender shall, before 2:00 p.m. on the date of the Initial Borrowing, make available for the account of its Applicable Lending Office to the Agent at the Agent’s Account, in same day funds, such Lender’s Ratable Share of the Initial Borrowing. After the Agent’s receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Agent will make such funds available to the Borrower at the Agent’s address referred to in Section 8.02 or as requested by the Borrower in the Notice of Initial Borrowing.
(b)      Anything in subsection (a) above to the contrary notwithstanding, (i) the Borrower may not select Eurodollar Rate Loans for any Borrowing if the aggregate amount of such Borrowing is less than $5,000,000 (or an integral multiple of $1,000,000 in excess thereof) or if the obligation of the Lenders to make Eurodollar Rate Loans shall then be suspended pursuant to Section 2.06 or 2.10, and (ii) at no time shall there be more than three (3) different Interest Periods outstanding for Eurodollar Rate Loans.
(c)      The Notice of Initial Borrowing shall be irrevocable and binding on the Borrower. If the Notice of Initial Borrowing specifies that the Initial Borrowing is to be comprised of Eurodollar Rate Loans, the Borrower shall indemnify each Lender against any loss, cost or expense reasonably incurred by such Lender as a result of any failure (i) to fulfill on or before the date specified in the Notice of Initial Borrowing the applicable conditions set forth in Article III or (ii) to otherwise borrow the Eurodollar Rate Loans requested by the Borrower in the Notice of Initial Borrowing on such date (and shall set forth such indemnification obligation in the Notice of Initial Borrowing),

including, without limitation, any loss (excluding loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund the Loan to be made by such Lender as part of the Initial Borrowing when such Loan, as a result of any such failure, is not made on such date.
(d)      Unless the Agent shall have received notice from a Lender prior to the time of the Initial Borrowing that such Lender will not make available to the Agent such Lender’s Ratable Share of the Initial Borrowing, the Agent may assume that such Lender has made such portion available to the Agent on the date of the Initial Borrowing in accordance with subsection (a) of this Section 2.02 and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have so made such Ratable Share available to the Agent, such Lender and the Borrower severally agree to repay to the Agent within one Business Day after demand for such Lender and within three Business Days after demand for the Borrower such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent, at (i) in the case of the Borrower, the interest rate applicable at the time to Loans comprising the Initial Borrowing and (ii) in the case of such Lender, the Federal Funds Rate. If the Borrower and such Lender shall pay such interest to the Agent for the same or an overlapping period, the Agent shall promptly remit to the Borrower the amount of such interest paid by the Borrower for such period. If such Lender shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Lender’s Loan as part of the Initial Borrowing for purposes of this Agreement.
(e)      The failure of any Lender to make the Loan to be made by it as part of the Initial Borrowing shall not relieve any other Lender of its obligation, if any, hereunder to make its Loan on the date of the Initial Borrowing, but no Lender shall be responsible for the failure of any other Lender to make the Loan to be made by such other Lender on the date of the Initial Borrowing.
Section 2.03      Agent’s Fees . The Borrower shall pay to the Agent for its own account such fees as are agreed between the Borrower and the Agent pursuant to the Fee Letter between the Borrower and the Agent.
Section 2.04      Repayment of Loans . The Borrower hereby unconditionally agrees to pay to the Agent on the Maturity Date, for the account of the Lenders and the Agent, the then unpaid principal amount of the Loans, together with all accrued and unpaid interest thereon, and all other outstanding Obligations.
Section 2.05      Interest on Loans .
(a)      Scheduled Interest . The Borrower shall pay interest on the unpaid principal amount of each Loan owing to each Lender from the date of such Loan until such principal amount shall be paid in full, at the following rates per annum :
(i)      Base Rate Loans . During such periods as such Loan is a Base Rate Loan, a rate per annum equal at all times to the sum of (x) the Base Rate in effect from time to time plus (y) the Applicable Rate for Base Rate Loans in effect from time to time, payable in

arrears quarterly on the last day of each March, June, September and December during such periods and on the date such Base Rate Loan shall be Converted or paid in full.
(ii)      Eurodollar Rate Loans . During such periods as such Loan is a Eurodollar Rate Loan, a rate per annum equal at all times during each Interest Period for such Loan to the sum of (x) the Eurodollar Rate for such Interest Period for such Loan plus (y) the Applicable Rate for Eurodollar Rate Loans in effect from time to time, payable in arrears on the last day of such Interest Period and, if such Interest Period has a duration of more than three months, on each day that occurs during such Interest Period every three months from the first day of such Interest Period and on the date such Eurodollar Rate Loan shall be Converted or paid in full.
(b)      Default Interest . Upon the occurrence and during the continuance of an Event of Default under Section 6.01(a), the Agent may, and upon the request of the Required Lenders shall, require the Borrower to pay interest (“ Default Interest ”) on (i) the unpaid principal amount of each Loan owing to each Lender, payable in arrears on the dates referred to in clause (a)(i) or (a)(ii) above, at a rate per annum equal at all times to 2% per annum above the rate per annum required to be paid on such Loan pursuant to clause (a)(i) or (a)(ii) above and (ii) to the fullest extent permitted by Law, the amount of any interest, fee or other amount payable hereunder that is not paid when due, from the date such amount shall be due until such amount shall be paid in full, payable in arrears on the date such amount shall be paid in full and on demand, at a rate per annum equal at all times to 2% per annum above the rate per annum required to be paid on Base Rate Loans pursuant to clause (a)(i) above, provided , however , that following acceleration of the Loans pursuant to Section 6.01, Default Interest shall accrue and be payable hereunder whether or not previously required by the Agent.
(c)      Interest Rate Limitation . Nothing contained in this Agreement or in any other Loan Document shall be deemed to establish or require the payment of interest to any Lender at a rate in excess of the maximum rate permitted by applicable Law. If the amount of interest payable for the account of any Lender on any interest payment date would exceed the maximum amount permitted by applicable Law to be charged by such Lender, the amount of interest payable for its account on such interest payment date shall be automatically reduced to such maximum permissible amount. In the event of any such reduction affecting any Lender, if from time to time thereafter the amount of interest payable for the account of such Lender on any interest payment date would be less than the maximum amount permitted by applicable Law to be charged by such Lender, then the amount of interest payable for its account on such subsequent interest payment date shall be automatically increased to such maximum permissible amount, provided that at no time shall the aggregate amount by which interest paid for the account of any Lender has been increased pursuant to this sentence exceed the aggregate amount by which interest paid for its account has theretofore been reduced pursuant to the previous sentence.
Section 2.06      Interest Rate Determination .
(a)      The Agent shall give prompt notice to the Borrower and the Lenders of the applicable interest rate determined by the Agent for purposes of Section 2.05(a).

(b)      If the Required Lenders determine that for any reason in connection with any request for a Eurodollar Rate Loan or a Conversion to or continuation thereof that (a) Dollar deposits are not being offered to banks in the London interbank eurodollar market for the applicable amount and Interest Period of such Eurodollar Rate Loan, (b) adequate and reasonable means do not exist for determining the Eurodollar Rate for any requested Interest Period with respect to a proposed Eurodollar Rate Loan, or (c) the Eurodollar Rate for any requested Interest Period with respect to a proposed Eurodollar Rate Loan does not adequately and fairly reflect the cost to such Lenders of funding such Loan, the Agent will promptly so notify the Borrower and each Lender, whereupon each Eurodollar Rate Loan will automatically on the last day of the then existing Interest Period therefor Convert into a Base Rate Loan. Thereafter, the obligation of the Lenders to make or maintain Eurodollar Rate Loans shall be suspended until the Agent (upon the instruction of the Required Lenders) revokes such notice. Upon receipt of such notice, the Borrower may revoke any pending request for a Borrowing of, Conversion to or continuation of Eurodollar Rate Loans or, failing that, will be deemed to have Converted such request into a request for a Base Rate Loan in the amount specified therein.
(c)      If the Borrower shall fail to select the duration of any Interest Period for any Eurodollar Rate Loans in accordance with the provisions contained in the definition of “Interest Period” in Section 1.01, the Agent will forthwith so notify the Borrower and the Lenders and such Loans will automatically, on the last day of the then existing Interest Period therefor, Convert into Base Rate Loans.
(d)      On the date on which the aggregate unpaid principal amount of Eurodollar Rate Loans comprising any Borrowing shall be reduced, by payment or prepayment or otherwise, to less than $5,000,000, such Loans shall automatically Convert into Base Rate Loans.
(e)      Upon the occurrence and during the continuance of any Event of Default,
(i)      with respect to Eurodollar Rate Loans, each such Loan will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Loan (or if such Loan is then a Base Rate Loan, will continue as a Base Rate Loan); and
(ii)      the obligation of the Lenders to Convert Loans into Eurodollar Rate Loans shall be suspended until the Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist.
Section 2.07      Optional Conversion of Loans . The Borrower may on any Business Day, upon notice given to the Agent (in the form of an Interest Election Request duly completed and executed by the Borrower) not later than 12:00 noon on the third Business Day prior to the date of the proposed Conversion and subject to the provisions of Sections 2.06 and 2.10, Convert all or any portion of the Loans of one Type comprising the same Borrowing into Loans of the other Type; provided , however , that (a) any Conversion of Eurodollar Rate Loans into Base Rate Loans shall be made only on the last day of an Interest Period for such Eurodollar Rate Loans, (b) any Conversion of Base Rate Loans into Eurodollar Rate Loans shall be in an amount not less than the minimum amount specified in Section 2.02(b) and (c) no Conversion of any Loans shall result in more separate Borrowings than permitted under Section 2.02(b). Each such notice of a Conversion shall, within

the restrictions specified above, specify (i) the date of such Conversion, (ii) the Loans to be Converted and (iii) if such Conversion is into Eurodollar Rate Loans, the duration of the initial Interest Period for each such Loan. Each Interest Election Request shall be irrevocable and binding on the Borrower.
Section 2.08      Prepayments of Loans .
(a)      Optional . At any time and from time to time, the Borrower shall have the right to prepay the Loans, in whole or in part, without premium or penalty (except as provided in clause (z) below), upon notice at least two Business Days’ prior to the date of such prepayment, in the case of Eurodollar Rate Loans, and not later than 11:00 a.m. on the date of such prepayment, in the case of Base Rate Loans, to the Agent specifying the proposed date of such prepayment and the aggregate principal amount and Type of the Loans to be prepaid (and, in the case of Eurodollar Rate Loans, the Interest Period of the Borrowing pursuant to which made); provided , however , that (x) each partial prepayment shall be in an aggregate principal amount of $5,000,000 or an integral multiple of $1,000,000 in excess thereof, (y) accrued interest to the date of prepayment on the principal amount prepaid shall be payable by the Borrower on the date of such prepayment, and (z) in the event of any such prepayment of a Eurodollar Rate Loan, the Borrower shall be obligated to reimburse the Lenders in respect thereof pursuant to Section 8.04(e). Each prepayment of Loans shall be applied ratably to the outstanding principal amount of each Lender’s Loan in accordance with such Lender’s Ratable Share.
(b)      Mandatory . The Borrower shall prepay the aggregate principal amount of the Loans, together with accrued interest to the date of prepayment on the principal amount prepaid, without requirement of demand therefor, or shall pay or prepay any other Indebtedness then outstanding at any time, when and to the extent required to comply with applicable Laws of any Governmental Authority or applicable resolutions of the Board of Directors of the Borrower.
Section 2.09      Increased Costs .
(a)      Increased Costs Generally . If any Change in Law shall:
(i)      impose, modify or deem applicable any reserve, special deposit, compulsory loan, insurance charge or similar requirement against assets of, deposits with or for the account of, or credit extended or participated in by, any Lender (except any reserve requirement contemplated by Section 2.09(e));
(ii)      impose on any Lender or the London interbank market any other condition, cost or expense affecting this Agreement or Eurodollar Rate Loans made by such Lender; or
(iii)      subject the Agent or any Lender to any Taxes (other than (A) Indemnified Taxes, (B) Excluded Taxes and (C) Other Taxes) on its loans, loan principal, letters of credit, commitments, or other obligations, or its deposits, reserves, other liabilities or capital attributable thereto;

and the result of any of the foregoing shall be to increase the cost to the Agent or such Lender of making or maintaining any Loan (or of maintaining its obligation to make any such Loan), or to reduce the amount of any sum received or receivable by the Agent or such Lender hereunder (whether of principal, interest or any other amount) then, upon request of the Agent or such Lender, the Borrower will pay to the Agent or such Lender such additional amount or amounts as will compensate the Agent or such Lender for such additional costs incurred or reduction suffered.
(b)      Capital Requirements . If any Lender determines that any Change in Law affecting such Lender or any Applicable Lending Office of such Lender or such Lender’s holding company, if any, regarding capital or liquidity requirements has or would have the effect of reducing the rate of return on such Lender’s capital or on the capital of such Lender’s holding company, if any, as a consequence of this Agreement, the Commitments of such Lender or the Loans made by such Lender, to a level below that which such Lender or such Lender’s holding company could have achieved but for such Change in Law (taking into consideration such Lender’s policies and the policies of such Lender’s holding company with respect to capital adequacy and liquidity), then from time to time the Borrower will pay to such Lender such additional amount or amounts as will compensate such Lender or such Lender’s holding company for any such reduction suffered.
(c)      Certificates for Reimbursement . A certificate of a Lender setting forth the amount or amounts necessary to compensate such Lender or its holding company, as the case may be, as specified in subsection (a) or (b) of this Section and delivered to the Borrower shall be conclusive and binding upon all parties absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 30 days after receipt thereof.
(d)      Delay in Requests . Failure or delay on the part of any Lender to demand compensation pursuant to the foregoing provisions of this Section shall not constitute a waiver of such Lender’s right to demand such compensation, provided that the Borrower shall not be required to compensate a Lender pursuant to the foregoing provisions of this Section for any increased costs incurred or reductions suffered more than three months prior to the date that such Lender notifies the Borrower of the Change in Law giving rise to such increased costs or reductions and of such Lender’s intention to claim compensation therefor (except that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the three-month period referred to above shall be extended to include the period of retroactive effect thereof).
(e)      Reserves on Eurodollar Rate Loans . The Borrower shall pay to each Lender, as long as such Lender shall be required to maintain reserves with respect to liabilities or assets consisting of or including Eurocurrency funds or deposits (currently known as “Eurocurrency liabilities”), additional interest on the unpaid principal amount of each Eurodollar Rate Loan equal to the actual costs of such reserves allocated to such Loan by such Lender (as determined by such Lender in good faith, which determination shall be conclusive absent manifest error), which shall be due and payable on each date on which interest is payable on such Loan, provided the Borrower shall have received at least 30 days’ prior notice (with a copy to the Agent) of such additional interest from such Lender. If a Lender fails to give notice 30 days prior to the relevant interest payment date, such additional interest shall be due and payable 30 days from receipt of such notice.

Section 2.10      Illegality . If any Lender shall have determined in good faith that the introduction of or any change in any applicable Law or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof, or compliance with any guideline or request from any such Governmental Authority (whether or not having the force of law), makes it unlawful for any Lender or its Applicable Lending Office to make, maintain or fund Eurodollar Rate Loans, or to determine or charge interest rates based upon the Eurodollar Rate, or any Governmental Authority has imposed material restrictions on the authority of such Lender to purchase or sell, or to take deposits of, Dollars in the London interbank market, then, on notice thereof by such Lender to the Borrower through the Agent, any obligation of such Lender to make or continue Eurodollar Rate Loans or to Convert Base Rate Loans to Eurodollar Rate Loans shall be suspended until such Lender notifies the Agent and the Borrower that the circumstances giving rise to such determination no longer exist. Upon receipt of such notice, the Borrower shall, upon demand from such Lender (with a copy to the Agent), prepay or, if applicable, Convert all Eurodollar Rate Loans of such Lender to Base Rate Loans, either on the last day of the Interest Period therefor, if such Lender may lawfully continue to maintain such Eurodollar Rate Loans to such day, or immediately, if such Lender may not lawfully continue to maintain such Eurodollar Rate Loans. Upon any such prepayment or Conversion, the Borrower shall also pay accrued interest on the amount so prepaid or Converted.
Section 2.11      Payments and Computations .
(a)      All payments to be made by the Borrower shall be made without condition or deduction for any counterclaim, defense, recoupment or setoff. The Borrower shall make each payment hereunder not later than 1:00 p.m. on the day when due in Dollars to the Agent at the Agent’s Account in same day funds. The Agent will promptly thereafter cause to be distributed like funds relating to the payment of principal, interest or fees ratably (other than amounts payable pursuant to Section 2.09, 2.10, 2.12, 2.17 or 8.04(e)) to the Lenders for the account of their respective Applicable Lending Offices, and like funds relating to the payment of any other amount payable to any Lender to such Lender for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. Upon its acceptance of an Assignment and Assumption and recording of the information contained therein in the Register pursuant to Section 8.07(c), from and after the effective date specified in such Assignment and Assumption, the Agent shall make all payments hereunder and under the Notes in respect of the interest assigned thereby to the Lender assignee thereunder, and the parties to such Assignment and Assumption shall make all appropriate adjustments in such payments for periods prior to such effective date directly between themselves.
(b)      All computations of interest based on the Base Rate (when the Base Rate is based on the Prime Rate) shall be made by the Agent on the basis of a year of 365 or 366 days, as the case may be, and all other computations of interest and fees hereunder (including computations of interest based on the Eurodollar Rate and the Federal Funds Rate) shall be made by the Agent on the basis of a year of 360 days, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest or fees are payable. Each determination by the Agent of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error.

