UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, ~~2021~~2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to


Commission File Number	Exact Name of Each Registrant as specified in its charter; State of Incorporation; Address; and Telephone Number			IRS Employer Identification No.
1-8962	PINNACLE WEST CAPITAL CORPORATION			86-0512431
	(an Arizona corporation)
	400 North Fifth Street, P.O. Box 53999
	Phoenix	Arizona	85072-3999
	(602)	250-1000
1-4473	ARIZONA PUBLIC SERVICE COMPANY			86-0011170
	(an Arizona corporation)
	400 North Fifth Street, P.O. Box 53999
	Phoenix	Arizona	85072-3999
	(602)	250-1000

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	PNW	The New York Stock Exchange

Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

PINNACLE WEST CAPITAL CORPORATION

Yes

☒

☐

ARIZONA PUBLIC SERVICE COMPANY

Yes

☒

☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

PINNACLE WEST CAPITAL CORPORATION

Yes

☒

☐

ARIZONA PUBLIC SERVICE COMPANY

Yes

☒

☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

PINNACLE WEST CAPITAL CORPORATION

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

ARIZONA PUBLIC SERVICE COMPANY

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether each registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

PINNACLE WEST CAPITAL CORPORATION

Yes

☐

☒

ARIZONA PUBLIC SERVICE COMPANY

Yes

☐

☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


PINNACLE WEST CAPITAL CORPORATION	Number of shares of common stock, no par value, outstanding as of July ~~29, 2021:~~27, 2022:	~~112,785,588~~113,043,622
ARIZONA PUBLIC SERVICE COMPANY	Number of shares of common stock, $2.50 par value, outstanding as of July ~~29, 2021:~~27, 2022:	71,264,947

Arizona Public Service Company meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format allowed under that General Instruction.

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This combined Form 10-Q is separately provided by Pinnacle West Capital Corporation (“Pinnacle West”) and Arizona Public Service Company (“APS”). Any use of the words “Company,” “we,” and “our” refer to Pinnacle West. Each registrant is providing on its own behalf all of the information contained in this Form 10-Q that relates to such registrant and, where required, its subsidiaries. Except as stated in the preceding sentence, neither registrant is providing any information that does not relate to such registrant, and therefore makes no representation as to any such information. The information required with respect to each company is set forth within the applicable items. Item 1 of this report includes Condensed Consolidated Financial Statements of Pinnacle West and Condensed Consolidated Financial Statements of APS. Item 1 also includes Combined Notes to Condensed Consolidated Financial Statements.

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FORWARD-LOOKING STATEMENTS

This document contains forward-looking statements based on current expectations. These forward-looking statements are often identified by words such as “estimate,” “predict,” “may,” “believe,” “plan,” “expect,” “require,” “intend,” “assume,” “project,” “anticipate,” “goal,” “seek,” “strategy,” “likely,” “should,” “will,” “could,” and similar words. Because actual results may differ materially from expectations, we caution readers not to place undue reliance on these statements. A number of factors could cause future results to differ materially from historical results, or from outcomes currently expected or sought by Pinnacle West or APS. In addition to the Risk Factors described in Part I, Item 1A of the Pinnacle West/APS Annual Report on Form 10-K for the fiscal year ended December 31, ~~2020~~2021 (“~~2020~~2021 Form 10-K”), Part II, Item 1A of the Pinnacle West/APS Quarterly Report on Form 10‑Q for the quarter ended March 31, 2022 (“2022 1st Quarter 10-Q”), Part II, Item 1A of this report and in Part I, Item 2 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report, these factors include, but are not limited to:

•the potential effects of the continued Coronavirus (“COVID-19”) pandemic, including, but not limited to, demand for energy, economic growth, our employees and contractors, vaccine mandates, supply chain, expenses, inflation, capital markets, capital projects, operations and maintenance activities, uncollectable accounts, liquidity, cash flows or other unpredictable events;

•our ability to manage capital expenditures and operations and maintenance costs while maintaining reliability and customer service levels;

•variations in demand for electricity, including those due to weather, seasonality (including large increases in ambient temperatures), the general economy or social conditions, customer and sales growth (or decline), the effects of energy conservation measures and distributed generation, and technological advancements;

•the potential effects of climate change on our electric system, including as a result of weather extremes, such as prolonged drought and high temperature variations in the area where APS conducts its business;

•power plant and transmission system performance and outages;

•competition in retail and wholesale power markets;

•regulatory and judicial decisions, developments, and proceedings;

•new legislation, ballot initiatives and regulation or interpretations of existing legislation or regulations, including those relating to environmental requirements, regulatory and energy policy, nuclear plant operations and potential deregulation of retail electric markets;

•fuel and water supply availability;

•our ability to achieve timely and adequate rate recovery of our costs through our rates and adjustor recovery mechanisms, including returns on and of debt and equity capital investment;

•our ability to meet renewable energy and energy efficiency mandates and recover related costs;

•the ability of APS to achieve its clean energy goals (including a goal by 2050 of 100% clean, carbon-free electricity) and, if these goals are achieved, the impact of such achievement on APS, its customers, and its business, financial condition, and results of operations;

•risks inherent in the operation of nuclear facilities, including spent fuel disposal uncertainty;

•current and future economic conditions in Arizona, including in real estate markets;

•the direct or indirect effect on our facilities or business from cybersecurity threats or intrusions, data security breaches, war, acts of war, international sanctions, terrorist attack, physical attack, severe storms, ~~droughts,~~ or other catastrophic events, such as fires, explosions, pandemic health events,, or similar occurrences;

•the development of new technologies which may affect electric sales or delivery;

•the cost of debt and equity capital and the ability to access capital markets when required;

•general economic conditions, including inflation rates, monetary fluctuations, and supply chain constraints;

•environmental, economic, and other concerns surrounding coal-fired generation, including regulation of greenhouse gas emissions;

•volatile fuel and purchased power costs;

•the investment performance of the assets of our nuclear decommissioning trust, pension, and other postretirement benefit plans and the resulting impact on future funding requirements;

•the liquidity of wholesale power markets and the use of derivative contracts in our business;

•potential shortfalls in insurance coverage;

•new accounting requirements or new interpretations of existing requirements;

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•generation, transmission and distribution facility and system conditions and operating costs;

•the ability to meet the anticipated future need for additional generation and associated transmission facilities in our region;

•the willingness or ability of our counterparties, power plant participants and power plant landowners to meet contractual or other obligations or extend the rights for continued power plant operations; and

•restrictions on dividends or other provisions in our credit agreements and Arizona Corporation Commission (“ACC”) orders.

These and other factors are discussed in the Risk Factors described in Part I, Item 1A of our ~~2020~~2021 Form 10-K, Part II, Item 1A of our 2022 1st Quarter 10-Q, Part II, Item 1A of this report, and in Part I, Item 2 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report, which readers should review carefully before placing any reliance on our financial statements or disclosures. Neither Pinnacle West nor APS assumes any obligation to update these statements, even if our internal estimates change, except as required by law.

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES


			Page

Pinnacle West Condensed Consolidated Statements of Income for Three and Six Months Ended June 30, ~~2021~~2022 and ~~2020~~2021			5
Pinnacle West Condensed Consolidated Statements of Comprehensive Income for Three and Six Months Ended June 30, ~~2021~~2022 and ~~2020~~2021			6
Pinnacle West Condensed Consolidated Balance Sheets as of June 30, ~~2021~~2022 and December 31, ~~2020~~2021			7
Pinnacle West Condensed Consolidated Statements of Cash Flows for Six Months Ended June 30, ~~2021~~2022 and ~~2020~~2021			9
Pinnacle West Condensed Consolidated Statements of Changes in Equity for Three and Six Months Ended June 30, ~~2021~~2022 and ~~2020~~2021			10

APS Condensed Consolidated Statements of Income for Three and Six Months Ended June 30, ~~2021~~2022 and ~~2020~~2021			12
APS Condensed Consolidated Statements of Comprehensive Income for Three and Six Months Ended June 30, ~~2021~~2022 and ~~2020~~2021			13
APS Condensed Consolidated Balance Sheets as of June 30, ~~2021~~2022 and December 31, ~~2020~~2021			14
APS Condensed Consolidated Statements of Cash Flows for Six Months Ended June 30, ~~2021~~2022 and ~~2020~~2021			16
APS Condensed Consolidated Statements of Changes in Equity for Three and Six Months Ended June 30, ~~2021~~2022 and ~~2020~~2021			17

Combined Notes to Condensed Consolidated Financial Statements			19
Note 1. Consolidation and Nature of Operations			19
Note 2. Revenue			2021
Note 3. Long-Term Debt and Liquidity Matters			22
Note 4. Regulatory Matters			2324
Note 5. Retirement Plans and Other Postretirement Benefits			4342
Note 6. Palo Verde Sale Leaseback Variable Interest Entities			4543
Note 7. Derivative Accounting			4644
Note 8. Commitments and Contingencies			5048
Note 9. Other Income and Other Expense			5755
Note 10. Earnings Per Share			5856
Note 11. Fair Value Measurements			5856
Note 12. Investment in Nuclear Decommissioning Trusts and Other Special Use Funds			6361

Note 13. Changes in Accumulated Other Comprehensive Loss			6765
~~Note 14. Income Taxes~~			69
~~Note 15. Leases~~			70
~~Note 16. Asset Retirement Obligations~~			72
~~Note 1~~7 ~~. New Accounting Standards~~			73

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PINNACLE WEST CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

(dollars and shares in thousands, except per share amounts)


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021

OPERATING REVENUES (NOTE 2)		$	1,000,249	$	929,590	$	1,696,724	$	1,591,520
OPERATING REVENUES (Note 2)										OPERATING REVENUES (Note 2)	$	1,061,669	$	1,000,249	$	1,845,200	$	1,696,724

OPERATING EXPENSES	OPERATING EXPENSES									OPERATING EXPENSES
Fuel and purchased power	Fuel and purchased power	269,835		238,382		468,062		426,903		Fuel and purchased power	352,187		269,835		617,456		468,062
Operations and maintenance	Operations and maintenance	229,690		219,392		459,745		440,710		Operations and maintenance	245,387		229,690		463,729		459,745

Depreciation and amortization	Depreciation and amortization	158,750		152,482		316,570		306,561		Depreciation and amortization	186,497		158,750		373,102		316,570
Taxes other than income taxes	Taxes other than income taxes	59,495		56,768		118,978		113,536		Taxes other than income taxes	54,118		59,495		112,116		118,978
Other expenses	Other expenses	4,093		692		7,449		1,514		Other expenses	385		4,093		1,210		7,449
Total	Total	721,863		667,716		1,370,804		1,289,224		Total	838,574		721,863		1,567,613		1,370,804
OPERATING INCOME	OPERATING INCOME	278,386		261,874		325,920		302,296		OPERATING INCOME	223,095		278,386		277,587		325,920
OTHER INCOME (DEDUCTIONS)	OTHER INCOME (DEDUCTIONS)									OTHER INCOME (DEDUCTIONS)
Allowance for equity funds used during construction	Allowance for equity funds used during construction	9,990		8,811		19,197		16,508		Allowance for equity funds used during construction	12,086		9,990		21,833		19,197
Pension and other postretirement non-service credits — net		28,175		14,142		55,966		28,053
Pension and other postretirement non-service credits - net (Note 5)										Pension and other postretirement non-service credits - net (Note 5)	25,257		28,175		49,066		55,966
Other income (Note 9)	Other income (Note 9)	12,207		16,670		24,636		29,239		Other income (Note 9)	1,682		12,207		3,386		24,636
Other expense (Note 9)	Other expense (Note 9)	(5,184)		(4,036)		(9,037)		(8,820)		Other expense (Note 9)	(4,584)		(5,184)		(8,006)		(9,037)
Total	Total	45,188		35,587		90,762		64,980		Total	34,441		45,188		66,279		90,762
INTEREST EXPENSE	INTEREST EXPENSE									INTEREST EXPENSE
Interest charges	Interest charges	62,777		62,690		124,715		121,924		Interest charges	68,103		62,777		133,492		124,715
Allowance for borrowed funds used during construction	Allowance for borrowed funds used during construction	(5,199)		(4,749)		(10,193)		(8,825)		Allowance for borrowed funds used during construction	(5,873)		(5,199)		(10,355)		(10,193)
Total	Total	57,578		57,941		114,522		113,099		Total	62,230		57,578		123,137		114,522
INCOME BEFORE INCOME TAXES	INCOME BEFORE INCOME TAXES	265,996		239,520		302,160		254,177		INCOME BEFORE INCOME TAXES	195,306		265,996		220,729		302,160
INCOME TAXES	INCOME TAXES	46,560		41,061		42,210		20,852		INCOME TAXES	26,688		46,560		30,849		42,210
NET INCOME	NET INCOME	219,436		198,459		259,950		233,325		NET INCOME	168,618		219,436		189,880		259,950
Less: Net income attributable to noncontrolling interests (Note 6)	Less: Net income attributable to noncontrolling interests (Note 6)	3,739		4,874		8,612		9,747		Less: Net income attributable to noncontrolling interests (Note 6)	4,306		3,739		8,612		8,612
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS	NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	215,697	$	193,585	$	251,338	$	223,578	NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	164,312	$	215,697	$	181,268	$	251,338

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING — BASIC		112,882		112,638		112,855		112,616
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING — DILUTED		113,223		112,879		113,158		112,871
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING - BASIC										WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING - BASIC	113,172		112,882		113,137		112,855
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING -DILUTED										WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING -DILUTED	113,369		113,223		113,332		113,158

EARNINGS PER WEIGHTED-AVERAGE COMMON SHARE OUTSTANDING	EARNINGS PER WEIGHTED-AVERAGE COMMON SHARE OUTSTANDING									EARNINGS PER WEIGHTED-AVERAGE COMMON SHARE OUTSTANDING
Net income attributable to common shareholders — basic		$	1.91	$	1.72	$	2.23	$	1.99
Net income attributable to common shareholders — diluted		$	1.91	$	1.71	$	2.22	$	1.98
Net income attributable to common shareholders - basic										Net income attributable to common shareholders - basic	$	1.45	$	1.91	$	1.60	$	2.23
Net income attributable to common shareholders - diluted										Net income attributable to common shareholders - diluted	$	1.45	$	1.91	$	1.60	$	2.22

The accompanying notes are an integral part of the financial statements.

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PINNACLE WEST CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(dollars in thousands)


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021

NET INCOME	NET INCOME	$	219,436	$	198,459	$	259,950	$	233,325	NET INCOME	$	168,618	$	219,436	$	189,880	$	259,950

OTHER COMPREHENSIVE INCOME, NET OF TAX	OTHER COMPREHENSIVE INCOME, NET OF TAX									OTHER COMPREHENSIVE INCOME, NET OF TAX
Derivative instruments:
Net unrealized gain (loss), net of tax benefit (expense) of $(286), $513, $(372) and $805		870		(1,549)		1,132		(1,257)
Reclassification of net realized gain, net of tax expense of $0, $87, $0 and $481		0		262		0		282
Pension and other postretirement benefit activity, net of tax benefit (expense) $(21), $334, $(357) and $90		64		(1,009)		1,086		196
Total other comprehensive income		934		(2,296)		2,218		(779)

Derivative instruments net unrealized gain, net of tax expense of $(331), $(286), $(413), and $(372)										Derivative instruments net unrealized gain, net of tax expense of $(331), $(286), $(413), and $(372)	1,007		870		1,259		1,132

Pension and other postretirement benefit activity, net of tax benefit (expense) of $693, $(21), $398 and $(357)										Pension and other postretirement benefit activity, net of tax benefit (expense) of $693, $(21), $398 and $(357)	(2,113)		64		(1,212)		1,086
Total other comprehensive income (loss)										Total other comprehensive income (loss)	(1,106)		934		47		2,218

COMPREHENSIVE INCOME	COMPREHENSIVE INCOME	220,370		196,163		262,168		232,546		COMPREHENSIVE INCOME	167,512		220,370		189,927		262,168
Less: Comprehensive income attributable to noncontrolling interests	Less: Comprehensive income attributable to noncontrolling interests	3,739		4,874		8,612		9,747		Less: Comprehensive income attributable to noncontrolling interests	4,306		3,739		8,612		8,612

COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS	COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	216,631	$	191,289	$	253,556	$	222,799	COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	163,206	$	216,631	$	181,315	$	253,556

The accompanying notes are an integral part of the financial statements.

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PINNACLE WEST CAPITAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(dollars in thousands)


		June 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021
ASSETS	ASSETS					ASSETS

CURRENT ASSETS	CURRENT ASSETS					CURRENT ASSETS
Cash and cash equivalents	Cash and cash equivalents	$	14,146	$	59,968	Cash and cash equivalents	$	29,189	$	9,969
Customer and other receivables	Customer and other receivables	357,130		313,576		Customer and other receivables	420,288		391,923
Accrued unbilled revenues	Accrued unbilled revenues	223,918		132,197		Accrued unbilled revenues	234,523		133,980
Allowance for doubtful accounts (Note 2)	Allowance for doubtful accounts (Note 2)	(22,769)		(19,782)		Allowance for doubtful accounts (Note 2)	(23,147)		(25,354)
Materials and supplies (at average cost)	Materials and supplies (at average cost)	340,672		314,745		Materials and supplies (at average cost)	371,655		349,135
Income tax receivable						Income tax receivable	—		7,514
Fossil fuel (at average cost)	Fossil fuel (at average cost)	25,074		19,552		Fossil fuel (at average cost)	29,827		18,032
Income tax receivable		0		6,792
Assets from risk management activities (Note 7)	Assets from risk management activities (Note 7)	82,309		2,931		Assets from risk management activities (Note 7)	137,028		63,481
Deferred fuel and purchased power regulatory asset (Note 4)	Deferred fuel and purchased power regulatory asset (Note 4)	300,912		175,835		Deferred fuel and purchased power regulatory asset (Note 4)	390,013		388,148
Other regulatory assets (Note 4)	Other regulatory assets (Note 4)	119,890		115,878		Other regulatory assets (Note 4)	119,163		130,376
Other current assets	Other current assets	81,901		76,627		Other current assets	89,609		83,896
Total current assets	Total current assets	1,523,183		1,198,319		Total current assets	1,798,148		1,551,100
INVESTMENTS AND OTHER ASSETS	INVESTMENTS AND OTHER ASSETS					INVESTMENTS AND OTHER ASSETS
Nuclear decommissioning trusts (Notes 11 and 12)	Nuclear decommissioning trusts (Notes 11 and 12)	1,223,088		1,138,435		Nuclear decommissioning trusts (Notes 11 and 12)	1,076,088		1,294,757
Other special use funds (Notes 11 and 12)	Other special use funds (Notes 11 and 12)	358,436		254,509		Other special use funds (Notes 11 and 12)	346,406		358,410
Assets from risk management activities (Note 7)						Assets from risk management activities (Note 7)	111,847		46,908
Other assets	Other assets	112,091		92,922		Other assets	117,573		97,884
Total investments and other assets	Total investments and other assets	1,693,615		1,485,866		Total investments and other assets	1,651,914		1,797,959
PROPERTY, PLANT AND EQUIPMENT	PROPERTY, PLANT AND EQUIPMENT					PROPERTY, PLANT AND EQUIPMENT
Plant in service and held for future use	Plant in service and held for future use	21,236,805		20,837,885		Plant in service and held for future use	22,167,179		21,688,661
Accumulated depreciation and amortization	Accumulated depreciation and amortization	(7,278,877)		(7,110,310)		Accumulated depreciation and amortization	(7,667,678)		(7,504,603)
Net	Net	13,957,928		13,727,575		Net	14,499,501		14,184,058
Construction work in progress	Construction work in progress	1,062,911		937,384		Construction work in progress	1,386,113		1,329,478
Palo Verde sale leaseback, net of accumulated depreciation (Note 6)	Palo Verde sale leaseback, net of accumulated depreciation (Note 6)	96,101		98,036		Palo Verde sale leaseback, net of accumulated depreciation (Note 6)	92,231		94,166
Intangible assets, net of accumulated amortization	Intangible assets, net of accumulated amortization	279,911		282,570		Intangible assets, net of accumulated amortization	265,662		273,693
Nuclear fuel, net of accumulated amortization	Nuclear fuel, net of accumulated amortization	109,110		113,645		Nuclear fuel, net of accumulated amortization	132,696		106,039
Total property, plant and equipment	Total property, plant and equipment	15,505,961		15,159,210		Total property, plant and equipment	16,376,203		15,987,434
DEFERRED DEBITS	DEFERRED DEBITS					DEFERRED DEBITS
Regulatory assets (Note 4)	Regulatory assets (Note 4)	1,173,977		1,133,987		Regulatory assets (Note 4)	1,180,656		1,192,987
Operating lease right-of-use assets (Note 15)		718,948		505,064
Operating lease right-of-use assets						Operating lease right-of-use assets	871,480		890,057
Assets for pension and other postretirement benefits (Note 5)	Assets for pension and other postretirement benefits (Note 5)	407,821		502,992		Assets for pension and other postretirement benefits (Note 5)	577,399		545,723
Other	Other	38,073		34,983		Other	45,680		37,962
Total deferred debits	Total deferred debits	2,338,819		2,177,026		Total deferred debits	2,675,215		2,666,729

TOTAL ASSETS	TOTAL ASSETS	$	21,061,578	$	20,020,421	TOTAL ASSETS	$	22,501,480	$	22,003,222

The accompanying notes are an integral part of the financial statements.

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PINNACLE WEST CAPITAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(dollars in thousands)


		June 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021
LIABILITIES AND EQUITY	LIABILITIES AND EQUITY					LIABILITIES AND EQUITY

CURRENT LIABILITIES	CURRENT LIABILITIES					CURRENT LIABILITIES
Accounts payable	Accounts payable	$	377,157	$	318,585	Accounts payable	$	436,308	$	393,083
Accrued taxes	Accrued taxes	183,037		159,551		Accrued taxes	181,927		168,645
Accrued interest	Accrued interest	56,864		56,962		Accrued interest	57,349		57,332
Common dividends payable	Common dividends payable	93,610		93,531		Common dividends payable	96,081		95,988
Short-term borrowings (Note 3)	Short-term borrowings (Note 3)	504,700		169,000		Short-term borrowings (Note 3)	541,000		292,000
Current maturities of long-term debt (Note 3)	Current maturities of long-term debt (Note 3)	150,000		0		Current maturities of long-term debt (Note 3)	—		150,000
Customer deposits	Customer deposits	44,419		48,340		Customer deposits	41,459		42,293
Liabilities from risk management activities (Note 7)	Liabilities from risk management activities (Note 7)	1,512		7,557		Liabilities from risk management activities (Note 7)	5,596		4,373
Liabilities for asset retirements (Note 16)		15,646		15,586
Liabilities for asset retirements						Liabilities for asset retirements	5,111		4,473

Operating lease liabilities (Note 15)		128,673		74,785
Operating lease liabilities						Operating lease liabilities	125,320		100,443
Regulatory liabilities (Note 4)	Regulatory liabilities (Note 4)	327,612		229,088		Regulatory liabilities (Note 4)	404,107		296,271
Other current liabilities	Other current liabilities	140,038		187,448		Other current liabilities	128,190		151,968
Total current liabilities	Total current liabilities	2,023,268		1,360,433		Total current liabilities	2,022,448		1,756,869
LONG-TERM DEBT LESS CURRENT MATURITIES (Note 3)	LONG-TERM DEBT LESS CURRENT MATURITIES (Note 3)	6,315,927		6,314,266		LONG-TERM DEBT LESS CURRENT MATURITIES (Note 3)	7,241,295		6,913,735
DEFERRED CREDITS AND OTHER	DEFERRED CREDITS AND OTHER					DEFERRED CREDITS AND OTHER
Deferred income taxes	Deferred income taxes	2,192,169		2,135,403		Deferred income taxes	2,357,469		2,311,862
Regulatory liabilities (Note 4)	Regulatory liabilities (Note 4)	2,443,312		2,450,169		Regulatory liabilities (Note 4)	2,268,148		2,499,213
Liabilities for asset retirements (Note 16)		716,344		689,497
Liabilities for asset retirements						Liabilities for asset retirements	779,360		762,909
Liabilities for pension benefits (Note 5)	Liabilities for pension benefits (Note 5)	163,207		166,484		Liabilities for pension benefits (Note 5)	150,837		152,865
Liabilities from risk management activities (Note 7)		0		11,062

Customer advances	Customer advances	247,531		221,032		Customer advances	336,198		257,151
Coal mine reclamation	Coal mine reclamation	172,357		170,097		Coal mine reclamation	176,936		174,616
Deferred investment tax credit	Deferred investment tax credit	187,720		191,372		Deferred investment tax credit	184,032		186,570
Unrecognized tax benefits	Unrecognized tax benefits	6,002		5,834		Unrecognized tax benefits	4,896		4,657
Operating lease liabilities (Note 15)		547,164		361,336
Operating lease liabilities						Operating lease liabilities	710,511		728,401
Other	Other	211,678		190,643		Other	247,827		232,914
Total deferred credits and other	Total deferred credits and other	6,887,484		6,592,929		Total deferred credits and other	7,216,214		7,311,158
COMMITMENTS AND CONTINGENCIES (NOTE 8)		0		0
COMMITMENTS AND CONTINGENCIES (Note 8)						COMMITMENTS AND CONTINGENCIES (Note 8)	0		0
EQUITY	EQUITY					EQUITY
Common stock, no par value; authorized 150,000,000 shares, 112,819,703 and 112,760,051 issued at respective dates		2,692,015		2,677,482
Treasury stock at cost; 36,153 and 72,006 shares at respective dates		(3,079)		(6,289)
Common stock, no par value; authorized 150,000,000 shares, 113,078,049 and 113,014,528 issued at respective dates						Common stock, no par value; authorized 150,000,000 shares, 113,078,049 and 113,014,528 issued at respective dates	2,712,297		2,702,743
Treasury stock at cost; 41,531 and 87,608 shares at respective dates						Treasury stock at cost; 41,531 and 87,608 shares at respective dates	(2,976)		(6,401)
Total common stock	Total common stock	2,688,936		2,671,193		Total common stock	2,709,321		2,696,342
Retained earnings	Retained earnings	3,089,266		3,025,106		Retained earnings	3,253,772		3,264,719
Accumulated other comprehensive loss		(60,578)		(62,796)
Accumulated other comprehensive loss (Note 13)						Accumulated other comprehensive loss (Note 13)	(54,814)		(54,861)
Total shareholders’ equity	Total shareholders’ equity	5,717,624		5,633,503		Total shareholders’ equity	5,908,279		5,906,200
Noncontrolling interests (Note 6)	Noncontrolling interests (Note 6)	117,275		119,290		Noncontrolling interests (Note 6)	113,244		115,260
Total equity	Total equity	5,834,899		5,752,793		Total equity	6,021,523		6,021,460

TOTAL LIABILITIES AND EQUITY	TOTAL LIABILITIES AND EQUITY	$	21,061,578	$	20,020,421	TOTAL LIABILITIES AND EQUITY	$	22,501,480	$	22,003,222

The accompanying notes are an integral part of the financial statements.

Table of Contents

PINNACLE WEST CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(dollars in thousands)


		Six Months Ended June 30,					Six Months Ended June 30,
		2021		2020			2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES	CASH FLOWS FROM OPERATING ACTIVITIES					CASH FLOWS FROM OPERATING ACTIVITIES
Net income	Net income	$	259,950	$	233,325	Net income	$	189,880	$	259,950
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization including nuclear fuel	Depreciation and amortization including nuclear fuel	350,536		343,173		Depreciation and amortization including nuclear fuel	405,127		350,536
Deferred fuel and purchased power	Deferred fuel and purchased power	(135,905)		(26,473)		Deferred fuel and purchased power	(98,707)		(135,905)
Deferred fuel and purchased power amortization	Deferred fuel and purchased power amortization	10,828		(4,815)		Deferred fuel and purchased power amortization	96,842		10,828
Allowance for equity funds used during construction	Allowance for equity funds used during construction	(19,197)		(16,508)		Allowance for equity funds used during construction	(21,833)		(19,197)
Deferred income taxes	Deferred income taxes	30,231		22,229		Deferred income taxes	22,169		30,231
Deferred investment tax credit	Deferred investment tax credit	(3,651)		(3,386)		Deferred investment tax credit	(2,538)		(3,651)

Stock compensation	Stock compensation	13,484		9,130		Stock compensation	7,872		13,484
Changes in current assets and liabilities:	Changes in current assets and liabilities:					Changes in current assets and liabilities:
Customer and other receivables	Customer and other receivables	(41,138)		7,767		Customer and other receivables	(31,146)		(41,138)
Accrued unbilled revenues	Accrued unbilled revenues	(91,721)		(63,413)		Accrued unbilled revenues	(100,543)		(91,721)
Materials, supplies and fossil fuel	Materials, supplies and fossil fuel	(31,449)		10,295		Materials, supplies and fossil fuel	(34,315)		(31,449)
Income tax receivable	Income tax receivable	6,792		4,605		Income tax receivable	7,514		6,792
Other current assets	Other current assets	(14,021)		(24,896)		Other current assets	5,195		(14,021)
Accounts payable	Accounts payable	66,558		17,772		Accounts payable	104,849		66,558
Accrued taxes	Accrued taxes	23,486		6,588		Accrued taxes	13,282		23,486
Other current liabilities	Other current liabilities	(39,638)		(45,334)		Other current liabilities	(7,316)		(39,638)

Change in margin and collateral accounts — assets						Change in margin and collateral accounts — assets	40,430		—

Change in other long-term assets	Change in other long-term assets	(118,036)		(4,885)		Change in other long-term assets	174,013		(152,846)
Change in operating lease assets						Change in operating lease assets	29,759		34,810
Change in other long-term liabilities	Change in other long-term liabilities	45,241		(96,142)		Change in other long-term liabilities	(184,626)		76,290
Net cash flow provided by operating activities		312,350		369,032
Change in operating lease liabilities						Change in operating lease liabilities	(27,622)		(31,049)
Net cash provided by operating activities						Net cash provided by operating activities	588,286		312,350
CASH FLOWS FROM INVESTING ACTIVITIES	CASH FLOWS FROM INVESTING ACTIVITIES					CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures	Capital expenditures	(681,148)		(676,973)		Capital expenditures	(843,219)		(681,148)
Contributions in aid of construction	Contributions in aid of construction	32,104		31,295		Contributions in aid of construction	68,879		32,104
Allowance for borrowed funds used during construction	Allowance for borrowed funds used during construction	(10,193)		(8,825)		Allowance for borrowed funds used during construction	(10,111)		(10,193)
Proceeds from nuclear decommissioning trusts sales and other special use funds	Proceeds from nuclear decommissioning trusts sales and other special use funds	587,842		391,859		Proceeds from nuclear decommissioning trusts sales and other special use funds	692,186		587,842
Investment in nuclear decommissioning trusts and other special use funds	Investment in nuclear decommissioning trusts and other special use funds	(588,982)		(393,000)		Investment in nuclear decommissioning trusts and other special use funds	(692,811)		(588,982)
Other	Other	10,809		3,123		Other	(9,174)		10,809
Net cash flow used for investing activities		(649,568)		(652,521)
Net cash used for investing activities						Net cash used for investing activities	(794,250)		(649,568)
CASH FLOWS FROM FINANCING ACTIVITIES	CASH FLOWS FROM FINANCING ACTIVITIES					CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt	Issuance of long-term debt	150,000		1,088,886		Issuance of long-term debt	325,802		150,000

Short-term borrowing and (repayments) — net	Short-term borrowing and (repayments) — net	354,700		184,225		Short-term borrowing and (repayments) — net	249,000		354,700
Short-term debt borrowings under revolving credit facility		0		751,690

Short-term debt repayments under revolving credit facility	Short-term debt repayments under revolving credit facility	(19,000)		(758,690)		Short-term debt repayments under revolving credit facility	—		(19,000)
Dividends paid on common stock	Dividends paid on common stock	(183,500)		(172,566)		Dividends paid on common stock	(188,542)		(183,500)
Repayment of long-term debt	Repayment of long-term debt	0		(800,000)		Repayment of long-term debt	(150,000)		—
Common stock equity issuance — net of purchases		(176)		(2,204)
Common stock equity issuances and (purchases) — net						Common stock equity issuances and (purchases) — net	(448)		(176)
Distributions to noncontrolling interests	Distributions to noncontrolling interests	(10,628)		(11,372)		Distributions to noncontrolling interests	(10,628)		(10,628)

Net cash flow provided by financing activities		291,396		279,969
Net cash provided by financing activities						Net cash provided by financing activities	225,184		291,396

NET DECREASE IN CASH AND CASH EQUIVALENTS		(45,822)		(3,520)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS						NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	19,220		(45,822)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	59,968		10,283		CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	9,969		59,968

CASH AND CASH EQUIVALENTS AT END OF PERIOD	CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	14,146	$	6,763	CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	29,189	$	14,146

The accompanying notes are an integral part of the financial statements.

Table of Contents

PINNACLE WEST CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(unaudited)

(dollars in thousands)

Three Months Ended June 30, 2021
Common Stock Treasury Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Noncontrolling Interests Total
Shares Amount Shares Amount
Balance, April 1, 2021 112,791,565 $ 2,687,052 (44,338) $ (3,776) $ 3,060,752 $ (61,512) $ 124,164 $ 5,806,680
Net income — — 215,697 — 3,739 219,436
Other comprehensive income — — — 934 — 934
Dividends on common stock ($1.66 per share) — — (187,181) — — (187,181)
Issuance of common stock 28,138 4,963 — — — — 4,963
Reissuance of treasury stock for stock-based compensation and other — 8,185 697 — — — 697
Other — — (2) — — (2)
Capital activities by noncontrolling interests — — — — (10,628) (10,628)
Balance, June 30, 2021 112,819,703 $ 2,692,015 (36,153) $ (3,079) $ 3,089,266 $ (60,578) $ 117,275 $ 5,834,899


	Three Months Ended June 30, 2022
	Common Stock			Treasury Stock			Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Noncontrolling Interests		Total
	Shares	Amount		Shares	Amount
Balance, April 1, 2022	113,047,699	$	2,706,325	(50,921)	$	(3,648)	$	3,281,601	$	(53,708)	$	119,566	$	6,050,136
Net income		—			—		164,312		—		4,306		168,618
Other comprehensive loss		—			—		—		(1,106)		—		(1,106)
Dividends on common stock ($1.70 per share)		—			—		(192,139)				—		(192,139)
Issuance of common stock	30,350	5,972			—		—		—		—		5,972
Reissuance of treasury stock for stock-based compensation and other		—		9,390	673		—		—		—		673
Capital activities by noncontrolling activities		—			—		—		—		(10,628)		(10,628)
Other		—			(1)		(2)		—		—		(3)
Balance, June 30, 2022	113,078,049	$	2,712,297	(41,531)	$	(2,976)	$	3,253,772	$	(54,814)	$	113,244	$	6,021,523

Three Months Ended June 30, 2020
Common Stock Treasury Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Noncontrolling Interests Total
Shares Amount Shares Amount
Balance, April 1, 2020 112,563,610 $ 2,664,387 (72,302) $ (7,000) $ 2,867,610 $ (55,579) $ 127,414 $ 5,596,832
Net income — — 193,585 — 4,874 198,459
Other comprehensive loss — — — (2,296) — (2,296)
Dividends on common stock ($1.57 per share) — — (176,086) — — (176,086)
Issuance of common stock 27,514 1,131 — — — — 1,131
Purchase of treasury stock (a) — (12,346) (924) — — — (924)
Reissuance of treasury stock for stock-based compensation and other — 48,665 4,734 — — — 4,734
Other — — — — (1) (1)
Capital activities by noncontrolling interests — — — — (11,372) (11,372)
Balance, June 30, 2020 112,591,124 $ 2,665,518 (35,983) $ (3,190) $ 2,885,109 $ (57,875) $ 120,915 $ 5,610,477

~~(a)Primarily represents shares of common stock withheld from certain stock awards for tax purposes.~~


	Three Months Ended June 30, 2021
	Common Stock			Treasury Stock			Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Noncontrolling Interests		Total
	Shares	Amount		Shares	Amount
Balance, April 1, 2021	112,791,565	$	2,687,052	(44,338)	$	(3,776)	$	3,060,752	$	(61,512)	$	124,164	$	5,806,680
Net income		—			—		215,697		—		3,739		219,436
Other comprehensive income		—			—		—		934		—		934
Dividends on common stock ($1.66 per share)		—			—		(187,181)		—		—		(187,181)
Issuance of common stock	28,138	4,963			—		—		—		—		4,963
Reissuance of treasury stock for stock-based compensation and other		—		8,185	697		—		—		—		697

Capital activities by noncontrolling interests		—			—		—		—		(10,628)		(10,628)
Other		—			—		(2)		—		—		(2)
Balance, June 30, 2021	112,819,703	$	2,692,015	(36,153)	$	(3,079)	$	3,089,266	$	(60,578)	$	117,275	$	5,834,899

The accompanying notes are an integral part of the financial statements.

