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, 2016 and 2015 (dollars in thousands):



	Maturity	Interest	December 31,
	Dates (a)	Rates	2016			2015
APS
Pollution control bonds:
Variable	2029	(b)	$	35,975		$	92,405
Fixed	2024-2029	1.75%-4.70%	147,150			211,150
Total pollution control bonds			183,125			303,555
Senior unsecured notes	2019-2046	2.20%-8.75%	3,725,000			3,375,000
Term loans	2018-2019	(c)	150,000			50,000
Unamortized discount			(11,816		)	(10,374		)
Unamortized premium			4,506			4,686
Unamortized debt issuance cost			(29,030		)	(27,896		)
Total APS long-term debt			4,021,785			3,694,971
Less current maturities			—			357,580
Total APS long-term debt less current maturities			4,021,785			3,337,391
Pinnacle West
Term loan	2017	(d)	125,000			125,000
Less current maturities			125,000			—
Total PNW long-term debt less current maturities			—			125,000
TOTAL LONG-TERM DEBT LESS CURRENT MATURITIES			$	4,021,785		$	3,462,391

(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 0.81% at December 31, 2016 and 0.01%-0.24% at December 31, 2015.


(c)	The weighted-average interest rate was 1.427% at December 31, 2016, and 1.024% at December 31, 2015.

(d) The interest rate was 1.520% at December 31, 2016 and 1.174% at December 31, 2015.

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
2017	$	125,000	$	—
2018	82,000		82,000
2019	600,000		600,000
2020	250,000		250,000
2021	—		—
Thereafter	3,126,125		3,126,125
Total	$	4,183,125	$	4,058,125

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, 2016				As of December 31, 2015
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Pinnacle West	$	125,000	$	125,000	$	125,000	$	125,000
APS	4,021,785		4,300,789		3,694,971		3,981,367
Total	$	4,146,785	$	4,425,789	$	3,819,971	$	4,106,367

Credit Facilities and Debt Issuances

APS

On April 22, 2016, APS entered into a $100 million term loan facility that matures April 22, 2019. 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 May 6, 2016, APS issued $350 million of 3.75% unsecured senior notes that mature on May 15, 2046. The net proceeds from the sale were used to redeem and cancel pollution control bonds (see details below), and to repay commercial paper borrowings and replenish cash temporarily used to fund capital expenditures.

On June 1, 2016, APS redeemed at par and canceled all $64 million of the Navajo County, Arizona Pollution Control Corporation Revenue Refunding Bonds (Arizona Public Service Company Cholla Project), 2009 Series D and E.

On June 1, 2016, APS redeemed at par and canceled all $13 million of the Coconino County, Arizona Pollution Control Corporation Revenue Refunding Bonds (Arizona Public Service Company Navajo Project), 2009 Series A.

On August 1, 2016, APS repaid at maturity APS's $250 million aggregate principal amount of 6.25% senior notes due August 1, 2016.

On September 20, 2016, APS issued $250 million of 2.55% unsecured senior notes that mature on September 15, 2026. The net proceeds from the sale were used to repay commercial paper borrowings and replenish cash temporarily used in connection with the payment at maturity of our $250 million aggregate principal amount of 6.25% Notes due August 1, 2016.

On September 20, 2016, APS redeemed at par and canceled all $27 million of the Coconino County Arizona Pollution Control Corporation Revenue Refunding Bonds (Arizona Public Service Company Navajo Project), 2009 Series B.

On December 6, 2016, APS redeemed at par and canceled all $17 million of the Coconino County Arizona Pollution Control Corporation Revenue Bonds (Arizona Public Service Company Project), Series 1998.

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, 2016, the ratio was approximately 48% for Pinnacle West and 47% 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, 2016, APS was in compliance with this common equity ratio requirement. Its total shareholder equity was approximately $4.9 billion, and total capitalization was approximately $9.1 billion. APS would be prohibited from paying dividends if the payment would reduce its total shareholder equity below approximately $3.6 billion, assuming APS’s total capitalization remains the same. APS was in compliance with this common equity ratio requirement as of December 31, 2016.

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.