Long-Term Debt and Liquidity Matters

All of Pinnacle West’s and APS’s debt is unsecured. The following table presents the components of long-term debt on the Consolidated Balance Sheets outstanding at December 31, 2015 and 2014 (dollars in thousands):



	Maturity	Interest	December 31,
	Dates (a)	Rates	2015			2014
APS
Pollution control bonds:
Variable	2029-2038	(b)	$	92,405		$	156,405
Fixed	2024-2034	1.75%-5.75%	211,150			249,300
Total pollution control bonds			303,555			405,705
Senior unsecured notes	2016-2045	2.20%-8.75%	3,375,000			2,875,000
Palo Verde sale leaseback lessor notes	2015	8.00%	—			13,420
Term loan	2018	(c)	50,000			—
Unamortized discount			(10,374		)	(9,206		)
Unamortized premium			4,686			4,866
Unamortized debt issuance cost	(d)		(27,896		)	(24,642		)
Total APS long-term debt			3,694,971			3,265,143
Less current maturities	(e)		357,580			383,570
Total APS long-term debt less current maturities			3,337,391			2,881,573
Pinnacle West
Term loan	2017	(f)	125,000			125,000
TOTAL LONG-TERM DEBT LESS CURRENT MATURITIES			$	3,462,391		$	3,006,573

(a) This schedule does not reflect the timing of redemptions that may occur prior to maturities.

(b) The weighted-average rate for the variable rate pollution control bonds was 0.01%-0.24% at December 31, 2015 and 0.03%-0.27% at December 31, 2014.


(c)	The weighted-average interest rate was 1.024% at December 31, 2015.


(d)	In the fourth quarter of 2015, we adopted a new accounting standard related to balance sheet presentation of debt issuance costs. See Note 2 for additional details.

(e) Current maturities include $108 million of pollution control bonds expected to be remarketed in 2016 and $250 million in senior unsecured notes that mature in 2016.

(f) The weighted-average interest rate was 1.174% at December 31, 2015 and 1.019% at December 31, 2014.

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



Year	Consolidated Pinnacle West		Consolidated APS
2016	$	357,580	$	357,580
2017	125,000		—
2018	82,000		82,000
2019	500,000		500,000
2020	250,000		250,000
Thereafter	2,538,975		2,538,975
Total	$	3,853,555	$	3,728,555

Debt Fair Value

Our long-term debt fair value estimates are based on quoted market prices for the same or similar issues, and are classified within Level 2 of the fair value hierarchy. Certain of our debt instruments contain third-party credit enhancements and, in accordance with GAAP, we do not consider the effect of these credit enhancements when determining fair value. The following table represents the estimated fair value of our long-term debt, including current maturities (dollars in thousands):



	As of December 31, 2015				As of December 31, 2014
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Pinnacle West	$	125,000	$	125,000	$	125,000	$	125,000
APS	3,694,971		3,981,367		3,265,143		3,714,108
Total	$	3,819,971	$	4,106,367	$	3,390,143	$	3,839,108

Credit Facilities and Debt Issuances

APS

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

On May 19, 2015, APS issued $300 million of 3.15% unsecured senior notes that mature on May 15, 2025. The net proceeds from the sale were used to repay short-term indebtedness consisting of commercial paper borrowings and drawings under our revolving credit facilities, incurred in connection with the payment at maturity of our $300 million aggregate principal amount of 4.65% notes due May 15, 2015.

On May 28, 2015, APS purchased all $32 million of Maricopa County, Arizona Pollution Control Corporation Pollution Control Revenue Refunding Bonds, 2009 Series B, due 2029 in connection with the mandatory tender provisions for this indebtedness. These bonds were classified as current maturities of long-term debt on our Consolidated Balance Sheets at December 31, 2014.

On June 26, 2015, APS entered into a $50 million term loan facility that matures June 26, 2018. Interest rates are based on APS’s senior unsecured debt credit ratings. APS used the proceeds to repay and refinance existing short-term indebtedness.

On November 6, 2015, APS issued $250 million of 4.35% unsecured senior notes that mature on November 15, 2045. The net proceeds from the sale were used to refinance via redemption and cancellation at par our indebtedness related to the principal amounts of the Navajo County, Arizona Pollution Control Corporation Pollution Control Revenue Refunding Bonds (Arizona Public Service Company Cholla Project), 2009 Series A and 2009 Series C both due June 1, 2034, and repay commercial paper borrowings and replenish cash temporarily used to fund capital expenditures.

On November 17, 2015, APS redeemed at par and canceled all $38 million of the Navajo County, Arizona Pollution Control Corporation Revenue Refunding Bonds (Arizona Public Service Company Cholla Project), 2009 Series A. These bonds were classified as current maturities of long-term debt on our Consolidated Balance Sheets at December 31, 2014.

On November 17, 2015, APS canceled all $32 million of the Navajo County, Arizona Pollution Control Corporation Revenue Refunding Bonds (Arizona Public Service Company Cholla Project), 2009 Series B, purchased in connection with the mandatory tender provision on May 30, 2014.

On December 8, 2015, APS redeemed at par and canceled all $32 million of the Navajo County, Arizona Pollution Control Corporation Revenue Refunding Bonds (Arizona Public Service Company Cholla Project), 2009 Series C.

See “Lines of Credit and Short-Term Borrowings” in Note 5 and “Financial Assurances” in Note 10 for discussion of APS’s separate outstanding letters of credit.

Debt Provisions

Pinnacle West’s and APS’s debt covenants related to their respective bank financing arrangements include maximum debt to capitalization ratios. Pinnacle West and APS comply with this covenant. For both Pinnacle West and APS, this covenant requires that the ratio of consolidated debt to total consolidated capitalization not exceed 65%. At December 31, 2015, the ratio was approximately 47% for Pinnacle West and 46% 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.

An existing ACC order requires APS to maintain a common equity ratio of at least 40%. As defined in the ACC order, the common equity ratio is total shareholder equity divided by the sum of total shareholder equity and long-term debt, including current maturities of long-term debt. At December 31, 2015, APS was in compliance with this common equity ratio requirement. Its total shareholder equity was approximately $4.7 billion, and total capitalization was approximately $8.6 billion. APS would be prohibited from paying dividends if the payment would reduce its total shareholder equity below approximately $3.4 billion, assuming APS’s total capitalization remains the same. Since APS was in compliance with this common equity ratio requirement, this restriction does not materially affect Pinnacle West’s ability to meet its ongoing capital requirements.

Although provisions in APS’s articles of incorporation and ACC financing orders establish maximum amounts of preferred stock and debt that APS may issue, APS does not expect any of these provisions to limit its ability to meet its capital requirements. On February 6, 2013, the ACC issued a financing order in which, subject to specified parameters and procedures, it approved an increase in APS’s long-term debt authorization from $4.2 billion to $5.1 billion in light of the projected growth of APS and its customer base and the resulting projected financing needs, and authorized APS to enter into derivative financial instruments for the purpose of managing interest rate risk associated with its long- and short-term debt. This financing order is set to expire on December 31, 2017. See Note 5 for additional short-term debt provisions.