Table of Contents

PINNACLE WEST CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(unaudited)

(dollars in ~~thousands~~thousands)


		Six Months Ended June 30, 2021															Six Months Ended June 30, 2022
		Common Stock			Treasury Stock			Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Noncontrolling Interests		Total			Common Stock			Treasury Stock			Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Noncontrolling Interests		Total
		Shares	Amount		Shares	Amount											Shares	Amount		Shares	Amount
Balance, Jan 1, 2021		112,760,051	$	2,677,482	(72,006)	$	(6,289)	$	3,025,106	$	(62,796)	$	119,290	$	5,752,793
Balance, January 1, 2022																Balance, January 1, 2022	113,014,528	$	2,702,743	(87,608)	$	(6,401)	$	3,264,719	$	(54,861)	$	115,260	$	6,021,460
Net income	Net income		—			—		251,338		—		8,612		259,950		Net income		—			—		181,268		—		8,612		189,880
Other comprehensive income	Other comprehensive income		—			—		—		2,218		—		2,218		Other comprehensive income		—			—		—		47		—		47
Dividends on common stock ($1.66 per share)			—			—		(187,176)		—		—		(187,176)
Dividends on common stock ($1.70 per share)																Dividends on common stock ($1.70 per share)		—			—		(192,213)		—		—		(192,213)
Issuance of common stock	Issuance of common stock	59,652	14,533					—		—		—		14,533		Issuance of common stock	63,521	9,554			—		—		—		—		9,554
Purchase of treasury stock (a)	Purchase of treasury stock (a)		—		(17,437)	(1,333)		—		—		—		(1,333)		Purchase of treasury stock (a)		—		(24,885)	(1,715)		—		—		—		(1,715)
Reissuance of treasury stock for stock-based compensation and other	Reissuance of treasury stock for stock-based compensation and other		—		53,290	4,543		—		—		—		4,543		Reissuance of treasury stock for stock-based compensation and other		—		70,962	5,140		—		—		—		5,140
Capital activities by noncontrolling interests																Capital activities by noncontrolling interests		—			—		—		—		(10,628)		(10,628)
Other	Other							(2)		—		1		(1)		Other		—			—		(2)		—		—		(2)
Capital activities by noncontrolling interests			—			—		—		—		(10,628)		(10,628)
Balance, June 30, 2021		112,819,703	$	2,692,015	(36,153)	$	(3,079)	$	3,089,266	$	(60,578)	$	117,275	$	5,834,899
Balance, June 30, 2022																Balance, June 30, 2022	113,078,049	$	2,712,297	(41,531)	$	(2,976)	$	3,253,772	$	(54,814)	$	113,244	$	6,021,523

Six Months Ended June 30, 2020
Common Stock Treasury Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Noncontrolling Interests Total
Shares Amount Shares Amount
Balance, Jan 1, 2020 112,540,126 $ 2,659,561 (103,546) $ (9,427) $ 2,837,610 $ (57,096) $ 122,540 $ 5,553,188
Net income — — 223,578 — 9,747 233,325
Other comprehensive loss — — — (779) — (779)
Dividends on common stock ($1.57 per share) — — (176,079) — — (176,079)
Issuance of common stock 50,998 5,957 — — — — 5,957
Purchase of treasury stock (a) — (33,070) (3,010) — — — (3,010)
Reissuance of treasury stock for stock-based compensation and other — 100,633 9,247 — — — 9,247
Capital activities by noncontrolling interests — — — — (11,372) (11,372)
Balance, June 30, 2020 112,591,124 $ 2,665,518 (35,983) $ (3,190) $ 2,885,109 $ (57,875) $ 120,915 $ 5,610,477


	Six Months Ended June 30, 2021
	Common Stock			Treasury Stock			Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Noncontrolling Interests		Total
	Shares	Amount		Shares	Amount
Balance, January 1, 2021	112,760,051	$	2,677,482	(72,006)	$	(6,289)	$	3,025,106	$	(62,796)	$	119,290	$	5,752,793
Net income		—			—		251,338		—		8,612		259,950
Other comprehensive income		—			—		—		2,218		—		2,218
Dividends on common stock ($1.66 per share)		—			—		(187,176)		—		—		(187,176)
Issuance of common stock	59,652	14,533			—		—		—		—		14,533
Purchase of treasury stock (a)		—		(17,437)	(1,333)		—		—		—		(1,333)
Reissuance of treasury stock for stock-based compensation and other		—		53,290	4,543		—		—		—		4,543
Capital activities by noncontrolling interests		—			—		—		—		(10,628)		(10,628)
Other		—			—		(2)		—		1		(1)
Balance, June 30, 2021	112,819,703	$	2,692,015	(36,153)	$	(3,079)	$	3,089,266	$	(60,578)	$	117,275	$	5,834,899

(a)Primarily represents shares of common stock withheld from certain stock awards for tax purposes.

The accompanying notes are an integral part of the financial statements.

Table of Contents

ARIZONA PUBLIC SERVICE COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

(dollars in thousands)


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021

OPERATING REVENUES (NOTE 2)		$	1,000,249	$	929,590	$	1,696,724	$	1,591,520
OPERATING REVENUES (Note 2)										OPERATING REVENUES (Note 2)	$	1,061,669	$	1,000,249	$	1,845,200	$	1,696,724

OPERATING EXPENSES	OPERATING EXPENSES									OPERATING EXPENSES
Fuel and purchased power	Fuel and purchased power	269,835		238,382		468,062		426,903		Fuel and purchased power	352,187		269,835		617,456		468,062
Operations and maintenance	Operations and maintenance	226,698		216,221		453,099		434,486		Operations and maintenance	242,273		226,698		456,874		453,099
Depreciation and amortization	Depreciation and amortization	158,728		152,460		316,528		306,518		Depreciation and amortization	186,477		158,728		373,060		316,528
Taxes other than income taxes	Taxes other than income taxes	59,478		56,758		118,950		113,516		Taxes other than income taxes	54,094		59,478		112,053		118,950
Other expenses	Other expenses	4,093		692		7,449		1,514		Other expenses	385		4,093		1,210		7,449
Total	Total	718,832		664,513		1,364,088		1,282,937		Total	835,416		718,832		1,560,653		1,364,088
OPERATING INCOME	OPERATING INCOME	281,417		265,077		332,636		308,583		OPERATING INCOME	226,253		281,417		284,547		332,636
OTHER INCOME (DEDUCTIONS)	OTHER INCOME (DEDUCTIONS)									OTHER INCOME (DEDUCTIONS)
Allowance for equity funds used during construction	Allowance for equity funds used during construction	9,990		8,811		19,197		16,508		Allowance for equity funds used during construction	12,086		9,990		21,833		19,197
Pension and other postretirement non-service credits — net		28,234		14,421		56,071		28,683
Pension and other postretirement non-service credits - net (Note 5)										Pension and other postretirement non-service credits - net (Note 5)	25,382		28,234		49,289		56,071
Other income (Note 9)	Other income (Note 9)	11,563		13,272		23,523		24,905		Other income (Note 9)	1,396		11,563		2,548		23,523
Other expense (Note 9)	Other expense (Note 9)	(4,261)		(3,859)		(7,611)		(8,527)		Other expense (Note 9)	(2,786)		(4,261)		(4,634)		(7,611)
Total	Total	45,526		32,645		91,180		61,569		Total	36,078		45,526		69,036		91,180
INTEREST EXPENSE	INTEREST EXPENSE									INTEREST EXPENSE
Interest charges	Interest charges	59,930		56,802		119,318		112,538		Interest charges	64,223		59,930		126,532		119,318
Allowance for borrowed funds used during construction	Allowance for borrowed funds used during construction	(5,199)		(4,749)		(10,193)		(8,825)		Allowance for borrowed funds used during construction	(5,689)		(5,199)		(10,111)		(10,193)
Total	Total	54,731		52,053		109,125		103,713		Total	58,534		54,731		116,421		109,125
INCOME BEFORE INCOME TAXES	INCOME BEFORE INCOME TAXES	272,212		245,669		314,691		266,439		INCOME BEFORE INCOME TAXES	203,797		272,212		237,162		314,691
INCOME TAXES	INCOME TAXES	48,725		43,677		51,044		24,229		INCOME TAXES	29,522		48,725		34,381		51,044
NET INCOME	NET INCOME	223,487		201,992		263,647		242,210		NET INCOME	174,275		223,487		202,781		263,647
Less: Net income attributable to noncontrolling interests (Note 6)	Less: Net income attributable to noncontrolling interests (Note 6)	3,739		4,874		8,612		9,747		Less: Net income attributable to noncontrolling interests (Note 6)	4,306		3,739		8,612		8,612
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDER	NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDER	$	219,748	$	197,118	$	255,035	$	232,463	NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDER	$	169,969	$	219,748	$	194,169	$	255,035

The accompanying notes are an integral part of the financial statements.

Table of Contents

ARIZONA PUBLIC SERVICE COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(dollars in thousands)


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021

NET INCOME	NET INCOME	$	223,487	$	201,992	$	263,647	$	242,210	NET INCOME	$	174,275	$	223,487	$	202,781	$	263,647

OTHER COMPREHENSIVE INCOME, NET OF TAX	OTHER COMPREHENSIVE INCOME, NET OF TAX									OTHER COMPREHENSIVE INCOME, NET OF TAX
Derivative instruments:
Net unrealized gain, net of tax benefit of $0, $0, $0 and $292		0		0		0		292
Reclassification of net realized gain, net of tax expense $0, $87, $0 and $481		0		262		0		282
Pension and other postretirement benefits activity, net of tax benefit (expense) $(53), $361, $(357) and $124		159		(1,090)		1,086		(77)
Total other comprehensive income		159		(828)		1,086		497

Pension and other postretirement benefits activity, net of tax benefit (expense) of $709, $(53), $440, and $(357)										Pension and other postretirement benefits activity, net of tax benefit (expense) of $709, $(53), $440, and $(357)	(2,161)		159		(1,341)		1,086
Total other comprehensive income (loss)										Total other comprehensive income (loss)	(2,161)		159		(1,341)		1,086

COMPREHENSIVE INCOME	COMPREHENSIVE INCOME	223,646		201,164		264,733		242,707		COMPREHENSIVE INCOME	172,114		223,646		201,440		264,733
Less: Comprehensive income attributable to noncontrolling interests	Less: Comprehensive income attributable to noncontrolling interests	3,739		4,874		8,612		9,747		Less: Comprehensive income attributable to noncontrolling interests	4,306		3,739		8,612		8,612

COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON SHAREHOLDER	COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON SHAREHOLDER	$	219,907	$	196,290	$	256,121	$	232,960	COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON SHAREHOLDER	$	167,808	$	219,907	$	192,828	$	256,121

The accompanying notes are an integral part of the financial statements.

Table of Contents

ARIZONA PUBLIC SERVICE COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(dollars in thousands)

June 30,
2021 December 31,
2020
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Plant in service and held for future use $ 21,233,344 $ 20,834,424
Accumulated depreciation and amortization (7,275,617) (7,107,058)
Net 13,957,727 13,727,366
Construction work in progress 1,062,911 937,384
Palo Verde sale leaseback, net of accumulated depreciation (Note 6) 96,101 98,036
Intangible assets, net of accumulated amortization 279,755 282,415
Nuclear fuel, net of accumulated amortization 109,110 113,645
Total property, plant and equipment 15,505,604 15,158,846
INVESTMENTS AND OTHER ASSETS
Nuclear decommissioning trusts (Notes 11 and 12) 1,223,088 1,138,435
Other special use funds (Notes 11 and 12) 358,436 254,509
Other assets 68,248 46,010
Total investments and other assets 1,649,772 1,438,954
CURRENT ASSETS
Cash and cash equivalents 11,954 57,310
Customer and other receivables 357,023 312,644
Accrued unbilled revenues 223,918 132,197
Allowance for doubtful accounts (Note 2) (22,769) (19,782)
Materials and supplies (at average cost) 340,672 314,745
Fossil fuel (at average cost) 25,074 19,552
Assets from risk management activities (Note 7) 82,309 2,931
Deferred fuel and purchased power regulatory asset (Note 4) 300,912 175,835
Other regulatory assets (Note 4) 119,890 115,878
Other current assets 51,482 47,593
Total current assets 1,490,465 1,158,903
DEFERRED DEBITS
Regulatory assets (Note 4) 1,173,977 1,133,987
Operating lease right-of-use assets (Note 15) 717,411 503,475
Assets for pension and other postretirement benefits (Note 5) 400,414 495,673
Other 37,210 34,413
Total deferred debits 2,329,012 2,167,548
TOTAL ASSETS $ 20,974,853 $ 19,924,251


	June 30, 2022		December 31, 2021
ASSETS

PROPERTY, PLANT AND EQUIPMENT
Plant in service and held for future use	$	22,163,718	$	21,685,200
Accumulated depreciation and amortization	(7,664,384)		(7,501,317)
Net	14,499,334		14,183,883
Construction work in progress	1,365,400		1,327,721
Palo Verde sale leaseback, net of accumulated depreciation (Note 6)	92,231		94,166
Intangible assets, net of accumulated amortization	265,507		273,537
Nuclear fuel, net of accumulated amortization	132,696		106,039
Total property, plant and equipment	16,355,168		15,985,346

INVESTMENTS AND OTHER ASSETS
Nuclear decommissioning trusts (Notes 11 and 12)	1,076,088		1,294,757
Other special use funds (Notes 11 and 12)	346,406		358,410
Assets from risk management activities (Note 7)	111,847		46,908
Other assets	42,748		42,440
Total investments and other assets	1,577,089		1,742,515

CURRENT ASSETS
Cash and cash equivalents	27,782		9,374
Customer and other receivables	419,364		390,533
Accrued unbilled revenues	234,523		133,980
Allowance for doubtful accounts (Note 2)	(23,147)		(25,354)
Materials and supplies (at average cost)	371,655		349,135
Fossil fuel (at average cost)	29,827		18,032
Income tax receivable	—		10,756
Assets from risk management activities (Note 7)	137,028		63,481
Deferred fuel and purchased power regulatory asset (Note 4)	390,013		388,148
Other regulatory assets (Note 4)	119,163		130,376
Other current assets	76,519		57,729
Total current assets	1,782,727		1,526,190

DEFERRED DEBITS
Regulatory assets (Note 4)	1,180,656		1,192,987
Operating lease right-of-use assets	866,182		888,207
Assets for pension and other postretirement benefits (Note 5)	568,515		537,092
Other	43,648		37,319
Total deferred debits	2,659,001		2,655,605

TOTAL ASSETS	$	22,373,985	$	21,909,656

The accompanying notes are an integral part of the financial statements.

Table of Contents

ARIZONA PUBLIC SERVICE COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(dollars in thousands)

June 30,
2021 December 31,
2020
LIABILITIES AND EQUITY
CAPITALIZATION
Common stock $ 178,162 $ 178,162
Additional paid-in capital 2,871,696 2,871,696
Retained earnings 3,284,989 3,216,955
Accumulated other comprehensive loss (39,832) (40,918)
Total shareholder equity 6,295,015 6,225,895
Noncontrolling interests (Note 6) 117,275 119,290
Total equity 6,412,290 6,345,185
Long-term debt less current maturities (Note 3) 5,819,198 5,817,945
Total capitalization 12,231,488 12,163,130
CURRENT LIABILITIES
Short-term borrowings (Note 3) 495,000 0
Accounts payable 369,905 311,699
Accrued taxes 193,409 148,970
Accrued interest 56,202 56,322
Common dividends payable 93,500 93,500
Customer deposits 44,419 48,340
Liabilities from risk management activities (Note 7) 1,512 7,557
Liabilities for asset retirements (Note 16) 15,646 15,586
Operating lease liabilities (Note 15) 128,578 74,695
Regulatory liabilities (Note 4) 327,612 229,088
Other current liabilities 142,926 190,420
Total current liabilities 1,868,709 1,176,177
DEFERRED CREDITS AND OTHER
Deferred income taxes 2,192,580 2,143,673
Regulatory liabilities (Note 4) 2,443,312 2,450,169
Liabilities for asset retirements (Note 16) 716,344 689,497
Liabilities for pension benefits (Note 5) 146,728 148,943
Liabilities from risk management activities (Note 7) 0 11,062
Customer advances 247,531 221,032
Coal mine reclamation 172,357 170,097
Deferred investment tax credit 187,720 191,372
Unrecognized tax benefits 39,995 39,410
Operating lease liabilities (Note 15) 545,534 359,653
Other 182,555 160,036
Total deferred credits and other 6,874,656 6,584,944
COMMITMENTS AND CONTINGENCIES (NOTE 8) 0 0
TOTAL LIABILITIES AND EQUITY $ 20,974,853 $ 19,924,251


	June 30, 2022		December 31, 2021
LIABILITIES AND EQUITY

CAPITALIZATION
Common stock	$	178,162	$	178,162
Additional paid-in capital	3,171,696		3,021,696
Retained earnings	3,472,403		3,470,235
Accumulated other comprehensive loss (Note 13)	(36,221)		(34,880)
Total shareholder equity	6,786,040		6,635,213
Noncontrolling interests (Note 6)	113,244		115,260
Total equity	6,899,284		6,750,473
Long-term debt less current maturities (Note 3)	6,268,271		6,266,693
Total capitalization	13,167,555		13,017,166
CURRENT LIABILITIES
Short-term borrowings (Note 3)	515,000		278,700
Accounts payable	429,672		389,365
Accrued taxes	191,420		152,012
Accrued interest	56,625		56,622
Common dividends payable	96,000		96,000
Customer deposits	41,459		42,293
Liabilities from risk management activities (Note 7)	5,596		4,373
Liabilities for asset retirements	5,111		4,473
Operating lease liabilities	124,947		100,199
Regulatory liabilities (Note 4)	404,107		296,271
Other current liabilities	131,285		145,286
Total current liabilities	2,001,222		1,565,594
DEFERRED CREDITS AND OTHER
Deferred income taxes	2,351,848		2,331,701
Regulatory liabilities (Note 4)	2,268,148		2,499,213
Liabilities for asset retirements	779,360		762,909
Liabilities for pension benefits (Note 5)	137,355		138,328

Customer advances	336,198		257,151
Coal mine reclamation	176,936		174,616
Deferred investment tax credit	184,032		186,570
Unrecognized tax benefits	37,662		37,423
Operating lease liabilities	705,305		726,572
Other	228,364		212,413
Total deferred credits and other	7,205,208		7,326,896
COMMITMENTS AND CONTINGENCIES (Note 8)	0		0
TOTAL LIABILITIES AND EQUITY	$	22,373,985	$	21,909,656

The accompanying notes are an integral part of the financial statements.

Table of Contents

ARIZONA PUBLIC SERVICE COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(dollars in thousands)

Six Months Ended
June 30,
2021 2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 263,647 $ 242,210
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization including nuclear fuel 350,494 343,130
Deferred fuel and purchased power (135,905) (26,473)
Deferred fuel and purchased power amortization 10,828 (4,815)
Allowance for equity funds used during construction (19,197) (16,508)
Deferred income taxes 23,161 15,233
Deferred investment tax credit (3,651) (3,386)
Changes in current assets and liabilities:
Customer and other receivables (41,963) 824
Accrued unbilled revenues (91,721) (63,413)
Materials, supplies and fossil fuel (31,449) 10,295
Income tax receivable 0 7,313
Other current assets (12,636) (19,752)
Accounts payable 66,192 17,915
Accrued taxes 44,439 14,551
Other current liabilities (39,749) (40,381)
Change in other long-term assets (114,154) (7,356)
Change in other long-term liabilities 46,327 (91,983)
Net cash flow provided by operating activities 314,663 377,404
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (681,148) (676,973)
Contributions in aid of construction 32,104 31,295
Allowance for borrowed funds used during construction (10,193) (8,825)
Proceeds from nuclear decommissioning trusts sales and other special use funds 587,842 391,859
Investment in nuclear decommissioning trusts and other special use funds (588,982) (393,000)
Other 2,986 (169)
Net cash flow used for investing activities (657,391) (655,813)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 0 591,936
Short-term borrowings and (repayments) — net 495,000 219,900
Short-term debt borrowings under revolving credit facility 0 540,000
Short-term debt repayments under revolving credit facility 0 (540,000)
Repayment of long-term debt 0 (350,000)
Dividends paid on common stock (187,000) (176,000)
Distributions to noncontrolling interests (10,628) (11,372)
Net cash flow provided by financing activities 297,372 274,464
NET DECREASE IN CASH AND CASH EQUIVALENTS (45,356) (3,945)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 57,310 10,169
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,954 $ 6,224


	Six Months Ended June 30,
	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	202,781	$	263,647
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization including nuclear fuel	405,085		350,494
Deferred fuel and purchased power	(98,707)		(135,905)
Deferred fuel and purchased power amortization	96,842		10,828
Allowance for equity funds used during construction	(21,833)		(19,197)
Deferred income taxes	(2,838)		23,161
Deferred investment tax credit	(2,538)		(3,651)

Changes in current assets and liabilities:
Customer and other receivables	(31,612)		(41,963)
Accrued unbilled revenues	(100,543)		(91,721)
Materials, supplies and fossil fuel	(34,315)		(31,449)
Income tax receivable	10,756		—
Other current assets	(7,883)		(12,636)
Accounts payable	101,931		66,192
Accrued taxes	39,408		44,439
Other current liabilities	2,384		(39,749)
Change in margin and collateral accounts — assets	40,430		—

Change in other long-term assets	183,701		(148,912)
Change in operating lease assets	29,613		34,758
Change in other long-term liabilities	(184,896)		77,323
Change in operating lease liabilities	(27,470)		(30,996)
Net cash provided by operating activities	600,296		314,663
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures	(824,269)		(681,148)
Contributions in aid of construction	68,879		32,104
Allowance for borrowed funds used during construction	(10,111)		(10,193)
Proceeds from nuclear decommissioning trusts sales and other special use funds	692,186		587,842
Investment in nuclear decommissioning trusts and other special use funds	(692,811)		(588,982)
Other	566		2,986
Net cash used for investing activities	(765,560)		(657,391)
CASH FLOWS FROM FINANCING ACTIVITIES

Short-term borrowings and (repayments) — net	236,300		495,000


Equity infusion	150,000		—

Dividends paid on common stock	(192,000)		(187,000)
Distributions to noncontrolling interests	(10,628)		(10,628)
Net cash provided by financing activities	183,672		297,372
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	18,408		(45,356)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	9,374		57,310
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	27,782	$	11,954

The accompanying notes are an integral part of the financial statements.

Table of Contents

ARIZONA PUBLIC SERVICE COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(unaudited)

(dollars in thousands)


		Three Months Ended June 30, 2021														Three Months Ended June 30, 2022
		Common Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Noncontrolling Interests		Total			Common Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Noncontrolling Interests		Total
		Shares	Amount													Shares	Amount
Balance, April 1, 2021		71,264,947	$	178,162	$	2,871,696	$	3,252,244	$	(39,991)	$	124,164	$	6,386,275
Balance, April 1, 2022															Balance, April 1, 2022	71,264,947	$	178,162	$	3,171,696	$	3,494,432	$	(34,060)	$	119,566	$	6,929,796
Net Income	Net Income		—		—		219,748		—		3,739		223,487		Net Income		—		—		169,969		—		4,306		174,275
Other comprehensive income			—		—		—		159		—		159
Other comprehensive loss															Other comprehensive loss		—		—		—		(2,161)		—		(2,161)
Dividends on common stock	Dividends on common stock		—		—		(187,000)		—		—		(187,000)		Dividends on common stock		—		—		(192,000)		—		—		(192,000)
Capital activities by noncontrolling activities															Capital activities by noncontrolling activities		—		—		—		—		(10,628)		(10,628)
Other	Other		—		—		(3)		—		—		(3)		Other		—		—		2		—		—		2
Capital activities by noncontrolling activities			—		—		—		—		(10,628)		(10,628)
Balance, June 30, 2021		71,264,947	$	178,162	$	2,871,696	$	3,284,989	$	(39,832)	$	117,275	$	6,412,290
Balance, June 30, 2022															Balance, June 30, 2022	71,264,947	$	178,162	$	3,171,696	$	3,472,403	$	(36,221)	$	113,244	$	6,899,284

Three Months Ended June 30, 2020
Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Noncontrolling Interests Total
Shares Amount
Balance, April 1, 2020 71,264,947 $ 178,162 $ 2,721,696 $ 3,047,269 $ (34,197) $ 127,414 $ 6,040,344
Net Income — — 197,118 — 4,874 201,992
Other comprehensive loss — — — (828) — (828)
Dividends on common stock — — (176,000) — — (176,000)
Other — — 2 — (1) 1
Capital activities by noncontrolling activities — — — — (11,372) (11,372)
Balance, June 30, 2020 71,264,947 $ 178,162 $ 2,721,696 $ 3,068,389 $ (35,025) $ 120,915 $ 6,054,137


	Three Months Ended June 30, 2021
	Common Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Noncontrolling Interests		Total
	Shares	Amount
Balance, April 1, 2021	71,264,947	$	178,162	$	2,871,696	$	3,252,244	$	(39,991)	$	124,164	$	6,386,275
Net Income		—		—		219,748		—		3,739		223,487
Other comprehensive income		—		—		—		159		—		159
Dividends on common stock		—		—		(187,000)		—		—		(187,000)
Capital activities by noncontrolling activities		—		—		—		—		(10,628)		(10,628)
Other		—		—		(3)		—		—		(3)
Balance, June 30, 2021	71,264,947	$	178,162	$	2,871,696	$	3,284,989	$	(39,832)	$	117,275	$	6,412,290

The accompanying notes are an integral part of the financial statements.

Table of Contents

ARIZONA PUBLIC SERVICE COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(unaudited)

(dollars in thousands)


		Six Months Ended June 30, 2021														Six Months Ended June 30, 2022
		Common Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Noncontrolling Interests		Total			Common Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Noncontrolling Interests		Total
		Shares	Amount													Shares	Amount
Balance, January 1, 2021		71,264,947	$	178,162	$	2,871,696	$	3,216,955	$	(40,918)	$	119,290	$	6,345,185
Balance, January 1, 2022															Balance, January 1, 2022	71,264,947	$	178,162	$	3,021,696	$	3,470,235	$	(34,880)	$	115,260	$	6,750,473
Equity infusion from Pinnacle West															Equity infusion from Pinnacle West		—		150,000		—		—		—		150,000
Net Income	Net Income		—		—		255,035		—		8,612		263,647		Net Income		—		—		194,169		—		8,612		202,781
Other comprehensive income			—		—		—		1,086		—		1,086
Other comprehensive loss															Other comprehensive loss		—		—		—		(1,341)		—		(1,341)
Dividends on common stock	Dividends on common stock		—		—		(187,000)						(187,000)		Dividends on common stock		—		—		(192,000)		—		—		(192,000)
Capital activities by noncontrolling activities															Capital activities by noncontrolling activities		—		—		—		—		(10,628)		(10,628)
Other	Other		—		—		(1)		—		1		0		Other		—		—		(1)		—		—		(1)
Capital activities by noncontrolling activities			—		—				—		(10,628)		(10,628)
Balance, June 30, 2021		71,264,947	$	178,162	$	2,871,696	$	3,284,989	$	(39,832)	$	117,275	$	6,412,290
Balance, June 30, 2022															Balance, June 30, 2022	71,264,947	$	178,162	$	3,171,696	$	3,472,403	$	(36,221)	$	113,244	$	6,899,284

Six Months Ended June 30, 2020
Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Noncontrolling Interests Total
Shares Amount
Balance, January 1, 2020 71,264,947 $ 178,162 $ 2,721,696 $ 3,011,927 $ (35,522) $ 122,540 $ 5,998,803
Net Income — — 232,463 — 9,747 242,210
Other comprehensive income — — — 497 — 497
Dividends on common stock — — (176,000) — — (176,000)
Other — — (1) — — (1)
Capital activities by noncontrolling activities — — — — (11,372) (11,372)
Balance, June 30, 2020 71,264,947 $ 178,162 $ 2,721,696 $ 3,068,389 $ (35,025) $ 120,915 $ 6,054,137


	Six Months Ended June 30, 2021
	Common Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Noncontrolling Interests		Total
	Shares	Amount
Balance, January 1, 2021	71,264,947	$	178,162	$	2,871,696	$	3,216,955	$	(40,918)	$	119,290	$	6,345,185
Net Income		—		—		255,035		—		8,612		263,647
Other comprehensive income		—		—		—		1,086		—		1,086
Dividends on common stock		—		—		(187,000)		—		—		(187,000)
Capital activities by noncontrolling activities		—		—		—		—		(10,628)		(10,628)
Other		—		—		(1)		—		1		—
Balance, June 30, 2021	71,264,947	$	178,162	$	2,871,696	$	3,284,989	$	(39,832)	$	117,275	$	6,412,290

The accompanying notes are an integral part of the financial statements.

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1. Consolidation and Nature of Operations

The unaudited condensed consolidated financial statements include the accounts of Pinnacle West and our subsidiaries: APS, 4C Acquisition, LLC (“4CA”), Bright Canyon Energy Corporation (“BCE”) and El Dorado Investment Company (“El Dorado”). See Note 8 for more information on 4CA matters. Intercompany accounts and transactions between the consolidated companies have been eliminated. The unaudited condensed consolidated financial statements for APS include the accounts of APS and the Palo Verde Generating Station (“Palo Verde”) sale leaseback variable interest entities (“VIEs”) ~~(see~~. See Note 6 for further ~~discussion).~~discussion. Our accounting records are maintained in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Amounts reported in our interim Condensed Consolidated Statements of Income are not necessarily indicative of amounts expected for the respective annual periods, due to the effects of seasonal temperature variations on energy consumption, timing of maintenance on electric generating units (“EGU”), and other factors.

Our condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments except as otherwise disclosed in the notes) that we believe are necessary for the fair presentation of our financial position, results of operations, and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in conformity with GAAP have been condensed or omitted pursuant to such regulations, although we believe that the disclosures provided are adequate to make the interim information presented not misleading. The accompanying condensed consolidated financial statements and these notes should be read in conjunction with the audited consolidated financial statements and notes included in our ~~2020~~2021 Form 10-K.

On June 30, 2020, the United States Federal Energy Regulatory Commission (“FERC”) issued an order granting a waiver request related to the existing Allowance for Funds Used During Construction (“AFUDC”) rate calculation beginning March 1, 2020, through February 28, 2021. On February 23, 2021, this waiver was extended until September 30, 2021. On September 21, 2021, it was further extended until March 31, 2022. The order ~~provides~~provided a simplified approach that companies may elect to implement in order to minimize the significant distorted effect on the AFUDC formula resulting from increased short-term debt financing during the COVID-19 pandemic. APS ~~has~~ adopted this simplified approach to computing the AFUDC composite rate by using a simple average of the actual historical short-term debt balances for 2019, instead of current period short-term debt balances, and ~~has~~ left all other aspects of the AFUDC formula composite rate calculation unchanged. This change ~~impacts~~impacted the AFUDC composite rate in ~~both 2020~~2021 and ~~2021 but does not impact prior years.~~for the three-month period ended March 31, 2022. Furthermore, the change in the composite rate calculation ~~does~~did not impact our accounting treatment for these costs. The change ~~will~~did not have a material impact on our financial statements. See Note 1 in our ~~2020~~2021 Form 10-K for information on the accounting treatment for AFUDC.

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Supplemental Cash Flow Information

The following table summarizes supplemental Pinnacle West cash flow information (dollars in thousands):


		Six Months Ended June 30,					Six Months Ended June 30,
		2021		2020			2022		2021
Cash paid (received) during the period for:	Cash paid (received) during the period for:					Cash paid (received) during the period for:
Income taxes, net of refunds	Income taxes, net of refunds	$	(788)	$	(3,028)	Income taxes, net of refunds	$	(1,746)	$	(788)
Interest, net of amounts capitalized	Interest, net of amounts capitalized	112,010		107,417		Interest, net of amounts capitalized	120,359		112,010
Significant non-cash investing and financing activities:	Significant non-cash investing and financing activities:					Significant non-cash investing and financing activities:
Accrued capital expenditures	Accrued capital expenditures	$	105,515	$	87,815	Accrued capital expenditures	$	106,033	$	105,515

Right-of-use operating lease assets obtained in exchange for operating lease liabilities						Right-of-use operating lease assets obtained in exchange for operating lease liabilities	11,101		248,694
Dividends accrued but not yet paid	Dividends accrued but not yet paid	93,610		88,066		Dividends accrued but not yet paid	96,081		93,610

The following table summarizes supplemental APS cash flow information (dollars in thousands):


		Six Months Ended June 30,					Six Months Ended June 30,
		2021		2020			2022		2021
Cash paid (received) during the period for:	Cash paid (received) during the period for:					Cash paid (received) during the period for:
Income taxes, net of refunds	Income taxes, net of refunds	$	3,317	$	0	Income taxes, net of refunds	$	(25)	$	3,317
Interest, net of amounts capitalized	Interest, net of amounts capitalized	107,044		100,991		Interest, net of amounts capitalized	114,069		107,044
Significant non-cash investing and financing activities:	Significant non-cash investing and financing activities:					Significant non-cash investing and financing activities:
Accrued capital expenditures	Accrued capital expenditures	$	105,515	$	87,815	Accrued capital expenditures	$	106,033	$	105,515

Right-of-use operating lease assets obtained in exchange for operating lease liabilities						Right-of-use operating lease assets obtained in exchange for operating lease liabilities	7,512		248,694
Dividends accrued but not yet paid	Dividends accrued but not yet paid	93,500		88,000		Dividends accrued but not yet paid	96,000		93,500

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2. Revenue

Sources of Revenue

The following table provides detail of Pinnacle West’s consolidated revenue disaggregated by revenue sources (dollars in thousands):


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Retail Electric Revenue
Retail Electric Service										Retail Electric Service
Residential	Residential	$	531,717	$	515,128	$	872,555	$	840,201	Residential	$	537,589	$	531,717	$	904,935	$	872,555
Non-Residential	Non-Residential	420,995		381,121		735,778		684,472		Non-Residential	462,669		420,995		822,185		735,778
Wholesale Energy Sales	Wholesale Energy Sales	18,007		15,927		35,604		30,595		Wholesale Energy Sales	29,902		18,007		58,805		35,604
Transmission Services for Others	Transmission Services for Others	22,579		14,766		41,572		30,693		Transmission Services for Others	29,352		22,579		54,844		41,572
Other Sources	Other Sources	6,951		2,648		11,215		5,559		Other Sources	2,157		6,951		4,431		11,215
Total operating revenues	Total operating revenues	$	1,000,249	$	929,590	$	1,696,724	$	1,591,520	Total operating revenues	$	1,061,669	$	1,000,249	$	1,845,200	$	1,696,724

Retail Electric Revenue. Pinnacle West’s retail electric revenue is generated by ~~wholly-owned~~wholly owned, regulated subsidiary APS’s sale of electricity to our regulated customers within the authorized service territory

~~COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

at tariff rates approved by the ACC and based on customer usage. Revenues related to the sale of electricity are generally recognized when service is rendered, or electricity is delivered to customers. The billing of electricity sales to individual customers is based on the reading of their meters. We obtain customers’ meter data on a systematic basis throughout the month, and generally bill customers within a month from when service was provided. Customers are generally required to pay for services within 1521 days of when the services are billed. See “Allowance for Doubtful Accounts” discussion below for additional details regarding payment terms.

Wholesale Energy Sales and Transmission Services for Others. Revenues from wholesale energy sales and transmission services for others represent energy and transmission sales to wholesale customers. These activities primarily consist of managing fuel and purchased power risks in connection with the cost of serving our retail customers’ energy requirements. We may also sell into the wholesale markets generation that is not needed for APS’s retail load. Our wholesale activities and tariff rates are regulated by FERC.

In the electricity business, some contracts to purchase energy are settled by netting against other contracts to sell electricity. This is referred to as a book-out, and usually occurs in contracts that have the same terms (product type, quantities, and delivery points) and for which power does not flow. We net these book-outs, which reduces both wholesale revenues and fuel and purchased power costs.

Revenue Activities

Our revenues primarily consist of activities that are classified as revenues from contracts with customers. We derive our revenues from contracts with customers primarily from sales of electricity to our regulated retail customers. Revenues from contracts with customers also include wholesale and transmission activities. Our revenues from contracts with customers for the three and six months ended June 30, ~~2021~~2022 were ~~$980~~$1,064 million and ~~$1,663~~$1,835 million, respectively, and for the three and six months ended June 30, ~~2020~~2021 were ~~$915~~$980 million and ~~$1,563~~$1,663 million, respectively.

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We have certain revenues that do not meet the specific accounting criteria to be classified as revenues from contracts with customers. For the three and six months ended June 30, 2022, and 2021, our revenues that do not qualify as revenue from contracts with customers were ~~$20~~$(2) million and ~~$34~~$10 million, respectively, and for the three and six months ended June 30, ~~2020~~2021 were ~~$15~~$20 million and ~~$29~~$34 million, respectively. This ~~relates primarily~~amount includes revenues related to certain regulatory cost recovery mechanisms that are considered alternative revenue programs. We recognize revenue associated with alternative revenue programs when specific events permitting recognition are completed. Certain amounts associated with alternative revenue programs will subsequently be billed to customers; however, we do not reclassify billed amounts into revenue from contracts with customers. See Note 4 for a discussion of our regulatory cost recovery mechanisms.

Contract Assets and Liabilities from Contracts with Customers

There were no material contract assets, contract liabilities, or deferred contract costs recorded on the Condensed Consolidated Balance Sheets as of June 30, ~~2021~~2022, or December 31, ~~2020.~~2021.

Allowance for Doubtful Accounts

The allowance for doubtful accounts represents our best estimate of accounts receivable and accrued unbilled revenues that will ultimately be uncollectible due to credit loss risk. The allowance includes a write-off component that is calculated by applying an estimated write-off factor to retail electric revenues. The write-off factor used to estimate uncollectible accounts is based upon consideration of historical collections experience, the current and forecasted economic environment, changes to our collection policies, and management’s best estimate of future collections success.

