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, 2014 and 2013 (dollars in thousands):



	Maturity	Interest	December 31,
	Dates (a)	Rates	2014			2013
APS
Pollution Control Bonds:
Variable	2029-2038	(b)	$	156,405		$	75,580
Fixed	2024-2034	0.45%-5.75%	249,300			426,125
Total Pollution Control Bonds			405,705			501,705
Senior unsecured notes	2015-2044	3.35%-8.75%	2,875,000			2,675,000
Palo Verde sale leaseback lessor notes	2015	8.00%	13,420			38,869
Unamortized discount			(9,206		)	(8,732		)
Unamortized premium			4,866			5,047
Total APS long-term debt			3,289,785			3,211,889
Less current maturities	(d)		383,570			540,424
Total APS long-term debt less current maturities			2,906,215			2,671,465
Pinnacle West
Term loan	2017	(c)	125,000			125,000
TOTAL LONG-TERM DEBT LESS CURRENT MATURITIES			$	3,031,215		$	2,796,465

(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%-0.27% at December 31, 2014 and 0.03%-0.06% at December 31, 2013.

(d) Current maturities include $70 million of pollution control bonds expected to be remarketed in 2015 and $300 million in senior unsecured notes that mature in 2015.

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
2015	$	384	$	384
2016	357		357
2017	157		32
2018	32		32
2019	500		500
Thereafter	1,989		1,989
Total	$	3,419	$	3,294

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, 2014				As of December 31, 2013
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Pinnacle West	$	125	$	125	$	125	$	125
APS	3,290		3,714		3,212		3,454
Total	$	3,415	$	3,839	$	3,337	$	3,579

Credit Facilities and Debt Issuances

Pinnacle West

On December 31, 2014, Pinnacle West entered into a $125 million term loan facility that matures December 31, 2017. Pinnacle West used the proceeds to repay and refinance the term loan facility that would have matured in November 2015.

APS

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 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, both of these series of bonds were canceled and refinanced.

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 acquisition of SCE’s 48% ownership interest in each of Units 4 and 5 of Four Corners and to replenish cash used in 2013 to re-acquire the two series of tax-exempt indebtedness.

On May 1, 2014, APS purchased a total of $100 million of the Maricopa County, Arizona, Pollution Control Corporation Pollution Control Revenue Refunding Bonds, 2009 Series A, D and E, due 2029 in connection with the mandatory tender provisions for this indebtedness. On May 14, 2014, APS remarketed all $36 million of the 2009 Series A Bonds, which are classified as long-term debt on our Consolidated Balance Sheets at December 31, 2014. We expect to remarket or refinance all $64 million of the 2009 Series D Bonds and 2009 Series E Bonds within the next twelve months.

On May 30, 2014, APS purchased all $38 million of the Navajo County, Arizona, Pollution Control Corporation Pollution Control Revenue Refunding Bonds, 2009 Series A, due 2034, and on June 1, 2014, APS purchased a total of $64 million of the Navajo 2009 Series B Bonds and 2009 Series C Bonds, in each case, in connection with the mandatory tender provisions for this indebtedness. On September 23, 2014, APS remarketed all $38 million of the 2009 Series A Bonds, which are classified as current maturities of long-term debt on our Consolidated Balance Sheets at December 31, 2014. On October 1, 2014, APS remarketed all $32 million of the 2009 Series C Bonds, which are classified as long-term debt on our Consolidated Balance Sheets at December 31, 2014. We expect to remarket or refinance all $32 million of the 2009 Series B Bonds within the next twelve months.

On June 1, 2014, APS remarketed all $13 million of the Coconino County, Arizona Pollution Control Corporation Pollution Control Revenue Refunding Bonds, 2009 Series A, due 2034. These bonds are classified as long-term debt on our Consolidated Balance Sheets at December 31, 2014.

On June 18, 2014, APS issued $250 million of 3.35% unsecured senior notes that mature on June 15, 2024. The net proceeds from the sale were used along with other funds to repay at maturity APS’s $300 million aggregate principal amount of 5.80% senior notes due June 30, 2014.

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.

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, 2014, 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, 2014, APS was in compliance with this common equity ratio requirement. Its total shareholder equity was approximately $4.5 billion, and total capitalization was approximately $8.0 billion. APS would be prohibited from paying dividends if the payment would reduce its total shareholder equity below approximately $3.2 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.