Table of Contents

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

 
FORM 10-Q
 
(Mark One)
 
x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2013
 
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	 	Exact Name of Each Registrant as specified in its
charter; State of Incorporation; Address; 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	
 
Indicate by check mark whether each 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 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.
PINNACLE WEST CAPITAL CORPORATION

Large accelerated filer x	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o	
ARIZONA PUBLIC SERVICE COMPANY

Large accelerated filer o	Accelerated filer o	Non-accelerated filer x	Smaller reporting company o	
 
Indicate by check mark whether each registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

PINNACLE WEST CAPITAL CORPORATION	Yes   o    No   x	
ARIZONA PUBLIC SERVICE COMPANY	Yes   o    No   x	
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

PINNACLE WEST CAPITAL CORPORATION	Number of shares of common stock, no par value, outstanding as of April 26, 2013:  109,947,418	
ARIZONA PUBLIC SERVICE COMPANY	Number of shares of common stock, $2.50 par value, outstanding as of April 26, 2013:  71,264,947	
 
Arizona Public Service Company meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format allowed under that General Instruction.

 

Table of Contents
 
TABLE OF CONTENTS 

 	 	Page	
 	 	 	
Forward-Looking Statements	 	2	
Part I	 	 	 	3	
Item 1.	 	Financial Statements	 	3	
 	 	Pinnacle West Capital Corporation	 	3	
 	 	Arizona Public Service Company	 	42	
Item 2.	 	Management’s Discussion and Analysis of Financial Condition and Results of Operations	 	50	
Item 3.	 	Quantitative and Qualitative Disclosures About Market Risk	 	67	
Item 4.	 	Controls and Procedures	 	67	
 	 	 	 	 	
Part II	 	 	 	69	
Item 1.	 	Legal Proceedings	 	69	
Item 1A.	 	Risk Factors	 	69	
Item 2.	 	Unregistered Sales of Equity Securities and Use of Proceeds	 	69	
Item 5.	 	Other Information	 	70	
Item 6.	 	Exhibits	 	71	
Signatures	 	74	
 
This combined Form 10-Q is separately provided by Pinnacle West Capital Corporation (“Pinnacle West”) and Arizona Public Service Company (“APS”).  Any use of the words “Company,” “we,” and “our” refer to Pinnacle West.  Each registrant is providing on its own behalf all of the information contained in this Form 10-Q that relates to such registrant and, where required, its subsidiaries.  Except as stated in the preceding sentence, neither registrant is providing 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 1 of this report includes Condensed Consolidated Financial Statements of Pinnacle West and Condensed Consolidated Financial Statements of APS.  Item 1 also includes Notes to Pinnacle West’s Condensed Consolidated Financial Statements, the majority of which also relate to APS, and Supplemental Notes, which only relate to APS’s Condensed Consolidated Financial Statements.

Table of Contents
 
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 Part I, Item 1A of the Pinnacle West/APS Annual Report on Form 10-K for the fiscal year ended December 31, 2012 (“2012 Form 10-K”), Part II, Item 1A of this report and in Part I, Item 2 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report, 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;
·                               volatile fuel and purchased power costs;
·                               fuel and water supply availability;
·                               our ability to achieve timely and adequate rate recovery of our costs, including returns on debt and equity capital;
·                               regulatory and judicial decisions, developments and proceedings;
·                               new legislation or regulation, including those relating to environmental requirements and nuclear plant operations;
·                               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;
·                               competition in retail and wholesale power markets;
·                               the duration and severity of the economic decline in Arizona and current real estate market conditions;
·                              the cost of debt and equity capital and the ability to access capital markets when required;
·                               changes to our credit ratings;
·                               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;
·                               technological developments affecting the electric industry; and
·                               restrictions on dividends or other provisions in our credit agreements and Arizona Corporation Commission (“ACC”) orders.
 
These and other factors are discussed in the Risk Factors described in Part I, Item 1A of our 2012 Form 10-K and in Part II, 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.
 
2 

Table of Contents
 
PART I — FINANCIAL INFORMATION 
 
ITEM 1.  FINANCIAL STATEMENTS 
 
PINNACLE WEST CAPITAL CORPORATION 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(dollars and shares in thousands, except per share amounts)

 	 	Three Months Ended
March 31,	 	
 	 	2013	 	2012	 	
 	 	 	 	 	 	
OPERATING REVENUES	 	$	686,652	 	$	620,631	 	
 	 	 	 	 	 	
OPERATING EXPENSES	 	 	 	 	 	
Fuel and purchased power	 	230,679	 	216,309	 	
Operations and maintenance	 	223,250	 	210,663	 	
Depreciation and amortization	 	103,730	 	100,109	 	
Taxes other than income taxes	 	40,021	 	42,475	 	
Other expenses	 	2,049	 	3,068	 	
Total	 	599,729	 	572,624	 	
OPERATING INCOME	 	86,923	 	48,007	 	
OTHER INCOME (DEDUCTIONS)	 	 	 	 	 	
Allowance for equity funds used during construction	 	6,864	 	4,756	 	
Other income (Note 10)	 	758	 	760	 	
Other expense (Note 10)	 	(3,752	)	(4,068	)	
Total	 	3,870	 	1,448	 	
INTEREST EXPENSE	 	 	 	 	 	
Interest charges	 	49,478	 	56,967	 	
Allowance for borrowed funds used during construction	 	(3,990	)	(3,151	)	
Total	 	45,488	 	53,816	 	
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	 	45,305	 	(4,361	)	
INCOME TAXES	 	12,469	 	(4,645	)	
INCOME FROM CONTINUING OPERATIONS	 	32,836	 	284	 	
LOSS FROM DISCONTINUED OPERATIONS	 	 	 	 	 	
Net of income tax benefit of $(505)	 	—	 	(765	)	
NET INCOME (LOSS)	 	32,836	 	(481	)	
Less: Net income attributable to noncontrolling interests (Note 6)	 	8,392	 	7,776	 	
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS	 	$	24,444	 	$	(8,257	)	
 	 	 	 	 	 	
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING — BASIC	 	109,832	 	109,299	 	
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING — DILUTED	 	110,835	 	109,299	 	
 	 	 	 	 	 	
EARNINGS PER WEIGHTED-AVERAGE COMMON SHARE OUTSTANDING	 	 	 	 	 	
Income (loss) from continuing operations attributable to common shareholders — basic	 	$	0.22	 	$	(0.07	)	
Net income (loss) attributable to common shareholders — basic	 	0.22	 	(0.08	)	
Income (loss) from continuing operations attributable to common shareholders — diluted	 	0.22	 	(0.07	)	
Net income (loss) attributable to common shareholders — diluted	 	0.22	 	(0.08	)	
 	 	 	 	 	 	
DIVIDENDS DECLARED PER SHARE	 	$	—	 	$	0.525	 	
 	 	 	 	 	 	
AMOUNTS ATTRIBUTABLE TO COMMON SHAREHOLDERS:	 	 	 	 	 	
Income (loss) from continuing operations, net of tax	 	$	24,444	 	$	(7,483	)	
Discontinued operations, net of tax	 	—	 	(774	)	
Net income (loss) attributable to common shareholders	 	$	24,444	 	$	(8,257	)	
 
See Notes to Pinnacle West’s Condensed Consolidated Financial Statements.
 
3 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(dollars in thousands)

 	 	Three Months Ended
March 31,	 	
 	 	2013	 	2012	 	
 	 	 	 	 	 	
NET INCOME (LOSS)	 	$	32,836	 	$	(481	)	
 	 	 	 	 	 	
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX	 	 	 	 	 	
Derivative instruments:	 	 	 	 	 	
Net unrealized gain (loss), net of tax benefit (expense) of ($38) and $16,551	 	58	 	(25,352	)	
Reclassification of net realized loss, net of tax benefit of $3,300 and $5,728	 	5,053	 	8,772	 	
Pension and other postretirement benefits activity, net of tax expense of $631 and $631	 	966	 	966	 	
Total other comprehensive income (loss)	 	6,077	 	(15,614	)	
 	 	 	 	 	 	
COMPREHENSIVE INCOME (LOSS)	 	38,913	 	(16,095	)	
Less: Comprehensive income attributable to noncontrolling interests	 	8,392	 	7,776	 	
 	 	 	 	 	 	
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS	 	$	30,521	 	$	(23,871	)	
 
See Notes to Pinnacle West’s Condensed Consolidated Financial Statements.
 
4 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands)

 	 	March 31,
2013	 	December 31,
2012	 	
ASSETS	 	 	 	 	 	
 	 	 	 	 	 	
CURRENT ASSETS	 	 	 	 	 	
Cash and cash equivalents	 	$	25,109	 	$	26,202	 	
Customer and other receivables	 	267,937	 	277,225	 	
Accrued unbilled revenues	 	90,147	 	94,845	 	
Allowance for doubtful accounts	 	(2,537	)	(3,340	)	
Materials and supplies (at average cost)	 	223,605	 	218,096	 	
Fossil fuel (at average cost)	 	35,211	 	31,334	 	
Deferred income taxes	 	75,866	 	152,191	 	
Income tax receivable (Note 5)	 	2,856	 	2,423	 	
Assets from risk management activities (Note 7)	 	20,346	 	25,699	 	
Deferred fuel and purchased power regulatory asset (Note 3)	 	41,315	 	72,692	 	
Other regulatory assets (Note 3)	 	52,872	 	71,257	 	
Other current assets	 	39,050	 	37,102	 	
Total current assets	 	871,777	 	1,005,726	 	
 	 	 	 	 	 	
INVESTMENTS AND OTHER ASSETS	 	 	 	 	 	
Assets from risk management activities (Note 7)	 	34,047	 	35,891	 	
Nuclear decommissioning trust (Note 13)	 	596,168	 	570,625	 	
Other assets	 	64,325	 	62,694	 	
Total investments and other assets	 	694,540	 	669,210	 	
 	 	 	 	 	 	
PROPERTY, PLANT AND EQUIPMENT	 	 	 	 	 	
Plant in service and held for future use	 	14,494,326	 	14,346,367	 	
Accumulated depreciation and amortization	 	(4,997,126	)	(4,929,613	)	
Net	 	9,497,200	 	9,416,754	 	
Construction work in progress	 	498,124	 	565,716	 	
Palo Verde sale leaseback, net of accumulated depreciation (Note 6)	 	128,027	 	128,995	 	
Intangible assets, net of accumulated amortization	 	162,978	 	162,150	 	
Nuclear fuel, net of accumulated amortization	 	140,909	 	122,778	 	
Total property, plant and equipment	 	10,427,238	 	10,396,393	 	
 	 	 	 	 	 	
DEFERRED DEBITS	 	 	 	 	 	
Regulatory assets (Note 3)	 	1,097,389	 	1,099,900	 	
Income tax receivable (Note 5)	 	70,828	 	70,389	 	
Other	 	139,155	 	137,997	 	
Total deferred debits	 	1,307,372	 	1,308,286	 	
 	 	 	 	 	 	
TOTAL ASSETS	 	$	13,300,927	 	$	13,379,615	 	
 
See Notes to Pinnacle West’s Condensed Consolidated Financial Statements.
 
5 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands)

 	 	March 31,
2013	 	December 31,
2012	 	
LIABILITIES AND EQUITY	 	 	 	 	 	
 	 	 	 	 	 	
CURRENT LIABILITIES	 	 	 	 	 	
Accounts payable	 	$	212,078	 	$	221,312	 	
Accrued taxes (Note 5)	 	164,554	 	124,939	 	
Accrued interest	 	44,818	 	49,380	 	
Common dividends payable	 	—	 	59,789	 	
Short-term borrowings	 	—	 	92,175	 	
Current maturities of long-term debt	 	122,828	 	122,828	 	
Customer deposits	 	80,783	 	79,689	 	
Liabilities from risk management activities (Note 7)	 	65,354	 	73,741	 	
Regulatory liabilities (Note 3)	 	76,640	 	88,116	 	
Other current liabilities	 	124,456	 	171,573	 	
Total current liabilities	 	891,511	 	1,083,542	 	
 	 	 	 	 	 	
LONG-TERM DEBT LESS CURRENT MATURITIES	 	 	 	 	 	
Long-term debt less current maturities	 	3,265,589	 	3,160,219	 	
Palo Verde sale leaseback lessor notes less current maturities (Note 6)	 	38,869	 	38,869	 	
Total long-term debt less current maturities	 	3,304,458	 	3,199,088	 	
 	 	 	 	 	 	
DEFERRED CREDITS AND OTHER	 	 	 	 	 	
Deferred income taxes	 	2,064,476	 	2,151,371	 	
Regulatory liabilities (Note 3)	 	805,230	 	759,201	 	
Liability for asset retirements	 	358,184	 	357,097	 	
Liabilities for pension and other postretirement benefits (Note 4)	 	1,034,327	 	1,058,755	 	
Liabilities from risk management activities (Note 7)	 	82,876	 	85,264	 	
Customer advances	 	108,986	 	109,359	 	
Coal mine reclamation	 	119,044	 	118,860	 	
Unrecognized tax benefits (Note 5)	 	72,252	 	71,135	 	
Other	 	307,253	 	283,654	 	
Total deferred credits and other	 	4,952,628	 	4,994,696	 	
 	 	 	 	 	 	
COMMITMENTS AND CONTINGENCIES (SEE NOTES)	 	 	 	 	 	
 	 	 	 	 	 	
EQUITY (Note 8)	 	 	 	 	 	
Common stock, no par value	 	2,484,347	 	2,466,923	 	
Treasury stock	 	(10,482	)	(4,211	)	
Total common stock	 	2,473,865	 	2,462,712	 	
Retained earnings	 	1,648,521	 	1,624,102	 	
Accumulated other comprehensive loss:	 	 	 	 	 	
Pension and other postretirement benefits	 	(63,450	)	(64,416	)	
Derivative instruments	 	(44,481	)	(49,592	)	
Total accumulated other comprehensive loss	 	(107,931	)	(114,008	)	
Total shareholders’ equity	 	4,014,455	 	3,972,806	 	
Noncontrolling interests (Note 6)	 	137,875	 	129,483	 	
Total equity	 	4,152,330	 	4,102,289	 	
 	 	 	 	 	 	
TOTAL LIABILITIES AND EQUITY	 	$	13,300,927	 	$	13,379,615	 	
 
See Notes to Pinnacle West’s Condensed Consolidated Financial Statements.
 
6 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)

 	 	Three Months Ended
March 31,	 	
 	 	2013	 	2012	 	
CASH FLOWS FROM OPERATING ACTIVITIES	 	 	 	 	 	
Net income (loss)	 	$	32,836	 	$	(481	)	
Adjustments to reconcile net income (loss) to net cash provided by operating activities:	 	 	 	 	 	
Depreciation and amortization including nuclear fuel	 	124,344	 	118,487	 	
Deferred fuel and purchased power	 	31,194	 	46,754	 	
Deferred fuel and purchased power amortization	 	1,122	 	(24,514	)	
Allowance for equity funds used during construction	 	(6,864	)	(4,756	)	
Deferred income taxes	 	12,163	 	(1,989	)	
Change in derivative instruments fair value	 	333	 	1,985	 	
Changes in current assets and liabilities:	 	 	 	 	 	
Customer and other receivables	 	3,931	 	52,264	 	
Accrued unbilled revenues	 	4,698	 	20,511	 	
Materials, supplies and fossil fuel	 	(9,386	)	(13,753	)	
Other current assets	 	(2,525	)	(3,502	)	
Accounts payable	 	11,925	 	(39,355	)	
Accrued taxes and income tax receivable — net	 	39,182	 	37,398	 	
Other current liabilities	 	(62,636	)	(39,804	)	
Change in margin and collateral accounts — assets	 	933	 	(1,853	)	
Change in margin and collateral accounts — liabilities	 	24,205	 	(32,950	)	
Change in other long-term assets	 	(31,202	)	(21,469	)	
Change in other long-term liabilities	 	37,904	 	22,362	 	
Net cash flow provided by operating activities	 	212,157	 	115,335	 	
 	 	 	 	 	 	
CASH FLOWS FROM INVESTING ACTIVITIES	 	 	 	 	 	
Capital expenditures	 	(182,859	)	(240,973	)	
Contributions in aid of construction	 	14,912	 	13,871	 	
Allowance for borrowed funds used during construction	 	(3,990	)	(3,151	)	
Proceeds from nuclear decommissioning trust sales	 	135,240	 	92,047	 	
Investment in nuclear decommissioning trust	 	(139,553	)	(96,360	)	
Other	 	(470	)	(533	)	
Net cash flow used for investing activities	 	(176,720	)	(235,099	)	
 	 	 	 	 	 	
CASH FLOWS FROM FINANCING ACTIVITIES	 	 	 	 	 	
Issuance of long-term debt	 	104,307	 	319,081	 	
Repayment of long-term debt	 	—	 	(375,727	)	
Short-term borrowings and payments — net	 	(92,175	)	216,600	 	
Dividends paid on common stock	 	(58,067	)	(55,595	)	
Common stock equity issuance	 	9,441	 	4,289	 	
Other	 	(36	)	(1,757	)	
Net cash flow provided by (used for) financing activities	 	(36,530	)	106,891	 	
 	 	 	 	 	 	
NET DECREASE IN CASH AND CASH EQUIVALENTS	 	(1,093	)	(12,873	)	
 	 	 	 	 	 	
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	 	26,202	 	33,583	 	
 	 	 	 	 	 	
CASH AND CASH EQUIVALENTS AT END OF PERIOD	 	$	25,109	 	$	20,710	 	
 
See Notes to Pinnacle West’s Condensed Consolidated Financial Statements.
 
7 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1.             Consolidation and Nature of Operations
 
The unaudited condensed consolidated financial statements include the accounts of Pinnacle West and our subsidiaries:  APS and El Dorado Investment Company (“El Dorado”) and formerly SunCor Development Company (“SunCor”).  Intercompany accounts and transactions between the consolidated companies have been eliminated.  The unaudited condensed consolidated financial statements for APS include the accounts of APS and the Palo Verde Nuclear Generating Station (“Palo Verde”) sale leaseback variable interest entities (“VIEs”) (see Note 6 for further discussion).  Our accounting records are maintained in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.
 
Weather conditions cause significant seasonal fluctuations in our revenues; therefore, results for interim periods do not necessarily represent results expected for the year.
 
Our condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments except as otherwise disclosed in the notes) that we believe are necessary for the fair presentation of our financial position, results of operations and cash flows for the periods presented.  These condensed consolidated financial statements and notes have been prepared consistently with the 2012 Form 10-K.
 
Supplemental Cash Flow Information
 
The following table summarizes supplemental Pinnacle West cash flow information (dollars in thousands):

 	 	Three Months Ended
March 31,	 	
 	 	2013	 	2012	 	
Cash paid during the period for:	 	 	 	 	 	
Income taxes, net of (refunds)	 	$	425	 	$	(650	)	
Interest, net of amounts capitalized	 	49,038	 	62,892	 	
Significant non-cash investing and financing activities:	 	 	 	 	 	
Accrued capital expenditures	 	$	6,575	 	$	13,622	 	
 
2.             Long-Term Debt and Liquidity Matters
 
Pinnacle West and APS maintain committed revolving credit facilities in order to enhance liquidity and provide credit support for their commercial paper programs.
 
Pinnacle West
 
At March 31, 2013, Pinnacle West’s $200 million 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
 
8 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
conditions and with the consent of the lenders.  At March 31, 2013, Pinnacle West had no outstanding borrowings under its credit facility, no letters of credit outstanding, and no commercial paper borrowings.
 
APS
 
On March 22, 2013, APS issued an additional $100 million par amount of its outstanding 4.50% unsecured senior notes that mature on April 1, 2042.  The net proceeds from the sale were used to repay short-term commercial paper borrowings and replenish cash used to redeem certain tax-exempt indebtedness in November 2012.
 
At March 31, 2013, APS had two credit facilities totaling $1 billion, including a $500 million credit facility that was refinanced in April 2013 (see below) and a $500 million 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 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.
 
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 terminates in April 2018.
 
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 March 31, 2013, APS had no outstanding borrowings or outstanding letters of credit under these credit facilities, nor did it have any commercial paper borrowings.
 
On May 1, 2013, APS purchased all $32 million of the Maricopa County, Arizona Pollution Control Corporation Pollution Control Revenue Refunding Bonds, 2009 Series C, due 2029.  We expect to remarket these bonds within the next twelve months.  These bonds are classified as current maturities of long-term debt on our Condensed Consolidated Balance Sheets at March 31, 2013 and December 31, 2012.
 
See “Financial Assurances” in Note 9 for a discussion of APS’s separate outstanding letters of credit.
 
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.  See Note 12 for discussion of the fair value hierarchy.  The following table represents the estimated fair value of our long-term debt, including current maturities (dollars in millions):
 
9 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 	 	As of
March 31, 2013	 	As of
December 31, 2012	 	
 	 	Carrying
Amount	 	Fair Value	 	Carrying
Amount	 	Fair Value	 	
 	 	 	 	 	 	 	 	 	 	
Pinnacle West	 	$	125	 	$	125	 	$	125	 	$	125	 	
APS	 	3,302	 	3,772	 	3,197	 	3,750	 	
Total	 	$	3,427	 	$	3,897	 	$	3,322	 	$	3,875	 	
 
Debt Provisions
 
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 March 31, 2013, APS was in compliance with this common equity ratio requirement.  Its total shareholder equity was approximately $4.1 billion, and total capitalization was approximately $7.4 billion.  APS would be prohibited from paying dividends if payment would reduce its total shareholder equity below approximately $2.9 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 cash needs.
 
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 approximately 6.6%.  On January 6, 2012, APS and other parties to the general retail rate case entered into an agreement (the “Settlement Agreement”) detailing the terms upon which the parties agreed to settle the rate case.  On May 15, 2012, the ACC approved the Settlement Agreement without material modifications.
 
Settlement Agreement
 
The 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 for fuel and purchased power costs (“Base Fuel Rate”) from $0.03757 to $0.03207 per kilowatt hour (“kWh”); and (3) the transfer of cost recovery for certain renewable energy projects from the Arizona Renewable Energy Standard and Tariff (“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 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 Settlement Agreement precluded from petitioning the ACC to examine the reasonableness of APS’s rates, in the event of significant regulatory
 
10 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
developments that materially impact the financial results expected under the terms of the Settlement Agreement.
 
Other key provisions of the 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 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 proposed acquisition (should it be consummated) of additional interests in Units 4 and 5 and the related closure of Units 1-3 of the Four Corners Power Plant (“Four Corners”);
 
·                                           Implementation of a “Lost Fixed Cost Recovery” rate mechanism to support energy efficiency and distributed renewable generation;
 
·                                           Modifications to the Environmental Improvement Surcharge (“EIS”) 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 Power Supply Adjustor (“PSA”), including the elimination of the 90/10 sharing provision;
 
·                                           A limitation on the use of the RES surcharge and the Demand Side Management Adjustor Charge (“DSMAC”) to recoup capital expenditures not required under the terms of the 2008 rate case 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 transmission cost adjustor (“TCA”) to streamline the process for future transmission-related rate changes; and
 
11 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
·                                           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 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 2008 rate case settlement to process subsequent rate cases within twelve months of sufficiency findings from the ACC staff, which generally occur within 30 days after the filing of a rate case.
 
2008 General Retail Rate Case On-Going Impacts
 
On December 30, 2009, the ACC issued an order approving a settlement agreement entered into by APS and twenty-one other parties in APS’s prior general retail rate case, which was originally filed in March 2008.  The settlement agreement contains certain on-going requirements, commitments and authorizations that will survive the 2012 Settlement Agreement, including the following:
 
·                                           A commitment from APS to reduce average annual operational expenses by at least $30 million from 2010 through 2014;
 
·                                           Authorization and requirements of equity infusions into APS of at least $700 million during the period beginning June 1, 2009 through December 31, 2014 ($253 million of which was infused into APS from proceeds of a Pinnacle West equity issuance in the second quarter of 2010); and
 
·                                           Various modifications to the existing energy efficiency, demand side management and renewable energy programs that require APS to, among other things, expand its conservation and demand side management programs through 2012 and its use of renewable energy through 2015, as well as allow for concurrent recovery of renewable energy expenses and provide for more concurrent recovery of demand side management costs and incentives.
 
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 December 14, 2011, the ACC voted to approve APS’s 2012 RES plan covering the 2012-2016 timeframe and authorized a total 2012 RES budget of $110 million.  On June 29, 2012, APS filed its annual RES implementation plan, covering the 2013-2017 timeframe and requested 2013 RES funding of $97 million to $107 million.  In a final order dated January 31, 2013, the ACC approved a budget of $103 million for APS’s 2013 RES plan.  That budget includes $4 million for residential distributed energy
 
12 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
incentives and $0.1 million for commercial distributed energy up-front incentives, but did not include any funds for new commercial distributed energy production-based incentives beyond those for previously approved programs.  The ACC further ordered that a hearing take place 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.  The track and record approach would require monitoring the distributed energy systems that are connected to APS’s system, recording the amount of energy they produce, and reporting the energy production amounts to the ACC for informational purposes only.  Finally, the ACC authorized an APS-led multi-session technical conference designed to consider APS’s net metering policy and the cost and benefits of distributed energy.
 
Demand Side Management Adjustor Charge.   The ACC Electric Energy Efficiency Standards require APS to submit a Demand Side Management Implementation Plan for review by and approval of the ACC.  In 2010, the DSMAC was modified to recover estimated amounts for use on certain demand side management programs over the current year.  Previously, the DSMAC allowed for such recovery only on a historical or after-the-fact basis.  The surcharge allows for the recovery of energy efficiency program expenses and any earned incentives.
 
The ACC previously approved recovery of all 2009 program costs plus incentives.  The change from program cost recovery on a historical basis to recovery on a concurrent basis, as authorized in the 2008 retail rate case settlement agreement, resulted in this one-time need to address two years (2009 and 2010) of cost recovery.  As requested by APS, 2009 program cost recovery was amortized over a three-year period, which ended in 2012.
 
On June 1, 2011, APS filed its 2012 Demand Side Management Implementation Plan consistent with the ACC’s Electric Energy Efficiency Standards, which became effective January 1, 2011.  The 2012 requirement under such standards is for cumulative energy efficiency savings of 3% of APS retail sales for the prior year.  This energy savings requirement is slightly higher than the goal established by the 2008 retail rate case settlement agreement (2.75% of total energy resources for the same two-year period).  The ACC issued an order on April 4, 2012 approving recovery of approximately $72 million of APS’s energy efficiency and demand side management program costs.  This amount will be recovered by the then existing DSMAC over a twelve-month period beginning March 1, 2012.  This amount does not include $10 million already being recovered in general retail base rates.
 
On June 1, 2012, APS filed its 2013 Demand Side Management Implementation Plan.  In 2013, the standards will require 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.  Although this proposed budget is approximately $5.6 million more than the approved 2012 budget, the expiration of the three-year amortization of 2009 costs and prior year credits would result in a small decrease in the DSMAC for the balance of 2013.  APS expects to receive a decision from the ACC in the second quarter of 2013.
 
PSA Mechanism and Balance.  The PSA provides for the adjustment of retail rates to reflect variations in retail fuel and purchased power costs.
 
The following table shows the changes in the deferred fuel and purchased power regulatory asset (liability) for 2013 and 2012 (dollars in millions):
 
13 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 	 	Three Months Ended
March 31,	 	
 	 	2013	 	2012	 	
Beginning balance	 	$	73	 	$	28	 	
Deferred fuel and purchased power costs — current period	 	(31	)	(47	)	
Amounts (collected from) credited to customers	 	(1	)	24	 	
Ending balance	 	$	41	 	$	5	 	
 
The PSA rate for the PSA year beginning February 1, 2013 is $0.0013 per kWh as compared to ($0.0042) per kWh for the prior year.  This represents a $0.0055 per kWh increase over the 2012 PSA charge.  This new rate is comprised of a forward component of ($0.0010) per kWh and a historical component of $0.0023 per kWh.  The Settlement Agreement allowed APS to exceed the $0.004 per kWh cap to PSA rate changes in this instance.  Any uncollected (overcollected) deferrals during the 2013 PSA year will be included in the calculation of the PSA rate for the PSA year beginning February 1, 2014.
 
Transmission Rates and Transmission Cost Adjustor .   In July 2008, the United States Federal Energy Regulatory Commission (“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 Settlement Agreement (discussed above), however, an adjustment to rates to recover the Retail Transmission Charges will be made annually each June 1 beginning in 2013 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, 2012, APS’s annual wholesale transmission rates for all users of its transmission system increased by approximately $16 million for the twelve-month period beginning June 1, 2012 in accordance with the FERC-approved formula.  Because of higher relative system demand by APS’s retail customers, the approximately $16 million increase reflects roughly a $2 million decrease for wholesale customers and an $18 million increase for APS retail customers.
 
On July 18, 2012, the ACC authorized the implementation of the FERC-approved transmission rates for retail customers discussed above, which became effective August 2012.
 
14 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
As part of APS’s proposed acquisition of Southern California Edison’s (“SCE”) interest in Units 4 and 5 of Four Corners, APS and SCE agreed that upon closing of the acquisition (or in 2016 if the closing does not occur), the companies will terminate an existing agreement that provides transmission capacity for SCE to transmit its portion of the output from Four Corners to California.  On May 1, 2013, APS filed a request with FERC seeking authorization to cancel the existing agreement and defer a $40 million payment to be made by APS associated with the termination and recover the payment through amortization over a 10-year period.  APS believes the costs associated with the termination of the existing agreement are recoverable, but cannot predict whether FERC will approve our request; however, if the recovery is disallowed by FERC, APS would record a charge to its results of operations at the time of the disallowance.
 
Lost Fixed Cost Recovery (“LFCR”) 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 roof-top solar arrays.  The fixed costs recoverable by the LFCR mechanism were established in the recent rate case and amount to approximately 3.1 cents per residential kWh lost and 2.3 cents per non-residential kWh lost.  The kWh’s lost from energy efficiency are based on a third-party evaluation of APS’s energy efficiency programs.  Distributed generation 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 its LFCR adjustment every January thereafter.  On February 12, 2013, the ACC approved an LFCR adjustment of $5.1 million, representing a pro-rated amount for 2012 since the Settlement Agreement went into effect on July 1, 2012.
 
15 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Regulatory Assets and Liabilities
 
The detail of regulatory assets is as follows (dollars in millions):

 	 	Remaining	 	 	 	 	 	 	 	 	 	
 	 	Amortization	 	March 31, 2013	 	December 31, 2012	 	
 	 	Period	 	Current	 	Non-Current	 	Current	 	Non-Current	 	
Pension and other postretirement benefits	 	(a)	 	$	—	 	$	769	 	$	—	 	$	780	 	
Income taxes — allowance for funds used during construction (“AFUDC”) equity	 	2043	 	4	 	93	 	4	 	92	 	
Deferred fuel and purchased power — mark-to-market (Note 7)	 	2016	 	—	 	20	 	19	 	21	 	
Transmission vegetation management	 	2016	 	9	 	20	 	9	 	23	 	
Coal reclamation	 	2038	 	8	 	22	 	8	 	24	 	
Palo Verde VIEs (Note 6)	 	2046	 	—	 	39	 	—	 	38	 	
Deferred compensation	 	2036	 	—	 	35	 	—	 	34	 	
Deferred fuel and purchased power (b) (c)	 	2013	 	41	 	—	 	73	 	—	 	
Tax expense of Medicare subsidy	 	2024	 	2	 	17	 	2	 	17	 	
Loss on reacquired debt	 	2034	 	1	 	18	 	2	 	18	 	
Income taxes — investment tax credit basis adjustment	 	2042	 	1	 	31	 	1	 	26	 	
Pension and other postretirement benefits deferral	 	2015	 	8	 	11	 	8	 	13	 	
Other	 	Various	 	20	 	22	 	18	 	14	 	
Total regulatory assets (d)	 	 	 	$	94	 	$	1,097	 	$	144	 	$	1,100	 	

(a)                                  This asset represents the future recovery of under-funded pension and other postretirement benefit obligations through retail rates.  If these costs are disallowed by the ACC, this regulatory asset would be charged to other comprehensive income (“OCI”) and result in lower future revenues.
(b)                                  See “Cost Recovery Mechanisms” discussion above.
(c)                                   Subject to a carrying charge.
(d)                                  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 and Transmission Cost Adjustor.”
 
16 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
The detail of regulatory liabilities is as follows (dollars in millions):

 	 	Remaining	 	 	 	 	 	 	 	 	 	
 	 	Amortization	 	March 31, 2013	 	December 31, 2012	 	
 	 	Period	 	Current	 	Non-Current	 	Current	 	Non-Current	 	
Removal costs	 	(a)	 	$	28	 	$	320	 	$	27	 	$	321	 	
Asset retirement obligations	 	(a)	 	—	 	273	 	—	 	256	 	
Renewable energy standard (b)	 	2014	 	29	 	16	 	43	 	—	 	
Income taxes — change in rates	 	2042	 	—	 	66	 	—	 	66	 	
Spent nuclear fuel	 	2047	 	5	 	38	 	10	 	36	 	
Deferred gains on utility property	 	2019	 	2	 	12	 	2	 	12	 	
Income taxes — deferred investment tax credit	 	2042	 	2	 	63	 	2	 	52	 	
Other	 	Various	 	11	 	17	 	4	 	16	 	
Total regulatory liabilities	 	 	 	$	77	 	$	805	 	$	88	 	$	759	 	

(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.
(b)                                  See “Cost Recovery Mechanisms” discussion above.
 
4.                                       Retirement Plans and Other Benefits
 
Pinnacle West sponsors a qualified defined benefit and account balance pension plan, a non-qualified supplemental excess benefit retirement plan, and other postretirement benefit plans for the employees of Pinnacle West and our subsidiaries.  Pinnacle West uses a December 31 measurement date for its pension and other postretirement benefit plans.  The market-related value of our plan assets is their fair value at the measurement date.
 