~~COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

On March 13, 2020, due to the COVID-19 pandemic we voluntarily suspended disconnections of customers for nonpayment. The suspension of customer disconnections was extended from March 13, 2020 through December 31, 2020. The suspension of disconnection of customers for nonpayment ended on January 1, 2021 and certain customers with past due balances were placed on eight-month payment arrangements. During this time our disconnection policies were also impacted by the Summer Disconnection Moratorium.~~These circumstances and the on-going COVID-19 pandemic have impacted our allowance for doubtful accounts, including our write-off factor.~~ We continue to monitor the impacts of COVID-19, our disconnection policies, payment arrangements, among other considerations impacting our estimated write-off factor and allowance for doubtful accounts. ~~See Note 4 for additional details.~~

The following table provides a rollforward of Pinnacle West’s allowance for doubtful accounts (dollars in thousands):

June 30, 2021 December 31, 2020
Allowance for doubtful accounts, balance at beginning of period $ 19,782 $ 8,171
Bad debt expense 10,048 20,633
Actual write-offs (7,061) (9,022)
Allowance for doubtful accounts, balance at end of period $ 22,769 $ 19,782


	June 30, 2022		December 31, 2021
Allowance for doubtful accounts, balance at beginning of period	$	25,354	$	19,782
Bad debt expense	8,119		22,251
Actual write-offs	(10,326)		(16,679)
Allowance for doubtful accounts, balance at end of period	$	23,147	$	25,354

3. Long-Term Debt and Liquidity Matters

Pinnacle West and APS maintain committed revolving credit facilities in order to enhance liquidity and provide credit support for their commercial paper programs, to refinance indebtedness, and for other general corporate purposes.

Pinnacle West

On ~~May 5, 2020,~~December 21, 2021, Pinnacle West ~~refinanced its 364-day $50~~entered into a $450 million term loan ~~agreement with a new 364-day $31~~facility that matures December 20, 2024. On December 21, 2021, $150 million ~~term loan agreement~~of the proceeds were received and recognized as long-term debt on the Condensed Consolidated Balance Sheets. On January 6, 2022, the remaining $300 million of proceeds were received and recognized on that ~~would have matured May 4, 2021. Borrowings under~~date as long-term debt on the ~~agreement bore interest at Eurodollar Rate plus 1.40% per annum. Pinnacle West repaid this agreement on April 27, 2021.~~Condensed Consolidated Balance Sheets. The proceeds were used for general corporate purposes.

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On December 23, 2020, Pinnacle West entered into a $150 million term loan facility that ~~matures~~would have matured June 30, 2022. The proceeds were received on January 4, 2021 and used for general corporate purposes. We recognized the term loan facility as long-term debt upon settlement on January 4, 2021. On January 6, 2022, Pinnacle West repaid this loan facility early.

~~On May 28, 2021,~~At June 30, 2022, Pinnacle West ~~replaced its $200 million revolving credit facility that would have matured on July 11, 2023, with~~had a ~~new~~ $200 million revolving credit facility that matures on May 28, 2026. Pinnacle West has the option to increase the amount of the facility up to a maximum of $300 million upon the satisfaction of certain conditions and with the consent of the lenders. Interest rates are based on Pinnacle West’s senior unsecured debt credit ratings and the agreement includes a sustainability-linked pricing metric which permits an interest rate reduction or increase by meeting or missing targets related to specific environmental and employee health and safety sustainability objectives. The facility is available to support Pinnacle West’s general corporate purposes, including support for Pinnacle ~~West's~~West’s $200 million commercial paper program, for bank borrowings or for issuances of letters of credits. At June 30, ~~2021,~~2022, Pinnacle West had 0no outstanding borrowings under its revolving credit facility, 0no letters of credit outstanding under the credit facility and ~~$9.7~~$26 million of outstanding commercial paper borrowings.

~~COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

APS

~~On May 28, 2021,~~At June 30, 2022, APS ~~replaced its~~had 2 ~~$500 million revolving credit facilities that would have matured in June 2022 and July 2023, with 2 new~~ $500 million revolving credit facilities that total $1 billion and that mature on May 28, 2026. APS may increase the amount of each facility up to a maximum of $700 million, for a total of $1.4 billion, upon the satisfaction of certain conditions and with the consent of the lenders. Interest rates are based on APS’s senior unsecured debt credit ratings and the agreements include a sustainability-linked pricing metric which permits an interest rate reduction or increase by meeting or missing targets related to specific environmental and employee health and safety sustainability objectives. These facilities are available to support APS’s general corporate purposes, including support for ~~APS's~~APS’s $750 million commercial paper program, for bank borrowings or for issuances of letters of credit. At June 30, ~~2021,~~2022, APS had 0no outstanding borrowings under its revolving credit facilities, 0no letters of credit outstanding under the credit facilities and ~~$495~~$515 million of outstanding commercial paper borrowings.

On December 17, 2020, the ACC issued a financing order in which, subject to specified parameters and procedures, it approved APS’s short-term debt authorization equal to the sum of (i) 7% of APS’s capitalization, and (ii) $500 million (which is required to be used for costs relating to purchases of natural gas and power) and a long-term debt authorization of $7.5 billion. On April 6, 2022, APS filed an application with the ACC to increase the long-term debt limit under the terms required by APS from $7.5 billion to $8.0 billion (subject to appropriate regulatory treatment of PPA lease agreements) and to continue its authorization of short-term debt granted in the 2020 financing order. This application is pending the ACC’s review. APS cannot predict the outcome of this matter.

On January 6, 2022, Pinnacle West contributed $150 million into APS in the form of an equity infusion. APS used this contribution to repay short-term indebtedness.

See “Financial Assurances” in Note 8 for a discussion of other outstanding letters of credit.

BCE

On February 11, 2022, a special purpose subsidiary of BCE entered into a credit agreement to finance capital expenditures and related costs for a 31 MW solar and battery storage project in Los Alamitos, California (“Los Alamitos”) that is under development by the subsidiary. The credit facilities consist of an approximately $33 million equity bridge loan facility, an approximately $42 million non-recourse construction to term loan facility, and an approximately $5 million letter of credit facility. In connection with the credit

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agreement, Pinnacle West has guaranteed the full amount of the equity bridge loan. As of June 30, 2022, $25.8 million has been drawn from the equity bridge loan and there is no outstanding balance for the non-recourse construction to term loan.

Debt Fair Value

Our long-term debt fair value estimates are classified within Level 2 of the fair value hierarchy. The following table presents the estimated fair value of our long-term debt, including current maturities (dollars in thousands):


		As of June 30, 2021				As of December 31, 2020					As of June 30, 2022				As of December 31, 2021
		Carrying Amount		Fair Value		Carrying Amount		Fair Value			Carrying Amount		Fair Value		Carrying Amount		Fair Value
Pinnacle West	Pinnacle West	$	646,729	$	654,095	$	496,321	$	509,050	Pinnacle West	$	947,547	$	909,520	$	797,042	$	792,735
APS	APS	5,819,198		6,746,984		5,817,945		7,103,791		APS	6,268,271		5,488,229		6,266,693		6,933,619
BCE										BCE	25,477		25,802		—		—
Total	Total	$	6,465,927	$	7,401,079	$	6,314,266	$	7,612,841	Total	$	7,241,295	$	6,423,551	$	7,063,735	$	7,726,354

4. Regulatory Matters

~~COVID-19 Pandemic~~2019 Retail Rate Case

Due to the COVID-19 pandemic, APS voluntarily suspended disconnections of customers for nonpayment and waived late payment fees beginning March 13, 2020 until December 31, 2020. The suspension of disconnection of customers for nonpayment ended on January 1, 2021 and customers were automatically placed on eight-month payment arrangements if they had past due balances at the end of the disconnection period of $75 or greater. APS will continue to waive late payment fees until October 15, 2021. APS has experienced and is continuing to experience an increase in bad debt expense associated with the COVID-19 pandemic, the Summer Disconnection Moratorium (defined below) and the related write-offs of customer delinquent accounts. In February 2021, due to COVID-19 APS delayed the annual reset of the PSA. Rather than the increase being effective February 2021, the PSA reset was implemented with 50% of the increase effective April 2021 and the remaining 50% increase effective November 2021 ~~(see below for discussion of EIS, TEAM Phase II and PSA).~~

~~COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

On April 17, 2020, APS filed an application with the ACC requesting a COVID-19 emergency relief package to provide additional assistance to its customers. On May 5, 2020, the ACC approved APS returning $36 million that had been collected through the Demand Side Management (“DSM”) Adjustor Charge, but not allocated for current DSM programs, directly to customers through a bill credit in June 2020. APS has refunded approximately $43 million to customers. The additional $7 million over the approved amount of $36 million was the result of the kWh credit being based on historic consumption, which was different than actual consumption in the refund period. The difference was recorded to the DSM balancing account and was included in the 2021 DSM Implementation Plan, which was approved by the ACC on June 13, 2021 (see below for discussion of the DSM Adjustor Charge).

In 2020, APS spent more than $15 million to assist customers and local non-profits and community organizations to help with the impact of the COVID-19 pandemic, with $12.4 million of these dollars directly committed to bill assistance programs (the “COVID Customer Support Fund”). The COVID Customer Support Fund was comprised of a series of voluntary commitments of funds that are not recoverable through rates throughout 2020 of approximately $8.8 million. An additional $3.6 million in bill credits for limited income customers was ordered by the ACC in December 2020 of which 50%, up to a maximum of $2.5 million, was committed to be funds that are not recoverable through rates with the remaining being deferred for potential future recovery in rates. Included in the COVID Customer Support Fund were programs that assisted customers that had a delinquency of two or more months with a one-time credit of $100, an expanded credit of $300 for limited income customers, programs to assist extra small and small non-residential customers with a one-time credit of $1,000, and other targeted programs allocated to assist with other COVID-19 needs in support of utility bill assistance. The December 2020 ACC order further assisted delinquent limited income customers with an additional bill credit of up to $250 or their delinquent balance, whichever was less. APS has distributed all funds for all COVID Customer Support Fund programs combined. Beyond the COVID Customer Support Fund, APS has also provided $2.7 million to assist local non-profits and community organizations working to mitigate the impacts of the COVID-19 pandemic.

~~2019 Retail Rate Case Filing with the Arizona Corporation Commission~~

~~In accordance with the requirements of the 2019 rate review order described below,~~ APS filed an application with the ACC on October 31, 2019 (the “2019 Rate Case”) seeking an increase in annual retail base rates of $69 million. This amount includes recovery of the deferral and rate base effects of the Four Corners Power Plant (“Four Corners”) selective catalytic reduction (“SCR”) project that ~~is currently~~was the subject of a separate ~~proceeding (see “SCR~~proceeding. See “Four Corners SCR Cost Recovery” ~~below).~~below. It also reflects a net credit to base rates of approximately $115 million primarily due to the prospective inclusion of rate refunds currently provided through the Tax Expense Adjustment Mechanism (“TEAM”). The proposed total annual revenue increase in APS’s application is $184 million. The average annual customer bill impact of APS’s request is an increase of 5.6% (the average annual bill impact for a typical APS residential customer is 5.4%).

The principal provisions of APS’s application were:

•a test year comprised of ~~twelve~~12 months ended June 30, 2019, adjusted as described below;

•an original cost rate base of $8.87 billion, which approximates the ACC-jurisdictional portion of the book value of utility assets, net of accumulated depreciation and other credits;

•the following proposed capital structure and costs of capital:


	Capital Structure		Cost of Capital
Long-term debt	45.3	%	4.10	%
Common stock equity	54.7	%	10.15	%
Weighted-average cost of capital			7.41	%

~~COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

•a 1% return on the increment of fair value rate base above APS’s original cost rate base, as provided for by Arizona law;

•a rate of $0.030168 per kWh for the portion of APS’s retail base rates attributable to fuel and purchased power costs (“Base Fuel Rate”);

•authorization to defer until APS’s next general rate case the increase or decrease in its Arizona property taxes attributable to tax rate changes after the date the rate application is adjudicated;

•a number of proposed rate and program changes for residential customers, including:

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▪a super off-peak period during the winter months for APS’s time-of-use with demand rates;

▪additional $1.25 million in funding for APS’s limited-income crisis bill program; and

▪a flat bill/subscription rate pilot program;

•proposed rate design changes for commercial customers, including an experimental program designed to provide access to market pricing for up to 200 MW of medium and large commercial customers;

•recovery of the deferral and rate base effects of the construction and operating costs of the Ocotillo modernization project (see discussion below of the 2017 Settlement Agreement); and

•continued recovery of the remaining investment and other costs related to the retirement and closure of the Navajo Generating Station (the “Navajo Plant”) (see “Navajo Plant” below).

On October 2, 2020, the ACC Staff, the Residential Utility Consumer Office (“RUCO”) and other intervenors filed their initial written testimony with the ~~ACC in this rate case.~~ACC. The ACC Staff ~~recommends,~~recommended, among other things, a (i) an $89.7 million revenue increase, (ii) an average annual customer bill increase of 2.7%, (iii) a return on equity of 9.4%, (iv) a 0.3% or, as an alternative, a 0% return on the increment of fair value rate base greater than original cost, (v) the recovery of the deferral and rate base effects of the construction and operating costs of the Four Corners SCR project and (vi) the recovery of the rate base effects of the construction and ongoing consideration of the deferral of the Ocotillo modernization project. RUCO ~~recommends,~~recommended, among other things, (i) a ~~(i)~~ $20.8 million revenue decrease, (ii) an average annual customer bill decrease of 0.63%, (iii) a return on equity of 8.74%, (iv) a 0% return on the increment of fair value rate base, (v) the nonrecovery of the deferral and rate base effects of the construction and operating costs of the Four Corners SCR project pending further consideration, and (vi) the recovery of the deferral and rate base effects of the construction and operating costs of the Ocotillo modernization project. Upon conclusion of APS's rate case and the completion of the deferral mechanisms, approximately $110 million of on-going operating costs related to the Four Corners SCR project and the Ocotillo modernization project will start to be reflected on APS’s income statement.

The filed ACC Staff and intervenor testimony include additional recommendations, some of which materially differ from APS’s filed application. On November 6, 2020, APS filed its rebuttal testimony and the principal provisions which differ from its initial application include, among other things, (i) a ~~(i)~~ $169 million revenue increase, (ii) average annual customer bill increase of 5.14%, (iii) return on equity of 10%, (iv) return on the increment of fair value rate base of 0.8%, (v) new cost recovery adjustor mechanism, the Advanced Energy Mechanism (“AEM”), to enable more timely recovery of clean investments as APS pursues its clean energy commitment, (vi) recognition that securitization is a potentially useful financing tool to recover the remaining book value of retiring assets and effectuate a transition to a cleaner energy future that APS intends to pursue, provided legislative hurdles are addressed, and (vii) a Coal Community Transition (“CCT”) plan related to the closure or future closure of coal-fired generation facilities, of which $25 million would be funds that are not recoverable through rates with a proposal that the remainder be funded by customers over 10 years.

~~COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

funds not recoverable through rates, (v) $12 million that will be paid over five years to the Navajo County Communities surrounding Cholla Power Plant, which would primarily be funded by customers, and (vi) $3.7 million that will be paid over five years to the Hopi Tribe related to APS’s ownership interests in the Navajo ~~Generating Station,~~Plant, which would primarily be funded by customers. The commitment of funds that would not be recoverable through rates of $25 million were recognized in our December 31, 2020 financials. In 2021, APS committed an additional $900,000 to be paid to the Hopi Tribe related to APS’s ownership interests in the Navajo Plant, and this amount was recognized in its December 31, 2021 financials.

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On December 4, 2020, the ACC Staff and intervenors filed surrebuttal testimony. The ACC Staff reduced its recommended rate increase to $59.8 million, or an average annual customer bill increase of 1.82%. In RUCO’s surrebuttal, the recommended revenue decrease changed to $50.1 million, or an average annual customer bill decrease of 1.52%.

The hearing concluded on March 3, 2021, and the post-hearing briefing ~~schedule~~ concluded on April 30, 2021. In May 2021, the ACC declined to re-open the evidentiary record in APS’s pending rate case to take additional evidence on topics raised by certain ACC Commissioners, including adjustor cost recovery mechanisms.

On August 2, 2021, the Administrative Law Judge issued a Recommended Opinion and Order in ~~APS’s rate case~~the 2019 Rate Case (the “2019 Rate Case ROO”). and issued corrections on September 10 and September 20, 2021. The 2019 Rate Case ROO ~~recommends,~~recommended, among other things, (i) a ~~(i)~~ $111 million ~~base~~decrease in annual revenue ~~decrease,~~requirements, (ii) a return on equity ~~for original cost rate base~~ of 9.16%, (iii) a ~~0.15%~~0.30% return on the increment of fair value rate base greater than original cost, with total fair value rate of return further adjusted to include a ~~0.10%~~0.03% reduction to return on equity resulting in an effective fair value rate of return of ~~0.05%~~4.95%, (iv) the nonrecovery of the deferral and rate base effects of the operating costs and construction of the Four Corners SCR project (see ~~"Four~~“Four Corners SCR Cost ~~Recovery"~~Recovery” below for additional information), (v) the recovery of the deferral and rate base effects of the operating costs and construction of the Ocotillo modernization project, which includes a reduction in the return on the deferral, ~~and~~ (vi) a 15% disallowance of annual amortization of Navajo Plant regulatory asset ~~recovery.~~recovery, (vii) the denial of the request to defer, until APS’s next general rate case, the increase or decrease in its Arizona property taxes attributable to tax rate changes, and (viii) a collaborative process to review and recommend revisions to APS’s adjustment mechanisms within 12 months after the date of the decision. The 2019 Rate Case ROO also recommended that the CCT plan include the following components: (i) $50 million that will be paid over 10 years to the Navajo Nation, (ii) $5 million that will be paid over five years to the Navajo County Communities surrounding Cholla Power Plant, and (iii) $1.675 million that will be paid to the Hopi Tribe related to APS’s ownership interests in the Navajo ~~Generating Station.~~Plant. These amounts would be recoverable from APS’s customers through the ~~RES.~~Arizona Renewable Energy Standard and Tariff (“RES”) adjustment mechanism. APS ~~expects to file an exception~~filed exceptions on September 13, 2021, regarding the disallowance of the SCR cost deferrals and plant investments that was recommended in the 2019 Rate Case ROO, among other issues.

On October 6, 2021 and ~~APS is continuing~~October 27, 2021, the ACC voted on various amendments to ~~evaluate any additional exceptions it may file.~~the 2019 Rate Case ROO that would result in, among other things, (i) a return on equity of 8.70%, (ii) the recovery of the deferral and rate base effects of the operating costs and construction of the Four Corners SCR project, with the exception of $215.5 million (see “Four Corners SCR Cost Recovery” below), (iii) that the CCT plan include the following components: (a) a payment of $1 million to the Hopi Tribe within 60 days of the 2019 Rate Case decision, (b) a payment of $10 million over three years to the Navajo Nation, (c) a payment of $0.5 million to the Navajo County communities within 60 days of the 2019 Rate Case decision, (d) up to $1.25 million for electrification of homes and businesses on the Hopi reservation, and (e) up to $1.25 million for the electrification of homes and businesses on the Navajo Nation reservation. These payments and expenditures are attributable to the future closures of Four Corners and Cholla, along with the prior closure of the Navajo Plant and all ordered payments and expenditures would be recoverable through rates, and (iv) a change in the residential on-peak time-of-use period from 3 p.m. to 8 p.m. to 4 p.m. to 7 p.m. Monday through Friday, excluding holidays. The 2019 Rate Case ROO, ~~will be discussed~~as amended, results in a total annual revenue decrease for APS of $4.8 million, excluding temporary CCT payments and expenditures. On November 2, 2021, the ACC approved the 2019 Rate Case ROO, as amended. On November 24, 2021, APS filed an application for rehearing of the 2019 Rate Case with the ACC and the application was deemed denied on December 15, 2021, as the ACC did not act upon it. On December 17, 2021, APS filed its Notice of Direct Appeal at ~~an upcoming ACC open meeting.~~the Arizona Court of Appeals and a Petition for Special Action with the Arizona Supreme Court, requesting review of the disallowance of $215 million of Four Corners SCR plant investments and deferrals (see “Four Corners SCR Cost Recovery” below for additional information) and the 20 basis point penalty reduction to the return on equity. On February 8, 2022, the Arizona Supreme Court declined to accept jurisdiction on APS’s Petition for

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Special Action. The appeal at the Arizona Court of Appeals is proceeding in the normal course. APS cannot predict the outcome of this proceeding.

Consistent with the 2019 Rate Case decision, APS implemented the new rates effective as of December 1, 2021. On December 3, 2021, ACC Staff notified the ACC of a discrepancy between the written decision, which approved the change in time-of-use on-peak hours to 4 p.m. to 7 p.m. but did not explicitly approve the 10 months contemplated in APS’s verbal testimony to implement the new time-of-use hours. On December 16, 2021, the ACC ordered APS to complete the implementation of the time-of-use peak period by April 1, 2022. On January 12, 2022, the ACC voted to extend the deadline until September 1, 2022, to complete the implementation of the new on-peak hours for residential customers. In addition, the ACC ordered extensive compliance and reporting obligations and will be continuing to explore whether penalties or rebates would be owed to certain customers. APS cannot predict the outcome of this matter.

Additionally, consistent with the 2019 Rate Case decision, as of April 2022, APS has completed the following payments that will be recoverable through rates related to the CCT: (i) $3.33 million to the Navajo Nation; (ii) $500,000 to the Navajo County communities; and (iii) $1 million to the Hopi Tribe. Consistent with APS’s commitment to the impacted communities, APS has also completed the following payments: (i) $500,000 to the Navajo Nation for CCT; (ii) $1.1 million to the Navajo County Communities for CCT and economic development; and (iii) $1.25 million to the Hopi Tribe for CCT and economic development. The ACC has also authorized $1.25 million to be recovered through rates for electrification of homes and businesses on both the Navajo Nation and Hopi reservation. Expenditure of the recoverable funds for electrification of homes and businesses on the Navajo Nation and the Hopi reservations is contingent upon completion of a census of the unelectrified homes and businesses in each that are also within APS service territory.

APS expects to file an application with the ACC for its next general retail rate case by the end of October 2022, allowing for a test year ending June 30, 2022.

Information Technology ACC Investigation

On December 16, 2021, the ACC opened an investigation into various matters related to APS’s Information Technology department, including information about technology projects, costs, vendor management leadership and decision making. APS is cooperating with the investigation. APS cannot predict the outcome of this matter.

2016 Retail Rate Case Filing ~~with the Arizona Corporation Commission~~

On June 1, 2016, APS filed an application with the ACC for an annual increase in retail base rates. On March 27, 2017, a majority of the stakeholders in the general retail rate case, including the ACC Staff, RUCO, limited income advocates and private rooftop solar organizations signed a settlement agreement (the “2017 Settlement Agreement”) and filed it with the ACC. The 2017 Settlement Agreement provides for a net retail base rate increase of $94.6 million, excluding the transfer of adjustor balances, consisting of: (1) a non-fuel, non-depreciation, base rate increase of $87.2 million per year; (2) a base rate decrease of $53.6 million attributable to reduced fuel and purchased power costs; and (3) a base rate increase of $61.0 million due to changes in depreciation schedules. The average annual customer bill impact under the 2017 Settlement Agreement was calculated as an increase of 3.28% (the average annual bill impact for a typical APS residential customer was calculated as an increase of 4.54%).

Other key provisions of the ~~agreement~~2017 Settlement Agreement include the following:

•an authorized return on common equity of 10.0%;

•a capital structure comprised of 44.2% debt and 55.8% common equity;

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•a cost deferral order for potential future recovery in APS’s next general retail rate case for the construction and operating costs APS incurs for its Ocotillo modernization project;

•a cost deferral and procedure to allow APS to request rate adjustments prior to its next general retail rate case related to its share of the construction costs associated with installing SCR equipment at the Four ~~Corners Power Plant (“Four Corners”);~~Corners;

•a deferral for future recovery (or credit to customers) of the Arizona property tax expense above or below a specified test year level caused by changes to the applicable Arizona property tax rate;

•an expansion of the Power Supply Adjustor (“PSA”) to include certain environmental chemical costs and third-party energy storage costs;

•a new AZ Sun II program (now known as “APS Solar Communities”) for utility-owned solar distributed generation (“DG”) with the purpose of expanding access to rooftop solar for ~~low and moderate income~~low-and moderate-income Arizonans, recoverable through the ~~Arizona Renewable Energy Standard and Tariff (“RES”),~~RES, to be no less than $10 million per year in capital costs, and not more than $15 million per year in capital costs;

•an increase to the per kWh cap for the environmental improvement surcharge from $0.00016 to $0.00050 and the addition of a balancing account;

•rate design changes, including:

▪a change in the on-peak ~~time of use~~time-of-use period from ~~noon-7~~noon to 7 p.m. to 3 ~~p.m.-8~~p.m. to 8 p.m. Monday through Friday, excluding holidays;

▪non-grandfathered ~~distributed generation (“DG”)~~DG customers would be required to select a rate option that has time of use rates and either a new grid access charge or demand component;

▪a Resource Comparison Proxy (“RCP”) for exported energy of 12.9 cents per kWh in year one; and

•an agreement by APS not to pursue any new self-build generation (with certain exceptions) having an in-service date prior to January 1, 2022 (extended to December 31, 2027, for combined-cycle generating units), unless expressly authorized by the ACC.

Through a separate agreement, APS, industry representatives, and solar advocates committed to stand by the 2017 Settlement Agreement and refrain from seeking to undermine it through ballot initiatives, legislation or advocacy at the ACC.

On August 15, 2017, the ACC approved ~~(by a vote of 4-1)~~ the 2017 Settlement Agreement without material ~~modifications. On~~modifications and on August 18, 2017, the ACC issued a final written Opinion and Order reflecting its decision in APS’s general retail rate case (the “2017 Rate Case Decision”)~~, which is subject to requests for rehearing and potential appeal.~~. The new rates went into effect on August 19, 2017.

On January 3, 2018, an APS customer filed a petition with the ACC that was determined by the ACC Staff to be a complaint filed pursuant to Arizona Revised Statute §40-246 (the “Complaint”). The Complaint was later amended alleging that the rates and charges in the 2017 Rate Case Decision are not just and reasonable. The ACC held a hearing on this matter, and the Administrative Law Judge issued a Recommended Opinion and Order recommending that the Complaint be dismissed. On July 3, 2019, the Administrative Law Judge issued an amendment to the Recommended Opinion and Order that incorporated the requirements of the rate review of the 2017 Rate Case Decision (see below discussion regarding the rate review). On July 10, 2019, the ACC adopted the Administrative Law Judge’s amended Recommended Opinion and Order along with several ACC Commissioner amendments and an amendment incorporating the results of the rate review and resolved the Complaint.

See “Rate Plan Comparison Tool and Investigation” below for information regarding a review and investigation pertaining to the rate plan comparison tool offered to APS customers and other related issues.

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~~ACC Review of APS 2017 Rate Case Decision~~

On December 24, 2018, certain ACC Commissioners filed a letter stating that because the ACC had received a substantial number of complaints that the rate increase authorized by the 2017 Rate Case Decision was much more than anticipated, they believe there is a possibility that APS is earning more than was authorized by the 2017 Rate Case Decision. Accordingly, the ACC Commissioners requested the ACC Staff to perform a rate review of APS using calendar year 2018 as a test year. The ACC Commissioners also asked the ACC Staff to evaluate APS’s efforts to educate its customers regarding the new rates approved in the 2017 Rate Case Decision.

On June 4, 2019, the ACC Staff filed a proposed order regarding the rate review of the 2017 Rate Case Decision. On June 11, 2019, the ACC Commissioners approved the proposed ACC Staff order with amendments. The key provisions of the amended order include the following:

•~~APS must file a rate case no later than October 31, 2019, using a June 30, 2019 test year;~~

•until the conclusion of the rate case being filed no later than October 31, 2019, APS must provide information on customer bills that shows how much a customer would pay on their most economical rate given their actual usage during each month;

•~~APS customers can switch rate plans during an open enrollment period of six months;~~

•APS must identify customers whose bills have increased by more than 9% and that are not on the most economical rate and provide such customers with targeted education materials and an opportunity to switch rate plans;

•~~APS must provide grandfathered net metering customers on legacy demand rates an opportunity to switch to another legacy rate to enable such customers to fully benefit from legacy net metering rates;~~

•~~APS must fund and implement a supplemental customer education and outreach program to be developed with and administered by ACC Staff and a third-party consultant; and~~

•APS must fund and organize, along with the third-party consultant, a stakeholder group to suggest better ways to communicate the impact of changes to adjustor cost recovery mechanisms (see below for discussion on cost recovery mechanisms), including more effective ways to educate customers on rate plans and to reduce energy usage.

APS filed its rate case on October 31, 2019 (see “2019 Retail Rate Case Filing with the Arizona Corporation Commission” above for more information). APS does not believe that the implementation of the other key provisions of the amended order regarding the rate review will have a material impact on its financial position, results of operations or cash flows.

On May 19, 2020, the ACC Staff filed a third-party consultant’s report which evaluated the effectiveness of APS’s customer outreach and education program related to the 2017 Rate Case Decision. On May 29, 2020, the Chairman of the ACC filed a letter with the ACC in response to this report and is alleging that APS is out of compliance with the 2017 Rate Case Decision and is over-earning. The Chairman proposed that the current rates should be classified as interim rates and customers held harmless if APS’s activities have caused the rates set in the 2017 Rate Case Decision to not be just and reasonable. Also, on May 29, 2020, a second commissioner filed a letter with the ACC agreeing with the Chairman’s assertions and further asserting that the 2017 Rate Case Decision should be re-opened. On June 18, 2020, at an ACC Open Meeting, the matters raised in these letters were discussed. The ACC did not vote to move forward with any adjustments to APS’s current rates. On November 4, 2020, the ACC voted to administratively close this docket.

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Cost Recovery Mechanisms

APS has received regulatory decisions that allow for more timely recovery of certain costs outside of a general retail rate case through the following recovery mechanisms.

Renewable Energy Standard. In 2006, the ACC approved the RES. Under the RES, electric utilities that are regulated by the ACC must supply an increasing percentage of their retail electric energy sales from eligible renewable resources, including solar, wind, biomass, biogas and geothermal technologies. In order to achieve these requirements, the ACC allows APS to include a RES surcharge as part of customer bills to recover the approved amounts for use on renewable energy projects. Each year, APS is required to file a five-year implementation plan with the ACC and seek approval for funding the upcoming year’s RES budget. In 2015, the ACC revised the RES rules to allow the ACC to consider all available information, including the number of rooftop solar arrays in a utility’s service territory, to determine compliance with the RES.

On November 20, 2017, APS filed an updated 2018 RES budget to include budget adjustments for APS Solar Communities (formerly known as AZ Sun II), which was approved as part of the 2017 Rate Case

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Decision. APS Solar Communities is a 3-year program authorizing APS to spend $10 million to $15 million in capital costs each year to install utility-owned DG systems for low to moderate income residential homes, non-profit entities, Title I schools and rural government facilities. The 2017 Rate Case Decision provided that all operations and maintenance expenses, property taxes, marketing and advertising expenses, and the capital carrying costs for this program will be recovered through the RES.

On July 1, 2019, APS filed its 2020 RES Implementation Plan and proposed a budget of approximately $86.3 million. APS’s budget request supports existing approved projects and commitments and requests a permanent waiver of the RES residential distributed energy requirement for ~~2020 contained in the RES rules.~~2020. On September 23, 2020, the ACC approved the 2020 RES Implementation Plan, including aAPS’s requested waiver of the residential distributed energy requirements for ~~the 2020 implementation year.~~2020. In addition, the ACC approved the implementation of a new pilot program that incentivizes Arizona households to install at-home battery systems. Recovery of the costs associated with the pilot will be addressed in the 2021 Demand Side Management Implementation Plan (“DSM Plan”).

On July 1, 2020, APS filed its 2021 RES Implementation Plan and proposed a budget of approximately $84.7 million. APS’s budget request supports existing approved projects and commitments and requests a permanent waiver of the RES residential distributed energy requirement for ~~2021 contained in the RES rules.~~2021. In the 2021 RES Implementation Plan, APS requested $4.5 million to meet revenue requirements associated with the APS Solar Communities program to complete installations delayed as a result of the COVID-19 pandemic in 2020. On June 7, 2021, the ACC approved the 2021 RES Implementation Plan, including aAPS’s requested waiver of the residential distributed energy requirements for ~~the 2021 implementation year.~~2021. As part of the approval, the ACC approved the requested budget and authorized APS to collect $68.3 million through the Renewable Energy Adjustment Charge to support ~~APS's~~APS’s RES programs.

~~On May 21,~~In June 2021, the ACC adopted a clean energy rules package which would require APS to meet certain clean energy standards and technology procurement mandates, obtain approval for its action plan included in its IRP, and seek cost recovery in a rate process. ~~The~~Since the adopted clean energy rules ~~included substantial changes since~~differed substantially from the original Recommended ~~Opinion and~~ Order and ~~thus will require~~Opinion, supplemental rulemaking procedures were required before ~~taking effect. APS cannot predict~~ the ~~outcome of this matter.~~rules could become effective. On January 26, 2022, the ACC reversed its prior decision and declined to send the final draft energy rules through the rulemaking process. Instead, the ACC opened a new docket to consider all-source requests for proposals (“RFP”) requirements and the IRP process. See “Energy Modernization Plan” below for more information.

On July 1, 2021, APS filed its 2022 RES Implementation Plan and proposed a budget of approximately $93.1 million. APS filed an amended 2022 RES Implementation Plan on December 9, 2021, with a proposed budget of $100.5 million. This budget includes funding for programs to comply with the decision in the 2019 Rate Case, including the ACC authorizing spending $20 million to $30 million in capital costs for the APS Solar Communities program each year for a period of three years from the effective date of the 2019 Rate Case decision. APS’s budget proposal supports existing approved projects and commitments and requests a

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~~permanent~~ waiver of the RES residential and non-residential distributed energy requirements for 2022. On May 18, 2022, ~~contained in~~ the ~~RES rules. The~~ ACC ~~has not yet ruled on~~approved the 2022 RES Implementation ~~Plan.~~Plan, including an amendment requiring a stakeholder working group convene to develop a community solar program for the Commission’s consideration at a future date.

In response to an ACC inquiry, the ACC Staff filed a report providing the history of APS’s long-term purchased power contract of the 280 MW Concentrating Solar Power Plant. This report outlines alternative options that the ACC could pursue to address the costs of this contract, which was executed in February 2008. On July 13, 2022, the ACC approved an option to take no action at this time.

Demand Side Management Adjustor Charge. The ACC Electric Energy Efficiency Standards require APS to submit a DSM Plan annually for review by and approval ofby the ACC. Verified energy savings from

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APS’s resource savings projects can be counted toward compliance with the Electric Energy Efficiency Standards; however, APS is not allowed to count savings from systems savings projects toward determination of the achievement of performance incentives, nor may APS include savings from these system savings projects in the calculation of its Lost Fixed Cost Recovery (“LFCR”) ~~mechanism (see~~mechanism. See below for discussion of the ~~LFCR).~~LFCR.

On September 1, 2017, APS filed its 2018 DSM Plan, which proposed modifications to the ~~demand side management~~DSM portfolio to better meet system and customer needs by focusing on peak demand reductions, storage, load shifting and demand response programs in addition to traditional energy savings measures. The 2018 DSM Plan sought a requested budget of $52.6 million and requested a waiver of the Electric Energy Efficiency Standard for 2018. On November 14, 2017, APS filed an amended 2018 DSM Plan, which revised the allocations between budget items to address customer participation levels but kept the overall budget at $52.6 million.

On December 31, 2018, APS filed its 2019 DSM Plan, which requested a budget of $34.1 million and focused on DSM strategies to better meet system and customer needs, such as peak demand reduction, load shifting, storage and electrification strategies.

On December 31, 2019, APS filed its 2020 DSM Plan, which requested a budget of $51.9 million and continued APS’s focus on DSM strategies such as peak demand reduction, load shifting, storage and electrification strategies. The 2020 DSM Plan addressed all components of the pending 2018 and 2019 DSM plans, which enabled the ACC to review the 2020 DSM Plan only. On May 15, 2020, APS filed an amended 2020 DSM Plan to provide assistance to customers experiencing economic impacts of the COVID-19 pandemic. The amended 2020 DSM Plan requested the same budget amount of $51.9 million. On September 23, 2020, the ACC approved the amended 2020 DSM Plan.

On April 17, 2020, APS filed an application with the ACC requesting a COVID-19 emergency relief package to provide additional assistance to its customers. On May 5, 2020, the ACC approved APS returning $36 million that had been collected through the DSM Adjustor Charge, but not allocated for current DSM programs, directly to customers through a bill credit in June 2020. APS has refunded approximately $43 million to customers. The additional $7 million over the ~~approved~~ACC-approved amount was the result of the kWh credit being based on historic consumption which was different than actual consumption induring the refund period. The difference was recorded to the DSM balancing account and was included in the 2021 DSM Implementation Plan, ~~which was approved by the ACC on June 13, 2021.~~as described below.

On December 31, 2020, APS filed its 2021 DSM Plan, which requested a budget of $63.7 million and continued APS’s focus on DSM strategies, such as peak demand reduction, load shifting, storage and electrification strategies, as well as enhanced assistance to customers impacted economically by COVID-19. On April 6, 2021, APS filed an amended 2021 DSM Plan that proposed an additional performance incentive for customers participating in the residential energy storage pilot program approved in the 2020 RES Implementation Plan. On July 13, 2021, the ACC approved the amended 2021 DSM Plan.