(c)      Whenever any payment hereunder or under the Notes shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or fees, as the case may be; provided , however , that, if such extension would cause payment of interest on or principal of Eurodollar Rate Loans to be made in the next following calendar month, such payment shall be made on the next preceding Business Day.
(d)      Unless the Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Lenders hereunder that the Borrower will not make such payment in full, the Agent may assume that the Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due to such Lender. If and to the extent the Borrower shall not have so made such payment in full to the Agent, each Lender shall repay to the Agent forthwith on demand such amount distributed to such Lender together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Agent, at the Federal Funds Rate.
Section 2.12      Taxes .
(a)      Payments Free of Taxes; Obligation to Withhold; Payments on Account of Taxes .
(i)      Any and all payments by or on account of any obligation of the Borrower hereunder or under any other Loan Document shall to the extent permitted by applicable Laws be made free and clear of and without reduction or withholding for any Taxes. If, however, applicable Laws require the Borrower or the Agent to withhold or deduct any Tax, such Tax shall be withheld or deducted in accordance with such Laws as determined by the Borrower or the Agent, as the case may be, upon the basis of the information and documentation to be delivered pursuant to subsection (e) below.
(ii)      If the Borrower or the Agent shall be required by the Internal Revenue Code to withhold or deduct any Taxes, including both United States of America Federal backup withholding and withholding Taxes, from any payment, then (A) the Agent shall withhold or make such deductions as are determined by the Agent to be required based upon the information and documentation it has received pursuant to subsection (e) below, (B) the Agent shall timely pay the full amount withheld or deducted to the relevant Governmental Authority in accordance with the Internal Revenue Code, and (C) to the extent that the withholding or deduction is made on account of Indemnified Taxes or Other Taxes, the sum payable by the Borrower shall be increased as necessary so that after any required withholding or the making of all required deductions (including deductions applicable to additional sums payable under this Section) the Agent or each Lender, as the case may be, receives an amount equal to the sum it would have received had no such withholding or deduction been made.
(b)      Payment of Other Taxes by the Borrower . Without limiting the provisions of subsection (a) above, the Borrower shall timely pay any Other Taxes to the relevant Governmental Authority in accordance with applicable Laws.

(c)      Tax Indemnifications .
(i)      Without limiting the provisions of subsection (a) or (b) above, the Borrower shall, and does hereby, indemnify the Agent and each Lender, and shall make payment in respect thereof within 30 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) withheld or deducted by the Borrower or the Agent or paid by the Agent or such Lender, as the case may be, and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. The Borrower shall also, and does hereby, indemnify the Agent, and shall make payment in respect thereof within 10 days after demand therefor, for any amount which a Lender for any reason fails to pay indefeasibly to the Agent as required by clause (ii) of this subsection. A certificate as to the amount of any such payment or liability delivered to the Borrower by a Lender (with a copy to the Agent), or by the Agent on its own behalf or on behalf of a Lender, shall be conclusive absent manifest error.
(ii)      Each Lender shall severally indemnify the Agent, within 30 days after demand therefor, for (i) any Indemnified Taxes and Other Taxes attributable to such Lender (but only to the extent that the Borrower has not already indemnified the Agent for such Indemnified Taxes and Other Taxes and without limiting the obligation of the Borrower to do so), (ii) any Taxes attributable to such Lender’s failure to comply with the provisions of Section 8.07(d) relating to the maintenance of a Participant Register and (iii) any Excluded Taxes attributable to such Lender, in each case, that are payable or paid by the Agent in connection with any Loan Document, and any reasonable expenses arising therefrom or with respect thereto, whether or not such Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to any Lender by the Agent shall be conclusive absent manifest error. Each Lender hereby authorizes the Agent to set off and apply any and all amounts at any time owing to such Lender under any Loan Document or otherwise payable by the Agent to the Lender from any other source against any amount due to the Agent under this clause (ii).
(d)      Evidence of Payments . Upon request by the Borrower or the Agent, as the case may be, after any payment of Taxes by the Borrower or by the Agent to a Governmental Authority as provided in this Section 2.12, the Borrower shall deliver to the Agent or the Agent shall deliver to the Borrower, as the case may be, the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of any return required by Laws to report such payment or other evidence of such payment reasonably satisfactory to the Borrower or the Agent, as the case may be.
(e)      Status of Lenders; Tax Documentation .
(i)      Each Lender shall deliver to the Borrower and to the Agent, at the time or times prescribed by applicable Laws or when reasonably requested by the Borrower or the

Agent, such properly completed and executed documentation prescribed by applicable Laws or by the taxing authorities of any jurisdiction and such other reasonably requested information as will permit the Borrower or the Agent, as the case may be, to determine (A) whether or not payments made hereunder or under any other Loan Document are subject to Taxes, (B) if applicable, the required rate of withholding or deduction, and (C) such Lender’s entitlement to any available exemption from, or reduction of, applicable Taxes in respect of all payments to be made to such Lender by the Borrower pursuant to this Agreement or otherwise to establish such Lender’s status for withholding tax purposes in the applicable jurisdiction.
(ii)      Without limiting the generality of the foregoing, if the Borrower is resident for tax purposes in the United States of America,
(A)      any Lender that is a “United States person” within the meaning of Section 7701(a)(30) of the Internal Revenue Code shall deliver to the Borrower and the Agent executed originals of Internal Revenue Service Form W-9 or such other documentation or information prescribed by applicable Laws or reasonably requested by the Borrower or the Agent as will enable the Borrower or the Agent, as the case may be, to determine whether or not such Lender is subject to backup withholding or information reporting requirements; and
(B)      each Foreign Lender that is entitled under the Internal Revenue Code or any applicable treaty to an exemption from or reduction of withholding tax with respect to payments hereunder or under any other Loan Document shall deliver to the Borrower and the Agent (in such number of copies as shall be requested by the recipient) on or prior to the date on which such Foreign Lender becomes a Lender under this Agreement (and from time to time thereafter upon the request of the Borrower or the Agent, but only if such Foreign Lender is legally entitled to do so), whichever of the following is applicable:
(1)      executed originals of Internal Revenue Service Form W-8BEN or Form W-8BEN-E claiming eligibility for benefits of an income tax treaty to which the United States of America is a party,
(2)      executed originals of Internal Revenue Service Form W-8ECI,
(3)      executed originals of Internal Revenue Service Form W-8IMY and all required supporting documentation,
(4)      in the case of a Foreign Lender claiming the benefits of the exemption for portfolio interest under section 881(c) of the Internal Revenue Code, (x) a certificate to the effect that such Foreign Lender is not (A) a “bank” within the meaning of section 881(c)(3)(A) of the Internal Revenue Code, (B) a “10 percent shareholder” of the Borrower within the meaning of section 881(c)(3)(B) of the Internal Revenue Code, or (C) a “controlled

foreign corporation” described in section 881(c)(3)(C) of the Internal Revenue Code and (y) executed originals of Internal Revenue Service Form W-8BEN or Form W-8BEN-E, or
(5)      executed originals of any other form prescribed by applicable Laws as a basis for claiming exemption from or a reduction in United States of America Federal withholding tax together with such supplementary documentation as may be prescribed by applicable Laws to permit the Borrower or the Agent to determine the withholding or deduction required to be made.
(iii)      Each Lender shall promptly (A) notify the Borrower and the Agent of any change in circumstances which would modify or render invalid any claimed exemption or reduction, and (B) take such steps as shall not be materially disadvantageous to it, in the reasonable judgment of such Lender, and as may be reasonably necessary (including the re-designation of its Applicable Lending Office) to avoid any requirement of applicable Laws of any jurisdiction that the Borrower or the Agent make any withholding or deduction for taxes from amounts payable to such Lender.
(iv)      If a payment made to a Lender under any Loan Document would be subject to U.S. federal withholding Tax imposed by FATCA if such Lender were to fail to comply with the applicable reporting requirements of FATCA (including those contained in Section 1471(b) or 1472(b) of the Internal Revenue Code, as applicable), such Lender shall deliver to each of the Borrower and the Agent at the time or times prescribed by law and at such time or times reasonably requested by the Borrower or the Agent such documentation prescribed by applicable law (including as prescribed by Section 1471(b)(3)(C)(i) of the Internal Revenue Code) and such additional documentation reasonably requested by the Borrower or the Agent as may be necessary for the Borrower and the Agent to comply with their obligations under FATCA and to determine that such Lender has complied with such Lender’s obligations under FATCA or to determine the amount to deduct and withhold from such payment. Solely for purposes of this clause (iv), “FATCA” shall include any amendments made to FATCA after the date of this Agreement.
(f)      Treatment of Certain Refunds . Unless required by applicable Laws, at no time shall the Agent have any obligation to file for or otherwise pursue on behalf of a Lender, or have any obligation to pay to any Lender, any refund of Taxes withheld or deducted from funds paid for the account of such Lender. If the Agent or any Lender determines, in its sole discretion, that it has received a refund of any Taxes or Other Taxes as to which it has been indemnified by the Borrower or with respect to which the Borrower has paid additional amounts pursuant to this Section, it shall pay to the Borrower an amount equal to such refund (but only to the extent of indemnity payments made, or additional amounts paid, by the Borrower under this Section with respect to the Taxes giving rise to such refund), net of all reasonable out-of-pocket expenses incurred by the Agent or such Lender, as the case may be, and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund), provided that the Borrower, upon the request of the Agent or such Lender, agrees to repay the amount paid over to the Borrower (plus any penalties,

interest or other charges imposed by the relevant Governmental Authority) to the Agent or such Lender in the event the Agent or such Lender is required to repay such refund to such Governmental Authority. This subsection shall not be construed to require the Agent or any Lender to make available its tax returns (or any other information relating to its taxes that it deems confidential) to the Borrower or any other Person.
(g)      Payments . Failure or delay on the part of the Agent or any Lender to demand compensation pursuant to the foregoing provisions of this Section 2.12 shall not constitute a waiver of the Agent’s or such Lender’s right to demand such compensation, provided that the Borrower shall not be required to compensate the Agent or a Lender pursuant to the foregoing provisions of this Section 2.12 for any Indemnified Taxes or Other Taxes imposed or asserted by the relevant Governmental Authority more than three months prior to the date that the Agent or such Lender, as the case may be, claims compensation with respect thereto (except that, if a Change in Law giving rise to such Indemnified Taxes or Other Taxes is retroactive, then the three-month period referred to above shall be extended to include the period of retroactive effect thereof).
(h)      The Agent and each Lender agrees to cooperate with any reasonable request made by the Borrower in respect of a claim of a refund in respect of Indemnified Taxes as to which it has been indemnified by the Borrower or with respect to which the Borrower has paid additional amounts pursuant to this Section 2.12 if (i) the Borrower has agreed in writing to pay all of the Agent’s or such Lender’s reasonable out-of-pocket costs and expenses relating to such claim, (ii) the Agent or such Lender determines, in its good faith judgment, that it would not be disadvantaged, unduly burdened or prejudiced as a result of such claim and (iii) the Borrower furnishes, upon request of the Agent or such Lender, an opinion of tax counsel (such opinion, which can be reasoned, and such counsel to be reasonably acceptable to such Lender or the Agent) that the Borrower is likely to receive a refund or credit.
Section 2.13      Sharing of Payments, Etc . If any Lender shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Loans owing to it (other than pursuant to Section 2.09, 2.10, 2.12, 2.17 or 8.04(e) or any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans to any assignee or participant, other than to the Borrower or any Subsidiary thereof if permitted hereby (as to which the provisions of this Section 2.13 shall apply) in excess of its Ratable Share of payments on account of the Loans obtained by all the Lenders, such Lender shall forthwith purchase from the other Lenders (for cash at face value) such participations in the Loans owing to them as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of them; provided , however , that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase from each Lender shall be rescinded and such Lender shall repay to the purchasing Lender the purchase price to the extent of such recovery together with an amount equal to such Lender’s ratable share (according to the proportion of (i) the amount of such Lender’s required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 2.13 may, to the fullest extent permitted by Law, exercise all its rights of payment (including the right of set-off) with respect to such

participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation.
Section 2.14      Evidence of Debt .
(a)      Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan owing to such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder in respect of Loans. The Borrower agrees that upon notice by any Lender to the Borrower (with a copy of such notice to the Agent) to the effect that a Note is required or appropriate in order for such Lender to evidence (whether for purposes of pledge, enforcement or otherwise) the Loans owing to, or to be made by, such Lender, the Borrower shall promptly execute and deliver to such Lender a Note payable to the order of such Lender in a principal amount equal to the Loans owing to, or to be made by, such Lender.
(b)      The Register maintained by the Agent pursuant to Section 8.07(c) shall include a control account, and a subsidiary account for each Lender, in which accounts (taken together) shall be recorded (i) the date and amount of each Borrowing made hereunder, the Type of Loans comprising such Borrowing and, if appropriate, the Interest Period applicable thereto, (ii) the terms of each Assignment and Assumption delivered to and accepted by it, (iii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iv) the amount of any sum received by the Agent from the Borrower hereunder and each Lender’s share thereof.
(c)      Entries made in good faith by the Agent in the Register pursuant to subsection (b) above, and by each Lender in its account or accounts pursuant to subsection (a) above, shall be prima facie evidence of the amount of principal and interest due and payable or to become due and payable from the Borrower to, in the case of the Register, each Lender and, in the case of such account or accounts, such Lender, under this Agreement, absent manifest error; provided , however , that the failure of the Agent or such Lender to make an entry, or any finding that an entry is incorrect, in the Register or such account or accounts shall not limit or otherwise affect the obligations of the Borrower under this Agreement.
Section 2.15      Use of Proceeds . The proceeds of the Loans shall be available (and the Borrower agrees that it shall use such proceeds) solely to repay and refinance the outstanding loans under the Existing Term Loan Agreement and in accordance with Section 4.01(p).
Section 2.16      Affected Lenders . Notwithstanding any provision of this Agreement to the contrary, if any Lender becomes an Affected Lender, then the following provisions shall apply for so long as such Lender is an Affected Lender:
(a)      the outstanding principal amount of the Loans of such Affected Lender shall not be included in determining whether the Required Lenders have taken or may take any action hereunder (including any consent to any amendment or waiver pursuant to Section 8.01), other than any waiver, amendment or modification requiring the consent of all Lenders or of each Lender affected;

(b)      to the extent the Agent receives any payments or other amounts for the account of an Affected Lender under this Agreement, such Affected Lender shall be deemed to have requested that the Agent use such payment or other amount to fulfill such Affected Lender’s previously unsatisfied obligations to fund a Loan under Section 2.01 or any other unfunded payment obligation of such Affected Lender under this Agreement; and
(c)      for the avoidance of doubt, the Borrower, the Agent and each other Lender shall retain and reserve its other rights and remedies respecting each Affected Lender.
In the event that the Agent and the Borrower each agrees that an Affected Lender has adequately remedied all matters that caused such Lender to be an Affected Lender, then this Section 2.16 will no longer apply to such Lender.
Section 2.17      Replacement of Lenders . If any Lender requests compensation under Section 2.09, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.12, or if any Lender is an Affected Lender, then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in, and consents required by, Section 8.07), all of its interests, rights and obligations under this Agreement and the related Loan Documents to one or more assignees that shall assume such obligations (which any such assignee may be another Lender (other than an Affected Lender), if such Lender accepts such assignment), provided that:
(a)      the Borrower shall have paid to the Agent the assignment fee specified in Section 8.07(b);
(b)      such Lender shall have received payment of an amount equal to the outstanding principal amount of its Loans, accrued interest thereon, accrued fees and all other amounts payable to it hereunder and under the other Loan Documents (including any amounts under Section 8.04(e)) from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts);
(c)      in the case of any such assignment resulting from a claim for compensation under Section 2.09 or payments required to be made pursuant to Section 2.12, such assignment will result in a reduction in such compensation or payments thereafter; and
(d)      such assignment does not conflict with applicable Laws.
A Lender shall not be required to make any such assignment or delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrower to require such assignment and delegation cease to apply.
ARTICLE III     