Certain pension and other postretirement benefit costs in excess of amounts recovered in electric retail rates were deferred as a regulatory asset for future recovery, pursuant to an ACC regulatory order.  We deferred pension and other postretirement benefit costs of approximately $9 million for the three months ended March 31, 2012.  Pursuant to an ACC regulatory order, we began amortizing the regulatory asset in July 2012.  We amortized approximately $2 million for the three months ended March 31, 2013.  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 or amortized to the regulatory asset) (dollars in millions):
 
17 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 	 	Pension Benefits	 	Other Benefits	 	
 	 	Three Months
Ended March 31,	 	Three Months
Ended March 31,	 	
 	 	2013	 	2012	 	2013	 	2012	 	
Service cost - benefits earned during the period	 	$	17	 	$	16	 	$	6	 	$	7	 	
Interest cost on benefit obligation	 	29	 	30	 	10	 	12	 	
Expected return on plan assets	 	(37	)	(35	)	(11	)	(11	)	
Amortization of net actuarial loss	 	9	 	11	 	3	 	6	 	
Net periodic benefit cost	 	$	18	 	$	22	 	$	8	 	$	14	 	
Portion of cost charged to expense	 	$	10	 	$	6	 	$	5	 	$	3	 	
 
Contributions
 
We have contributed $56 million to our pension plan year to date in 2013.  The minimum contributions for the pension plan due in 2013, 2014, and 2015 under the recently enacted Moving Ahead for Progress in the 21 st  Century Act (MAP-21) are estimated to be zero, $89 million, and $112 million, respectively.  We expect to make voluntary contributions totaling $140 million to the pension plan in 2013, and contributions up to approximately $175 million in each of 2014 and 2015.  The contributions to our other postretirement benefit plans for 2013, 2014 and 2015 are expected to be approximately $20 million each year.
 
5.                                       Income Taxes
 
The $71 million long-term income tax receivable on the Condensed Consolidated Balance Sheets represents the anticipated refunds related to an APS tax accounting method change approved by the Internal Revenue Service (“IRS”) in the third quarter of 2009.  This amount is classified as long-term, as there remains uncertainty regarding the timing of this cash receipt.  Further clarification of the timing is expected from the IRS within the next twelve months.
 
Net Income associated with the Palo Verde sale leaseback variable interest entities is not subject to tax (see Note 6).  As a result, there is no income tax expense associated with the VIEs recorded on the Condensed Consolidated Statements of Income.
 
It is reasonably possible that within the next twelve months the IRS will finalize the examination of tax returns for the years ended December 31, 2008 and 2009.  At this time, a reasonable estimate of the range of possible change in the uncertain tax position cannot be made.  However, we do not expect the ultimate outcome of this examination to have a material adverse impact on our financial position or results of operations.
 
The American Taxpayer Relief Act of 2012, signed into law on January 2, 2013, includes provisions making qualified property placed into service in 2013 eligible for 50% bonus depreciation for federal income tax purposes.  Full recognition of the cash benefit of this provision is expected to delay realization of approximately $78 million in federal general business income tax credit carryforwards which were classified as current deferred income taxes as of December 31, 2012.  These federal general business tax credit carryforwards have been reclassified to long-term deferred income taxes as of March 31, 2013 as they are no longer expected to be realized within the next twelve months.
 
18 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
As of March 31, 2013, the tax year ended December 31, 2008 and all subsequent tax years remain subject to examination by the IRS.  With few exceptions, we are no longer subject to state income tax examinations by tax authorities for years before 2008.
 
6.                                       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 per year for the years 2013 to 2015 related to these leases.  The lease agreements include fixed rate renewal periods, which gives APS the ability to utilize the asset for a significant portion of the asset’s economic life, and therefore provide APS with the power to direct activities of the 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 December 31, 2012, APS notified the lessor trust entities that APS would retain the assets beyond 2015 by either exercising the fixed rate lease renewals or by purchasing the assets.  If APS elects to purchase the assets, the purchase price will be based on the fair market value of the assets at the end of 2015.  If APS elects to extend the leases, we will be required to make payments beginning in 2016 of approximately $23 million annually.  The length of the lease extensions is unknown at this time as it must be determined through an appraisal process.  APS must give notice to the lessor trusts by June 30, 2014 notifying them which of these two options (lease renewal or purchasing the assets) it will exercise.  The December 31, 2012 notification does not impact APS’s consolidation of the VIEs, as APS continues to be deemed the primary beneficiary of the VIEs.
 
As a result of consolidation, we eliminate rent expense and recognize depreciation and interest expense, resulting in an increase in net income for the three months ended March 31, 2013 of $8 million and for the three months ended March 31, 2012 of $8 million, entirely attributable to the noncontrolling interests.  Income attributable to Pinnacle West shareholders remains the same.  Consolidation of these VIEs also results in changes to our Condensed Consolidated Statements of Cash Flows, but does not impact net cash flows.
 
Our Condensed Consolidated Balance Sheets at March 31, 2013 and December 31, 2012 include the following amounts relating to the VIEs (in millions):

 	 	March 31,
2013	 	December 31,
2012	 	
Palo Verde sale leaseback property plant and equipment, net of accumulated depreciation	 	$	128	 	$	129	 	
Current maturities of long-term debt	 	27	 	27	 	
Palo Verde sale leaseback lessor notes long-term debt excluding current maturities	 	39	 	39	 	
Equity — Noncontrolling interests	 	138	 	129	 	

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 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.
 
19 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
APS is exposed to losses relating to these VIEs upon the occurrence of certain events that APS does not consider to be reasonably likely to occur.  Under certain circumstances (for example, the United States Nuclear Regulatory Commission (“ 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 Unit 2 interests, which, if appropriate, may be required to be written down in value.  If such an event had occurred as of March 31, 2013, APS would have been required to pay the noncontrolling equity participants approximately $139 million and assume $66 million of debt.  Since APS consolidates these VIEs, the debt APS would be required to assume is already reflected in our Condensed Consolidated Balance Sheets.
 
For regulatory ratemaking purposes, the leases continue to be treated as operating leases and, as a result, we have recorded a regulatory asset relating to the arrangements.
 
7.                                       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 Condensed 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 accounting 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 other comprehensive income (“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.  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 12 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 normal sales
 
20 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
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.
 
Prior to the Settlement Agreement, for its regulated operations, APS deferred for future rate treatment approximately 90% of unrealized gains and losses on certain derivatives pursuant to the PSA mechanism that would otherwise be recognized in income.  Due to the Settlement Agreement, for its regulated operations, APS now defers for future rate treatment 100% of the unrealized gains and losses for delivery periods after June 30, 2012 on derivatives pursuant to the PSA mechanism that would otherwise be recognized in income.  Realized 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 March 31, 2013, we had the following outstanding gross notional volume of derivatives, which represent both purchases and sales (does not reflect net position):

Commodity	 	Quantity	 	
Power	 	7,628	 	gigawatt hours	 	
Gas	 	127	 	Bcfs (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 (dollars in thousands):
 
21 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 	 	Financial Statement	 	Three Months Ended
March 31,	 	
Commodity Contracts	 	Location	 	2013	 	2012	 	
Gain (Loss) Recognized in OCI on Derivative Instruments (Effective Portion)	 	Other comprehensive income (loss) - derivative instruments	 	$	96	 	$	(41,903	)	
Loss Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion Realized) (a)	 	Fuel and purchased power (b)	 	(8,353	)	(14,500	)	
Gain Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)	 	Fuel and purchased power (b)	 	—	 	85	 	

(a)          During the three months ended March 31, 2013 and 2012, we had no amounts reclassified from AOCI 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 $40 million before income taxes will be reclassified from accumulated other comprehensive income 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.
 
The following table provides information about gains and losses from derivative instruments not designated as accounting hedging instruments during the three months ended March 31, 2013 and 2012 (dollars in thousands):

 	 	 	 	Three Months Ended
March 31,	 	
Commodity Contracts	 	Financial Statement Location	 	2013	 	2012	 	
 	 	 	 	 	 	 	 	
Net Loss Recognized in Income	 	Operating revenues (a)	 	$	(117	)	$	(326	)	
 	 	 	 	 	 	 	 	
Net Gain (Loss) Recognized in Income	 	Fuel and purchased power expense (a)	 	17,350	 	(25,052	)	
Total	 	 	 	$	17,233	 	$	(25,378	)	

(a)          Amounts are before the effect of PSA deferrals.
 
Derivative Instruments in the Condensed 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
 
22 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
reported net on the Condensed Consolidated Balance Sheets.  Transactions that do not allow for offsetting of positive and negative positions are reported gross on the Condensed 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 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 Condensed Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012, include gross liabilities of $5 million of derivative instruments designated as hedging instruments.
 
The following tables provide information about the fair value of our risk management activities reported on a gross basis, and the impacts of offsetting.  These amounts relate to commodity contracts and are located in the assets and liabilities from risk management activities lines of our Condensed Consolidated Balance Sheets.

As of March 31, 2013:
(dollars in thousands)	 	Gross
Recognized
Derivatives 
 (a)	 	Amounts
Offset 
 (b)	 	Net 
 Recognized 
 Derivatives	 	Other 
(c)	 	Amount
Reported on
Balance Sheet	 	
Current Assets	 	$	38,623	 	$	(18,344	)	$	20,279	 	$	67	 	$	20,346	 	
Investments and Other Assets	 	39,467	 	(5,420	)	34,047	 	—	 	34,047	 	
Total Assets	 	78,090	 	(23,764	)	54,326	 	67	 	54,393	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Current Liabilities	 	(78,412	)	38,521	 	(39,891	)	(25,463	)	(65,354	)	
Deferred Credits and Other	 	(93,215	)	10,339	 	(82,876	)	—	 	(82,876	)	
Total Liabilities	 	(171,627	)	48,860	 	(122,767	)	(25,463	)	(148,230	)	
Total	 	$	(93,537	)	$	25,096	 	$	(68,441	)	$	(25,396	)	$	(93,837	)	

(a)          All of our gross recognized derivative instruments were subject to master netting arrangements.
(b)          Includes cash collateral provided to counterparties of $25,096.
(c)           Other represents cash collateral and margin relating to non-derivative instruments or derivatives qualifying for scope exceptions.  Includes cash collateral received from counterparties of $25,463, and cash margin provided to counterparties of $67.  This amount is not subject to offsetting.
 
23 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2012: 
 (dollars in thousands) 	 	Gross 
 Recognized 
 Derivatives 
 (a)	 	Amounts
Offset
(b)	 	Net 
 Recognized 
 Derivatives	 	Other 
 (c)	 	Amount 
 Reported on 
 Balance Sheet	 	
Current Assets	 	$	42,495	 	$	(17,797	)	$	24,698	 	$	1,001	 	$	25,699	 	
Investments and Other Assets	 	41,563	 	(5,672	)	35,891	 	—	 	35,891	 	
Total Assets	 	84,058	 	(23,469	)	60,589	 	1,001	 	61,590	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Current Liabilities	 	(105,324	)	57,046	 	(48,278	)	(25,463	)	(73,741	)	
Deferred Credits and Other	 	(100,986	)	15,722	 	(85,264	)	—	 	(85,264	)	
Total Liabilities	 	(206,310	)	72,768	 	(133,542	)	(25,463	)	(159,005	)	
Total	 	$	(122,252	)	$	49,299	 	$	(72,953	)	$	(24,462	)	$	(97,415	)	

(a)          All of our gross recognized derivative instruments were subject to master netting arrangements.
(b)          Includes cash collateral provided to counterparties of $49,299.
(c)           Other represents cash collateral relating to non-derivative instruments or derivatives qualifying for scope exceptions.  Includes cash collateral provided to counterparties of $1,001, and cash collateral received from counterparties of $25,463.  This amount is not subject to offsetting.
 
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 two counterparties for which our exposure represents approximately 83% of Pinnacle West’s $54 million of risk management assets as of March 31, 2013.  This exposure relates to long-term traditional wholesale contracts with counterparties that have 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 a subjective event and/or condition.  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).
 
24 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
The following table provides information about our derivative instruments that have credit-risk-related contingent features at March 31, 2013 (dollars in millions):

 	 	March 31,
2013	 	
Aggregate Fair Value of Derivative Instruments in a Net Liability Position	 	$	172	 	
Cash Collateral Posted	 	25	 	
Additional Cash Collateral in the Event Credit-Risk Related Contingent Features were Fully Triggered (a)	 	106	 	

(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 $174 million if our debt credit ratings were to fall below investment grade.
 
8.                                       Changes in Equity
 
The following tables show Pinnacle West’s changes in shareholders’ equity and changes in equity of noncontrolling interests for the three months ended March 31, 2013 and 2012 (dollars in thousands):

 	 	Three Months Ended March 31, 2013	 	Three Months Ended March 31, 2012	 	
 	 	Common
Shareholders	 	Noncontrolling
Interests	 	Total	 	Common
Shareholders	 	Noncontrolling
Interests	 	Total	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Beginning balance, January 1	 	$	3,972,806	 	$	129,483	 	$	4,102,289	 	$	3,821,850	 	$	108,736	 	$	3,930,586	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	24,444	 	8,392	 	32,836	 	(8,257	)	7,776	 	(481	)	
Other comprehensive income (loss)	 	6,077	 	—	 	6,077	 	(15,614	)	—	 	(15,614	)	
Total comprehensive income (loss)	 	30,521	 	8,392	 	38,913	 	(23,871	)	7,776	 	(16,095	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Issuance of capital stock	 	2,574	 	—	 	2,574	 	2,700	 	—	 	2,700	 	
Purchase of treasury stock — net	 	(6,271	)	—	 	(6,271	)	(1,754	)	—	 	(1,754	)	
Other (primarily stock compensation)	 	14,825	 	—	 	14,825	 	3,350	 	—	 	3,350	 	
Dividends on common stock	 	—	 	—	 	—	 	(57,358	)	—	 	(57,358	)	
Ending balance, March 31	 	$	4,014,455	 	$	137,875	 	$	4,152,330	 	$	3,744,917	 	$	116,512	 	$	3,861,429	 	
 
25 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
9.                                       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 United States Department of Energy (“DOE”) in the United States Court of Federal Claims.  The lawsuit seeks to recover APS’s 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 Nuclear Waste Policy Act.
 
APS currently estimates it will incur $122 million over the current life of Palo Verde for its share of the costs related to the on-site interim storage of spent nuclear fuel.  At March 31, 2013, APS had a regulatory liability of $43 million that represents amounts recovered in retail rates in excess of amounts spent for on-site interim spent fuel storage.
 
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 private 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 $12.6 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 $12.2 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 assessment per reactor under the program for each nuclear incident is approximately $118 million, subject to an annual limit of $18 million per incident, to be periodically adjusted for inflation.  Based on APS’s interest in the three Palo Verde units, APS’s maximum potential retrospective assessment per incident for all three units is approximately $103 million, with an annual payment limitation of approximately $15 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.  Effective April 1, 2013, a sublimit of $1.5 billion for non-nuclear property damage losses has been imposed on the primary policy offered by Nuclear Electric Insurance Limited (“NEIL”).  APS has also secured insurance against portions of any increased cost of generation or purchased power and business interruption resulting from a sudden and unforeseen accidental outage of any of the three units.  Effective April 1, 2013, a sublimit of $327.6 million has been imposed on the non-nuclear losses of the accidental outage policy (NEIL I policy).  The property damage, decontamination, and replacement power coverages are provided by NEIL.  APS is subject to retrospective 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 $18 million for each retrospective 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 $48 million of collateral assurance within 20 business days of a rating downgrade to non-
 
26 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
investment grade.  The insurance coverage discussed in this and the previous paragraph is subject to certain policy conditions, sublimits and exclusions.
 
Contractual Obligations
 
There have been no material changes outside the normal course of business in contractual obligations from the information provided in our 2012 Form 10-K.
 
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, the United States Environmental Protection Agency (“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.
 
The Roosevelt Irrigation District (“RID”) filed a lawsuit in Arizona District Court against over 40 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.  On February 21, 2013, certain of the defendants filed third-party complaints against additional parties, including APS.  The allegations against APS arise out of APS’s current and former ownership of facilities in and around OU3.  We are unable to determine a range of potential losses that are reasonably possible of occurring.
 
Climate Change Lawsuit
 
In February 2008, the Native Village of Kivalina and the City of Kivalina, Alaska filed a lawsuit in federal court in the Northern District of California against nine oil companies, fourteen power companies (including Pinnacle West), and a coal company, alleging that the defendants’ emissions of carbon dioxide contribute to global warming and constitute a public and private nuisance under both federal and state law.  The plaintiffs also allege that the effects of global warming will require the relocation of the village, and they are seeking an unspecified amount of monetary damages.  In June 2008, the defendants filed motions to dismiss the action, which were granted.  The plaintiffs filed an appeal with the United States Court of Appeals for the Ninth Circuit in November 2009.
 
On September 21, 2012, a three-judge panel of the Ninth Circuit affirmed the district court’s dismissal of the Kivalina plaintiffs’ federal common law public nuisance action.  The court declined to address any other issue raised by the parties, including the plaintiffs’ state nuisance law claim.  On
 
27 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
October 4, 2012, the plaintiffs filed a petition for rehearing by the entire Ninth Circuit, but on November 27, 2012, the court denied plaintiffs’ petition.  On February 25, 2013, plaintiffs requested the United States Supreme Court to hear the case.  The Court has not yet ruled on this request.  APS continues to believe the action in Kivalina is without merit and will continue to defend against both the federal and state claims.
 
Southwest Power Outage
 
On September 8, 2011 at approximately 3:30 PM, a 500 kilovolt (“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 megawatts (“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.
 
The FERC and the North American Electric Reliability Corporation (“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 includes 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 does not address potential reliability violations or an assessment of responsibility of the parties involved.  APS continues to analyze business practices and procedures related to the September 8 events.
 
APS cannot predict the timing, results or potential impacts of enforcement actions that may be brought against APS relating to the September 8 events, or any claims that may be made as a result of the outages.  If violations of NERC Reliability Standards are ultimately determined to have occurred, FERC has the legal authority to assert a possible fine of up to $1 million per violation per day that a violation is found to have been in existence.
 
Clean Air Act 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 New Source Review (“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 New Source Performance Standards (“NSPS”) program.  Among other things, the 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
 
28 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
participants may reinstate their motions to dismiss without risk of default.  We are unable to determine a range of potential losses that are reasonably possible of occurring.
 
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 coal combustion residuals (“CCR”).  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 and the Cholla Power Plant (“Cholla”) and is currently awaiting a final rulemaking from EPA that could impose new requirements on the Navajo Generating Station (“Navajo Plant”).  EPA and Arizona Department of Environmental Quality (“ADEQ”) will require these plants to install pollution control equipment that constitutes the best available retrofit technology to lessen the impacts of emissions on visibility surrounding the plants.  Based on EPA’s final standards, APS’s share of its total costs for Four Corners (assuming the consummation of its purchase of SCE’s interest in Units 4 and 5 and subsequent shut down of Units 1-3) could be approximately $300 million.  APS’s share of costs for upgrades at Navajo, based on EPA’s Federal Implementation Plan (“FIP”) proposal, could be up to approximately $158 million.  APS has filed a Petition for Review of EPA’s rule as it applies to Cholla, which, if not successful, will require installation of controls with a cost to APS of approximately $187 million.
 
Mercury and Other Hazardous Air Pollutants.   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 $124 million for Cholla Units 1-3.  Estimated costs for Four Corners Units 1-3 are not included in our current environmental expenditure estimates since our estimates assume the consummation of APS’s purchase of SCE’s interest in Four Corners Units 4 and 5 and the subsequent shut down of Units 1-3.  Salt River Project Agricultural Improvement and Power District (“SRP”), the operating agent for the Navajo Plant, is still evaluating compliance options under the rules.
 
Other future environmental rules that could involve material compliance costs include those related to cooling water intake structures, coal combustion waste, effluent limitations, ozone national ambient air quality, greenhouse gas emissions and other rules or matters involving the Clean Air Act, Endangered Species Act, 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 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.
 
29 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
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 State Implementation Plan (“SIP”) and promulgating a FIP that is inconsistent with the state’s considered “best available retrofit technology” (“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.  In addition, on February 4, 2013, APS filed a Petition for Reconsideration and Stay of the final BART rule with EPA.  On March 22, 2013, APS filed a motion with the court to suspend the compliance deadlines under the BART rule until the court rules on the matter.  The State of Arizona and three other utilities also filed similar petitions and motions.
 
Financial Assurances
 
APS has entered into various agreements that require letters of credit for financial assurance purposes.  At March 31, 2013, approximately $76 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.  One of these letters of credit expires in 2015 and two expire in 2016.  APS has also entered into letters of credit to support certain equity participants in the Palo Verde sale leaseback transactions (see Note 6 for further details on the Palo Verde sale leaseback transactions).  These letters of credit will expire December 31, 2015, and totaled approximately $34 million at March 31, 2013.  Additionally, APS has issued letters of credit to support collateral obligations under certain risk management arrangements including certain natural gas tolling contracts entered into with third parties.  At March 31, 2013, $65 million of such letters of credit were outstanding that will expire in 2013 and 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 surety bonds for APS which were not material at March 31, 2013.
 
10.                                Other Income and Other Expense
 
The following table provides detail of other income and other expense for the three months ended March 31, 2013 and 2012 (dollars in thousands):
 
30 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 	 	Three Months Ended
March 31,	 	
 	 	2013	 	2012	 	
Other income:	 	 	 	 	 	
Interest income	 	$	76	 	$	605	 	
Miscellaneous	 	682	 	155	 	
Total other income	 	$	758	 	$	760	 	
 	 	 	 	 	 	
Other expense:	 	 	 	 	 	
Non-operating costs	 	$	(1,932	)	$	(1,850	)	
Investment losses — net	 	(112	)	(53	)	
Miscellaneous	 	(1,708	)	(2,165	)	
Total other expense	 	$	(3,752	)	$	(4,068	)	
 
11.          Earnings Per Share
 
The following table presents earnings per weighted average common share outstanding for the three months ended March 31, 2013 and 2012:

 	 	Three Months Ended
March 31,	 	
 	 	2013	 	2012	 	
Basic earnings per share:	 	 	 	 	 	
Income (loss) from continuing operations attributable to common shareholders	 	$	0.22	 	$	(0.07	)	
Loss from discontinued operations	 	—	 	(0.01	)	
Earnings (loss) per share — basic	 	$	0.22	 	$	(0.08	)	
 	 	 	 	 	 	
Diluted earnings per share:	 	 	 	 	 	
Income (loss) from continuing operations attributable to common shareholders	 	$	0.22	 	$	(0.07	)	
Loss from discontinued operations	 	—	 	(0.01	)	
Earnings (loss) per share — diluted	 	$	0.22	 	$	(0.08	)	
 
Performance shares and restricted stock units (which are contingently issuable) increased the weighted average common shares outstanding by approximately 1,003,000 shares for the three months ended March 31, 2013.  For the three months ended March 31, 2012, the weighted average common shares outstanding were the same for both basic and diluted shares.
 
For the three months ended March 31, 2013 and 2012, there were no common stock options that were excluded from the computation of diluted earnings per share as a result of the options’ exercise prices being greater than the average market price of the common shares.
 
31 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
12.          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:
 
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 United States 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 in common and collective trusts and commingled funds that are redeemable and valued based on the funds’ net asset value (“NAV”).
 
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 8 in the 2012 Form 10-K for the fair value discussion of plan assets held in our retirement and other benefit plans.
 
32 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
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 market 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 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 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 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.
 
33 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
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 United States government fixed income securities.  We may transact in this commingled fund on a daily basis at the NAV.
 
Fixed income securities issued by the United States 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 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.
 
Our trustee provides valuation of our nuclear decommissioning trust assets by using 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 13 for additional discussion about our nuclear decommissioning trust.
 
34 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Fair Value Tables
 
The following table presents the fair value at March 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
March 31,
2013	 	
Assets	 	 	 	 	 	 	 	 	 	 	 	
Risk management activities — derivative instruments:	 	 	 	 	 	 	 	 	 	 	 	
Commodity contracts	 	$	—	 	$	28	 	$	50	 	$	(24	)(b)	$	54	 	
Nuclear decommissioning trust:	 	 	 	 	 	 	 	 	 	 	 	
U.S. commingled equity funds	 	—	 	226	 	—	 	—	 	226	 	
Fixed income securities:	 	 	 	 	 	 	 	 	 	 	 	
U.S. Treasury	 	115	 	—	 	—	 	—	 	115	 	
Cash and cash equivalent funds	 	5	 	17	 	—	 	(9	)(c)	13	 	
Corporate debt	 	—	 	80	 	—	 	—	 	80	 	
Mortgage-backed securities	 	—	 	89	 	—	 	—	 	89	 	
Municipality bonds	 	—	 	63	 	—	 	—	 	63	 	
Other	 	—	 	10	 	—	 	—	 	10	 	
Subtotal nuclear decommissioning trust	 	120	 	485	 	—	 	(9	)	596	 	
Total	 	$	120	 	$	513	 	$	50	 	$	(33	)	$	650	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Liabilities	 	 	 	 	 	 	 	 	 	 	 	
Risk management activities — derivative instruments:	 	 	 	 	 	 	 	 	 	 	 	
Commodity contracts	 	$	—	 	$	(69	)	$	(103	)	$	24	(b)	$	(148	)	

(a)                                  Primarily consists of heat rate options and long-dated electricity contracts.
(b)                                  Primarily represents counterparty netting, margin and collateral (see Note 7).
(c)                                   Represents nuclear decommissioning trust net pending securities sales and purchases.
 
35 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
The following table presents the fair value at December 31, 2012 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,
2012	 	
Assets	 	 	 	 	 	 	 	 	 	 	 	
Cash equivalents	 	$	16	 	$	—	 	$	—	 	$	—	 	$	16	 	
Risk management activities — derivative instruments:	 	 	 	 	 	 	 	 	 	 	 	
Commodity Contracts	 	—	 	22	 	62	 	(22	)(b)	62	 	
Nuclear decommissioning trust:	 	 	 	 	 	 	 	 	 	 	 	
U.S. commingled equity funds	 	—	 	204	 	—	 	—	 	204	 	
Fixed income securities:	 	 	 	 	 	 	 	 	 	 	 	
U.S. Treasury	 	104	 	—	 	—	 	—	 	104	 	
Cash and cash equivalent funds	 	6	 	13	 	—	 	(4	)(c)	15	 	
Corporate debt	 	—	 	80	 	—	 	—	 	80	 	
Mortgage-backed securities	 	—	 	83	 	—	 	—	 	83	 	
Municipality bonds	 	—	 	74	 	—	 	—	 	74	 	
Other	 	—	 	11	 	—	 	—	 	11	 	
Subtotal nuclear decommissioning trust	 	110	 	465	 	—	 	(4	)	571	 	
Total	 	$	126	 	$	487	 	$	62	 	$	(26	)	$	649	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Liabilities	 	 	 	 	 	 	 	 	 	 	 	
Risk management activities — derivative instruments:	 	 	 	 	 	 	 	 	 	 	 	
Commodity contracts	 	$	—	 	$	(96	)	$	(110	)	$	47	(b)	$	(159	)	

(a)                                  Primarily consists of heat rate options and long-dated electricity contracts.
(b)                                  Represents counterparty netting, margin and collateral (see Note 7).
(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).
 
36 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
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 implied volatilities.  If electricity prices and electricity price implied 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 implied 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 implied 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 table provides information regarding our significant unobservable inputs used to value our Level 3 instruments:

 	 	March 31, 2013
Fair Value (millions)	 	Valuation	 	Significant	 	 	 	Weighted-	 	
Commodity Contracts	 	Assets	 	Liabilities	 	Technique	 	Unobservable Input	 	Range	 	Average	 	
Electricity:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Forward Contracts (a)	 	$	49	 	$	73	 	Discounted cash flows	 	Electricity forward price (per MWh)	 	$24.88 - $65.92	 	$	44.47	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Option Contracts	 	—	 	29	 	Option model	 	Electricity forward price (per MWh)	 	$42.37 - $90.46	 	$	61.70	 	
 	 	 	 	 	 	 	 	Natural gas forward price (per mmbtu)	 	$4.09 - $4.22	 	$	4.17	 	
 	 	 	 	 	 	 	 	Implied electricity price volatilities	 	15% - 74%	 	40	%	
 	 	 	 	 	 	 	 	Implied natural gas price volatilities	 	16% - 31%	 	22	%	
Natural Gas:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Forward Contracts (a)	 	1	 	1	 	Discounted cash flows	 	Natural gas forward price (per mmbtu)	 	$3.81 - $4.48	 	$	4.29	 	
Total	 	$	50	 	$	103	 	 	 	 	 	 	 	 	 	

(a)                                  Includes swaps and physical and financial contracts.
 
37 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 	 	December 31, 2012
Fair Value (millions)	 	Valuation	 	Significant	 	 	 	Weighted-	 	
Commodity Contracts	 	Assets	 	Liabilities	 	Technique	 	Unobservable Input	 	Range	 	Average	 	
Electricity:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Forward Contracts (a)	 	$	57	 	$	82	 	Discounted cash flows	 	Electricity forward price (per MWh)	 	$23.06 - $64.20	 	$	43.16	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Option Contracts	 	—	 	27	 	Option model	 	Electricity forward price (per MWh)	 	$36.66 - $92.19	 	$	60.97	 	
 	 	 	 	 	 	 	 	Natural gas forward price (per mmbtu)	 	$4.10 - $4.25	 	$	4.20	 	
 	 	 	 	 	 	 	 	Implied electricity price volatilities	 	15% - 66%	 	39	%	
 	 	 	 	 	 	 	 	Implied natural gas price volatilities	 	17% - 36%	 	23	%	
Natural Gas:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Forward Contracts (a)	 	5	 	1	 	Discounted cash flows	 	Natural gas forward price (per mmbtu)	 	$3.25 - $4.44	 	$	3.93	 	
Total	 	$	62	 	$	110	 	 	 	 	 	 	 	 	 	

(a)                                  Includes swaps and physical and financial contracts.
 
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 three months ended March 31, 2013 and 2012 (dollars in millions):

 	 	Three Months Ended
March 31,	 	
Commodity Contracts	 	2013	 	2012	 	
Net derivative balance at beginning of period	 	$	(48	)	$	(51	)	
Total net gains (losses) realized/unrealized:	 	 	 	 	 	
Included in earnings	 	—	 	1	 	
Included in OCI	 	—	 	(5	)	
Deferred as a regulatory asset or liability	 	(1	)	(5	)	
Settlements	 	(2	)	1	 	
Transfers into Level 3 from Level 2	 	(1	)	2	 	
Transfers from Level 3 into Level 2	 	(1	)	(1	)	
Net derivative balance at end of period	 	$	(53	)	$	(58	)	
 	 	 	 	 	 	
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 purchased power depending on the nature of the underlying contract.
 
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
 
38 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
from any other hierarchy level.  Transfers in or out of Level 3 are typically related to our heat rate options and 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 any short-term borrowings approximate fair value.  Our short-term borrowings are classified within Level 2 of the fair value hierarchy.  For our long-term debt fair values, see Note 2.
 
13.                                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 their 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 Condensed Consolidated Balance Sheets.  See Note 12 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 March 31, 2013 and December 31, 2012 (dollars in millions):

 	 	Fair Value	 	Total
Unrealized
Gains	 	Total
Unrealized
Losses	 	
March 31, 2013	 	 	 	 	 	 	 	
Equity securities	 	$	226	 	$	87	 	$	—	 	
Fixed income securities	 	379	 	21	 	(1	)	
Net payables (a)	 	(9	)	—	 	—	 	
Total	 	$	596	 	$	108	 	$	(1	)	

(a)                                  Net payables relate to pending securities sales and purchases.

 	 	Fair Value	 	Total
Unrealized
Gains	 	Total
Unrealized
Losses	 	
December 31, 2012	 	 	 	 	 	 	 	
Equity securities	 	$	204	 	$	67	 	$	—	 	
Fixed income securities	 	371	 	24	 	—	 	
Net payables (a)	 	(4	)	—	 	—	 	
Total	 	$	571	 	$	91	 	$	—	 	
 
(a)                                  Net payables relate to pending securities sales and purchases.
 
39 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
The costs of securities sold are determined on the basis of specific identification.  The following table sets forth approximate realized gains and losses and proceeds from the sale of securities by the nuclear decommissioning trust funds (dollars in millions):

 	 	Three Months Ended
March 31,	 	
 	 	2013	 	2012	 	
Realized gains	 	$	2	 	$	2	 	
Realized losses	 	(1	)	(1	)	
Proceeds from the sale of securities (a)	 	135	 	92	 	

(a)                                  Proceeds are reinvested in the trust.
 
The fair value of fixed income securities, summarized by contractual maturities, at March 31, 2013 is as follows (dollars in millions):

 	 	Fair Value	 	
Less than one year	 	$	17	 	
1 year - 5 years	 	105	 	
5 years - 10 years	 	100	 	
Greater than 10 years	 	157	 	
Total	 	$	379	 	
 
14.                                New Accounting Standards
 
During 2013, we adopted, on a retrospective basis, new guidance relating to balance sheet offsetting disclosures.  The new guidance requires enhanced disclosures regarding an entity’s ability to offset certain instruments on the balance sheet and how offsetting impacts the balance sheet.  The adoption of this guidance resulted in expanded disclosures relating to our derivative instruments (see Note 7), but did not impact our financial statement results.
 
During 2013, we also adopted, on a prospective basis, new guidance relating to reporting amounts reclassified from accumulated other comprehensive income.   This guidance requires new disclosures relating to accumulated other comprehensive income and how reclassifications from accumulated other comprehensive income impact net income.   As a result of adopting this new guidance, we have included a new footnote disclosure to provide the information required by the new standard (see Notes 15 and S-3).   The adoption of this guidance did not impact our financial statement results.
 