On April 20, 2021, APS filed a request to extend the June 1, 2021 deadline to file its 2022 DSM Plan until 120 days after the ACC has taken action on ~~APS's~~APS’s amended 2021 DSM Plan. The ACC approved ~~this~~the request, granting an extension until 120 days after the ACC action on ~~June 8,~~the 2021 DSM Plan, or December 31, 2021, whichever is later. On December 17, 2021, APS filed its 2022 DSM Plan, which requested a budget of $78.4 million and represents an increase of approximately $14 million in DSM spending above 2021. In March 2022, APS indicated that it intends to file its 2023 DSM Plan within 120 days after the ACC has taken action on APS's 2022 DSM Plan. The ACC has not yet ruled on the 2022 DSM Plan.

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Power Supply Adjustor Mechanism and Balance. The PSA provides for the adjustment of retail rates to reflect variations primarily in retail fuel and purchased power costs. The following table shows the changes in the deferred fuel and purchased power regulatory asset for ~~2021~~2022 and ~~2020~~2021 (dollars in thousands):

Six Months Ended
June 30,
2021 2020
Beginning balance $ 175,835 $ 70,137
Deferred fuel and purchased power costs — current period 135,905 26,473
Amounts (charged) refunded to customers (10,828) 4,815
Ending balance $ 300,912 $ 101,425

The PSA rate for the PSA year beginning February 1, 2019 was $0.001658 per kWh, as compared to the $0.004555 per kWh for the prior year. This rate was comprised of a forward component of $0.000536 per kWh and a historical component of $0.001122 per kWh. This represented a $0.002897 per kWh decrease compared to 2018. These rates went into effect as filed on February 1, 2019.


	Six Months Ended June 30,
	2022		2021
Beginning balance	$	388,148	$	175,835
Deferred fuel and purchased power costs — current period	98,707		135,905
Amounts charged to customers	(96,842)		(10,828)
Ending balance	$	390,013	$	300,912

On November 27, 2019, APS filed its PSA rate for the PSA year beginning February 1, 2020. That rate was $(0.000456) per kWh, ~~and~~which consisted of a forward component of $(0.002086) per kWh and a historical component of $0.001630 per kWh. The 2020 PSA rate is a $0.002115 per kWh decrease compared to the 2019 PSA year. These rates went into effect as filed on February 1, 2020.

On November 30, 2020, APS filed its PSA rate for the PSA year beginning February 1, 2021. That rate was $0.003544 per kWh, ~~and~~which consisted of a forward component of $0.003434 per kWh and a historical component of $0.000110 per kWh. The 2021 PSA rate is a $0.004 per kWh increase compared to the 2020 PSA year, which is the maximum permitted under the Plan of Administration for the PSA. This left $215.9 million of fuel and purchased power costs above this annual cap which will be reflected in future year resets of the PSA. These rates were to be effective on February 1, 2021, but APS delayed the effectiveness of these rates until the first billing cycle of April 2021 due to concerns of the impact on customers during COVID-19. In March 2021, the ACC voted to implement the 2021 PSA rate on a staggered basis, with 50% of the rate increase ~~effective~~taking effect in April 2021, and the remaining 50% ~~of the increase effective~~taking effect in November 2021. The PSA rate implemented on April 1, 2021 was $0.001544 per kWh, ~~and~~which consisted of a forward component of $(0.004444) per kWh and a historical component of $0.005988 per kWh. On November 1, 2021, the remaining increase ~~will be~~was implemented to a rate of $0.003544 per kWh and ~~will consist~~consisted of a forward component of $(0.004444) per kWh and a historical component of $0.007988 per kWh. As part of this approval, the ACC ordered ACC Staff to conduct a fuel and purchased power procurement audit ~~which is currently underway,~~ to better understand the factors that contributed to the ~~increase.~~increase in fuel costs.

On April 1, 2022, the ACC filed a final report of its audit findings regarding APS’s fuel and purchased power costs for the period January 2019 through January 2021. The report contains an in-depth review of APS’s fuel and purchased power contracts, its monthly fuel accounting activities, its forecasting and dispatching procedures, and its monthly PSA filings, among other fuel-related activities. The report finds that the APS’s fuel processing accounting practices, dispatching procedures, and procedures for hedging activity are reasonable and appropriate. The report includes several recommendations for the ACC’s consideration, including review of current contracts, maintenance schedules, and certain changes and improvements to the schedules in APS’s monthly PSA filings. APS cannot predict the ~~outcome~~future impacts, if any, of this audit.

On November 30, 2021, APS filed its PSA rate for the PSA year beginning February 1, 2022. That rate was $0.007544 per kWh, which consisted of a forward component of $(0.004842) per kWh and a historical component of $0.012386 per kWh. The 2022 PSA rate is a $0.004 per kWh increase compared to the 2021 PSA year, which is the maximum permitted under the Plan of Administration for the PSA. These rates went into effect as filed on February 1, 2022. At the time of the compliance filing, the amount remaining

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over the annual cap was approximately $365 million of fuel and purchased power costs which will be reflected in future year resets of the PSA.

On March 15, 2019, APS filed an application with the ACC requesting approval to recover the costs related to 2 energy storage power purchase tolling agreements through the ~~PSA. On December 29, 2020, the ACC Staff filed its report~~PSA, and ~~recommended the storage costs be included in the PSA once the systems are in-service. On~~on January 12, 2021, the ACC approved this application. On October 28, 2021, APS filed an application ~~but did~~requesting approval to recover costs related to three additional energy storage projects through the PSA once the systems are in service, and on December 16, 2021, the ACC approved this application. On February 22, 2022, APS filed an application requesting similar recovery through the PSA for a solar plus energy storage project, and on April 13, 2022, the ACC approved this application. For each of these applications that have been approved by the ACC, the ACC has not ~~rule~~ruled on ~~the~~ prudency.

Environmental Improvement Surcharge. The EIS permits APS to recover the capital carrying costs (rate of return, depreciation and taxes) plus incremental operations and maintenance expenses associated with environmental improvements made outside of a test year to comply with environmental standards set by federal, state, tribal, or local laws and regulations. A filing is made on or before February 1 each year for qualified environmental improvements ~~made during~~since the prior ~~calendar~~rate case test year, and the new charge becomes effective April 1 unless suspended by the ACC. There is an overall cap of $0.0005 per kWh (approximately $13 million to $14 million per year). APS’s February 1, ~~2021~~2022 application requested an increase in the charge to

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~~$10.3~~ $11.4 million, or ~~$1.5~~$1.1 million over the prior-period charge, and it became effective with the first billing cycle in April ~~2021.~~2022.

Transmission Rates, Transmission Cost Adjustor (“TCA”) and Other Transmission Matters. In July 2008, FERC approved a modification to APS’s Open Access Transmission Tariff to allow APS to move from fixed rates to a formula rate-setting methodology in order to more accurately reflect and recover the costs that APS incurs in providing transmission services. A large portion of the rate represents charges for transmission services to serve APS’s retail customers (“Retail Transmission Charges”). In order to recover the Retail Transmission Charges, APS was previously required to file an application with, and obtain approval from, the ACC to reflect changes in Retail Transmission Charges through the TCA. Under the terms of the settlement agreement entered into in 2012 regarding APS’s rate case (“2012 Settlement Agreement”), however, an adjustment to rates to recover the Retail Transmission Charges will be made annually each June 1 and will go into effect automatically unless suspended by the ACC.

The formula rate is updated each year effective June 1 on the basis of APS’s actual cost of service, as disclosed in APS’s FERC Form 1 report for the previous fiscal year. Items to be updated include actual capital expenditures made as compared with previous projections, transmission revenue credits and other items. APS reviews the proposed formula rate filing amounts with the ACC Staff. Any items or adjustments which are not agreed to by APS and the ACC Staff can remain in dispute until settled or litigated atwith FERC. Settlement or litigated resolution of disputed issues could require an extended period of time and could have a significant effect on the Retail Transmission Charges because any adjustment, though applied prospectively, may be calculated to account for previously over- or under-collected amounts. The resolution of proposed adjustments can result in significant volatility in the revenues to be collected.

On March 7, 2018, APS made a filing to make modifications to its annual transmission formula to provide transmission customers the benefit of the reduced federal corporate income tax rate resulting from the Tax Cuts and Jobs Act (“Tax Act”) beginning in its 2018 annual transmission formula rate update filing. These modifications were approved by FERC on May 22, 2018 and reduced APS’s transmission rates compared to the rate that would have gone into effect absent these changes. On March 17, 2020, APS made a filing to make ~~further~~ modifications to its annual transmission formula to provide additional transparency for excess and deficient accumulated deferred income taxes resulting from the Tax Cuts and Job Act (the “Tax Act”), as well as for future local, state, and federal statutory tax rate changes. ~~This~~APS amended its March 17, 2020 filing ~~is pending with FERC.~~on April 28, 2020, September 29, 2021, and October 27, 2021. In January 2022, FERC approved APS’s modifications to its annual transmission formula.

~~Effective June 1, 2019, APS’s annual wholesale transmission revenue requirement for all users~~

Table of its transmission system increased by approximately $25.8 million for the twelve-month period beginning June 1, 2019 in accordance with the FERC-approved formula. Of this amount, wholesale customer rates increased by $21.1 million and retail customer rates would have increased by approximately $4.7 million. However, since changes in retail transmission charges are reflected through the TCA after consideration of transmission recovery in retail base rates and the ACC approved TCA balancing account, the retail revenue requirement increased by a total of $4.9 million, resulting in a decrease to residential rates and an increase to commercial rates. An adjustment to APS’s retail rates to recover FERC approved transmission charges went into effect automatically on June 1, 2019.Contents

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Effective June 1, 2020, APS’s annual wholesale transmission revenue requirement for all users of its transmission system decreased by approximately $6.1 million for the ~~twelve-month~~12-month period beginning June 1, 2020, in accordance with the FERC-approved formula. Of this net amount, wholesale customer rates increased by $4.8 million and retail customer rates would have decreased by approximately $10.9 million. However, since changes in ~~retail transmission charges~~Retail Transmission Charges are reflected through the TCA after consideration of transmission recovery in retail base rates and the ACC approved balancing account, the retail revenue requirement decreased by a total of $7.4 million, resulting in reductions to both residential and commercial rates. An adjustment to APS’s retail rates to recover FERC approved transmission charges went into effect automatically on June 1, 2020.

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Effective June 1, 2021, APS’s annual wholesale transmission revenue requirement for all users of its transmission system increased by approximately $4 million for the ~~twelve-month~~12-month period beginning June 1, 2021, in accordance with the FERC-approved formula. Of this net amount, wholesale customer rates decreased by approximately $3.2 million and retail customer rates would have increased by approximately $7.2 million. However, since changes in ~~retail transmission charges~~Retail Transmission Charges are reflected through the TCA after consideration of transmission recovery in retail base rates and the ACC approved balancing account, the retail revenue requirement decreased by $28.4 million, resulting in reductions to both residential and commercial rates. An adjustment to APS’s retail rates to recover FERC-approved transmission charges went into effect automatically on June 1, 2021.

Effective June 1, 2022, APS’s annual wholesale transmission revenue requirement for all users of its transmission system decreased by approximately $33 million for the 12-month period beginning June 1, 2022, in accordance with the FERC-approved formula. Of this net amount, wholesale customer rates decreased by approximately $6.4 million and retail customer rates would have decreased by approximately $26.6 million. However, since changes in Retail Transmission Charges are reflected through the TCA after consideration of transmission recovery in retail base rates and the ACC approved balancing account, the retail revenue requirement decreased by $2.4 million, resulting in a reduction to the residential rate and increases to commercial rates. An adjustment to APS’s retail rates to recover FERC-approved transmission charges went into effect automatically on June 1, 2022.

Lost Fixed Cost Recovery Mechanism. The LFCR mechanism permits APS to recover on an after-the-fact basis a portion of its fixed costs that would otherwise have been collected by APS in the kWh sales lost due to APS energy efficiency programs and to DG such as rooftop solar arrays. The fixed costs recoverable by the LFCR mechanism ~~are currently~~were 2.5 cents for both lost residential and non-residential kWh as set forth in the 2017 Settlement Agreement. The fixed costs recoverable by the LFCR mechanism are currently 2.56 cents for lost residential and 2.68 cents for lost non-residential kWh as set forth in the 2019 Rate Case decision. The LFCR adjustment has a year-over-year cap of 1% of retail revenues. Any amounts left unrecovered in a particular year because of this cap can be carried over for recovery in a future year. The kWhs lost from energy efficiency are based on a third-party evaluation of APS’s energy efficiency programs. DG sales losses are determined from the metered output from the DG units.

On February 15, 2018, APS filed its 2018 annual LFCR adjustment, requesting that effective May 1, 2018, the LFCR be adjusted to $60.7 million. On February 6, 2019, the ACC approved the 2018 annual LFCR adjustment to become effective March 1, 2019. On February 15, 2019, APS filed its 2019 annual LFCR adjustment, requesting that effective May 1, 2019, the annual LFCR recovery amount be reduced to $36.2 million (a $24.5 million decrease from previous levels). On July 10, 2019, the ACC approved APS’s 2019 LFCR adjustment as filed, effective with the next billing cycle of July 2019. On February 14, 2020, APS filed its 2020 annual LFCR adjustment, requesting that effective May 1, 2020, the annual LFCR recovery amount be reduced to $26.6 million (a $9.6 million decrease from previous levels). On April 14, 2020, the ACC approved the 2020 LFCR adjustment as filed, effective with the first billing cycle in May 2020. On February 15, 2021, APS filed its 2021 annual LFCR adjustment, requesting that effective May 1, 2021, the annual LFCR recovery amount be increased to $38.5 million (an $11.8 million increase from previous levels). On April 13, 2021, the ACC voted not to approve the requested $11.8 million increase to the annual LFCR ~~adjustment,~~adjustment; thus, the previously approved rates ~~continue~~continued to remain ~~intact. The~~intact and the $11.8 million ~~will continue to be maintained in the LFCR regulatory asset balancing account and will be included~~increase was reflected in APS’s ~~next LFCR application~~2022 filing in accordance with the compliance requirements.

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As a result of the 2019 Rate Case decision, APS’s annual LFCR adjustor rate will be dependent on an annual earnings test filing, which will compare APS’s previous year’s rate of return with the related authorized rate of return. If the actual rate of return is higher than the authorized rate of return, the LFCR rate for the subsequent year is set at zero. APS determined that the changes to the LFCR mechanism, as a result of the 2019 Rate Case decision effective on December 1, 2021, did not materially impact its results of operations and financial statements for the year ended December 31, 2021. However, as a result of certain changes made to the LFCR mechanism in the 2019 Rate Case decision, the mechanism no longer qualified for alternative revenue program accounting treatment, which impacts the future timing of related revenue recognition.

On February 15, 2022, APS filed its 2022 annual LFCR adjustment, requesting that effective May 1, 2022, the annual LFCR recovery amount be increased to $59.1 million (a $32.5 million increase from previous levels, which was inclusive of the $11.8 million balance from the 2021 filing). On May 9, 2022, the ACC Staff filed its revised report and proposed order regarding APS’s 2022 LFCR adjustment, concluding that APS calculated the adjustment in accordance with its Plan of Administration. On May 18, 2022, the ACC approved the 2022 LFCR adjustment, with a rate effective date of June 1, 2022.

Tax Expense Adjustor Mechanism. As part of the 2017 Settlement Agreement, the parties agreed to a rate adjustment mechanism to address potential federal income tax reform and enable the pass-through of certain income tax effects to customers. The TEAM expressly applies to APS’s retail rates with the exception of a small subset of customers taking service under specially-approved tariffs. On December 22, 2017, the Tax Act was enacted. This legislation made significant changes to the federal income tax laws including a reduction in the corporate tax rate from 35% to 21% effective January 1, 2018.

On January 8, 2018, APS filed an application with the ACC that addressed the change in the marginal federal tax rate from 35% to 21% resulting from the Tax Act and reduced rates by $119.1 million annually through an equal cents per kWh credit (“TEAM Phase I”). On February 22, 2018, the ACC approved the reduction of rates through an equal cents per kWh credit. The rate reduction was effective for the first billing cycle in March 2018.

The impact of the TEAM Phase I, over time, is expected to be earnings neutral. However, on a quarterly basis, there is a difference between the timing and amount of the income tax benefit and the reduction in revenues refunded through the TEAM Phase I related to the lower federal income tax rate. The amount of

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the benefit of the lower federal income tax rate is based on quarterly pre-tax results, while the reduction in revenues refunded through the TEAM Phase I is based on a per kWh sales credit which follows our seasonal kWh sales pattern and is not impacted by earnings of the Company.

On August 13, 2018, APS filed a ~~second~~ request with the ACC that addressed the return of ~~an additional~~ $86.5 million in tax savings to customers related to the amortization of non-depreciation related excess deferred taxes previously collected from customers (“TEAM Phase II”). The ACC approved this request on March 13, 2019, effective the first billing cycle in April 2019 through the last billing cycle in March 2020.

On March 19, 2020, due to the COVID-19 pandemic, APS delayed the discontinuation of TEAM Phase II until the first billing cycle in May 2020. Amounts credited to customers after the last billing cycle in March 2020 ~~will be~~were recorded as a part of the balancing account and ~~will be~~were addressed for recovery as part of ~~APS’s~~the 2019 ~~ACC rate case.~~Rate Case. Both the timing of the reduction in revenues refunded through TEAM Phase II and the offsetting income tax benefit ~~are~~were recognized based upon our seasonal kWh sales pattern.

On April 10, 2019, APS filed a third request with the ACC that addressed the amortization of depreciation related excess deferred taxes over a 28.5-year period consistent with IRS normalization rules (“TEAM Phase III”). On October 29, 2019, the ACC approved TEAM Phase III providing both (i) a one-time bill credit of $64 million which was credited to customers on their December 2019 bills, and (ii) a monthly bill credit effective the first billing cycle in December 2019 which ~~will provide~~provided an additional benefit of $39.5 million to customers through December 31, 2020. On November 20, 2020, APS filed an application to continue the TEAM Phase III monthly bill credit through the earlier of December 31, 2021, or at the conclusion of ~~APS’s~~the 2019 ~~pending rate case.~~Rate Case. On December 9, 2020, the ACC approved this request. Both the timing of the reduction in revenues refunded through the TEAM Phase III monthly bill credit and the offsetting income tax benefit ~~are~~were recognized based upon APS’s seasonal kWh sales pattern.

As part of the 2019 Rate Case decision, the TEAM rates were reset to zero beginning December 31, 2021, and all impacts of the Tax Act were removed from the TEAM and incorporated into APS’s base rates. The TEAM was retained to address potential changes in tax law that may be enacted prior to a decision in APS’s next rate case.

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Net Metering

APS’s 2017 Rate Case Decision provides that payments by utilities for energy exported to the grid from residential DG solar facilities will be determined using a RCP methodology as determined in the ACC’s generic Value and Cost of Distributed Generation docket. RCP is a method that is based on the most recent five-year rolling average price that APS ~~pays~~incurs for utility-scale solar ~~projects, while a forecasted avoided cost methodology is being developed.~~projects. The price established by this RCP method will be updated annually (between general retail rate cases) but will not be decreased by more than 10% per year. ~~Once the~~The ACC is no longer pursuing development of a forecasted avoided cost methodology ~~is developed,~~as an option for utilities in place of the ~~ACC will determine in APS’s subsequent rate cases which method (or a combination of methods) is appropriate~~RCP. Commercial customers, grandfathered residential solar customers, and residential customers with DG systems other than solar facilities continue to ~~determine the actual price to be paid by APS~~qualify for ~~exported distributed energy.~~net metering.

In addition, the ACC made the following ~~determinations:~~determinations in the Value and Cost of Distributed Generation docket:

•RCP customers who have interconnected a DG system or submitted an application for interconnection for DG systems ~~prior to September 1, 2017, based on APS’s 2017 Rate Case Decision,~~ will be grandfathered for a period of 20 years from the date the customer’s interconnection application was accepted by the ~~utility;~~utility (for APS residential customers, as of September 1, 2017, based on APS’s 2017 Rate Case Decision);

•customers with DG solar systems are to be considered a separate class of customers for ratemaking purposes; and

•once an initial export price is set for ~~APS,~~utilities, no netting or banking of retail credits will be available for new DG customers, and the then-applicable export price will be guaranteed for new customers for a period of 10 years.

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This decision of the ACC addresses policy determinations only. The decision states that its principles will be applied in future general retail rate cases, and the policy determinations themselves may be subject to future change, as are all ACC policies. ~~A first-year export energy price of 12.9 cents per kWh was included in the 2017 Settlement Agreement and became effective on September 1, 2017.~~

In accordance with the 2017 Rate Case Decision, APS filed its request for a ~~third-year~~RCP export energy price of 10.5 cents per kWh on May 1, 2019. This price also reflects the 10% annual reduction discussed above. The new rate rider became effective on October 1, 2019. APS filed its request for a fourth-year export energy price of 9.4 cents per kWh on May 1, 2020, with a requested effective date of September 1, 2020. This price reflects the 10% annual reduction discussed above. On September 23, 2020, the ACC approved the annual reduction of the export energy price but voted to delay the effectiveness of the reduction in export prices until October 1, 2021. ~~APS’s~~In accordance with this decision, the RCP export energy price ~~will remain at 10.5~~of 9.4 cents per kWh ~~until~~became effective on October 1, 2021.

On ~~January 23, 2017, The Alliance for Solar Choice (“TASC”) sought rehearing of~~April 29, 2022, APS filed an application to decrease the ~~ACC’s decision regarding the value and cost of DG. TASC asserted that~~RCP price to 8.46 cents per kWh, reflecting a 10% annual reduction, to become effective September 1, 2022. On July 12, 2022, the ACC ~~improperly ignored~~approved the ~~Administrative Procedure Act, failed to give adequate notice regarding the scope of the proceedings, and relied on information that was not submitted~~RCP as evidence, among other alleged defects. TASC filed a Notice of Appeal in the Arizona Court of Appeals and filed a Complaint and Statutory Appeal in the Maricopa County Superior Court on March 10, 2017. As part of the 2017 Settlement Agreement described above, TASC agreed to withdraw these appeals when the ACC decision implementing the 2017 Settlement Agreement is no longer subject to appellate review.filed.

See “2016 Retail Rate Case ~~Filing with the Arizona Corporation Commission”~~Filing” above for information regarding an ACC order in connection with the rate review of the 2017 Rate Case Decision requiring APS to provide grandfathered net metering customers on legacy demand rates with an opportunity to switch to another legacy rate to enable such customers to benefit from legacy net metering rates.

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Subpoena from Former Arizona Corporation Commissioner Robert Burns

On August 25, 2016, then-Commissioner Robert Burns, individually and not by action of the ACC as a whole, served subpoenas in APS’s then current retail rate proceeding on APS and Pinnacle West for the production of records and information relating to a range of expenditures from 2011 through 2016. The subpoenas requested information concerning marketing and advertising expenditures, charitable donations, lobbying expenses, contributions to 501(c)(3) and (c)(4) nonprofits and political contributions. The return date for the production of information was set as September 15, 2016. The subpoenas also sought testimony from Company personnel having knowledge of the material, including the Chief Executive Officer.

OnAfter various proceedings between September 9, 2016 ~~APS filed with the ACC~~and March 2020, at which time Burns’ appeal of a motion to quash the subpoenas or, alternatively to stay APS’s obligations to comply with the subpoenas and decline to decide APS’s motion pending court proceedings. Contemporaneously with the filing of this motion, APS and Pinnacle West filed a complaint for special action and declaratory judgment in the Superior Court of Arizona for Maricopa County, seeking a declaratory judgment that Burns’ subpoenas are contrary to law. On September 15, 2016, APS produced all non-confidential and responsive documents and offered to produce any remaining responsive documents that are confidential after an appropriate confidentiality agreement is signed.

On February 7, 2017, Burns opened a new ACC docket and indicated that its purpose is to study and rectify problems with transparency and disclosure regarding financial contributions from regulated monopolies or other stakeholders who may appear before the ACC that may directly or indirectly benefit an ACC Commissioner, a candidate for ACC Commissioner, or key ACC Staff. As part of this docket, Burns set March 24, 2017 as a deadline for the production of all information previously requested through the subpoenas.

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Neither APS nor Pinnacle West produced the information requested and instead objected to the subpoena. On March 10, 2017, Burns filed suit against APS and Pinnacle West in the Superior Court of Arizona for Maricopa County in an effort to enforce his subpoenas. On March 30, 2017, APS filed a motion to dismiss Burns’ suit against APS and Pinnacle West. In response to the motion to dismiss, the court stayed the suit and ordered Burns to file a motion to compel the production of the information soughtprior dismissal by ~~the subpoenas with the ACC. On June 20, 2017, the ACC denied the motion to compel.~~

On August 4, 2017, Burns amended his complaint to add all of the ACC Commissioners and the ACC itself as defendants. All defendants moved to dismiss the amended complaint. On February 15, 2018, the Superior Court dismissed Burns’ amended complaint. On March 6, 2018, Burns filed an objection to the proposed final order from the Superior Court and a motion to further amend his complaint. The Superior Court permitted Burns to amend his complaint to add a claim regarding his attempted investigation into whether his fellow commissioners should have been disqualified from voting on APS’s 2017 rate case. Burns filed his second amended complaint, and all defendants filed responses opposing the second amended complaint and requested that it be dismissed. Oral argument occurred in November 2018 regarding the motion to dismiss. On December 18, 2018, the trial court ~~granted the defendants’ motions to dismiss and entered final judgment on January 18, 2019.~~

~~On February 13, 2019, Burns filed a notice of appeal. On July 12, 2019, Burns filed his opening brief in~~was pending before the Arizona Court of ~~Appeals. APS filed its answering brief on October 21, 2019. The Arizona Court of~~ Appeals, originally granted the request for oral argument; however, on March 31, 2020, the court vacated the date scheduled for oral argument given the COVID-19 pandemic. The court determined that the matter could be submitted without oral argument and has taken the matter under advisement and will issue a decision without oral argument.

Burns’ position as an ACC commissioner ended on January 4, 2021. Nevertheless, Burns filed a motion with the Court of Appeals arguing that the appeal was not mooted by this fact and the court should decide the matter. ~~Both APS and the ACC filed responses opposing the motion and asserting that the matter is moot.~~ On March 4, 2021, the Court of Appeals found Burns’ motion to be moot because the Court of Appeals had issued an opinion deciding the matter that same day.

In its March 4, 2021, opinion, the Court of Appeals affirmed the trial court’s dismissal of Burns’ complaint, concluding that Burns could not overturn the ~~ACC's~~ACC’s 4-1 vote refusing to enforce his subpoenas.On May 15, 2021, Burns filed a petition for review with the Arizona Supreme Court asking for reversal of the Court of Appeals opinion and the trial court’s judgment. APS and the ACC filed responses to Burns’ petition on July 14, 2021, requesting that the petition be denied.The ~~grant of review by the~~ Arizona Supreme Court ~~is discretionary.~~ granted Burns’ petition and heard oral argument on March 8, 2022.Pinnacle West and APS cannot predict the outcome of this matter.

~~Information Requests from Arizona Corporation Commissioners~~

On January 14, 2019, ACC Commissioner Kennedy opened a docket to investigate campaign expenditures and political participation of APS and Pinnacle West. In addition, on February 27, 2019, ACC Commissioners Burns and Dunn opened a new docket and requested documents from APS and Pinnacle West related to ACC elections and charitable contributions related to the ACC. On March 1, 2019, ACC Commissioner Kennedy issued a subpoena to APS seeking several categories of information for both Pinnacle West and APS, including political contributions, lobbying expenditures, marketing and advertising expenditures, and contributions made to 501(c)(3) and 501(c)(4) entities, for the years 2013-2018. Pinnacle West and APS voluntarily responded to both sets of requests on March 29, 2019. APS also received and responded to various follow-on requests from ACC Commissioners on these matters. Pinnacle West and APS cannot predict the outcome of these matters. The Company’s CEO, Mr. Guldner, appeared at the ACC’s January 14, 2020 Open Meeting regarding ACC Commissioners’ questions about political spending. Mr. Guldner committed to the ACC that, during his tenure, Pinnacle West and APS, and any of their affiliated

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~~companies, will not participate in ACC campaign elections through financial contributions or in-kind contributions.~~

Energy Modernization Plan

On January 30, 2018, ~~former ACC Commissioner Tobin proposed~~ the initial Energy Modernization Plan was proposed, which consisted of a series of energy policies tied to clean energy sources such as energy storage, biomass, energy efficiency, electric vehicles, and expanded energy planning through the integrated resource plan (“IRP”) process. In August 2018, the ACC directed ACC Staff to open a new rulemaking docket which will address a wide range of energy issues, including the Energy Modernization Plan proposals. The rulemaking will consider possible modifications to existing ACC rules, such as the RES, Electric and Gas Energy Efficiency Standards, Net Metering, Resource Planning, and the Biennial Transmission Assessment, as well as the development of new rules regarding forest bioenergy, electric vehicles, interconnection of distributed generation, baseload security, blockchain technology and other technological developments, retail competition, and other energy-related topics.

On April 25, 2019, the ACC Staff issued an initial set of draft energy rules and ~~held various workshops to incorporate feedback from stakeholders and ACC Commissioners from April 2019 through July 2020. At the March 11-12, 2020 workshop, the~~subsequent drafts were filed by ACC Staff ~~committed to filing a final draft of proposed rules by~~in July 2019, February 2020, and July 2020. On July 30, 2020, the ACC Staff issued final draft energy rules which proposed 100% of retail kWh sales from clean energy resources by the end of 2050. Nuclear ispower was defined as a clean energy resource. The proposed rules also ~~require~~required 50% of retail energy served be renewable by the end of 2035. A new ~~energy efficiency standard~~Energy Efficiency Standard (“EES”) was not included in the proposed rules. ~~APS would be required to obtain approval of its action plan included in its IRP and seek recovery of prudently incurred costs in a rate process. If approved by the ACC Commissioners, the~~These rules would ~~require~~have required utilities to file a Clean Energy Implementation Plan and Energy Efficiency Report as part of their IRP every three years beginning in 2023. In addition, ~~the ACC Staff proposed changing~~these rules would have changed the IRP planning horizon from 15 years to 10 years.

The ACC discussed the final draft energy rules at several different meetings in ~~2020. On October 14,~~ 2020 the ACC passed one amendment to ACC Staff’s final draft energy rules that would have required electric utilities to obtain 35% of peak load (as measured in 2020) by 2030 from DSM resources, including traditional energy efficiency, demand response and other programs aimed at reducing energy usage, peak demand management and load shifting. This standard aligned with the proposed rules’ three-year resource planning cycle and allowed recovery of costs through existing mechanisms until the ACC issues a decision in a future rate proceeding. On October 29, 2020, the ACC approved an amendment that would have required electric utilities to reduce their carbon emissions over 2016-2018 levels by 50% by 2032; 75% by 2040; and 100% by 2050. The ACC also approved an amendment that required utilities to install energy storage systems with an aggregate capacity equal to 5% of each utility’s 2020 peak demand by 2035, of which 40% must be derived from customer-owned or customer-leased distributed storage. Another approved amendment modified the resource planning process, including requirements for the ACC to approve a utility’s load forecast and resource plan, and for a utility to perform an all-source request for information to guide its resource plan.2021. On November 13, 2020, the ACC approved a final draft energy rules package. On April 19, 2021, the Administrative Law Judge issued a Recommended Order and Opinion on the final energy rules. In ~~May~~June 2021, the ACC adopted clean energy rules based on a series of ACC amendments. The adopted rules ~~include~~included a final standard of 100% clean energy by 2070 and the following interim standards for carbon reduction from baseline carbon emissions level: 50% reduction by December 31, 2032; 65% reduction by December 31, 2040; 80% reduction by December 31, 2050, and 95% reduction by December 31, 2060. Since the adopted clean energy rules ~~differ~~differed substantially from the original Recommended Order and Opinion, supplemental rulemaking procedures ~~will be~~were required before the rules could become effective. On January 26, 2022, the ACC reversed its prior decision and declined to send the final draft energy rules through the rulemaking process. Instead, the ACC opened a new docket to consider all-source RFP requirements and the IRP process. During March and

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April 2022, the ACC reviewed several proposed amendments for a proposed all-source RFP and IRP rulemaking package but delayed a vote on the amendments to a future date. APS cannot predict the outcome of this matter.

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Integrated Resource Planning

ACC rules require utilities to develop 15-year IRPs which describe how the utility plans to serve customer load in the plan timeframe. The ACC reviews each utility’s IRP to determine if it meets the necessary requirements and whether it should be acknowledged. In March of 2018, the ACC reviewed the 2017 IRPs of its jurisdictional utilities and voted to not acknowledge any of the plans. APS does not believe that this lack of acknowledgment will have a material impact on our financial position, results of operations or cash flows. Based on an ACC decision, APS was originally required to file its next IRP by April 1, 2020. On February 20, 2020, the ACC extended the deadline for all utilities to file their ~~IRP’s~~IRPs from April 1, 2020, to June 26, 2020. On June 26, 2020, APS filed its final IRP. On July 15, 2020, the ACC extended the schedule for final ACC review of utility IRPs to February 2021. In ~~March 2021,~~February 2022, the ACC ~~Staff requested additional time to prepare its assessment of utility IRPs.~~acknowledged APS’s IRP. The ACC ~~has taken no action on APS’s IRP. APS cannot predict~~also approved certain amendments to the ~~outcome~~IRP process, including, setting an EES of ~~this matter.~~1.3% of retail sales annually (averaged over a three-year period) and a demand-side resource capacity of 35% of 2020 peak demand by 2030 and authorizing future rate base treatment of qualifying demand-side resources as proposed in future rate cases. See “Energy Modernization Plan” above for information regarding proposed changes to the IRP filings.

Public Utility Regulatory Policies Act

Under the Public Utility Regulatory Policies Act of 1978 (“PURPA”), qualifying facilities are provided the right to sell energy and/or capacity to utilities and are granted relief from certain regulatory burdens. On December 17, 2019, the ACC mandated a minimum contract length of 18 years for qualifying facilities over 100 kW in Arizona and established that the rate paid to qualifying facilities must be based on the long-term avoided cost. “Avoided cost” is generally defined as the price at which the utility could purchase or produce the same amount of power from sources other than the qualifying facility on a long-term basis. During calendar year 2020, APS entered into 2 18-year ~~power purchase agreements~~PPAs with qualified facilities, each for 80 MW solar facilities. In March 2021, the ACC approved these agreements.

On July 16, 2020, FERC issued a final rule revising FERC’s regulations implementing PURPA. The final rule went into effect on December 31, 2020. ~~APS is evaluating how the revised regulations may impact its operations.~~

Residential Electric Utility Customer Service Disconnections

On June 13, 2019, APS voluntarily suspended electric disconnections for residential customers who had not paid their bills.On June 20, 2019, the ACC voted to enact emergency rule amendments to prevent residential electric utility customer service disconnections during the period June 1 through October 15 (“Summer Disconnection Moratorium”).During the Summer Disconnection Moratorium, APS could not charge late fees and interest on amounts that were past due from customers.Customer deposits must also be used to pay delinquent amounts before disconnection can occur and customers will have four months to pay back their deposit and any remaining delinquent amounts.In accordance with the emergency rules, APS began putting delinquent customers on a mandatory four-month payment plan beginning on October 16, 2019.

In June 2019, the ACC began a formal regular rulemaking process to allow stakeholder input and time for consideration of permanent rule changes. The ACC further ordered that each regulated utility serving retail customers in Arizona update its service conditions by incorporating the emergency rule amendments, restore power to any customers who were disconnected during the month of June 2019 and credit any fees that were charged for a reconnection. The ACC Staff and ACC proposed draft amendments to the customer service disconnections rules. ~~ACC stakeholder meetings were held in September 2019, October 2019 and January 2020 regarding the customer service disconnections rules.~~ On April 14, 2021, the ACC voted to send to the formal rulemaking process a draft rules package governing customer disconnections that allows utilities to choose between a temperature threshold ~~(above 95 degrees and below 32 degrees) or calendar threshold (June 1 – October 15) for disconnection moratoriums. The ACC held two public comment sessions on the draft rules~~

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(above 95 degrees and ~~will conduct a final vote before the rules become effective. The Summer Disconnection Moratorium will remain in effect until~~below 32 degrees) or calendar method (June 1 – October 15) for disconnection moratoriums. On November 2, 2021, the ACC ~~formalizes~~approved the final rules, ~~package.~~and on November 23, 2021, the rules were submitted to the Arizona Office of the Attorney General for final review and approval. The new rules became effective on April 18, 2022, and APS has employed the calendar method for its disconnection moratorium.

~~Due to~~In accordance with the ~~COVID-19 pandemic,~~ACC service disconnection rules, APS ~~voluntarily suspended disconnections of customers for nonpayment and waived late payment fees beginning March 13, 2020 until December 31, 2020. The suspension of~~now suspends the disconnection of customers for nonpayment ~~ended on January~~from June 1 ~~2021 and customers were~~through October 15 each year (“Annual Disconnection Moratorium”). Customers with past due balances of $75 or greater as of the beginning of the Annual Disconnection Moratorium are automatically placed on ~~eight-month~~six-month payment ~~arrangements if they had past due balances at the end of the disconnection period of $75 or greater.~~arrangements. In addition, APS ~~will continue to waive~~voluntarily began waiving late payment fees ~~until October 15, 2021.~~of its customers (“Late Fee Waivers”) on March 13, 2020. APS is continuing to apply Late Fee Waivers for residential customers; however, effective May 1, 2022, late payment fees for commercial and industrial customers were reinstated. Since the suspensions and moratoriums on disconnections began, APS has experienced ~~and is continuing to experience~~ an increase in bad debt expense ~~associated with~~and the ~~COVID-19 pandemic. See “COVID-19 Pandemic” above for more information.~~related write-offs of delinquent customer accounts.