 CONDITIONS PRECEDENT

Section 3.01      Conditions Precedent to Effectiveness . This Agreement shall become effective on and as of the first date (the “ Effective Date ”) on which the following conditions precedent have been satisfied:
(f)      The Lenders shall have been given such access to the management, records, books of account, contracts and properties of the Borrower and its Subsidiaries as they shall have requested.
(g)      The Borrower shall have paid all accrued fees and agreed expenses of the Agent, the Arrangers and the Lenders, including but not limited to all fees payable pursuant to the Fee Letter, and the reasonable accrued fees and expenses of counsel to the Agent that have been invoiced at least one Business Day prior to the Effective Date.
(h)      On the Effective Date, the following statements shall be true and the Agent shall have received a certificate signed by a duly authorized officer of the Borrower, dated the Effective Date, stating that:
(iv)      The representations and warranties contained in Section 4.01 are true and correct on and as of the Effective Date, both before and after giving effect to the Initial Borrowing and the application of the proceeds thereof, as though made on and as of such date; and
(v)      No event has occurred and is continuing, or would result from the Initial Borrowing or the application of the proceeds thereof, that constitutes a Default.
(i)      The Agent shall have received the Notice of Initial Borrowing pursuant to Section 2.02.
(j)      The Agent shall have received on or before the Effective Date the following, each dated such day, in form and substance satisfactory to the Agent and the Lenders:
(i)      Receipt by the Agent of executed counterparts of this Agreement properly executed by a duly authorized officer of the Borrower and by each Lender.
(ii)      The Notes, payable to the order of the Lenders to the extent requested by any Lender pursuant to Section 2.14(a).
(iii)      The articles of incorporation of the Borrower certified to be true and complete as of a recent date by the appropriate governmental authority of the state or other jurisdiction of its incorporation and certified by a secretary, assistant secretary or associate secretary of the Borrower to be true and correct as of the Effective Date.
(iv)      The bylaws of the Borrower certified by a secretary, assistant secretary or associate secretary of the Borrower to be true and correct as of the Effective Date.
(v)      Certified copies of the resolutions of the Board of Directors of the Borrower approving this Agreement and the Notes, and of all documents evidencing other necessary

corporate action, third party consents and governmental approvals, if any, with respect to this Agreement and the Notes.
(vi)      A certificate of the secretary, assistant secretary or associate secretary of the Borrower certifying the names and true signatures of the officers of the Borrower authorized to sign this Agreement and the Notes and the other documents to be delivered hereunder.
(vii)      A certificate as of a recent date from the Borrower’s state of incorporation evidencing that the Borrower is in good standing in such state.
(viii)      A favorable opinion of counsel for the Borrower, in form and substance reasonably acceptable to the Lenders.
(ix)      A written opinion of Sidley Austin LLP, special New York counsel for the Agent, addressed to the Agent and the Lenders, with respect to the enforceability of this Agreement and the Notes, if any, issued on the Effective Date, in form and substance reasonably acceptable to the Agent.
(x)      Evidence that that certain Term Credit Agreement, dated as of November 29, 2012, by and among the Borrower, the lenders from time to time parties thereto, and JPMorgan Chase Bank, N.A., as agent (as the same shall have been amended or otherwise modified prior to the date hereof, the “ Existing Term Loan Agreement ”) shall have been terminated and cancelled and all indebtedness thereunder shall have been (or shall concurrently with the funding of the Loans hereunder be) fully repaid.
(k)      PATRIOT Act . The Borrower shall have provided to the Agent and the Lenders the documentation and other information reasonably requested by the Agent in order to comply with requirements of the PATRIOT Act.
Section 3.02      Determinations Under Section 3.01 . For purposes of determining compliance with the conditions specified in Section 3.01 and the satisfaction of each Lender with respect to letters delivered to it from the Borrower as set forth in Sections 4.01(a), 4.01(e) and 4.01(f), each Lender that has signed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to the Lenders unless an officer of the Agent responsible for the transactions contemplated by this Agreement shall have received notice from such Lender prior to the date that the Borrower designates as the proposed Effective Date, specifying its objection thereto. The Agent shall promptly notify the Lenders and the Borrower of the occurrence of the Effective Date.
ARTICLE IV     

 REPRESENTATIONS AND WARRANTIES
Section 4.01      Representations and Warranties of the Borrower . The Borrower represents and warrants as follows:

(a)      Each of the Borrower and each Material Subsidiary: (i) is a corporation or other entity duly organized and validly existing under the Laws of the jurisdiction of its incorporation or organization; (ii) has all requisite corporate or if the Material Subsidiary is not a corporation, other comparable power necessary to own its assets and carry on its business as presently conducted; (iii) has all governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as presently conducted, if the failure to have any such license, authorization, consent or approval is reasonably likely to have a Material Adverse Effect and except as disclosed to the Agent in the SEC Reports or by means of a letter from the Borrower to the Lenders (such letter, if any, to be delivered to the Agent for prompt distribution to the Lenders) delivered prior to the execution and delivery of this Agreement (which, in each case, shall be satisfactory to each Lender in its sole discretion) and except that (A) APS from time to time may make minor extensions of its lines, plants, services or systems prior to the time a related franchise, certificate of convenience and necessity, license or permit is procured, (B) from time to time communities served by APS may become incorporated and considerable time may elapse before such a franchise is procured, (C) certain such franchises may have expired prior to the renegotiation thereof, (D) certain minor defects and exceptions may exist which, individually and in the aggregate, are not material and (E) certain franchises, certificates, licenses and permits may not be specific as to their geographical scope); and (iv) is qualified to do business in all jurisdictions in which the nature of the business conducted by it makes such qualification necessary and where failure so to qualify is reasonably likely to have a Material Adverse Effect.
(b)      The execution, delivery and performance by the Borrower of this Agreement and the other Loan Documents, and the consummation of the transactions contemplated hereby and thereby, are within the Borrower’s corporate powers, have been duly authorized by all necessary corporate action, and do not or did not (i) contravene the Borrower’s articles of incorporation or by-laws, (ii) contravene any Law, decree, writ, injunction or determination of any Governmental Authority, in each case applicable to or binding upon the Borrower or any of its properties, (iii) contravene any contractual restriction binding on or affecting the Borrower or (iv) cause the creation or imposition of any Lien upon the assets of the Borrower or any Material Subsidiary, except for Liens created under this Agreement and except where such contravention or creation or imposition of such Lien is not reasonably likely to have a Material Adverse Effect.
(c)      No authorization or approval or other action by, and no notice to or filing with, any Governmental Authority is required for the due execution, delivery and performance by the Borrower of this Agreement or the Notes to be delivered by it.
(d)      This Agreement has been, and each of the other Loan Documents upon execution and delivery will have been, duly executed and delivered by the Borrower. This Agreement is, and each of the other Loan Documents upon execution and delivery will be, the legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with their respective terms, subject, however, to the application by a court of general principles of equity and to the effect of any applicable bankruptcy, insolvency, reorganization, moratorium or similar Laws affecting creditors’ rights generally.

(e)      (i) The Consolidated balance sheet of the Borrower as of December 31, 2013, and the related Consolidated statements of income and cash flows of the Borrower for the fiscal year then ended, accompanied by an opinion thereon of Deloitte & Touche LLP, independent registered public accountants, and the Consolidated balance sheet of the Borrower as of September 30, 2014, and the related Consolidated statements of income and cash flows of the Borrower for the nine months then ended, duly certified by the chief financial officer of the Borrower, copies of which have been furnished to the Agent, fairly present in all material respects, subject, in the case of said balance sheet as of September 30, 2014, and said statements of income and cash flows for the nine months then ended, to year-end audit adjustments, the Consolidated financial condition of the Borrower as at such dates and the Consolidated results of the operations of the Borrower for the periods ended on such dates, all in accordance with GAAP (except as disclosed therein); and (ii) except as disclosed to the Agent in the SEC Reports or by means of a letter from the Borrower to the Lenders (such letter, if any, to be delivered to the Agent for prompt distribution to the Lenders) delivered prior to the execution and delivery of this Agreement (which, in each case, shall be satisfactory to each Lender in its sole discretion), since December 31, 2013, there has been no Material Adverse Effect.
(f)      There is no pending or, to the knowledge of an Authorized Officer of the Borrower, threatened action, suit, investigation, litigation or proceeding, including, without limitation, any Environmental Action, affecting the Borrower or any of its Subsidiaries before any court, governmental agency or arbitrator that (i) purports to affect the legality, validity or enforceability of this Agreement or any other Loan Document or the consummation of the transactions contemplated hereby or (ii) would be reasonably likely to have a Material Adverse Effect (except as disclosed to the Agent in the SEC Reports or by means of a letter from the Borrower to the Lenders (such letter, if any, to be delivered to the Agent for prompt distribution to the Lenders) delivered prior to the execution and delivery of this Agreement (which, in each case, shall be satisfactory to each Lender in its sole discretion)), and there has been no adverse change in the status, or financial effect on the Borrower or any of its Subsidiaries, of such disclosed litigation that would be reasonably likely to have a Material Adverse Effect.
(g)      No proceeds of any Loan will be used to acquire any equity security not issued by the Borrower of a class that is registered pursuant to Section 12 of the Securities Exchange Act of 1934.
(h)      The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System), and no proceeds of any Loan will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock, in any case in violation of Regulation U. After application of the proceeds of any Loan, not more than 25% of the value of the assets subject to any restriction under this Agreement on the right to sell, pledge, transfer, or otherwise dispose of such assets is represented by margin stock.
(i)      The Borrower and its Subsidiaries have filed all United States of America Federal income Tax returns and all other material Tax returns which are required to be filed by them and

have paid all Taxes due pursuant to such returns or pursuant to any assessment received by the Borrower or any of its Subsidiaries, except to the extent that (i) such Taxes are being contested in good faith and by appropriate proceedings and that appropriate reserves for the payment thereof have been maintained by the Borrower and its Subsidiaries in accordance with GAAP or (ii) the failure to make such filings or such payments is not reasonably likely to have a Material Adverse Effect. The charges, accruals and reserves on the books of the Borrower and its Material Subsidiaries as set forth in the most recent financial statements of the Borrower delivered to the Agent pursuant to Section 4.01(e) or Section 5.01(h)(i) or (ii) hereof in respect of Taxes and other governmental charges are, in the opinion of the Borrower, adequate.
(j)      Set forth on Schedule 4.01(j) hereto (as such schedule may be modified from time to time by the Borrower by written notice to the Agent) is a complete and accurate list of all the Material Subsidiaries of the Borrower.
(k)      Set forth on Schedule 4.01(k) hereto is a complete and accurate list identifying any Indebtedness of the Borrower outstanding in a principal amount equal to or exceeding $5,000,000 and which is not described in the financial statements referred to in Section 4.01(e).
(l)      The Borrower is not an “investment company”, or a company “controlled” by an “investment company”, within the meaning of the Investment Company Act of 1940, as amended.
(m)      No report, certificate or other written information furnished by the Borrower or any of its Subsidiaries to the Agent, any Arranger or any Lender in connection with the transactions contemplated hereby and the negotiation of this Agreement or delivered hereunder or any other Loan Document (as modified or supplemented by other information so furnished) at the time so furnished, when taken together as a whole with all such written information so furnished, contains an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, except as would not reasonably be expected to result in a Material Adverse Effect; provided that with respect to any projected financial information, forecasts, estimates or forward-looking information, the Borrower represents only that such information and materials have been prepared in good faith on the basis of assumptions believed to be reasonable at the time of preparation of such forecasts, and no representation or warranty is made as to the actual attainability of any such projections, forecasts, estimates or forward-looking information.
(n)      Neither the Borrower nor any of its Subsidiaries or, to the knowledge of the Borrower, any of their respective Affiliates over which any of the foregoing exercises management control (each, a “ Controlled Affiliate ”) or any director or officer of the Borrower, any of its Subsidiaries or any of their respective Controlled Affiliates (each, a “ Manager ”) is a Prohibited Person, and the Borrower, its Subsidiaries and, to the knowledge of the Borrower, such Controlled Affiliates are in compliance with all applicable orders, rules and regulations of OFAC.
(o)      Neither the Borrower nor any of its Subsidiaries or, to the knowledge of the Borrower, any of their respective Controlled Affiliates or Managers: (i) is the target of Sanctions ; (ii) is owned or controlled by, or acts on behalf of, any Person that is targeted by United States or multilateral economic or trade sanctions currently in force; (iii) is, or is owned or controlled by, a Person who

is located, organized or resident in a country or territory that is, or whose government is, the subject of Sanctions, including, without limitation, Cuba, Iran, North Korea, Sudan and Syria, or (iv) is named, identified or described on any list of Persons with whom United States Persons may not conduct business, including any such blocked persons list, designated nationals list, denied persons list, entity list, debarred party list, unverified list, sanctions list or other such lists published or maintained by the United States, including OFAC, the United States Department of Commerce or the United States Department of State.
(p)      None of the Borrower’s or its Subsidiaries’ assets constitute property of, or are beneficially owned, directly or indirectly, by any Person that is the target of Sanctions, including but not limited to, the International Emergency Economic Powers Act, 50 U.S.C. §§ 1701 et seq., The Trading with the Enemy Act, 50 U.S.C. App. 1 et seq. (the “ Trading With the Enemy Act ”), any of the foreign assets control regulations of the Treasury (31 C.F.R., Subtitle B, Chapter V, as amended) (the “ Foreign Assets Control Regulations ”) or any enabling legislation or regulations promulgated thereunder or executive order relating thereto (which includes, without limitation, (i) Executive Order No. 13224, effective as of September 24, 2001, and relating to Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism (66 Fed. Reg. 49079 (2001)) (the “ Executive Order ”) and (ii) the PATRIOT Act), if the result of such ownership would be that any Borrowing made by any Lender would be in violation of law (“ Embargoed Person ”); (a) no Embargoed Person has any interest of any nature whatsoever in the Borrower if the result of such interest would be that any Borrowing would be in violation of law; (b) the Borrower has not engaged in business with Embargoed Persons if the result of such business would be that any Borrowing made by any Lender would be in violation of law; (c) the Borrower will not, directly or indirectly, use the proceeds of the Borrowing, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other Person, (i) to fund any activities or business of or with any Person, or in any country or territory, that, at the time of such funding, is, or whose government is, the subject of Sanctions, or (ii) in any other manner that would result in a violation of Sanctions or Anti-Corruption Laws by any Person (including any Person participating in the Borrowing, whether as a Lender or otherwise), and (d) neither the Borrower nor any Controlled Affiliate (i) is or will become a “blocked person” as described in the Executive Order, the Trading With the Enemy Act or the Foreign Assets Control Regulations or (ii) to the knowledge of the Borrower, engages in any dealings or transactions, or be otherwise associated, with any such “blocked person”. For purposes of determining whether or not a representation is true under this Section 4.01(p), with respect to the securities of the Borrower, the Borrower shall not be required to make any investigation into (x) the ownership of publicly traded stock or other publicly traded securities or (y) the beneficial ownership of any collective investment fund.
(q)      Neither the Borrower nor any of its Subsidiaries or, to the knowledge of the Borrower and its Subsidiaries, any of their respective Managers, has failed to comply with the U.S. Foreign Corrupt Practices Act, as amended from time to time (the “ FCPA ”), or any other applicable Anti-Corruption Law, and it and they have not made, offered, promised or authorized, and will not make, offer, promise or authorize, whether directly or indirectly, any payment, of anything of value to a Government Official while knowing or having a reasonable belief that all or some portion will be used for the purpose of: (a) influencing any act, decision or failure to act by a Government Official

in his or her official capacity, (b) inducing a Government Official to use his or her influence with a government or instrumentality to affect any act or decision of such  government or entity or (c) securing an improper advantage, in each case in order to obtain, retain or direct business.
ARTICLE V     