40 

Table of Contents
 
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
15.                                Changes in Accumulated Other Comprehensive Loss
 
The following table shows the changes in accumulated other comprehensive loss, including reclassification adjustments, by component for the three-month period ended March 31, 2013 (dollars in thousands):

 	 	Derivative
Instruments	 	Pension and
Other
Postretirement
Benefits	 	Total	 	
 	 	 	 	 	 	 	 	
Beginning balance, January 1	 	$	(49,592	)	$	(64,416	)	$	(114,008	)	
 	 	 	 	 	 	 	 	
Other comprehensive income before reclassifications, net of tax expense of $38	 	58	 	—	 	58	 	
 	 	 	 	 	 	 	 	
Amounts reclassified from accumulated other comprehensive loss:	 	 	 	 	 	 	 	
Net realized loss, net of tax benefit of $3,300	 	5,053	 	—	 	5,053	 	
Amortization of actuarial loss, net of tax benefit of $582	 	—	 	890	 	890	 	
Amortization of prior service cost, net of tax benefit of $49	 	—	 	76	 	76	 	
 	 	 	 	 	 	 	 	
Total reclassifications for the period, net of tax benefit of $3,300, $631 and $3,931	 	5,053	(a)	966	(b)	6,019	 	
 	 	 	 	 	 	 	 	
Net current period other comprehensive income, net of tax expense of $3,338, $631 and $3,969	 	5,111	 	966	 	6,077	 	
 	 	 	 	 	 	 	 	
Ending balance, March 31	 	$	(44,481	)	$	(63,450	)	$	(107,931	)	

(a)          These amounts are included in the computation of fuel and purchased power costs and are subject to the PSA.  See Note 7.
(b)          These amounts are included in the computation of net periodic pension cost.  See Note 4.
 
41 

Table of Contents
 
ARIZONA PUBLIC SERVICE COMPANY 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(dollars in thousands)

 	 	Three Months Ended
March 31,	 	
 	 	2013	 	2012	 	
 	 	 	 	 	 	
ELECTRIC OPERATING REVENUES	 	$	685,827	 	$	620,248	 	
 	 	 	 	 	 	
OPERATING EXPENSES	 	 	 	 	 	
Fuel and purchased power	 	230,679	 	216,309	 	
Operations and maintenance	 	220,752	 	208,447	 	
Depreciation and amortization	 	103,706	 	100,085	 	
Income taxes	 	16,060	 	(814	)	
Taxes other than income taxes	 	39,768	 	42,226	 	
Total	 	610,965	 	566,253	 	
OPERATING INCOME	 	74,862	 	53,995	 	
 	 	 	 	 	 	
OTHER INCOME (DEDUCTIONS)	 	 	 	 	 	
Income taxes	 	2,332	 	1,706	 	
Allowance for equity funds used during construction	 	6,864	 	4,756	 	
Other income (Note S-2)	 	1,343	 	510	 	
Other expense (Note S-2)	 	(6,296	)	(4,624	)	
Total	 	4,243	 	2,348	 	
 	 	 	 	 	 	
INTEREST EXPENSE	 	 	 	 	 	
Interest on long-term debt	 	46,221	 	52,737	 	
Interest on short-term borrowings	 	1,429	 	2,035	 	
Debt discount, premium and expense	 	1,011	 	1,060	 	
Allowance for borrowed funds used during construction	 	(3,990	)	(3,151	)	
Total	 	44,671	 	52,681	 	
 	 	 	 	 	 	
NET INCOME	 	34,434	 	3,662	 	
 	 	 	 	 	 	
Less: Net income attributable to noncontrolling interests (Note 6)	 	8,392	 	7,767	 	
 	 	 	 	 	 	
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDER	 	$	26,042	 	$	(4,105	)	
 
See Notes to Pinnacle West’s Condensed Consolidated Financial Statements and Supplemental Notes to Arizona Public Service Company’s Condensed Consolidated Financial Statements.
 
42 

Table of Contents
 
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(dollars in thousands)

 	 	Three Months Ended
March 31,	 	
 	 	2013	 	2012	 	
 	 	 	 	 	 	
NET INCOME	 	$	34,434	 	$	3,662	 	
 	 	 	 	 	 	
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX	 	 	 	 	 	
Derivative instruments:	 	 	 	 	 	
Net unrealized gain (loss), net of tax benefit (expense) of ($38) and $16,554	 	58	 	(25,348	)	
Reclassification of net realized loss, net of tax benefit of $3,300 and $5,728	 	5,052	 	8,772	 	
Pension and other postretirement benefits activity, net of tax expense of $576 and $536	 	882	 	821	 	
Total other comprehensive income (loss)	 	5,992	 	(15,755	)	
 	 	 	 	 	 	
COMPREHENSIVE INCOME (LOSS)	 	40,426	 	(12,093	)	
Less: Comprehensive income attributable to noncontrolling interests	 	8,392	 	7,767	 	
 	 	 	 	 	 	
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDER	 	$	32,034	 	$	(19,860	)	
 
See Notes to Pinnacle West’s Condensed Consolidated Financial Statements and Supplemental Notes to Arizona Public Service Company’s Condensed Consolidated Financial Statements.
 
43 

Table of Contents
 
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands)

 	 	March 31,	 	December 31,	 	
 	 	2013	 	2012	 	
ASSETS	 	 	 	 	 	
 	 	 	 	 	 	
PROPERTY, PLANT AND EQUIPMENT	 	 	 	 	 	
Plant in service and held for future use	 	$	14,490,460	 	$	14,342,501	 	
Accumulated depreciation and amortization	 	(4,993,480	)	(4,925,990	)	
Net	 	9,496,980	 	9,416,511	 	
 	 	 	 	 	 	
Construction work in progress	 	498,124	 	565,716	 	
Palo Verde sale leaseback, net of accumulated depreciation (Note 6)	 	128,027	 	128,995	 	
Intangible assets, net of accumulated amortization	 	162,823	 	161,995	 	
Nuclear fuel, net of accumulated amortization	 	140,909	 	122,778	 	
Total property, plant and equipment	 	10,426,863	 	10,395,995	 	
 	 	 	 	 	 	
INVESTMENTS AND OTHER ASSETS	 	 	 	 	 	
Nuclear decommissioning trust (Note 13)	 	596,168	 	570,625	 	
Assets from risk management activities (Note 7)	 	34,047	 	35,891	 	
Other assets	 	32,120	 	31,650	 	
Total investments and other assets	 	662,335	 	638,166	 	
 	 	 	 	 	 	
CURRENT ASSETS	 	 	 	 	 	
Cash and cash equivalents	 	7,328	 	3,499	 	
Customer and other receivables	 	266,994	 	274,815	 	
Accrued unbilled revenues	 	90,147	 	94,845	 	
Allowance for doubtful accounts	 	(2,537	)	(3,340	)	
Materials and supplies (at average cost)	 	223,605	 	218,096	 	
Fossil fuel (at average cost)	 	35,211	 	31,334	 	
Deferred fuel and purchased power regulatory asset (Note 3)	 	41,315	 	72,692	 	
Other regulatory assets (Note 3)	 	52,872	 	71,257	 	
Deferred income taxes	 	59,807	 	74,420	 	
Assets from risk management activities (Note 7)	 	20,346	 	25,699	 	
Other current assets	 	39,354	 	37,666	 	
Total current assets	 	834,442	 	900,983	 	
 	 	 	 	 	 	
DEFERRED DEBITS	 	 	 	 	 	
Regulatory assets (Note 3)	 	1,097,389	 	1,099,900	 	
Unamortized debt issue costs	 	22,889	 	22,492	 	
Income tax receivable (Note 5)	 	71,223	 	70,784	 	
Other	 	114,903	 	114,222	 	
Total deferred debits	 	1,306,404	 	1,307,398	 	
 	 	 	 	 	 	
TOTAL ASSETS	 	$	13,230,044	 	$	13,242,542	 	
 
See Notes to Pinnacle West’s Condensed Consolidated Financial Statements and Supplemental Notes to Arizona Public Service Company’s Condensed Consolidated Financial Statements.
 
44 

Table of Contents
 
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands)

 	 	March 31,	 	December 31,	 	
 	 	2013	 	2012	 	
LIABILITIES AND EQUITY	 	 	 	 	 	
 	 	 	 	 	 	
CAPITALIZATION	 	 	 	 	 	
Common stock	 	$	178,162	 	$	178,162	 	
Additional paid-in capital	 	2,379,696	 	2,379,696	 	
Retained earnings	 	1,650,277	 	1,624,237	 	
Accumulated other comprehensive loss:	 	 	 	 	 	
Pension and other postretirement benefits	 	(38,621	)	(39,503	)	
Derivative instruments	 	(44,482	)	(49,592	)	
Total shareholder equity	 	4,125,032	 	4,093,000	 	
Noncontrolling interests (Note 6)	 	137,875	 	129,483	 	
Total equity (Note S-1)	 	4,262,907	 	4,222,483	 	
Long-term debt less current maturities	 	3,140,589	 	3,035,219	 	
Palo Verde sale leaseback lessor notes less current maturities (Note 6)	 	38,869	 	38,869	 	
Total capitalization	 	7,442,365	 	7,296,571	 	
 	 	 	 	 	 	
CURRENT LIABILITIES	 	 	 	 	 	
Commercial paper	 	—	 	92,175	 	
Current maturities of long-term debt	 	122,828	 	122,828	 	
Accounts payable	 	207,310	 	215,577	 	
Accrued taxes (Note 5)	 	159,762	 	116,700	 	
Accrued interest	 	44,649	 	49,135	 	
Common dividends payable	 	—	 	59,800	 	
Customer deposits	 	80,783	 	79,689	 	
Liabilities from risk management activities (Note 7)	 	65,354	 	73,741	 	
Regulatory liabilities (Note 3)	 	76,640	 	88,116	 	
Other current liabilities	 	102,349	 	145,326	 	
Total current liabilities	 	859,675	 	1,043,087	 	
 	 	 	 	 	 	
DEFERRED CREDITS AND OTHER	 	 	 	 	 	
Deferred income taxes	 	2,109,332	 	2,133,976	 	
Regulatory liabilities (Note 3)	 	805,230	 	759,201	 	
Liability for asset retirements	 	358,184	 	357,097	 	
Liabilities for pension and other postretirement benefits (Note 4)	 	994,365	 	1,017,556	 	
Liabilities from risk management activities (Note 7)	 	82,876	 	85,264	 	
Customer advances	 	108,986	 	109,359	 	
Coal mine reclamation	 	119,044	 	118,860	 	
Unrecognized tax benefits (Note 5)	 	72,047	 	70,932	 	
Other	 	277,940	 	250,639	 	
Total deferred credits and other	 	4,928,004	 	4,902,884	 	
 	 	 	 	 	 	
COMMITMENTS AND CONTINGENCIES (SEE NOTES)	 	 	 	 	 	
 	 	 	 	 	 	
TOTAL LIABILITIES AND EQUITY	 	$	13,230,044	 	$	13,242,542	 	
 
See Notes to Pinnacle West’s Condensed Consolidated Financial Statements and Supplemental Notes to Arizona Public Service Company’s Condensed Consolidated Financial Statements.
 
45 

Table of Contents
 
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)

 	 	Three Months Ended
March 31,	 	
 	 	2013	 	2012	 	
CASH FLOWS FROM OPERATING ACTIVITIES	 	 	 	 	 	
Net income	 	$	34,434	 	$	3,662	 	
Adjustments to reconcile net income to net cash provided by operating activities:	 	 	 	 	 	
Depreciation and amortization including nuclear fuel	 	124,320	 	118,463	 	
Deferred fuel and purchased power	 	31,194	 	46,754	 	
Deferred fuel and purchased power amortization	 	1,122	 	(24,514	)	
Allowance for equity funds used during construction	 	(6,864	)	(4,756	)	
Deferred income taxes	 	12,756	 	(2,044	)	
Change in derivative instruments fair value	 	333	 	1,985	 	
Changes in current assets and liabilities:	 	 	 	 	 	
Customer and other receivables	 	2,464	 	52,416	 	
Accrued unbilled revenues	 	4,698	 	20,511	 	
Materials, supplies and fossil fuel	 	(9,386	)	(13,753	)	
Other current assets	 	(2,526	)	(3,847	)	
Accounts payable	 	12,892	 	(39,812	)	
Accrued taxes and income taxes receivable — net	 	43,323	 	42,039	 	
Other current liabilities	 	(58,419	)	(53,449	)	
Change in margin and collateral accounts — assets	 	933	 	(1,853	)	
Change in margin and collateral accounts — liabilities	 	24,205	 	(32,950	)	
Change in other long-term assets	 	(29,022	)	(21,656	)	
Change in other long-term liabilities	 	41,760	 	27,557	 	
Net cash flow provided by operating activities	 	228,217	 	114,753	 	
CASH FLOWS FROM INVESTING ACTIVITIES	 	 	 	 	 	
Capital expenditures	 	(182,859	)	(240,973	)	
Contributions in aid of construction	 	14,912	 	13,871	 	
Allowance for borrowed funds used during construction	 	(3,990	)	(3,151	)	
Proceeds from nuclear decommissioning trust sales	 	135,240	 	92,047	 	
Investment in nuclear decommissioning trust	 	(139,553	)	(96,360	)	
Other	 	(470	)	(533	)	
Net cash flow used for investing activities	 	(176,720	)	(235,099	)	
CASH FLOWS FROM FINANCING ACTIVITIES	 	 	 	 	 	
Issuance of long-term debt	 	104,307	 	319,081	 	
Short-term borrowings — net	 	(92,175	)	216,600	 	
Repayment of long-term debt	 	—	 	(375,727	)	
Dividends paid on common stock	 	(59,800	)	(57,400	)	
Net cash flow provided by (used for) financing activities	 	(47,668	)	102,554	 	
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	 	3,829	 	(17,792	)	
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	 	3,499	 	19,873	 	
CASH AND CASH EQUIVALENTS AT END OF PERIOD	 	$	7,328	 	$	2,081	 	
Supplemental disclosure of cash flow information	 	 	 	 	 	
Cash paid during the period for:	 	 	 	 	 	
Interest, net of amounts capitalized	 	$	48,146	 	$	61,701	 	
Significant non-cash investing and financing activities:	 	 	 	 	 	
Accrued capital expenditures	 	$	6,575	 	$	13,622	 	
 
See Notes to Pinnacle West’s Condensed Consolidated Financial Statements and Supplemental Notes to Arizona Public Service Company’s Condensed Consolidated Financial Statements.
 
46 

Table of Contents
 
Certain notes to APS’s Condensed Consolidated Financial Statements are combined with the Notes to Pinnacle West’s Condensed Consolidated Financial Statements.  Listed below are the Condensed Consolidated Notes to Pinnacle West’s Condensed Consolidated Financial Statements, the majority of which also relate to APS’s Condensed Consolidated Financial Statements.  In addition, listed below are the Supplemental Notes that are required disclosures for APS and should be read in conjunction with Pinnacle West’s Condensed Consolidated Notes.

 	 	Condensed
Consolidated
Note
Reference	 	APS’s
Supplemental
Note
Reference	 	
Consolidation and Nature of Operations	 	Note 1	 	—	 	
Long-Term Debt and Liquidity Matters	 	Note 2	 	—	 	
Regulatory Matters	 	Note 3	 	—	 	
Retirement Plans and Other Benefits	 	Note 4	 	—	 	
Income Taxes	 	Note 5	 	—	 	
Palo Verde Sale Leaseback Variable Interest Entities	 	Note 6	 	—	 	
Derivative Accounting	 	Note 7	 	—	 	
Changes in Equity	 	Note 8	 	Note S-1	 	
Commitments and Contingencies	 	Note 9	 	—	 	
Other Income and Other Expense	 	Note 10	 	Note S-2	 	
Earnings Per Share	 	Note 11	 	—	 	
Fair Value Measurements	 	Note 12	 	—	 	
Nuclear Decommissioning Trusts	 	Note 13	 	—	 	
New Accounting Standards	 	Note 14	 	—	 	
Changes in Accumulated Other Comprehensive Income	 	Note 15	 	Note S-3	 	
 
47 

Table of Contents
 
ARIZONA PUBLIC SERVICE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
S-1.                            Changes in Equity
 
The following tables show APS’s changes in shareholder equity and changes in equity of noncontrolling interests for the three months ended March 31, 2013 and 2012 (dollars in thousands):

 	 	Three Months Ended March 31, 2013	 	Three Months Ended March 31, 2012	 	
 	 	Shareholder
Equity	 	Noncontrolling
Interests	 	Total	 	Shareholder
Equity	 	Noncontrolling
Interests	 	Total	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Beginning balance, January 1	 	$	4,093,000	 	$	129,483	 	$	4,222,483	 	$	3,943,007	 	$	108,399	 	$	4,051,406	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	26,042	 	8,392	 	34,434	 	(4,105	)	7,767	 	3,662	 	
OCI (loss)	 	5,992	 	—	 	5,992	 	(15,755	)	—	 	(15,755	)	
Total comprehensive income (loss)	 	32,034	 	8,392	 	40,426	 	(19,860	)	7,767	 	(12,093	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Dividends on common stock	 	—	 	—	 	—	 	(57,400	)	—	 	(57,400	)	
Other	 	(2	)	—	 	(2	)	1	 	—	 	1	 	
Ending balance, March 31	 	$	4,125,032	 	$	137,875	 	$	4,262,907	 	$	3,865,748	 	$	116,166	 	$	3,981,914	 	
 
S-2.                            Other Income and Other Expense
 
The following table provides detail of APS’s other income and other expense for the three months ended March 31, 2013 and 2012 (dollars in thousands):

 	 	Three Months Ended
March 31,	 	
 	 	2013	 	2012	 	
Other income:	 	 	 	 	 	
Interest income	 	$	23	 	$	107	 	
Miscellaneous	 	1,320	 	403	 	
Total other income	 	$	1,343	 	$	510	 	
 	 	 	 	 	 	
Other expense:	 	 	 	 	 	
Non-operating costs (a)	 	$	(2,320	)	$	(1,741	)	
Asset dispositions	 	(1,264	)	(223	)	
Miscellaneous	 	(2,712	)	(2,660	)	
Total other expense	 	$	(6,296	)	$	(4,624	)	

(a)                                  As defined by the FERC, includes below-the-line non-operating utility expense (items excluded from utility rate recovery).
 
48 

Table of Contents
 
ARIZONA PUBLIC SERVICE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
S-3.                            Changes in Accumulated Other Comprehensive Loss
 
The following table shows the changes in accumulated other comprehensive income (loss), including reclassification adjustments, by component for the three-month period ended March 31, 2013 (dollars in thousands):

 	 	Derivative
Instruments	 	Pension and
Other
Postretirement
Benefits	 	Total	 	
 	 	 	 	 	 	 	 	
Beginning balance, January 1	 	$	(49,592	)	$	(39,503	)	$	(89,095	)	
 	 	 	 	 	 	 	 	
Other comprehensive income before reclassifications, net of tax expense of $38	 	58	 	—	 	58	 	
 	 	 	 	 	 	 	 	
Amounts reclassified from accumulated other comprehensive loss:	 	 	 	 	 	 	 	
Net realized loss, net of tax benefit of $3,300	 	5,052	 	—	 	5,052	 	
Amortization of actuarial loss, net of tax benefit of $527	 	—	 	808	 	808	 	
Amortization of prior service cost, net of tax benefit of $49	 	—	 	74	 	74	 	
 	 	 	 	 	 	 	 	
Total reclassifications for the period, net of tax benefit of $3,300, $576 and $3,876	 	5,052	(a)	882	(b)	5,934	 	
 	 	 	 	 	 	 	 	
Net current period other comprehensive income, net of tax expense of $3,338, $576 and $3,914	 	5,110	 	882	 	5,992	 	
 	 	 	 	 	 	 	 	
Ending balance, March 31	 	$	(44,482	)	$	(38,621	)	$	(83,103	)	

(a)          These amounts are included in the computation of fuel and purchased power costs and are subject to the PSA.  See Note 7.
(b)          These amounts are included in the computation of net periodic pension cost.  See Note 4.
 
49 

Table of Contents
 
ITEM 2.                         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 Condensed Consolidated Financial Statements and APS’s Condensed Consolidated Financial Statements and the related Notes that appear in Item 1 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 Part 1, Item 1A of the 2012 Form 10-K.
 
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.  APS management continues to work closely with regulators and others in the nuclear industry to analyze the lessons learned and address any rulemaking or improvements resulting from the March 2011 events impacting the Fukushima Daiichi Nuclear Power Station in Japan.
 
Coal and Related Environmental Matters.   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 greenhouse gas emissions.  Concern over climate change and other emission-related issues could have a significant impact on our capital expenditures and operating costs in the form of taxes, emissions allowances or required equipment upgrades for these plants.  APS is closely monitoring its long-range capital management plans, 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 fund any such equipment upgrades.
 
SCE, a participant in Four Corners, has indicated that certain California legislation may prohibit it from making emission control expenditures at the plant.  On November 8, 2010, APS and SCE entered into an asset purchase agreement (“Asset Purchase Agreement”), providing for the purchase by APS of SCE’s 48% interest in each of Units 4 and 5 of Four Corners.  The purchase price is $294 million, subject to certain adjustments.  Completion of the purchase by APS is subject to the receipt of approvals by the ACC, the California Public Utilities Commission (“CPUC”) and the FERC.  On March 29, 2012, the CPUC issued an order approving the sale.  On April 18, 2012, the ACC voted to allow APS to move forward with the purchase.  The Asset Purchase Agreement provides that the purchase price will be reduced by $7.5 million for each month between October 1, 2012 and the closing date.  The ACC reserved the right to review the prudence of the transaction for cost recovery purposes in a future proceeding if the purchase closes.  The ACC also authorized an accounting
 
50 

Table of Contents
 
deferral of certain costs associated with the purchase until any such cost recovery proceeding concludes.  The FERC application seeking authorization for the transaction was approved on November 27, 2012.  The principal remaining condition to closing is the negotiation and execution of a new coal supply contract on terms reasonably acceptable to APS.
 
On December 19, 2012, BHP Billiton New Mexico Coal, Inc. (“BHP Billiton”), the parent company of BHP Navajo Coal Company (“BNCC”), the coal supplier and operator of the mine that serves Four Corners, announced that it has entered into a Memorandum of Understanding with the Navajo Nation setting out the key terms under which full ownership of BNCC would be sold to the Navajo Nation.  BHP Billiton would be retained by BNCC under contract as the mine manager and operator until July 2016.  Key terms of the new coal supply contract are being finalized by the Navajo Nation and APS and the other Four Corners co-owners.
 
As a result of this proposed change in ownership of BNCC, APS now expects that a new coal supply contract would be executed upon completion of negotiations and following the endorsement of the transfer of ownership of the stock of BNCC to a new Navajo Nation commercial enterprise to be established by the Navajo Nation Tribal Council.  On April 29, 2013, the Tribal Council approved the creation of the new commercial enterprise with sufficient power and authority to execute the transaction with BHP Billiton.
 
Pursuant to the Asset Purchase Agreement, either APS or SCE has a right to terminate the Agreement if satisfaction of the closing conditions had not occurred by December 31, 2012, unless the party seeking to terminate is then in breach of the Agreement.
 
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 United States Department of the Interior (“DOI”), as does a related federal rights-of-way grant which the Four Corners participants will pursue.  A federal environmental review is underway as part of the DOI review process.
 
APS has announced that, if APS’s purchase of SCE’s interests in Units 4 and 5 at Four Corners is consummated, it will close Units 1, 2 and 3 at the plant.  APS owns 100% of Units 1-3.  These events will change the plant’s overall generating capacity from 2,100 MW to 1,540 MW and APS’s entitlement from the plant from 791 MW to 970 MW.  When the ACC approved APS moving forward with the purchase of Units 4 and 5, it also approved the recovery of any unrecovered costs associated with the closure of Units 1, 2 and 3.  The Settlement Agreement in APS’s most recent retail rate case allows APS to seek a rate adjustment to reflect the Four Corners transaction should the transaction close (see Note 3).
 
APS cannot predict whether the mutual right to terminate in the Asset Purchase Agreement will be exercised by a party to that agreement in the future, whether BHP Billiton and the Navajo Nation will consummate the transfer of ownership of BNCC, or whether the coal supply contract will be finalized and executed by the Four Corners co-owners, such that closing of APS’s purchase of SCE’s interest in Four Corners can occur.
 
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 the next three years of new transmission projects, along with other transmission
 
51 

Table of Contents
 
costs for upgrades and replacements.  APS is also working to establish and expand smart grid technologies throughout its service territory designed to provide long-term benefits both to APS and its customers.  APS is piloting and 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 4% of retail electric sales in 2013 and increases annually until it reaches 15% in 2025.  In the settlement agreement related to the 2008 retail rate case, APS agreed to exceed the RES standards, committing to use APS’s best efforts to obtain 1,700 gigawatt hours (“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 June 29, 2012, APS filed its annual RES implementation plan, covering the 2013-2017 timeframe and requesting 2013 RES funding of $97 million to $107 million.  In a final order dated January 31, 2013, the ACC approved a budget of $103 million for APS’s 2013 RES plan.  That budget includes $4 million for residential distributed energy incentives and $0.1 million for commercial distributed energy up-front incentives, but did not include any funds for new commercial distributed energy production-based incentives beyond those for previously approved programs.  The ACC further ordered that a hearing take place 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.  The track and record approach would require monitoring the distributed energy systems that are connected to APS’s system, recording the amount of energy they produce, and reporting the energy production amounts to the ACC for informational purposes only.  Finally, the ACC authorized an APS-led multi-session technical conference designed to consider APS’s net metering policy and the costs and benefits of distributed energy.
 
APS has a diverse portfolio of existing and planned renewable resources totaling 1,131 MW, including solar, wind, geothermal, biomass and biogas.  Of this portfolio, 709 MW are currently in operation and 422 MW are under contract for development or are under construction.  Renewable resources in operation include 98 MW of solar facilities owned by APS, 349 MW of long-term purchased power agreements, and an estimated 262 MW of customer-sited, third-party owned distributed energy resources.
 
To achieve our RES requirements, as mentioned above, to date APS has entered into contracts for 422 MW of renewable resources that are planned, in development or under construction.  APS’s strategy to procure these resources includes new facilities to be owned by APS, purchased power contracts for new facilities and ongoing development of distributed energy resources.  APS has also entered into long-term purchased power agreements for 280 MW from solar facilities currently planned, in development or under construction, and 72 MW from distributed energy resources.
 
The following table summarizes APS’s renewable energy sources in operation and under development as of May 3, 2013.
 
52 

Table of Contents

 	 	Net Capacity in Operation
(MW)	 	Net Capacity Planned / Under
Development (MW)	 	
Total APS Owned: Solar (a)	 	98	 	70	 	
 	 	 	 	 	 	
Purchased Power Agreements:	 	 	 	 	 	
Solar	 	30	 	280	 	
Wind	 	289	 	—	 	
Geothermal	 	10	 	—	 	
Biomass	 	14	 	—	 	
Biogas	 	6	 	—	 	
Total Purchased Power Agreements	 	349	 	280	 	
 	 	 	 	 	 	
Total Distributed Energy: Solar	 	262	 	72	 	
 	 	 	 	 	 	
Total Renewable Portfolio	 	709	 	422	 	

(a)          Through the ACC-approved AZ Sun Program, a program that contemplates the development of photovoltaic solar plants which APS owns or will own, APS has executed contracts for the development of 150 MW of new solar generation, representing an investment commitment of approximately $614 million.
 
Agreements for the development and completion of future resources are subject to various conditions, including successful siting, permitting and interconnection of the project to the electric grid.
 
Demand Side Management.  In recent years, Arizona regulators have 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.  In December 2009, the ACC initiated an Energy Efficiency rulemaking, with a proposed Energy Efficiency Standard 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 ambitious standard became effective on January 1, 2011 and will likely impact Arizona’s future energy resource needs.  The ACC issued an order on April 4, 2012 approving recovery of approximately $72 million of APS’s energy efficiency and demand side management program costs.  This amount will be recovered by the then-existing DSMAC over a twelve-month period beginning March 1, 2012.  This amount does not include $10 million already being recovered in general retail base rates.
 
On June 1, 2012, APS filed its 2013 Demand Side Management Implementation Plan.  In 2013, the standards will require 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.  APS expects to receive a decision from the ACC in the second quarter of 2013.
 
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
 
53 

Table of Contents
 
wholesale electric rates (primarily for transmission) are regulated by the 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 a Settlement Agreement detailing the terms upon which the parties have agreed to settle the rate case.  See Note 3 for details regarding the 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 proposed acquisition of SCE’s interest in Units 4 and 5 of Four Corners, APS and SCE agreed that upon closing of the acquisition (or in 2016 if the closing does not occur), the companies will terminate an existing agreement that provides transmission capacity for SCE to transmit its portion of the output from Four Corners to California. On May 1, 2013, APS filed a request with FERC seeking authorization to cancel the existing agreement and defer a $40 million payment to be made by APS associated with the termination and recover the payment through amortization over a 10-year period.  APS believes the costs associated with the termination of the existing agreement are recoverable, but cannot predict whether FERC will approve our request; however, if the recovery is disallowed by FERC, APS would record a charge to its results of operations at the time of the disallowance.
 
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.   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.  As a result of the continuing distressed conditions in the real estate markets, during 2009 our other first-tier subsidiary, SunCor, undertook a program to dispose of its homebuilding operations, master-planned communities, land parcels, commercial assets and golf courses in order to eliminate its outstanding debt.  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.
 
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 2010 through 2012, retail electric revenues comprised approximately 93% of our total electric operating revenues.  Our electric operating revenues
 
54 

Table of Contents
 
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 customer growth in APS’s service territory for the three-month period ended March 31, 2013 was 1.4% compared with the comparable prior-year period.  For the three years 2010 through 2012, APS’s customer growth averaged 0.7% per year.  We currently expect annual customer growth to average about 2% for 2013 through 2015 based on our assessment of modestly improving economic conditions, both nationally and in Arizona.  Retail electricity sales in kilowatt-hours, adjusted to exclude the effects of weather variations, increased 0.6% for the three-month period ended March 31, 2013 compared with the prior-year period, reflecting the effects of customer conservation and energy efficiency and distributed renewable generation initiatives, offset by mildly improving economic conditions.  For the three years 2010 through 2012, APS experienced annual declines in retail electricity sales averaging 0.1%, adjusted to exclude the effects of weather variations.  We currently estimate that annual retail electricity sales in kilowatt-hours will increase on average by less than one percent during 2013 through 2015, including the effects of customer conservation and energy efficiency and distributed renewable generation initiatives, but excluding the effects of weather variations.  A failure of the Arizona economy to continue to improve 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, impacts of energy efficiency programs and growth in distributed generation, and responses to retail price changes.  Our experience indicates that a reasonable range of variation in our kilowatt-hour 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.  Historical 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 Condensed 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 growth, power plant operations, maintenance of utility plant (including generation, transmission, and distribution facilities), inflation, outages, higher-trending pension and other postretirement benefit costs, renewable energy and demand side management related expenses (which are offset by the same amount of operating revenues) and other factors.  In the settlement agreement related to the 2008 retail rate case, APS committed to operational expense reductions from 2010 through 2014 and received approval to defer certain pension and other postretirement benefit cost increases incurred in 2011 and
 
55 

Table of Contents
 
2012, which totaled $25 million, as a regulatory asset, until the most recent general retail rate case decision became effective on July 1, 2012.  In July 2012, we began amortizing the regulatory asset over a 36-month period.
 
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.
 
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 9.6% of the assessed value for 2012 and 9.0% for 2011.  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 Settlement Agreement).
 
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 2).  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 electricity service to Native Load customers) and related activities and includes electricity generation, transmission and distribution.
 
Operating Results
 
Three-month period ended March 31, 2013 compared with three-month period ended March 31, 2012  Our consolidated net income attributable to common shareholders for the three months ended March 31, 2013 was $24 million, compared with a net loss of $8 million for the prior-year period.  The results reflect an increase of approximately $31 million for the regulated electricity segment primarily due to increases related to the retail regulatory settlement effective July 1, 2012 (see Note 3), the effects of weather, higher retail transmission revenues, higher retail sales due to customer growth and changes in customer usage patterns and related pricing, 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 and higher income taxes in the current-year period.
 
The following table presents net income attributable to common shareholders by business segment compared with the prior-year period:
 
56 

Table of Contents

 	 	Three Months Ended
March 31,	 	 	 	
 	 	2013	 	2012	 	Net Change	 	
 	 	(dollars in millions)	 	
Regulated Electricity Segment:	 	 	 	 	 	 	 	
Operating revenues less fuel and purchased power expenses	 	$	455	 	$	404	 	$	51	 	
Operations and maintenance	 	(223	)	(211	)	(12	)	
Depreciation and amortization	 	(104	)	(100	)	(4	)	
Taxes other than income taxes	 	(40	)	(43	)	3	 	
Other income (expenses), net	 	3	 	1	 	2	 	
Interest charges, net of allowance for borrowed funds used during construction	 	(45	)	(53	)	8	 	
Income taxes	 	(13	)	4	 	(17	)	
Less income related to noncontrolling interests (Note 6)	 	(8	)	(8	)	—	 	
Regulated electricity segment net income (loss)	 	25	 	(6	)	31	 	
 	 	 	 	 	 	 	 	
All other	 	(1	)	(1	)	—	 	
Income (Loss) from Continuing Operations Attributable to Common Shareholders	 	24	 	(7	)	31	 	
 	 	 	 	 	 	 	 	
Loss from Discontinued Operations Attributable to Common Shareholders (a)	 	—	 	(1	)	1	 	
 	 	 	 	 	 	 	 	
Net Income (Loss) Attributable to Common Shareholders	 	$	24	 	$	(8	)	$	32	 	

(a)                                  Includes activities related to SunCor.
 