Retail Electric Competition Rules

On November 17, 2018, the ACC voted to re-examine the facilitation of a deregulated retail electric market in Arizona. An ACC special open meeting workshop was held on December 3, 2018. No substantive action was taken, but interested parties were asked to submit written comments and respond to a list of questions from ACC Staff. On July 1 and July 2, 2019, ACC Staff issued a report and initial proposed draft rules regarding possible modifications to the ACC’s retail electric competition rules. Interested parties filed comments to the ACC Staff report and a stakeholder meeting and workshop to discuss the retail electric competition rules was held on July 30, 2019. ACC Commissioners submitted additional questions regarding this matter. On February 10, 2020, two ACC Commissioners filed two sets of draft proposed retail electric competition rules. On February 12, 2020, ACC Staff issued its second report regarding possible modifications to the ACC’s retail electric competition rules. ~~The ACC held a workshop on February 25-26, 2020 on further consideration and discussion of the retail electric competition rules.~~ During a July 15, 2020, ACC Staff meeting, the ACC Commissioners discussed the possible development of a retail competition pilot program, but no action was taken. The ACC ~~Commissioners are continuing~~continues to ~~explore the~~discuss matters related to retail electric competition, ~~rules.~~including the potential for additional buy-through programs or other pilot programs. In April 2022, the Arizona Legislature passed a bill that would nullify a 24-year-old electric deregulation law that has been in place since 1998. The bill was signed by the Arizona Governor and will take effect September 23, 2022. APS cannot predict ~~whether these efforts will result in any changes and, if changes to the rules results,~~ what impact, ~~these rules would~~if any, this change will have on APS.

On August 4, 2021, Green Mountain Energy filed an application seeking a certificate of convenience and necessity to allow it to provide competitive electric generation service in Arizona.Green Mountain Energy has requested that the ACC grant it the ability to provide competitive service in APS’s and Tucson Electric Power Company’s certificated service territories and proposes to deliver a 100% renewable energy product to residential and general service customers in those service territories. APS opposes Green Mountain Energy’s application and intends to intervene to contest it. On November 3, 2021, the ACC submitted questions to the Arizona Attorney General requesting legal opinions related to a number of issues surrounding retail electric competition and the ACC’s ability to issue competitive certificates of convenience and necessity. On November 26, 2021, the Administrative Law Judge issued a procedural order indicating it would not be appropriate to set a schedule until the Attorney General has provided his insights on the applicable law.

On October 28, 2021, an ACC Commissioner docketed a letter directing ACC Staff and interested stakeholders to design a 200-300 MW pilot program that would allow residential and small commercial customers of APS to elect a competitive electricity supplier.The letter also states that similar programs should be designed for other Arizona regulated electric utilities.APS cannot predict the outcome of these future activities.

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Rate Plan Comparison Tool and Investigation

On November 14, 2019, APS learned that its rate plan comparison tool was not functioning as intended due to an integration error between the tool and APS’s meter data management system. APS immediately removed the tool from its website and notified the ACC. The purpose of the tool was to provide customers with a rate plan recommendation based upon historical usage data. Upon investigation, APS determined that the error may have affected rate plan recommendations to customers between February 4, 2019, and November 14, 2019. By the middle of May 2020, APS provided refunds to approximately 13,000 potentially impacted customers equal to the difference between what they paid for electricity and the amount they would have paid had they selected their most economical rate, as applicable, and a $25 payment for any inconvenience that the customer may have experienced. The refunds and payment for inconvenience being provided did not have a material impact on APS’s financial statements. ~~APS developed a new tool for comparing customers’ rate plan options. APS had an independent third party verify that the new rate comparison tool works correctly.~~ In February 2020, APS launched ~~the~~a new online rate comparison ~~tool, which is now available for its customers.~~tool. The ACC hired an outside consultant to evaluate the extent of the error and the overall effectiveness of the tool. On August 20, 2020, ACC Staff filed the outside consultant’s report on APS’s rate comparison tool. The report concluded APS’s new rate comparison tool is working as intended. The report also identified a small population of additional customers that may have been affected by the error and APS has provided refunds and the $25 inconvenience payment to approximately 3,800 additional customers. These additional refunds and payment for inconvenience did not have a material impact on APS’s financial statements. On September 28,

~~COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

2020, the ACC discussed this report but did not take any action. APS cannot predict ~~if any action will~~whether additional inquiries or actions may be taken by the ACC ~~at this time.~~.

APS received civil investigative demands from the Office of the Arizona Attorney General, Civil Litigation Division, Consumer Protection & Advocacy Section (“Attorney General”) seeking information pertaining to the rate plan comparison tool offered to APS customers and other related issues including implementation of rates from the 2017 Settlement Agreement and its Customer Education and Outreach Plan associated with the 2017 Settlement Agreement. APS fully cooperated with the Attorney General’s Office in this matter. On February 22, 2021, APS entered into a consent agreement with the Attorney General as a way to settle the matter. The settlement resulted in APS paying $24.75 million, approximately $24 million of which ~~is being~~has been returned to customers as restitution. While this matter has been resolved with the Attorney General, APS cannot predict whether additional inquiries or actions may be taken by the ACC.

Four Corners SCR Cost Recovery

On December 29, 2017, in accordance with the 2017 Rate Case Decision, APS filed a Notice of Intent to file its SCR Adjustment to permit recovery of costs associated with the installation of SCR equipment at Four Corners Units 4 and 5. APS filed the SCR Adjustment request in April 2018. ~~Consistent with the 2017 Rate Case Decision, the request was narrow in scope and addressed only costs associated with this specific environmental compliance equipment.~~ The SCR Adjustment request provided that there would be a $67.5 million annual revenue impact that would be applied as a percentage of base rates for all applicable customers. Also, as provided for in the 2017 Rate Case Decision, APS requested that the adjustment become effective no later than January 1, 2019. The hearing for this matter occurred in September 2018. At the hearing, APS accepted ACC Staff’s recommendation of a lower annual revenue impact of approximately $58.5 million. The Administrative Law Judge issued a Recommended Opinion and Order finding that the costs for the SCR project were prudently incurred and recommending authorization of the $58.5 million annual revenue requirement related to the installation and operation of the SCRs. ~~Exceptions to the Recommended Opinion and Order were filed by the parties and intervenors on December 7, 2018.~~ The ACC ~~has~~did not ~~issued~~issue a decision on this matter. APS included the costs for the SCR project in the retail rate base in its 2019 ~~Retail~~ Rate Case filing with the ACC. ~~On March 18, 2020, the ACC agreed to take administrative notice to include in the pending rate case portions of the record in this prior proceeding that are relevant to the SCRs.~~

On ~~August~~November 2, 2021, the 2019 Rate Case ~~ROO recommended a disallowance of~~decision was approved by the ACC allowing approximately ~~$399~~$194 million of SCR related plant investments and ~~$61 million of SCR~~ cost ~~deferrals. The ACC has not issued a decision on this matter, but if the recommendation regarding the Four Corners SCR project~~deferrals in ~~the 2019 Rate Case ROO is adopted~~rate base and ~~ordered by the ACC, APS would be required~~ to ~~record a write-off related to the SCR cost deferrals. As of June 30, 2021, the SCR cost deferral balance is approximately $75 million net of accumulated deferred income taxes.In addition, if the recommendation regarding the SCR plant investment disallowance~~recover, depreciate and amortize in ~~the 2019 Rate Case ROO is adopted and ordered by the ACC, the amount of any loss will be determined~~rates based on ~~the value~~an end-of-life assumption of ~~the SCR plant investment assets at the time the disallowance is probable~~July 2031. The decision also included a partial and ~~estimable and could also be affected by other regulatory and legal considerations.As of June 30, 2021, the value of the SCR plant investments is approximately $320 million, net of accumulated deferred income taxes.If a~~combined disallowance of all or a portion of the SCR plant investments is determined to be estimable and probable, or if regulatory recovery of all or a portion of the deferred costs is determined to no longer be probable, it is reasonably possible that APS will recognize a material loss$215.5 million on the SCR investments and ~~cost~~ deferrals. F~~or the period ended June 30, 2021, based on the fact that the 2019 Rate Case ROO is not a final decision and that~~ APS intends to file exceptions to the 2019 Rate Case ROO related to the recommended disallowance of SCR plant investments and cost deferrals, among other factors, APS has not recorded any adjustments to write-off or write-downbelieves the SCR plant ~~investments or cost deferrals.~~ T~~he pollution control assets are used and useful and are required to operate Four Corners and APS believes that these SCR investments were prudently~~

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~~incurred.~~

investments and related SCR cost deferrals were prudently incurred, and on December 17, 2021, APS filed its Notice of Direct Appeal at the Arizona Court of Appeals requesting review of the $215.5 million disallowance and the appeal is proceeding in the normal course. Based on the partial recovery of these investments and cost deferrals in current rates and the uncertainty of the outcome of the legal appeals process, APS has not recorded an impairment or write-off relating to the SCR plant investments or deferrals as of June 30, 2022. If the 2019 Rate Case decision to disallow $215.5 million of the SCRs is ultimately upheld, APS will be required to record a charge to its results of operations, net of tax, of approximately $154.4 million. We cannot predict the ~~final~~ outcome of the ~~decision on~~legal challenges nor the timing of when this matter ~~nor reasonably estimate~~will be resolved. See above for further discussion on the ~~amount of any potential loss.~~2019 Rate Case decision.

Cholla

On September 11, 2014, APS announced that it would close Unit 2 of the Cholla Power Plant (“Cholla”) and cease burning coal at the other APS-owned units (Units 1 and 3) at the plant by the mid-2020s, if the United States Environmental Protection Agency (“EPA”) approved a compromise proposal offered by APS to meet required environmental and emissions standards and rules. On April 14, 2015, the ACC approved APS’s plan to retire Unit 2, without expressing any view on the future recoverability of APS’s remaining investment in the unit. APS closed Unit 2 on October 1, 2015. In early 2017, EPA approved a final rule incorporating APS’s compromise proposal, which took effect on April 26, 2017. In December 2019, PacifiCorp notified APS that it planned to retire Cholla Unit 4 by the end of 2020 and the unit ceased operation in December 2020. APS has committed to end the use of coal at its remaining Cholla ~~Unit 4 was retired on December 24, 2020.~~units by 2025.

Previously, APS estimated Cholla Unit 2’s end of life to be 2033. APS has been recovering a return on and of the net book value of the unit in base rates. Pursuant to the 2017 Settlement Agreement described above, APS will be allowed continued recovery of the net book value of the unit and the unit’s decommissioning and other retirement-related costs, ~~($48.9~~$39.5 million as of June 30, ~~2021),~~2022, in addition to a return on its investment. In accordance with GAAP, in the third quarter of 2014, Unit 2’s remaining net book value was reclassified from property, plant and equipment to a regulatory asset. ~~The 2017 Settlement Agreement also shortened~~In accordance with the ~~depreciation lives of Cholla Units 1 and 3 to 2025.~~2019 Rate Case decision, the regulatory asset is being amortized through 2033.

Navajo Plant

The Navajo Plant ceased operations in November 2019. The co-owners and the Navajo Nation executed a lease extension on November 29, 2017, that allows for decommissioning activities to begin after the plant ceased operations.

APS is currently recovering depreciation and a return on the net book value of its interest in the Navajo Plant over its previously estimated life through 2026. APS will seek continued recovery in rates for the book value of its remaining investment in the plant ($67 million as of June 30, 2021) plus a return on the net book value as well as other costs related to retirement and closure, including the Navajo coal reclamation regulatory asset ($17.5 million as of June 30, 2021). APS believes it will be allowed recovery of the net book value, retirement and closure costs, in addition to a return on its investment. In accordance with GAAP, in the second quarter of 2017, APS’s remaining net book value of its interest in the Navajo Plant was reclassified from property, plant and equipment to a regulatory asset. ~~If the ACC does not allow full recovery~~

APS has been recovering a return on and of the ~~remaining~~ net book value of ~~this~~its interest ~~all or a portion of~~in the ~~regulatory asset will be written off and APS’s net income, cash flows, and financial position will be negatively impacted. On August 2, 2021,~~Navajo plant in base rates over its previously estimated life through 2026. Pursuant to the 2019 Rate Case ~~ROO recommended that~~decision described above, APS ~~record~~will be allowed continued recovery of the book value of its remaining investment in the Navajo plant, $57.4 million as of June 30, 2022, in addition to a return on the net book value, with the exception of 15% of the annual amortization expense in rates. In addition, APS will be allowed recovery of other costs related to retirement and closure, including the Navajo coal reclamation regulatory asset, $15.4 million as of June 30, 2022. The disallowed recovery of 15% of the ~~regulatory asset as a non-operating expense. If the recommendation regarding the Navajo Plant in the 2019 Rate Case ROO is adopted and ordered by the ACC, APS~~annual amortization does not ~~expect this to~~ have a material impact on ~~its~~APS financial statements.

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Regulatory Assets and Liabilities

The detail of regulatory assets is as follows (dollars in thousands):


		Amortization Through	June 30, 2021				December 31, 2020					Amortization Through	June 30, 2022				December 31, 2021
			Current		Non-Current		Current		Non-Current				Current		Non-Current		Current		Non-Current
Pension	Pension	(a)	$	0	$	496,372	$	0	$	469,953	Pension	(a)	$	—	$	514,330	$	—	$	509,751
Deferred fuel and purchased power (b) (c)	Deferred fuel and purchased power (b) (c)	2022	300,912		0		175,835		0		Deferred fuel and purchased power (b) (c)	2023	390,013		—		388,148		—
Income taxes — allowance for funds used during construction (“AFUDC”) equity	Income taxes — allowance for funds used during construction (“AFUDC”) equity	2051	7,169		161,279		7,169		158,776		Income taxes — allowance for funds used during construction (“AFUDC”) equity	2052	7,625		167,644		7,625		164,768
Ocotillo deferral (e)											Ocotillo deferral (e)	2031	9,507		133,390		9,507		138,143
Retired power plant costs	Retired power plant costs	2033	28,182		100,123		28,181		114,214		Retired power plant costs	2033	15,157		91,113		15,160		99,681
Ocotillo deferral		N/A	0		124,919		0		95,723
SCR deferral(f)	SCR deferral(f)	N/A	0		95,171		0		81,307		SCR deferral(f)	2031	8,147		93,551		8,147		97,624
Deferred property taxes	Deferred property taxes	2027	8,569		45,342		8,569		49,626		Deferred property taxes	2027	8,569		36,772		8,569		41,057
Lost fixed cost recovery (b)	Lost fixed cost recovery (b)	2022	53,087		0		41,807		0		Lost fixed cost recovery (b)	2023	43,788		—		63,889		—
Deferred compensation	Deferred compensation	2036	0		35,806		0		36,195		Deferred compensation	2036	—		34,251		—		33,997
Four Corners cost deferral		2024	8,077		20,037		8,077		24,075
Income taxes — investment tax credit basis adjustment	Income taxes — investment tax credit basis adjustment	2049	1,113		23,807		1,113		24,291		Income taxes — investment tax credit basis adjustment	2056	826		23,606		1,129		23,639
Palo Verde VIEs (Note 6)	Palo Verde VIEs (Note 6)	2046	0		21,174		0		21,255		Palo Verde VIEs (Note 6)	2046	—		21,013		—		21,094
Four Corners cost deferral											Four Corners cost deferral	2024	8,077		11,960		8,077		15,998
Coal reclamation	Coal reclamation	2026	1,068		16,465		1,068		16,999		Coal reclamation	2026	2,978		12,372		2,978		13,862
Active Union Medical Trust											Active Union Medical Trust	(g)	—		13,704		—		1,175
Loss on reacquired debt	Loss on reacquired debt	2038	1,648		10,128		1,689		10,877		Loss on reacquired debt	2038	1,648		8,579		1,648		9,372
Mead-Phoenix transmission line contributions in aid of construction (“CIAC”)	Mead-Phoenix transmission line contributions in aid of construction (“CIAC”)	2050	332		9,214		332		9,380		Mead-Phoenix transmission line contributions in aid of construction (“CIAC”)	2050	332		8,882		332		9,048
TCA balancing account (b)											TCA balancing account (b)	2023	8,805		—		170		3,663
Tax expense adjustor mechanism (b)	Tax expense adjustor mechanism (b)	2021	7,956		0		6,226		0		Tax expense adjustor mechanism (b)	2031	656		5,518		656		5,845
Demand side management (b)		2022	0		7,269		0		7,268
Tax expense of Medicare subsidy	Tax expense of Medicare subsidy	2024	1,235		3,167		1,235		3,704		Tax expense of Medicare subsidy	2024	1,235		1,968		1,235		2,469
TCA balancing account (b)		2023	0		1,903		0		0
Deferred fuel and purchased power — mark-to-market (Note 7)		2024	0		0		3,341		9,244

PSA interest		2022	133		0		4,355		0
Other	Other	Various	1,321		1,801		2,716		1,100		Other	Various	1,813		2,003		1,254		1,801
Total regulatory assets (d)	Total regulatory assets (d)		$	420,802	$	1,173,977	$	291,713	$	1,133,987	Total regulatory assets (d)		$	509,176	$	1,180,656	$	518,524	$	1,192,987

(a)This asset represents the future recovery of pension benefit obligations and expense through retail rates. If these costs are disallowed by the ACC, this regulatory asset would be charged to ~~other comprehensive income (“OCI”)~~OCI and result in lower future revenues. As a result of the 2019 Rate Case decision, the amount authorized for inclusion in rate base was determined using an averaging methodology, which resulted in a reduced return in retail rates. See Note 5.5 for further discussion.

(b)See “Cost Recovery Mechanisms” discussion above.

(c)Subject to a carrying charge.

(d)There are no regulatory assets for which the ACC has allowed recovery of costs, but not allowed a return by exclusion from rate base. FERC rates are set using a formula rate as described in “Transmission Rates, Transmission Cost Adjustor and Other Transmission Matters.”

(e)Balance includes amounts for future regulatory consideration and amortization period determination.

(f)See “Four Corners SCR Cost Recovery” discussion above.

(g)Collected in retail rates.

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The detail of regulatory liabilities is as follows (dollars in thousands):


		Amortization Through	June 30, 2021				December 31, 2020					Amortization Through	June 30, 2022				December 31, 2021
			Current		Non-Current		Current		Non-Current				Current		Non-Current		Current		Non-Current
Excess deferred income taxes — ACC - Tax Act (a)	Excess deferred income taxes — ACC - Tax Act (a)	2046	$	41,381	$	993,982	$	41,330	$	1,012,583	Excess deferred income taxes — ACC - Tax Act (a)	2046	$	40,903	$	954,939	$	40,903	$	971,545
Excess deferred income taxes — FERC - Tax Act (a)	Excess deferred income taxes — FERC - Tax Act (a)	2058	7,240		225,995		7,240		229,147		Excess deferred income taxes — FERC - Tax Act (a)	2058	7,239		218,939		7,239		221,877
Asset retirement obligations	Asset retirement obligations	2057	0		567,900		0		506,049		Asset retirement obligations	2057	—		376,575		—		614,683
Other postretirement benefits	Other postretirement benefits	(d)	47,798		314,218		37,705		349,588		Other postretirement benefits	(d)	50,624		305,045		37,789		337,027
Deferred fuel and purchased power — mark-to-market (Note 7)											Deferred fuel and purchased power — mark-to-market (Note 7)	2024	173,712		111,847		60,693		46,908
Removal costs	Removal costs	(c)	69,348		61,601		52,844		103,008		Removal costs	(c)	57,454		55,570		69,476		50,104
Deferred fuel and purchased power — mark-to-market (Note 7)		2024	82,082		27,305		0		0
Income taxes — change in rates	Income taxes — change in rates	2050	2,839		65,319		2,839		66,553		Income taxes — change in rates	2051	2,876		63,636		2,876		64,802
Four Corners coal reclamation	Four Corners coal reclamation	2038	5,461		49,904		5,460		49,435		Four Corners coal reclamation	2038	2,316		50,860		2,316		53,076
Income taxes — deferred investment tax credit	Income taxes — deferred investment tax credit	2049	2,231		47,677		2,231		48,648		Income taxes — deferred investment tax credit	2056	2,264		46,663		2,264		47,337
Spent nuclear fuel	Spent nuclear fuel	2027	6,510		41,815		6,768		44,221		Spent nuclear fuel	2027	6,730		35,227		6,701		38,581
FERC transmission true up (b)											FERC transmission true up (b)	2024	29,238		3,620		21,379		12,924
Renewable energy standard (b)	Renewable energy standard (b)	2022	30,665		0		39,442		103		Renewable energy standard (b)	2024	25,401		492		38,453		187
Property tax deferral		N/A	0		16,188		0		13,856
Property tax deferral (e)											Property tax deferral (e)	2024	4,671		13,186		4,671		15,521
Sundance maintenance											Sundance maintenance	2031	—		15,345		—		13,797
Demand side management (b)	Demand side management (b)	2022	3,149		12,457		10,819		0		Demand side management (b)	2023	—		9,214		—		5,417
Sundance maintenance		2031	556		12,312		2,989		11,508
FERC transmission true up		2023	7,547		3,511		6,598		3,008
TCA balancing account (b)		2023	10,750		159		2,902		4,672
Tax expense adjustor mechanism (b) (e)	Tax expense adjustor mechanism (b) (e)	2021	7,148		0		7,089		0		Tax expense adjustor mechanism (b) (e)	N/A	—		4,835		—		4,835
Deferred gains on utility property		2022	2,423		333		2,423		1,544
Active union medical trust		N/A	0		2,347		0		6,057
Other	Other	Various	484		289		409		189		Other	Various	679		2,155		1,511		592
Total regulatory liabilities	Total regulatory liabilities		$	327,612	$	2,443,312	$	229,088	$	2,450,169	Total regulatory liabilities		$	404,107	$	2,268,148	$	296,271	$	2,499,213

(a)For purposes of presentation on the Statement of Cash Flows, amortization of the regulatory liabilities for excess deferred income taxes are reflected as “Deferred income taxes” under Cash Flows From Operating Activities.

(b)See “Cost Recovery Mechanisms” discussion above.

(c)In accordance with regulatory accounting guidance, APS accrues removal costs for its regulated assets, even if there is no legal obligation for removal.

(d)See Note 5.

(e)Pursuant to Decision 77852, the ACC has authorized APS to return to customers up to $7 million of liability recorded to the TEAM balancing account through December 31, 2021. Should new base rates become effective prior to December 31, 2021, any remaining unreturned balance is anticipated to be included in the new base rates.Balance includes amounts for future regulatory consideration and amortization period determination.

5. Retirement Plans and Other Postretirement Benefits

Pinnacle West sponsors a qualified defined benefit and account balance pension plan, a non-qualified supplemental excess benefit retirement plan, and other postretirement benefit plans for the employees of Pinnacle West and our subsidiaries. The other postretirement benefit plans include a group life and medical plan and a post-65 retiree health reimbursement arrangement (“HRA”). Pinnacle West uses a December 31

~~COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

measurement date each year for its pension and other postretirement benefit plans. The market-related value of our plan assets is their fair value at the measurement date.

~~Under the HRA, included in the other postretirement benefit plan, the Company provides a subsidy to retirees to defray the cost~~

Table of a Medicare supplemental policy. In prior years, we had been assuming a 4.75% escalation of these benefits; however, actual escalation has been significantly less than this assumption. Accordingly, during 2020 and for future periods, the escalation assumption was reduced to 2.00%. This escalation factor assumption change, among other factors, resulted in an increase in the over-funded status of the other postretirement benefit plan as of December 31, 2020. As a result, on January 4, 2021, we initiated the transfer of approximately $106 million of assets from the other postretirement benefit plan into the Active Union Employee Medical Account. The Active Union Employee Medical Account is an existing trust account that holds assets restricted for paying active union employee medical costs (see Note 12). The transfer of other postretirement benefit plan assets into the Active Union Employee Medical Account permits access to approximately $106 million of assets for the sole purpose of paying active union employee medical benefits. This transfer of assets into the Active Union Employee Medical Account is consistent with the terms of a similar 2018 transaction.Contents

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table provides details of the plans’ net periodic benefit costs and the portion of these costs charged to expense (including administrative costs and excluding amounts capitalized as overhead construction or billed to electric plant participants) (dollars in thousands):


		Pension Benefits								Other Benefits									Pension Benefits								Other Benefits
		Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020		2021		2020		2021		2020			2022		2021		2022		2021		2022		2021		2022		2021
Service cost — benefits earned during the period	Service cost — benefits earned during the period	$	14,939	$	13,859	$	30,618	$	28,116	$	4,341	$	5,401	$	8,898	$	11,118	Service cost — benefits earned during the period	$	13,406	$	14,939	$	27,737	$	30,618	$	4,017	$	4,341	$	8,235	$	8,898
Non-service costs (credits):	Non-service costs (credits):																	Non-service costs (credits):
Interest cost on benefit obligation	Interest cost on benefit obligation	24,614		29,522		49,283		59,283		4,095		6,417		8,257		12,929		Interest cost on benefit obligation	26,723		24,614		53,746		49,283		4,283		4,095		8,746		8,257
Expected return on plan assets	Expected return on plan assets	(50,706)		(46,915)		(101,314)		(93,721)		(10,361)		(10,019)		(20,722)		(20,038)		Expected return on plan assets	(46,494)		(50,706)		(92,888)		(101,314)		(11,511)		(10,361)		(23,021)		(20,722)
Amortization of:	Amortization of:																	Amortization of:
Prior service credit	Prior service credit	0		0		0		0		(9,427)		(9,394)		(18,854)		(18,788)		Prior service credit	—		—		—		—		(9,447)		(9,427)		(18,894)		(18,854)
Net actuarial loss (gain)	Net actuarial loss (gain)	3,989		8,295		7,974		17,306		(2,641)		0		(5,046)		0		Net actuarial loss (gain)	3,989		3,989		8,757		7,974		(3,436)		(2,641)		(6,418)		(5,046)
Net periodic benefit cost/(benefit)		$	(7,164)	$	4,761	$	(13,439)	$	10,984	$	(13,993)	$	(7,595)	$	(27,467)	$	(14,779)
Portion of cost/(benefit) charged to expense		$	(8,614)	$	271	$	(16,625)	$	1,613	$	(9,608)	$	(5,056)	$	(19,136)	$	(10,512)
Net periodic benefit																		Net periodic benefit	$	(2,376)	$	(7,164)	$	(2,648)	$	(13,439)	$	(16,094)	$	(13,993)	$	(31,352)	$	(27,467)
Portion of benefit charged to expense																		Portion of benefit charged to expense	$	(4,722)	$	(8,614)	$	(8,012)	$	(16,625)	$	(11,523)	$	(9,608)	$	(22,418)	$	(19,136)

Contributions

We have 0tnot made any voluntary contributions to our pension plan year-to-date in ~~2021.~~2022. The minimum required contributions for the pension plan are ~~0 for the next three years. We expect to make voluntary contributions up to $100 million in 2021~~zero and ~~0 in 2022 and 2023. We~~we do 0tnot expect to make any contributions ~~over this period~~in 2022, 2023 or 2024. With regard to contributions to our other postretirement benefit ~~plans.~~plan, we have not made a contribution year-to-date in 2022 and do not expect to make any contributions in 2022, 2023 or 2024.

~~COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

6. Palo Verde Sale Leaseback Variable Interest Entities

In 1986, APS entered into agreements with 3 separate VIE lessor trust entities in order to sell and lease back interests in Palo Verde Unit 2 and related common facilities. Prior to April 1, 2021, the lease terms allowed APS the right to retain the assets through 2023 under 1 lease and 2033 under the other 2 leases. On April 1, 2021, APS executed an amended lease agreement with one of the VIE lessor trust entities relating to the lease agreement with the term ending in 2023. The amendment extends the lease term for this lease through 2033 and changes the lease payment. As a result of this amendment, APS will ~~now~~ retain the assets through 2033 under all ~~three~~3 lease agreements. APS will be required to make payments relating to the 3 leases in total of approximately $21 million annually for the period ~~2021~~2022 through 2033. At the end of the lease period, APS will have the option to purchase the leased assets at their fair market value, extend the leases for up to two years, or return the assets to the lessors.

The leases’ terms give APS the ability to utilize the assets for a significant portion of the assets’ economic life, and therefore provide APS with the power to direct activities of the VIEs that most significantly impact the VIEs’ economic performance. Predominantly due to the lease terms, APS has been deemed the primary beneficiary of these VIEs and therefore consolidates the VIEs.

As a result of consolidation, we eliminate lease accounting and instead recognize depreciation expense, resulting in an increase in net income for the three and six months ended June 30, ~~2021~~2022, of $4 million and $9 million respectively, and for the three and six months ended June 30, ~~2020~~2021 of $5$4 million and ~~$10~~$9 million, ~~respectively,~~respectively. The increase in net income is entirely attributable to the noncontrolling interests. Income attributable to Pinnacle West shareholders is not impacted by the consolidation.

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Our Condensed Consolidated Balance Sheets at June 30, ~~2021~~2022, and December 31, ~~2020~~2021, include the following amounts relating to the VIEs (dollars in thousands):


		June 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021
Palo Verde sale leaseback property, plant and equipment, net of accumulated depreciation	Palo Verde sale leaseback property, plant and equipment, net of accumulated depreciation	$	96,101	$	98,036	Palo Verde sale leaseback property, plant and equipment, net of accumulated depreciation	$	92,231	$	94,166
Equity — Noncontrolling interests	Equity — Noncontrolling interests	117,275		119,290		Equity — Noncontrolling interests	113,244		115,260

Assets of the VIEs are restricted and may only be used for payment to the noncontrolling interest holders. These assets are reported on our condensed consolidated financial statements.

APS is exposed to losses relating to these VIEs upon the occurrence of certain events that APS does not consider to be reasonably likely to occur. Under certain circumstances (for example, the Nuclear Regulatory Commission (“NRC”) issuing specified violation orders with respect to Palo Verde or the occurrence of specified nuclear events), APS would be required to make specified payments to the VIEs’ noncontrolling equity participants and take title to the leased Unit 2 interests, which, if appropriate, may be required to be written down in value. If such an event were to occur during the lease periods, APS may be required to pay the noncontrolling equity participants approximately ~~$307~~$315 million beginning in ~~2021,~~2022, and up to $501 million over the lease terms.

For regulatory ratemaking purposes, the agreements continue to be treated as operating leases and, as a result, we have recorded a regulatory asset relating to the arrangements.

~~COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

7. Derivative Accounting

Derivative financial instruments are used to manage exposure to commodity price and transportation costs of electricity, natural gas, emissions allowances, and in interest rates. Risks associated with market volatility are managed by utilizing various physical and financial derivative instruments, including futures, forwards, options and swaps. As part of our overall risk management program, we may use derivative instruments to hedge purchases and sales of electricity and natural gas. Derivative instruments that meet certain hedge accounting criteria may be designated as cash flow hedges and are used to limit our exposure to cash flow variability on forecasted transactions. The changes in market value of such instruments have a high correlation to price changes in the hedged transactions. Derivative instruments are also entered into for economic hedging purposes. While economic hedges may mitigate exposure to fluctuations in commodity prices, these instruments have not been designated as accounting hedges. Contracts that have the same terms (quantities, delivery points and delivery periods) and for which power does not flow are netted, which reduces both revenues and fuel and purchased power costs in our Condensed Consolidated Statements of Income, but does not impact our financial condition, net income or cash flows.

Our derivative instruments, excluding those qualifying for a scope exception, are recorded on the balance sheets as an asset or liability and are measured at fair value. See Note 11 for a discussion of fair value measurements. Derivative instruments may qualify for the normal purchases and normal sales scope exception if they require physical delivery, and the quantities represent those transacted in the normal course of business. Derivative instruments qualifying for the normal purchases and sales scope exception are accounted for under the accrual method of accounting and excluded from our derivative instrument discussion and disclosures below.

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For its regulated operations, APS defers for future rate treatment 100% of the unrealized gains and losses on derivatives pursuant to the PSA mechanism that would otherwise be recognized in income. Realized gains and losses on derivatives are deferred in accordance with the PSA to the extent the amounts are above or below the Base Fuel ~~Rate (see~~Rate. See Note ~~4).~~4. Gains and losses from derivatives in the following tables represent the amounts reflected in income before the effect of PSA deferrals.

The following table shows the outstanding gross notional volume of derivatives, which represent both purchases and sales (does not reflect net position):

Quantity

Commodity

Unit of Measure

June 30, 2021

December 31, 2020

Commodity

Unit of Measure

June 30, 2022

December 31, 2021

Power

GWh

368

Power

GWh

1,208

—

Gas

Billion cubic feet

189

205

Gas

Billion cubic feet

168

155

~~COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

Gains and Losses from Derivative Instruments

~~The following table provides information about APS’s gains and losses from derivative instruments in designated cash flow accounting hedging relationships (dollars in thousands):~~

Financial Statement Location Three Months Ended
June 30, Six Months Ended
June 30,
Commodity Contracts 2021 2020 2021 2020
Loss Reclassified from Accumulated OCI into Income (Effective Portion Realized) (a) Fuel and purchased power (b) $ 0 $ (349) $ 0 $ (763)

~~(a)During~~For the three and six months ended June 30, 2022 and 2021, ~~and 2020, we~~APS had ~~0 gains or losses reclassified from accumulated OCI to earnings~~ ~~related to discontinued cash flow hedges~~.

~~(b)Amounts are before the effect of PSA deferrals.~~

~~During the next twelve months, we estimate that 0 amounts will be reclassified from accumulated OCI into income. For APS, the delivery period for all~~no derivative instruments in designated ~~cash flow~~ accounting hedging ~~relationships have lapsed.~~relationships.

The following table provides information about gains and losses from derivative instruments not designated as accounting hedging instruments (dollars in thousands):


		Financial Statement Location		Three Months Ended June 30,					Six Months Ended June 30,						Financial Statement Location		Three Months Ended June 30,						Six Months Ended June 30,
Commodity Contracts	Commodity Contracts		2021		2020		2021			2020		Commodity Contracts				2022			2021			2022			2021

Net Gain (Loss) Recognized in Income			Fuel and purchased power (a)		$	95,116	$	(4,894)		$	121,975		$	(34,971)
Net Gain Recognized in Income													Net Gain Recognized in Income		Fuel and purchased power (a)		$	62,525		$	95,116		$	286,267		$	121,975

(a)Amounts are before the effect of PSA deferrals.

Derivative Instruments in the Condensed Consolidated Balance Sheets

Our derivative transactions are typically executed under standardized or customized agreements, which include collateral requirements and, in the event of a default, would allow for the netting of positive and negative exposures associated with a single counterparty. Agreements that allow for the offsetting of positive and negative exposures associated with a single counterparty are considered master netting arrangements. Transactions with counterparties that have master netting arrangements are offset and reported net on the Condensed Consolidated Balance Sheets. Transactions that do not allow for offsetting of positive and negative positions are reported gross on the Condensed Consolidated Balance Sheets.

We do not offset a counterparty’s current derivative contracts with the counterparty’s non-current derivative contracts, although our master netting arrangements would allow current and non-current positions to be offset in the event of a default. These types of transactions may include non-derivative instruments, derivatives qualifying for scope exceptions, trade receivables and trade payables arising from settled positions, and other forms of non-cash collateral (such as letters of credit). These types of transactions are excluded from the offsetting tables presented below.

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The following tables provide information about the fair value of our risk management activities reported on a gross basis, and the impacts of offsetting. These amounts relate to commodity contracts and are

~~COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

located in the assets and liabilities from risk management activities ~~and other assets~~ lines of our Condensed Consolidated Balance Sheets.


As of June 30, 2021: (dollars in thousands)		Gross Recognized Derivatives (a)		Amounts Offset (b)		Net Recognized Derivatives		Other (c)		Amount Reported on Balance Sheets
As of June 30, 2022: (dollars in thousands)												As of June 30, 2022: (dollars in thousands)	Gross Recognized Derivatives (a)		Amounts Offset (b)		Net Recognized Derivatives		Other (c)		Amount Reported on Balance Sheets
Current assets	Current assets	$	83,677	$	(1,368)	$	82,309	$	0	$	82,309	Current assets	$	177,765	$	(40,787)	$	136,978	$	50	$	137,028
Investments and other assets	Investments and other assets	27,305		0		27,305		0		27,305		Investments and other assets	111,847		—		111,847		—		111,847
Total assets	Total assets	110,982		(1,368)		109,614		0		109,614		Total assets	289,612		(40,787)		248,825		50		248,875

Current liabilities	Current liabilities	(1,595)		1,368		(227)		(1,285)		(1,512)		Current liabilities	(4,053)		357		(3,696)		(1,900)		(5,596)
Deferred credits and other		0		0		0		0		0
Total liabilities		(1,595)		1,368		(227)		(1,285)		(1,512)
Total	Total	$	109,387	$	0	$	109,387	$	(1,285)	$	108,102	Total	$	285,559	$	(40,430)	$	245,129	$	(1,850)	$	243,279

(a)All of our gross recognized derivative instruments were subject to master netting arrangements.

(b)~~NaN~~Includes cash collateral ~~has been provided to counterparties, or~~ received from counterparties of $40,430 that is subject to offsetting.

(c)Represents cash collateral and cash margin that is not subject to offsetting. Amounts relate to non-derivative instruments, derivatives qualifying for scope exceptions, or collateral and margin posted or received in excess of the recognized derivative instrument. Includes cash collateral received from counterparties of ~~$1,285.~~$1,900 and cash margin provided to counterparties of $50.