 COVENANTS OF THE BORROWER
Section 5.01      Affirmative Covenants . So long as any Loan or any other Obligations shall remain unpaid, the Borrower shall:
(a)      Compliance with Laws, Etc . (i) Comply, and cause each of its Material Subsidiaries to comply, in all material respects, with all applicable Laws of Governmental Authorities, such compliance to include, without limitation, compliance with ERISA and Environmental Laws, unless the failure to so comply is not reasonably likely to have a Material Adverse Effect and (ii) comply at all times with all Laws, orders, decrees, writs, injunctions or determinations of any Governmental Authority relating to the incurrence or maintenance of Indebtedness by the Borrower, such compliance to include, without limitation, compliance with the PATRIOT Act, all applicable orders, rules and regulations of OFAC, the FCPA, the Racketeer Influenced and Corrupt Organizations Chapter of the Organized Crime Control Act of 1970 and other Anti-Corruption Laws, except (other than in the case of the PATRIOT Act, the applicable orders, rules and regulations of OFAC, or the FCPA) to the extent that the failure to do so could not reasonably be expected to have a Material Adverse Effect.
(b)      Payment of Taxes, Etc . Pay and discharge, and cause each of its Subsidiaries to pay and discharge, before the same shall become delinquent, all Taxes, imposed upon it or upon its property; provided , however , that neither the Borrower nor any of its Subsidiaries shall be required to pay or discharge any such Tax (i) that is being contested in good faith and by proper proceedings and as to which appropriate reserves are being maintained in accordance with GAAP or (ii) if the failure to pay such Tax is not reasonably likely to have a Material Adverse Effect.
(c)      Maintenance of Insurance . Maintain, and cause each of its Material Subsidiaries to maintain, insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower or such Material Subsidiary operates; provided , however , that the Borrower and its Subsidiaries may self-insure to the same extent as other companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower or such Subsidiary operates and to the extent consistent with prudent business practice.
(d)      Preservation of Corporate Existence, Etc . Preserve and maintain, and cause each of its Material Subsidiaries to preserve and maintain, its corporate existence, rights (charter and statutory) and franchises (other than “franchises” as described in Arizona Revised Statutes, Section 40-283 or any successor provision ) reasonably necessary in the normal conduct of its business, if the failure to maintain such rights or privileges is reasonably likely to have a Material Adverse Effect, and, in the case of APS, will cause APS to use its commercially reasonable efforts to preserve

and maintain such franchises reasonably necessary in the normal conduct of its business, except that (i) APS from time to time may make minor extensions of its lines, plants, services or systems prior to the time a related franchise, certificate of convenience and necessity, license or permit is procured, (ii) from time to time communities served by APS may become incorporated and considerable time may elapse before such a franchise is procured, (iii) certain such franchises may have expired prior to the renegotiation thereof, (iv) certain minor defects and exceptions may exist which, individually and in the aggregate, are not material and (v) certain franchises, certificates, licenses and permits may not be specific as to their geographical scope; provided , however , that the Borrower and its Subsidiaries may consummate any merger or consolidation permitted under Section 5.02(b).
(e)      Visitation Rights . At any reasonable time and from time to time, permit and cause each of its Subsidiaries to permit the Agent or any of the Lenders or any agents or representatives thereof, to examine and make copies of and abstracts from the records and books of account of, and visit the properties of, the Borrower and any of its Subsidiaries, and to discuss the affairs, finances and accounts of the Borrower and any of its Subsidiaries with any of their officers or directors; provided , however , that the Borrower and its Subsidiaries reserve the right to restrict access to any of its properties in accordance with reasonably adopted procedures relating to safety and security; and provided further that the costs and expenses incurred by such Lender or its agents or representatives in connection with any such examinations, copies, abstracts, visits or discussions shall be, upon the occurrence and during the continuation of a Default, for the account of the Borrower and, in all other circumstances, for the account of such Lender.
(f)      Keeping of Books . Keep, and cause each of its Material Subsidiaries to keep, proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and business of the Borrower and each such Subsidiary in a manner that permits the preparation of financial statements in accordance with GAAP.
(g)      Maintenance of Properties, Etc . Keep, and cause each Material Subsidiary to keep, all property useful and necessary in its business in good working order and condition (ordinary wear and tear excepted), if the failure to do so is reasonably likely to have a Material Adverse Effect, it being understood that this covenant relates only to the working order and condition of such properties and shall not be construed as a covenant not to dispose of properties.
(h)      Reporting Requirements . Furnish to the Agent:
(xi)      as soon as available and in any event within 50 days after the end of each of the first three fiscal quarters of each fiscal year of the Borrower commencing with the fiscal quarter ending March 31, 2015, (A) for each such fiscal quarter of the Borrower, Consolidated statements of income and cash flows of the Borrower for such fiscal quarter and the related Consolidated balance sheet of the Borrower as of the end of such fiscal quarter setting forth in each case in comparative form the corresponding figures for the corresponding fiscal quarter in (or, in the case of the balance sheet, as of the end of) in the preceding fiscal year and (B) for the period commencing at the end of the previous fiscal year and ending with the end of such fiscal quarter, Consolidated statements of income and cash flows of the Borrower for such period setting forth in each case in comparative form

the corresponding figures for the corresponding period in the preceding fiscal year; provided that so long as the Borrower remains subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, the Borrower may provide, in satisfaction of the requirements of this first sentence of this Section 5.01(h)(i), its report on Form 10-Q for such fiscal quarter. Each set of financial statements provided under this Section 5.01(h)(i) shall be accompanied by a certificate of an Authorized Officer, which certificate shall state that said Consolidated financial statements fairly present in all material respects the Consolidated financial condition and results of operations and cash flows of the Borrower in accordance with GAAP (except as disclosed therein), as at the end of, and for, such period (subject to normal year-end audit adjustments) and shall set forth reasonably detailed calculations demonstrating compliance with Section 5.03;
(xii)      as soon as available and in any event within 90 days after the end of each fiscal year of the Borrower, commencing with the fiscal year ending December 31, 2014, audited Consolidated statements of income and cash flows of the Borrower for such year and the related Consolidated balance sheet of the Borrower as at the end of such year, setting forth in each case in comparative form the corresponding figures for the preceding fiscal year; provided that, so long as the Borrower remains subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, the Borrower may provide, in satisfaction of the requirements of this first sentence of this Section 5.01(h)(ii), its report on Form 10-K for such fiscal year. Each set of financial statements provided pursuant to this Section 5.01(h)(ii) shall be accompanied by (A) an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall state that said Consolidated financial statements fairly present in all material respects the Consolidated financial condition and results of operations of the Borrower as at the end of, and for, such fiscal year, in accordance with GAAP (except as disclosed therein) and (B) a certificate of an Authorized Officer, which certificate shall set forth reasonably detailed calculations demonstrating compliance with Section 5.03;
(xiii)      as soon as possible and in any event within five days after any Authorized Officer of the Borrower knows of the occurrence of each Default continuing on the date of such statement, a statement of an Authorized Officer of the Borrower setting forth details of such Default and the action that the Borrower has taken and proposes to take with respect thereto;
(xiv)      promptly after the sending or filing thereof, copies of all reports and registration statements (other than exhibits thereto and registration statements on Form S-8 or its equivalent) that the Borrower or any Subsidiary files with the Securities and Exchange Commission;
(xv)      promptly after an Authorized Officer becomes aware of the commencement thereof, notice of all actions and proceedings before any court, governmental agency or arbitrator affecting the Borrower or any of its Subsidiaries of the type described in Section 4.01(f), except, with respect to any matter referred to in Section 4.01(f)(ii), to the extent disclosed in a report on Form 8-K, Form 10-Q or Form 10-K of the Borrower;

(xvi)      promptly after an Authorized Officer becomes aware of the occurrence thereof, notice of any change by Moody’s or S&P of its respective Public Debt Rating or of the cessation (or subsequent commencement) by Moody’s or S&P of publication of its respective Public Debt Rating;
(xvii)      promptly after the occurrence thereof, notice of the occurrence of any ERISA Event, together with (x) a written statement of an Authorized Officer of the Borrower specifying the details of such ERISA Event and the action that the Borrower has taken and proposes to take with respect thereto, (y) a copy of any notice with respect to such ERISA Event that may be required to be filed with the PBGC and (z) a copy of any notice delivered by the PBGC to the Borrower or an ERISA Affiliate with respect to such ERISA Event; and
(xviii)      such other information respecting the Borrower or any of its Subsidiaries as any Lender through the Agent may from time to time reasonably request.
Information required to be delivered pursuant to Sections 5.01(h)(i), (ii) and (iv) above shall be deemed to have been delivered on the date on which the Borrower provides notice to the Agent that such information has been posted on the Borrower’s website on the Internet at www.pinnaclewest.com, at sec.gov/edaux/searches.htm or at another website identified in such notice and accessible by the Lenders without charge; provided that (i) such notice may be included in a certificate delivered pursuant to Section 5.01(h)(i) or (ii) and (ii) the Borrower shall deliver paper copies of the information referred to in Section 5.01(h)(i), (ii), and (iv) to any Lender which requests such delivery.
(i)      Change in Nature of Business . Conduct directly or through its Subsidiaries the same general type of business conducted by the Borrower and its Material Subsidiaries on the date hereof.
(j)      Ownership of APS . Except to the extent permitted under Section 5.02(b), at all times continue to own directly or indirectly at least 80% of the outstanding capital stock of APS.
Section 5.02      Negative Covenants . So long as Loan or any other Obligations shall remain unpaid, the Borrower shall not:
(d)      Liens, Etc . Directly or indirectly create, incur, assume or permit to exist any Lien securing Indebtedness for borrowed money on or with respect to any property or asset (including, without limitation, the capital stock of APS) of the Borrower, whether now owned or held or hereafter acquired (unless it makes, or causes to be made, effective provision whereby the Obligations will be equally and ratably secured with any and all other obligations thereby secured so long as such other Indebtedness shall be so secured, such security to be pursuant to an agreement reasonably satisfactory to the Required Lenders); provided , however , that this Section 5.02(a) shall not apply to Liens securing Indebtedness for borrowed money (other than Indebtedness for borrowed money secured by the capital stock of APS) which do not in the aggregate exceed at any time outstanding the principal amount of $50,000,000.
(e)      Mergers, Etc . Merge or consolidate with or into any Person, or permit any of its Material Subsidiaries to do so, except that (i) any Material Subsidiary of the Borrower may merge

or consolidate with or into any other Material Subsidiary of the Borrower, (ii) any Subsidiary of the Borrower may merge into the Borrower or any Material Subsidiary of the Borrower and (iii) the Borrower or any Material Subsidiary may merge with any other Person so long as the Borrower or such Material Subsidiary is the surviving corporation, provided , in each case, that no Default shall have occurred and be continuing at the time of such proposed transaction or would result therefrom.
(f)      Sales, Etc. of Assets . Sell, lease, transfer or otherwise dispose of, or permit any of its Material Subsidiaries to sell, lease, transfer or otherwise dispose of, any assets, or grant any option or other right to purchase, lease or otherwise acquire any assets to any Person other than the Borrower or any Subsidiary of the Borrower, except (i) dispositions in the ordinary course of business, including, without limitation, sales or other dispositions of electricity and related and ancillary services, other commodities, emissions credits and similar mechanisms for reducing pollution, and damaged, obsolete, worn out or surplus property no longer required or useful in the business or operations of the Borrower or any of its Subsidiaries, (ii) sale or other disposition of patents, copyrights, trademarks or other intellectual property that are, in the Borrower’s reasonable judgment, no longer economically practicable to maintain or necessary in the conduct of the business of the Borrower or its Subsidiaries and any license or sublicense of intellectual property that does not interfere with the business of the Borrower or any Material Subsidiary, (iii) in a transaction authorized by subsection (b) of this Section, (iv) individual dispositions occurring in the ordinary course of business which involve assets with a book value not exceeding $5,000,000, (v) sales, leases, transfers or other dispositions of assets during the term of this Agreement having an aggregate book value not to exceed 30% of the total of all assets properly appearing on the most recent balance sheet of the Borrower provided pursuant to Section 4.01(e) or 5.01(h)(ii) hereof, (vi) at any time following the consummation of the Four Corners Acquisition, which occurred on December 30, 2013 and the closure by APS of Units 1, 2 and 3 of the Four Corners Power Plant near Farmington, New Mexico, as described in the SEC Reports, disposition of all or any portion of APS’ interests in such Units 1, 2 and 3, and (vii) any Lien permitted under Section 5.02(a).
Section 5.03      Financial Covenant . So long as any Loan or any other Obligations shall remain unpaid, the Borrower will maintain a ratio of (a) Consolidated Indebtedness to (b) the sum of Consolidated Indebtedness plus Consolidated Net Worth of not greater than 0.65 to 1.
ARTICLE VI     

 EVENTS OF DEFAULT
Section 6.01      Events of Default . If any of the following events (“ Events of Default ”) shall occur and be continuing:
(g)      The Borrower shall fail to pay when due (i) any principal of any Loan or (ii) any interest on any Loan or any fees or other amounts payable under this Agreement or any other Loan Documents, and (in the case of this clause (ii) only) such failure shall continue for a period of three Business Days; or

(h)      Any representation or warranty made by the Borrower herein or by the Borrower (or any of its officers) in any certificate or other document delivered in connection with this Agreement or any other Loan Document shall prove to have been incorrect in any material respect when made or deemed made or furnished; or
(i)      (i) The Borrower shall fail to perform or observe any term, covenant or agreement contained in Section 2.15, Section 5.01(d) (as to the corporate existence of the Borrower), Section 5.01(h)(iii), Section 5.01(h)(vi), Section 5.01(j), Section 5.02 or Section 5.03; or (ii) the Borrower shall fail to perform or observe any term, covenant or agreement contained in Section 5.01(e) if such failure shall remain unremedied for 15 days after written notice thereof shall have been given to the Borrower by the Agent or any Lender; or (iii) the Borrower shall fail to perform or observe any other term, covenant or agreement contained in this Agreement or any other Loan Document on its part to be performed or observed if such failure shall remain unremedied for 30 days after written notice thereof shall have been given to the Borrower by the Agent or any Lender; or
(j)      (i) The Borrower or any of its Material Subsidiaries shall fail to pay (A) any principal of or premium or interest on any Indebtedness that is outstanding in a principal amount of at least $35,000,000 in the aggregate (but excluding Indebtedness outstanding hereunder), or (B) an amount, or post collateral as contractually required in an amount, of at least $35,000,000 in respect of any Hedge Agreement, of the Borrower or such Material Subsidiary (as the case may be), in each case, when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Indebtedness or Hedge Agreement; or (ii) any event of default shall exist under any agreement or instrument relating to any such Indebtedness and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event is to accelerate, or to permit the acceleration of, the maturity of such Indebtedness; or
(k)      The Borrower or any of its Material Subsidiaries shall fail to pay any principal of or premium or interest in respect of any operating lease in respect of which the payment obligations of the Borrower have a present value of at least $35,000,000, when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in such operating lease, if the effect of such failure is to terminate, or to permit the termination of, such operating lease; or
(l)      The Borrower or any of its Material Subsidiaries shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower or any of its Material Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any Debtor Relief Law, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it), either such proceeding shall remain undismissed or unstayed for a period of

60 days, or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or for any substantial part of its property) shall occur; or the Borrower or any of its Material Subsidiaries shall take any corporate action to authorize any of the actions set forth above in this subsection (f); or
(m)      Judgments or orders for the payment of money that exceed any applicable insurance coverage (the insurer of which shall be rated at least “A” by A.M. Best Company) by more than $35,000,000 in the aggregate shall be rendered against the Borrower or any Material Subsidiary and such judgments or orders shall continue unsatisfied or unstayed for a period of 45 days; or
(n)      (i) Any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, but excluding any employee benefit plan of such person or its subsidiaries, and any person or entity acting in its capacity as trustee, agent or other fiduciary or administrator of any such plan) becomes the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934), directly or indirectly, of 30% or more of the equity securities of the Borrower entitled to vote for members of the board of directors of the Borrower; or (ii) during any period of 24 consecutive months, a majority of the members of the board of directors of the Borrower cease (other than due to death or disability) to be composed of individuals (A) who were members of that board on the first day of such period, (B) whose election or nomination to that board was approved by individuals referred to in clause (A) above constituting at the time of such election or nomination at least a majority of that board or (C) whose election or nomination to that board was approved by individuals referred to in clauses (A) and (B) above constituting at the time of such election or nomination at least a majority of that board; or
(o)      (i) An ERISA Event occurs with respect to a Pension Plan or Multiemployer Plan which has resulted or could reasonably be expected to result in liability of the Borrower under Title IV of ERISA to the Pension Plan, Multiemployer Plan or the PBGC in an aggregate amount in excess of $35,000,000; or (ii) the Borrower or any ERISA Affiliate fails to pay when due, after the expiration of any applicable grace period, any installment payment with respect to its withdrawal liability under Section 4201 of ERISA under a Multiemployer Plan in an aggregate amount in excess of $35,000,000;
then, and in any such event, the Agent shall at the request, or may with the consent, of the Required Lenders, by notice to the Borrower, (i) declare the Loans, all interest thereon and all other amounts payable under this Agreement to be forthwith due and payable, whereupon the Loans, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided , however , that in the event of an actual or deemed entry of an order for relief with respect to the Borrower under the Bankruptcy Code of the United States of America, the Loans, all such interest and all such amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrower, and (ii) exercise all rights and remedies available to it under this Agreement, the other Loan Documents and applicable Law.