Operating revenues less fuel and purchased power expenses Regulated electricity segment operating revenues less fuel and purchased power expenses were $51 million higher for the three months ended March 31, 2013 compared with the prior-year period.  The following table summarizes the major components of this change:
 
57 

Table of Contents

 	 	Increase (Decrease)	 	
 	 	Operating
revenues	 	Fuel and
purchased
power
expenses	 	Net change	 	
 	 	(dollars in millions)	 	
 	 	 	 	 	 	 	 	
Impacts of retail regulatory settlement effective July 1, 2012	 	$	25	 	$	2	 	$	23	 	
Effects of weather	 	19	 	7	 	12	 	
Higher retail sales due to customer growth and changes in customer usage patterns and related pricing	 	11	 	1	 	10	 	
Higher retail transmission revenues	 	10	 	—	 	10	 	
Higher demand-side management, renewable energy and similar regulatory surcharges	 	6	 	2	 	4	 	
Higher fuel and purchased power costs, net of related deferrals and off-system sales	 	(5	)	3	 	(8	)	
Miscellaneous items, net	 	(1	)	(1	)	—	 	
Total	 	$	65	 	$	14	 	$	51	 	
 
Operations and maintenance Operations and maintenance expenses increased $12 million for the three months ended March 31, 2013 compared with the prior-year period primarily because of:
 
·                                           An increase of $8 million related to higher performance-based compensation costs resulting from an improved company stock price and estimated full-year performance;
 
·                                           An increase of $4 million related to employee benefit costs, comprised of an increase of $11 million related to amortization of certain pension and other postretirement benefit costs in 2013 compared with regulatory deferral of such costs in 2012, and a decrease of $7 million related to other employee benefit costs, primarily pension and other postretirement benefit costs;
 
·                                           An increase of $4 million in information technology costs;
 
·                                           A decrease of $6 million in generation costs, primarily due to lower power plant maintenance costs as a result of less work being completed early in the year compared to 2012; and
 
·                                           An increase of $2 million related to other miscellaneous factors.
 
Interest charges, net of allowance for borrowed funds used during construction Interest charges, net of allowance for borrowed funds used during construction, decreased $8 million for the three months ended March 31, 2013 compared with the prior-year period primarily because of lower debt balances and lower interest rates in the current year.
 
58 

Table of Contents
 
Income taxes Income taxes were $17 million higher for the three months ended March 31, 2013 compared with the prior-year period primarily due to higher pretax income in the current period.
 
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 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 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 March 31, 2013, APS’s common equity ratio, as defined, was 56%.  Its total shareholder equity was approximately $4.1 billion, and total capitalization was approximately $7.4 billion.  Under this order, APS would be prohibited from paying dividends if such payment would reduce its total shareholder equity below approximately $2.9 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.
 
Many of APS’s current capital expenditure projects qualify for bonus depreciation.  The American Taxpayer Relief Act of 2012, signed into law on January 2, 2013, includes provisions extending the eligibility for 50% bonus depreciation to qualified property placed in service in 2013.  As a result of this provision, and the previously enacted bonus depreciation provisions provided for in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, total cash tax benefits of up to $400-$500 million are expected to be generated for APS through accelerated depreciation.  The cash generated is an acceleration of the tax benefits that APS would have otherwise received over 20 years.  It is anticipated that these cash benefits will be fully realized by APS by the end of 2013, with a majority of the benefit realized as of December 31, 2012.
 
Summary of Cash Flows
 
The following tables present net cash provided by (used for) operating, investing and financing activities for the three months ended March 31, 2013 and 2012 (dollars in millions):
 
59 

Table of Contents
 
Pinnacle West Consolidated

 	 	Three Months Ended
March 31,	 	Net	 	
 	 	2013	 	2012	 	Change	 	
Net cash flow provided by operating activities	 	$	212	 	$	115	 	$	97	 	
Net cash flow used for investing activities	 	(176	)	(235	)	59	 	
Net cash flow provided by (used for) financing activities	 	(37	)	107	 	(144	)	
Net decrease in cash and cash equivalents	 	$	(1	)	$	(13	)	$	12	 	
 
Arizona Public Service Company

 	 	Three Months Ended
March 31,	 	Net	 	
 	 	2013	 	2012	 	Change	 	
Net cash flow provided by operating activities	 	$	228	 	$	115	 	$	113	 	
Net cash flow used for investing activities	 	(176	)	(235	)	59	 	
Net cash flow provided by (used for) financing activities	 	(48	)	102	 	(150	)	
Net increase (decrease) in cash and cash equivalents	 	$	4	 	$	(18	)	$	22	 	
 
Operating Cash Flows
 
Three-month period ended March 31, 2013 compared with three-month period ended March 31, 2012  Pinnacle West’s consolidated net cash provided by operating activities was $212 million in the first quarter of 2013, compared to $115 million in the first quarter of 2012, an increase of $97 million in net cash provided.  The increase is primarily related to a $60 million reduction of cash collateral posted, a $14 million decrease in cash paid for interest in the current year period, 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 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 105% funded as of January 1, 2012 and 101% funded as of January 1, 2013.  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 have contributed $56 million to our pension plan year to date in 2013.  The minimum contributions for the pension plan due in 2013, 2014 and 2015 under the recently enacted Moving Ahead for Progress in the 21 st  Century Act (MAP-21) are estimated to be zero, $89 million and $112 million, respectively.  We expect to make voluntary contributions totaling $140 million to the pension plan in 2013, and contributions up to approximately $175 million in each of 2014 and 2015.  The contributions to our other postretirement benefit plans for 2013, 2014 and 2015 are expected to be approximately $20 million each year.
 
The $71 million long-term income tax receivable on the Condensed Consolidated Balance Sheets represents the anticipated refunds related to an APS tax accounting method change approved by the IRS in the third quarter of 2009.  This amount is classified as long-term, as there remains
 
60 

Table of Contents
 
uncertainty regarding the timing of this cash receipt.  Further clarification of the timing is expected from the IRS within the next twelve months.
 
Investing Cash Flows
 
Three-month period ended March 31, 2013 compared with three-month period ended March 31, 2012  Pinnacle West’s consolidated net cash used for investing activities was $176 million in the first quarter of 2013, compared to $235 million in the first quarter of 2012, a decrease of $59 million in net cash used.  The decrease in net cash used for investing activities is primarily due to a decrease of approximately $58 million in 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,	 	
 	 	2013	 	2014	 	2015	 	
APS	 	 	 	 	 	 	 	
Generation:	 	 	 	 	 	 	 	
Nuclear Fuel	 	$	55	 	$	82	 	$	83	 	
Renewables	 	192	 	39	 	—	 	
Environmental	 	20	 	71	 	198	 	
Four Corners Units 4 and 5	 	253	 	—	 	—	 	
Other Generation	 	144	 	252	 	333	 	
Distribution	 	256	 	307	 	310	 	
Transmission	 	149	 	211	 	200	 	
Other (a)	 	47	 	68	 	66	 	
Total APS	 	$	1,116	 	$	1,030	 	$	1,190	 	

(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.  For purposes of this table, we have assumed the consummation of APS’s purchase of SCE’s interest in Four Corners Units 4 and 5 and the subsequent shutdown of Units 1-3, as discussed in the “Overview” section above.  As a result, we included the estimated $253 million purchase price under Generation and have not included environmental expenditures for Units 1-3.  We have not included estimated costs for Cholla’s compliance with EPA’s regional haze rule since we have challenged the rule judicially and are considering our future options with respect to that plant if the rule is upheld.  We are also monitoring the status of certain environmental matters, which, depending on their final outcome, could require modification to our environmental expenditures.
 
61 

Table of Contents
 
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 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
 
Three-month period ended March 31, 2013 compared with three-month period ended March 31, 2012  Pinnacle West’s consolidated net cash used for financing activities was $37 million in the first quarter of 2013, compared to $107 million of net cash provided in the first quarter of 2012, an increase of $144 million in net cash used.  The increase in net cash used for financing activities is primarily due to a $309 million net change in APS’s short-term borrowings and $215 million in lower issuances of long-term debt, partially offset by $376 million in lower repayments of long-term debt (see below).
 
Significant Financing Activities On April 17, 2013, the Pinnacle West Board of Directors declared a quarterly dividend of $0.545 per share of common stock, payable on June 3, 2013, to shareholders of record on May 1, 2013.
 
On March 22, 2013, APS issued an additional $100 million par amount of its outstanding 4.50% unsecured senior notes that mature on April 1, 2042.  The net proceeds from the sale were used to repay short-term commercial paper borrowings and replenish cash used to redeem certain tax-exempt indebtedness in November 2012.
 
On May 1, 2013, APS purchased all $32 million of the Maricopa County, Arizona Pollution Control Corporation Pollution Control Revenue Refunding Bonds, 2009 Series C, due 2029.  We expect to remarket these bonds within the next twelve months.  These bonds are classified as current maturities of long-term debt on our Condensed Consolidated Balance Sheets at March 31, 2013 and December 31, 2012.
 
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.
 
At March 31, 2013, Pinnacle West’s $200 million 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 March 31, 2013, Pinnacle West had no outstanding borrowings under its credit facility, no letters of credit outstanding, and no commercial paper borrowings.
 
At March 31, 2013, APS had two credit facilities totaling $1 billion, including a $500 million credit facility that was refinanced in April 2013 (see below) and a $500 million 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 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.
 
62 

Table of Contents
 
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 terminates in April 2018.
 
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 March 31, 2013, APS had no outstanding borrowings or outstanding letters of credit under these credit facilities, nor did it have any commercial paper borrowings.
 
See “Financial Assurances” in Note 9 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 3 for information regarding the settlement related to the 2008 retail rate case, which includes ACC authorization and requirements of equity infusions into APS of at least $700 million by December 31, 2014 ($253 million of which was infused into APS from proceeds of a Pinnacle West equity issuance in 2010).
 
See Note 7 for information related to the change in our margin accounts.
 
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 March 31, 2013, 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 2 for further discussions of liquidity matters.
 
63 

Table of Contents
 
Credit Ratings
 
The ratings of securities of Pinnacle West and APS as of April 26, 2013 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.

 	 	Moody’s	 	Standard & Poor’s	 	Fitch	
Pinnacle West	 	 	 	 	 	 	
Corporate credit rating	 	Baa2	 	BBB+	 	BBB	
Commercial paper	 	P-3	 	A-2	 	F3	
Outlook	 	Stable	 	Stable	 	Stable	
 	 	 	 	 	 	 	
APS	 	 	 	 	 	 	
Corporate credit rating	 	Baa1	 	BBB+	 	BBB	
Senior unsecured	 	Baa1	 	BBB+	 	BBB+	
Secured lease obligation bonds	 	Baa1	 	BBB+	 	BBB+	
Commercial paper	 	P-2	 	A-2	 	F3	
Outlook	 	Stable	 	Stable	 	Stable	
 
Off-Balance Sheet Arrangements
 
See Note 6 for a discussion of the impacts on our financial statements of consolidating certain VIEs.
 
Financial Assurances
 
See “Financial Assurances” in Note 9 for a discussion of APS’s outstanding letters of credit.  Pinnacle West has also issued parental guarantees and surety bonds for APS, which were not material at March 31, 2013.
 
Contractual Obligations
 
There have been no material changes outside the normal course of business in contractual obligations from the information provided in our 2012 Form 10-K.
 
CRITICAL ACCOUNTING POLICIES
 
In preparing the financial statements in accordance with 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.
 
64 

Table of Contents
 
There have been no changes to our critical accounting policies since our 2012 Form 10-K.  See “Critical Accounting Policies” in Item 7 of the 2012 Form 10-K for further details about our critical accounting policies.
 
OTHER ACCOUNTING MATTERS
 
See Note 14 for adoption of new accounting guidance relating to balance sheet offsetting disclosures, and reclassifications of accumulated other comprehensive income disclosures.
 
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 trusts (see Notes 12 and 13) and benefit plan assets.  The nuclear decommissioning trusts and benefit plan assets also have risks associated with the changing value of their investments.  Nuclear decommissioning and benefit plan costs are recovered in regulated electricity prices.
 
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.
 
The following table shows the net pretax changes in mark-to-market of our derivative positions for the three months ended March 31, 2013 and 2012 (dollars in millions):
 
65 

Table of Contents

 	 	Three Months Ended
March 31,	 	
 	 	2013	 	2012	 	
Mark-to-market of net positions at beginning of period	 	$	(122	)	$	(222	)	
Recognized in earnings (a):	 	 	 	 	 	
Change in mark-to-market losses for future period deliveries	 	—	 	(2	)	
Decrease (increase) in regulatory asset	 	20	 	(14	)	
Recognized in OCI:	 	 	 	 	 	
Change in mark-to-market losses for future period deliveries (b)	 	—	 	(42	)	
Mark-to-market losses realized during the period	 	8	 	15	 	
Change in valuation techniques	 	—	 	—	 	
Mark-to-market of net positions at end of period	 	$	(94	)	$	(265	)	

(a)                                 Represents the amounts reflected in income after the effect of PSA deferrals.
(b)                                  The changes in mark-to-market recorded in OCI are due primarily to changes in forward natural gas prices.
 
The table below shows the fair value of maturities of our derivative contracts (dollars in millions and excluding margin and collateral) at March 31, 2013 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,” in Item 8 of our 2012 Form 10-K and Note 12 for more discussion of our valuation methods.

Source of Fair Value	 	2013	 	2014	 	2015	 	2016	 	2017	 	Years
thereafter	 	Total fair
value	 	
Observable prices provided by other external sources	 	$	(24	)	$	(16	)	$	(1	)	$	—	 	$	—	 	$	—	 	$	(41	)	
Prices based on unobservable inputs	 	(11	)	(11	)	(12	)	(8	)	(4	)	(7	)	(53	)	
Total by maturity	 	$	(35	)	$	(27	)	$	(13	)	$	(8	)	$	(4	)	$	(7	)	$	(94	)	
 
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 Condensed Consolidated Balance Sheets at March 31, 2013 and December 31, 2012 (dollars in millions):
 
66 

Table of Contents

Mark-to-market changes	 	March 31, 2013
Gain (Loss)	 	December 31, 2012
Gain (Loss)	 	
reported in:	 	Price Up 10%	 	Price Down 10%	 	Price Up 10%	 	Price Down 10%	 	
Regulatory asset (liability) or OCI (a)	 	 	 	 	 	 	 	 	 	
Electricity	 	$	7	 	$	(7	)	$	7	 	$	(7	)	
Natural gas	 	25	 	(25	)	25	 	(25	)	
Total	 	$	32	 	$	(32	)	$	32	 	$	(32	)	

(a)                                  These contracts are 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 12 for a discussion of our credit valuation adjustment policy.  See Note 7 for a further discussion of credit risk.
 
Item 3.                                                          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 
 
See “Key Financial Drivers” and “Market and Credit Risks” in Item 2 above for a discussion of quantitative and qualitative disclosures about market risks.
 
Item 4.                                                          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, as amended (the “Exchange Act”) (15 U.S.C. 78a et seq .), is recorded, processed, summarized and reported, within the time periods specified in the United States Securities and Exchange Commission’s (“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 March 31, 2013.  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.
 
67 

Table of Contents
 
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 March 31, 2013.  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)                                  Changes in Internal Control Over Financial Reporting
 
The term “internal control over financial reporting” (defined in SEC Rule 13a-15(f)) refers to the process of a company that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
 
No change in Pinnacle West’s or APS’s internal control over financial reporting occurred during the fiscal quarter ended March 31, 2013 that materially affected, or is reasonably likely to materially affect, Pinnacle West’s or APS’s internal control over financial reporting.
 
68 

Table of Contents
 
PART II — OTHER INFORMATION 
 
Item 1.                                                          LEGAL PROCEEDINGS 
 
See “Environmental Matters” in Item 5 below and “Business of Arizona Public Service Company — Environmental Matters” in Item 1 of the 2012 Form 10-K in regard to pending or threatened litigation and other disputes.
 
See Note 3 for ACC and FERC-related matters.
 
See Note 9 for information regarding environmental and climate change matters, Superfund-related matters and matters related to a September 2011 power outage.
 
Item 1A.                                                 RISK FACTORS 
 
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A — Risk Factors in the 2012 Form 10-K, which could materially affect the business, financial condition, cash flows or future results of Pinnacle West and APS.  The risks described in the 2012 Form 10-K are not the only risks facing Pinnacle West and APS.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect the business, financial condition, cash flows and/or operating results of Pinnacle West and APS.
 
Item 2.                                                          UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 
 
Issuer Purchases of Equity Securities
 
The following table contains information about our purchases of our common stock during the first quarter of 2013.

Period	 	Total
Number of
Shares
Purchased
(a)	 	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	 	
January 1 — January 31, 2013	 	—	 	—	 	—	 	—	 	
February 1 — February 28, 2013	 	114,694	 	$	54.91	 	—	 	—	 	
March 1 — March 31, 2013	 	—	 	—	 	—	 	—	 	
 	 	 	 	 	 	 	 	 	 	
Total	 	114,694	 	$	54.91	 	—	 	—	 	

(a)          Represents shares of common stock withheld by Pinnacle West to satisfy tax withholding obligations upon the vesting of restricted stock.
 
69 

Table of Contents
 
Item 5.                                                          OTHER INFORMATION 
 
Environmental Matters
 
EPA Environmental Regulation
 
Regional Haze Rules — Four Corners.   On October 22, 2012, WildEarth Guardians filed a petition for review in the United States Court of Appeals for the Ninth Circuit alleging EPA violated the Endangered Species Act (“ESA”) when it promulgated the final Four Corners BART FIP.  On November 21, 2012, APS filed a motion for leave to intervene as a defendant, and the court granted the motion on December 10, 2012.  On December 12, 2012, EPA and APS filed motions with the court to dismiss the petition or, in the alternative, transfer the case to the United States Court of Appeals for the Tenth Circuit, the circuit in which APS believes the petition should have been filed.  On February 25, 2013, the court denied the motion to dismiss, but ordered that the case be transferred to the Tenth Circuit.  We cannot currently predict the outcome of this case or whether such outcome will have a material adverse impact on our financial position, results of operations, or cash flows.
 
Effluent Limitation Guidelines.   On April 19, 2013, EPA proposed revised effluent limitation guidelines establishing technology-based wastewater discharge limitations for fossil-fired electric generating units.  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 (BAT) 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 subject to a consent decree deadline to finalize the revised guidelines by May 22, 2014.
 
Union Matters
 
As previously discussed in Part 1, Item 1 — “Business — Other Information” in the 2012 Form 10-K, the Palo Verde security officers changed their collective bargaining representative from the Security, Police and Fire Professionals of America to the United Security Professionals of America (“USPA”).  The Company is currently engaged in negotiations with the USPA regarding a new collective bargaining agreement.  The Company cannot predict the outcome of these negotiations.
 
70 

Table of Contents
 
Item 6.                                                          EXHIBITS 
 
(a)                                  Exhibits

Exhibit No.	 	Registrant(s)	 	Description	
 	 	 	 	 	
10.1	 	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	
 	 	 	 	 	
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	
 	 	 	 	 	
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, Executive Vice President and Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended	
 	 	 	 	 	
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, Executive Vice President and Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended	
 	 	 	 	 	
32.1*	 	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*	 	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	
 	 	 	 	 	
101.INS*	 	Pinnacle West
APS	 	XBRL Instance Document	
 
71 

Table of Contents

Exhibit No.	 	Registrant(s)	 	Description	
 	 	 	 	 	
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	

*Furnished herewith as an Exhibit.
 
72 

Table of Contents
 
In addition, Pinnacle West and APS hereby incorporate the following Exhibits pursuant to Exchange Act Rule 12b-32 and Regulation §229.10(d) by reference to the filings set forth below:

Exhibit
No.	 	Registrant(s)	 	Description	 	Previously Filed as
Exhibit(1)	 	Date
Filed	
 	 	 	 	 	 	 	 	 	
3.1	 	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 Nos. 1-8962 and 1-4473	 	8-3-10	
 	 	 	 	 	 	 	 	 	
3.2	 	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 Nos. 1-8962 and 1-4473	 	8-7-08	
 	 	 	 	 	 	 	 	 	
3.3	 	APS	 	Articles of Incorporation, restated as of May 25, 1988	 	4.2 to APS’s Form S-3 Registration Nos. 33-33910 and 33-55248 by means of September 24, 1993 Form 8-K Report, File No. 1-4473	 	9-29-93	
 	 	 	 	 	 	 	 	 	
3.4	 	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	 	5-22-12	
 	 	 	 	 	 	 	 	 	
3.5	 	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 Nos. 1-8962 and 1-4473	 	2-20-09	

(1)  Reports filed under File Nos. 1-4473 and 1-8962 were filed in the office of the Securities and Exchange Commission located in Washington, D.C.
 
73 

Table of Contents
 
SIGNATURES 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 	PINNACLE WEST CAPITAL CORPORATION	
 	(Registrant)	

Dated:	May 3, 2013	By:	/s/ James R. Hatfield	
 	 	James R. Hatfield	
 	 	Executive Vice President and	
 	 	Chief Financial Officer	
 	 	(Principal Financial Officer and	
 	 	Officer Duly Authorized to sign this Report)	

 	ARIZONA PUBLIC SERVICE COMPANY	
 	(Registrant)	

Dated:	May 3, 2013	By:	/s/ James R. Hatfield	
 	 	James R. Hatfield	
 	 	Executive Vice President and	
 	 	Chief Financial Officer	
 	 	(Principal Financial Officer and	
 	 	Officer Duly Authorized to sign this Report)	
 
74 

Exhibit 10.1
 
EXECUTION COPY
 
U.S. $500,000,000
FIVE-YEAR CREDIT AGREEMENT
Dated as of April 9, 2013
 
among
 
ARIZONA PUBLIC SERVICE COMPANY,
as Borrower ,
 
THE LENDERS PARTY HERETO,
 
BARCLAYS BANK PLC ,
as Agent and Issuing Bank ,
 
THE ROYAL BANK OF SCOTLAND plc
as Syndication Agent ,
 
THE ROYAL BANK OF SCOTLAND plc,
BANK OF AMERICA, N.A.,
JPMORGAN CHASE BANK, N.A.
and
WELLS FARGO BANK, NATIONAL ASSOCIATION,
as Issuing Banks,
 
BANK OF AMERICA, N.A.,
JPMORGAN CHASE BANK, N.A.
and
WELLS FARGO BANK, NATIONAL ASSOCIATION ,
as Co-Documentation Agents ,
 
BARCLAYS BANK PLC
RBS SECURITIES INC.
J.P. MORGAN SECURITIES LLC
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
and
WELLS FARGO SECURITIES, LLC ,
as Joint Lead Arrangers and Joint Book Runners

 
TABLE OF CONTENTS
 
ARTICLE I
 
DEFINITIONS AND ACCOUNTING TERMS

Section 1.01	Certain Defined Terms	1	
Section 1.02	Other Interpretive Provisions	20	
Section 1.03	Accounting Terms	21	
Section 1.04	Rounding	21	
Section 1.05	Times of Day	21	
 	 	 	
ARTICLE II	
 	
AMOUNTS AND TERMS OF THE ADVANCES AND	
LETTERS OF CREDIT	
 	
Section 2.01	The Revolving Advances and Letters of Credit	21	
Section 2.02	Making the Revolving Advances	22	
Section 2.03	Letters of Credit	24	
Section 2.03A	Swingline Advances	31	
Section 2.04	Fees	33	
Section 2.05	Optional Termination or Reduction of the Commitments	34	
Section 2.06	Repayment of Advances	35	
Section 2.07	Interest on Advances	35	
Section 2.08	Interest Rate Determination	37	
Section 2.09	Optional Conversion of Revolving Advances	37	
Section 2.10	Prepayments of Advances	38	
Section 2.11	Increased Costs	39	
Section 2.12	Illegality	40	
Section 2.13	Payments and Computations	41	
Section 2.14	Taxes	42	
Section 2.15	Sharing of Payments, Etc.	46	
Section 2.16	Evidence of Debt	46	
Section 2.17	Use of Proceeds	47	
Section 2.18	Increase in the Aggregate Revolving Credit Commitments	47	
Section 2.19	Affected Lenders	49	
Section 2.20	Replacement of Lenders	51	
 	 	 	
ARTICLE III	
 	
CONDITIONS PRECEDENT	
 	
Section 3.01	Conditions Precedent to Effectiveness	52	
 
i 

 

Section 3.02	Conditions Precedent to Each Credit Extension and Commitment Increase	53	
Section 3.03	Determinations Under Section 3.01	54	
 	 	 	
ARTICLE IV	
 	
REPRESENTATIONS AND WARRANTIES	
 	
Section 4.01	Representations and Warranties of the Borrower	54	
 	 	 	
ARTICLE V	
 	
COVENANTS OF THE BORROWER	
 	
Section 5.01	Affirmative Covenants	58	
Section 5.02	Negative Covenants	61	
Section 5.03	Financial Covenant	63	
 	 	 	
ARTICLE VI	
 	
EVENTS OF DEFAULT	
 	
Section 6.01	Events of Default	63	
Section 6.02	Actions in Respect of Letters of Credit upon Default	66	
 	 	 	
ARTICLE VII	
 	
THE AGENT	
 	
Section 7.01	Appointment and Authority	66	
Section 7.02	Rights as a Lender	67	
Section 7.03	Exculpatory Provisions	67	
Section 7.04	Reliance by Agent	68	
Section 7.05	Delegation of Duties	68	
Section 7.06	Resignation of Agent	68	
Section 7.07	Non-Reliance on Agent and Other Lenders	69	
Section 7.08	No Other Duties, Etc.	69	
Section 7.09	Issuing Banks	69	
 	 	 	
ARTICLE VIII	
 	
MISCELLANEOUS	
 	
Section 8.01	Amendments, Etc.	69	
Section 8.02	Notices, Etc .	71	
Section 8.03	No Waiver; Cumulative Remedies; Enforcement	72	
Section 8.04	Costs and Expenses; Indemnity; Damage Waiver	73	
Section 8.05	Right of Set-off	75	
 
ii 

 

Section 8.06	Binding Effect	75	
Section 8.07	Successors and Assigns	76	
Section 8.08	Confidentiality	79	
Section 8.09	Governing Law	80	
Section 8.10	Counterparts; Integration; Effectiveness	80	
Section 8.11	Jurisdiction, Etc .	80	
Section 8.12	Payments Set Aside	81	
Section 8.13	Patriot Act	81	
Section 8.14	Waiver of Jury Trial	81	
Section 8.15	No Advisory or Fiduciary Responsibility	81	
Section 8.16	Survival of Representations and Warranties	82	
Section 8.17	Severability	82	

Schedules	
 	
Schedule 1.01 Commitments and Ratable Shares	
Schedule 4.01(j) Subsidiaries	
Schedule 4.01(k) Existing Indebtedness	
Schedule 8.02 Certain Address for Notices	
 	
Exhibits	
 	
Exhibit A Form of Note	
Exhibit B Form of Notice of Borrowing	
Exhibit C Form of Assignment and Assumption	
 
iii 

 
FIVE-YEAR CREDIT AGREEMENT
 
Dated as of April 9, 2013
 
ARIZONA PUBLIC SERVICE COMPANY, an Arizona corporation (the “ Borrower ”), the banks, financial institutions and other institutional lenders (the “ Initial Lenders ”) and initial issuing banks (the “ Initial Issuing Banks ”) listed on the signature pages hereof, the other Lenders (as hereinafter defined), BARCLAYS BANK PLC, as Agent for the Lenders (as hereinafter defined), THE ROYAL BANK OF SCOTLAND plc, as Syndication Agent and BANK OF AMERICA, N.A., JPMORGAN CHASE BANK, N.A. and WELLS FARGO BANK, NATIONAL ASSOCIATION, as Co-Documentation Agents, agree as follows:
 
The Borrower has requested that the Lenders provide a revolving credit 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:
 
“ 2013 Order ” means Decision No. 73659, dated February 6, 2013, of the Arizona Corporation Commission.
 
“ Administrative Questionnaire ” means an Administrative Questionnaire in a form supplied by the Agent.
 
“ Advance ” means a Revolving Advance or a Swingline Advance.
 
“ 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 any Revolving Advance within three (3) Business Days of the date such Revolving Advances were required to be funded hereunder unless such Lender notifies the Agent and the Borrower in writing that such failure is the result of such Lender’s determination that one or more conditions precedent to funding (each of which conditions precedent, together with any applicable default, shall be specifically identified in writing) has not been satisfied, or (ii) pay to the Agent, any Issuing Bank, the Swingline Lender, if any, or any other Lender any other amount required to be paid by it hereunder (including in respect of its participation in Letters of Credit and funding obligations in respect of Swingline Advances) within three (3) Business Days of the date when due, (b) has notified the Borrower, the Agent, any Issuing Bank or any Lender in writing of its intention not to fund any Revolving Advance 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 prospective Revolving Advances and other funding obligations under this Agreement 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 (e), 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 any 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 Barclays 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 on Schedule 8.02 under the heading “Agent’s Account” or such other account as the Agent may designate to the Lenders and the Borrower from time to time.
 
“ Agent’s Office ” means the Agent’s address and, as appropriate, the Agent’s Account, or such other address or account as the Agent may from time to time notify the Borrower and the Lenders.
 
“ Applicable Lending Office ” means, with respect to each Lender, such Lender’s Domestic Lending Office in the case of a Base Rate Advance and such Lender’s Eurodollar Lending Office in the case of a Eurodollar Rate Advance.
 
2 

 
“ 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	 	Eurodollar Rate
Advances	 	Base Rate
Advances	 	Commitment Fee	
Level 1
> A/A2	 	1.000%	 	0.000%	 	0.100%	
Level 2
< Level 1 but > A-/A3	 	1.125%	 	0.125%	 	0.125%	
Level 3
< Level 2 but >
BBB+/Baa1	 	1.250%	 	0.250%	 	0.175%	
Level 4
< Level 3 but >
BBB/Baa2	 	1.500%	 	0.500%	 	0.225%	
Level 5
< Level 4 but >
BBB-/Baa3	 	1.750%	 	0.750%	 	0.275%	
Level 6
< Level 5	 	2.000%	 	1.000%	 	0.350%	
 
“ 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.
 
“ Arrangers ” means, collectively, Barclays, RBS Securities Inc., Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and J.P. Morgan Securities LLC.
 
“ 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.
 
“ Assuming Lender ” has the meaning specified in Section 2.18(d).
 
“ Assumption Agreement ” has the meaning specified in Section 2.18(d)(ii).
 
“ 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.
 
“ Available Amount ” of any Letter of Credit means, at any time, the maximum amount available to be drawn under such Letter of Credit at such time (assuming compliance at such time with all conditions to drawing).
 
“ Barclays ” means Barclays Bank PLC.
 
“ Base Rate ” means for any day a fluctuating rate per annum equal to the highest of:
 
(a)                                  the rate of interest in effect for such day as publicly announced from time to time by the Agent as its “prime rate”;
 
3 

 
(b)                                  the Federal Funds Rate plus 0.50%; and
 
(c)                                   an amount equal to (i) 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 (ii) 1%.
 
“Prime rate” means the rate of interest in effect for such day as publicly announced from time to time by the Agent as its “prime rate.”  The “prime rate” is a rate set by the Agent based upon various factors including the Agent’s costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate.  Any change in the “prime rate” announced by the Agent shall take effect at the opening of business on the day specified in the public announcement of such change.
 
“ Base Rate Advance ” means a Revolving Advance that bears interest as provided in Section 2.07(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 (a) a borrowing consisting of simultaneous Revolving Advances of the same Type made by each of the Lenders pursuant to Section 2.01(a) or (b) Swingline Advances.
 
“ Business Day ” means a day of the year on which banks are not required or authorized by Law to close in New York City or Phoenix, Arizona and, if the applicable Business Day relates to any Advance in which interest is calculated by reference to the Eurodollar Rate, on which dealings are carried on in the London interbank market.
 
“ 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, guideline 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
 
4 

 
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.
 
“ Commitment ” means a Revolving Credit Commitment or a Letter of Credit Commitment.
 
“ Commitment Date ” has the meaning specified in Section 2.18(b).
 
“ Commitment Increase ” has the meaning specified in Section 2.18(a).
 
“ 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 the Borrower, “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 Revolving Advances of one Type into Revolving Advances of the other Type pursuant to Section 2.08, Section 2.09 or Section 2.12.
 
“ Credit Extension ” means each of the following: (a) a Borrowing and (b) the issuance of a Letter of Credit.
 
“ 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.
 
5 

 
“ 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), (v) and (vi) (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
 
6 

 
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:
 
(a)                                  for any Interest Period with respect to a Eurodollar Rate Advance, the rate per annum equal to the British Bankers Association LIBOR Rate (“ BBA LIBOR ”), as published by Reuters (or other commercially available source providing quotations of BBA LIBOR as designated by the Agent from time to time) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, for Dollar deposits (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period.  If such rate is not available at such time for any reason, then the “Eurodollar Rate” for such Interest Period shall be the rate per annum determined by the Agent to be the rate at which deposits in dollars for delivery on the first day of such Interest Period in same day funds in the approximate amount of the Eurodollar Rate Advance being made, continued or converted by the Agent and with a term equivalent to such Interest Period would be offered by the Agent to major banks in the London interbank eurodollar market at their request at approximately 11:00 a.m. (London time) two Business Days prior to the commencement of such Interest Period; and
 
(b)                                  for any interest rate calculation with respect to a Base Rate Advance, the rate per annum equal to (i) BBA LIBOR, at approximately 11:00 a.m., London time, two Business Days prior to the date of determination (provided that if such day is not a Business Day in London, the next preceding Business Day in London) for Dollar deposits being delivered in the London interbank market for a term of one month commencing that day or (ii) if such published rate is not available at such time for any reason, the rate determined by the Agent to be the rate at which deposits in Dollars for delivery on the date of determination in same day funds in the approximate amount of the Base Rate Advance being made, continued or converted by the Agent and with a term equal to one month would be offered by the Agent’s London Branch to major banks in the London interbank Eurodollar market at their request at the date and time of determination.
 
“ Eurodollar Rate Advance ” means a Revolving Advance that bears interest at a rate based on the Eurodollar Rate (other than a Base Rate Advance 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, any Issuing Bank or any other recipient of any payment to be made by or on account of any obligation of the Borrower
 
7 

 
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 2.14(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 2.20), 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 2.14(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 2.14(a)(i) or (ii) and (v) any United States withholding tax imposed by FATCA.
 