As of December 31, 2020:
(dollars in thousands)
Gross
Recognized
Derivatives
(a)
Amounts
Offset
(b)
Net
Recognized
Derivatives
Other
(c)
Amount
Reported on
Balance Sheets
Current assets $ 5,870 $ (2,939) $ 2,931 $ 0 $ 2,931
Investments and other assets 3,150 (1,332) 1,818 0 1,818
Total assets 9,020 (4,271) 4,749 0 4,749
Current liabilities (9,211) 2,939 (6,272) (1,285) (7,557)
Deferred credits and other (12,394) 1,332 (11,062) 0 (11,062)
Total liabilities (21,605) 4,271 (17,334) (1,285) (18,619)
Total $ (12,585) $ 0 $ (12,585) $ (1,285) $ (13,870)


As of December 31, 2021: (dollars in thousands)	Gross Recognized Derivatives (a)		Amounts Offset (b)		Net Recognized Derivatives		Other (c)		Amount Reported on Balance Sheets
Current assets	$	66,777	$	(3,346)	$	63,431	$	50	$	63,481
Investments and other assets	48,302		(1,394)		46,908		—		46,908
Total assets	115,079		(4,740)		110,339		50		110,389

Current liabilities	(6,084)		3,346		(2,738)		(1,635)		(4,373)
Deferred credits and other	(1,394)		1,394		—		—		—
Total liabilities	(7,478)		4,740		(2,738)		(1,635)		(4,373)
Total	$	107,601	$	—	$	107,601	$	(1,585)	$	106,016

(a)All of our gross recognized derivative instruments were subject to master netting arrangements.

(b)~~NaN~~No cash collateral has been provided to counterparties, or received from counterparties, that is subject to offsetting.

(c)Represents cash collateral and cash margin that is not subject to offsetting. Amounts relate to non-derivative instruments, derivatives qualifying for scope exceptions, or collateral and margin posted in excess of the recognized derivative instrument. Includes cash collateral received from counterparties of ~~$1,285.~~$1,635 and cash margin provided to counterparties of $50.

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Credit Risk and Credit Related Contingent Features

We are exposed to losses in the event of nonperformance or nonpayment by counterparties and have risk management contracts with many counterparties. As of June 30, ~~2021,~~2022, we have ~~two counterparties~~one counterparty for which our exposure represents approximately ~~35%~~19% of Pinnacle West’s ~~$110~~$249 million of risk management assets. This exposure relates to a master ~~agreements~~agreement with ~~counterparties~~the counterparty, and ~~both are~~the counterparty is rated as investment grade. Our risk management process assesses and monitors the financial exposure of all counterparties. Despite the fact that the great majority of our trading counterparties’ debt is rated as investment grade by the credit rating agencies, there is still a possibility that one or more of these companies could default, resulting in a material impact on consolidated earnings for a given period. Counterparties in the portfolio consist principally of financial institutions, major energy companies, municipalities and local distribution companies. We maintain credit policies that we believe minimize overall credit risk to within acceptable limits. Determination of the credit quality of our counterparties is based upon a number of factors, including credit ratings and our evaluation of their financial condition. To manage credit risk, we employ collateral requirements and standardized agreements that allow for the netting of positive and negative exposures associated with a single counterparty. Valuation adjustments are established representing our estimated credit losses on our overall exposure to counterparties.

Certain of our derivative instrument contracts contain credit-risk-related contingent features including, among other things, investment grade credit rating provisions, credit-related cross-default provisions, and adequate assurance provisions. Adequate assurance provisions allow a counterparty with reasonable grounds for uncertainty to demand additional collateral based on subjective events and/or conditions. For those derivative instruments in a net liability position, with investment grade credit contingencies, the counterparties could demand additional collateral if our debt credit rating were to fall below investment grade (below BBB- for Standard & Poor’s or Fitch or Baa3 for Moody’s).

The following table provides information about our derivative instruments that have credit-risk-related contingent features (dollars in thousands):


	June 30, ~~2021~~2022
Aggregate fair value of derivative instruments in a net liability position	$	~~1,595~~1,882
~~Cash collateral posted~~	0
Additional cash collateral in the event credit-risk-related contingent features were fully triggered (a)	0883

(a)This amount is after counterparty netting and includes those contracts which qualify for scope exceptions, which are excluded from the derivative details above.

We ~~also~~ have energy-related non-derivative instrument contracts with investment grade credit-related contingent features, which could ~~also~~ require us to post additional collateral of approximately ~~$87~~$77 million if our debt credit ratings were to fall below investment grade.

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8. Commitments and Contingencies

Palo Verde Generating Station

Spent Nuclear Fuel and Waste Disposal

On December 19, 2012, APS, acting on behalf of itself and the participant owners of Palo Verde, filed a second breach of contract lawsuit against the United States Department of Energy (“DOE”) in the United States Court of Federal Claims (“Court of Federal Claims”). The lawsuit sought to recover damages incurred due to DOE’s breach of the Contract for Disposal of Spent Nuclear Fuel and/or ~~High Level~~High-Level Radioactive Waste (“Standard Contract”) for failing to accept Palo Verde’s spent nuclear fuel and high level waste from January 1, 2007, through June 30, 2011, as it was required to do pursuant to the terms of the Standard Contract and the Nuclear Waste Policy Act. On August 18, 2014, APS and DOE entered into a settlement agreement, stipulating to a dismissal of the lawsuit and payment by DOE to the Palo Verde owners for certain specified costs incurred by Palo Verde during the period January 1, 2007 through June 30, 2011. In addition, the settlement agreement, as amended, provides APS with a method for submitting claims and getting recovery for costs incurred through December 31, 2022.

APS has submitted 67 claims pursuant to the terms of the August 18, 2014 settlement agreement, for 67 separate time periods during July 1, 2011 through June 30, ~~2019.~~2020. The DOE has approved and paid ~~$99.7~~$111.8 million for these claims (APS’s share is ~~$29.0~~$32.5 million). The amounts recovered were primarily recorded as adjustments to a regulatory liability and had no impact on reported net income. In accordance with the 2017 Rate Case Decision, this regulatory liability is being refunded to ~~customers (see~~customers. See Note ~~4).~~4. On November ~~2, 2020,~~1, 2021, APS filed its ~~7th~~8h claim pursuant to the terms of the August 18, 2014 settlement agreement in the amount of $12.2 million (APS’s share is $3.6 million). On March ~~15, 2021,~~22, 2022, the DOE approved a payment of $12.1 million (APS’s share is $3.5 million) and on April ~~16, 2021,~~19, 2022, APS received this payment.

Nuclear Insurance

Public liability for incidents at nuclear power plants is governed by the Price-Anderson Nuclear Industries Indemnity Act (“Price-Anderson Act”), which limits the liability of nuclear reactor owners to the amount of insurance available from both commercial sources and an industry-wide retrospective payment plan. In accordance with the Price-Anderson Act, the Palo Verde participants are insured against public liability for a nuclear incident of up to approximately $13.5 billion per occurrence. Palo Verde maintains the maximum available nuclear liability insurance in the amount of $450 million, which is provided by American Nuclear Insurers (“ANI”). The remaining balance of approximately $13.1 billion of liability coverage is provided through a mandatory industry-wide retrospective premium program. If losses at any nuclear power plant covered by the program exceed the accumulated funds, APS could be responsible for retrospective premiums. The maximum retrospective premium per reactor under the program for each nuclear liability incident is approximately $137.6 million, subject to a maximum annual premium of approximately $20.5 million per incident. Based on APS’s ownership interest in the 3 Palo Verde units, APS’s maximum retrospective premium per incident for all 3 units is approximately $120.1 million, with a maximum annual retrospective premium of approximately $17.9 million.

The Palo Verde participants maintain insurance for property damage to, and decontamination of, property at Palo Verde in the aggregate amount of $2.8 billion. APS has also secured accidental outage insurance for a sudden and unforeseen accidental outage of any of the 3 units. The property damage, decontamination, and accidental outage insurance are provided by Nuclear Electric Insurance Limited (“NEIL”). APS is subject to retrospective premium adjustments under all NEIL policies if NEIL’s losses in

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any policy year exceed accumulated funds. The maximum amount APS could incur under the current NEIL

~~COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

policies totals approximately ~~$22.4~~$22.3 million for each retrospective premium assessment declared by NEIL’s Board of Directors due to losses. In addition, NEIL policies contain rating triggers that would result in APS providing approximately ~~$63.3~~$62.8 million of collateral assurance within 20 business days of a rating downgrade to non-investment grade. The insurance coverage discussed in this and the previous paragraph is subject to certain policy conditions, sublimits and exclusions.

Contractual Obligations

As of June 30, ~~2021,~~2022, our fuel and purchased power and purchase obligation commitments have increased from the information provided in our ~~2020~~2021 Form 10-K. The increase is primarily due to new purchased power and energy storage commitments of approximately ~~$624 million.~~$1.2 billion. The majority of the changes relate to ~~2026~~2024 and thereafter. This amount includes approximately $500 million of commitments relating to a new purchased power lease contract that is included in our non-commenced lease discussion below.

At June 30, 2022, we have various lease arrangements that have been executed but have not yet commenced. These arrangements primarily relate to energy storage assets, with expected lease commencement dates ranging from September 2022 through June 2024, with terms expiring through May 2044. We expect the total fixed consideration paid for these arrangements, which includes both lease and nonlease payments, will approximate $1.8 billion over the term of the arrangements. For additional information regarding our lease commitments see our 2021 Form 10-K. Certain of these non-commenced lease agreements were previously expected to commence in June 2022; however, during the second quarter of 2022 due to delays impacting the leased asset’s in-service date, the lease commencement date has been delayed from June 2022 to September 2022. APS is currently working with the lessor to determine if this revised lease commencement date will be achieved.

Other than the ~~item~~items described above, there have been no material changes, as of June 30, ~~2021,~~2022, outside the normal course of business in contractual obligations from the information provided in our ~~2020~~2021 Form 10-K. See Note 3 for discussion regarding changes in our short-term and long-term debt obligations. ~~See Note 6 for discussion regarding changes to our contractual obligations related to the Palo Verde sale leaseback transactions.~~

~~Superfund-Related~~Superfund and Other Related Matters

The Comprehensive Environmental Response Compensation and Liability Act (“Superfund” or “CERCLA”) establishes liability for the cleanup of hazardous substances found contaminating the soil, water or air. Those who released, generated, transported to or disposed of hazardous substances at a contaminated site are among the parties who are potentially responsible ~~(“PRPs”~~(each a “PRP”). PRPs may be strictly, ~~and often are~~ jointly, and severally liable for clean-up. On September 3, 2003, EPA advised APS that EPA considers APS to be a PRP in the Motorola 52nd52nd Street Superfund Site, Operable Unit 3 (“OU3”) in Phoenix, Arizona. APS has facilities that are within this Superfund site. APS and Pinnacle West have agreed with EPA to perform certain investigative activities of the APS facilities within OU3. In addition, on September 23, 2009, APS agreed with EPA and one other PRP to voluntarily assist with the funding and management of the site-wide groundwater remedial investigation and feasibility study (“RI/FS”). Based upon discussions between the OU3 working group parties and EPA, along with the results of recent technical analyses prepared by the OU3 working group to supplement the RI/FS for OU3, APS anticipates finalizing the RI/FS ~~during the fourth quarter of 2021. We estimate that our~~later in 2022. APS’s estimated costs related to this investigation and study ~~will be~~are approximately $3 million. ~~We anticipate~~APS anticipates incurring additional expenditures in the future, but because the overall investigation is not complete and ultimate remediation requirements are not yet finalized, at the present time expenditures related to this matter cannot be reasonably estimated.

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On August 6, 2013, the Roosevelt Irrigation District (“RID”) filed a lawsuit in Arizona District Court against APS and 24 other defendants, alleging that RID’s groundwater wells were contaminated by the release of hazardous substances from facilities owned or operated by the defendants. The lawsuit also alleges that, under Superfund laws, the defendants are jointly and severally liable to RID. The allegations against APS arise out of APS’s current and former ownership of facilities in and around OU3. As part of a state governmental investigation into groundwater contamination in this area, on January 25, 2015, the Arizona Department of Environmental Quality (“ADEQ”) sent a letter to APS seeking information concerning the degree to which, if any, APS’s current and former ownership of these facilities may have contributed to groundwater contamination in this area. APS responded to ADEQ on May 4, 2015. On December 16, 2016, 2 RID environmental and engineering contractors filed an ancillary lawsuit for recovery of costs against APS and the other defendants in the RID litigation. That same day, another RID service provider filed an additional ancillary CERCLA lawsuit against certain of the defendants in the main RID litigation but excluded APS and certain other parties as named defendants. Because the ancillary lawsuits concern past costs allegedly incurred

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by these RID vendors, which were ruled unrecoverable directly by RID in November of 2016, the additional lawsuits do not increase APS’s exposure or risk related to these matters.

On April 5, 2018, RID and the defendants in that particular litigation executed a settlement agreement, fully resolving RID’s CERCLA claims concerning both past and future cost recovery. APS’s share of this settlement was immaterial. In addition, the 2 environmental and engineering vendors voluntarily dismissed their lawsuit against APS and the other named defendants without prejudice. An order to this effect was entered on April 17, 2018. With this disposition of the case, the vendors may file their lawsuit again in the future. On August 16, 2019, Maricopa County, one of the three direct defendants in the service provider lawsuit, filed a third-party complaint seeking contribution for its liability, if any, from APS and 28 other third-party defendants. We are unable to predict the outcome of these matters; however, we do not expect the outcome to have a material impact on our financial position, results of operations or cash flows.

On February 28, 2022, EPA provided APS with a request for information under CERCLA related to APS’s Ocotillo power plant site located in Tempe, Arizona. In particular, EPA seeks information from APS regarding APS’s use, storage, and disposal of substances containing per-and polyfluoroalkyl (“PFAS”) compounds at the Ocotillo power plant site in order to aid EPA’s investigation into actual or threatened releases of PFAS into groundwater within the South Indian Bend Wash (“SIBW”) Superfund site. The SIBW Superfund site includes the APS Ocotillo power plant site. On April 29, 2022, APS filed its response to this information request. At the present time, we are unable to predict the outcome of this matter and expenditures related to this matter cannot be reasonably estimated.

Arizona Attorney General Matter

APS received civil investigative demands from the Attorney General seeking information pertaining to the rate plan comparison tool offered to APS customers and other related issues including implementation of rates from the 2017 Settlement Agreement and its Customer Education and Outreach Plan associated with the 2017 Settlement Agreement. APS fully cooperated with the Attorney General’s Office in this matter. On February 22, 2021, APS entered into a consent agreement with the Attorney General as a way to settle the matter. The settlement resulted in APS paying $24.75 million, approximately $24 million of which ~~is being~~was returned to customers as restitution.

Four Corners SCR Cost Recovery

As part of ~~APS's rate case filing in~~APS’s 2019 Rate Case, APS included recovery of the deferral and rate base effects of the Four Corners SCR project. On ~~August~~November 2, 2021, the 2019 Rate Case ~~ROO recommended~~decision was approved by the ACC allowing approximately $194 million of SCR related plant investments and cost deferrals in rate base and to

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recover, depreciate and amortize in rates based on an end-of-life assumption of July 2031. The decision also included a partial and combined disallowance of ~~approximately $399~~$215.5 million ofon the SCR investments and deferrals. APS believes the SCR plant investments and ~~$61~~related SCR cost deferrals were prudently incurred, and on December 17, 2021, APS filed its Notice of Direct Appeal at the Arizona Court of Appeals requesting review of the $215.5 million disallowance and the appeal is proceeding in the normal course. Based on the partial recovery of these investments and cost deferrals in current rates and the uncertainty of the outcome of the legal appeals process, APS has not recorded an impairment or write-off relating to the SCR plant investments or deferrals as of June 30, 2022. If the 2019 Rate Case decision to disallow $215.5 million of ~~SCR cost deferrals. The ACC has not issued~~the SCRs is ultimately upheld, APS will be required to record a ~~decision on~~charge to its results of operations, net of tax, of approximately $154.4 million. We cannot predict the outcome of the legal challenges nor the timing of when this matter ~~but if the recommendation~~will be resolved. See Note 4 for additional information regarding the Four Corners SCR ~~project in the 2019 Rate Case ROO is adopted and ordered by the ACC, APS would be required to record a write-off related to the SCR~~ cost ~~deferrals. As of June 30, 2021, the SCR cost deferral balance is approximately $75 million net of accumulated deferred income taxes.~~In addition, if the recommendation regarding the SCR plant investment disallowance in the 2019 Rate Case ROO is adopted and ordered by the ACC, the amount of any loss will be determined based on the value of the SCR plant investment assets at the time the disallowance is probable and estimable and could also be affected by other regulatory and legal considerations.~~As of June 30, 2021, the value of the SCR plant investments is approximately $320 million, net of accumulated deferred income taxes.~~If a disallowance of all or a portion of the SCR plant investments is determined to be estimable and probable, or if regulatory recovery of all or a portion of the deferred costs is determined to no longer be probable, it is reasonably possible that APS will recognize a material loss on the SCR investments and cost deferrals. For the period ended June 30, 2021, based on the fact that the 2019 Rate Case ROO is not a final decision and that APS intends to file exceptions to the 2019 Rate Case ROO related to the recommended disallowance of SCR plant investments and cost deferrals, among other factors, APS has not recorded any adjustments to write-off or write-down the SCR plant investments or cost deferrals. The pollution control assets are used and useful and are required to operate Four Corners and APS believes that these SCR investments were prudently incurred. APS cannot predict the final outcome of the decision on this matter nor reasonably estimate the amount of any potential loss.recovery.

Environmental Matters

APS is subject to numerous environmental laws and regulations affecting many aspects of its present and future operations, including air emissions of both conventional pollutants and greenhouse gases, water quality, wastewater discharges, solid waste, hazardous waste, and coal combustion residuals (“CCRs”). These

~~COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

laws and regulations can change from time to time, imposing new obligations on APS resulting in increased capital, operating, and other costs. Associated capital expenditures or operating costs could be material. APS intends to seek recovery of any such environmental compliance costs through our rates but cannot predict whether it will obtain such recovery. The following proposed and final rules involve material compliance costs to APS.

Regional Haze Rules. APS has received the final rulemaking imposing pollution control requirements on Four Corners. EPA required the plant to install pollution control equipment that constitutes best available retrofit technology (“BART”) to lessen the impacts of emissions on visibility surrounding the plant. Based on EPA’s final standards, APS’s 63% share of the cost of required controls for Four Corners Units 4 and 5 was approximately $400 million, which has been incurred.

In addition, EPA issued a final rule for Regional Haze compliance at Cholla that does not involve the installation of new pollution controls and that will replace an earlier BART determination for this facility. See ~~below for details of the Cholla BART approval.~~

~~Four Corners.~~ Based on EPA’s final standards, APS’s 63% share of the cost of required controls for Four Corners Units 4 and 5 was approximately $400 million, which has been incurred. In addition, APS and El Paso Electric Company (“El Paso”) entered into an asset purchase agreement providing for the purchase by APS, or an affiliate of APS, of El Paso’s 7% interest in Four Corners Units 4 and 5. 4CA purchased the El Paso interest on July 6, 2016. Navajo Transitional Energy Company, LLC (“NTEC”) purchased the interest from 4CA on July 3, 2018. See “Four Corners — 4CA Matter” below for a discussion of the NTEC purchase. The cost of the pollution controls related to the 7% interest is approximately $45 million, which was assumed by NTEC through its purchase of the 7% interest.

~~Cholla~~. In early 2017, EPA approved a final rule containing a revision to Arizona’s State Implementation Plan (“SIP”) for Cholla that implemented BART requirements for this facility, which did not require the installation of any new pollution control capital improvements.~~In conjunction with the closure of Cholla Unit 2 in 2015, APS has committed to ceasing coal combustion within Units 1 and 3 by April 2025.PacifiCorp retired Cholla Unit 4 at the end of 2020. (See~~ “Cholla” in Note 4 for information regarding future plans for Cholla and details related to the resulting regulatory ~~asset).~~asset and see “Four Corners SCR Cost Recovery” above regarding recovery of the Four Corners SCR project.

Coal Combustion Waste. On December 19, 2014, EPA issued its final regulations governing the handling and disposal of CCR, such as fly ash and bottom ash. The rule regulates CCR as a non-hazardous waste under Subtitle D of the Resource Conservation and Recovery Act (“RCRA”) and establishes national minimum criteria for existing and new CCR landfills and surface impoundments and all lateral expansions. These criteria include standards governing location restrictions, design and operating criteria, groundwater monitoring and corrective action, closure requirements and post closure care, and recordkeeping, notification, and internet posting requirements. The rule generally requires any existing unlined CCR surface impoundment to stop receiving CCR and either retrofit or close, and further requires the closure of any CCR landfill or surface impoundment that cannot meet the applicable performance criteria for location restrictions or structural integrity. Such closure requirements are deemed “forced closure” or “closure for cause” of unlined surface impoundments and are the subject of recent regulatory and judicial activities described below.

Since these regulations were finalized, EPA has taken steps to substantially modify the federal rules governing CCR disposal. While certain changes have been prompted by utility industry petitions, others have

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resulted from judicial review, court-approved settlements with environmental groups, and statutory changes to RCRA. The following lists the pending regulatory changes that, if finalized, could have a material impact as to how APS manages CCR at its coal-fired power plants:

•Following the passage of the Water Infrastructure Improvements for the Nation Act in 2016, EPA possesses authority to either authorize states to develop their own permit programs for CCR management or issue federal permits governing CCR disposal both in states without their own permit programs and on tribal lands. Although ADEQ has taken steps to develop a CCR permitting program,

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including supporting the passage of new state legislation providing ADEQ with appropriate permitting authority for CCR under the state solid waste management program, it is not clear when that program will be put into effect. On December 19, 2019, EPA proposed its own set of regulations governing the issuance of CCR management permits. The proposal remains pending.

•On March 1, 2018, as a result of a settlement with certain environmental groups, EPA proposed adding boron to the list of constituents that trigger corrective action requirements to remediate groundwater impacted by CCR disposal activities. Apart from a subsequent proposal issued on August 14, 2019, to add a specific, health-based groundwater protection standard for boron, EPA has yet to take action on this proposal.

•Based on an August 21, 2018 D.C. Circuit decision, which vacated and remanded those provisions of the EPA CCR regulations that allow for the operation of unlined CCR surface impoundments, EPA recently proposed corresponding changes to federal CCR regulations. On July 29, 2020, EPA took final action on new regulations establishing revised deadlines for initiating the closure of unlined CCR surface impoundments, April 11, 2021 at the latest. All APS disposal units subject to these closure requirements were closed as of April 11, 2021.

•On November 4, 2019, EPA also proposed to change the manner by which facilities that have committed to cease burning coal in the near-term may qualify for alternative closure.Such qualification would allow CCR disposal units at these plants to continue operating, even though they would otherwise be subject to forced closure under the federal CCR regulations.EPA’s July 29, 2020, final regulation adopted this proposal and now requires explicit EPA approval for facilities to utilize an alternative closure deadline. With respect to the Cholla facility, APS’s application for alternative closure ~~(which~~was submitted to EPA on November 30, 2020, and is currently pending. If granted, this application would allow the continued disposal of CCR within ~~the facility’s~~Cholla’s existing unlined CCR surface impoundments until the required date for ceasing coal-fired boiler operations in April ~~2025) was submitted to EPA on November 30, 2020 and is currently pending.~~ 2025. This application will be subject to public comment and, potentially, judicial review. EPA began taking action on these applications in January 2022, deeming APS’s application for the Cholla facility “complete.” We expect to have a proposed decision from EPA regarding Cholla in 2023.

We cannot at this time predict the outcome of these regulatory proceedings or when the EPA will take final action on those matters that are still pending. Depending on the eventual outcome, the costs associated with APS’s management of CCR could materially increase, which could affect APS’s financial position, results of operations, or cash flows.

APS currently disposes of CCR in ash ponds and dry storage areas at Cholla and Four Corners. APS estimates that its share of incremental costs to comply with the CCR rule for Four Corners is approximately ~~$27~~$30 million and its share of incremental costs to comply with the CCR rule for Cholla is approximately $16 million. The Navajo Plant disposed of CCR only in a dry landfill storage area. To comply with the CCR rule for the Navajo Plant, APS’s share of incremental costs was approximately $1 million, which has been incurred. Additionally, the CCR rule requires ongoing, phased groundwater monitoring.

As of October 2018, APS has completed the statistical analyses for its CCR disposal units that triggered assessment monitoring. APS determined that several of its CCR disposal units at Cholla and Four Corners will need to undergo corrective action. In addition, under the current regulations, all such disposal units must have ceased operating and initiated closure by April 11, 2021, at the latest (except for those disposal units subject to alternative closure). APS ~~initiated an assessment~~completed the assessments of corrective measures on ~~January~~June 14, ~~2019~~2019; however, additional investigations and ~~expects such assessment~~engineering analyses that will ~~continue through late-2021. As part~~support the remedy selection are still

Table of ~~this assessment, APS continues to gather additional groundwater data and perform remedial evaluations as to the CCR disposal units at Cholla and Four Corners undergoing corrective action.~~Contents

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underway. In addition, APS will also solicit input from the public and host public hearings ~~and select remedies~~ as part of this process. Based on the work performed to date, APS currently estimates that its share of corrective action and monitoring costs at Four Corners will likely range from $10 million to $15 million, which would be incurred over 30 years. The analysis needed to perform a similar cost estimate for Cholla remains ongoing at this time. As APS continues to implement the CCR rule’s corrective

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action assessment process, the current cost estimates may change. Given uncertainties that may exist until we have fully completed the corrective action assessment process, we cannot predict any ultimate impacts to the Company; however, at this time we do not believe the cost estimates for Cholla and any potential change to the cost estimate for Four Corners would have a material impact on our financial position, results of operations or cash flows.

~~Clean Power Plan/Affordable Clean Energy Regulations~~EPA Climate Regulations.. On June 19, 2019, EPA took final action on its proposals to repeal EPA’s 2015 Clean Power Plan (“CPP”) and replace those regulations with a new rule, the Affordable Clean Energy (“ACE”) regulations. EPA originally finalized the CPP on August 3, 2015, and such rules would have had far broader impact on the electric power sector than the ACE regulations. On January 19, 2021, the U.S. Court of Appeals for the D.C. Circuit vacated the ACE regulations and remanded them back to EPA to develop new existing power plant carbon regulations consistent with the court’s ruling. That ruling endorsed an expansive view of the federal Clean Air Act consistent with EPA’s 2015 CPP. Thereafter, on June 30, 2022, the U.S. Supreme Court reversed the D.C. Circuit’s ruling, holding that existing power plant carbon regulations on the scale of the CPP are not authorized by the federal Clean Air Act. While the Biden administration has nonetheless expressed an intent to continue its effort to regulate carbon emissions in this sector more aggressively under the Clean Air Act (consistent with the U.S. Supreme Court’s June 30 ruling), we cannot at this time predict the outcome of pending EPA rulemaking proceedings ~~in response~~related to the ~~court’s recent ACE decision.~~regulation of carbon emissions from existing power plants.

Other environmental rules that could involve material compliance costs include those related to effluent limitations, the ozone national ambient air quality standard and other rules or matters involving the Clean Air Act, Clean Water Act, Endangered Species Act, RCRA, Superfund, the Navajo Nation, and water supplies for our power plants. The financial impact of complying with current and future environmental rules could jeopardize the economic viability of our coal plants or the willingness or ability of power plant participants to fund any required equipment upgrades or continue their participation in these plants. The economics of continuing to own certain resources, particularly our coal plants, may deteriorate, warranting early retirement of those plants, which may result in asset impairments. APS would seek recovery in rates for the book value of any remaining investments in the plants, as well as other costs related to early retirement, but cannot predict whether it would obtain such recovery.

Four Corners National Pollutant Discharge Elimination System (“NPDES”) Permit

The latest NPDES permit for Four Corners was issued on September 30, 2019. Based upon a November 1, 2019, filing by several environmental groups, the Environmental Appeals Board (“EAB”) took up review of the Four Corners NPDES Permit. ~~Oral argument on this appeal was held on September 3, 2020 and the~~The EAB denied the environmental group petition on September 30, 2020. ~~On January 22, 2021,~~While the environmental groups had filed a petition for review of the EAB’s decision with the U.S. Court of Appeals for the Ninth ~~Circuit. The September 2019 permit remains in effect pending~~Circuit, on May 2, 2022, the parties to the litigation executed a settlement agreement. We do not anticipate that this appeal. The parties are presently engaged in mediation to settle this dispute. We cannot predict the outcome of this appeal proceeding, the ongoing mediation, and, if such appeal is successful, whether that outcomeagreement will have a material impact on our financial position, results of operations, or cash flows.

Four Corners — 4CA Matter

On July 6, 2016, 4CA purchased El Paso’s 7% interest in Four Corners. NTEC purchased this 7% interest on July 3, 2018, from 4CA. NTEC purchased the 7% interest at 4CA’s book value, approximately $70 million, and ~~is paying~~paid 4CA the purchase price over a period of four years pursuant to a secured interest-bearing promissory ~~note. The~~ note, ~~is secured by a portion of APS’s payments to be owed to NTEC under the 2016 Coal Supply Agreement. As~~which was paid in full as of June 30, 2021, the note has a remaining balance of $18 million. NTEC continues to make payments in accordance with the terms of the note. Due to its short-remaining term, among other factors, there are no expected credit losses associated with the note.2022.

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In connection with the sale, Pinnacle West guaranteed certain obligations that NTEC will have to the other owners of Four Corners, such as NTEC’s 7% share of capital expenditures and operating and maintenance expenses. Pinnacle West’s guarantee is secured by a portion of APS’s payments to be owed to NTEC under the 2016 Coal Supply Agreement.

The 2016 Coal Supply Agreement contained alternate pricing terms for the 7% interest in the event NTEC did not purchase the interest. Until the time that NTEC purchased the 7% interest, the alternate pricing provisions were applicable to 4CA as the holder of the 7% interest. These terms included a formula under which NTEC must make certain payments to 4CA for reimbursement of operations and maintenance costs and a specified rate of return, offset by revenue generated by 4CA’s power sales. The amount under this formula for calendar year 2018 (up to the date that NTEC purchased the 7% interest) was approximately $10 million, which was due to 4CA on December 31, 2019. Such payment was satisfied in January 2020 by NTEC directing to 4CA a prepayment from APS of future coal payment obligations of which the prepayment has been fully utilized as of June 2020.

Financial Assurances

In the normal course of business, we obtain standby letters of credit and surety bonds from financial institutions and other third parties. These instruments guarantee our own future performance and provide third parties with financial and performance assurance in the event we do not perform. These instruments support commodity contract collateral obligations and other transactions. As of June 30, ~~2021,~~2022, standby letters of credit totaled ~~$5.3~~$9 million and ~~would have expired~~expire in ~~2021, subsequently in April of 2021 an extension was effective that reset the expiration dates to 2022.~~2023. As of June 30, ~~2021,~~2022, surety bonds expiring through ~~2022~~2023 totaled ~~$16~~$6 million. The underlying liabilities insured by these instruments are reflected on our balance sheets, where applicable. Therefore, no additional liability is reflected for the letters of credit and surety bonds themselves.

We enter into agreements that include indemnification provisions relating to liabilities arising from or related to certain of our agreements. Most significantly, APS has agreed to indemnify the equity participants and other parties in the Palo Verde sale leaseback transactions with respect to certain tax matters. Generally, a maximum obligation is not explicitly stated in the indemnification provisions and, therefore, the overall maximum amount of the obligation under such indemnification provisions cannot be reasonably estimated. Based on historical experience and evaluation of the specific indemnities, we do not believe that any material loss related to such indemnification provisions is likely.

Pinnacle West has issued parental guarantees and has provided indemnification under certain surety bonds for APS which were not material at June 30, ~~2021.~~2022. In connection with the sale of 4CA’s 7% interest to NTEC, Pinnacle West is guaranteeing certain obligations that NTEC will have to the other owners of Four Corners. (See “Four Corners — 4CA Matter” above for information related to this guarantee). Pinnacle West has not needed to perform under this guarantee. A maximum obligation is not explicitly stated in the guarantee and, therefore, the overall maximum amount of the obligation under such guarantee cannot be reasonably estimated; however, we consider the fair value of this guarantee, including expected credit losses, to be immaterial.

In connection with BCE’s acquisition of minority ownership positions in the Clear Creek and Nobles 2 wind farms, Pinnacle West has issued parental guarantees to guarantee the obligations of BCE subsidiaries to make required equity contributions to fund project construction (the “Equity Contribution Guarantees”) and to make production tax credit funding payments to borrowers of the projects (the “PTC Guarantees”). The amounts guaranteed by Pinnacle West are reduced as payments are made under the respective guarantee agreements. The Equity Contribution Guarantees remaining as of June 30, ~~2021~~2022, are immaterial in amount ~~(approximately $2 million)~~ and the PTC Guarantees (approximately ~~$38~~$35 million as of June 30, ~~2021)~~2022) are

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currently expected to be terminated ten years following the commercial operation date of the applicable project.

In connection with the credit agreement entered into by Los Alamitos on February 11, 2022, Pinnacle West has guaranteed the full amount of the equity bridge loan under the credit facility. See Note 3 for additional details.

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9. Other Income and Other Expense

The following table provides detail of Pinnacle West’s Consolidated other income and other expense (dollars in thousands):


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Other income:	Other income:									Other income:
Interest income	Interest income	$	1,687	$	2,755	$	3,635	$	6,032	Interest income	$	1,691	$	1,687	$	3,333	$	3,635
Investment gains - net		0		2,826		0		2,826

Debt return on Four Corners SCR deferrals (Note 4)	Debt return on Four Corners SCR deferrals (Note 4)	4,089		4,249		8,175		7,389		Debt return on Four Corners SCR deferrals (Note 4)	—		4,089		—		8,175
Debt return on Ocotillo modernization project (Note 4)	Debt return on Ocotillo modernization project (Note 4)	6,391		6,703		12,783		12,847		Debt return on Ocotillo modernization project (Note 4)	—		6,391		—		12,783
Miscellaneous	Miscellaneous	40		137		43		145		Miscellaneous	(9)		40		53		43
Total other income	Total other income	$	12,207	$	16,670	$	24,636	$	29,239	Total other income	$	1,682	$	12,207	$	3,386	$	24,636
Other expense:	Other expense:									Other expense:
Non-operating costs	Non-operating costs	(4,102)		(2,290)		(6,039)		(4,948)		Non-operating costs	(3,701)		(4,102)		(6,154)		(6,039)
Investment gains (losses) — net		(431)		0		(774)		60
Investment losses — net										Investment losses — net	(575)		(431)		(1,256)		(774)
Miscellaneous	Miscellaneous	(651)		(1,746)		(2,224)		(3,932)		Miscellaneous	(308)		(651)		(596)		(2,224)
Total other expense	Total other expense	$	(5,184)	$	(4,036)	$	(9,037)	$	(8,820)	Total other expense	$	(4,584)	$	(5,184)	$	(8,006)	$	(9,037)

The following table provides detail of APS’s other income and other expense (dollars in thousands):


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Other income:	Other income:									Other income:
Interest income	Interest income	$	1,047	$	2,183	$	2,528	$	4,524	Interest income	$	1,396	$	1,047	$	2,495	$	2,528
Debt return on Four Corners SCR deferrals (Note 4)	Debt return on Four Corners SCR deferrals (Note 4)	4,089		4,249		8,175		7,389		Debt return on Four Corners SCR deferrals (Note 4)	—		4,089		—		8,175
Debt return on Ocotillo modernization project (Note 4)	Debt return on Ocotillo modernization project (Note 4)	6,391		6,703		12,783		12,847		Debt return on Ocotillo modernization project (Note 4)	—		6,391		—		12,783
Miscellaneous	Miscellaneous	36		137		37		145		Miscellaneous	—		36		53		37
Total other income	Total other income	$	11,563	$	13,272	$	23,523	$	24,905	Total other income	$	1,396	$	11,563	$	2,548	$	23,523
Other expense:	Other expense:									Other expense:
Non-operating costs	Non-operating costs	(3,615)		(2,113)		(5,392)		(4,595)		Non-operating costs	(2,477)		(3,615)		(4,038)		(5,392)
Miscellaneous	Miscellaneous	(646)		(1,746)		(2,219)		(3,932)		Miscellaneous	(309)		(646)		(596)		(2,219)
Total other expense	Total other expense	$	(4,261)	$	(3,859)	$	(7,611)	$	(8,527)	Total other expense	$	(2,786)	$	(4,261)	$	(4,634)	$	(7,611)

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10. Earnings Per Share

The following table presents the calculation of Pinnacle West’s basic and diluted earnings per share (in thousands, except per share amounts):


		Three Months Ended June 30,					Six Months Ended June 30,					Three Months Ended June 30,						Six Months Ended June 30,
			2021		2020			2021		2020				2022		2021			2022		2021
Net income attributable to common shareholders	Net income attributable to common shareholders		$	215,697	$	193,585		$	251,338	$	223,578		Net income attributable to common shareholders	$	164,312	$	215,697		$	181,268	$	251,338
Weighted average common shares outstanding — basic	Weighted average common shares outstanding — basic		112,882		112,638			112,855		112,616			Weighted average common shares outstanding — basic	113,172		112,882			113,137		112,855
Net effect of dilutive securities:	Net effect of dilutive securities:												Net effect of dilutive securities:
Contingently issuable performance shares and restricted stock units	Contingently issuable performance shares and restricted stock units		341		241			303		255			Contingently issuable performance shares and restricted stock units	197		341			195		303
Weighted average common shares outstanding — diluted	Weighted average common shares outstanding — diluted		113,223		112,879			113,158		112,871			Weighted average common shares outstanding — diluted	113,369		113,223			113,332		113,158
Earnings per weighted-average common share outstanding	Earnings per weighted-average common share outstanding												Earnings per weighted-average common share outstanding
Net income attributable to common shareholders — basic	Net income attributable to common shareholders — basic		$	1.91	$	1.72		$	2.23	$	1.99		Net income attributable to common shareholders — basic	$	1.45	$	1.91		$	1.60	$	2.23
Net income attributable to common shareholders — diluted	Net income attributable to common shareholders — diluted		$	1.91	$	1.71		$	2.22	$	1.98		Net income attributable to common shareholders — diluted	$	1.45	$	1.91		$	1.60	$	2.22

11. Fair Value Measurements

We classify our assets and liabilities that are carried at fair value within the fair value hierarchy. This hierarchy ranks the quality and reliability of the inputs used to determine fair values, which are then classified and disclosed in one of three categories. The three levels of the fair value hierarchy are:

Level 1 — Inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2 — Other significant observable inputs, including quoted prices in active markets for similar assets or liabilities; quoted prices in markets that are not active, and model-derived valuations whose inputs are observable (such as yield curves).