ARTICLE VII     

 THE AGENT
Section 7.01      Appointment and Authority . Each of the Lenders hereby irrevocably appoints JPMorgan Chase Bank, N.A. to act on its behalf as the Agent hereunder and under the other Loan Documents and authorizes the Agent to take such actions on its behalf and to exercise such powers as are delegated to the Agent by the terms hereof or thereof, together with such actions and powers as are reasonably incidental thereto. Except as set forth in Section 7.06, the provisions of this Article are solely for the benefit of the Agent and the Lenders, and neither the Borrower nor any of its Affiliates shall have rights as a third party beneficiary of any of such provisions.
Section 7.02      Rights as a Lender . The Person serving as the Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Agent and the term “Lender” or “Lenders” shall, unless otherwise expressly indicated or unless the context otherwise requires, include the Person serving as the Agent hereunder in its individual capacity. Such Person and its Affiliates may accept deposits from, lend money to, act as the financial advisor or in any other advisory capacity for and generally engage in any kind of business with the Borrower or any Subsidiary or other Affiliate thereof as if such Person were not the Agent hereunder and without any duty to account therefor to the Lenders.
Section 7.03      Exculpatory Provisions . The Agent shall not have any duties or obligations except those expressly set forth herein and in the other Loan Documents. Without limiting the generality of the foregoing, the Agent:
(c)      shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing;
(d)      shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby or by the other Loan Documents that the Agent is required to exercise as directed in writing by the Required Lenders (or such other number or percentage of the Lenders as shall be expressly provided for herein), provided that the Agent shall not be required to take any action that, in its opinion or the opinion of its counsel, may expose the Agent to liability or that is contrary to any Loan Document or applicable Law; and
(e)      shall not, except as expressly set forth herein and in the other Loan Documents, have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Borrower or any of its Affiliates that is communicated to or obtained by the Person serving as the Agent or any of its Affiliates in any capacity.
The Agent shall not be liable for any action taken or not taken by it (i) with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary, or as the Agent shall believe in good faith shall be necessary, under the circumstances as provided in Section 6.01 and Section 8.01) or (ii) in the absence of its own gross negligence or willful misconduct. The Agent shall be deemed not to have knowledge of any Default unless and until notice describing such Default is given to the Agent by the Borrower or a Lender.

The Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement or any other Loan Document, (ii) the contents of any certificate, report or other document delivered hereunder or thereunder or in connection herewith or therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein or therein or the occurrence of any Default, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement, any other Loan Document or any other agreement, instrument or document or (v) the satisfaction of any condition set forth in Article III or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Agent.
Section 7.04      Reliance by Agent . The Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing (including any electronic message, internet or intranet website posting or other distribution) believed by it to be genuine and to have been signed, sent or otherwise authenticated by the proper Person. The Agent also may rely upon any statement made to it orally or by telephone and believed by it to have been made by the proper Person, and shall not incur any liability for relying thereon. In determining compliance with any condition hereunder to the making of any Loan that by its terms must be fulfilled to the satisfaction of a Lender, the Agent may presume that such condition is satisfactory to such Lender unless the Agent shall have received notice to the contrary from such Lender prior to the making of such Loan. The Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in good faith in accordance with the advice of any such counsel, accountants or experts.
Section 7.05      Delegation of Duties . The Agent may perform any and all of its duties and exercise its rights and powers hereunder or under any other Loan Document by or through any one or more sub-agents appointed by the Agent. The Agent and any such sub-agent may perform any and all of its duties and exercise its rights and powers by or through their respective Related Parties. The exculpatory provisions of this Article shall apply to any such sub-agent and to the Related Parties of the Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Agent.
Section 7.06      Resignation of Agent . The Agent may at any time give notice of its resignation to the Lenders and the Borrower. Upon receipt of any such notice of resignation, the Required Lenders shall have the right, with the consent of the Borrower so long as no Event of Default has occurred and is continuing, to appoint a successor, which shall be a bank with an office in the United States of America, or an Affiliate of any such bank with an office in the United States of America. If no such successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 45 days after the retiring Agent gives notice of its resignation, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent meeting the qualifications set forth above; provided that if the Agent shall notify the Borrower and the Lenders that no qualifying Person has accepted such appointment, then such resignation shall nonetheless become effective in accordance with such notice and (1) the retiring Agent shall be discharged from its duties and obligations hereunder and under the other Loan Documents (except that in the case

of any collateral security held by the Agent on behalf of the Lenders under any of the Loan Documents, the retiring Agent shall continue to hold such collateral security until such time as a successor Agent is appointed) and (2) all payments, communications and determinations provided to be made by, to or through the Agent shall instead be made by or to each Lender directly, until such time as the Required Lenders appoint a successor Agent as provided for above in this Section. Upon the acceptance of a successor’s appointment as Agent hereunder, such successor shall succeed to and become vested with all of the rights, powers, privileges and duties of the retiring (or retired) Agent, and the retiring Agent shall be discharged from all of its duties and obligations hereunder or under the other Loan Documents (if not already discharged therefrom as provided above in this Section). The fees payable by the Borrower to a successor Agent shall be as agreed between the Borrower and such successor. After the retiring Agent’s resignation hereunder and under the other Loan Documents, the provisions of this Article and Section 8.04 shall continue in effect for the benefit of such retiring Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while the retiring Agent was acting as Agent.
Section 7.07      Non-Reliance on Agent and Other Lenders . Each Lender acknowledges that it has, independently and without reliance upon the Agent or any other Lender or any of their Related Parties and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Agent or any other Lender or any of their Related Parties and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any other Loan Document or any related agreement or any document furnished hereunder or thereunder.
Section 7.08      No Other Duties, Etc . Anything herein to the contrary notwithstanding, none of the Arrangers, the Syndication Agent, the Co-Documentation Agents or any other agents listed on the cover page hereof shall have any powers, duties or responsibilities under this Agreement or any of the other Loan Documents, except in its capacity, as applicable, as the Agent or a Lender hereunder.
ARTICLE VIII     

 MISCELLANEOUS
Section 8.01      Amendments, Etc . No amendment or waiver of any provision of this Agreement or any other Loan Document, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Required Lenders, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided , however , that no amendment, waiver or consent shall
(a)      unless agreed to by each Lender directly affected thereby, (i) reduce or forgive the principal amount of any Loan, reduce the rate of or forgive any interest thereon ( provided that only the consent of the Required Lenders shall be required to waive the applicability of any post-default increase in interest rates), or reduce or forgive any fees hereunder (other than fees payable to the Agent or the Arrangers for their own respective accounts), (ii) extend the final scheduled maturity

date or any other scheduled date for the payment of any principal of or interest on any Loan, or extend the time of payment of any fees hereunder (other than fees payable to the Agent or the Arrangers for their own respective accounts), or (iii) increase any Commitment of any such Lender over the amount thereof in effect or extend the maturity thereof (it being understood that a waiver of any Default, if agreed to by the Required Lenders or all Lenders (as may be required hereunder with respect to such waiver), shall not constitute such an increase);
(b)      unless agreed to by all of the Lenders, (i) reduce the percentage of the aggregate Commitments or of the aggregate unpaid principal amount of the Loans, or the number or percentage of Lenders, that shall be required for the Lenders or any of them to take or approve, or direct the Agent to take, any action hereunder or under any other Loan Document (including as set forth in the definition of “Required Lenders”), (ii) change any other provision of this Agreement or any of the other Loan Documents requiring, by its terms, the consent or approval of all the Lenders for any amendment, modification, waiver, discharge or termination thereof or any consent to any departure by the Borrower therefrom, or (iii) change or waive any provision of Section 2.13, any other provision of this Agreement or any other Loan Document requiring pro rata treatment of any Lenders, or this Section 8.01 or Section 2.17(b); and
(c)      unless agreed to by the Agent in addition to the Lenders required as provided hereinabove to take such action, affect the respective rights or obligations of the Agent hereunder or under any of the other Loan Documents.
(d)      If, in connection with any proposed amendment, waiver or consent requiring the consent of “each Lender” or “each Lender directly affected thereby,” the consent of the Required Lenders is obtained, but the consent of other necessary Lenders is not obtained (any such Lender whose consent is necessary but not obtained being referred to herein as a “Non-Consenting Lender”), then the Borrower may elect to replace a Non-Consenting Lender as a Lender party to this Agreement, provided that, concurrently with such replacement, (i) another bank or other entity which is reasonably satisfactory to the Borrower and the Agent shall agree, as of such date, to purchase for cash the Loans and other Obligations due to the Non-Consenting Lender pursuant to an Assignment and Assumption and to become a Lender for all purposes under this Agreement and to assume all obligations of the Non-Consenting Lender to be terminated as of such date and to comply with the requirements of clause (b) of Section 8.07, and (ii) the Borrower shall pay to such Non-Consenting Lender in same day funds on the day of such replacement (1) all interest, fees and other amounts then accrued but unpaid to such Non-Consenting Lender by the Borrower hereunder to and including the date of termination, including without limitation payments due to such Non-Consenting Lender under Sections 2.09 and 2.12, and (2) an amount, if any, equal to the payment which would have been due to such Lender on the day of such replacement under Section 8.04(e) had the Loans of such Non-Consenting Lender been prepaid on such date rather than sold to the replacement Lender.
Section 8.02      Notices, Etc .
(f)      All notices and other communications provided for hereunder shall be either (x) in writing (including facsimile communication) and mailed, faxed or delivered or (y) delivered, furnished, distributed or made available as and to the extent set forth in Sections 8.02(b) and (c), if to the Borrower, at the address specified on Schedule 8.02 ; if to any Lender, at its Domestic Lending

Office; and if to the Agent, at the address specified on Schedule 8.02 ; or, as to the Borrower or the Agent, at such other address as shall be designated by such party in a written notice to the other parties and, as to each other party, at such other address as shall be designated by such party in a written notice to the Borrower and the Agent. All such notices and communications shall, when mailed or faxed, be effective when deposited in the mails or faxed, respectively, except that notices and communications to the Agent pursuant to Article II, III or VII shall not be effective until received by the Agent. Delivery by facsimile of an executed counterpart of any amendment or waiver of any provision of this Agreement or the Notes or of any Exhibit hereto to be executed and delivered hereunder shall be effective as delivery of a manually executed counterpart thereof. Notices delivered through electronic communications to the extent provided in subsection (b) below, shall be effective as provided in such subsection (b). Upon request of the Borrower, the Agent will provide to the Borrower (i) copies of each Administrative Questionnaire or (ii) the address of each Lender.
(g)      Notices and other communications to the Lenders and the Agent hereunder may be delivered or furnished by electronic communication (including e-mail and Internet or intranet websites) pursuant to procedures approved by the Agent and agreed to by the Borrower, provided that the foregoing shall not apply to notices to any Lender pursuant to Article II if such Lender has notified the Agent and the Borrower that it is incapable of receiving notices under such Article by electronic communication. The Agent or the Borrower may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it, provided that approval of such procedures may be limited to particular notices or communications. Unless the Agent and the Borrower otherwise agree, (i) notices and other communications sent to an e-mail address shall be deemed received upon the sender’s receipt of an acknowledgement from the intended recipient (such as by the “return receipt requested” function, as available, return e-mail or other written acknowledgement), provided that if such notice or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next Business Day for the recipient, and (ii) notices or communications posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing clause (i) of notification that such notice or communication is available and identifying the website address therefor.
(h)      The Borrower agrees that the Agent may make materials delivered to the Agent pursuant to Sections 5.01(h)(i), (ii) and (iv), as well as any other written information, documents, instruments and other material relating to the Borrower or any of its Subsidiaries and relating to this Agreement, the Notes or the transactions contemplated hereby, or any other materials or matters relating to this Agreement, the Notes or any of the transactions contemplated hereby (collectively, the “ Communications ”) available to the Lenders by posting such notices on Intralinks or a substantially similar electronic system (the “ Platform ”). The Borrower acknowledges that (i) the distribution of material through an electronic medium is not necessarily secure and that there are confidentiality and other risks associated with such distribution, (ii) the Platform is provided “as is” and “as available” and (iii) neither the Agent nor any of its Affiliates warrants the accuracy, adequacy or completeness of the Communications or the Platform and each expressly disclaims liability for errors or omissions in the Communications or the Platform. No warranty of any kind,

express, implied or statutory, including, without limitation, any warranty of merchantability, fitness for a particular purpose, non-infringement of third party rights or freedom from viruses or other code defects, is made by the Agent or any of its Affiliates in connection with the Platform.
(i)      Each Lender agrees that notice to it (as provided in the next sentence) (a “ Notice ”) specifying that any Communications have been posted to the Platform shall constitute effective delivery of such information, documents or other materials to such Lender for purposes of this Agreement; provided that if requested by any Lender the Agent shall deliver a copy of the Communications to such Lender by e-mail, facsimile or mail. Each Lender agrees (i) to notify the Agent in writing of such Lender’s e-mail address to which a Notice may be sent by electronic transmission (including by electronic communication) on or before the date such Lender becomes a party to this Agreement (and from time to time thereafter to ensure that the Agent has on record an effective e-mail address for such Lender) and (ii) that any Notice may be sent to such e-mail address.
(j)      The Borrower hereby acknowledges that certain of the Lenders may be “public-side” Lenders ( i.e., Lenders that do not wish to receive material non-public information with respect to the Borrower or its securities) (each, a “ Public Lender ”). The Borrower hereby agrees that (w) all Communications that are to be made available to Public Lenders shall be clearly and conspicuously marked “PUBLIC” which shall mean that the word “PUBLIC” shall appear prominently on the first page thereof; (x) by marking Communications “PUBLIC,” the Borrower shall be deemed to have authorized the Agent, the Arrangers and the Lenders to treat such Communications as not containing any material non-public information with respect to the Borrower or its securities for purposes of United States of America federal and state securities laws; (y) all Communications marked “PUBLIC” are permitted to be made available through a portion of the Platform designated as “Public Investor;” and (z) the Agent and the Arrangers shall be entitled to treat any Communications that are not marked “PUBLIC” as being suitable only for posting on a portion of the Platform not marked as “Public Investor.” Notwithstanding the foregoing, the Borrower shall be under no obligation to mark any Communications “PUBLIC.” Notwithstanding anything to the contrary herein, the Borrower and the Agent need not provide to any Public Lender any information, notice, or other document hereunder that is not public information, including without limitation, the Notice of Initial Borrowing and any notice of Default.
Section 8.03      No Waiver; Cumulative Remedies; Enforcement . No failure by any Lender or the Agent to exercise, and no delay by any such Person in exercising, any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by Law.
Notwithstanding anything to the contrary contained herein or in any other Loan Document, the authority to enforce rights and remedies hereunder and under the other Loan Documents against the Borrower shall be vested exclusively in, and all actions and proceedings at Law in connection with such enforcement shall be instituted and maintained exclusively by, the Agent in accordance

with Article VI for the benefit of all the Lenders; provided , however , that the foregoing shall not prohibit (a) the Agent from exercising on its own behalf the rights and remedies that inure to its benefit (solely in its capacity as Agent) hereunder and under the other Loan Documents, (b) any Lender from exercising setoff rights in accordance with Section 8.05 (subject to the terms of Section 2.13), or (c) any Lender from filing proofs of claim or appearing and filing pleadings on its own behalf during the pendency of a proceeding relative to the Borrower under any Debtor Relief Law; and provided , further , that if at any time there is no Person acting as Agent hereunder and under the other Loan Documents, then (i) the Required Lenders shall have the rights otherwise ascribed to the Agent pursuant to Article VI and (ii) in addition to the matters set forth in clauses (b) and (c) of the preceding proviso and subject to Section 2.13, any Lender may, with the consent of the Required Lenders, enforce any rights and remedies available to it and as authorized by the Required Lenders.
Section 8.04      Costs and Expenses; Indemnity; Damage Waiver .
(a)      The Borrower agrees to pay on demand all costs and expenses of the Agent in connection with the administration, modification and amendment of this Agreement, the Notes and the other Loan Documents to be delivered hereunder, including, without limitation, the reasonable fees and expenses of counsel for the Agent with respect thereto and with respect to advising the Agent as to its rights and responsibilities under this Agreement. The Borrower further agrees to pay on demand all costs and expenses of the Agent and the Lenders, if any (including, without limitation, reasonable counsel fees and expenses), in connection with the enforcement (whether through negotiations, legal proceedings or otherwise) of this Agreement, the Notes and the other Loan Documents to be delivered hereunder, including, without limitation, reasonable fees and expenses of counsel for the Agent and each Lender in connection with the enforcement of rights under this Section 8.04(a).
(b)      The Borrower agrees to indemnify and hold harmless the Agent (and any sub-agent thereof), each Lender, each Arranger, the Syndication Agent, each Co-Documentation Agent and each Related Party of any of the foregoing (each, an “ Indemnified Party ”) from and against any and all claims, damages, losses, liabilities and expenses (including, without limitation, reasonable fees and expenses of counsel) incurred by or asserted or awarded against any Indemnified Party, in each case arising out of or in connection with or by reason of (including, without limitation, in connection with any investigation, litigation or proceeding or preparation of a defense in connection therewith, whether based on contract, tort or any other theory) (i) the Notes, this Agreement, any other Loan Document, any of the transactions contemplated herein or the actual or proposed use of the proceeds of any Loan, or (ii) the actual or alleged presence of Hazardous Materials on any property of the Borrower or any of its Subsidiaries or any Environmental Action relating in any way to the Borrower or any of its Subsidiaries, provided that such indemnity shall not, as to any Indemnified Party, be available to the extent (a) such fees and expenses are expressly stated in this Agreement to be payable by the Indemnified Party, included expenses payable under Section 2.12, Section 5.01(e) and Section 8.07(b) or (b) such claim, damage, loss, liability or expense is found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from such Indemnified Party’s gross negligence, willful misconduct or material breach of its obligations under this Agreement, in which case any fees and expenses previously paid or advanced by the Borrower to such Indemnified Party in respect of such indemnified obligation will be returned by such