“ Executive Order ” has the meaning specified in Section 4.01(p).
 
“ Existing Credit Agreement ” means that certain Four-Year Credit Agreement, dated as of February 14, 2011 by and among the Borrower, the Lenders from time to time party thereto and the Agent.
 
“ FATCA ” means Section 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 rate per annum equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate (rounded upward, if necessary, to a whole multiple of 1/100 of 1%) charged to the Agent on such day on such transactions as determined by the Agent, and (c) solely for purposes for determining the Money Market Rate, any such other publication or means of determining the rate for federal funds as agreed to between the Borrower and Swingline Lender.
 
“ Fee Letters ” means (a) each of the following letters to the Borrower dated March 12, 2013:  (i) the letter from Barclays and RBS Securities Inc., (ii) the letter from Bank of America, N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Wells Fargo Bank, National Association, Wells Fargo Securities, LLC, JPMorgan Chase Bank, N.A. and J.P. Morgan
 
8 

 
Securities LLC, and (iii) the agent fee letter from Barclays, as Agent, each relating to certain fees payable by the Borrower to such parties in respect of the transactions contemplated by this Agreement and (b) any letter between the Borrower and any Issuing Bank other than an Initial Issuing Bank relating to certain fees payable to such Issuing Bank in its capacity as such, each 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 (including such a Lender when acting in the capacity of an Issuing Bank or a Swingline Lender).  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 the Borrower 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 the Borrower.
 
“ 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).
 
“ 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.
 
9 

 
“ 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.
 
“ Increase Date ” has the meaning specified in Section 2.18(a).
 
“ Increasing Lender ” has the meaning specified in Section 2.18(b).
 
“ 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 (unless subject to a good faith dispute) of the date incurred; (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.
 
“ Initial Issuing Banks ” has the meaning given to such term in the introductory paragraph hereof.
 
“ Initial Lenders ” has the meaning given to such term in the introductory paragraph hereof.
 
“ Interest Period ” means, for each Eurodollar Rate Advance comprising part of the same Borrowing, the period commencing on the date such Eurodollar Rate Advance is disbursed or the date of the Conversion of any Base Rate Advance into such Eurodollar Rate Advance 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 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 Termination Date;
 
(b)                                  Interest Periods commencing on the same date for Eurodollar Rate Advances 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
 
10 

 
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.
 
“ ISP ” means, with respect to any Letter of Credit, the “International Standby Practices 1998” published by the Institute of International Banking Law & Practice, Inc. (or such later version thereof as may be in effect at the time of issuance).
 
“ Issuing Bank ” means the Initial Issuing Banks or any other Lender approved by the Borrower that may agree to issue Letters of Credit pursuant to an Assignment and Assumption or other agreement in form satisfactory to the Borrower and the Agent, so long as such Lender expressly agrees to perform in accordance with their terms all of the obligations that by the terms of this Agreement are required to be performed by it as an Issuing Bank and notifies the Agent of its Applicable Lending Office (which information shall be recorded by the Agent in the Register), for so long as such Initial Issuing Bank or Lender, as the case may be, shall have a Letter of Credit Commitment.
 
“ L/C Advance ” means, with respect to each Lender, such Lender’s funding of its participation in any L/C Borrowing in accordance with its Ratable Share.
 
“ L/C Borrowing ” means an extension of credit resulting from a drawing under any Letter of Credit which has not been reimbursed on the date when made nor refinanced as a Base Rate Advance.
 
“ L/C Cash Deposit Account ” means an interest bearing cash deposit account to be established and maintained by the Agent, over which the Agent shall have sole dominion and control, upon terms as may be satisfactory to the Agent.
 
“ L/C Obligations ” means, as at any date of determination, the aggregate Available Amount of all outstanding Letters of Credit plus the aggregate of all Unreimbursed Amounts, including all L/C Borrowings.  For all purposes of this Agreement, if on any date of determination a Letter of Credit has expired by its terms but any amount may still be drawn thereunder by reason of the operation of Rule 3.14 of the ISP, such Letter of Credit shall be deemed to be “outstanding” in the amount so remaining available to be drawn.
 
“ L/C Related Documents ” means with respect to any Letter of Credit, the Letter of Credit Application, and any other document, agreement and instrument entered into by any Issuing Bank and the Borrower or in favor of any Issuing Bank and relating to such Letter of Credit.
 
11 

 
“ 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, each Issuing Bank, the Swingline Lender, if any, each Assuming Lender that shall become a party hereto pursuant to Section 2.18 and each Person that shall become a party hereto pursuant to Section 8.07.
 
“ Letter of Credit ” has the meaning specified in Section 2.01(b).
 
“ Letter of Credit Application ” means an application and agreement for the issuance or amendment of a Letter of Credit in the form from time to time in use by any Issuing Bank.
 
“ Letter of Credit Commitment ” means, with respect to each Issuing Bank, the obligation of such Issuing Bank to issue Letters of Credit for the account of the Borrower from time to time in an aggregate amount equal to (a) for each of the Initial Issuing Banks, $75,000,000 and (b) for any other Issuing Bank, as separately agreed to by such Issuing Bank and the Borrower.  The Letter of Credit Commitment is part of, and not in addition to, the Revolving Credit Commitments.
 
“ Letter of Credit Expiration Date ” means the day that is five Business Days prior to the Termination Date.
 
“ 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.
 
“ Loan Documents ” mean this Agreement, each Note, each L/C Related Document and the Fee Letters.
 
“ Material Adverse Effect ” means a material adverse effect on (a) the financial condition, operations, business or property of the Borrower 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, at any time, a 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).
 
“ Money Market Rate ” means (a) the Federal Funds Rate plus (b) the Applicable Rate for Eurodollar Rate Advances.
 
12 

 
“ Money Market Rate Advance ” means a Swingline Advance that bears interest at a rate based on the Money Market Rate.
 
“ 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 2.16 in substantially the form of Exhibit A hereto.
 
“ Notice of Borrowing ” has the meaning specified in Section 2.02(a).
 
“ Obligations ” means all advances to, and debts, liabilities, obligations, covenants and duties of, the Borrower arising under any Loan Document or otherwise with respect to any Revolving Advance, Swingline Advance or Letter of Credit, 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.
 
“ 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.
 
“ Permitted Lien ” of the Borrower or any Material Subsidiary means any of the following:
 
(i)                                      Liens for taxes, assessments or other governmental charges or levies not at the time delinquent or thereafter payable without penalty or being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been made;
 
13 

 
(ii)                                   Liens imposed by or arising by operation of law, such as Liens of carriers, warehousemen, mechanics, materialmen and landlords incurred in the ordinary course of business, including, without limitation, landlord’s liens arising under Arizona Law under leases entered into by the Borrower in the 1986 sale and leaseback transactions with respect to PVNGS Unit 2 and securing the payment of rent under such leases, in each case, for sums not overdue for a period of more than 30 days or being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been made;
 
(iii)                                Liens incurred in the ordinary course of business in connection with worker’s compensation, unemployment insurance or other forms of governmental insurance or benefits or other similar statutory obligations;
 
(iv)                               Liens to secure obligations on surety or appeal bonds;
 
(v)                                  Liens on cash deposits in the nature of a right of setoff, banker’s lien, counterclaim or netting of cash amounts owed arising in the ordinary course of business on deposit accounts, commodity accounts or securities accounts;
 
(vi)                               easements, restrictions, reservations, licenses, covenants, and other defects of title that are not, in the aggregate, materially adverse to the use of such property for the purpose for which it is used;
 
(vii)                            Liens securing claims against or other obligations of any Person other than the Borrower or any Subsidiary of the Borrower neither assumed nor guaranteed by the Borrower or any Subsidiary of the Borrower nor on which the Borrower or any Subsidiary of the Borrower customarily pays interest, existing upon real estate or rights in or relating to real estate acquired by the Borrower or any Subsidiary of the Borrower for use in the operation of the business of the Borrower or any Subsidiary of the Borrower, including, without limitation, for the generation, transmission or distribution of electric energy, transportation, telephonic, telegraphic, radio, wireless or other electronic communication or any other purpose;
 
(viii)                         rights reserved to or vested in and Liens on assets arising out of obligations or duties to any municipality or public authority with respect to any right, power, franchise, grant, license or permit, or by any provision of Law;
 
(ix)                               rights reserved to or vested in others to take or receive any part of the power pursuant to firm power commitment contracts, purchased power contracts, tolling agreements and similar agreements, coal, gas, oil or other minerals, timber or other products generated, developed, manufactured or produced by, or grown on, or acquired with, any property of the Borrower;
 
(x)                                  rights reserved to or vested in any municipality or public authority to control or regulate any property of the Borrower, or to use such property in a manner that does not materially impair the use of such property for the purposes for which it is held by the Borrower;
 
14 

 
(xi)                               security interests granted in favor of the lessors in the Borrower’s Decommissioning Trust Agreement (PVNGS Unit 2) dated as of January 31, 1992 (such agreement, as amended or otherwise modified from time to time, being the “ Unit 2 Trust Agreement ”) entered into in connection with the PVNGS Unit 2 sale leaseback transaction to secure the Borrower’s obligations in respect of the decommissioning of PVNGS Unit 2 or related facilities;
 
(xii)                            Liens that may exist with respect to the Unit 2 Trust Agreement (other than as described in paragraph (xi) above) or with respect to either of the Borrower’s Decommissioning Trust Agreement (PVNGS Unit 1) or Decommissioning Trust Agreement (PVNGS Unit 3), each dated as of July 1, 1991, as amended or otherwise modified from time to time, relating to the Borrower’s obligation to set aside funds for the decommissioning and retirement from service of such Units;
 
(xiii)                         pledges of pollution control bonds and related rights to secure the Borrower’s reimbursement obligations in respect of letters of credit, bond insurance, and other credit or liquidity enhancements supporting pollution control bond transactions, provided that such pollution control bonds are not secured by any other assets of the Borrower or any Material Subsidiary;
 
(xiv)                        rights and interests of Persons other than the Borrower or any Material Subsidiary (including, without limitation, acquisition rights), related obligations of the Borrower or any Material Subsidiary and restrictions on it or its property arising out of contracts, agreements and other instruments to which the Borrower or any Material Subsidiary is a party that relate to the common ownership or joint use of property or other use of property for the benefit of one or more third parties or that allow a third party to purchase property of the Borrower or any Material Subsidiary and all Liens on the interests of Persons other than the Borrower or any Material Subsidiary in such property;
 
(xv)                           transfers of operational or other control of facilities to a regional transmission organization or other similar body and Liens on such facilities to cover expenses, fees and other costs of such an organization or body;
 
(xvi)                        Liens established on specified bank accounts of the Borrower to secure the Borrower’s reimbursement obligations in respect of letters of credit supporting commercial paper issued by the Borrower and similar arrangements for collateral security with respect to refinancings or replacements of the same;
 
(xvii)                     rights of transmission users or any regional transmission organizations or similar entities in transmission facilities;
 
(xviii)                  Liens on property of the Borrower sold in a transaction permitted by Section 5.02(a)  to another Person pursuant to a conditional sales agreement where the Borrower retains title;
 
(xix)                        Liens created under this Agreement;
 
15 

 
(xx)                           Liens on cash or cash equivalents not to exceed $200,000,000 (A) deposited in margin accounts with or on behalf of futures contract brokers or paid over to other contract counterparties or (B) pledged or deposited as collateral to a contract counterparty to secure obligations with respect to (1) contracts (other than for Indebtedness) for commercial and trading activities in the ordinary course of business for the purchase, transmission, distribution, sale, storage, lease or hedge of any energy or energy related commodity or (2) Hedge Agreements;
 
(xxi)                        Liens granted on cash or cash equivalents to defease Indebtedness of the Borrower or any of its Subsidiaries;
 
(xxii)                     Liens granted on cash or cash equivalents constituting proceeds from any sale or disposition of assets that is not prohibited by Section 5.02(c)  deposited in escrow accounts or otherwise withheld or set aside to secure obligations of the Borrower or any Subsidiary providing for indemnification, adjustment of purchase price or any similar obligations, in each case, in an amount not to exceed the amount of gross proceeds received by the Borrower or any Subsidiary in connection with such sale or disposition;
 
(xxiii)                  Liens, deposits and similar arrangements to secure the performance of bids, tenders or contracts (other than contracts for borrowed money), public or statutory obligations, performance bonds and other obligations of a like nature incurred in the ordinary course of business by the Borrower or any of its Subsidiaries;
 
(xxiv)                 rights of lessees arising under leases entered into by the Borrower or any of its Subsidiaries as lessor, in the ordinary course of business;
 
(xxv)                    any Liens on or reservations with respect to governmental and other licenses, permits, franchises, consents and allowances;
 
(xxvi)                 Liens on property which is the subject of a Capital Lease Obligation designating the Borrower or any of its Subsidiaries as lessee and all right, title and interest of the Borrower or any of its Subsidiaries in and to such property and in, to and under such lease agreement, whether or not such lease agreement is intended as a security;
 
(xxvii)              licenses of intellectual property entered into in the ordinary course of business;
 
(xxviii)           Liens solely on any cash earnest money deposits made by the Borrower or any of its Subsidiaries in connection with any letter of intent or purchase agreement permitted hereunder;
 
(xxix)                 deposits or funds established for the removal from service of operating facilities and coal mines and related facilities or other similar facilities used in connection therewith; and
 
(xxx)                    Liens on cash deposits used to secure letters of credit under defaulting lender provisions in credit or reimbursement facilities;
 
16 

 
provided , however , that no Lien in favor of the PBGC shall, in any event, be a Permitted Lien.
 
“ 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).
 
“ Public Debt Rating ” means, as of any date, the rating that has been most recently announced by either S&P or Moody’s, as the case may be, for any class of non-credit enhanced long-term senior unsecured debt issued by the Borrower or, if any such rating agency shall have issued more than one such rating, the lowest such rating issued by such rating agency.  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 6 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.
 
17 

 
“ PWCC ” means Pinnacle West Capital Corporation, an Arizona corporation.
 
“ Ratable Share ” of any amount means, with respect to any Lender at any time but subject to the provisions of Section 2.19, the product of such amount times a fraction the numerator of which is the amount of such Lender’s Revolving Credit Commitment at such time (or, if the Revolving Credit Commitments shall have been terminated pursuant to Section 2.05 or 6.01, such Lender’s Revolving Credit Commitment as in effect immediately prior to such termination) and the denominator of which is the aggregate amount of all Revolving Credit Commitments at such time (or, if the Revolving Credit Commitments shall have been terminated pursuant to Section 2.05 or 6.01, the aggregate amount of all Revolving Credit Commitments as in effect immediately prior to such termination).
 
“ 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, at any time, but subject to Section 2.19, Lenders holding in the aggregate more than 50% of (a) the Revolving Credit Commitments or (b) if the Revolving Credit Commitments have been terminated, the Total Outstandings.
 
“ Revolving Advance ” means an advance by a Lender to the Borrower as part of a Borrowing, including a Base Rate Advance made pursuant to Section 2.03(c), but excluding any L/C Advance made as part of an L/C Borrowing and any Swingline Advance, and refers to a Base Rate Advance or a Eurodollar Rate Advance (each of which shall be a Type of Revolving Advance).
 
“ Revolving Credit Commitment ” means, as to any Lender, its obligation to (a) make Revolving Advances to the Borrower pursuant to Section 2.01 and 2.03(c), (b) purchase participations in L/C Obligations and (c) make Revolving Advances pursuant to Section 2.03A(c) for the purpose of repaying Swingline Advances, in an aggregate principal amount at any one time outstanding not to exceed the amount set forth opposite such Lender’s name on Schedule 1.01 under the column “Revolving Credit Commitment” or if such Lender has become a Lender hereunder pursuant to an Assumption Agreement or if such Lender has entered into any Assignment and Assumption, the amount set forth for such Lender in the Register, in each case as such amount may be reduced pursuant to Section 2.05 or increased pursuant to Section 2.18.
 
“ S&P ” means Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc.
 
18 

 
“ Sale Leaseback Obligation Bonds ” means PVNGS II Funding Corp.’s (a) 8.00% Secured Lease Obligation Bonds, Series 1993, due 2015; (b) any other bonds issued by or on behalf of the Borrower in connection with a sale/leaseback transaction; and (c) any refinancing or refunding of the obligations specified in subclauses (a) and (b) above.
 
“ SEC Reports ” means the Borrower’s (i) Form 10-K Report for the year ended December 31, 2012 and (ii) Form 8-K Reports filed on March 11, 2013 and March 21, 2013.
 
“ Subsequent Order ” means any decision, order or ruling of the Arizona Corporation Commission issued after the Effective Date relating to the incurrence or maintenance of Indebtedness by the Borrower and that amends, supersedes or otherwise modifies the 2013 Order or any successor decision, order or ruling.
 
“ 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.
 
“ Swingline Advance ” means an advance made by the Swingline Lender, if any, to the Borrower pursuant to Section 2.03A.
 
“ Swingline Eurodollar Rate Advance ” means a Swingline Advance that bears interest at a rate equivalent to (a) clause (b) under the definition of Eurodollar Rate, plus (b) the Applicable Rate for Eurodollar Rate Advances.
 
“ Swingline Exposure ” means, at any time, the aggregate principal amount of all Swingline Advances outstanding at such time.  The Swingline Exposure of any Lender shall be its Ratable Share of the total Swingline Exposure at such time.
 
“ Swingline Lender ” means, upon notice to the Agent by such Lender and the Borrower, any Lender approved by the Borrower and the Agent from time to time that may agree to fund Swingline Advances.
 
“ 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.
 
“ Termination Date ” means the earlier of (a) April 9, 2018 and (b) the date of termination in whole of the Commitments pursuant to Section 2.05 or 6.01.
 
“ Total Outstandings ” means the sum of (a) the aggregate principal amount of all Revolving Advances plus (b) all L/C Obligations outstanding plus (c) the aggregate Swingline Exposure.
 
“ Type ” means a Base Rate Advance or a Eurodollar Rate Advance.
 
19 

 
“ Unreimbursed Amount ” has the meaning specified in Section 2.03(c)(i).
 
“ Unissued Letter of Credit Commitment ” means, with respect to any Issuing Bank, the obligation of such Issuing Bank to issue Letters of Credit for the account of the Borrower in an amount equal to the excess of (a) the amount of its Letter of Credit Commitment over (b) the aggregate Available Amount of all Letters of Credit issued by such Issuing Bank.
 
“ Unused Commitment ” means, with respect to each Lender at any time, (a) such Lender’s Revolving Credit Commitment at such time minus (b) the sum of (i) the aggregate principal amount of all Revolving Advances made by such Lender (in its capacity as a Lender) and outstanding at such time and (ii) such Lender’s Ratable Share of the aggregate L/C Obligations and, other than for the purposes of calculation of the commitment fees, such Lender’s Ratable Share of the aggregate Swingline Exposure outstanding at such time.
 
“ USA PATRIOT Act ” has the meaning specified in Section 8.13.
 
“ VIE Lessor Trusts ” means the three (3) separate variable-interest entity lessor trusts that purchased from, and leased back to, the Borrower certain interests in the PVNGS Unit 2 and related common facilities, as described in Note 9 of Notes to Condensed Consolidated Financial Statements in the Borrower’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010.
 
“ 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, supplemented or otherwise modified (subject to any restrictions on such amendments, 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
 
20 

 
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 ADVANCES AND
LETTERS OF CREDIT
 
Section 2.01                              The Revolving Advances and Letters of Credit .
 
(a)                                  The Revolving Advances .  Each Lender severally agrees, on the terms and conditions hereinafter set forth, to make Revolving Advances in Dollars to the Borrower from time to time on any Business Day during the period from the Effective Date until the Termination Date in an amount not to exceed such Lender’s Unused Commitment.  Each
 
21 

 
Borrowing (other than a Swingline Advance) shall be in an aggregate amount of $5,000,000 or an integral multiple of $1,000,000 in excess thereof and shall consist of Revolving Advances of the same Type made on the same day by the Lenders ratably according to their respective Revolving Credit Commitments.  Within the limits of each Lender’s Revolving Credit Commitment, and subject to the other terms and conditions hereof, the Borrower may borrow under this Section 2.01(a), prepay pursuant to Section 2.10 and reborrow under this Section 2.01(a).  Any Swingline Advance shall be made and repaid in accordance with the procedures set forth in Section 2.03A.
 
(b)                                  Letters of Credit .  Each Issuing Bank agrees, on the terms and conditions hereinafter set forth, in reliance upon the agreements of the other Lenders set forth in this Agreement, to issue standby letters of credit (each a “ Letter of Credit ”) for the account of the Borrower from time to time on any Business Day during the period from the Effective Date until 30 days before the Termination Date in an aggregate Available Amount for all Letters of Credit issued by each Issuing Bank not to exceed at any time such Issuing Bank’s Letter of Credit Commitment, provided that after giving effect to the issuance of any Letter of Credit, (i) the Total Outstandings shall not exceed the aggregate Revolving Credit Commitments and (ii) each Lender’s Ratable Share of the Total Outstandings shall not exceed such Lender’s Revolving Credit Commitment.  No Letter of Credit shall have an expiration date (including all rights of the Borrower or the beneficiary to require renewal) later than the Letter of Credit Expiration Date.  Within the limits referred to above, the Borrower may from time to time request the issuance of Letters of Credit under this Section 2.01(b).  The terms “issue”, “issued”, “issuance” and all similar terms, when applied to a Letter of Credit, shall include any renewal, extension or amendment thereof.
 
Section 2.02                              Making the Revolving Advances .
 
(a)                                  Except as otherwise provided in Section 2.03(c), each Borrowing (other than a Swingline Advance) shall be made on notice, given not later than (x) 12:00 noon on the third Business Day prior to the date of the proposed Borrowing in the case of a Borrowing consisting of Eurodollar Rate Advances or (y) 12:00 noon on the date of the proposed Borrowing in the case of a Borrowing consisting of Base Rate Advances, by the Borrower to the Agent, which shall give to each Lender prompt notice thereof by facsimile.  Each such notice of a Borrowing (a “ Notice of Borrowing ”) shall be in writing or by facsimile in substantially the form of Exhibit B hereto, specifying therein the requested (i) date of such Borrowing, (ii) Type of Revolving Advances comprising such Borrowing, (iii) aggregate amount of such Borrowing, and (iv) in the case of a Borrowing consisting of Eurodollar Rate Advances, initial Interest Period for each such Revolving Advance.  Each Lender shall, in the case of a Borrowing consisting of Base Rate Advances, before 2:00 p.m. on the date of such Borrowing, and in the case of a Borrowing consisting of Eurodollar Rate Advances, before 11:00 a.m. on date of such 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 such 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 applicable Notice of Borrowing.
 
22 

 
(b)                                  Anything in subsection (a) above to the contrary notwithstanding, (i) the Borrower may not select Eurodollar Rate Advances for any Borrowing if the aggregate amount of such Borrowing is less than $5,000,000 or if the obligation of the Lenders to make Eurodollar Rate Advances shall then be suspended pursuant to Section 2.08 or 2.12 and (ii) at no time shall there be more than fifteen different Interest Periods outstanding for Eurodollar Rate Advances.
 
(c)                                   Each Notice of Borrowing shall be irrevocable and binding on the Borrower.  In the case of any Borrowing that the related Notice of Borrowing specifies is to be comprised of Eurodollar Rate Advances, the Borrower shall indemnify each Lender against any loss, cost or expense reasonably incurred by such Lender as a result of any failure to fulfill on or before the date specified in such Notice of Borrowing for such Borrowing the applicable conditions set forth in Article III, 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 Revolving Advance to be made by such Lender as part of such Borrowing when such Revolving Advance, as a result of 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 applicable Borrowing that such Lender will not make available to the Agent such Lender’s Ratable Share of such Borrowing, the Agent may assume that such Lender has made such portion available to the Agent on the date of such 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 Revolving Advances comprising such 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 Revolving Advance as part of such Borrowing for purposes of this Agreement.
 
(e)                                   The failure of any Lender to make the Revolving Advance to be made by it as part of any Borrowing shall not relieve any other Lender of its obligation, if any, hereunder to make its Revolving Advance on the date of such Borrowing, but no Lender shall be responsible for the failure of any other Lender to make the Revolving Advance to be made by such other Lender on the date of any Borrowing.
 
23 

 
Section 2.03                              Letters of Credit .
 
(a)                                  General .
 
(i)                                      No Issuing Bank shall issue any Letter of Credit, if the expiry date of such requested Letter of Credit would occur after the Letter of Credit Expiration Date, unless all the Lenders have approved such expiry date.
 
(ii)                                   No Issuing Bank shall be under any obligation to issue any Letter of Credit if:
 
(A)                                any order, judgment or decree of any Governmental Authority or arbitrator shall by its terms purport to enjoin or restrain such Issuing Bank from issuing such Letter of Credit, or any Law applicable to such Issuing Bank or any request or directive (whether or not having the force of law) from any Governmental Authority with jurisdiction over such Issuing Bank shall prohibit, or request that such Issuing Bank refrain from, the issuance of letters of credit generally or such Letter of Credit in particular or shall impose upon such Issuing Bank with respect to such Letter of Credit any restriction, reserve or capital and liquidity requirement (for which such Issuing Bank is not otherwise compensated hereunder) not in effect on the Effective Date, or shall impose upon such Issuing Bank any unreimbursed loss, cost or expense which was not applicable on the Effective Date and which, in each such case, such Issuing Bank in good faith deems material to it;
 
(B)                                except as otherwise agreed by the Borrower and such Issuing Bank, such Letter of Credit is in an initial stated amount less than $100,000;
 
(C)                                such Letter of Credit is to be denominated in a currency other than Dollars;
 
(D)                                such Letter of Credit contains any provisions for automatic reinstatement of the stated amount after any drawing thereunder;
 
(E)                                 subject to Section 2.03(b)(iii), the expiry date of such requested Letter of Credit would occur more than twelve months after the date of issuance or last extension; or
 
(F)                                  any Lender is at such time an Affected Lender hereunder, unless the applicable Issuing Bank is satisfied that the related exposure will be 100% covered by the Commitments of the non-Affected Lenders or, if not so covered, until such Issuing Bank has entered into arrangements satisfactory to it in its sole discretion with the Borrower or such Affected Lender to eliminate such Issuing Bank’s risk with respect to such Affected Lender, and participating interests in any such newly issued Letter of Credit shall be allocated among non-Affected Lenders in a manner consistent with Section 2.19(c)(i) (and Affected Lenders shall not participate therein).
 
24 

 
(iii)                                No Issuing Bank shall amend any Letter of Credit if such Issuing Bank would not be permitted at such time to issue such Letter of Credit in its amended form under the terms hereof.
 
(iv)                               No Issuing Bank shall be under any obligation to amend any Letter of Credit if (A) such Issuing Bank would have no obligation at such time to issue such Letter of Credit in its amended form under the terms hereof, or (B) the beneficiary of such Letter of Credit does not accept the proposed amendment to such Letter of Credit.
 
(b)                                  Procedures for Issuance and Amendment of Letters of Credit; Auto-Extension Letters of Credit .
 
(i)                                      Each Letter of Credit shall be issued or amended, as the case may be, upon the request of the Borrower delivered to the applicable Issuing Bank (with a copy to the Agent) in the form of a Letter of Credit Application appropriately completed and signed by an Authorized Officer of the Borrower, together with agreed-upon draft language for such Letter of Credit reasonably acceptable to the applicable Issuing Bank.  Such Letter of Credit Application must be received by such Issuing Bank and the Agent not later than 11:00 a.m. at least two Business Days (or such later date and time as the Agent and such Issuing Bank may agree in a particular instance in their sole discretion) prior to the proposed issuance date or date of amendment, as the case may be.  In the case of a request for an initial issuance of a Letter of Credit, such Letter of Credit Application shall specify in form and detail satisfactory to the applicable Issuing Bank: (A) the proposed issuance date of the requested Letter of Credit (which shall be a Business Day); (B) the amount thereof; (C) the expiry date thereof; (D) the name and address of the beneficiary thereof; (E) the documents to be presented by such beneficiary in case of any drawing thereunder; (F) the full text of any certificate to be presented by such beneficiary in case of any drawing thereunder; (G) the purpose and nature of the requested Letter of Credit; and (H) such other matters as such Issuing Bank may require.  In the case of a request for an amendment of any outstanding Letter of Credit, such Letter of Credit Application shall specify in form and detail satisfactory to the applicable Issuing Bank (A) the Letter of Credit to be amended; (B) the proposed date of amendment thereof (which shall be a Business Day); (C) the nature of the proposed amendment; and (D) such other matters as such Issuing Bank may require.  Additionally, the Borrower shall furnish to the applicable Issuing Bank and the Agent such other documents and information pertaining to such requested Letter of Credit issuance or amendment, including any L/C Related Documents, as the applicable Issuing Bank or the Agent may require.  In the event and to the extent that the provisions of any Letter of Credit Application or other L/C Related Document shall conflict with this Agreement, the provisions of this Agreement shall govern.  Without limitation of the immediately preceding sentence, to the extent that any such Letter of Credit Application or other L/C Related Document shall impose any additional conditions on the maintenance of a Letter of Credit, any additional default provisions, collateral requirements or other obligations of the Borrower to any Issuing Bank, other than as stated in this Agreement, such additional conditions, provisions, requirements or other obligations shall not have effect so long as this Agreement shall be in effect, except to the extent as expressly agreed to by the Borrower and such Issuing Bank.
 
25 

 
(ii)                                   Promptly after receipt of any Letter of Credit Application, the applicable Issuing Bank will confirm with the Agent (by telephone or in writing) that the Agent has received a copy of such Letter of Credit Application from the Borrower and, if not, such Issuing Bank will provide the Agent with a copy thereof.  Unless the applicable Issuing Bank has received written notice from the Required Lenders, the Agent or the Borrower, at least one Business Day prior to the requested date of issuance or amendment of the applicable Letter of Credit, that one or more applicable conditions contained in Article III shall not then be satisfied, then, subject to the terms and conditions hereof and any applicable Letter of Credit Application, such Issuing Bank shall, on the requested date, issue a Letter of Credit for the account of the Borrower or enter into the applicable amendment, as the case may be, in each case in accordance with such Issuing Bank’s usual and customary business practices.  Immediately upon the issuance of each Letter of Credit, each Lender shall be deemed to, and hereby irrevocably and unconditionally agrees to, purchase from such Issuing Bank a risk participation in such Letter of Credit in an amount equal to the product of such Lender’s Ratable Share times the amount of such Letter of Credit.
 
(iii)                                If the Borrower so requests in any applicable Letter of Credit Application, the applicable Issuing Bank may, in its sole and absolute discretion, agree to issue a Letter of Credit that has automatic extension provisions (each, an “ Auto-Extension Letter of Credit ”); provided that any such Auto-Extension Letter of Credit must permit such Issuing Bank to prevent any such extension at least once in each twelve-month period (commencing with the date of issuance of such Letter of Credit) by giving prior notice to the beneficiary thereof not later than a day (the “ Non-Extension Notice Date ”) in each such twelve-month period to be agreed upon at the time such Letter of Credit is issued.  Unless otherwise directed by the applicable Issuing Bank, the Borrower shall not be required to make a specific request to the applicable Issuing Bank for any such extension.  Once an Auto-Extension Letter of Credit has been issued, the Lenders shall be deemed to have authorized (but may not require) the applicable Issuing Bank to permit the extension of such Letter of Credit at any time to an expiry date not later than the Letter of Credit Expiration Date; provided , however , that the applicable Issuing Bank shall not permit any such extension (or may issue a Notice of Non-Extension) if (A) such Issuing Bank has determined that it would not be permitted at such time to issue such Letter of Credit in its revised form (as extended) by reason of the provisions of clause (i) of Section 2.03(a) (or would have no obligation to issue such Letter of Credit by reason of the provisions of clause (ii) of Section 2.03(a)), or (B) it has received notice (which may be by telephone or in writing) on or before the day that is seven Business Days before the Non-Extension Notice Date (1) from the Agent that the Required Lenders have elected not to permit such extension pursuant to Section 6.02 or (2) from the Agent, the Required Lenders or the Borrower that one or more of the applicable conditions specified in Section 3.02 is not then satisfied, and in each such case directing such Issuing Bank not to permit such extension.
 
(iv)                               Promptly after its delivery of any Letter of Credit or any amendment to a Letter of Credit to an advising bank with respect thereto or to the beneficiary thereof, the applicable Issuing Bank will also deliver to the Borrower and the Agent a true and complete copy of such Letter of Credit or amendment.
 
26 

 
(c)                                   Drawings and Reimbursements; Funding of Participations .
 
(i)                                      Subject to the provisions below, not later than 2:30 p.m. on the date (the “ Honor Date ”) that any Issuing Bank makes any payment on a drawing on any Letter of Credit, if the Borrower shall have received notice of such payment prior to 11:30 a.m. on such date, or, if such notice has not been received by the Borrower prior to such time on such date, then not later than 2:30 p.m. on the next Business Day, the Borrower shall reimburse such Issuing Bank through the Agent in an amount equal to the amount of such drawing together with interest thereon.  If the Borrower fails to so reimburse such Issuing Bank by such time, unless the Borrower shall have advised the Agent that it does not meet the conditions specified in either clause (B) or (C) below, the Agent shall promptly notify each Lender of the Honor Date, the amount of the unreimbursed drawing (the “ Unreimbursed Amount ”), and the amount of such Lender’s Ratable Share thereof.  In such event, the Borrower shall be deemed to have requested a Base Rate Advance to be disbursed on the Honor Date in an amount equal to the Unreimbursed Amount, without regard to the minimum and multiples specified in Section 2.01(a) or the delivery of a Notice of Borrowing but subject to (A) the amount of the aggregate Unused Commitments, (B) no Event of Default having occurred and be continuing, or resulting therefrom, and (C) the conditions specified in Sections 3.02(c)  and (d)  being satisfied on and as of the date of the applicable Base Rate Advance and, to the extent so financed, the Borrower’s obligation to satisfy the reimbursement obligation created by such payment by the Issuing Bank on the Honor Date shall be discharged and replaced by the resulting Base Rate Advance.  Any notice given by any Issuing Bank or the Agent pursuant to this Section 2.03(c)(i) may be given by telephone if immediately confirmed in writing; provided that the lack of such an immediate confirmation shall not affect the conclusiveness or binding effect of such notice.
 