Level 3 — Valuation models with significant unobservable inputs that are supported by little or no market activity. Instruments in this category may include long-dated derivative transactions where valuations are unobservable due to the length of the transaction, options, and transactions in locations where observable market data does not exist. The valuation models we employ utilize spot prices, forward prices, historical market data and other factors to forecast future prices.

Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Thus, a valuation may be classified in Level 3 even though the valuation may include significant inputs that are readily observable. We maximize the use of observable inputs and minimize the use of unobservable inputs. We rely primarily on the market approach of using prices and other market information for identical and/or comparable assets and liabilities. If market data is not readily available, inputs may reflect our own assumptions about the inputs market participants would use. Our assessment of the inputs and the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities as well as their placement within the fair value hierarchy levels. We assess whether a market is active by obtaining observable broker quotes, reviewing actual market activity, and assessing the volume of transactions. We consider broker quotes observable inputs when the quote is

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binding on the broker, we can validate the quote with market activity, or we can determine that the inputs the broker used to arrive at the quoted price are observable.

Certain instruments have been valued using the concept of Net Asset Value (“NAV”) as a practical expedient. These instruments are typically structured as investment companies offering shares or units to multiple investors for the purpose of providing a return. These instruments are similar to mutual funds; however, their NAV is generally not published and publicly available, nor are these instruments traded on an exchange. Instruments valued using NAV as a practical expedient are included in our fair value disclosures; however, in accordance with GAAP are not classified within the fair value hierarchy levels.

Recurring Fair Value Measurements

We apply recurring fair value measurements to cash equivalents, derivative instruments, and investments held in the nuclear decommissioning trusts and other special use funds. On an annual basis, we apply fair value measurements to plan assets held in our retirement and other benefit plans. See Note 8 in the ~~2020~~2021 Form 10-K for fair value discussion of plan assets held in our retirement and other benefit plans.

Cash Equivalents

Cash equivalents represent certain investments in money market funds that are valued using quoted prices in active markets.

Risk Management Activities — Derivative Instruments

Exchange traded commodity contracts are valued using unadjusted quoted prices. For non-exchange traded commodity contracts, we calculate fair value based on the average of the bid and offer price, discounted to reflect net present value. We maintain certain valuation adjustments for a number of risks associated with the valuation of future commitments. These include valuation adjustments for liquidity and credit risks. The liquidity valuation adjustment represents the cost that would be incurred if all unmatched positions were closed out or hedged. The credit valuation adjustment represents estimated credit losses on our net exposure to counterparties, taking into account netting agreements, expected default experience for the credit rating of the counterparties and the overall diversification of the portfolio. We maintain credit policies that management believes minimize overall credit risk.

Certain non-exchange traded commodity contracts are valued based on unobservable inputs due to the long-term nature of contracts, characteristics of the product, or the unique location of the transactions. Our long-dated energy transactions consist of observable valuations for the near-term portion and unobservable valuations for the long-term portions of the transaction. We rely primarily on broker quotes to value these instruments. When our valuations utilize broker quotes, we perform various control procedures to ensure the quote has been developed consistent with fair value accounting guidance. These controls include assessing the quote for reasonableness by comparison against other broker quotes, reviewing historical price relationships, and assessing market activity. When broker quotes are not available, the primary valuation technique used to calculate the fair value is the extrapolation of forward pricing curves using observable market data for more liquid delivery points in the same region and actual transactions at more illiquid delivery points.

When the unobservable portion is significant to the overall valuation of the transaction, the entire transaction is classified as Level 3.

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Investments Held in Nuclear Decommissioning Trusts and Other Special Use Funds

The nuclear decommissioning trusts and other special use funds invest in fixed income and equity securities. Other special use funds include the coal reclamation escrow account and the active union employee medical account. See Note 12 for additional discussion about our investment accounts.

We value investments in fixed income and equity securities using information provided by our trustees and escrow agent. Our trustees and escrow agent use pricing services that utilize the valuation methodologies described below to determine fair market value. We have internal control procedures designed to ensure this information is consistent with fair value accounting guidance. These procedures include assessing valuations using an independent pricing source, verifying that pricing can be supported by actual recent market transactions, assessing hierarchy classifications, comparing investment returns with benchmarks, and obtaining and reviewing independent audit reports on the trustees’ and escrow agent’s internal operating controls and valuation processes.

Fixed Income Securities

Fixed income securities issued by the U.S. Treasury are valued using quoted active market prices and are typically classified as Level 1. Fixed income securities issued by corporations, municipalities, and other agencies, including mortgage-backed instruments, are valued using quoted inactive market prices, quoted active market prices for similar securities, or by utilizing calculations which incorporate observable inputs such as yield curves and spreads relative to such yield curves. These fixed income instruments are classified as Level 2. Whenever possible, multiple market quotes are obtained which enables a cross-check validation. A primary price source is identified based on asset type, class, or issue of securities.

Fixed income securities may also include short-term investments in certificates of deposit, variable rate notes, time deposit accounts, U.S. Treasury and Agency obligations, U.S. Treasury repurchase agreements, commercial paper, and other short-term instruments. These instruments are valued using active market prices or utilizing observable inputs described above.

Equity Securities

The nuclear decommissioning ~~trusts's~~trusts’ equity security investments are held indirectly through commingled funds. The commingled funds are valued using the funds’ NAV as a practical expedient. The funds’ NAV is primarily derived from the quoted active market prices of the underlying equity securities held by the funds. We may transact in these commingled funds on a semi-monthly basis at the NAV. The commingled funds are maintained by a bank and hold investments in accordance with the stated objective of tracking the performance of the S&P 500 Index. Because the commingled funds’ shares are offered to a limited group of investors, they are not considered to be traded in an active market. As these instruments are valued using NAV, as a practical expedient, they have not been classified within the fair value hierarchy.

The nuclear decommissioning trusts and other special use funds may also hold equity securities that include exchange traded mutual funds and money market accounts for short-term liquidity purposes. These short-term, highly-liquid investments are valued using active market prices.

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Fair Value Tables

The following table presents the fair value at June 30, ~~2021~~2022, of our assets and liabilities that are measured at fair value on a recurring basis (dollars in thousands):


		Level 1		Level 2		Level 3		Other			Total			Level 1		Level 2		Level 3		Other			Total
Assets	Assets												Assets

Risk management activities — derivative instruments:	Risk management activities — derivative instruments:												Risk management activities — derivative instruments:
Commodity contracts	Commodity contracts	$	0	$	84,594	$	26,388	$	(1,368)	(a)	$	109,614	Commodity contracts	$	—	$	281,107	$	8,505	$	(40,737)	(a)	$	248,875
Nuclear decommissioning trust:	Nuclear decommissioning trust:												Nuclear decommissioning trust:
Equity securities	Equity securities	22,749		0		0		(9,506)		(b)	13,243		Equity securities	12,773		—		—		1,401		(b)	14,174
U.S. commingled equity funds	U.S. commingled equity funds	0		0		0		702,836		(c)	702,836		U.S. commingled equity funds	—		—		—		460,619		(c)	460,619
U.S. Treasury debt	U.S. Treasury debt	167,584		0		0		—			167,584		U.S. Treasury debt	211,284		—		—		—			211,284
Corporate debt	Corporate debt	0		150,681		0		—			150,681		Corporate debt	—		177,297		—		—			177,297
Mortgage-backed securities	Mortgage-backed securities	0		119,481		0		—			119,481		Mortgage-backed securities	—		135,858		—		—			135,858
Municipal bonds	Municipal bonds	0		59,876		0		—			59,876		Municipal bonds	—		67,943		—		—			67,943
Other fixed income	Other fixed income	0		9,387		0		—			9,387		Other fixed income	—		8,913		—		—			8,913
Subtotal nuclear decommissioning trust	Subtotal nuclear decommissioning trust	190,333		339,425		0		693,330			1,223,088		Subtotal nuclear decommissioning trust	224,057		390,011		—		462,020			1,076,088

Other special use funds:	Other special use funds:												Other special use funds:
Equity securities	Equity securities	19,904		0		0		952		(b)	20,856		Equity securities	29,093		—		—		938		(b)	30,031
U.S. Treasury debt	U.S. Treasury debt	324,418		0		0		—			324,418		U.S. Treasury debt	310,667		—		—		—			310,667
Municipal bonds	Municipal bonds	0		13,162		0		—			13,162		Municipal bonds	—		5,708		—		—			5,708
Subtotal other special use funds	Subtotal other special use funds	344,322		13,162		0		952			358,436		Subtotal other special use funds	339,760		5,708		—		938			346,406

Total assets	Total assets	$	534,655	$	437,181	$	26,388	$	692,914		$	1,691,138	Total assets	$	563,817	$	676,826	$	8,505	$	422,221		$	1,671,369
Liabilities	Liabilities												Liabilities
Risk management activities — derivative instruments:	Risk management activities — derivative instruments:												Risk management activities — derivative instruments:
Commodity contracts	Commodity contracts	$	0	$	(1,586)	$	(9)	$	83	(a)	$	(1,512)	Commodity contracts	$	—	$	(94)	$	(3,959)	$	(1,543)	(a)	$	(5,596)

(a)Represents counterparty netting, margin, and collateral. See Note 7.

(b)Represents net pending securities sales and purchases.

(c)Valued using NAV as a practical expedient and, therefore, are not classified in the fair value hierarchy.

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The following table presents the fair value at December 31, ~~2020~~2021, of our assets and liabilities that are measured at fair value on a recurring basis (dollars in thousands):


		Level 1		Level 2		Level 3		Other			Total			Level 1		Level 2		Level 3		Other			Total
Assets	Assets												Assets

Risk management activities — derivative instruments:	Risk management activities — derivative instruments:												Risk management activities — derivative instruments:
Commodity contracts	Commodity contracts	$	0	$	9,016	$	4	$	(4,271)	(a)	$	4,749	Commodity contracts	$	—	$	115,079	$	—	$	(4,690)	(a)	$	110,389
Nuclear decommissioning trust:	Nuclear decommissioning trust:												Nuclear decommissioning trust:
Equity securities	Equity securities	29,796		0		0		(17,828)		(b)	11,968		Equity securities	45,264		—		—		(27,782)		(b)	17,482
U.S. commingled equity funds	U.S. commingled equity funds	0		0		0		610,055		(c)	610,055		U.S. commingled equity funds	—		—		—		595,048		(c)	595,048
U.S. Treasury debt	U.S. Treasury debt	164,514		0		0		—			164,514		U.S. Treasury debt	240,745		—		—		—			240,745
Corporate debt	Corporate debt	0		149,509		0		—			149,509		Corporate debt	—		203,454		—		—			203,454
Mortgage-backed securities	Mortgage-backed securities	0		99,623		0		—			99,623		Mortgage-backed securities	—		155,574		—		—			155,574
Municipal bonds	Municipal bonds	0		89,705		0		—			89,705		Municipal bonds	—		72,189		—		—			72,189
Other fixed income	Other fixed income	0		13,061		0		—			13,061		Other fixed income	—		10,265		—		—			10,265
Subtotal nuclear decommissioning trust	Subtotal nuclear decommissioning trust	194,310		351,898		0		592,227			1,138,435		Subtotal nuclear decommissioning trust	286,009		441,482		—		567,266			1,294,757

Other special use funds:	Other special use funds:												Other special use funds:
Equity securities	Equity securities	37,337		0		0		504		(b)	37,841		Equity securities	47,570		—		—		936		(b)	48,506
U.S. Treasury debt	U.S. Treasury debt	203,220		0		0		—			203,220		U.S. Treasury debt	298,170		—		—		—			298,170
Municipal bonds	Municipal bonds	0		13,448		0		—			13,448		Municipal bonds	—		11,734		—		—			11,734
Subtotal other special use funds	Subtotal other special use funds	240,557		13,448		0		504			254,509		Subtotal other special use funds	345,740		11,734		—		936			358,410

Total assets	Total assets	$	434,867	$	374,362	$	4	$	588,460		$	1,397,693	Total assets	$	631,749	$	568,295	$	—	$	563,512		$	1,763,556
Liabilities	Liabilities												Liabilities
Risk management activities — derivative instruments:	Risk management activities — derivative instruments:												Risk management activities — derivative instruments:
Commodity contracts	Commodity contracts	$	0	$	(20,498)	$	(1,107)	$	2,986	(a)	$	(18,619)	Commodity contracts	$	—	$	(4,740)	$	(2,738)	$	3,105	(a)	$	(4,373)

(a)Represents counterparty netting, margin, and collateral. See Note 7.

(b)Represents net pending securities sales and purchases.

(c)Valued using NAV as a practical expedient and, therefore, are not classified in the fair value hierarchy.

Fair Value Measurements Classified as Level 3

The significant unobservable inputs used in the fair value measurement of our energy derivative contracts include broker quotes that cannot be validated as an observable input primarily due to the long-term nature of the quote or other characteristics of the product. Significant changes in these inputs in isolation would result in significantly higher or lower fair value measurements. Changes in our derivative contract fair values, including changes relating to unobservable inputs, typically will not impact net income due to regulatory accounting ~~treatment (see~~treatment. See Note ~~4).~~4.

Because our forward commodity contracts classified as Level 3 are currently in a net purchase position, we would expect price increases of the underlying commodity to result in increases in the net fair value of the related contracts. Conversely, if the price of the underlying commodity decreases, the net fair value of the related contracts would likely decrease.

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Other unobservable valuation inputs include credit and liquidity reserves which do not have a material impact on our valuations; however, significant changes in these inputs could also result in higher or lower fair value measurements.

Financial Instruments Not Carried at Fair Value

The carrying value of our short-term borrowings approximate fair value and are classified within Level 2 of the fair value hierarchy. See Note 3 for our long-term debt fair values. The NTEC note receivable related to the sale of 4CA’s interest in Four Corners bears interest at 3.9% per annum and has a book value of $18.2 million as of June 30, 2021 and $27.1 million as of December 31, 2020, as presented on the Condensed Consolidated Balance Sheets. The carrying amount is not materially different from the fair value of the note receivable and is classified within Level 3 of the fair value hierarchy. See Note 8 for more information on 4CA matters.

12. Investments in Nuclear Decommissioning Trusts and Other Special Use Funds

We have investments in debt and equity securities held in Nuclear Decommissioning Trusts, Coal Reclamation Escrow Account, and an Active Union Employee Medical Account.Investments in debt securities are classified as available-for-sale securities.We record both debt and equity security investments at their fair value on our Condensed Consolidated Balance Sheets.See Note 11 for a discussion of how fair value is determined and the classification of the investments within the fair value hierarchy.The investments in each trust or account are restricted for use and are intended to fund specified costs and activities as further described for each fund below.

Nuclear Decommissioning Trusts — APS established external decommissioning trusts in accordance with NRC regulations to fund the future costs APS expects to incur to decommission Palo Verde.Third-party investment managers are authorized to buy and sell securities per stated investment guidelines.The trust funds are invested in fixed income securities and equity securities. Earnings and proceeds from sales and maturities of securities are reinvested in the trusts. Because of the ability of APS to recover decommissioning costs in rates, and in accordance with the regulatory treatment, APS has deferred realized and unrealized gains and losses (including credit losses) in other regulatory liabilities.

Coal Reclamation Escrow Account — APS has investments restricted for the future coal mine reclamation funding related to Four Corners.This escrow account is primarily invested in fixed income securities. Earnings and proceeds from sales of securities are reinvested in the escrow account.Because of the ability of APS to recover coal ~~mine~~ reclamation costs in rates, and in accordance with the regulatory treatment, APS has deferred realized and unrealized gains and losses (including credit losses) in other regulatory liabilities.Activities relating to APS coal mine reclamation escrow account investments are included within the other special use funds in the table below.

Active Union Employee Medical Account — APS has investments restricted for paying active union employee medical costs.These investments may be used to pay active union employee medical costs incurred in the current and future periods. In ~~2020 and 2019,~~2021, APS was reimbursed ~~$14 million and~~ $15 million ~~respectively,~~ for prior year active union employee medical claims from the active union employee medical account.The account is invested primarily in fixed income securities.In accordance with the ratemaking treatment, APS has deferred the unrealized gains and losses (including credit losses) in other regulatory liabilities. Activities relating to active union employee medical account investments are included within the other special use funds in the table below. ~~On January 4, 2021, an additional $106 million of investments were transferred from APS other postretirement benefit trust assets into the active union employee medical account (see Note 5).~~

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APS

The following tables present the unrealized gains and losses based on the original cost of the investment and summarizes the fair value of APS’s nuclear decommissioning trusts and other special use fund assets (dollars in thousands):


		June 30, 2021															June 30, 2022
		Fair Value							Total Unrealized Gains					Total Unrealized Losses			Fair Value											Total Unrealized Gains			Total Unrealized Losses
Investment Type:	Investment Type:	Nuclear Decommissioning Trusts		Other Special Use Funds		Total					Investment Type:		Nuclear Decommissioning Trusts					Other Special Use Funds				Total
Equity securities	Equity securities	$	725,585	$	19,904	$	745,489				$	510,432					$	0	Equity securities	$	473,392		$	29,093			$	502,485		$	327,032		$	(183)
Available for sale-fixed income securities	Available for sale-fixed income securities	507,009		337,580		844,589		(a)	31,269					(1,357)		Available for sale-fixed income securities	601,295				316,375			917,670		(a)		2,997			(56,826)
Other	Other	(9,506)		952		(8,554)		(b)	0					0		Other	1,401				938			2,339		(b)		—			—
Total	Total	$	1,223,088	$	358,436	$	1,581,524		$	541,701				$	(1,357)	Total	$	1,076,088			$	346,406		$	1,422,494			$	330,029		$	(57,009)

(a)As of June 30, ~~2021,~~2022, the amortized cost basis of these available-for-sale investments is ~~$815~~$971 million.

(b)Represents net pending securities sales and purchases.


		December 31, 2020															December 31, 2021
		Fair Value							Total Unrealized Gains					Total Unrealized Losses			Fair Value											Total Unrealized Gains			Total Unrealized Losses
Investment Type:	Investment Type:	Nuclear Decommissioning Trusts		Other Special Use Funds		Total					Investment Type:		Nuclear Decommissioning Trusts					Other Special Use Funds				Total
Equity securities	Equity securities	$	639,851	$	37,337	$	677,188				$	421,666					$	0	Equity securities	$	640,312		$	47,570			$	687,882		$	451,387		$	—
Available for sale-fixed income securities	Available for sale-fixed income securities	516,412		216,668		733,080		(a)	46,581					(398)		Available for sale-fixed income securities	682,227				309,904			992,131		(a)		24,283			(4,063)
Other	Other	(17,828)		504		(17,324)		(b)	0					0		Other	(27,782)				936			(26,846)		(b)		—			—
Total	Total	$	1,138,435	$	254,509	$	1,392,944		$	468,247				$	(398)	Total	$	1,294,757			$	358,410		$	1,653,167			$	475,670		$	(4,063)

(a)As of December 31, ~~2020,~~2021, the amortized cost basis of these available-for-sale investments is ~~$687~~$972 million.

(b)Represents net pending securities sales and purchases.

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The following ~~table sets~~tables set forth APS’s realized gains and losses relating to the sale and maturity of available-for-sale debt securities and equity securities, and the proceeds from the sale and maturity of these investment securities (dollars in thousands):


		Three Months Ended June 30,							Three Months Ended June 30,
		Nuclear Decommissioning Trusts		Other Special Use Funds		Total			Nuclear Decommissioning Trusts		Other Special Use Funds		Total
2022								2022
Realized gains								Realized gains	$	6,282	$	—	$	6,282
Realized losses								Realized losses	(12,439)		—		(12,439)
Proceeds from the sale of securities (a)								Proceeds from the sale of securities (a)	309,966		20,466		330,432
2021	2021							2021
Realized gains	Realized gains	$	1,406	$	0	$	1,406	Realized gains	$	1,406	$	—	$	1,406
Realized losses	Realized losses	(1,146)		0		(1,146)		Realized losses	(1,146)		—		(1,146)
Proceeds from the sale of securities (a)	Proceeds from the sale of securities (a)	190,340		17,524		207,864		Proceeds from the sale of securities (a)	190,340		17,524		207,864
2020
Realized gains		$	4,500	$	0	$	4,500
Realized losses		(1,621)		0		(1,621)
Proceeds from the sale of securities (a)		176,942		19,830		196,772

(a) Proceeds are reinvested in the nuclear decommissioning trusts and other special use funds, excluding amounts reimbursed to the Company for active union employee medical claims from the active union employee medical account.

Six Months Ended June 30,
Nuclear Decommissioning Trusts Other Special Use Funds Total
2021
Realized gains $ 4,374 $ 0 $ 4,374
Realized losses (5,294) 0 (5,294)
Proceeds from the sale of securities (a) 425,068 162,774 587,842
2020
Realized gains $ 7,813 $ 0 $ 7,813
Realized losses (3,848) 0 (3,848)
Proceeds from the sale of securities (a) 355,138 36,721 391,859


	Six Months Ended June 30,
	Nuclear Decommissioning Trusts		Other Special Use Funds		Total
2022
Realized gains	$	7,305	$	—	$	7,305
Realized losses	(19,674)		—		(19,674)
Proceeds from the sale of securities (a)	629,659		62,011		691,670
2021
Realized gains	$	4,374	$	—	$	4,374
Realized losses	(5,294)		—		(5,294)
Proceeds from the sale of securities (a)	425,068		162,774		587,842

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Fixed Income Securities Contractual Maturities

The fair value of APS’s fixed income securities, summarized by contractual maturities, at June 30, ~~2021,~~2022, is as follows (dollars in thousands):


		Nuclear Decommissioning Trust		Coal Reclamation Escrow Account		Active Union Employee Medical Account		Total			Nuclear Decommissioning Trusts		Coal Reclamation Escrow Account		Active Union Employee Medical Account		Total
Less than one year	Less than one year	$	28,151	$	26,123	$	40,263	$	94,537	Less than one year	$	13,114	$	47,528	$	40,224	$	100,866
1 year – 5 years	1 year – 5 years	133,054		35,880		162,728		331,662		1 year – 5 years	192,566		31,422		150,008		373,996
5 years – 10 years	5 years – 10 years	131,462		2,676		61,288		195,426		5 years – 10 years	127,287		—		43,023		170,310
Greater than 10 years	Greater than 10 years	214,342		8,622		0		222,964		Greater than 10 years	268,328		4,170		—		272,498
Total	Total	$	507,009	$	73,301	$	264,279	$	844,589	Total	$	601,295	$	83,120	$	233,255	$	917,670

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13. Changes in Accumulated Other Comprehensive Loss

The following ~~table shows~~tables show the changes in Pinnacle West’s consolidated accumulated other comprehensive loss, including reclassification adjustments, net of tax, by component (dollars in thousands):


		Pension and Other Postretirement Benefits			Derivative Instruments			Total			Pension and Other Postretirement Benefits			Derivative Instruments		Total
Three Months Ended June 30	Three Months Ended June 30									Three Months Ended June 30
Balance March 31, 2022										Balance March 31, 2022	$	(52,984)		$	(724)	$	(53,708)
OCI before reclassifications										OCI before reclassifications	(3,213)			1,007		(2,206)
Amounts reclassified from accumulated other comprehensive loss										Amounts reclassified from accumulated other comprehensive loss	1,100		(a)	—		1,100
Balance June 30, 2022										Balance June 30, 2022	$	(55,097)		$	283	$	(54,814)

Balance March 31, 2021	Balance March 31, 2021	$	(59,703)		$	(1,809)		$	(61,512)	Balance March 31, 2021	$	(59,703)		$	(1,809)	$	(61,512)
OCI (loss) before reclassifications		(1,125)			870			(255)
Amounts reclassified from accumulated other comprehensive loss		1,189		(a)	0			1,189
Balance June 30, 2021		$	(59,639)		$	(939)		$	(60,578)

Balance March 31, 2020		$	(55,317)		$	(262)		$	(55,579)
OCI (loss) before reclassifications		(2,008)			(1,549)			(3,557)
OCI before reclassifications										OCI before reclassifications	(1,125)			870		(255)
Amounts reclassified from accumulated other comprehensive loss	Amounts reclassified from accumulated other comprehensive loss	999		(a)	262		(b)	1,261		Amounts reclassified from accumulated other comprehensive loss	1,189		(a)	—		1,189

Balance June 30, 2020		$	(56,326)		$	(1,549)		$	(57,875)
Balance June 30, 2021										Balance June 30, 2021	$	(59,639)		$	(939)	$	(60,578)

Pension and Other Postretirement Benefits Derivative Instruments Total
Six Months Ended June 30
Balance December 31, 2020 $ (60,725) $ (2,071) $ (62,796)
OCI (loss) before reclassifications (1,125) 1,132 7
Amounts reclassified from accumulated other comprehensive loss 2,211 (a) 0 2,211
Balance June 30, 2021 $ (59,639) $ (939) $ (60,578)
Balance December 31, 2019 $ (56,522) $ (574) $ (57,096)
OCI (loss) before reclassifications (2,008) (1,257) (3,265)
Amounts reclassified from accumulated other comprehensive loss 2,204 (a) 282 (b) 2,486
Balance June 30, 2020 $ (56,326) $ (1,549) $ (57,875)


	Pension and Other Postretirement Benefits			Derivative Instruments		Total
Six Months Ended June 30
Balance December 31, 2021	$	(53,885)		$	(976)	$	(54,861)
OCI (loss) before reclassifications	(3,213)			1,259		(1,954)
Amounts reclassified from accumulated other comprehensive loss	2,001		(a)	—		2,001
Balance June 30, 2022	$	(55,097)		$	283	$	(54,814)

Balance December 31, 2020	$	(60,725)		$	(2,071)	$	(62,796)
OCI (loss) before reclassifications	(1,125)			1,132		7
Amounts reclassified from accumulated other comprehensive loss	2,211		(a)	—		2,211

Balance June 30, 2021	$	(59,639)		$	(939)	$	(60,578)

(a) These amounts primarily represent amortization of actuarial loss and are included in the computation of net periodic pension cost. See Note 5.

~~(b) These amounts primarily represent realized gains and losses and are included in the computation of fuel and purchased power costs and are subject to the PSA. See Note 7.~~

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COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following ~~table shows~~tables show the changes in APS’s consolidated accumulated other comprehensive loss, including reclassification adjustments, net of tax, by component (dollars in thousands):

Pension and Other Postretirement Benefits Derivative Instruments Total
Three Months Ended June 30
Balance March 31, 2021 $ (39,991) $ 0 $ (39,991)
OCI (loss) before reclassifications (914) 0 (914)
Amounts reclassified from accumulated other comprehensive loss 1,073 (a) 0 1,073
Balance June 30, 2021 $ (39,832) $ 0 $ (39,832)
Balance March 31, 2020 $ (33,935) $ (262) $ (34,197)
OCI (loss) before reclassifications (1,951) 0 (1,951)
Amounts reclassified from accumulated other comprehensive loss 861 (a) 262 (b) 1,123
Balance June 30, 2020 $ (35,025) $ 0 $ (35,025)


	Pension and Other Postretirement Benefits
Three Months Ended June 30
Balance March 31, 2022	$	(34,060)
OCI (loss) before reclassifications	(3,160)
Amounts reclassified from accumulated other comprehensive loss	999		(a)
Balance June 30, 2022	$	(36,221)

Balance March 31, 2021	$	(39,991)
OCI (loss) before reclassifications	(914)
Amounts reclassified from accumulated other comprehensive loss	1,073		(a)

Balance June 30, 2021	$	(39,832)

Pension and Other Postretirement Benefits Derivative Instruments Total
Six Months Ended June 30
Balance December 31, 2020 $ (40,918) $ 0 $ (40,918)
OCI (loss) before reclassifications (914) 0 (914)
Amounts reclassified from accumulated other comprehensive loss 2,000 (a) 0 2,000
Balance June 30, 2021 $ (39,832) $ 0 $ (39,832)
Balance December 31, 2019 $ (34,948) $ (574) $ (35,522)
OCI (loss) before reclassifications (1,951) 292 (1,659)
Amounts reclassified from accumulated other comprehensive loss 1,874 (a) 282 (b) 2,156
Balance June 30, 2020 $ (35,025) $ 0 $ (35,025)


	Pension and Other Postretirement Benefits
Six Months Ended June 30
Balance December 31, 2021	$	(34,880)
OCI (loss) before reclassifications	(3,160)
Amounts reclassified from accumulated other comprehensive loss	1,819		(a)
Balance June 30, 2022	$	(36,221)

Balance December 31, 2020	$	(40,918)
OCI (loss) before reclassifications	(914)
Amounts reclassified from accumulated other comprehensive loss	2,000		(a)

Balance June 30, 2021	$	(39,832)

(a) These amounts primarily represent amortization of actuarial loss and are included in the computation of net periodic pension cost. See Note 5.

~~(b) These amounts primarily represent realized gains and losses and are included in the computation of fuel and purchased power costs and are subject to the PSA. See Note 7.~~

~~COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~14.Income Taxes~~

The Tax Act reduced the corporate tax rate to 21% effective January 1, 2018. As a result of this rate reduction, the Company recognized a $1.14 billion reduction in its net deferred income tax liabilities as of December 31, 2017. In accordance with accounting for regulated companies, the effect of this rate reduction was substantially offset by a net regulatory liability.

Federal income tax laws require the amortization of a majority of the balance over the remaining regulatory life of the related property. As a result of the modifications made to the annual transmission formula rate during the second quarter of 2018, the Company began amortization of FERC jurisdictional net excess deferred tax liabilities in 2018. On March 13, 2019, the ACC approved the Company’s proposal to amortize non-depreciation related net excess deferred tax liabilities subject to its jurisdiction over a twelve-month period. As a result, the Company began amortization in March 2019. The Company recorded $14 million of income tax benefit related to the amortization of these non-depreciation related net excess deferred tax liabilities as of March 31, 2020, with these non-depreciation related net excess deferred tax liabilities being fully amortized as of March 31, 2020. On October 29, 2019, the ACC approved the Company’s proposal to amortize depreciation related net excess deferred tax liabilities subject to its jurisdiction over a 28.5-year period with amortization to retroactively begin as of January 1, 2018. The Company recorded $14 million of income tax benefit related to amortization of these depreciation related net excess deferred tax liabilities for the periods ending June 30, 2021 and June 30, 2020. See Note 4 for more details.

Net income associated with the Palo Verde sale leaseback VIEs is not subject to tax. As a result, there is 0 income tax expense associated with the VIEs recorded on the Pinnacle West Consolidated and APS Consolidated Statements of Income. See Note 6 for additional details related to the Palo Verde sale leaseback VIEs.

As of the balance sheet date, the tax year ended December 31, 2017 and all subsequent tax years remain subject to examination by the IRS. With a few exceptions, the Company is no longer subject to state income tax examinations by tax authorities for years before 2016.

~~COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~15.Leases~~

We lease certain land, buildings, vehicles, equipment and other property through operating rental agreements with varying terms, provisions, and expiration dates. APS also has certain purchased power agreements that qualify as lease arrangements. Our leases have remaining terms that expire in 2021 through 2050. Substantially all of our leasing activities relate to APS.

In 1986, APS entered into agreements with 3 separate lessor trust entities in order to sell and lease back interests in Palo Verde Unit 2 and related common facilities. These lessor trust entities have been deemed VIEs for which APS is the primary beneficiary. As the primary beneficiary, APS consolidated these lessor trust entities. The impacts of these sale leaseback transactions are excluded from our lease disclosures as lease accounting is eliminated upon consolidation. See Note 6 for a discussion of VIEs.

On May 1, 2021, APS had a new purchased power lease contract that commenced. The lease term ends on October 31, 2027. This lease allows APS the right to the generation capacity from a natural-gas fueled generator during the months of May through October over the contract term. APS does not operate or maintain the leased asset. APS controls the dispatch of the leased asset during the months of May through October and is required to pay a fixed monthly capacity payment during these periods of use. For these types of leased assets APS has elected to combine both the lease and non-lease payment components and accounts for the entire fixed payment as a lease obligation. This purchased power lease contract is accounted for as an operating lease. The contract does not contain a purchase option or a term extension option. In addition to the fixed monthly capacity payment, APS must also pay variable charges based on the actual production volume of the asset. The variable consideration is not included in the measurement of our lease obligation.

~~The following tables provide information related to our lease costs (dollars in thousands):~~

Three Months Ended
June 30, 2021 Three Months Ended
June 30, 2020
Purchased Power Lease Contracts Land, Property & Equipment Leases Total Purchased Power Lease Contracts Land, Property & Equipment Leases Total
Operating lease cost $ 29,514 $ 4,598 $ 34,112 $ 17,221 $ 4,651 $ 21,872
Variable lease cost 40,539 256 40,795 40,821 255 41,076
Short-term lease cost 0 1,260 1,260 0 996 996
Total lease cost $ 70,053 $ 6,114 $ 76,167 $ 58,042 $ 5,902 $ 63,944

Six Months Ended
June 30, 2021 Six Months Ended
June 30, 2020
Purchased Power Lease Contracts Land, Property & Equipment Leases Total Purchased Power Lease Contracts Land, Property & Equipment Leases Total
Operating lease cost $ 29,514 $ 9,239 $ 38,753 $ 17,221 $ 9,304 $ 26,525
Variable lease cost 62,027 510 62,537 61,394 498 61,892
Short-term lease cost 0 2,249 2,249 0 1,786 1,786
Total lease cost $ 91,541 $ 11,998 $ 103,539 $ 78,615 $ 11,588 $ 90,203

~~COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

Lease costs are primarily included as a component of operating expenses on our Condensed Consolidated Statements of Income. Lease costs relating to purchased power lease contracts are recorded in fuel and purchased power on the Condensed Consolidated Statements of Income, and are subject to recovery under the PSA or RES (see Note 4). The tables above reflect the lease cost amounts before the effect of regulatory deferral under the PSA and RES. Variable lease costs are recognized in the period the costs are incurred, and primarily relate to renewable purchased power lease contracts. Payments under most renewable purchased power lease contracts are dependent upon environmental factors, and due to the inherent uncertainty associated with the reliability of the fuel source, the payments are considered variable and are excluded from the measurement of lease liabilities and right-of-use lease assets. Certain of our lease agreements have lease terms with non-consecutive periods of use. For these agreements, we recognize lease costs during the periods of use. Leases with initial terms of 12 months or less are considered short-term leases and are not recorded on the balance sheet.

~~The following table provides information related to the maturity of our operating lease liabilities (dollars in thousands):~~

June 30, 2021
Year Purchased Power Lease Contracts Land, Property & Equipment Leases Total
2021 (remaining six months of 2021) $ 95,596 $ 7,762 $ 103,358
2022 103,744 11,872 115,616
2023 106,161 9,544 115,705
2024 108,634 6,955 115,589
2025 111,166 5,181 116,347
2026 75,099 3,989 79,088
Thereafter 39,106 34,444 73,550
Total lease commitments 639,506 79,747 719,253
Less imputed interest 25,803 17,613 43,416
Total lease liabilities $ 613,703 $ 62,134 $ 675,837

We recognize lease assets and liabilities upon lease commencement. At June 30, 2021, we have lease arrangements that have been executed, but have not yet commenced. These arrangements primarily relate to energy storage agreements, with lease commencement dates expected to begin in June 2022 with terms ending through December 2042. We expect the total fixed consideration paid for these arrangements, which includes both lease and nonlease payments, will approximate $392 million over the term of the arrangements.

~~COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~The following tables provide other additional information related to operating lease liabilities (dollars in thousands):~~

Six Months Ended
June 30, 2021 Six Months Ended June 30, 2020
Cash paid for amounts included in the measurement of lease liabilities — operating cash flows: $ 13,068 $ 7,624
Right-of-use operating lease assets obtained in exchange for operating lease liabilities 248,694 434,997

June 30, 2021 December 31, 2020
Weighted average remaining lease term 6 years 6 years
Weighted average discount rate (a) 1.72 % 1.69 %

(a) Most of our lease agreements do not contain an implicit rate that is readily determinable. For these agreements we use our incremental borrowing rate to measure the present value of lease liabilities. We determine our incremental borrowing rate at lease commencement based on the rate of interest that we would have to pay to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. We use the implicit rate when it is readily determinable.

~~16.Asset Retirement Obligations~~

During the six months ended June 30, 2021, the Company revised its cost estimates for existing Asset Retirement Obligations (ARO) at Cholla related to updated estimates for the closure of ponds and facilities, which resulted in an increase to the ARO of $11.1 million. (See additional details in Notes 4 and 8.)

~~The following schedule shows the change in our asset retirement obligations for the six months ended June 30, 2021 (dollars in thousands):~~


	~~2021~~
~~Asset retirement obligations at January 1, 2021~~	$	~~705,083~~
~~Changes attributable to:~~
~~Accretion expense~~	~~18,828~~
~~Settlements~~	~~(2,853)~~
~~Estimated cash flow revisions~~	~~10,932~~
~~Asset retirement obligations at June 30, 2021~~	$	~~731,990~~

In accordance with regulatory accounting, APS accrues removal costs for its regulated utility assets, even if there is no legal obligation for removal. See detail of regulatory liabilities in Note 4.