Indemnified Party. In the case of an investigation, litigation or other proceeding to which the indemnity in this Section 8.04(b) applies, such indemnity shall be effective whether or not such investigation, litigation or proceeding is brought by the Borrower, its directors, equityholders or creditors or an Indemnified Party or any other Person, whether or not any Indemnified Party is otherwise a party thereto, and whether or not the transactions contemplated hereby are consummated, provided that if the Borrower and such Indemnified Party are adverse parties in any such litigation or proceeding, and the Borrower prevails in a final, non-appealable judgment by a court of competent jurisdiction, any amounts under this Section 8.04(b) previously paid or advanced by the Borrower to such Indemnified Party pursuant to this Section 8.04(b) will be returned by such Indemnified Party.
(c)      To the extent that the Borrower for any reason fails to indefeasibly pay any amount required under subsection (a) or (b) of this Section to be paid by it to the Agent (or any sub-agent thereof) or any Related Party of any of the foregoing (and without limiting its obligation to do so), each Lender severally agrees to pay to the Agent (or any such sub-agent) or such Related Party, as the case may be, such Lender’s Ratable Share (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount, provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Agent (or any such sub-agent) in its capacity as such, or against any Related Party of any of the foregoing acting for the Agent (or any such sub-agent) in connection with such capacity.
(d)      Without limiting the rights of indemnification of the Indemnified Parties set forth in this Agreement with respect to liabilities asserted by third parties, each party hereto also agrees not to assert any claim for special, indirect, consequential or punitive damages against the other parties hereto, or any Related Party of any party hereto, on any theory of liability, arising out of or otherwise relating to the Notes, this Agreement, any other Loan Document, any of the transactions contemplated herein or the actual or proposed use of the proceeds of the Loans. No Indemnified Party shall be liable for any damages arising from the use by unintended recipients of any information or other materials distributed by it through telecommunications, electronic or other information transmission systems (including Intralinks, SyndTrak or similar systems) in connection with this Agreement or the other Loan Documents, provided that such indemnity shall not, as to any Indemnified Party, be available to the extent such damages are found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from such Indemnified Party’s gross negligence or willful misconduct.
(e)      If any payment of principal of, or Conversion of, any Eurodollar Rate Loan is made by the Borrower to or for the account of a Lender other than on the last day of the Interest Period for such Loan, as a result of a payment or Conversion pursuant to Section 2.06(d) or (e), 2.08 or 2.10, acceleration of the maturity of the Loans pursuant to Section 6.01 or for any other reason, or by an Eligible Assignee to a Lender other than on the last day of the Interest Period for such Loan upon an assignment of rights and obligations under this Agreement pursuant to Section 8.07 as a result of a demand by the Borrower pursuant to Section 2.17, the Borrower shall, upon demand by such Lender (with a copy of such demand to the Agent), pay to the Agent for the account of such Lender any amounts required to compensate such Lender for any additional losses, costs or expenses

that it may reasonably incur as a result of such payment or Conversion, including, without limitation, any loss (excluding loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Lender to fund or maintain such Loan.
(f)      Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in Sections 2.09, 2.12 and 8.04 shall survive the payment in full of principal, interest and all other amounts payable hereunder and under the Notes.
Section 8.05      Right of Set-off . Upon (i) the occurrence and during the continuance of any Event of Default and (ii) the making of the request or the granting of the consent specified by Section 6.01 to authorize the Agent to declare the Loans due and payable pursuant to the provisions of Section 6.01, each Lender and each of its Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by Law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender or any such Affiliate to or for the credit or the account of the Borrower against any and all of the obligations of the Borrower now or hereafter existing under this Agreement or any other Loan Document to such Lender, whether or not such Lender shall have made any demand under this Agreement or such Note and although such obligations may be contingent or unmatured or are owed to a branch or office of such Lender different from the branch or office holding such deposit or obligated on such indebtedness. Each Lender agrees promptly to notify the Borrower after any such set-off and application, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) that such Lender may have.
Section 8.06      Effectiveness; Binding Effect . Except as provided in Section 3.01, this Agreement shall become effective when it shall have been executed by the Borrower and the Agent and when the Agent shall have received counterparts hereof that, when taken together, bear the signatures of each of the other parties hereto and thereafter shall be binding upon and inure to the benefit of the Borrower, the Agent and each Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Lenders (and any purported assignment without such consent shall be null and void).
Section 8.07      Successors and Assigns .
(a)      The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of the Agent and each Lender (and any purported assignment or transfer without such consent shall be null and void) and no Lender may assign or otherwise transfer any of its rights or obligations hereunder except (i) to an assignee in accordance with the provisions of subsection (b) of this Section, (ii) by way of participation in accordance with the provisions of subsection (d) of this Section, or (iii) by way of pledge or assignment of a security interest subject to the restrictions of subsection (f) of this Section. Nothing in this Agreement, expressed or implied,

shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, Participants to the extent provided in subsection (d) of this Section and, to the extent expressly contemplated hereby, the Related Parties of each of the Agent and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement.
(b)      Any Lender may at any time assign to one or more assignees (other than to an Ineligible Institution) all or a portion of its rights and obligations under this Agreement (including all or a portion of the Loans owing to it at such time); provided that any such assignment shall be subject to the following conditions:
(iii)      Minimum Amounts .
(A)      in the case of an assignment of the entire principal amount of the assigning Lender’s Loans at the time owing to it or in the case of an assignment to a Lender, no minimum amount need be assigned; and
(B)      in any case not described in subsection (b)(i)(A) of this Section, the aggregate outstanding principal amount of the Loans of the assigning Lender subject to each such assignment, determined as of the date the Assignment and Assumption with respect to which such assignment is delivered to the Agent or, if “Trade Date” is specified in the Assignment and Assumption, as of the Trade Date, shall not be less than $5,000,000 unless each of the Agent and, so long as no Event of Default has occurred and is continuing, the Borrower otherwise consents (each such consent not to be unreasonably withheld or delayed).
(iv)      Proportionate Amounts . Each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender’s rights and obligations under this Agreement with respect to the Loans assigned, and each such assignment shall be of a constant, and not a varying, percentage of all rights and obligations under this Agreement;
(v)      Required Consents . No consent shall be required for any assignment except to the extent required by subsection (b)(i)(B) of this Section and, in addition:
(A)      the consent of the Borrower (such consent not to be unreasonably withheld or delayed; provided that the Borrower shall be deemed to have consented to any such assignment unless it shall object thereto by written notice to the Agent within ten (10) Business Days after having received notice thereof) shall be required unless (1) an Event of Default has occurred and is continuing at the time of such assignment or (2) such assignment is to a Lender, an Affiliate of a Lender or an Approved Fund; and
(B)      the consent of the Agent (such consent not to be unreasonably withheld or delayed) shall be required if such assignment is to a Person that is not a Lender, an Affiliate of a Lender or an Approved Fund with respect to such Lender.

(vi)      Assignment and Assumption . The parties to each assignment shall execute and deliver to the Agent an Assignment and Assumption, together with a processing and recordation fee in the amount of $3,500; provided , however , that no such fee shall be payable in the case of an assignment made at the request of the Borrower to an existing Lender. The assignee, if it is not a Lender, shall deliver to the Agent an Administrative Questionnaire.
(vii)      No Assignment to Ineligible Institutions . No such assignment shall be made to any Ineligible Institution.
Subject to acceptance and recording thereof by the Agent pursuant to subsection (c) of this Section and notice thereof to the Borrower, from and after the effective date specified in each Assignment and Assumption, the assignee thereunder shall be a party to this Agreement and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto) but shall continue to be entitled to the benefits of Sections 2.09, 2.12 and 8.04 with respect to facts and circumstances occurring prior to the effective date of such assignment. Upon request, the Borrower (at its expense) shall execute and deliver a Note to the assignee Lender. Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this subsection shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with subsection (d) of this Section.
(c)      Register . The Agent shall maintain at the Agent’s Office a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitments of, and principal amounts of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the “ Register ”). The entries in the Register shall be conclusive, absent manifest error, and the Borrower, the Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower and any Lender, at any reasonable time and from time to time upon reasonable prior notice.
(d)      Participations . Any Lender may at any time, without the consent of, or notice to, the Borrower or the Agent, sell participations to any Person (other than an Ineligible Institution) (each, a “ Participant ”) in all or a portion of such Lender’s rights and/or obligations under this Agreement (including all or a portion of the Loans owing to it); provided that (i) such Lender’s obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the Borrower, the Agent and the Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement and (iv) no participant under any such participation shall have any right to approve any amendment or waiver of any provision of this Agreement or any Note, or any consent to any departure by the Borrower therefrom, except to the extent that such amendment, waiver or consent would reduce the principal of, or interest on,

any Obligations or any fees or other amounts payable hereunder, in each case to the extent subject to such participation, or postpone any date fixed for any payment of principal of, or interest on, any Obligations or any fees or other amounts payable hereunder, in each case to the extent subject to such participation.
Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, waiver or other modification addressing the matters set forth in clause (iv) above to the extent subject to such participation. Subject to subsection (e) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.09, 2.12 and 8.04(e) to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to subsection (b) of this Section. To the extent permitted by Law, each Participant also shall be entitled to the benefits of Section 8.05 as though it were a Lender, provided such Participant agrees to be subject to Section 2.13 as though it were a Lender. Each Lender that sells a participation shall, acting solely for this purpose as an agent of the Borrower, maintain a register on which it enters the name and address of each Participant and the principal amounts (and stated interest) of each Participant’s interest in the Loans or other obligations under the Loan Documents (the “ Participant Register ”); provided that no Lender shall have any obligation to disclose all or any portion of the Participant Register (including the identity of any Participant or any information relating to a Participant’s interest in any Loans or its other obligations under any Loan Document) to any Person except to the extent that such disclosure is necessary to establish that such Loan or other obligation is in registered form under Section 5f.103-1(c) of the United States Treasury Regulations. The entries in the Participant Register shall be conclusive absent manifest error, and such Lender shall treat each Person whose name is recorded in the Participant Register as the owner of such participation for all purposes of this Agreement notwithstanding any notice to the contrary. For the avoidance of doubt, the Agent (in its capacity as Agent) shall have no responsibility for maintaining a Participant Register.
(e)      Limitations upon Participant Rights . A Participant shall not be entitled to receive any greater payment under Section 2.09 or 2.12 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower’s prior written consent. A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 2.12 unless the Borrower is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrower, to comply with Section 2.12(e) as though it were a Lender.
(f)      Certain Pledges . Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement (including under its Note, if any) to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank or other central banking authority; provided that no such pledge or assignment shall release such Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.

(g)      The words “execution,” “signed,” “signature,” and words of like import in any Assignment and Assumption shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable Law, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act, or any other similar state Laws based on the Uniform Electronic Transactions Act.
Section 8.08      Confidentiality . Neither the Agent nor any Lender may disclose to any Person any confidential, proprietary or non-public information of the Borrower furnished to the Agent or the Lenders by the Borrower (such information being referred to collectively herein as the “ Borrower Information ”), except that each of the Agent and each of the Lenders may disclose Borrower Information (i) to its and its Affiliates’ employees, officers, directors, agents and advisors having a need to know in connection with this Agreement (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Borrower Information and instructed to keep such Borrower Information confidential on substantially the same terms as provided herein), (ii) to the extent requested by any regulatory authority or self regulatory body, (iii) to the extent required by applicable Laws or regulations or by any subpoena or similar legal process, (iv) to any other party to this Agreement, (v) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or the enforcement of rights hereunder, (vi) subject to an agreement containing provisions substantially the same as those of this Section 8.08, (A) to any assignee or participant or prospective assignee or participant, (B) to any direct, indirect, actual or prospective counterparty (and its advisor) to any swap, derivative or securitization transaction related to the obligations under this Agreement and (C) to any credit insurance provider relating to the Borrower and its Obligations, (vii) to the extent such Borrower Information (A) is or becomes generally available to the public on a non-confidential basis other than as a result of a breach of this Section 8.08 by the Agent or such Lender or their Related Parties, or (B) is or becomes available to the Agent or such Lender on a nonconfidential basis from a source other than the Borrower (provided that the source of such information was not known by the recipient after inquiry to be bound by a confidentiality agreement with or other contractual, legal or fiduciary obligation of confidentiality to the Borrower or any other Person with respect to such information) and (viii) with the consent of the Borrower. The obligations under this Section 8.08 shall survive for two calendar years after the date of the termination of this Agreement.
Section 8.09      Governing Law . This Agreement and the Notes shall be governed by, and construed in accordance with, the Laws of the State of New York.
Section 8.10      Counterparts; Integration . This Agreement may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. Delivery of an executed counterpart of a signature page of this Agreement by telecopy or other electronic imaging means shall be effective as delivery of a manually executed counterpart of this Agreement. This Agreement and the other Loan Documents constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof.

Section 8.11      Jurisdiction, Etc .
(e)      Each of the parties hereto hereby submits to the exclusive jurisdiction of any New York State court or federal court of the United States of America sitting in the Borough of Manhattan in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Loan Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby agrees that all claims in respect of any such action or proceeding may be heard and determined in any such New York State court or, to the extent permitted by Law, in such federal court. Except to the extent expressly set forth in the preceding sentence, nothing in this Agreement shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Agreement or the Notes in the courts of any jurisdiction.
(f)      Each of the parties hereto irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the Notes in any New York State court or federal court of the United States of America sitting in New York City, and any appellate court from any thereof. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by Law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.
Section 8.12      Payments Set Aside . To the extent that any payment by or on behalf of the Borrower is made to the Agent or any Lender, or the Agent or any Lender exercises its right of setoff, and such payment or the proceeds of such setoff or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Agent or such Lender in its discretion) to be repaid to a trustee, receiver or any other party, in connection with any proceeding under any Debtor Relief Law or otherwise, then (a) to the extent of such recovery, the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such setoff had not occurred, and (b) each Lender severally agrees to pay to the Agent upon demand its applicable share (without duplication) of any amount so recovered from or repaid by the Agent, plus interest thereon from the date of such demand to the date such payment is made at a rate per annum equal to the Federal Funds Rate from time to time in effect. The obligations of the Lenders under clause (b) of the preceding sentence shall survive the payment in full of the Obligations and the termination of this Agreement.
Section 8.13      Patriot Act . The Agent and each Lender hereby notifies the Borrower that pursuant to the requirements of the PATRIOT Act, it is required to obtain, verify and record information that identifies each borrower (including the Borrower), guarantor or grantor (the “ Loan Parties ”), which information includes the name and address of each Loan Party and other information that will allow such Lender to identify such Loan Party in accordance with the PATRIOT Act. The Borrower shall provide, to the extent commercially reasonable, such information and take such actions as are reasonably requested by the Agent or any Lender in order to assist the Agent and such Lender in maintaining compliance with the PATRIOT Act.

Section 8.14      Waiver of Jury Trial . EACH OF THE BORROWER, THE AGENT AND THE LENDERS HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE NOTES OR ANY OTHER LOAN DOCUMENT OR THE ACTIONS OF THE BORROWER, THE AGENT OR ANY LENDER IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.
Section 8.15      No Advisory or Fiduciary Responsibility . In connection with all aspects of each transaction contemplated hereby, the Borrower acknowledges and agrees that: (i) the credit facilities provided for hereunder and any related arranging or other services in connection therewith (including in connection with any amendment, waiver or other modification hereof or of any other Loan Document) are an arm’s-length commercial transaction between the Borrower, on the one hand, and the Agent, each of the Lenders and each of the Arrangers, on the other hand, and the Borrower is capable of evaluating and understanding and understands and accepts the terms, risks and conditions of the transactions contemplated hereby and by the other Loan Documents (including any amendment, waiver or other modification hereof or thereof); (ii) in connection with the process leading to such transaction, each of the Agent, the Lenders and the Arrangers is and has been acting solely as a principal and is not the financial advisor, agent or fiduciary, for the Borrower or any of its Affiliates, stockholders, creditors or employees or any other Person; (iii) neither the Agent nor any Lender or Arranger has assumed or will assume an advisory, agency or fiduciary responsibility in favor of the Borrower with respect to any of the transactions contemplated hereby or the process leading thereto, including with respect to any amendment, waiver or other modification hereof or of any other Loan Document (irrespective of whether the Agent or any Lender or Arranger has advised or is currently advising the Borrower or any of its Affiliates on other matters) and neither the Agent nor any Lender or Arranger has any obligation to the Borrower with respect to the transactions contemplated hereby except those obligations expressly set forth herein and in the other Loan Documents; (iv) the Agent, each of the Lenders and the Arrangers and their respective Affiliates may be engaged in a broad range of transactions that involve interests that differ from those of the Borrower and its Affiliates, and neither the Agent nor any Lender or Arranger has any obligation to disclose any of such interests by virtue of any advisory, agency or fiduciary relationship; and (v) the Agent and each Lender and Arranger have not provided and will not provide any legal, accounting, regulatory or tax advice with respect to any of the transactions contemplated hereby (including any amendment, waiver or other modification hereof or of any other Loan Document) and the Borrower has consulted its own legal, accounting, regulatory and tax advisors to the extent it has deemed appropriate. The Borrower hereby waives and releases, to the fullest extent permitted by Law, any claims that it may have against the Agent and each Lender and Arranger with respect to any breach or alleged breach of agency or fiduciary duty in connection with the Loan Documents.
Section 8.16      Survival of Representations and Warranties . All representations and warranties made hereunder and in any other Loan Document or other document delivered pursuant hereto or thereto or in connection herewith or therewith shall survive the execution and delivery hereof and thereof. Such representations and warranties have been or will be relied upon by the Agent and each Lender, regardless of any investigation made by the Agent or any Lender or on their

behalf, and shall continue in full force and effect as long as any Loan or any other Obligation hereunder shall remain unpaid or unsatisfied.
Section 8.17      Severability . If any provision of this Agreement or the other Loan Documents is held to be illegal, invalid or unenforceable, (a) the legality, validity and enforceability of the remaining provisions of this Agreement and the other Loan Documents shall not be affected or impaired thereby and (b) the parties shall endeavor in good faith negotiations to replace the illegal, invalid or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the illegal, invalid or unenforceable provisions. The invalidity of a provision in a particular jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
[ REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGES FOLLOW ]

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written.