(ii)                                   Each Lender shall upon any notice pursuant to Section 2.03(c)(i) make funds available to the Agent for the account of the applicable Issuing Bank at the Agent’s Office in an amount equal to its Ratable Share of the Unreimbursed Amount not later than 4:00 p.m. on the Business Day specified in such notice by the Agent, whereupon, subject to the provisions of Section 2.03(c)(iii), each Lender that so makes funds available shall be deemed to have made a Base Rate Advance to the Borrower in such amount.  The Agent shall remit the funds so received to the applicable Issuing Bank.
 
(iii)                                With respect to any Unreimbursed Amount that is not fully refinanced by a Base Rate Advance because any of the conditions set forth in clauses (A), (B) or (C) of Section 2.03(c)(i) cannot be satisfied or for any other reason, then not later than 2:30 p.m. on the next Business Day after the day notice of the drawing is given to the Borrower, in the case of a failure to meet any such condition, or in any other case, after notice of the event resulting in the outstanding Unreimbursed Amount, the Borrower shall reimburse such Issuing Bank through the Agent in an amount equal to the amount of such outstanding Unreimbursed Amount with interest thereon.  If the Borrower fails to so reimburse such Issuing Bank by such time, the Borrower shall be deemed to have incurred from the applicable Issuing Bank an L/C Borrowing in the amount of the Unreimbursed Amount that is not so refinanced, which L/C Borrowing shall be due and payable on demand (together with interest) and shall bear interest at the Base Rate in
 
27 

 
effect from time to time plus the Applicable Rate for Base Rate Advances in effect from time to time plus 2% per annum.  In such event, each Lender’s payment to the Agent for the account of the applicable Issuing Bank pursuant to Section 2.03(c)(ii) shall be deemed payment in respect of its participation in such L/C Borrowing and shall constitute an L/C Advance from such Lender in satisfaction of its participation obligation under this Section 2.03.
 
(iv)                               Until each Lender funds its Base Rate Advance or L/C Advance pursuant to this Section 2.03(c) to reimburse the applicable Issuing Bank for any amount drawn under any Letter of Credit, interest in respect of such Lender’s Ratable Share of such amount shall be solely for the account of the applicable Issuing Bank.
 
(v)                                  Each Lender’s obligation to make Base Rate Advances or L/C Advances to reimburse the applicable Issuing Bank for amounts drawn under Letters of Credit, as contemplated by this Section 2.03(c), shall be absolute and unconditional and shall not be affected by any circumstance, including (A) any setoff, counterclaim, recoupment, defense or other right which such Lender may have against such Issuing Bank, the Borrower or any other Person for any reason whatsoever; (B) the occurrence or continuance of a Default, or (C) any other occurrence, event or condition, whether or not similar to any of the foregoing; provided , however , that each Lender’s obligation to make Base Rate Advances pursuant to this Section 2.03(c) is subject to the conditions set forth in Section 2.03(c)(i).  No such making of an L/C Advance shall relieve or otherwise impair the obligation of the Borrower to reimburse the applicable Issuing Bank for the amount of any payment made by such Issuing Bank under any Letter of Credit, together with interest as provided herein.
 
(vi)                               If any Lender fails to make available to the Agent for the account of the applicable Issuing Bank any amount required to be paid by such Lender pursuant to the foregoing provisions of this Section 2.03(c) by the time specified in Section 2.03(c)(ii), such Issuing Bank shall be entitled to recover from such Lender (acting through the Agent), on demand, such amount with interest thereon for the period from the date such payment is required to the date on which such payment is immediately available to such Issuing Bank at a rate per annum equal to the greater of the Federal Funds Rate and a rate determined by such Issuing Bank in accordance with banking industry rules on interbank compensation, plus any administrative, processing or similar fees customarily charged by such Issuing Bank in connection with the foregoing.  If such Lender pays such amount (with interest and fees as aforesaid), the amount so paid shall constitute such Lender’s Base Rate Advance included in the relevant Borrowing or L/C Advance in respect of the relevant L/C Borrowing, as the case may be.  A certificate of the applicable Issuing Bank submitted to any Lender (through the Agent) with respect to any amounts owing under this clause (vi) shall be conclusive absent manifest error.
 
(d)                                  Repayment of Participations .
 
(i)                                      At any time after the applicable Issuing Bank has made a payment under any Letter of Credit and has received from any Lender such Lender’s L/C Advance in respect of such payment in accordance with Section 2.03(c), if the Agent receives for the
 
28 

 
account of such Issuing Bank any payment in respect of the related Unreimbursed Amount or interest thereon (whether directly from the Borrower or otherwise, including proceeds of Cash Collateral (as defined in Section 2.03(h)) applied thereto by the Agent), the Agent will distribute to such Lender its Ratable Share thereof in the same funds as those received by the Agent.
 
(ii)                                   If any payment received by the Agent for the account of the applicable Issuing Bank pursuant to Section 2.03(c)(i) is required to be returned under any of the circumstances described in Section 8.12 (including pursuant to any settlement entered into by such Issuing Bank in its discretion), each Lender shall pay to the Agent for the account of such Issuing Bank its Ratable Share thereof on demand of the Agent, plus interest thereon from the date of such demand to the date such amount is returned by such Lender, at a rate per annum equal to the Federal Funds Rate from time to time in effect.  The obligations of the Lenders under this clause shall survive the payment in full of the Obligations and the termination of this Agreement.
 
(e)                                   Failure to Make Revolving Advances .  The failure of any Lender to make the Revolving Advance to be made by it on the date specified in Section 2.03(c) or any L/C Advance shall not relieve any other Lender of its obligation hereunder to make its Revolving Advance or L/C Advance, as the case may be, to be made by such other Lender on such date.
 
(f)                                    Obligations Absolute .  The obligation of the Borrower to reimburse the applicable Issuing Bank for each drawing under each Letter of Credit and to repay each L/C Borrowing shall be absolute, unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including the following:
 
(i)                                      any lack of validity or enforceability of such Letter of Credit, this Agreement, or any other Loan Document;
 
(ii)                                   the existence of any claim, counterclaim, setoff, defense or other right that the Borrower may have at any time against any beneficiary or any transferee of such Letter of Credit (or any Person for whom any such beneficiary or any such transferee may be acting), any Issuing Bank or any other Person, whether in connection with this Agreement, the transactions contemplated hereby or by such Letter of Credit or any agreement or instrument relating thereto, or any unrelated transaction;
 
(iii)                                any draft, demand, certificate or other document presented under such Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; or any loss or delay in the transmission or otherwise of any document required in order to make a drawing under such Letter of Credit;
 
(iv)                               any payment by the applicable Issuing Bank under such Letter of Credit against presentation of a draft or certificate that does not strictly comply with the terms of such Letter of Credit; or any payment made by the applicable Issuing Bank under such Letter of Credit to any Person purporting to be a trustee in bankruptcy, debtor-in-possession, assignee for the benefit of creditors, liquidator, receiver or other
 
29 

 
representative of or successor to any beneficiary or any transferee of such Letter of Credit, including any arising in connection with any proceeding under any Debtor Relief Law; or
 
(v)                                  any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, including any other circumstance that might otherwise constitute a defense available to, or a discharge of, the Borrower.
 
provided , however , that nothing in this Section 2.03(f) shall limit the rights of the Borrower under Section 2.03(g).
 
The Borrower shall promptly examine a copy of each Letter of Credit and each amendment thereto that is delivered to it and, in the event of any claim of noncompliance with the Borrower’s instructions or other irregularity that is known to the Borrower in connection with any draw under such Letter of Credit of which the Borrower has reasonable notice, the Borrower will immediately notify the applicable Issuing Bank.  To the extent allowed by applicable Law, Borrower shall be conclusively deemed to have waived any such claim against the applicable Issuing Bank and its correspondents unless such notice is given as aforesaid.  Nothing herein shall require the Borrower to make any determination as to whether the drawing is in accordance with the requirements of the Letter of Credit, provided that the Borrower may waive any discrepancies in the drawing on any such Letter of Credit.
 
(g)                                   Role of Issuing Bank .  Each Lender and the Borrower agree that, in paying any drawing under a Letter of Credit, the applicable Issuing Bank shall not have any responsibility to obtain any document (other than any sight draft, certificates and documents expressly required by the Letter of Credit) or to ascertain or inquire as to the validity or accuracy of any such document or the authority of the Person executing or delivering any such document.  None of the applicable Issuing Bank, the Agent, any of their respective Related Parties nor any correspondent, participant or assignee of such Issuing Bank shall be liable to any Lender for (i) any action taken or omitted in connection herewith at the request or with the approval of the Lenders or the Required Lenders, as applicable; (ii) any action taken or omitted in the absence of gross negligence or willful misconduct; or (iii) the due execution, effectiveness, validity or enforceability of any document or instrument related to any Letter of Credit or L/C Related Document.  The Borrower hereby assumes all risks of the acts or omissions of any beneficiary or transferee with respect to its use of any Letter of Credit; provided , however , that this assumption is not intended to, and shall not, preclude the Borrower’s pursuing such rights and remedies as it may have against the beneficiary or transferee at Law or under any other agreement.  None of the applicable Issuing Bank, the Agent, any of their respective Related Parties nor any correspondent, participant or assignee of such Issuing Bank shall be liable or responsible for any of the matters described in clauses (i) through (v) of Section 2.03(f); provided , however , that anything in such clauses to the contrary notwithstanding, the Borrower may have a claim against the applicable Issuing Bank, and such Issuing Bank may be liable to the Borrower, to the extent, but only to the extent, of any direct, as opposed to consequential or exemplary, damages suffered by the Borrower which the Borrower proves were caused by such Issuing Bank’s willful misconduct or gross negligence or such Issuing Bank’s willful failure to pay under any Letter of Credit after the presentation to it by the beneficiary of a sight draft and certificate(s) strictly complying with the terms and conditions of a Letter of Credit.  In furtherance and not in
 
30 

 
limitation of the foregoing, the applicable Issuing Bank may accept documents that appear on its face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary, and such Issuing Bank shall not be responsible for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason.
 
(h)                                  Cash Collateral .  Upon the request of the Agent or the applicable Issuing Bank, if, as of the Letter of Credit Expiration Date, any L/C Obligation for any reason remains outstanding, the Borrower shall, in each case, immediately Cash Collateralize the then outstanding L/C Obligations.  Section 6.02 sets forth certain additional requirements to deliver Cash Collateral hereunder.  For purposes of this Section 2.03 , Section 2.10(b)(ii) , Section 2.19(c)  ( ii ), ( iv ) and (v)  and Section 6.02 , “Cash Collateralize” means to pledge and deposit with or deliver to the Agent, for the benefit of the Issuing Banks and the Lenders, as collateral for the L/C Obligations, cash or deposit account balances pursuant to documentation in form and substance satisfactory to the Agent and each Issuing Bank (which documents are hereby consented to by the Lenders) in an amount equal to 100% of the amount of the L/C Obligations as of such date plus any accrued and unpaid interest and fees thereon.  Derivatives of such term have corresponding meanings.  The Borrower hereby grants to the Agent, for the benefit of the Issuing Banks and the Lenders, a security interest in all such cash, deposit accounts and all balances therein and all proceeds of the foregoing.  Cash Collateral shall be maintained in blocked, non-interest bearing deposit accounts with the Agent.
 
(i)                                      Letter of Credit Reports .  Each Issuing Bank shall furnish (A) to the Agent on the first Business Day of each month a written report summarizing issuance and expiration dates of Letters of Credit issued by such Issuing Bank during the preceding month and drawings during such month under all such Letters of Credit and (B) to the Agent on the first Business Day of each calendar quarter a written report setting forth the average daily aggregate Available Amount during the preceding calendar quarter of all Letters of Credit issued by such Issuing Bank.
 
(j)                                     Interim Interest .  Except as provided in Section 2.03(c)(ii) with respect to Unreimbursed Amounts refinanced as Base Rate Advances and Section 2.03(c)(iii) with respect to L/C Borrowings, unless the Borrower shall reimburse each payment by an Issuing Bank pursuant to a Letter of Credit in full on the Honor Date, the Unreimbursed Amount thereof shall bear interest, for each day from and including the Honor Date to but excluding the date that the Borrower reimburses such Issuing Bank for the Unreimbursed Amount in full, at the rate per annum equal to (i) the Base Rate in effect from time to time plus the Applicable Rate for Base Rate Advances in effect from time to time, to but excluding the next Business Day after the Honor Date and (ii) from and including the next Business Day after the Honor Date, the Base Rate in effect from time to time plus the Applicable Rate for Base Rate Advances in effect from time to time plus 2% per annum.
 
Section 2.03A                     Swingline Advances .
 
(a)                                  Amount of Swingline Advances .  Subject to the terms and conditions set forth herein, the Swingline Lender will make Swingline Advances in Dollars to the Borrower from time to time during the period from the Effective Date until the Termination Date, in an
 
31 

 
aggregate principal amount at any time outstanding that will not result in (i) the aggregate principal amount of all outstanding Swingline Advances exceeding $50,000,000 (or such lesser amount as agreed between the Borrower and the Swingline Lender) or (ii) the Total Outstandings exceeding the aggregate Revolving Credit Commitment.  Each Swingline Advance shall be in an aggregate amount of $500,000 or an integral multiple of $100,000 in excess thereof or such greater amounts as agreed between the Borrower and the Swingline Lender.  Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Swingline Advances.  The Swingline Lender shall be under no obligation to make a Swingline Advance if any Lender is at such time an Affected Lender hereunder, unless the Swingline Lender is satisfied that the related exposure will be 100% covered by the Commitments of the non-Affected Lenders or, if not so covered, until the Swingline Lender has entered into arrangements satisfactory to it in its sole discretion with the Borrower or such Affected Lender to eliminate the Swingline Lender’s risk with respect to such Affected Lender, and participating interests in any such newly made Swingline Advance shall be allocated among non-Affected Lenders in a manner consistent with Section 2.19(c)(i) (and Affected Lenders shall not participate therein).
 
(b)                                  Borrowing Notice and Making of Swingline Advances .  To request a Swingline Advance, the Borrower shall notify the Swingline Lender and the Agent of such request by telephone (confirmed by facsimile), not later than 2:00 p.m. (or such later time as the Swingline Lender may determine in its sole discretion), on the day of such Swingline Advance.  Each such notice shall be irrevocable and shall specify the requested date (which shall be a Business Day) and amount of the requested Swingline Advance.  The Swingline Lender shall promptly notify the Borrower and the Agent (and the Agent shall promptly notify each Lender) and the Swingline Lender shall make each Swingline Advance available to the Borrower by 2:30 p.m. (or such later time as may be agreed by the Swingline Lender and the Borrower) on the requested date of such Swingline Advance in a manner agreed upon by the Borrower and the Swingline Lender.  Each Swingline Advance shall bear interest at the Base Rate, or, at the option of the Borrower and subject to prior agreement between the Borrower and the Swingline Lender, shall be a Swingline Eurodollar Rate Advance or a Money Market Rate Advance.
 
(c)                                   Repayment of Swingline Advances .  Each Swingline Advance shall be paid in full by the Borrower on the earlier of (x) on or before the fourteenth (14 th ) Business Day after the date such Swingline Advance was made by the Swingline Lender or (y) the Termination Date.  A Swingline Advance may not be repaid with the proceeds from another Swingline Advance.  In addition, the Swingline Lender (i) may at any time in its sole discretion with respect to any outstanding Swingline Advance, or (ii) shall, on the fourteenth (14 th ) Business Day after the date any Swingline Advance is made and which has not been otherwise repaid, require each Lender (including the Swingline Lender) to make a Revolving Advance in the amount of such Lender’s Ratable Share of such Swingline Advance (including, without limitation, any interest accrued and unpaid thereon), for the purpose of repaying such Swingline Advance.  Not later than 2:00 p.m. on the date of any notice received pursuant to this Section 2.03A(c), each Lender shall make available to the Agent its required Revolving Advance, in immediately available funds in the same manner as provided in Section 2.02(a) with respect to Revolving Advances made by such Lender.  Revolving Advances made pursuant to this Section 2.03A(c) shall initially be Base Rate Advances and thereafter may be continued as Base Rate Advances or converted into Eurodollar Rate Advances in the manner provided in Section 2.09 and subject to the other conditions and
 
32 

 
limitations set forth in this Article II.  Each Lender’s obligation to make Revolving Advances pursuant to this Section 2.03A(c)  to repay Swingline Advances shall be unconditional, continuing, irrevocable and absolute and shall not be affected by any circumstances, including, without limitation, (a) any set-off, counterclaim, recoupment, defense or other right which such Lender may have against the Agent, the Swingline Lender or any other Person, (b) the occurrence or continuance of a Default or an Event of Default, (c) any adverse change in the condition (financial or otherwise) of the Borrower, or (d) any other circumstance, happening or event whatsoever.  In the event that any Lender fails to make payment to the Agent of any amount due under this Section 2.03A(c), the Agent shall be entitled to receive, retain and apply against such obligation the principal and interest otherwise payable to such Lender hereunder until the Agent receives such payment from such Lender or such obligation is otherwise fully satisfied.  In addition to the foregoing, if for any reason any Lender fails to make payment to the Agent of any amount due under this Section 2.03A(c), such Lender shall be deemed, at the option of the Agent, to have unconditionally and irrevocably purchased from the Swingline Lender without recourse or warranty, an undivided interest and participation in the applicable Swingline Advance in the amount of such Revolving Advance, and such interest and participation may be recovered from such Lender together with interest thereon at the Federal Funds Rate for each day during the period commencing on the date of demand and ending on the date such amount is received.
 
(d)                                  Swingline Advances Reports .  The Swingline Lender shall furnish to the Agent on each Business Day a written report summarizing outstanding Swingline Advances made by the Swingline Lender and the due date for the repayment of such Swingline Advances; provided that if no Swingline Advances are outstanding, no such report shall be required to be delivered.
 
(e)                                   Successor Swingline Lender .  Subject to the appointment and acceptance of a successor Swingline Lender as provided in this paragraph, the Borrower may, upon not less than ten (10) Business Days prior notice to the Agent and the Lenders, replace the existing Swingline Lender with the consent of the Agent (which consent shall not unreasonably be withheld).  Upon the acceptance of its appointment as Swingline Lender hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the replaced Swingline Lender, and the replaced Swingline Lender shall be discharged from its duties and obligations hereunder.  The fees payable by the Borrower to a successor Swingline Lender shall be as agreed between the Borrower and such successor.  After the Swingline Lender’s replacement hereunder, the provisions of this Article and Section 8.04 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Swingline Lender.
 
Section 2.04                              Fees.
 
(a)                                  Commitment Fee .  The Borrower agrees to pay to the Agent for the account of each Lender a commitment fee on such Lender’s Unused Commitment (provided that, for the avoidance of doubt, and without duplication, such Lender’s Unused Commitment shall be calculated exclusive of such Lender’s Swingline Exposure and, if such Lender is the Swingline Lender, without giving effect to the Swingline Advances, and in no event shall the aggregate of such commitment fees exceed an amount calculated based on the product of (a) the aggregate Revolving Credit Commitments minus the aggregate principal amount of all Revolving
 
33 

 
Advances and aggregate L/C Obligations and (b) the Applicable Rate for commitment fees) from the Effective Date in the case of each Initial Lender and from the effective date specified in the Assumption Agreement or in the Assignment and Assumption pursuant to which it became a Lender in the case of each other Lender until the Termination Date at a rate per annum equal to the Applicable Rate for commitment fees in effect from time to time, payable in arrears quarterly on the last day of each March, June, September and December, commencing June 30, 2013, and on the Termination Date, provided that no commitment fee shall accrue with respect to the Unused Commitment of an Affected Lender so long as such Lender shall be an Affected Lender.
 
(b)                                  Letter of Credit Fees .
 
(i)                                      The Borrower shall pay to the Agent for the account of each Lender a commission on such Lender’s Ratable Share of the average daily aggregate Available Amount of all Letters of Credit outstanding from time to time at a rate per annum equal to the Applicable Rate for Eurodollar Rate Advances in effect from time to time, during such calendar quarter, payable in arrears quarterly on the last day of each March, June, September and December, commencing with the quarter ended June 30, 2013, and on the Termination Date; provided that the Applicable Rate for Eurodollar Rate Advances shall be 2% above such Applicable Rate in effect upon the occurrence and during the continuation of an Event of Default if the Borrower is required to pay default interest pursuant to Section 2.07(b).
 
(ii)                                   The Borrower shall pay to each Issuing Bank, for its own account, a fronting fee with respect to each Letter of Credit issued by such Issuing Bank, payable in the amounts and at the times specified in the applicable Fee Letter between the Borrower and such Issuing Bank, and such other commissions, issuance fees, transfer fees and other fees and charges in connection with the issuance or administration of each Letter of Credit as the Borrower and such Issuing Bank shall agree promptly following receipt of an invoice therefor.
 
(c)                                   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 2.05                              Optional Termination or Reduction of the Commitments .
 
(a)                                  The Borrower shall have the right, upon at least three Business Days’ notice to the Agent, to terminate in whole or permanently reduce ratably in part the Unused Commitments or the Unissued Letter of Credit Commitments, provided that each partial reduction shall be in the aggregate amount of $10,000,000 or an integral multiple of $1,000,000 in excess thereof.
 
(b)                                  So long as no Default or Event of Default shall be continuing, the Borrower shall have the right, at any time, upon at least ten Business Days’ notice to an Affected Lender (with a copy to the Agent), to terminate in whole such Lender’s Revolving Credit Commitment and, if applicable, its Letter of Credit Commitment, without affecting the Commitments of any other Lender.  Such termination shall be effective, (x) with respect to such Lender’s Unused Commitment, on the date set forth in such notice, provided , however , that such date shall be no
 
34 

 
earlier than ten Business Days after receipt of such notice and (y) with respect to each Revolving Advance outstanding to such Lender, in the case of Base Rate Advances, on the date set forth in such notice and, in the case of Eurodollar Rate Advances, on the last day of the then current Interest Period relating to such Revolving Advance.  Upon termination of a Lender’s Commitments under this Section 2.05(b), the Borrower will pay or cause to be paid all principal of, and interest accrued to the date of such payment on, Revolving Advances (and if such Lender is the Swingline Lender, the Swingline Advances) owing to such Lender and, subject to Section 2.19, pay any accrued commitment fees or Letter of Credit fees payable to such Lender pursuant to the provisions of Section 2.04, and all other amounts payable to such Lender hereunder (including, but not limited to, any increased costs or other amounts owing under Section 2.11 and any indemnification for Taxes under Section 2.14); and, if such Lender is an Issuing Bank, shall pay to such Issuing Bank for deposit in an escrow account an amount equal to the Available Amount of all Letters of Credit issued by such Issuing Bank, whereupon all Letters of Credit issued by such Issuing Bank shall be deemed to have been issued outside of this Agreement on a bilateral basis and shall cease for all purposes to constitute a Letter of Credit issued under this Agreement, and upon such payments, except as otherwise provided below, the obligations of such Lender hereunder shall, by the provisions hereof, be released and discharged; provided , however , that (i) such Lender’s rights under Sections 2.11, 2.14 and 8.04, and, in the case of an Issuing Bank, Section 8.04(c), and its obligations under Section 8.04 and 8.08, in each case in accordance with the terms thereof, shall survive such release and discharge as to matters occurring prior to such date and (ii) such escrow agreement shall be in a form reasonably agreed to by the Borrower and such Issuing Bank, but in no event shall either the Borrower or such Issuing Bank require any waivers, covenants, events of default or other provisions that are more restrictive than or inconsistent with the provisions of this Agreement.  Subject to Section 2.18, the aggregate amount of the Commitments of the Lenders once reduced pursuant to this Section 2.05(b) may not be reinstated.  The termination of the Commitments of an Affected Lender pursuant to this Section 2.05(b) will not be deemed to be a waiver of any right that the Borrower, the Agent, any Issuing Bank, the Swingline Lender or any other Lender may have against the Affected Lender that arose prior to the date of such termination.  Upon any such termination, the Ratable Share of each remaining Lender will be revised.
 
Section 2.06                              Repayment of Advances .  The Borrower shall repay to the Agent for the ratable account of the Lenders on the Termination Date the aggregate principal amount of the Revolving Advances made by such Lender and then outstanding.  The Borrower shall repay Swingline Advances in accordance with Section 2.03A(c).
 
Section 2.07                              Interest on Advances .
 
(a)                                  Scheduled Interest .  The Borrower shall pay interest on the unpaid principal amount of each Advance owing to each Lender (including the Swingline Lender) from the date of such Advance until such principal amount shall be paid in full, at the following rates per annum:
 
(i)                                      Base Rate Advances .  During such periods as such Revolving Advance is a Base Rate Advance, 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 Advances in effect from time to time, payable in arrears quarterly on the last day of each March, June,
 
35 

 
September and December during such periods and on the date such Base Rate Advance shall be Converted or paid in full.
 
(ii)                                   Eurodollar Rate Advances .  During such periods as such Revolving Advance is a Eurodollar Rate Advance, a rate per annum equal at all times during each Interest Period for such Revolving Advance to the sum of (x) the Eurodollar Rate for such Interest Period for such Revolving Advance plus (y) the Applicable Rate for Eurodollar Rate Advances 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 Advance shall be Converted or paid in full.
 
(iii)                                Swingline Advances .  During such period as such Swingline Advance remains outstanding, the Base Rate or, as agreed to by the Swingline Lender and the Borrower, the Money Market Rate or the Eurodollar Rate, payable on the date such Swingline Advance is required to be repaid.
 
(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 Advance owing to each Lender, payable in arrears on the dates referred to in clause (a)(i), (a)(ii) or (a)(iii) 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 Advance pursuant to clause (a)(i), (a)(ii) or (a)(iii) 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 Advances pursuant to clause (a)(i) above, provided , however , that following acceleration of the Advances 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.
 
36 

 
Section 2.08                              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 2.07(a).
 
(b)          If the Required Lenders determine that for any reason in connection with any request for a Eurodollar Rate Advance 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 Advance, (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 Advance, or (c) the Eurodollar Rate for any requested Interest Period with respect to a proposed Eurodollar Rate Advance does not adequately and fairly reflect the cost to such Lenders of funding such Revolving Advance, the Agent will promptly so notify the Borrower and each Lender, whereupon each Eurodollar Rate Advance will automatically on the last day of the then existing Interest Period therefor Convert into a Base Rate Advance.  Thereafter, the obligation of the Lenders to make or maintain Eurodollar Rate Advances 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 Advances or, failing that, will be deemed to have Converted such request into a request for a Base Rate Advance in the amount specified therein.
 
(c)           If the Borrower shall fail to select the duration of any Interest Period for any Eurodollar Rate Advances 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 Revolving Advances will automatically, on the last day of the then existing Interest Period therefor, Convert into Base Rate Advances.
 
(d)          On the date on which the aggregate unpaid principal amount of Eurodollar Rate Advances comprising any Borrowing shall be reduced, by payment or prepayment or otherwise, to less than $5,000,000, such Revolving Advances shall automatically Convert into Base Rate Advances.
 
(e)           Upon the occurrence and during the continuance of any Event of Default,
 
(i)                                      with respect to Eurodollar Rate Advances, each such Revolving Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance (or if such Revolving Advance is then a Base Rate Advance, will continue as a Base Rate Advance); and
 
(ii)                                   the obligation of the Lenders to make Eurodollar Rate Advances or to Convert Revolving Advances into Eurodollar Rate Advances shall be suspended until the Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist.
 
Section 2.09                              Optional Conversion of Revolving Advances .  The Borrower may on any Business Day, upon notice given to the Agent 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 2.08
 
37 

 
and 2.12, Convert all Revolving Advances of one Type comprising the same Borrowing into Revolving Advances of the other Type; provided , however , that (a) any Conversion of Eurodollar Rate Advances into Base Rate Advances shall be made only on the last day of an Interest Period for such Eurodollar Rate Advances, (b) any Conversion of Base Rate Advances into Eurodollar Rate Advances shall be in an amount not less than the minimum amount specified in Section 2.02(b), (c) no Conversion of any Revolving Advances shall result in more separate Borrowings than permitted under Section 2.02(b) and (d) no Swingline Advances may be converted.  Each such notice of a Conversion shall, within the restrictions specified above, specify (i) the date of such Conversion, (ii) the Revolving Advances to be Converted, and (iii) if such Conversion is into Eurodollar Rate Advances, the duration of the initial Interest Period for each such Revolving Advance.  Each notice of Conversion shall be irrevocable and binding on the Borrower.
 
Section 2.10                              Prepayments of Advances .
 
(a)          Optional .  At any time and from time to time, the Borrower shall have the right to prepay any Advance, in whole or in part, without premium or penalty (except as provided in clause (y) below), upon notice at least two Business Days’ prior to the date of such prepayment, in the case of Eurodollar Rate Advances, and not later than 11:00 a.m. on the date of such prepayment in the case of Base Rate Advances and Swingline Advances, to the Agent (and, in the case of prepayment a Swingline Advance, the Swingline Lender) specifying the proposed date of such prepayment and the aggregate principal amount and Type of the Advance to be prepaid (and, in the case of Eurodollar Rate Advances, 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, and shall be accompanied by accrued interest to the date of prepayment on the principal amount prepaid, and (y) in the event of any such prepayment of a Eurodollar Rate Advance, the Borrower shall be obligated to reimburse the Lenders in respect thereof pursuant to Section 8.04(e).
 
(b)          Mandatory .
 
(i)                                      The Borrower shall prepay the aggregate principal amount of the Advances, 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, including the 2013 Order and/or any Subsequent Order, or applicable resolutions of the Board of Directors of the Borrower.
 
(ii)                                   If for any reason the Total Outstandings at any time exceed the aggregate Revolving Credit Commitments then in effect, the Borrower shall, within one Business Day after notice thereof, prepay Advances and/or Cash Collateralize the L/C Obligations in an aggregate amount equal to such excess; provided , however , that the Borrower shall not be required to Cash Collateralize the L/C Obligations pursuant to this Section 2.10(b) unless, after the prepayment in full of the Advances, the Total Outstandings exceed the aggregate Revolving Credit Commitments then in effect.
 
38 

 
Section 2.11                              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 2.11(e)) or any Issuing Bank; or
 
(ii)                                   impose on any Lender or any Issuing Bank or the London interbank market any other condition, cost or expense affecting this Agreement or Eurodollar Rate Advances made by such Lender or any Letter of Credit or participation therein;
 
and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Rate Advance (or of maintaining its obligation to make any such Revolving Advance), or to increase the cost to such Lender or such Issuing Bank of participating in, issuing or maintaining any Letter of Credit (or of maintaining its obligation to participate in or to issue any Letter of Credit), or to reduce the amount of any sum received or receivable by such Lender or such Issuing Bank hereunder (whether of principal, interest or any other amount) then, upon request of such Lender or such Issuing Bank, the Borrower will pay to such Lender or such Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or such Issuing Bank, as the case may be, for such additional costs incurred or reduction suffered.
 
(b)          Capital Requirements .  If any Lender or any Issuing Bank determines that any Change in Law affecting such Lender or such Issuing Bank or any Applicable Lending Office of such Lender or such Lender’s or such Issuing Bank’s holding company, if any, regarding capital and liquidity requirements has or would have the effect of reducing the rate of return on such Lender’s or such Issuing Bank’s capital or on the capital of such Lender’s or such Issuing Bank’s holding company, if any, as a consequence of this Agreement, the Commitments of such Lender or the Advances made by, or participations in Letters of Credit held by, such Lender, or the Letters of Credit issued by such Issuing Bank, to a level below that which such Lender or such Issuing Bank or such Lender’s or such Issuing Bank’s holding company could have achieved but for such Change in Law (taking into consideration such Lender’s or such Issuing Bank’s policies and the policies of such Lender’s or such Issuing Bank’s holding company with respect to capital adequacy and liquidity), then from time to time the Borrower will pay to such Lender or such Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or such Issuing Bank or such Lender’s or such Issuing Bank’s holding company for any such reduction suffered.
 
(c)           Certificates for Reimbursement .  A certificate of a Lender or an Issuing Bank setting forth the amount or amounts necessary to compensate such Lender or such Issuing Bank 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 or such Issuing Bank, as the case may be, the amount shown as due on any such certificate within 30 days after receipt thereof.
 
39 

 
(d)          Delay in Requests .  Failure or delay on the part of any Lender or any Issuing Bank to demand compensation pursuant to the foregoing provisions of this Section shall not constitute a waiver of such Lender’s or such Issuing Bank’s right to demand such compensation, provided that the Borrower shall not be required to compensate a Lender or an Issuing Bank 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 or such Issuing Bank, as the case may be, notifies the Borrower of the Change in Law giving rise to such increased costs or reductions and of such Lender’s or such Issuing Bank’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 Advances .  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 Advance equal to the actual costs of such reserves allocated to such Revolving Advance 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 Eurodollar Rate Advance, 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 2.12                              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), for any Lender or its Applicable Lending Office to make, maintain or fund Eurodollar Rate Advances, 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 Advances or to convert Base Rate Advances to Eurodollar Rate Advances 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 Advances of such Lender to Base Rate Advances, either on the last day of the Interest Period therefor, if such Lender may lawfully continue to maintain such Eurodollar Rate Advances to such day, or immediately, if such Lender may not lawfully continue to maintain such Eurodollar Rate Advances.  Upon any such prepayment or conversion, the Borrower shall also pay accrued interest on the amount so prepaid or converted.
 
