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Long-Term Debt and Liquidity Matters

12 Months Ended

Dec. 31, 2011

Long-Term Debt and Liquidity Matters

6. Long-Term Debt and Liquidity Matters

All of Pinnacle West’s and APS’s debt is unsecured. The following table presents the components of long-term debt on the Consolidated Balance Sheets outstanding at December 31, 2011 and 2010 (dollars in thousands):

	Maturity	Interest	December 31,
	Dates (a)	Rates	2011			2010
APS
Pollution Control Bonds:
Variable	2024-2038	(b)	$	43,580		$	43,580
Fixed	2029-2034	2.875%-6.000%	522,275			522,275
Pollution control bonds with senior notes	2029	5.050%	90,000			90,000
Total Pollution Control Bonds			655,855			655,855

Senior unsecured notes	2012-2041	4.650%-8.750%	2,625,000			2,725,000
Palo Verde sale leaseback lessor notes	2015	8.00%	96,803			126,000
Capitalized lease obligations	2012	(c)	1,029			2,001
Unamortized discount			(7,198		)	(6,183		)
Total APS Long-term debt			3,371,489			3,502,673
Less current maturities			477,435			456,879
Total APS Long-term debt less current maturities			2,894,054			3,045,794
Pinnacle West
Senior notes	2011	5.91%	—			175,000
Term loan	2015	(d)	125,000			—
Total Pinnacle West Long-term debt			125,000			175,000
Less current maturities			—			175,000
Total Pinnacle West long-term debt less current maturities			125,000			—
TOTAL LONG-TERM DEBT LESS CURRENT MATURITIES			$	3,019,054		$	3,045,794

(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 0.09% at December 31, 2011 and 0.32% at December 31, 2010.

(d) The weighted-average interest rate was 1.794% at December 31, 2011.

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

Year	Consolidated Pinnacle West		Consolidated APS
2012	$	477	$	477
2013	123		123
2014	502		502
2015	438		313
2016	358		358
Thereafter	1,606		1,606
Total	$	3,504	$	3,379

Debt Fair Value

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

	As of December 31, 2011				As of December 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value

Pinnacle West	$	125	$	123	$	175	$	176
APS	3,371		3,803		3,503		3,737
Total	$	3,496	$	3,926	$	3,678	$	3,913

Credit Facilities and Debt Issuances

Pinnacle West

On February 23, 2011, Pinnacle West entered into a $175 million term loan facility that matures February 20, 2015. Pinnacle West used the proceeds of the loan to repay its 5.91% $175 million Senior Notes. Interest rates are based on Pinnacle West’s senior unsecured debt credit ratings or, if unavailable, its long-term issuer ratings. As of December 31, 2011, $50 million of the $175 million term loan facility had been repaid.

APS

On August 25, 2011, APS issued $300 million of 5.05% unsecured senior notes that mature on September 1, 2041. The net proceeds from the sale of the notes were used along with cash on hand to repay at maturity APS’s $400 million aggregate principal amount of 6.375% senior notes due October 15, 2011.

On September 7, 2011, APS entered into a new letter of credit agreement supporting its approximately $27 million aggregate principal amount of Coconino County, Arizona Pollution Control Corporation Pollution Control Revenue Refunding Bonds (Arizona Public Service Company Navajo Project), 2009 Series B. The agreement expires September 22, 2016.

On December 8, 2011, APS extended a letter of credit agreement supporting its approximately $17 million aggregate principal amount of Coconino County, Arizona Pollution Control Corporation Pollution Control Revenue Bonds (Arizona Public Service Company Project), 1998. The agreement expires December 8, 2016.

On January 10, 2012, APS issued $325 million of 4.50% unsecured senior notes that mature on April 1, 2042. The net proceeds from the sale will be used along with other funds to repay at maturity APS’s $375 million aggregate principal amount of 6.50% senior notes due March 1, 2012.

See Lines of Credit and Short-Term Borrowings in Note 5 and “Financial Assurances” in Note 11 for discussion of APS’s other 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, 2011, 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, 2011, APS was in compliance with this common equity ratio requirement. Its total shareholder equity was approximately $3.9 billion, and total capitalization was approximately $7.2 billion. APS would be prohibited from paying dividends if the 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 capital requirements.

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

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