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, 2013 and 2012 (dollars in thousands):

	Maturity	Interest	December 31,
	Dates (a)	Rates	2013			2012
APS
Pollution Control Bonds:
Variable	2029-2038	(b)	$	75,580		$	75,580
Fixed	2024-2034	1.25%-6.00%	426,125			490,275
Total Pollution Control Bonds			501,705			565,855

Senior unsecured notes	2014-2042	4.50%-8.75%	2,675,000			2,575,000
Palo Verde sale leaseback lessor notes	2015	8.00%	38,869			65,547
Unamortized discount			(8,732		)	(9,486		)
Unamortized premium			5,047			—
Total APS long-term debt			3,211,889			3,196,916
Less current maturities	(d)		540,424			122,828
Total APS long-term debt less current maturities			2,671,465			3,074,088
Pinnacle West
Term loan	2015	(c)	125,000			125,000
TOTAL LONG-TERM DEBT LESS CURRENT MATURITIES			$	2,796,465		$	3,199,088

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

(b) The weighted-average rate for the variable rate pollution control bonds was 0.03%-0.06% at December 31, 2013 and 0.13%-0.15% at December 31, 2012.

(d) Current maturities include $215 million of pollution control bonds expected to be remarketed in 2014 and $300 million in senior unsecured notes that mature in 2014.

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
2014	$	540	$	540
2015	470		345
2016	358		358
2017	—		—
2018	32		32
Thereafter	1,940		1,940
Total	$	3,340	$	3,215

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, 2013				As of December 31, 2012
	Carrying Amount		Fair Value		Carrying Amount		Fair Value

Pinnacle West	$	125	$	125	$	125	$	125
APS	3,212		3,454		3,197		3,750
Total	$	3,337	$	3,579	$	3,322	$	3,875

Credit Facilities and Debt Issuances

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.

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. On May 28, 2013, we remarketed the bonds. The interest rate for these bonds was set to a new term rate. The new term rate for these bonds ends, subject to a mandatory tender, on May 30, 2018. During this time, the bonds will bear interest at a rate of 1.75% per annum. These bonds are classified as long-term debt on our Consolidated Balance Sheets at December 31, 2013 and were classified as current maturities of long-term debt on our Consolidated Balance Sheets at December 31, 2012.

On July 12, 2013, APS purchased all $33 million of the Coconino County, Arizona Pollution Control Corporation Pollution Control Revenue Refunding Bonds, 1994 Series A, due 2029. On January 15, 2014, these bonds were canceled. These bonds were classified as current maturities of long-term debt on our Consolidated Balance Sheets at December 31, 2012.

On October 11, 2013, APS purchased all $32 million of the City of Farmington, New Mexico Pollution Control Revenue Bonds, 1994 Series C, due 2024. On January 15, 2014, these bonds were canceled. These bonds were classified as current maturities of long-term debt on our Consolidated Balance Sheets at December 31, 2012.

On January 10, 2014, APS issued $250 million of 4.70% unsecured senior notes that mature on January 15, 2044. The proceeds from the sale were used to repay commercial paper which was used to fund the purchase price and costs associated with the acquisition of SCE’s 48% ownership interest in each of Units 4 and 5 of Four Corners and to replenish cash used to re-acquire two series of tax-exempt indebtedness.

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, 2013, the ratio was approximately 47% 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, 2013, APS was in compliance with this common equity ratio requirement. Its total shareholder equity was approximately $4.3 billion, and total capitalization was approximately $7.5 billion. APS would be prohibited from paying dividends if the payment would reduce its total shareholder equity below approximately $3.0 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.