40 

 
Section 2.13                              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 U.S. 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, fees or commissions ratably (other than amounts payable pursuant to Section 2.05(b), 2.11, 2.12, 2.14, 2.20 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 any Assuming Lender becoming a Lender hereunder as a result of a Commitment Increase pursuant to Section 2.18, and upon the Agent’s receipt of such Lender’s Assumption Agreement and recording of the information contained therein in the Register, from and after the applicable Increase Date, the Agent shall make all payments hereunder and under any Notes issued in connection therewith in respect of the interest assumed thereby to the Assuming Lender.  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 (i) the Prime rate (as defined in the definition of “Base Rate” in Section 1.01 ) shall be made by the Agent on the basis of a year of 365 or 366 days, as the case may be and (ii) the Federal Funds Rate, the Eurodollar Rate and of fees and Letter of Credit commissions 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, fees or commissions are payable.  Interest on Swingline Advances shall be calculated on the basis of a year of 360 days or such other basis agreed to by the Swingline Lender and the Borrower, 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 is 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, fees or commissions, as the case may be; provided , however , that, if such extension would cause payment of interest on or principal of Eurodollar Rate Advances 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
 
41 

 
to each Lender on such due date an amount equal to the amount then due 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 2.14                              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, Lender or Issuing Bank, 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, each Lender and each Issuing Bank, 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, such Lender or such Issuing Bank, 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
 
42 

 
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 or an Issuing Bank 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 or an Issuing Bank (with a copy to the Agent), or by the Agent on its own behalf or on behalf of a Lender or an Issuing Bank, shall be conclusive absent manifest error.
 
(ii)                                   Without limiting the provisions of subsection (a) or (b) above, each Lender and each Issuing Bank shall, and does hereby, indemnify the Borrower and the Agent, and shall make payment in respect thereof within 30 days after demand therefor, against any and all Taxes and any and all related losses, claims, liabilities, penalties, interest and expenses (including the fees, charges and disbursements of any counsel for the Borrower or the Agent) incurred by or asserted against the Borrower or the Agent by any Governmental Authority as a result of the failure by such Lender or such Issuing Bank, as the case may be, to deliver, or as a result of the inaccuracy, inadequacy or deficiency of, any documentation required to be delivered by such Lender or such Issuing Bank, as the case may be, to the Borrower or the Agent pursuant to subsection (e).  Each Lender and each Issuing Bank hereby authorizes the Agent to set off and apply any and all amounts at any time owing to such Lender or such Issuing Bank, as the case may be, under this Agreement or any other Loan Document against any amount due to the Agent under this clause (ii).  The agreements in this clause (ii) shall survive the resignation and/or replacement of the Agent, any assignment of rights by, or the replacement of, a Lender or an Issuing Bank, the termination of the Commitments and the repayment, satisfaction or discharge of all other Obligations.
 
(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 2.14, 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.
 
43 

 
(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 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
 
(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.
 
44 

 
(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 an Issuing Bank, or have any obligation to pay to any Lender or any Issuing Bank, any refund of Taxes withheld or deducted from funds paid for the account of such Lender or such Issuing Bank, as the case may be.  If the Agent, any Lender or any Issuing Bank 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 or Other Taxes giving rise to such refund), net of all reasonable out-of-pocket expenses incurred by the Agent, such Lender or such Issuing Bank, 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, such Lender or such Issuing Bank, 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, such Lender or such Issuing Bank in the event the Agent, such Lender or such Issuing Bank is required to repay such refund to such Governmental Authority.  This subsection shall not be construed to require the Agent, any Lender or any Issuing Bank 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, any Lender or any Issuing Bank to demand compensation pursuant to the foregoing provisions of this Section 2.14 shall not constitute a waiver of the Agent’s, such Lender’s or such Issuing Bank’s right to demand such
 
45 

 
compensation, provided that the Borrower shall not be required to compensate the Agent, a Lender or an Issuing Bank pursuant to the foregoing provisions of this Section 2.14 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, such Lender or such Issuing Bank, 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)          Each of the Agent, any Issuing Bank or any 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 2.14 if (i) the Borrower has agreed in writing to pay all of the Agent’s or such Issuing Bank’s or such Lender’s reasonable out-of-pocket costs and expenses relating to such claim, (ii) the Agent or such Issuing Bank 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 Issuing Bank 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 such Issuing Bank or the Agent) that the Borrower is likely to receive a refund or credit.
 
Section 2.15                              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 Advances or L/C Advances owing to it (other than pursuant to Section 2.05(b), 2.11, 2.12, 2.14, 2.20 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 Advances or participations in Letters of Credit 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 2.15 shall apply) in excess of its Ratable Share of payments on account of the Advances obtained by all the Lenders, such Lender shall forthwith purchase from the other Lenders (for cash at face value) such participations in the Advances 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 2.15 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 2.16                              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 Advance owing to such Lender from time to time, including the amounts of principal and interest
 
46 

 
payable and paid to such Lender from time to time hereunder in respect of Advances.  The Borrower agrees that upon notice by any Lender (including the Swingline 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 Advances 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 up to the Revolving Credit Commitment of 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 Advances comprising such Borrowing and, if appropriate, the Interest Period applicable thereto, (ii) the terms of each Assumption Agreement and 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 2.17                              Use of Proceeds .  The proceeds of the Advances and issuances of Letters of Credit shall be available (and the Borrower agrees that it shall use such proceeds) solely to refinance Indebtedness of the Borrower from time to time and for other general corporate purposes of the Borrower, subject to such restrictions that are imposed in the 2013 Order and/or any Subsequent Order.
 
Section 2.18                              Increase in the Aggregate Revolving Credit Commitments .
 
(a)          The Borrower may, at any time prior to the Termination Date, by notice to the Agent, request that the aggregate amount of the Revolving Credit Commitments be increased by an amount of $10,000,000 or an integral multiple thereof (each a “ Commitment Increase ”) to be effective as of a date that is at least 90 days prior to the Termination Date (the “ Increase Date ”) as specified in the related notice to the Agent; provided , however that (i) in no event shall the aggregate amount of the Revolving Credit Commitments at any time exceed $700,000,000 or the aggregate amount of Commitment Increases exceed $200,000,000 and (ii) on the date of any request by the Borrower for a Commitment Increase and on the related Increase Date, the applicable conditions set forth in this Section 2.18 shall be satisfied.
 
(b)          The Agent shall promptly notify the Lenders of a request by the Borrower for a Commitment Increase, which notice shall include (i) the proposed amount of such requested Commitment Increase, (ii) the proposed Increase Date and (iii) the date by which Lenders
 
47 

 
wishing to participate in the Commitment Increase must commit to an increase in the amount of their respective Revolving Credit Commitments (the “ Commitment Date ”).  Each Lender that is willing to participate in such requested Commitment Increase (each an “ Increasing Lender ”) shall, in its sole discretion, give written notice to the Agent on or prior to the Commitment Date of the amount by which it is willing to increase its Revolving Credit Commitment.  If the Lenders notify the Agent that they are willing to increase the amount of their respective Revolving Credit Commitments by an aggregate amount that exceeds the amount of the requested Commitment Increase, the requested Commitment Increase shall be allocated among the Lenders willing to participate therein in such amounts as are agreed between the Borrower and the Agent.  Each Increasing Lender shall be subject to such applicable consents as may be required under Section 8.07(b)(iii) (including, but not limited to, the consent of each Issuing Bank and the Swingline Lender).
 
(c)           Promptly following each Commitment Date, the Agent shall notify the Borrower as to the amount, if any, by which the Lenders are willing to participate in the requested Commitment Increase.  If the aggregate amount by which the Lenders are willing to participate in any requested Commitment Increase on any such Commitment Date is less than the requested Commitment Increase, then the Borrower may extend offers to one or more Eligible Assignees to participate in any portion of the requested Commitment Increase that has not been committed to by the Lenders as of the applicable Commitment Date; provided , however , that the Revolving Credit Commitment of each such Eligible Assignee shall be in an amount of not less than $10,000,000.
 
(d)          On each Increase Date, each Eligible Assignee that accepts an offer to participate in a requested Commitment Increase in accordance with Section 2.18(c) (each such Eligible Assignee, an “ Assuming Lender ”) shall become a Lender party to this Agreement as of such Increase Date and the Revolving Credit Commitment of each Increasing Lender for such requested Commitment Increase shall be so increased by the amount by which the Increasing Lender agreed to increase its Revolving Credit Commitment (or by the amount allocated to such Lender pursuant to the next to last sentence of Section 2.18(b)) as of such Increase Date; provided , however , that the Agent shall have received on or before such Increase Date the following, each dated such date:
 
(i)                                      (A) certified copies of resolutions of the Board of Directors of the Borrower approving the Commitment Increase and the corresponding modifications to this Agreement, (B) an opinion of counsel for the Borrower (which may be in-house counsel), in form and substance reasonably acceptable to the Required Lenders and (C) a certificate from a duly authorized officer of the Borrower, stating that the conditions set forth in Section 3.02(a) and (b) are satisfied;
 
(ii)                                   an assumption agreement from each Assuming Lender, if any, in form and substance satisfactory to the Borrower and the Agent (each an “ Assumption Agreement ”), duly executed by such Assuming Lender, the Agent, the Borrower and each other Person required to consent thereto, as applicable under Section 8.07(b)(iii); and
 
48 

 
(iii)                                confirmation from each Increasing Lender of the increase in the amount of its Revolving Credit Commitment in a writing satisfactory to the Borrower and the Agent.
 
On each Increase Date, upon fulfillment of the conditions set forth in the immediately preceding sentence of this Section 2.18(d), the Agent shall notify the Lenders (including, without limitation, each Assuming Lender) and the Borrower, on or before 1:00 p.m., by telecopier, of the occurrence of the Commitment Increase to be effected on such Increase Date and shall record in the Register the relevant information with respect to each Increasing Lender and each Assuming Lender on such date.  Each Increasing Lender and each Assuming Lender shall, before 2:00 p.m. on the Increase Date, make available for the account of its Applicable Lending Office to the Agent at the Agent’s Account, in same day funds, in the case of such Assuming Lender, an amount equal to such Assuming Lender’s Ratable Share of the Borrowings then outstanding (calculated based on its Revolving Credit Commitment as a percentage of the aggregate Revolving Credit Commitments outstanding after giving effect to the relevant Commitment Increase) and, in the case of such Increasing Lender, an amount equal to the excess of (i) such Increasing Lender’s Ratable Share of the Borrowings then outstanding (calculated based on its Revolving Credit Commitment as a percentage of the aggregate Revolving Credit Commitments outstanding after giving effect to the relevant Commitment Increase) over (ii) such Increasing Lender’s Ratable Share of the Borrowings then outstanding (calculated based on its Revolving Credit Commitment (without giving effect to the relevant Commitment Increase) as a percentage of the aggregate Revolving Credit Commitments (without giving effect to the relevant Commitment Increase).  After the Agent’s receipt of such funds from each such Increasing Lender and each such Assuming Lender, the Agent will promptly thereafter cause to be distributed like funds to the other Lenders for the account of their respective Applicable Lending Offices in an amount to each other Lender such that the aggregate amount of the outstanding Advances owing to each Lender after giving effect to such distribution equals such Lender’s Ratable Share of the Borrowings then outstanding (calculated based on its Revolving Credit Commitment as a percentage of the aggregate Revolving Credit Commitments outstanding after giving effect to the relevant Commitment Increase).
 
Section 2.19                              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)          fees shall cease to accrue on the Unused Commitment of such Affected Lender pursuant to Section 2.04(a);
 
(b)          the Revolving Credit Commitment and Advances 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;
 
(c)           if (x) there shall be any Available Amount under any outstanding Letter of Credit or (y) any Swingline Exposure shall exist during any time a Lender is an Affected Lender, then:
 
49 

 
(i)                                      so long as no Default or Event of Default has occurred and is continuing, all or any part of the Available Amount of all such Letters of Credit and Swingline Exposure shall be reallocated among the non-Affected Lenders in accordance with their respective Ratable Shares (disregarding any Affected Lender’s Revolving Credit Commitment) but only to the extent that with respect to each non-Affected Lender the sum of (A) the aggregate principal amount of all Revolving Advances made by such non-Affected Lender (in its capacity as a Lender) and outstanding at such time plus (B) such non-Affected Lender’s Ratable Share (after giving effect to the reallocation contemplated in this Section 2.19(c)(i)) of the outstanding L/C Obligations plus (C) such non-Affected Lender’s Ratable Share (after giving effect to the reallocation contemplated in this Section 2.19(c)(i)) of the outstanding Swingline Exposure, does not exceed such non-Affected Lender’s Revolving Credit Commitment;
 
(ii)                                   if the reallocation described in clause (i) above cannot, or can only partially, be effected, the Borrower shall within one (1) Business Day following notice by the Agent (x) first, prepay such unallocable Swingline Exposure and (y) second, Cash Collateralize for the benefit of the applicable Issuing Bank only the Borrower’s obligations corresponding to such Affected Lender’s Ratable Share of the Available Amount of outstanding Letters of Credit (after giving effect to any partial reallocation pursuant to clause (i) above) (the “ Affected Lender Share ”) in accordance with the procedures set forth in Section 2.03(h) for so long as such there shall be any Available Amount of outstanding Letters of Credit;
 
(iii)                                if the Ratable Share of the Available Amount of outstanding Letters of Credit and the Swingline Exposure of the non-Affected Lenders is reallocated pursuant to this Section 2.19(c), then the fees payable to the Lenders pursuant to Section 2.04(a) and Section 2.04(b) shall be adjusted in accordance with such non-Affected Lenders’ Ratable Shares;
 
(iv)                               if any Affected Lender Share is not reallocated pursuant to clause (i) above and if the Borrower fails to Cash Collateralize any portion of such Affected Lender Share pursuant to clause (ii) above, then, without prejudice to any rights or remedies of any Issuing Bank or any Lender hereunder, the fee payable under Section 2.04(b) with respect to such Affected Lender Share shall be payable to the Issuing Bank until such Affected Lender Share is reallocated; and
 
(v)                                  if the Borrower Cash Collateralizes any portion of any Affected Lender Share pursuant to clause (ii) above, the Borrower shall not be required to pay any fees to such Affected Lender pursuant to Section 2.04(b)(i)  or the applicable Issuing Bank pursuant to Section 2.04(b)(ii)  (solely with respect to any fronting fee) with respect to such Affected Lender’s Affected Lender Share during the period such Affected Lender’s Affected Lender Share is Cash Collateralized;
 
(d)          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 Revolving Advance under Section 2.03(c) or Section
 
50 

 
2.03A(c) or L/C Advance or any other unfunded payment obligation of such Affected Lender under this Agreement; and
 
(e)           for the avoidance of doubt, the Borrower, each Issuing Bank, the Swingline Lender, 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, the Borrower, the Swingline Lender and the Issuing Banks each agrees that an Affected Lender has adequately remedied all matters that caused such Lender to be an Affected Lender, then the Ratable Shares of the Lenders shall be readjusted to reflect the inclusion of such Lender’s Revolving Credit Commitment and on such date such Lender shall purchase at par such of the Revolving Advances of the other Lenders as the Agent shall determine may be necessary in order for such Lender to hold such Revolving Advances in accordance with its Ratable Share.  In addition, at such time as the Affected Lender is replaced by another Lender pursuant to Section 2.20, the Ratable Shares of the Lenders will be readjusted to reflect the inclusion of the replacing Lender’s Commitment in accordance with Section 2.20.  In either such case, this Section 2.19 will no longer apply.
 
Section 2.20                              Replacement of Lenders .  If any Lender requests compensation under Section 2.11, 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 2.14, 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, if a 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 of its Revolving Advances and L/C Advances, 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 2.11 or payments required to be made pursuant to Section 2.14, 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.
 
51 

 
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:
 
(a)   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.
 
(b)   The Borrower shall have paid all accrued fees and agreed expenses of the Agent, the Arrangers and the Lenders 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.
 
(c)   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:
 
(i)            The representations and warranties contained in Section 4.01 are true and correct on and as of the Effective Date, and
 
(ii)           No event has occurred and is continuing that constitutes a Default.
 
(d)   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 2.16.
 
(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 and governmental approvals, if any, with respect to this Agreement and the Notes.
 
52 

 
(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 its state of organization or formation.
 
(viii)        A favorable opinion of counsel for the Borrower, in form and substance reasonably acceptable to the Lenders.
 
(ix)          A favorable opinion of Sidley Austin LLP, counsel for the Agent, in form and substance reasonably acceptable to the Lenders.
 
(e)   Concurrently with or before the Effective Date, (i) all principal, interest and other amounts outstanding under the Borrower’s Existing Credit Agreement shall be repaid and satisfied in full, (ii) all commitments to extend credit under the Existing Credit Agreement shall be terminated and (iii) any letters of credit outstanding under the Existing Credit Agreement shall have been terminated, canceled, transferred or replaced; and the Agent shall have received evidence of the foregoing satisfactory to it, including an escrow agreement or payoff letter executed by the lenders or the agent under the Existing Credit Agreement if applicable.
 
Section 3.02          Conditions Precedent to Each Credit Extension and Commitment Increase .  The obligation of each Lender to make an Advance (other than an L/C Advance or an Advance made pursuant to Section 2.03(c) or Section 2.03A(c)) on the occasion of each Borrowing, the obligation of each Issuing Bank to issue a Letter of Credit, and each Commitment Increase shall be subject to the conditions precedent that the Effective Date shall have occurred and on the date of such Borrowing or such issuance (as the case may be), or the applicable Increase Date, the following statements shall be true (and each of the giving of the applicable Notice of Borrowing or request for issuance and the acceptance by the Borrower of the proceeds of such Borrowing shall constitute a representation and warranty by the Borrower that on the date of such Borrowing or date of such issuance such statements are true):the representations and warranties contained in Section 4.01 (other than Section 4.01(k), and in the case of a Borrowing or issuance of a Letter of Credit, Section 4.01(e)(ii) and 4.01(f)(ii)) are correct on and as of such date, before and after giving effect to such Borrowing or issuance of a Letter of Credit, or such Commitment Increase and to the application of the proceeds therefrom, as though made on and as of such date;
 
(b)   no event has occurred and is continuing, or would result from such Borrowing or issuance of a Letter of Credit, or such Commitment Increase or from the application of the proceeds therefrom, that constitutes a Default;
 
(c)   all required regulatory authorizations including the 2013 Order and/or any Subsequent Order in respect of such Credit Extension have been obtained and are in full force and effect and, before and after giving effect to such Borrowing or such issuance of a Letter of Credit and to the application of the proceeds therefrom, the Borrower is in compliance with the provisions of the applicable order; and
 
53 

 
(d)   before and after giving effect to such Credit Extension and to the application of the proceeds therefrom, as though made on and as of such date, the Indebtedness of the Borrower does not exceed that permitted by (i) applicable resolutions of the Board of Directors of the Borrower, (ii) applicable Arizona Law, or (iii) the 2013 Order or any Subsequent Order, whichever is in force and effect at such time.
 
Each request for Credit Extension (which shall not include a Conversion or a continuation of Eurodollar Rate Advances) submitted by the Borrower shall be deemed to be a representation and warranty that the conditions specified in Sections 3.02(a)  through (d)  have been satisfied on and as of the date of the applicable Credit Extension.
 
Section 3.03          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) the Borrower 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 the Borrower 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
 
54 

 
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 (including without limitation the 2013 Order and/or any Subsequent Order), 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, except for the 2013 Order or any Subsequent Order, which has been duly obtained and is in full force and effect, and any notices or compliance filings required therein.
 
(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, 2012, 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 fairly present in all material respects 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).  (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, 2012, 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
 
55 

 
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 Advance 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 Advance 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 Advance, 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 Subsidiaries of the Borrower and, as of the Effective Date, no such Subsidiary of the Borrower is a Material Subsidiary.
 
(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.
 
56 

 
(m)  No report, certificate or other written information furnished by the Borrower or any of its Subsidiaries to any Agent 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 ”) 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:  (i) is targeted by United States or multilateral economic or trade sanctions currently in force; (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; or (iii) 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 targeted by economic or trade sanctions under United States law, 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 USA PATRIOT Act), if the result of such ownership would be that any Credit Extension 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 Credit Extension 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 Credit Extension made by any Lender would be in violation of law; and (c) neither the Borrower nor any Controlled Affiliate (i) is or will become a
 
57 

 
“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), the Borrower shall not be required to make any investigation into (i) the ownership of publicly traded stock or other publicly traded securities or (ii) the beneficial ownership of any collective investment fund.
 
ARTICLE V
 
COVENANTS OF THE BORROWER
 
Section 5.01          Affirmative Covenants .  So long as any Advance shall remain unpaid, any Letter of Credit shall remain outstanding or any Lender shall have any Commitment hereunder, 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 the 2013 Order, any Subsequent Order, Arizona Revised Statutes, Section 40-302 and all similar or comparable Laws, orders, decrees, writs, injunctions or determinations of any Governmental Authority relating to the incurrence or maintenance of Indebtedness by the Borrower, unless the failure to so comply is not reasonably likely 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, assessments and governmental charges or levies 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, assessment, charge or levy (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, assessment, charge or levy 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 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,
 
58 

 
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 use its commercially reasonable efforts to preserve and maintain such franchises reasonably necessary in the normal conduct of its business, except that (i) the Borrower 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 the Borrower 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 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:
 
(i)            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, (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) 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
 
59 

 
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;
 
(ii)           as soon as available and in any event within 90 days after the end of each fiscal year of the Borrower, 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;
 
(iii)          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;
 
(iv)          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;
 
(v)           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
 
60 

 
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;
 
(vi)          promptly after (A) any amendment or modification of the 2013 Order, (B) any amendment or modification of Arizona Revised Statutes, Section 40-302, or the promulgation, amendment or modification of any successor or similar statute, or (C) the promulgation, amendment or modification of any Subsequent Order by the Arizona Corporation Commission or any successor thereto, in any case if such amendment, modification or promulgation could affect the validity or enforceability of the indebtedness of the Borrower pursuant to this Agreement, a copy thereof;
 
(vii)         promptly after an Authorized Officer becomes aware of the occurrence thereof, notice of any change by Moody’s or S&P of their respective Public Debt Rating or of the cessation (or subsequent commencement) by Moody’s or S&P of publication of their respective Public Debt Rating;
 
(viii)        promptly after 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
 
(ix)          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 parent’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 the same general type of business conducted on the date hereof.
 
Section 5.02          Negative Covenants .  So long as any Advance shall remain unpaid, any Letter of Credit shall remain outstanding or any Lender shall have any Commitment hereunder, the Borrower shall not:
 
(a)   Liens, Etc .  Create or suffer to exist, or permit any of its Material Subsidiaries to create or suffer to exist, any Lien on or with respect to any of its properties, whether now owned or hereafter acquired, or assign, or permit any of its Material Subsidiaries to assign, any right to receive income, other than:
 
(i)            Permitted Liens;
 
61 

 
(ii)           Liens upon or in, or conditional sales agreements or other title retention agreements with respect to, any real or personal property acquired or held by the Borrower or any Subsidiary in the ordinary course of business to secure the purchase price of such property, or the construction of or improvements to such property, or to secure Indebtedness incurred solely for the purpose of financing the acquisition, construction or improvement of such property to be subject to such Liens (including any Liens placed on such property within 180 days after the latest of the acquisition, completion of construction or improvement of such property), or Liens existing on such property at the time of its acquisition (other than any such Liens created in contemplation of such acquisition that were not incurred to finance the acquisition of such property) or extensions, renewals, refundings or replacements of any of the foregoing for the same or a lesser amount, provided , however , that no such Lien shall extend to or cover any properties of any character other than the property being acquired, constructed or improved and proceeds, improvements and replacements thereof and no such extension, renewal, refunding or replacement shall extend to or cover any properties not theretofore subject to the Lien being extended, renewed, refunded or replaced;
 
(iii)          assignments of the right to receive income, and Liens on property, of a Person existing at the time such Person is merged into or consolidated with the Borrower or any Subsidiary of the Borrower or becomes a Subsidiary of the Borrower;
 
(iv)          Liens with respect to the leases and related documents entered into by the Borrower in connection with PVNGS Unit 2 and Liens with respect to the leased interests and related rights if the Borrower 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 Liens on the Borrower’s interests in the trusts that hold title to such leased interests and related rights in the event that the Borrower acquires any of the equity or owner participants’ interests in such trusts pursuant to a “special transfer” under the Borrower’s existing PVNGS Unit 2 sale and leaseback transactions and any Liens resulting or deemed to have resulted if the PVNGS Unit 2 leases are required to be accounted for as capital leases in accordance with GAAP;
 
(v)           other assignments of the right to receive income and Liens securing Indebtedness or claims in an aggregate principal amount not to exceed 20% of the Borrower’s total assets as stated on the most recent balance sheet of the Borrower provided pursuant to Section 4.01(e)(i) or 5.01(h)(ii) hereof at any time outstanding; and
 
(vi)          the replacement, extension or renewal of any Lien permitted by clause (iii) or (iv) above upon or in the same property theretofore subject thereto or the replacement, extension or renewal (without increase in the amount or change in any direct or contingent obligor) of the Indebtedness secured thereby.
 
(b)   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
 
62 

 
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.
 
(c)   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 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)(i) or 5.01(h)(ii) hereof, (vi) at any time following the consummation of the Four Corners Acquisition and the closure by the Borrower 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 the Borrower’s 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 Advance shall remain unpaid, any Letter of Credit shall remain outstanding or any Lender shall have any Commitment hereunder, 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 1.0.
 
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:
 
(a)   The Borrower shall fail to pay when due (i) any principal of any Advance, (ii) any drawing under any Letter of Credit, or (iii) any interest on any Advance or any other fees or other amounts payable under this Agreement or any other Loan Documents, and (in the case of this clause (iii) only), such failure shall continue for a period of three Business Days; or
 
(b)   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
 
63 

 
Agreement or any other Loan Document shall prove to have been incorrect in any material respect when made or deemed made or furnished; or
 
(c)   (i) The Borrower shall fail to perform or observe any term, covenant or agreement contained in Section 5.01(d) (as to the corporate existence of the Borrower), (h)(iii) or (h)(vi), 5.02 or 5.03, or (ii) the Borrower shall fail to perform or observe any other 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
 
(d)   (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
 
(e)   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
 
(f)    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
 
64 

 
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
 
(g)   Judgments or orders for the payment of money that exceeds 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
 
(h)   (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 PWCC entitled to vote for members of the board of directors of PWCC; or (ii) during any period of 24 consecutive months, a majority of the members of the board of directors of PWCC 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 (iii) PWCC shall cease for any reason to own, directly or indirectly, 80% of the Voting Stock of the Borrower; or
 
(i)    (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 obligation of each Lender to make Advances (other than L/C Advances) and of the Issuing Banks to issue Letters of Credit to be terminated, whereupon the same shall forthwith terminate, (ii) declare the Advances, all interest thereon and all other amounts payable under this Agreement to be forthwith due and payable, whereupon the Advances, 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, (A) the obligation of each Lender to make Advances (other than L/C Advances) and of the Issuing Banks to issue Letters of Credit shall automatically be terminated and (B) the Advances, 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,
 
65 

 
all of which are hereby expressly waived by the Borrower and (iii) exercise all rights and remedies available to it under this Agreement, the other Loan Documents and applicable Law.
 
Section 6.02          Actions in Respect of Letters of Credit upon Default .  If any Event of Default shall have occurred and be continuing, the Agent may with the consent, or shall at the request, of the Required Lenders, irrespective of whether it is taking any of the actions described in Section 6.01 or otherwise, (a) make demand upon the Borrower to, and forthwith upon such demand the Borrower will Cash Collateralize the aggregate Available Amount of all Letters of Credit then outstanding (whether or not any beneficiary under any Letter of Credit shall have drawn or be entitled at such time to draw thereunder) or (b) make such other arrangements in respect of the outstanding Letters of Credit as shall be acceptable to the Required Lenders, 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 Borrower will Cash Collateralize the aggregate Available Amount of all Letters of Credit then outstanding, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrower.  If at any time the Agent determines that any funds held in the L/C Cash Deposit Account are subject to any right or interest of any Person other than the Agent, the Issuing Banks and the Lenders or that the total amount of such funds is less than the aggregate Available Amount of all Letters of Credit, the Borrower will, forthwith upon demand by the Agent, pay to the Agent, as additional funds to be deposited and held in the L/C Cash Deposit Account, an amount equal to the excess of (a) such aggregate Available Amount over (b) the total amount of funds, if any, then held in the L/C Cash Deposit Account that are free and clear of any such right and interest.  Upon the drawing of any Letter of Credit, to the extent funds are on deposit in the L/C Cash Deposit Account, such funds shall be applied to reimburse the Issuing Banks to the extent permitted by applicable Law, or each Lender to the extent such Lender has funded a Revolving Advance in respect of such Letter of Credit.  The Borrower hereby grants to the Agent, for the benefit of the Issuing Banks and the Lenders, a Lien upon and security interest in the L/C Cash Deposit Account and all amounts held therein from time to time as security for the L/C Obligations, and for application to the Borrower’s reimbursement obligations as and when the same shall arise.  The Agent shall have exclusive dominion and control, including the exclusive right of withdrawal, over such account.  After all such Letters of Credit shall have expired or been fully drawn upon and all other obligations of the Borrower hereunder and under the other Loan Documents shall have been paid in full, the balance, if any, in such L/C Cash Deposit Account shall be promptly returned to the Borrower.
 
ARTICLE VII
 
THE AGENT
 
Section 7.01          Appointment and Authority .  Each of the Lenders (for purposes of this Article, references to the Lenders shall also mean the Issuing Banks) hereby irrevocably appoints Barclays 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.
 
66 

 
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:
 
(a)           shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing;
 
(b)           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
 
(c)           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 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.
 
67 

 
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 Advance, or the issuance of a Letter of Credit, that by its terms must be fulfilled to the satisfaction of a Lender or an Issuing Bank, the Agent may presume that such condition is satisfactory to such Lender or such Issuing Bank unless the Agent shall have received notice to the contrary from such Lender or such Issuing Bank prior to the making of such Advance or the issuance of such Letter of Credit.  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
 
68 

 
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, Syndication Agents, Documentation Agents or 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.
 
Section 7.09          Issuing Banks .  Each Issuing Bank shall act on behalf of the Lenders with respect to any Letters of Credit issued by it and the documents associated therewith, and each Issuing Bank shall have all of the benefits and immunities provided in this Article VII (other than Section 7.02) to the same extent as such provisions apply to the Agent.
 
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 Advance or the Borrower’s obligations to reimburse any drawing on a Letter of Credit, 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, the Arrangers, any Issuing Bank or the Swingline Lender, if any, 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 Advance, extend the time of payment of any obligation of the Borrower to reimburse any drawing on any Letter of Credit or any interest
 
69 

 
thereon, extend the expiry date of any Letter of Credit beyond the Letter of Credit Expiration Date, or extend the time of payment of any fees hereunder (other than fees payable to the Agent, the Arrangers, any Issuing Bank or the Swingline Lender, if any, for their own respective accounts), or (iii) increase any Revolving Credit Commitment of any such Lender over the amount thereof in effect or extend the maturity thereof (it being understood that a waiver of any condition precedent set forth in Section 3.02 or 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 Revolving Credit Commitments or of the aggregate unpaid principal amount of the Advances, 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 such amendment, modification, waiver, discharge, termination or consent, or (iii) change or waive any provision of Section 2.15, 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 2.19(b); and
 
(c)   unless agreed to by the Issuing Banks, the Swingline Lender, if any, or the Agent in addition to the Lenders required as provided hereinabove to take such action, affect the respective rights or obligations of the Issuing Banks, the Swingline Lender, if any, or the Agent, as applicable, hereunder or under any of the other Loan Documents.
 
(d)   Notwithstanding the foregoing, this Agreement may be amended (or amended and restated) pursuant to an increase in the Revolving Credit Commitment pursuant to Section 2.18 with only the consents prescribed by such Section.
 
(e)   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, each Issuing Bank and the Agent shall agree, as of such date, to purchase for cash the Advances 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 2.11 and 2.14, 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 Advances of such Non-Consenting Lender been prepaid on such date rather than sold to the replacement Lender.
 
70 

 
Section 8.02          Notices, Etc .
 
(a)   All notices and other communications provided for hereunder shall be either (x) in writing (including facsimile communication) and mailed, faxed or delivered or (y) as and to the extent set forth in Sections 8.02(b) and (c) and in the proviso to this Section 8.02(a), if to the Borrower, at the address specified on Schedule 8.02 ; if to any Lender, at its Domestic Lending Office; if to the Agent, at the address specified on Schedule 8.02 ; if to the Swingline Lender, at the address specified by the Swingline Lender to the Borrower and the Agent, and if to any Issuing Bank, 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.
 
(b)   Notices and other communications to the Lenders, the Agent and the Issuing Banks 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 or the Issuing Banks pursuant to Article II if such Lender or the Issuing Banks, as applicable, 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.
 
(c)   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
 
71 

 
(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.
 
(d)   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.
 
(e)   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 Arranger 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 Arranger 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 Borrowing and any notice of Default.
 
Section 8.03          No Waiver; Cumulative Remedies; Enforcement .  No failure by any Lender, any Issuing Bank 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
 
72 

 
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 and the Issuing Banks; 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 Issuing Bank from exercising the rights and remedies that inure to its benefit (solely in its capacity as an Issuing Bank) hereunder and under the other Loan Documents, (c) any Lender from exercising setoff rights in accordance with Section 8.05 (subject to the terms of Section 2.15), or (d) 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), (c) and (d) of the preceding proviso and subject to Section 2.15, 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, 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 of the transactions contemplated herein or the actual or proposed use of the proceeds of any Advance or Letter of Credit (including any refusal by any Issuing Bank to honor a demand for payment under a Letter of Credit if the documents presented in connection with such demand do not strictly comply with
 
73 

 
the terms of such Letter of Credit), 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 2.14, 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 fees or expenses 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), any Issuing Bank 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), such Issuing Bank 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) or such Issuing Bank in its capacity as such, or against any Related Party of any of the foregoing acting for the Agent (or any such sub-agent) or such Issuing Bank in connection with such capacity.
 
(d)   Without limiting the rights of indemnification 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 Person any party hereto, on any theory of liability, arising out of or otherwise relating to the Notes, this Agreement, any of the transactions contemplated herein or the actual or proposed use of the proceeds of the Advances or the Letters of Credit.  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.
 
