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, 2012 and 2011 (dollars in thousands):

	Maturity	Interest	December 31,
	Dates (a)	Rates	2012			2011
APS
Pollution Control Bonds:
Variable	2029-2038	(b)	$	75,580		$	43,580
Fixed	2024-2034	1.25%-6.00%	490,275			522,275
Pollution control bonds with senior notes		5.05%	—			90,000
Total Pollution Control Bonds			565,855			655,855
Senior unsecured notes	2014-2042	4.50%-8.75%	2,575,000			2,625,000
Palo Verde sale leaseback lessor notes	2015	8.00%	65,547			96,803
Capitalized lease obligations		(c)	—			1,029
Unamortized discount			(9,486		)	(7,198		)
Total APS long-term debt			3,196,916			3,371,489
Less current maturities			122,828			477,435
Total APS long-term debt less current maturities			3,074,088			2,894,054
Pinnacle West
Term loan	2015	(d)	125,000			125,000
TOTAL LONG-TERM DEBT LESS CURRENT MATURITIES			$	3,199,088		$	3,019,054

(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 0.13%-0.15% at December 31, 2012 and 0.09% at December 31, 2011.

(d) The weighted-average interest rate was 1.312% at December 31, 2012 and 1.794% at December 31, 2011.

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

Year	Consolidated Pinnacle West		Consolidated APS
2013	$	123	$	123
2014	540		540
2015	470		345
2016	358		358
2017	—		—
Thereafter	1,840		1,840
Total	$	3,331	$	3,206

Debt Fair Value

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

	As of December 31, 2012				As of December 31, 2011
	Carrying Amount		Fair Value		Carrying Amount		Fair Value

Pinnacle West	$	125	$	125	$	125	$	123
APS	3,197		3,750		3,371		3,803
Total	$	3,322	$	3,875	$	3,496	$	3,926

Credit Facilities and Debt Issuances

Pinnacle West

On November 29, 2012, Pinnacle West entered into a $125 million term loan that matures November 27, 2015. Pinnacle West used the proceeds of the loan to repay its existing term loan of $125 million. Interest rates are based on Pinnacle West’s senior unsecured debt credit ratings or, if unavailable, its long-term issuer ratings.

APS

On January 13, 2012, APS issued $325 million of 4.50% unsecured senior notes that mature on April 1, 2042. The net proceeds from the sale were used along with other funds to repay at maturity APS’s $375 million aggregate principal amount of 6.50% senior notes on March 1, 2012.

On May 1, 2012, pursuant to the mandatory tender provision, APS purchased all $32 million of the Maricopa County, Arizona Pollution Control Corporation Pollution Control Revenue Refunding Bonds (Arizona Public Service Company Palo Verde Project), 2009 Series B, due 2029. On June 1, 2012 these bonds were remarketed. Currently, the interest rate on these bonds is reset daily by a remarketing agent. The daily rate at December 31, 2012 was 0.13% per annum. Additionally, the bonds are supported by a letter of credit. These bonds are classified as long-term debt on our Consolidated Balance Sheets at December 31, 2012 and were classified as current maturities of long-term debt on our Consolidated Balance Sheets at December 31, 2011.

On June 1, 2012, pursuant to the mandatory tender provision, APS changed the interest rate mode for the approximately $38 million of Navajo County, Arizona Pollution Control Corporation Pollution Control Revenue Refunding Bonds (Arizona Public Service Company Cholla Project), 2009 Series A. The new term rate period for these bonds commenced on June 1, 2012, and ends, subject to a mandatory tender, on May 29, 2014. During this time, the bonds will bear interest at a rate of 1.25% per annum. These bonds are classified as long-term debt on our Consolidated Balance Sheets at December 31, 2012 and were classified as current maturities of long-term debt on our Consolidated Balance Sheets at December 31, 2011.

On November 1, 2012 APS redeemed at par all $90 million of the Maricopa County, Arizona Pollution Control Corporation Pollution Control Revenue Refunding Bonds (Arizona Public Service Company Palo Verde Project) 2002 Series A, due 2029.

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, 2012, 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.

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, 2012, APS was in compliance with this common equity ratio requirement. Its total shareholder equity was approximately $4.1 billion, and total capitalization was approximately $7.2 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.