		
 	PINNACLE WEST CAPITAL CORPORATION	
 	 	
 	By:     /s/ Lee R. Nickloy	
 	Name: Lee R. Nickloy	
 	Title:    Vice President and Treasurer	

 	 	

Signature Page to
Pinnacle West Term Loan Agreement

	
		
ADMINISTRATIVE AGENT:	JPMORGAN CHASE BANK, N.A., as Agent	
 	 	
 	By:     /s/ Nancy R. Barwig	
 	Name: Nancy R. Barwig	
 	Title:     Credit Executive	

 	 	

    

Signature Page to
Pinnacle West Term Loan Agreement

	
		
LENDERS:	JPMORGAN CHASE BANK, N.A., as a Lender	
 	 	
 	By:     /s/ Nancy R. Barwig	
 	Name: Nancy R. Barwig	
 	Title:    Credit Executive	

 	 	

    

Signature Page to
Pinnacle West Term Loan Agreement

	
		
 	US Bank, National Association, as a Lender	
 	 	
 	By:    /s/ Holland H. Williams	
 	Name:    Holland H. Williams	
 	Title:    Vice President	

 	 	

Signature Page to
Pinnacle West Term Loan Agreement

	
		
 	TD Bank, N.A., as a Lender	
 	 	
 	By:     /s/ David Perlman	
 	Name:    David Perlman	
 	Title:    Senior Vice President	

 	 	

Signature Page to
Pinnacle West Term Loan Agreement

	
		
 	THE BANK OF NOVA SCOTIA, as a Lender	
 	 	
 	By:     /s/ Thane Rattew	
 	Name:    Thane Rattew	
 	Title:    Managing Director	

 	 	

Signature Page to
Pinnacle West Term Loan Agreement

	
		
 	THE BANK OF TOKYO-MITSUBISHI UFJ, LTD., as a Lender	
 	 	
 	By:     /s/ Chi-Cheng Chen	
 	Name:    Chi=Cheng Chen	
 	Title:    Director	

 	 	

Signature Page to
Pinnacle West Term Loan Agreement

SCHEDULE 1.01

COMMITMENTS AND RATABLE SHARES

	
			
Lender	Commitment	Ratable Share	
JPMorgan Chase Bank, N.A.	$37,000,000	29.6%	
U.S. Bank National Association	$22,000,000	17.6%	
The Bank of Nova Scotia	$22,000,000	17.6%	
The Bank of Tokyo-Mitsubishi UFJ, Ltd.	$22,000,000	17.6%	
TD Bank, N.A.	$22,000,000	17.6%	
TOTAL	$125,000,000	    100%	

SCHEDULE 4.01(j)

SUBSIDIARIES

Arizona Public Service Company

SCHEDULE 4.01(k)

EXISTING INDEBTEDNESS

None.

SCHEDULE 8.02

CERTAIN ADDRESSES FOR NOTICES

BORROWER:
Pinnacle West Capital Corporation
400 North Fifth Street
Mail Station 9040
Phoenix, AZ 85004
Attention:     Treasurer
Telephone:    (602) 250-3300
Telecopier:    (602) 250-3902
Electronic    Lee.Nickloy@PinnacleWest.com

AGENT :
Notices relating to Borrowing requests or Interest Election Requests:

JPMorgan Chase Bank, N.A.
10 S. Dearborn St., Floor L2
Mail Code IL1-0480
Chicago, IL 60603
Facsimile No.: (888) 303-9732
Telephone No.: (312) 732-1891
Attention: Jonathan Dowdy
Email: jonathan.dowdy@jpmorgan.com
Notices other than with respect to Borrowing requests or Interest Election Requests:
                                                      
JPMorgan Chase Bank, N.A.
                                                            10 S. Dearborn St.
                                                            Mail Code IL1-0090
                                                            Chicago, IL 60603
                                                            Facsimile No.: (312) 732-1762
                                                            Telephone No.: (312) 732-1838
                                                            Attention:  Nancy Barwig
                                                            Email:  nancy.r.barwig@jpmorgan.com
With a copy to the Portfolio Management Administration:
                                                            JPMorgan Chase Bank, N.A.
                                                            10 S. Dearborn St.
                                                            Mail Code IL1-0874
                                                            Chicago, IL 60603
                                                            Facsimile No.: (312) 325-3150
                                                            Telephone No.: (312) 325-3238
                                                            Attention:  Lisa Tverdek
                                                            Email:  lisa.tverdek@jpmorgan.com

EXHIBIT A - FORM OF
PROMISSORY NOTE

	
		
$_____________	December 31, 2014	

FOR VALUE RECEIVED, the undersigned, PINNACLE WEST CAPITAL CORPORATION, an Arizona corporation (the “ Borrower ”), HEREBY UNCONDITIONALLY PROMISES TO PAY to the order of _______________ (the “ Lender ”) or its registered assigns, without offset or counterclaim, in lawful money of the United States of America and in same day funds, the principal amount of ________________________ DOLLARS ($___________), or, if less, the aggregate outstanding principal amount of the Loans made by the Lender to the Borrower pursuant to the Term Loan Agreement (as defined below). The principal amount hereof shall be paid in the amounts and on the dates specified in the Term Loan Agreement. The Borrower further agrees to pay interest in like money on the unpaid principal amount hereof from time to time outstanding at the rates and on the dates specified in the Term Loan Agreement. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings assigned to such terms in the Term Loan Agreement.
Both principal and interest are payable to JPMorgan Chase Bank, N.A., as Agent, in accordance with Section 2.11 of the Term Loan Agreement, in same day funds. The Loans made by the Lender to the Borrower pursuant to the Term Loan Agreement, and all payments made on account of the principal amount thereof, shall be recorded by the Lender and, prior to any transfer hereof, endorsed on the grid attached hereto which is part of this Note, provided that the failure to so record any such Loan or any payment on account thereof shall not affect the payment obligations of the Borrower hereunder or under the Term Loan Agreement.
This Note (a) is one of the Notes referred to in the Term Loan Agreement, dated as of December 31, 2014 (as amended, restated, supplemented or otherwise modified from time to time, the “ Term Loan Agreement ”), among the Borrower, the Lenders named therein and from time to time party thereto, U.S. Bank National Association, as Syndication Agent, TD Bank, N.A., The Bank of Nova Scotia and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Co-Documentation Agents, and JPMorgan Chase Bank, as Agent, (b) is subject to the provisions of the Term Loan Agreement and (c) is subject to optional and mandatory prepayment in whole or in part as provided in the Term Loan Agreement.
Upon the occurrence of any one or more Events of Default, all principal and all accrued interest then remaining unpaid on this Note shall become, or may be declared to be, immediately due and payable, as provided in the Term Loan Agreement.
All parties now and hereafter liable with respect to this Note, whether maker, principal, surety, guarantor, endorser or otherwise, hereby waive presentment, demand, protest, and all other notices of any kind. No failure to exercise, and no delay in exercising, any rights hereunder on the part of the holder hereof shall operate as a waiver of such rights.

This Note may not be transferred except pursuant to and in accordance with the terms and conditions of the Term Loan Agreement.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

	
	
PINNACLE WEST CAPITAL CORPORATION	
By:_________________________________
      Name:
      Title:	

LOANS AND PAYMENTS OF PRINCIPAL

	
					
Date	Amount of
Loan	Amount of Principal
Paid or Prepaid	Unpaid Principal
Balance	Notation Made By	

 	 	 	 	 	

 	 	 	 	 	

 	 	 	 	 	

 	 	 	 	 	

 

EXHIBIT B - FORM OF NOTICE OF INITIAL
BORROWING

JPMorgan Chase Bank, N.A., as Agent
for the Lenders parties
to the Term Loan Agreement
referred to below
10 S. Dearborn St.
Mail Code IL1-0480
Chicago, IL 60603
Facsimile No. (888) 303-9732
Email: jonathan.dowdy@jpmorgan.com

Attention: Jonathan Dowdy

December [__], 2014

Ladies and Gentlemen:

The undersigned, Pinnacle West Capital Corporation, an Arizona corporation (the “ Borrower ”), refers to the draft dated 12/ [__] /14 of the Term Loan Agreement (document ID number: CHI 204583986 v. [ __ ] ) (the “ Term Loan Agreement ”, the terms defined therein being used herein as therein defined) to be entered into among the Borrower, the Lenders named therein and from time to time party thereto, U.S. Bank National Association, as Syndication Agent, TD Bank, N.A., The Bank of Nova Scotia and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Co-Documentation Agents, and JPMorgan Chase Bank, N.A., as Agent, and hereby gives you notice, irrevocably, pursuant to Section 2.02 of the Term Loan Agreement that the undersigned hereby requests the Initial Borrowing under the Term Loan Agreement, and in that connection sets forth below the information relating to the Initial Borrowing as required by Section 2.02(a) of the Term Loan Agreement:

(i)	The Business Day of the Initial Borrowing is December [__] , 2014.	
		
(ii)	The Type of Loans comprising the Initial Borrowing is Eurodollar Rate Loans.	
		
(iii)	The aggregate amount of the Initial Borrowing is $125,000,000.	
		
(iv)	The initial Interest Period for each Eurodollar Rate Loan made as part of the Initial Borrowing is one month.	
The undersigned hereby certifies that the following statements will be true on the date of the Initial Borrowing:
(A)      the representations and warranties contained in Section 4.01 of the Term Loan Agreement are true and correct, both before and after giving effect to the Initial Borrowing and to the application of the proceeds thereof, as though made on and as of such date;

(B)      no event has occurred and is continuing, or would result from the Initial Borrowing or from the application of the proceeds therefrom, that constitutes a Default; and
(C)      after giving effect to the Initial Borrowing, the Indebtedness of the Borrower does not exceed that permitted by (A) applicable resolutions of the Board of Directors of the Borrower or (B) applicable Laws of any Governmental Authority.
The Borrower hereby acknowledges and agrees as follows:

1.	This Notice of Initial Borrowing is irrevocable.	
		
2.	The Borrower shall indemnify each Lender against any loss (excluding loss of anticipated profits), cost or expense incurred by such Lender as a result of any failure by the Borrower (a) to execute and deliver the Term Loan Agreement on or before December 31, 2014, (b) to fulfill the applicable conditions set forth in Article III of the Term Loan Agreement on December 31, 2014 or (c) to otherwise borrow the Eurodollar Rate Loans requested by the Borrower in this Notice of Initial Borrowing on December [__], 2014, in each case in accordance with Section 8.04(e) of the Term Loan Agreement (the terms of which Section are hereby incorporated by reference into this Notice of Initial Borrowing to the same extent and with the same force as if fully set forth herein).	
		
3.	The terms of paragraphs 1 and 2 above are not conditioned upon the execution and delivery by the Borrower, the Agent or the Lenders of the Term Loan Agreement.	
This Notice of Initial Borrowing shall be governed by, and construed in accordance with, the laws of the State of New York.

		
 	Very truly yours,	
 	 	
 	PINNACLE WEST CAPITAL CORPORATION	

 	By:      ______________________________	
 	Name:	
 	Title:	

EXHIBIT C - FORM OF
ASSIGNMENT AND ASSUMPTION

This Assignment and Assumption (the “ Assignment and Assumption ”) is dated as of the Effective Date set forth below and is entered into by and between [Insert name of Assignor] (the “ Assignor ”) and [Insert name of Assignee] (the “ Assignee ”). Capitalized terms used but not defined herein shall have the meanings given to them in the Term Loan Agreement identified below (as amended, restated, supplemented or otherwise modified from time to time, the “ Term Loan Agreement ”), receipt of a copy of which is hereby acknowledged by the Assignee. Annex 1 attached hereto (the “ Standard Terms and Conditions ”) is hereby agreed to and incorporated herein by reference and made a part of this Assignment and Assumption as if set forth herein in full.
For an agreed consideration, the Assignor hereby irrevocably sells and assigns to the Assignee, and the Assignee hereby irrevocably purchases and assumes from the Assignor, subject to and in accordance with the Standard Terms and Conditions and the Term Loan Agreement, as of the Effective Date referred to below, (i) all of the Assignor’s rights and obligations in its capacity as a Lender under the Term Loan Agreement and any other documents or instruments delivered pursuant thereto to the extent related to the amount and percentage interest identified below of all of such outstanding rights and obligations of the Assignor under the Term Loan Agreement (including, without limitation, all Loans owing to the Assignor) and (ii) to the extent permitted to be assigned under applicable Law, all claims, suits, causes of action and any other right of the Assignor (in its capacity as a Lender) against any Person, whether known or unknown, arising under or in connection with the Term Loan Agreement, any other documents or instruments delivered pursuant thereto or the loan transactions governed thereby or in any way based on or related to any of the foregoing, including, but not limited to, contract claims, tort claims, malpractice claims, statutory claims and all other claims at Law or in equity related to the rights and obligations sold and assigned pursuant to clause (i) above (the rights and obligations sold and assigned pursuant to clauses (i) and (ii) above being referred to herein collectively as, the “ Assigned Interest ”). Such sale and assignment is without recourse to the Assignor and, except as expressly provided in this Assignment and Assumption, without representation or warranty by the Assignor. Assignee shall deliver (if it is not already a Lender) to the Agent an Administrative Questionnaire.

1.	Assignor: ________________________________	
		
2.	Assignee: ________________________________	
[and is an Affiliate of [identify Lender] Select as applicable. ]

3.	Borrower: Pinnacle West Capital Corporation	
		
4.	Agent: JPMorgan Chase Bank, N.A., as the agent under the Term Loan Agreement	
		
5.	Term Loan Agreement: Term Loan Agreement, dated as of December 31, 2014, among the Borrower, the Lenders named therein and from time to time party thereto, U.S. Bank National Association, as Syndication Agent, TD Bank, N.A., The Bank of Nova Scotia and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Co-Documentation Agents, and JPMorgan Chase Bank, N.A., as Agent.	
		
6.	Assigned Interest:	

	
			
Aggregate Principal Amount
of Loans of all Lenders	Principal Amount of Loans Assigned	Percentage Assigned of Aggregate Principal Amount of Loans Outstanding Set forth, to at least 9 decimals, as a percentage of the principal amount of all Loans outstanding under the Term Loan Agreement as of the Effective Date or the Trade Date, as applicable.	
 	 	 	
$____________	$____________	___________%	

[7. Trade Date:] To be completed if the Assignor and the Assignee intend that the minimum assignment amount is to be determined as of the Trade Date.

Effective Date: ________, 20___ [TO BE INSERTED BY AGENT AND WHICH SHALL BE THE EFFECTIVE DATE OF RECORDATION OF TRANSFER IN THE REGISTER THEREFOR.]

The terms set forth in this Assignment and Assumption are hereby agreed to:

	
		
 	ASSIGNOR	
 	 	
 	[NAME OF ASSIGNOR]	

 	By:      ______________________________	
 	Name:	
 	Title:	
 	 	
 	ASSIGNEE	
 	 	
 	[NAME OF ASSIGNEE]	

 	By:      ______________________________	
 	Name:	
 	Title:	

[Consented to and] To be added only if the consent of the Agent is required by the terms of the Term Loan Agreement. Accepted:

	
		
JPMORGAN CHASE BANK, N.A., as Agent	 	
 	 	
By:      ______________________________	 	
Name:	 	
Title:	 	

[Consented to:] To be added only if the consent of the Borrower is required by the terms of the Term Loan Agreement.