74 

 
(e)   If any payment of principal of, or Conversion of, any Eurodollar Rate Advance 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 Revolving Advance, as a result of a payment or Conversion pursuant to Section 2.08(d) or (e), 2.10 or 2.12, acceleration of the maturity of the Revolving Advances 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 Revolving Advance 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 8.07(a), 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 Revolving Advance.
 
(f)    Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in Sections 2.11, 2.14 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 Advances due and payable pursuant to the provisions of Section 6.01, each Lender, each Issuing Bank and each of their respective 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, such Issuing Bank 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 or Issuing Bank, whether or not such Lender or Issuing Bank 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 or such Issuing Bank different from the branch or office holding such deposit or obligated on such indebtedness.  Each Lender and each Issuing Bank 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 and each Issuing Bank 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          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 been notified by each Initial Lender that such Initial Lender has executed it 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.
 
75 

 
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, the Issuing Banks 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 all or a portion of its rights and obligations under this Agreement (including all or a portion of its Revolving Credit Commitment, Swingline Exposure and the Revolving Advances (including for purposes of this subsection (b), participations in L/C Obligations) at the time owing to it); provided that any such assignment shall be subject to the following conditions:
 
(i)            Minimum Amounts .
 
(A)          in the case of an assignment of the entire remaining amount of the assigning Lender’s Revolving Credit Commitment and the Revolving Advances 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 amount of the Revolving Credit Commitment (which for this purpose includes Revolving Advances outstanding thereunder) or, if the Revolving Credit Commitment is not then in effect, the principal outstanding balance of the Revolving Advances 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).
 
(ii)           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 Revolving Advances, L/C Obligations, Swingline Exposure or the Revolving Credit Commitment assigned, and each such
 
76 

 
assignment shall be of a constant, and not a varying, percentage of all rights and obligations under this Agreement;
 
(iii)          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;
 
(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;
 
(C)          the consent of each Issuing Bank (such consent not to be unreasonably withheld or delayed) shall be required for any assignment that increases the obligation of the assignee to participate in exposure under one or more Letters of Credit (whether or not then outstanding); and
 
(D)          the consent of the Swingline Lender, if any, (such consent not to be unreasonably withheld or delayed) shall be required for any assignment that increases the obligation of the assignee to participate in exposure under Swingline Advances (whether or not then outstanding).
 
(iv)          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.
 
(v)           No Assignment to Borrower .  No such assignment shall be made to the Borrower or any of the Borrower’s Affiliates or Subsidiaries.
 
(vi)          No Assignment to Natural Persons .  No such assignment shall be made to a natural person.
 
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
 
77 

 
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 2.11, 2.14 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 Revolving Credit Commitments of, and principal amounts of the Advances and L/C Obligations 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 a natural person or the Borrower or any of the Borrower’s Affiliates or Subsidiaries) (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 its Revolving Credit Commitment, Swingline Exposure and/or the Revolving Advances (including such Lender’s participations in L/C Obligations) 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, the Lenders and the Issuing Banks 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 2.11, 2.14 and 8.04(e) to the same extent as if it were a Lender and had acquired its interest by
 
78 

 
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 2.15 as though it were a Lender.
 
(e)   Limitations upon Participant Rights .  A Participant shall not be entitled to receive any greater payment under Section 2.11 or 2.14 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 2.14 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 2.14(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)   Resignation as an Issuing Bank after Assignment .  Notwithstanding anything to the contrary contained herein, if at any time any Issuing Bank assigns all of its Revolving Credit Commitment and Revolving Advances pursuant to subsection (b) above, such Issuing Bank may, upon 30 days’ notice to the Borrower and the Lenders, resign as an Issuing Bank.  If any Issuing Bank resigns, it shall retain all the rights, powers, privileges and duties of an Issuing Bank hereunder with respect to all Letters of Credit outstanding as of the effective date of its resignation as an Issuing Bank and all L/C Obligations with respect thereto (including the right to require the Lenders to make Base Rate Advances or fund risk participations in Unreimbursed Amounts pursuant to Section 2.03(c)).
 
(h)   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
 
79 

 
substantially the same terms as provided herein), (ii) to the extent requested by any regulatory authority, (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) 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 (including Sections 5-1401 and 5-1402 of the General Obligations Law but otherwise without regard to conflict of law principles).
 
Section 8.10          Counterparts; Integration; Effectiveness .  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.  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.  Except as provided in Section 3.01, this Agreement shall become effective when it shall have been executed by 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.  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.
 
Section 8.11          Jurisdiction, Etc .
 
(a)   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
 
80 

 
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.
 
(b)   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 or federal court.  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, any Issuing Bank or any Lender, or the Agent, any Issuing Bank 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, such Issuing Bank 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 and each Issuing Bank 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 and the Issuing Banks 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 .  Each Lender hereby notifies the Borrower that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “ USA PATRIOT Act ”), it is required to obtain, verify and record information that identifies each 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 USA 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 USA 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
 
81 

 
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 Advance or any other Obligation hereunder shall remain unpaid or unsatisfied or any Letter of Credit shall remain outstanding.
 
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.
 
82 

 
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
 
83 

 
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.

 	ARIZONA PUBLIC SERVICE COMPANY	
 	 	
 	By	/s/ Lee R. Nickloy	
 	 	 	 	
 	 	Name:	Lee R. Nickloy	
 	 	Title:	Vice President and Treasurer	
 
84 

 

ADMINISTRATIVE AGENT:	BARCLAYS BANK, PLC , as Agent, Issuing Bank	
 	and Lender	
 	 	
 	By	/s/ Ann E. Sutton	
 	 	 	 	
 	 	Name:	Ann E. Sutton	
 	 	Title:	Director	
 
85 

 

LENDERS:	THE ROYAL BANK OF SCOTLAND plc, as a Lender and as an Issuing Bank	

 	By	/s/ Tyler J. McCarthy	
 	 	 	 	
 	 	Name:	Tyler J. McCarthy	
 	 	Title:	Director	
 	 	
 	WELLS FARGO BANK, NATIONAL	
 	ASSOCIATION, as a Lender and as an Issuing Bank	

 	By	/s/ Yann Blindert	
 	 	 	 	
 	 	Name:	Yann Blindert	
 	 	Title:	Director	
 	 	
 	JPMORGAN CHASE BANK, N.A., as a Lender and as an Issuing Bank	

 	By	/s/ Nancy R. Barwig	
 	 	 	 	
 	 	Name:	Nancy R. Barwig	
 	 	Title:	Credit Executive	
 	 	
 	BANK OF AMERICA, N.A., as a Lender and as an Issuing Bank	

 	By	/s/ William Merritt	
 	 	 	 	
 	 	Name:	William Merritt	
 	 	Title:	Vice President	
 	 	 	 	
 	BNP PARIBAS, as a Lender	

 	By	/s/ Francis DeLaney	
 	 	 	 	
 	 	Name:	Francis DeLaney	
 	 	Title:	Managing Director	
 
86 

 

 	By	/s/ Pasquale Perraglia	
 	 	 	 	
 	 	Name:	Pasquale Perraglia	
 	 	Title:	Director	
 	 	 	 	
 	THE BANK OF NEW YORK MELLON, as a Lender	

 	By	/s/ Mark W. Rogers	
 	 	 	 	
 	 	Name:	Mark W. Rogers	
 	 	Title:	Vice President	
 	 	
 	CREDIT SUISSE AG, CAYMAN ISLANDS BRANCH, as a Lender	

 	By	/s/ Kevin Buddhdew	
 	 	 	 	
 	 	Name:	Kevin Buddhdew	
 	 	Title:	Vice President	
 	 	
 	By	/s/ Sanja Gazahi	
 	 	 	 	
 	 	Name:	Sanja Gazahi	
 	 	Title:	Associate	
 	 	
 	CITIBANK, N.A., as a Lender	
 	 	
 	By	/s/ Amit Vasani	
 	 	 	 	
 	 	Name:	Amit Vasani	
 	 	Title:	Vice President	
 	 	
 	DEUTSCHE BANK AG NEW YORK BRANCH, as a Lender	
 	 	
 	By	/s/ Virginia Cosenza	
 	 	 	 	
 	 	Name:	Virginia Cosenza	
 	 	Title:	Vice President	
 
87 

 

 	By	/s/ Ming K. Chu	
 	 	 	 	
 	 	Name:	Ming K. Chu	
 	 	Title:	Vice President	
 	 	 	 	
 	KEYBANK NATIONAL ASSOCIATION, as a Lender	

 	By	/s/ Kevin D. Smith	
 	 	 	
 	 	Name:	Kevin D. Smith	
 	 	Title:	Senior Vice President	
 	 	
 	UNION BANK, N.A., as a Lender	

 	By	/s/ Efrain Soto	
 	 	 	
 	 	Name:	Efrain Soto	
 	 	Title:	Vice President	
 	 	
 	THE BANK OF NOVA SCOTIA, as a Lender	

 	By	/s/ Thane Rattew	
 	 	 	
 	 	Name:	Thane Rattew	
 	 	Title:	Managing Director	
 	 	
 	SUNTRUST BANK, as a Lender	

 	By	/s/ Andrew Johnson	
 	 	 	
 	 	Name:	Andrew Johnson	
 	 	Title:	Director	
 	 	
 	UBS LOAN FINANCE LLC, as a Lender	

 	By	/s/ Lana Gifas	
 	 	 	
 	 	Name:	Lana Gifas	
 	 	Title:	Director	
 
88 

 

 	By	/s/ Joselin Fernandes	
 	 	 	
 	 	Name:	Joselin Fernandes	
 	 	Title:	Associate Director	
 	 	
 	U.S. BANK NATIONAL ASSOCIATION, as a Lender	

 	By	/s/ Holland H. Williams	
 	 	 	
 	 	Name:	Holland H. Williams	
 	 	Title:	AVP & Portfolio Manager	
 	 	
 	CANADIAN IMPERIAL BANK OF COMMERCE, NEW YORK AGENCY, as a Lender	

 	By	/s/ Gordon Eadon	
 	 	 	
 	 	Name:	Gordon Eadon	
 	 	Title:	Authorized Signatory	
 	 	
 	By	/s/ Robert Casey	
 	 	 	
 	 	Name:	Robert Casey	
 	 	Title:	Authorized Signatory	
 	 	
 	COBANK, ACB, as a Lender	

 	By	/s/ John Kemper	
 	 	 	
 	 	Name:	John Kemper	
 	 	Title:	Vice President	
 	 	 	 	
 	THE NORTHERN TRUST COMPANY, as a Lender	

 	By	/s/ John Lascody	
 	 	 	 	
 	 	Name:	John Lascody	
 	 	Title:	Vice President	

89 

 

 	BRANCH BANKING & TRUST COMPANY, as a Lender	

 	By	/s/ Sarah Bryson	
 	 	 	 	
 	 	Name:	Sarah Bryson	
 	 	Title:	Vice President	
 	 	 	 	
 	PNC BANK, NATIONAL ASSOCIATION, as a Lender	

 	By	/s/ Philip K. Liebscher	
 	 	 	 	
 	 	Name:	Philip K. Liebscher	
 	 	Title:	Senior Vice President	
 	 	
 	TD BANK, N.A., as a Lender	

 	By	/s/ David Perlman	
 	 	 	 	
 	 	Name:	David Perlman	
 	 	Title:	Senior Vice President	
 
90 

 
SCHEDULE 1.01
COMMITMENTS AND RATABLE SHARES

Bank	 	Revolving Credit
Commitment	 	Ratable Share	 	
Barclays Bank PLC	 	$	32,500,000.00	 	6.50	%	
The Royal Bank of Scotland plc	 	$	32,500,000.00	 	6.50	%	
Wells Fargo Bank, National Association	 	$	32,500,000.00	 	6.50	%	
JPMorgan Chase Bank, N.A.	 	$	32,500,000.00	 	6.50	%	
Bank of America, N.A.	 	$	32,500,000.00	 	6.50	%	
Credit Suisse AG, Cayman Islands Branch	 	$	22,500,000.00	 	4.50	%	
The Bank of New York Mellon	 	$	22,500,000.00	 	4.50	%	
BNP Paribas	 	$	22,500,000.00	 	4.50	%	
Citibank, N.A.	 	$	22,500,000.00	 	4.50	%	
Deutsche Bank AG New York Branch	 	$	22,500,000.00	 	4.50	%	
KeyBank National Association	 	$	22,500,000.00	 	4.50	%	
Union Bank, N.A.	 	$	22,500,000.00	 	4.50	%	
The Bank of Nova Scotia	 	$	22,500,000.00	 	4.50	%	
SunTrust Bank	 	$	22,500,000.00	 	4.50	%	
UBS Loan Finance LLC	 	$	22,500,000.00	 	4.50	%	
U.S. Bank National Association	 	$	22,500,000.00	 	4.50	%	
Canadian Imperial Bank of Commerce, New York Agency	 	$	15,000,000.00	 	3.00	%	
CoBank, ACB	 	$	15,000,000.00	 	3.00	%	
The Northern Trust Company	 	$	15,000,000.00	 	3.00	%	
Branch Banking & Trust Company	 	$	15,000,000.00	 	3.00	%	
PNC Bank, National Association	 	$	15,000,000.00	 	3.00	%	
TD Bank, N.A.	 	$	15,000,000.00	 	3.00	%	
TOTAL	 	$	500,000,000.00	 	100.00	%	
 
91 

 
SCHEDULE 4.01(j)
SUBSIDIARIES(1)
 
Bixco, Inc.
Axiom Power Solutions, Inc.
PWE Newco, Inc.

(1)  The Borrower’s three nuclear decommissioning trusts relating to PVNGS may also be deemed to be subsidiaries under a literal reading of the definition.

 
SCHEDULE 4.01(k)
EXISTING INDEBTEDNESS
 
$100,000,000 aggregate principal amount of the Borrower’s 4.50% Notes due 2042 pursuant to an Underwriting Agreement, dated March 19, 2013, among the Borrower and the underwriters named therein, and the Indenture, dated as of January 15, 1998, as amended and supplemented including as amended and supplemented by the Thirteenth Supplemental Indenture thereto.

 
SCHEDULE 8.02
CERTAIN ADDRESSES FOR NOTICES
 
BORROWER:
 
Arizona Public Service Company
400 North 5th Street
Mail Station 9040
Phoenix, AZ 85004
Attention: Treasurer
Telephone:                                    (602) 250-3300
Telecopier:                                     (602) 250-3902
Electronic                                           lee.nickloy@pinnaclewest.com
 
AGENT :
 
Agent’s Office
(for payments and Requests for Credit Extensions):
Barclays Bank PLC
1301 6 th  Avenue
New York, NY 10019
Attention: Omer Khan
Telephone: (212) 320-6864
Email: omer.khan@barclays.com / xrausloanops5@barclays.com
 
with copies to:
 
Barclays Bank PLC
745 Seventh Avenue
New York, NY 10019
Attention: Alicia Borys / Kruthi Raj
Facsimile: (212) 526-5115
Telephone: (212) 526-4291 / (212) 526-3713
Email: Alicia.borys@barclays.com / Kruthi.raj@barclays.com
 
Agent’s Account/Barclays Bank Agency Service Wiring Information
 
Barclays Bank PLC
New York, New York
ABA: 026002574

 
Account Number: 050-01910-4
Account Name: Clad Control Account
Ref: Arizona Public Service
 
Other Notices as Agent :
 
Barclays Bank PLC
745 Seventh Avenue
New York, NY 10019
Attention: Alicia Borys / Kruthi Raj
Facsimile: (212) 526-5115
Telephone: 212) 526-4291 / (212) 526-3713
Email: Alicia.borys@barclays.com / Kruthi.raj@barclays.com
 
ISSUING BANKS:
 
Barclays Bank PLC
 
Barclays Bank PLC
200 Park Avenue
New York, NY 10166
Attn. Letters of Credit / Dawn Townsend
Facsimile (212) 412-5011
Telephone (201) 499-2081
Email xraletterofcredit@barclays.com
 
The Royal Bank of Scotland plc
 
The Royal Bank of Scotland plc
600 Washington Boulevard
Stamford, CT 06901
Attention: Richard Emmich
Facsimile: (203) 873-3569
Telephone: (203) 897-7619
Email: richard.emmich@rbs.com
 
and
 
Attention: Marchette Major
Facsimile: (203) 873-3569
Telephone: (203) 897-7638
Email: marchette.major@rbs.com

 
Wells Fargo Bank, National Association
 
Wells Fargo Bank, National Association
Corporate Banking - Utility and Power Group
1300 SW 5th Avenue, 7th Floor
Mail Code: MAC P6101-076
Portland, OR 97201
Attention:  Yann Blindert
Telephone:  (503) 886-2215
Facsimile:  (503) 886-2211
E-mail:  yann.blindert@wellsfargo.com
 
JPMorgan Chase Bank, N.A.
 
JPMorgan Chase Bank, N.A.
10 South Dearborn, 9 th  Floor
Mail Code: IL1-0090
Chicago, IL 60603
Attention:  Nancy R. Barwig
Telephone:  (312) 732-1838
Facsimile:  (312) 732-1762
E-mail: nancy.r.barwig@jpmorgan.com
With a cc to: jpm.standbylc.ccb@jpmorgan.com
 
Bank of America, N.A.
 
Bank of America, N.A.
100 N. Tryon Street
Charlotte, NC 28255-0001
Attention:  William A. Merritt, III
Telephone:  (980) 386-9762
Facsimile:  (980) 683-6339
E-mail: william.merritt@baml.com

 
EXHIBIT A — FORM OF
PROMISSORY NOTE
 
                    , 20  
 
FOR VALUE RECEIVED, the undersigned, ARIZONA PUBLIC SERVICE COMPANY, an Arizona corporation (the “ Borrower ”), hereby promises to pay to the order of                or its registered assigns (the “ Lender ”), in accordance with the provisions of the Credit Agreement (as hereinafter defined), the principal amount of each Advance from time to time made by the Lender to the Borrower pursuant to the Five-Year Credit Agreement dated as of April 9, 2013 among the Borrower, the Lender and certain other lenders parties thereto, Barclays Bank PLC, as Agent for the Lender and such other lenders, and the issuing banks and other agents party thereto (as amended or modified from time to time, the “ Credit Agreement ”; the terms defined therein being used herein as therein defined) outstanding on such date.
 
The Borrower promises to pay interest on the unpaid principal amount of each Advance from the date of such Advance until such principal amount is paid in full, at such interest rates, and payable at such times, as are specified in the Credit Agreement.
 
Both principal and interest are payable in lawful money of the United States of America to the Agent for the account of the Lender in same day funds at the address and account specified on Schedule 8.02 .  Each Advance owing to the Lender by the Borrower pursuant to the Credit Agreement, and all payments made on account of principal thereof, shall be recorded by the Lender and, prior to any transfer hereof, endorsed on the grid attached hereto which is part of this Promissory Note.
 
This Promissory Note is one of the Notes referred to in, and is entitled to the benefits of, the Credit Agreement.  The Credit Agreement, among other things, (i) provides for the making of Advances by the Lender to the Borrower from time to time in an aggregate amount not to exceed at any time the Lender’s Unused Commitment, the indebtedness of the Borrower resulting from each such Advance being evidenced by this Promissory Note and (ii) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified.
 
THIS PROMISSORY NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

 	ARIZONA PUBLIC SERVICE COMPANY	
 	 	
 	By	 	
 	 	Name:	 	
 	 	Title:	 	
 
A-1 

 
ADVANCES AND PAYMENTS OF PRINCIPAL

Date	 	Amount of
Advance	 	Amount of
Principal Paid
or Prepaid	 	Unpaid Principal
Balance	 	Notation
Made By	 	

 	 	 	 	 	 	 	 	 	 	
 
A-2 

 
EXHIBIT B — FORM OF NOTICE OF
BORROWING
 
Barclays Bank PLC, as Agent
for the Lenders parties
to the Credit Agreement
referred to below
 
Attention:  Bank Loan Syndications Department
 
[Date]
 
Ladies and Gentlemen:
 
The undersigned, Arizona Public Service Company, refers to the Five-Year Credit Agreement, dated as of April 9, 2013 (as amended or modified from time to time, the “ Credit Agreement ”, the terms defined therein being used herein as therein defined), among the undersigned, certain Lenders parties thereto, Barclays Bank PLC, as Agent for said Lenders and the Issuing Banks and other agents party thereto, and hereby gives you notice, irrevocably, pursuant to Section 2.02 of the Credit Agreement that the undersigned hereby requests a Borrowing under the Credit Agreement, and in that connection sets forth below the information relating to such Borrowing (the “ Proposed Borrowing ”) as required by Section 2.02(a) of the Credit Agreement:
 
(i)                                      The Business Day of the Proposed Borrowing is                         , 20      .
(ii)                                   The Type of Revolving Advances comprising the Proposed Borrowing is [Base Rate Advances] [Eurodollar Rate Advances].
(iii)                                The aggregate amount of the Proposed Borrowing is $                          .
[(iv)                           The initial Interest Period for each Eurodollar Rate Advance made as part of the Proposed Borrowing is       month[s].]
 
The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Borrowing:
 
(A)                                the representations and warranties contained in Section 4.01 (other than Sections 4.01(k), 4.01(e)(ii) and 4.01(f)(ii)) of the Credit Agreement are correct, before and after giving effect to the Proposed Borrowing and to the application of the proceeds therefrom, as though made on and as of such date;
 
(B)                                no event has occurred and is continuing, or would result from such Proposed Borrowing or from the application of the proceeds therefrom, that constitutes a Default;
 
(C)                                all required regulatory authorizations including the 2013 Order and/or any Subsequent Order in respect of the Proposed Borrowing have been obtained and are in full force and effect and, before and after giving effect to the Proposed Borrowing and to the application of
 
B-1 

 
the proceeds therefrom, the Borrower is in compliance with the provisions of the applicable order; and
 
(D)                                before and after giving effect to the Proposed Borrowing and to the application of the proceeds therefrom, as though made on and as of such date, the Indebtedness of the Borrower does not exceed that permitted by (i) applicable resolutions of the Board of Directors of the Borrower, (ii) applicable Arizona Laws, or (iii) the 2013 Order or any Subsequent Order, whichever is in force and effect at such time.

 	Very truly yours,	
 	 	
 	ARIZONA PUBLIC SERVICE COMPANY	
 	 	
 	By	 	
 	 	Name:	 	
 	 	Title:	 	
 
B-2 

 
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 Credit Agreement identified below (as amended, the “ Credit 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 Credit 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 Credit 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 respective facilities identified below (including without limitation any letters of credit, guarantees, and swingline loans included in such facilities) 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 Credit 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 ”).  Each 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 Bank](1)]	
 	 	 	
3.	 	Borrower: Arizona Public Service Company	
 	 	 	
4.	 	Agent: Barclays Bank PLC, as the administrative agent under the Credit Agreement	
 	 	 	
5.	 	Credit Agreement: The Five-Year Credit Agreement dated as of April 9, 2013, by and among the Borrower, the Lenders party thereto, the Agent and the Issuing Banks and other agents party thereto.	
 	 	 	
6.	 	Assigned Interest:	

(1)  Select as applicable.
 
C-1 

 

Aggregate Amount
of Commitment for
all Lenders	 	Amount of
Commitment
Assigned	 	Percentage
Assigned of
Commitment(2)	 	CUSIP
Number	 	
 	 	 	 	 	 	 	 	
$	 	 	$	 	 	 	%	 	 	

[7. Trade Date: ](3)
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](4) Accepted:	 	
BARCLAYS BANK PLC, as Agent	 	
 	 	
By	 	 	
Name:	 	 	
Title:	 	 	
 	 	
[Consented to:](5)	 	
[BARCLAYS BANK PLC, as Issuing Bank]	 	
 	 	
By	 	 	
Name:	 	 	
Title:	 	 	

(2)  Set forth, to at least 9 decimals, as a percentage of the Commitment of all Banks thereunder.
(3)  To be completed if the Assignor and the Assignee intend that the minimum assignment amount is to be determined as of the Trade Date.
(4)  To be added only if the consent of the Agent is required by the terms of the Credit Agreement.
(5)  To be added only if the consent of the Borrowers and/or other parties (e.g. Issuing Bank) is required by the terms of the Credit Agreement.
 
C-2 

 

[THE ROYAL BANK OF SCOTLAND plc, as Issuing Bank]	
 	 	
By	 	 	
Name:	 	 	
Title:	 	 	

[WELLS FARGO BANK, NATIONAL ASSOCIATION, as Issuing Bank]	
 	 	
By	 	 	
Name:	 	 	
Title:	 	 	
 	 	
[JPMORGAN CHASE BANK, N.A., as Issuing Bank]	 	
 	 	
By	 	 	
Name:	 	 	
Title:	 	 	
 	 	
[BANK OF AMERICA, N.A., as Issuing Bank]	 	
 	 	
By	 	 	
Name:	 	 	
Title:	 	 	
 	 	
ARIZONA PUBLIC SERVICE COMPANY	 	
 	 	
By	 	 	
Name:	 	 	
Title:	 	 	
 
C-3 

 
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 Credit 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 Credit Agreement, (ii) it meets all the requirements to be an Eligible Assignee under Section 8.07 of the Credit Agreement (subject to such consents, if any, as may be required under Section 8.07 of the Credit Agreement), (iii) from and after the Effective Date, it shall be bound by the provisions of the Credit 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 Credit Agreement, and has received or has been accorded the opportunity to receive copies of the most recent financial statements referred to in Section 4.01(e) or delivered pursuant to Section 5.01(h), as applicable, thereof, 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, the Assignor 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 (vi) if it is a foreign lender, attached to the Assignment and Assumption is any documentation required to be delivered by it pursuant to the terms of the Credit Agreement, duly completed and executed by the Assignee; and (b) 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
 
C-4 

 
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 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.
 
C-5 

Exhibit 12.1
 
PINNACLE WEST CAPITAL CORPORATION
RATIO OF EARNINGS TO FIXED CHARGES
(dollars in thousands)

 	 	Three Months
Ended
March 31,	 	Twelve Months Ended December 31,	 	
 	 	2013	 	2012	 	2011	 	2010	 	2009	 	2008	 	
Earnings:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations attributable to common shareholders	 	$	24,444	 	$	387,380	 	$	328,110	 	$	324,688	 	$	236,839	 	$	259,871	 	
Income taxes	 	12,469	 	237,317	 	183,604	 	160,869	 	138,551	 	95,231	 	
Fixed charges	 	50,588	 	219,437	 	246,462	 	248,664	 	241,807	 	224,760	 	
Total earnings	 	$	87,501	 	$	844,134	 	$	758,176	 	$	734,221	 	$	617,197	 	$	579,862	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fixed Charges:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest expense	 	$	49,478	 	$	214,616	 	$	241,995	 	$	244,174	 	$	237,766	 	$	220,223	 	
Estimated interest portion of annual rents	 	1,110	 	4,821	 	4,467	 	4,490	 	4,041	 	4,537	 	
Total fixed charges	 	$	50,588	 	$	219,437	 	$	246,462	 	$	248,664	 	$	241,807	 	$	224,760	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Ratio of Earnings to Fixed Charges (rounded down)	 	1.72	 	3.84	 	3.07	 	2.95	 	2.55	 	2.57	 	
 
1 

Exhibit 12.2
 
ARIZONA PUBLIC SERVICE COMPANY
RATIO OF EARNINGS TO FIXED CHARGES
(dollars in thousands)

 	 	Three Months
Ended
March 31,	 	Twelve Months Ended December 31,	 	
 	 	2013	 	2012	 	2011	 	2010	 	2009	 	2008	 	
Earnings:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations attributable to common shareholders	 	$	26,042	 	$	395,497	 	$	336,249	 	$	335,663	 	$	251,225	 	$	262,344	 	
Income taxes	 	13,728	 	244,396	 	192,542	 	170,465	 	152,574	 	107,261	 	
Fixed charges	 	49,675	 	214,227	 	238,286	 	234,184	 	227,274	 	206,896	 	
Total earnings	 	$	89,445	 	$	854,120	 	$	767,077	 	$	740,312	 	$	631,073	 	$	576,501	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fixed Charges:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest charges	 	$	47,650	 	$	205,533	 	$	229,326	 	$	225,269	 	$	218,969	 	$	197,964	 	
Amortization of debt discount	 	1,011	 	4,215	 	4,616	 	4,559	 	4,675	 	4,702	 	
Estimated interest portion of annual rents	 	1,014	 	4,479	 	4,344	 	4,356	 	3,630	 	4,230	 	
Total fixed charges	 	$	49,675	 	$	214,227	 	$	238,286	 	$	234,184	 	$	227,274	 	$	206,896	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Ratio of Earnings to Fixed Charges (rounded down)	 	1.80	 	3.98	 	3.21	 	3.16	 	2.77	 	2.78	 	
 
1 

Exhibit 12.3
 
PINNACLE WEST CAPITAL CORPORATION
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED
STOCK DIVIDEND REQUIREMENTS
(dollars in thousands)

 	 	Three Months
Ended
March 31,	 	Twelve Months Ended December 31,	 	
 	 	2013	 	2012	 	2011	 	2010	 	2009	 	2008	 	
Earnings:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations attributable to common shareholders	 	$	24,444	 	$	387,380	 	$	328,110	 	$	324,688	 	$	236,839	 	$	259,871	 	
Income taxes	 	12,469	 	237,317	 	183,604	 	160,869	 	138,551	 	95,231	 	
Fixed charges	 	50,588	 	219,437	 	246,462	 	248,664	 	241,807	 	224,760	 	
Total earnings	 	$	87,501	 	$	844,134	 	$	758,176	 	$	734,221	 	$	617,197	 	$	579,862	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fixed Charges:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest expense	 	$	49,478	 	$	214,616	 	$	241,995	 	$	244,174	 	$	237,766	 	220,223	 	
Estimated interest portion of annual rents	 	1,110	 	4,821	 	4,467	 	4,490	 	4,041	 	4,537	 	
Total fixed charges	 	$	50,588	 	$	219,437	 	$	246,462	 	$	248,664	 	$	241,807	 	$	224,760	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Preferred Stock Dividend Requirements:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before income taxes attributable to common shareholders	 	$	36,913	 	$	624,697	 	$	511,714	 	$	485,557	 	$	375,390	 	$	355,102	 	
Net income from continuing operations attributable to common shareholders	 	24,444	 	387,380	 	328,110	 	324,688	 	236,839	 	259,871	 	
Ratio of income before income taxes to net income	 	1.51	 	1.61	 	1.56	 	1.50	 	1.59	 	1.37	 	
Preferred stock dividends	 	—	 	—	 	—	 	—	 	—	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Preferred stock dividend requirements – ratio (above) times preferred stock dividends	 	$	—	 	$	—	 	$	—	 	$	—	 	$	—	 	$	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fixed Charges and Preferred Stock Dividend Requirements:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fixed charges	 	$	50,588	 	$	219,437	 	$	246,462	 	$	248,664	 	$	241,807	 	$	224,760	 	
Preferred stock dividend requirements	 	—	 	—	 	—	 	—	 	—	 	—	 	
Total	 	$	50,588	 	$	219,437	 	$	246,462	 	$	248,664	 	$	241,807	 	$	224,760	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Ratio of Earnings to Fixed Charges (rounded down)	 	1.72	 	3.84	 	3.07	 	2.95	 	2.55	 	2.57	 	
 
1 

Exhibit 31.1
 
CERTIFICATION
 
I, Donald E. Brandt, certify that:
 
1.                                       I have reviewed this Quarterly Report on Form 10-Q 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

 
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:	May 3, 2013	 	
 	 	 	
 	/s/ Donald E. Brandt	
 	Donald E. Brandt	
 	Chairman, President and	
 	Chief Executive Officer	
 
2 

Exhibit 31.2
 
CERTIFICATION
 
I, James R. Hatfield, certify that:
 
1.                                       I have reviewed this Quarterly Report on Form 10-Q 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

 
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:	May 3, 2013	 	
 	 	 	
 	/s/ James R. Hatfield	
 	James R. Hatfield	
 	Executive Vice President and	
 	Chief Financial Officer	
 
2 

Exhibit 31.3
 
CERTIFICATION
 
I, Donald E. Brandt, certify that:
 
1.                                       I have reviewed this Quarterly Report on Form 10-Q 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

 
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:	May 3, 2013.	 	
 	 	
 	/s/ Donald E. Brandt	
 	Donald E. Brandt	
 	Chairman and Chief Executive Officer	
 
2 

Exhibit 31.4
 
CERTIFICATION
 
I, James R. Hatfield, certify that:
 
1.                                       I have reviewed this Quarterly Report on Form 10-Q 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

 
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:	May 3, 2013	 	
 	 	
 	/s/ James R. Hatfield	
 	James R. Hatfield	
 	Executive Vice President and	
 	Chief Financial Officer	
 
2 

Exhibit 32.1
 
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 Quarterly Report on Form 10-Q of Pinnacle West Capital Corporation for the quarter ended March 31, 2013 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 Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Pinnacle West Capital Corporation.

Date:	May 3, 2013	 	
 	/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 Quarterly Report on Form 10-Q of Pinnacle West Capital Corporation for the quarter ended March 31, 2013 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 Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Pinnacle West Capital Corporation.

Date:	May 3, 2013	 	
 	 	
 	/s/ James R. Hatfield	
 	James R. Hatfield	
 	Executive Vice President and	
 	Chief Financial Officer	

Exhibit 32.2
 
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 Quarterly Report on Form 10-Q of Arizona Public Service Company for the quarter ended March 31, 2013 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 Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Arizona Public Service Company.

Date:	May 3, 2013	 	
 	 	
 	/s/ Donald E. Brandt	
 	Donald E. Brandt	
 	Chairman 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 Quarterly Report on Form 10-Q of Arizona Public Service Company for the quarter ended March 31, 2013 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 Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Arizona Public Service Company.

Date:	May 3, 2013	 	
 	 	
 	/s/ James R. Hatfield	
 	James R. Hatfield	
 	Executive Vice President and	
 	Chief Financial Officer