	
		
PINNACLE WEST CAPITAL CORPORATION	 	
 	 	
By:      ______________________________	 	
Name:	 	
Title:	 	

ANNEX 1 TO ASSIGNMENT AND ASSUMPTION
STANDARD TERMS AND CONDITIONS FOR
ASSIGNMENT AND ASSUMPTION

1.      Representations and Warranties .
1.1      Assignor . The Assignor (a) represents and warrants that (i) it is the legal and beneficial owner of the Assigned Interest, (ii) the Assigned Interest is free and clear of any lien, encumbrance or other adverse claim and (iii) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby; and (b) assumes no responsibility with respect to (i) any statements, warranties or representations made in or in connection with the Term Loan Agreement or any other Loan Document, (ii) the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Documents, (iii) the financial condition of the Borrower, any of its Subsidiaries or Affiliates or any other Person obligated in respect of any Loan Document or (iv) the performance or observance by the Borrower of any of its obligations under any Loan Document.
1.2      Assignee . The Assignee (a) represents and warrants that (i) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby and to become a Lender under the Term Loan Agreement, (ii) it meets all the requirements to be an Eligible Assignee under Section 8.07 of the Term Loan Agreement (subject to such consents, if any, as may be required under Section 8.07 of the Term Loan Agreement), (iii) from and after the Effective Date, it shall be bound by the provisions of the Term Loan Agreement as a Lender thereunder and, to the extent of the Assigned Interest, shall have the obligations of a Lender thereunder, (iv) it is sophisticated with respect to decisions to acquire assets of the type represented by the Assigned Interest and either it, or the Person exercising discretion in making its decision to acquire the Assigned Interest, is experienced in acquiring assets of such type, (v) it has received a copy of the Term Loan Agreement, and has received or has been accorded the opportunity to receive copies of the most recent financial statements delivered pursuant to Section 4.01(e) or 5.01(h) of the Term Loan Agreement, as applicable, and such other documents and information as it deems appropriate to make its own credit analysis and decision to enter into this Assignment and Assumption and to purchase the Assigned Interest, (vi) it has, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Assignment and Assumption and to purchase the Assigned Interest, and (vii) if it is a Foreign Lender, attached to this Assignment and Assumption is any documentation required to be delivered by it pursuant to the terms of the Term Loan Agreement, duly completed and executed by the Assignee; (b) appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under the Loan Documents as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto; and (c) agrees that (i) it will, independently and without reliance on the Agent, the Assignor or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents, and (ii) it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender.

2.      Payments . From and after the Effective Date, the Agent shall make all payments in respect of the Assigned Interest (including payments of principal, interest, fees and other amounts) to the Assignor for amounts which have accrued to but excluding the Effective Date and to the Assignee for amounts which have accrued from and after the Effective Date.
3.      General Provisions . This Assignment and Assumption shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. This Assignment and Assumption may be executed in any number of counterparts, which together shall constitute one instrument. Delivery of an executed counterpart of a signature page of this Assignment and Assumption by facsimile or other electronic transmission shall be effective as delivery of a manually executed counterpart of this Assignment and Assumption. This Assignment and Assumption shall be governed by, and construed in accordance with, the Law of the State of New York.

EXHIBIT D - FORM OF
INTEREST ELECTION REQUEST

[Date]

JPMorgan Chase Bank, N.A., as Agent for the Lenders party to the
Term Loan Agreement referred to below
10 S. Dearborn St., Floor L2
Mail Code IL 1-0480
Chicago, IL 60603
Facsimile No. (888) 303-9732
Email: jonathan.dowdy@jpmorgan.com

Attention: Jonathan Dowdy

Ladies and Gentlemen:

The undersigned, Pinnacle West Capital Corporation, an Arizona corporation (the “Borrower ”), refers to the Term Loan Agreement, dated as of December 31, 2014 (as amended, restated, supplemented, or otherwise modified from time to time, the “Term Loan Agreement” , the terms defined therein and not otherwise defined herein being used herein as therein defined), among the Borrower, the Lenders named therein and from time to time party thereto, U.S. Bank National Association, as Syndication Agent, TD Bank, N.A., The Bank of Nova Scotia and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Co-Documentation Agents, and JPMorgan Chase Bank, N.A., as Agent,, and hereby gives you notice, irrevocably, that the undersigned requests a [Conversion] [continuation] of a Borrowing (the “Existing Borrowing” ) under the Term Loan Agreement, and in that connection has set forth below the information relating to such [Conversion] [continuation] (the “Proposed [Conversion] [Continuation]” ) as required by the definition of “Interest Period” contained in Section 1.01 of the Term Loan Agreement and/or Section 2.07 of the Term Loan Agreement, as applicable:
(i)      The Business Day of the Proposed [Conversion] [Continuation] is _______ ___, 20__.
(ii)      The Type of Loans comprising the Existing Borrowing is [Base Rate Loans] [Eurodollar Rate Loans having an Interest Period of ____ months(s)].
(iii)      The aggregate amount of the Proposed [Conversion] [Continuation] is $______________.
(iv)      The type of Loans to which such Existing Borrowing is proposed to be [Converted] [continued] is [Base Rate Loans] [Eurodollar Rate Loans].
[(v)      The initial Interest Period for the Eurodollar Rate Loans made as part of the Proposed [Conversion] [Continuation] is _____months(s).]      To be included for a Conversion to, or a continuation of, Eurodollar Rate Loans only.

The undersigned hereby certifies that the Borrower’s request for the Proposed [Conversion] [Continuation] is made in compliance with the definition of “Interest Period” contained in Section 1.01 of the Term Loan Agreement and with Sections 2.06 and 2.07 of the Term Loan Agreement. [The undersigned hereby acknowledges that the delivery of this Interest Election Request shall constitute a representation and warranty by the Borrower that, on the date of the Proposed [Conversion] [Continuation], no Event of Default has occurred and is continuing (unless the Borrower informs the Agent otherwise prior to the date of the Proposed [Conversion] [Continuation], in which case the Proposed [Conversion] [Continuation] shall not be made.]      Include this bracketed sentence for a Conversion to, or a continuation of, Eurodollar Rate Loans only.

	
		
 	Very truly yours,	
 	 	
 	PINNACLE WEST CAPITAL CORPORATION	

 	By:      ______________________________	
 	Name:	
 	Title:	

Exhibit 12.1
 
PINNACLE WEST CAPITAL CORPORATION
RATIO OF EARNINGS TO FIXED CHARGES
(dollars in thousands)

																				
 	2014	 	2013	 	2012	 	2011	 	2010	
Earnings:	 		 	 		 	 		 	 		 	 		
Income from continuing operations attributable to common shareholders	$	397,595		 	$	406,074		 	$	387,380		 	$	328,110		 	$	324,688		
Income taxes	220,705		 	230,591		 	237,317		 	183,604		 	160,869		
Fixed charges	208,226		 	206,089		 	219,437		 	246,462		 	248,664		
Total earnings	$	826,526		 	$	842,754		 	$	844,134		 	$	758,176		 	$	734,221		
Fixed Charges:	 		 	 		 	 		 	 		 	 		
Interest expense	$	200,950		 	$	201,888		 	$	214,616		 	$	241,995		 	$	244,174		
Estimated interest portion of annual rents	7,276		 	4,201		 	4,821		 	4,467		 	4,490		
Total fixed charges	$	208,226		 	$	206,089		 	$	219,437		 	$	246,462		 	$	248,664		
Ratio of Earnings to Fixed Charges (rounded down)	3.96		 	4.08		 	3.84		 	3.07		 	2.95		

Exhibit 12.2
 
ARIZONA PUBLIC SERVICE COMPANY
RATIO OF EARNINGS TO FIXED CHARGES
(dollars in thousands)

																				
 	2014	 	2013	 	2012	 	2011	 	2010	
Earnings:	 	 	 	 	 	 	 	 	 	
Income from continuing operations attributable to common shareholders	$	421,219		 	$	424,969		 	$	395,497		 	$	336,249		 	$	335,663		
Income taxes	237,360		 	245,095		 	244,396		 	192,542		 	170,465		
Fixed charges	204,198		 	202,457		 	214,227		 	238,286		 	234,184		
Total earnings	$	862,777		 	$	872,521		 	$	854,120		 	$	767,077		 	$	740,312		
 	 	 	 	 	 	 	 	 	 	
Fixed Charges:	 	 	 	 	 	 	 	 	 	
Interest charges	$	193,119		 	$	194,616		 	$	205,533		 	$	229,326		 	$	225,269		
Amortization of debt discount	4,168		 	4,046		 	4,215		 	4,616		 	4,559		
Estimated interest portion of annual rents	6,911		 	3,795		 	4,479		 	4,344		 	4,356		
Total fixed charges	$	204,198		 	$	202,457		 	$	214,227		 	$	238,286		 	$	234,184		
 	 	 	 	 	 	 	 	 	 	
Ratio of Earnings to Fixed Charges (rounded down)	 	 	 	 	 	 	 	 	 	
Earnings:	4.22		 	4.30		 	3.98		 	3.21		 	3.16		

Exhibit 12.3
 
PINNACLE WEST CAPITAL CORPORATION
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED
STOCK DIVIDEND REQUIREMENTS
(dollars in thousands)

																				
 	2014	 	2013	 	2012	 	2011	 	2010	
Earnings:	 	 	 	 	 	 	 	 	 	
Income from continuing operations attributable to common shareholders	$	397,595		 	$	406,074		 	$	387,380		 	$	328,110		 	$	324,688		
Income taxes	220,705		 	230,591		 	237,317		 	183,604		 	160,869		
Fixed charges	208,226		 	206,089		 	219,437		 	246,462		 	248,664		
Total earnings	$	826,526		 	$	842,754		 	$	844,134		 	$	758,176		 	$	734,221		
 	 	 	 	 	 	 	 	 	 	
Fixed Charges:	 	 	 	 	 	 	 	 	 	
Interest expense	$	200,950		 	$	201,888		 	$	214,616		 	$	241,995		 	$	244,174		
Estimated interest portion of annual rents	7,276		 	4,201		 	4,821		 	4,467		 	4,490		
Total fixed charges	$	208,226		 	$	206,089		 	$	219,437		 	$	246,462		 	$	248,664		
 	 	 	 	 	 	 	 	 	 	
Preferred Stock Dividend Requirements:	 	 	 	 	 	 	 	 	 	
Income before income taxes attributable to common shareholders	$	618,300		 	$	636,665		 	$	624,697		 	$	511,714		 	$	485,557		
Net income from continuing operations attributable to common shareholders	397,595		 	406,074		 	387,370		 	328,110		 	324,688		
Ratio of income before income taxes to net income	1.56		 	1.57		 	1.61		 	1.56		 	1.50		
Preferred stock dividends	—		 	—		 	—		 	—		 	—		
 	 	 	 	 	 	 	 	 	 	
Preferred stock dividend requirements — ratio (above) times preferred stock dividends	$	—		 	$	—		 	$	—		 	$	—		 	$	—		
 	 	 	 	 	 	 	 	 	 	
Fixed Charges and Preferred Stock Dividend Requirements:	 	 	 	 	 	 	 	 	 	
Fixed charges	$	208,226		 	$	206,089		 	$	219,437		 	$	246,462		 	$	248,664		
Preferred stock dividend requirements	—		 	—		 	—		 	—		 	—		
Total	$	208,226		 	$	206,089		 	$	219,437		 	$	246,462		 	$	248,664		
 	 	 	 	 	 	 	 	 	 	
Ratio of Earnings to Fixed Charges (rounded down)	3.96		 	4.08		 	3.84		 	3.07		 	2.95		

Exhibit 21.1

SUBSIDIARIES LIST

Arizona Public Service Company

	

	 	
*All other subsidiaries of Pinnacle West Capital Corporation and all subsidiaries of Arizona Public Service Company have been omitted as they do not constitute significant subsidiaries within the meaning of Rule 1-02(w) of Regulation S-X.

 

Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-180897 and 333-197017 on Form S-3; and in Registration Statement Nos. 333-143432, 333-182427 and 333-157151 on Form S-8 of our report dated February 20, 2015, relating to the consolidated financial statements and financial statement schedules of Pinnacle West Capital Corporation, and the effectiveness of Pinnacle West Capital Corporation’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of Pinnacle West Capital Corporation for the year ended December 31, 2014.
/s/ Deloitte & Touche LLP
Phoenix, Arizona
February 20, 2015

 

Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-180897-01 on Form S-3; and in Registration Statement Nos. 333-46161 and 333-158774 on Form S-8 of our report dated February 20, 2015, relating to the consolidated financial statements and financial statement schedule of Arizona Public Service Company and the effectiveness of Arizona Public Service Company’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of Arizona Public Service Company for the year ended December 31, 2014.

/s/ Deloitte & Touche LLP

Phoenix, Arizona 
 February 20, 2015

Exhibit 31.1
CERTIFICATION
I, Donald E. Brandt, certify that:

1.	I have reviewed this Annual Report on Form 10-K of Pinnacle West Capital Corporation;	
		
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
		
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
		
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	
		
a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
		
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
		
c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
		
d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	
		
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the	

1

audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
		
a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
		
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	

Date: February 20, 2015

				
	 	 	 	
 	 	/s/ Donald E. Brandt	 	
 	 	Donald E. Brandt	 	
 	 	Chairman, President and Chief Executive Officer	 	

 	 	 	 	

 	 	 	 	

                                                

2

CERTIFICATION
I, James R. Hatfield, certify that:

1.	I have reviewed this Annual Report on Form 10-K of Pinnacle West Capital Corporation;	
		
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
		
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
		
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	
		
a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
		
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
		
c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
		
d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	
		
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the	

1

audit committee of the registrant's board of directors (or persons performing the equivalent functions):
		
a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and	
		
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	

Date:    February 20, 2015

	

 	 	/s/ James R. Hatfield	 	
 	 	James R. Hatfield	 	
 	 	Executive Vice President and Chief Financial Officer	 	

 	 	 	 	

 	 	 	 	

                        

2

CERTIFICATION
I, Donald E. Brandt, certify that:

1.	I have reviewed this Annual Report on Form 10-K of Arizona Public Service Company;	
		
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
		
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
		
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	
		
a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
		
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
		
c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
		
d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	
		
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the	

2

audit committee of the registrant's board of directors (or persons performing the equivalent functions):
		
a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
		
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	

Date:    February 20, 2015

	

 	 	/s/ Donald E. Brandt	 	
 	 	Donald E. Brandt	 	
 	 	Chairman, President and Chief Executive Officer	 	

 	 	 	 	

 	 	 	 	

                    

2

CERTIFICATION
I, James R. Hatfield, certify that:

1.	I have reviewed this Annual Report on Form 10-K of Arizona Public Service Company;	
		
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
		
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
		
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	
		
a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
		
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
		
c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
		
d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	
		
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the	

2

audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
		
a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
		
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	

Date:    February 20, 2015

	

 	 	/s/ James R. Hatfield	 	
 	 	James R. Hatfield	 	
 	 	Executive Vice President and Chief Financial Officer	 	

 	 	 	 	

 	 	 	 	

2

CERTIFICATION 
 OF 
 CHIEF EXECUTIVE OFFICER 
 AND 
 CHIEF FINANCIAL OFFICER 
 PURSUANT TO 18 U.S.C. 1350, 
 AS ADOPTED PURSUANT TO 
 SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Donald E. Brandt, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report on Form 10-K of Pinnacle West Capital Corporation for the year ended December 31, 2014 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Pinnacle West Capital Corporation.
Date:    February 20, 2015

	

 	 	/s/ Donald E. Brandt	 	
 	 	Donald E. Brandt	 	
 	 	Chairman, President and Chief Executive Officer	 	
 	 	 	 	
I, James R. Hatfield, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report on Form 10-K of Pinnacle West Capital Corporation for the year ended December 31, 2014 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Pinnacle West Capital Corporation.
Date:    February 20, 2015

	

 	 	/s/ James R. Hatfield	 	
 	 	James R. Hatfield	 	
 	 	Executive Vice President and Chief Financial Officer	 	

CERTIFICATION 
 OF 
 CHIEF EXECUTIVE OFFICER 
 AND 
 CHIEF FINANCIAL OFFICER 
 PURSUANT TO 18 U.S.C. 1350, 
 AS ADOPTED PURSUANT TO 
 SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Donald E. Brandt, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report on Form 10-K of Arizona Public Service Company for the year ended December 31, 2014 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Arizona Public Service Company.
Date:    February 20, 2015

	

 	 	/s/ Donald E. Brandt	 	
 	 	Donald E. Brandt	 	
 	 	Chairman, President and Chief Executive Officer	 	
 	 	 	 	
I, James R. Hatfield, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report on Form 10-K of Arizona Public Service Company for the year ended December 31, 2014 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Arizona Public Service Company.
Date:    February 20, 2015

	

 	 	/s/ James R. Hatfield	 	
 	 	James R. Hatfield	 	
 	 	Executive Vice President and Chief Financial Officer