~~COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~17. New Accounting Standard~~

~~ASU 2021-05, Leases: Certain Leases with Variable Lease Payments~~

In July 2021, a new accounting standard was issued that amends the lease accounting guidance. The amended guidance will require lessors to account for certain lease transactions, that contain variable lease payments, as operating leases. The amendments are intended to eliminate the recognition of any day-one loss associated with certain sales-type and direct-financing lease transactions. The changes do not impact lessee accounting. The new guidance is effective for us on January 1, 2022 and may be adopted using either a retrospective or prospective approach. As we typically are not the lessor in these type of lease transactions, we do not expect the adoption of this guidance will have a material impact on our financial statements.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

The following discussion should be read in conjunction with Pinnacle West’s Condensed Consolidated Financial Statements and APS’s Condensed Consolidated Financial Statements and the related Combined Notes that appear in Item 1 of this report. For information on factors that may cause our actual future results to differ from those we currently seek or anticipate, see “Forward-Looking Statements” at the front of this report and “Risk Factors” in Part 1, Item 1A of the ~~2020~~2021 Form 10-K,Part II, Item 1A of our 2022 1st Quarter 10-Q, and Part II, Item 1A of this report.

OVERVIEW

Business Overview

Pinnacle West is an investor-owned electric utility holding company based in Phoenix, Arizona with consolidated assets of about ~~$21~~$23 billion. For over 130 years, Pinnacle West and our affiliates have provided energy and energy-related products to people and businesses throughout Arizona.

Pinnacle West derives essentially all of our revenues and earnings from our principal subsidiary, APS. APS is Arizona’s largest and longest-serving electric company that generates safe, affordable and reliable electricity for approximately 1.3 million retail customers in 11 of Arizona’s 15 counties. APS is also the operator and co-owner of Palo Verde — a primary source of electricity for the southwest United States and the largest nuclear power plant in the United States.

COVID-19 Pandemic

The COVID-19 pandemic continues to be an evolving situation. The Company is operating under long-standing pandemic and business continuity plans that exist to address situations including pandemics like COVID-19. We are focused on ensuring the health and safety of our employees, contractors and the general public by helping limit the spread of this virus and ensuring continued, safe and reliable electric service for APS customers.

We identified business-critical positions in our operations and support organizations, with backup personnel ready to assist if an issue arose. Additionally, efforts to ensure the health and safety of our employees resulted in bifurcated control rooms, thus reducing the number of employees in mission-critical locations. We also established COVID-19 safety protocols, social distancing practices and offering virtual options whenever possible. The Company also took rapid action to implement an all Company COVID-19 hotline, a focused COVID-19 team, and procured on-site COVID-19 testing at key facilities early in the pandemic. Through this testing, case management and contact tracing, the Company has been able to significantly limit COVID-19 transmission in the workplace. As a result of these efforts, we were able to maintain the continuity of the essential services that we provide to our customers, while also managing the spread of the virus and promoting the health, physical and mental well-being and safety of our employees, customers and communities. In the summer of 2021, the Company began transitioning employees that were previously working remotely back to the workplace on a limited basis and began the reduction of our COVID-19 safety protocols and restrictions.

Essential planned work and capital investments ~~are continuing~~have continued during the COVID-19 pandemic with priority given to support fire mitigation and summer storm efforts, as well as heat related outages. Raw material shortages, rising inflation, COVID-19 related work force disruptions and natural disasters are putting increased pressure on the global supply chain. APS is experiencing some delays in finished materials and tight labor markets. To date, APS has not experienced labor or material supply chain shortages that have significantly impacted its ability to serve its customers’ needs. However, shortages are causing some delays and shifting of work projects based on material availability. If APS continues to experience delays in materials, it could experience an increase in purchased power costs for summer generation needs. Such increased purchased power costs would be expected to be recoverable through the PSA. See Note 4 for additional information on the PSA. APS has measures in place to ~~continue to~~continually monitor and evaluate resource needs and supply chain ~~adequacy. At this time, APS does not believe it has any~~adequacy but cannot predict whether there will be material supply chain ~~risks due to COVID-19 that would impact its ability to serve customers’ needs.~~

~~The Company’s operations and maintenance expenses, exclusive of bad debt expense, increased by approximately $3.4 million for~~shortages in the period ended June 30, 2021 due to costs for personal protective equipment and other health and safety-related costs related to COVID-19. We expect the Company’s operation and maintenance expenses will continue to be impacted for 2021 by the need for additional personal protective equipment and other health and safety-related costs related to COVID-19.future.

~~While~~Though the total expected impact of COVID-19 on future sales ~~is currently~~remains unknown, APS experienced higher electric residential sales and lower electric commercial and industrial sales from the outset of the pandemic through April 2021.Beginning in May 2021, electric sales to commercial and industrial customers increased to levels in line with pre-COVID ~~sales. APS cannot predict whether~~ sales ~~from commercial~~ and ~~industrial customers has fully recovered, but it expects~~such sales ~~trends~~levels have remained to continue normalizing during 2021 as business activity continues to recover and more people return to work. Based on past experience, a 1% variation in our annual kWh sales projections under normal business conditions can result in increases or decreases in annual net income of approximately $20 million.date.

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Social Security payroll taxes for the period July 1, 2020, through December 31, 2020, ~~that~~which was approximately $18 million.We ~~will pay~~paid half of this cash deferral by December 31, 2021, and the remainder will be paid by December 31, 2022.

On June 30, 2020, ~~FERC~~ the United States Federal Energy Regulatory Commission (“FERC”) issued an order granting a waiver request related to the existing ~~AFUDC~~Allowance for Funds Used During Construction (“AFUDC”) rate calculation beginning March 1, 2020 through February 28, 2021. On February 23, 2021, this waiver was extended until September 30, 2021. On September 21, 2021, it was further extended until March 31, 2022. The order ~~provides~~provided a simplified approach that companies may elect to implement in order to minimize the significant distorted effect on the AFUDC formula resulting from increased short-term debt financing during the COVID-19 pandemic. APS ~~has~~ adopted this simplified approach to computing the AFUDC composite rate by using a simple average of the actual historical short-term debt balances for 2019, instead of current period short-term debt balances, and ~~has~~ left all other aspects of the AFUDC formula composite rate calculation unchanged. This change ~~impacts~~impacted the AFUDC composite rate in ~~both 2020~~2021 and ~~2021, but does not impact prior years.~~for the three month ended March 31, 2022. Furthermore, the change in the composite rate calculation ~~does~~did not impact our accounting treatment for these costs. The change did not have a material impact on our financial statements.See Note 1.

Due to the COVID-19 pandemic, APS voluntarily suspended disconnections of customers for nonpayment and waived late payment fees beginning March 13, 2020 until December 31, 2020. The suspension of disconnection of customers for nonpayment ended on January 1, 2021 and customers were automatically placed on eight-month payment arrangements if they had past due balances at the end of the disconnection period of $75 or greater. APS will continue to waive late payment fees until October 15, 2021. APS has experienced and is continuing to experience an increase in bad debt expense associated with the COVID-19 pandemic, the Summer Disconnection Moratorium and the related write-offs of customer delinquent accounts. APS currently estimates that the Summer Disconnection Moratorium, the suspension of disconnections during the COVID-19 pandemic and the increased bad debt expense associated with this will result in a negative impact to its 2021 operating results of approximately $20 million to $30 million pre-tax above the impact of disconnections on its operating results for years that did not have the Summer Disconnection Moratorium or COVID-19 pandemic. These estimated impact amounts for 2021 depend on certain current assumptions, including, but not limited to, customer behaviors, population and employment growth, and the impacts of COVID-19 on the economy. See Note 4.

In February 2021, due to COVID-19, APS delayed the annual reset of the PSA. Rather than the increase being effective February 2021, the PSA reset will be implemented with 50% of the increase effective April 2021 and the remaining 50% increase effective November 2021. S~~ee Note 4.~~

More detailed discussion of the impacts and future uncertainties related to the COVID‑19 pandemic can be found throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Combined Notes to Pinnacle West’s and APS’s financial statements that appear in Item 1 of this report.

Strategic Overview

Our strategy is to deliver shareholder value by creating a sustainable energy future for Arizona by serving our customers with clean, reliable and affordable energy.

Clean Energy Commitment

We are committed to doing our part to make the future clean and carbon-free. As Arizona stewards, we do what is right for the people and prosperity of Arizona.Our vision is to create a sustainable energy future for ~~APS~~Arizona through providing clean, affordable, and ~~Arizona presents an opportunity to engage~~reliable energy.We can accomplish our visions through collaboration with customers, communities, employees, policymakers, shareholders, and ~~others to achieve a shared, sustainable vision for Arizona. This~~other stakeholders. Our clean energy goal is based on sound science and supports continued growth and economic development while maintaining reliability and affordable prices for APS’s customers.

APS’s ~~new~~ clean energy goals consist of three parts:

•A 2050 goal to provide 100% clean, carbon-free electricity;

•A 2030 target of achieving a resource mix that is 65% clean energy, with 45% of the generation portfolio coming from renewable energy; and

•A commitment to end APS’s use of coal-fired generation by 2031.

APS’s ability to successfully execute its clean energy commitment is dependent upon a number of important external factors, some of which include a supportive regulatory environment, sales and customer growth, development of clean energy technologies and continued access to capital markets.

2050 Goal: 100% Clean, Carbon-Free Electricity. Achieving a fully clean, carbon-free energy mix by 2050 is our aspiration.The 2050 goal will involve new thinking and depends on improved and new technologies.

2030 Goal: 65% Clean Energy. APS has an energy mix that is already 50% clean with existing plans to add more renewables and energy storage before 2025. By building on those plans, APS intends to attain an energy mix that is 65% clean by 2030, with 45% of APS’s generation portfolio coming from renewable energy. ~~“Clean”~~“Clean” is measured as percent of energy mix which includes all carbon-free resources like nuclear and ~~demand-side~~demand-

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side management, and ~~“renewable”~~“renewable” is expressed as a percent of retail sales. This target will serve as a checkpoint for our resource planning, investment strategy, and customer affordability efforts as APS moves toward 100% clean, carbon-free energy mix by 2050.

2031 Goal: End APS’s Use of Coal-Fired Generation. ~~Our~~The commitment to end APS’s use of coal-fired generation by 2031 will require APS to cease use of coal-generation at Four Corners.APS has permanently retired more than 1,000 MW of coal-fired electric generating capacity. These closures and other measures taken by APS have resulted in a total reduction of carbon emissions of 33% since 2005. In addition, APS has committed to end the use of coal at its remaining Cholla units by 2025.

APS understands that the transition away from coal-fired power plants toward a clean energy future will pose unique economic challenges for the communities around these plants. We worked collaboratively with stakeholders and leaders of the Navajo Nation to consider the impacts of ceasing operation of APS coal-fired power plants on the communities surrounding those facilities to propose a comprehensive Coal Community Transition (“CCT”) plan. The proposed framework ~~provides~~provided substantial financial and economic development support to build new economic opportunities and addresses a transition strategy for plant employees. We are committed to continuing our long-running partnership with the Navajo Nation in other areas as well, including expanding electrification and developing tribal renewable projects. Our proposed CCT plan ~~supports~~supported the Navajo Nation, where ~~the~~ Four Corners ~~Power Plant~~ is located, the communities surrounding the Cholla Power Plant and the Hopi Tribe, which is impacted by closure of the Navajo Plant. ~~The CCT plan is currently pending~~On November 2, 2021, the ACC ~~approval. See Note 4 for~~approved an amended 2019 Rate Case ROO that will require (i) equal payments over a ~~discussion~~three-year period that total $10 million to the Navajo Nation, (ii) a $1 million one-time payment to the Hopi Tribe within 60 days of the 2019 Rate Case decision, (iii) a $500,000 one-time payment to the Navajo County communities within 60 days of the 2019 Rate Case decision, (iv) up to $1.25 million for electrification of homes and businesses on the Hopi reservation and (v) up to $1.25 million for the electrification of homes and businesses on the Navajo Nation reservation. The payments and expenditures are attributable to the future closures of Four Corners and Cholla, along with the prior closure of the Navajo Plant. All ordered payments and expenditures would be recoverable through rates.

Consistent with the 2019 Rate Case decision, as of April 2022, APS has completed the following payments that will be recoverable through rates related to the CCT: (i) $3.33 million to the Navajo Nation; (ii) $500,000 to the Navajo County communities; and (iii) $1 million to the Hopi Tribe. Consistent with APS’s commitment to the impacted communities, APS has also completed the following payments: (i)$500,000 to the Navajo Nation for CCT; (ii) $1.1 million to the Navajo County Communities for CCT ~~plan.~~and economic development; and (iii) $1.25 million to the Hopi Tribe for CCT and economic development. Expenditure of the recoverable funds for electrification of homes and businesses on the Navajo Nation and the Hopi reservations is contingent upon completion of a census of the unelectrified homes and businesses in each that are also within APS service territory.

In June 2021, APS and the owners of Four Corners entered into ~~agreements~~an agreement that would allow Four Corners to operate ~~Four Corners~~ seasonally at the election of the owners beginning in ~~Fall~~fall 2023, subject to the necessary ~~approvals.~~governmental approvals and conditions associated with changes in plant ownership. Under seasonal operation, ~~a single~~

one generating unit ~~will~~would be shut down during seasons where electricity demand is reduced, such as the winter and spring. The other unit would remain ~~on-line~~online year-round, subject to market conditions as well as planned maintenance outages and unplanned outages. ~~In addition,~~As of the ~~other unit~~end of July 2022, APS anticipates that it will be operational throughout the summer season of June through October when customer demand is the highest. APS believes that operating Four Corners seasonally will bring environmental benefits and ensure continued service reliability for its customers, especially during Arizona’s hot summer months, as APS transitionselect not to ~~ceasing to use coal-fired generation by 2031. By moving to~~begin seasonal operations, Four Corners will become a more flexible resource that supports increasing amounts of clean energy, helping to compensate for the intermittent output of renewable resources. This change also helps ensure reliability of a critical energy source while reducing operations and maintenance costs. APS estimates that the shift to seasonal operations will reduce annual carbon emissions at Four Corners by an estimated 20-25%, as compared to current conditions.operation in November 2023, unless market conditions change.

Renewables. APS’s IRP (see Note 4 for additional information) establishes the path to meeting our clean energy commitment and maintaining reliable electric service for our customers. APS intends to strengthen its already diverse energy mix by increasing its investments in carbon-free resources. Our IRP rapidly adds clean energy and storage resources while maintaining reliable and affordable service. Its ~~near-term~~near-

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term actions ~~include~~are focused on clean energy and positive customer outcomes and includes: (a) competitive solicitations to procure clean energy resources such as solar, wind, energy storage, ~~demand response~~ and DSM resources, all of which lead to a cleaner ~~grid.~~grid; and (b) strategic, short-term wholesale market purchases from a combination of existing merchant natural gas units, neighboring utility systems and wholesale market participants that ensure operational reliability.

APS has a diverse portfolio of existing and planned renewable resources, including solar, wind, geothermal, biomass and ~~biogas.~~biogas, that supports our commitment to clean energy. That commitment has its foundation in the Palo Verde generating station, which is the nation’s largest carbon-free, clean energy resource, and it provides critical reliable and affordable service for APS customers. APS’s longer-term clean energy strategy includes ~~executing~~pursuing the right mix of purchased power contracts for new facilities, ~~ongoing development of distributed energy resources and~~ procurement of new facilities to be owned by ~~APS.~~APS, and the ongoing development of distributed energy resources. This balance will ensure an appropriately diverse portfolio designed to achieve the same operational reliability and customer affordability as APS’s near-term strategies. In addition, APS is actively seeking to include future facility purchase options in its PPAs that will enable investments with greater financial flexibility.

APS uses competitive “all source” requests for proposal (“RFPs”) to pursue market resources that meet its system needs and offer the best value for customers. APS selects projects based on cost and non-cost factors, taking into consideration timing and likelihood of successful contracting and development. Under current market conditions, APS must aggressively contract for resources that can withstand supply chain and other geopolitical pressures. Available projects are guided by IRP timelines and quantities and APS maintains a flexible approach that allows it to optimize system reliability and customer affordability through the RFP process. Agreements for the development and completion of future resources are subject to various conditions, including successful siting, permitting and interconnection of the projects to the electric grid. See “Business of Arizona Public Service Company — Energy Sources and Resource Planning — Current and Future Resources — Renewable Energy Standard — Renewable Energy Portfolio” in Item 1 for details regarding APS’s renewable energy resources.

In September 2019, APS issued aan RFP that requested up to 250 MW of wind resources to be in service as soon as possible, but no later than 2022. As a result of this RFP, APS executed a 200 MW ~~power purchase agreement~~PPA for a wind resource that ~~is expected to be in~~went into service in the fourth quarter of 2021. Also in September 2019, APS issued a RFP that sought competitive proposals for up to 150 MW of APS-owned solar resources, designed with the flexibility to add energy storage as a future option. Negotiations pursuant to this RFP were terminated in March 2021.January 2022. In December 2020, APS issued two additional RFPs: (i) a battery storage RFP for projects to be located at two AZ Sun sites; and (ii) an ~~“all source”~~all-source RFP that ~~solicits both standalone~~solicited resources to meet our clean energy ~~storage~~needs and ~~renewable energy plus energy storage~~capacity to maintain system reliability, and was later amended to include a request for 150 MW of solar resources to be developed on APS property and ~~additional peaking capacity resources~~owned by APS (collectively, the “December 2020 RFPs”). ~~In April 2021, the all source RFP portion~~As a result of the ~~December 2020 RFPs was expanded to seek proposals~~all-source RFP, APS executed two solar plus storage PPAs totaling 275 combined MWs, a PPA for ~~the development of~~ a 238 MW wind resource, two energy storage PPAs for a combined 300 MWs; extended an existing natural gas tolling agreement; and also executed an engineering, procurement, and construction contract in November 2021 for a 150 MW solar ~~generating~~ resource to be owned by APS and ~~sited on~~in service in early 2023. APS ~~land. Such~~continues to negotiate contracts for additional resources ~~are expected~~ to be in service ~~during 2023~~in late 2024 in connection with the December 2020 all-source RFP.

In May 2022, APS issued an all-source RFP to address resource needs for 2025 and ~~2024.~~beyond (“2022 all-source RFP”). The 2022 all-source RFP solicits competitive proposals for approximately 1,000 MW to 1,500 MW of resources, including up to 600 MW to 800 MW of renewable resources to meet the needs of 2025 and 2026 while considering resources that can be online as late as 2027. The RFP stopped accepting bids on July 15, 2022, and APS is currently in the process of reviewing those bids.

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The following table summarizes the resources in APS’s renewable energy portfolio that are in operation and under development as of June 30, ~~2021.~~2022. Agreements for the development and completion of future resources are subject to various conditions, including successful siting, permitting, and interconnection of the projects to the electric grid.


		Net Capacity in Operation (MW)	Net Capacity Planned / Under Development (MW)			Net Capacity in Operation (MW)	Net Capacity Planned / Under Development (MW)
Total APS Owned: Solar	Total APS Owned: Solar	247	—		Total APS Owned: Solar	250	150
Purchased Power Agreements Renewables:	Purchased Power Agreements Renewables:				Purchased Power Agreements Renewables:
Solar	Solar	310	160		Solar	310	435
Wind ~~(a)~~	Wind ~~(a)~~	289	110		Wind ~~(a)~~	399	238
Geothermal	Geothermal	10	—		Geothermal	10	—
Biomass	Biomass	14	—		Biomass	14	—
Biogas	Biogas	3	—		Biogas	3	—
Total Purchased Power Agreements	Total Purchased Power Agreements	626	270		Total Purchased Power Agreements	736	673
Total Distributed Energy: Solar (b)		1,162	52	(c)
Total Distributed Energy: Solar (a)					Total Distributed Energy: Solar (a)	1,325	105	(b)
Total Renewable Portfolio	Total Renewable Portfolio	2,035	322		Total Renewable Portfolio	2,311	928

(a)Includes 90 MW wind power purchase agreement that is currently in operation that will be decommissioned in 2021 and rebuilt in the same year, together with an additional 110 MW, for a total of 200 MW, as a result of a power purchase agreement executed in September 2020.

~~(b)~~ Includes rooftop solar facilities owned by third parties. Distributed generation is produced in Direct Current and is converted to Alternating Current for reporting purposes.

~~(c)~~(b) Applications received by APS that are not yet installed and online.

Energy Storage. APS deploys a number of advanced technologies on its system, including energy storage. ~~Storage can provide~~Energy storage provides capacity, ~~improve~~improves power quality, can be utilized for system regulation ~~integrate renewable generation~~ and, in certain circumstances, be used to defer certain traditional infrastructure investments. Energy storage ~~can~~ also ~~aid~~aids in integrating ~~higher levels of renewables~~renewable generation by storing excess energy when system demand is low and renewable production is high and then releasing the stored energy during peak demand hours later in the day and after sunset. APS is utilizing grid-scale energy storage projects to ~~benefit customers, to~~meet customer reliability requirements, increase renewable utilization, and to further our understanding of how storage works with other advanced technologies and the grid. ~~We are preparing for additional energy storage in the future.~~

In early 2018, APS entered into a 15-year power purchase agreement for a 65 MW solar facility that charges a 50 MW solar-fueled battery. Service under the agreement was scheduled to begin in 2021; however, APS terminated the agreement, effective February 16, 2021, because project development could not be sufficiently advanced to support the expected in-service date. In 2018, APS issued an RFP for approximately 106 MW of energy storage to be located at up to five of its AZ Sun sites. Based upon its evaluation of the RFP responses, APS decided to expand the initial phase of battery deployment to 141 MW by adding a sixth AZ Sun site. These battery storage facilities are expected to be in service by ~~June~~the end of 2022. On August 2, 2021, APS executed a contract for an additional 60 ~~megawatts~~MW of utility-owned energy storage to be located on ~~APS's~~APS’s AZ Sun sites. This contract, with a 2023 in-service date, will complete the addition of storage on ~~all of APS's~~ current APS-owned utility-scale solar facilities.

Additionally, in February 2019, APS signed two 20-year PPAs for energy storage totaling 150 MW. In April 2019, a battery module in APS’s McMicken battery energy storage facility experienced an equipment failure, which prompted an internal investigation to determine the cause. APS completed its investigation of the McMicken battery incident and is working with all counterparties to ensure that the learnings from the investigation, and the corresponding safety requirements, are incorporated into all battery storage projects going forward, including the projects associated with the two above-referenced PPAs. These PPAs were ~~also~~

subject to ACC approval in order to allow for cost recovery through the PSA. APS received the requested ACC approval on January 12, 2021, and service under ~~both~~the agreements is contracted to begin in 2022 with respect to 100 MW and in 2023 with respect to 50 MW. These agreements are facing delays and APS is currently working with the developers to determine revised in-service dates.

As a result of its December 2020 RFPs, as of May 2022, APS has executed four 20-year PPAs for resources that include energy storage: (a) two PPAs for standalone energy storage resources totaling 300 MW; and (b) two PPAs totaling 275 MW solar plus storage resource. The PPAs are also subject to ACC approval to enable cost recovery through the PSA. APS received the requested ACC approval for three out of four of the projects on December 16, 2021. The remaining project was filed in February 2022 for ACC approval and on

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April 13, 2022, the ACC approved this application. Service under the agreements is expected to begin in ~~2022.~~2023 and 2024.

APS currently plans to install ~~at least 850~~more than 900 MW of energy storage by 2025, including the energy storage projects under PPAs and AZ Sun retrofits described above. The remaining energy storage is expected to be made up of resources solicited through current and future RFPs. ~~Currently, APS is seeking energy storage resources through the December 2020 RFPs. Such resources are expected to be in service during 2023 and 2024.~~

The following table summarizes the resources in APS’s energy storage portfolio that are in operation and under development as of June 30, ~~2021.~~2022. Agreements for the development and completion of future resources are subject to various conditions.


		Net Capacity in Operation (MW)	Net Capacity Planned / Under Development (MW)		Net Capacity in Operation (MW)	Net Capacity Planned / Under Development (MW)
APS Owned: Energy Storage	APS Owned: Energy Storage	—	201	APS Owned: Energy Storage	—	201
Purchase Power Agreements Energy Storage		—	150
Purchase Power Agreements - Energy Storage				Purchase Power Agreements - Energy Storage	—	725
Residential Energy Storage ~~(a)~~	Residential Energy Storage ~~(a)~~	9	—	Residential Energy Storage ~~(a)~~	15(a)	4
Total Energy Storage Portfolio	Total Energy Storage Portfolio	9	351	Total Energy Storage Portfolio	15	930

(a) This includes 914.5 MW of APS ~~customer owned~~customer-owned batteries and ~~0.3~~0.2 MW of ~~APS owned~~APS-owned residential batteries.

Palo Verde. Palo Verde, the nation’s largest carbon-free, clean energy resource, will continue to be a foundational part of APS’s resource portfolio. The plant currently supplies nearly 70% of our clean energy and provides the foundation for the reliable and affordable service for APS customers. Palo Verde is not just the cornerstone of our current clean energy ~~mix,~~mix; it also is a significant provider of clean energy to the southwest United States. The plant is a critical asset to the Southwest, generating more than 32 million megawatt-hours annually – enough power for more than 4 million people. Its continued operation is important to a carbon-free and clean energy future for Arizona and the region, as a reliable, continuous, affordable resource and as a large contributor to the local economy.

Affordable

We believe it is APS’s responsibility to deliver electric services to customers in the most cost-effective manner. Since January 2018 through June 2021, the average residential bill decreased by 6.7%, or $10.01, due to net reductions in cost recovery adjustor mechanisms.

Building upon existing cost management efforts, APS launched a customer affordability initiative in 2019. The initiative was implemented company-wide to thoughtfully and deliberately assess our business processes and organizational approaches through LEAN Sigma procedures to ~~completing high-value work~~identify and develop internal efficiencies. ~~Through the initiative and existing cost management practices, in 2020, APS met its goal of $20 million in cost savings. In 2021, APS continues~~We continue to drive this initiative ~~to identify~~by identifying opportunities to streamline ~~its~~our business processes to assist in mitigating cost increases, increasing employee retention, and ~~deliver sustainable cost savings.~~improving customer satisfaction.

Participation in the ~~EIM~~Energy Imbalance Market (“EIM”) continues to be ~~an effective~~a tool for creating savings for APS’s customers from the real-time, voluntary market. APS continues to expect that its participation in EIM will lower its fuel and purchased-power costs, improve ~~visibility and~~ situational awareness for system operations in the Western Interconnection power grid, and improve integration of APS’s renewable resources. APS continues to evaluate opportunities that benefit our customers and is exploring opportunities to move to a day-ahead market with the expectation of reliably achieving incrementally greater cost savings and using the region’s increasing renewable resources more efficiently. As part of that effort, APS is exploring several options. APS is in discussions with the current EIM operator, ~~California Independent~~

~~System Operator, Inc. (“CAISO”),~~the CAISO, the Western Resource Adequacy Program, the Western Markets Exploratory Group, and the Southwest Power Pool. Each of these explorations also involve other ~~EIM participants about~~entities and are being undertaken to evaluate the feasibility and cost/benefit of creating a voluntary day-ahead ~~market to achieve more cost savings and use the region’s renewable resources more efficiently.~~market.

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Reliable

While our energy mix evolves, the obligation to deliver reliable service to our customers remains. ~~Notwithstanding~~APS is managing through significant growth in the ~~challenges presented by the COVID-19 pandemic as well as the hottest summer on record, APS continued~~Phoenix metropolitan area while experiencing supply chain issues similar to provide reliable service to its customers in 2020, setting a new all-time high peak energy demand of 7,660 MW, exceeding the prior peak set in 2017 by nearly 300 MW and achieved strong reliability results.other industries.

Planned investments will support operating and maintaining the grid, updating technology, accommodating customer growth, and enabling more renewable energy resources.Our advanced distribution management system allows operators to locate outages, control line devices remotely and helps them coordinate more closely with field crews to safely maintain an increasingly dynamic grid.The system also integrates a new meter data management system that increases grid visibility and gives customers access to more of their energy usage data.

Wildfire safety remains a critical focus for APS and other utilities.We increased investment in fire mitigation efforts to clear defensible space around our infrastructure, continue ongoing system upgrades, build partnerships with government entities and first responders and educate customers and communities.These programs contribute to customer reliability, responsible forest management and safe communities.

The new units at our modernized Ocotillo Power Plant provide cleaner-running and more efficient units.They support reliability by responding quickly to the variability of solar generation and delivering energy in the late afternoon and early evening when solar production declines as the sun sets and customer demand peaks.

In ~~April~~October of 2021, APS announced plans to evaluate regional market solutions as part of the ~~CAISO sought FERC authorization for certain tariff changes intended to try to address risks associated with high heat weather events. Although~~informal Western Markets Exploratory Group (“WMEG”). As part of WMEG, APS is ~~generally supportive of some of these changes, others would change~~exploring the ~~load, export,~~potential for a staged approach to new market services, including day-ahead energy sales, transmission system expansion, and ~~wheeling priorities in a way~~other power supply and grid solutions consistent with existing state regulations. WMEG hopes to identify market solutions that ~~would unfairly benefit California entities at the expense of non-California entities.~~can help achieve carbon reduction goals while supporting reliable, affordable service for customers. APS formally opposed those changes in front of FERC. On June 25, 2021, FERC issued an order accepting the CAISO’s proposed changes. On July 26, 2021, APS filed seeking a rehearing of FERC’s June 25, 2021 order. However, APS cannotis unable to predict the outcome of these proceedings. Nor can PNW or APS predict whether energy shortages, market priorities, and/or price spikes due to extreme weather conditions will have an impact on its financial position, results of operations or cash flows.discussions.

APS’s key elements to delivering reliable power include resource planning, sufficient reserve margins, customer partnerships to manage peak demand, fire mitigation, and operational preparedness.Seasonal readiness procedures at APS also include walkdowns to ensure good material conditions and critical control system surveys.APS also plans for the unexpected by conducting emergency operations drills and coordinating on fire and emergency management with federal, state, and local agencies.

Customer-Focused

~~Customers are at the core of what APS does every day and its~~Recognizing that creating customer value is inextricably linked to increasing shareholder value, APS’s focus remains on its customers and the communities it serves. ItAccordingly, it is APS’s goal to achieve an industry-leading, best-in-class customer experience, ~~including that APS improve~~while demonstrating compassion and advocacy for its customers. This multi-year objective includes incrementally improving APS’s J.D. Power (“JDP”) overall customer satisfaction ratings from the fourth quartile to the first quartile ~~nationally. APS's focus on customer experience has resulted in a measurable increase in~~of its customer satisfaction. Its mid-year 2021 JDP customer satisfaction score represents APS's highest overall satisfaction score on record and continued incremental improvement from 2020 year-end scores, which were among the most improved nationally.peer set comprised of large investor-owned utilities.

~~APS also convened a~~As previously disclosed, APS’s JDP residential rankings for overall customer ~~advisory board and stakeholder committee~~satisfaction rating improved in 2020 and 2021. That improvement trend continued with the latest JDP residential 2022 second-quarter results, which reflect APS’s mid-year progress. Compared to ~~serve as a vehicle for gathering valuable qualitative insights, directly from customers and stakeholders, that intends to keep~~2021, APS ~~apprised~~has made quartile gains in every single driver of customer ~~needs, wants,~~satisfaction and ~~perspectives. Additionally,~~made significant headway that lifted the company above industry benchmarks for overall satisfaction when compared to our large investor-owned peers. APS’s

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strongest performing drivers in the latest JDP survey were Customer Care (phone and digital), Power Quality and Reliability, and Corporate Citizenship. APS’s improvement also is being recognized by its business customers, as evidenced by JDP’s Business 2022 first wave results. APS was the second most improved utility in the nation, placing APS in the first quartile for business customer advisory board is leveraged to identify and diagnose potential customer pain points and to help shape and co-create customer solutions. The customer advisory board has met several times in 2021, addressing rate plan simplification, bill redesign and customer construction communications, among other things.

APS is also focused on educating customers on rate plans through monthly bill analysis and communicating to customers their most economical plan. APS continues to see an increase in rate plan digital engagement, rate plan changes and rate comparison volumes on its website. As of June 30, 2021, 53.3% of its customers are on their most economical plan (as determined based on the time of the calculation).satisfaction.

Developing Clean Energy Technologies

Electric Vehicles

APS is making electric vehicle charging more accessible for its customers and helping Arizona businesses, schools and governments electrify their fleets. In 2021, APS continued its expansion of its Take Charge AZ Pilot Program. As of ~~July 1, 2021,~~June 29, 2022, APS ~~has~~had installed ~~256 dual-plug~~598 Level 2 (“L2”)charging ~~stations~~ports at ~~business~~ customer locations, with more stations expected to be added through the remainder of 2022. The program provides charging equipment, installation, and maintenance to business customers, government agencies, non-profits, and multifamily housing communities. In addition to the ~~Level 2~~L2 charging stations, APS ~~will begin~~has begun construction of ~~direct current~~DC fast charging (“DCFC”) stations that will be owned and operated by APS at five locations in Arizona, with the first location opened for public use in March 2022 in Show Low, Arizona. ~~This project is projected~~The other four projects’ locations are expected to be completed during 2022, with each location including 2-150 kilowatt and 2-350 kilowatt ~~DC fast charging stations.~~DCFC ports. Charging at these stations will be accessible through the Electrify America charging network. APS has a goal of 450,000 light-duty electric vehicles in its service territory by 2030.

Additionally, as part of ~~the 2020~~APS’s DSM Plan, APS has launched an Electric Vehicle Charging Demand Management Pilot Program to proactively address the ~~ACC approved programs for~~growing electric ~~vehicles, including a residential program to measure~~demand from electric vehicle charging as ~~well as~~electric vehicles become more widely adopted. This program includes the APS SmartCharge data gathering program, a $250 residential electric vehicle smart charger rebate for qualifying electric vehicle chargers, and a $100 rebate to home builders for new ~~home~~homes to be built EV ready with 240V charging station garage outlets.

The ACC ordered ~~the state’s~~certain public service corporations, including APS, to develop a long-term, comprehensive ~~Statewide Transportation Electrification Plan~~statewide transportation electrification plan (“TE Plan”) for Arizona. The statewide TE Plan is intended to provide a roadmap for ~~Transportation Electrification~~transportation electrification in Arizona, focused on realizing the associated air quality and economic development benefits for all residents in the state along with understanding the impact of electric vehicle charging on the grid. APS is actively ~~participating~~participated in ~~this process,~~the development of that plan, which was ~~submitted~~approved by the ACC in ~~April 2021~~December 2021. In the decision, the ACC also ordered APS and another large Arizona electric public service corporation to each develop and submit for ACC approval their own TE Plans and corresponding budget for 2023. Accordingly, APS filed its first TE Annual Progress Report on March 15, 2022, and its 2023 TE Plan and budget on June 1, 2022. APS will file a supplement to the ~~ACC for review and approval. The ACC will be holding workshops in August 2021 to discuss the~~2023 TE ~~Plan.~~Plan later this year.

Hydrogen Production

Palo Verde, in partnership with Idaho National Laboratory (“INL”) ~~and~~, Energy Harbor Corporation (“Energy Harbor”) and Xcel Energy Incorporated ~~has been~~(“Xcel”), was chosen by the DOE’s Office of Nuclear Energy to participate in a series of hydrogen production ~~project~~projects with the goal to improve the long-term economic competitiveness of the nuclear power industry. The multi-phase ~~project is planned for~~projects began in 2020 ~~through 2023. In the first phase, INL performed~~with a series of small-scale hydrogen production demonstration projects led by Energy Harbor and Xcel, as well as a technical and economic assessment performed by INL of using electricity generated at Palo Verde to produce hydrogen.

Based on the experience from Palo Verde’s utility partners’ small scale demonstration projects and from the Palo Verde-specific technical and economic assessment performed by INL, in April 2021, PNW Hydrogen LLC (“PNW Hydrogen”), a newly formed subsidiary of Pinnacle West, ~~recently submitted~~applied for DOE funding for a ~~request for funding to the~~larger scale hydrogen production demonstration project using electricity sourced from Palo Verde. On

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October 7, 2021, PNW Hydrogen was notified that DOE’s Office of Energy Efficiency & Renewable Energy and Office of Nuclear Energy had selected PNW Hydrogen’s application for an award of $20 million in federal funding to support ~~moving forward with a~~the hydrogen production ~~pilot.~~demonstration project, subject to negotiation and execution of a definitive Cooperative Agreement funding instrument between PNW Hydrogen and DOE. PNW Hydrogen continues to work through negotiations with DOE. If a definitive agreement is not completed within the DOE allotted negotiation period, the DOE will rescind the award and make other use of the funds.

Carbon Capture

Carbon capture technologies can isolate ~~CO2~~CO2 and either sequester it permanently in geologic formations or convert it for use in products. Currently, almost all existing fossil fuel generators do not control carbon emissions the way they control emissions of other air pollutants such as sulfur dioxide or oxides of nitrogen. Carbon capture technologies are still in the demonstration phase and while they show promise, they are still being tested in real-world conditions. These technologies could offer the potential to keep in operation existing generators that otherwise would need to be retired. APS will continue to monitor this emerging technology.

Environmental, Social, and Governance (“ESG”) Practices

Pinnacle West has been integrating ESG practices into its core work for almost 30 years. As a business strategy, we seek solutions that provide “shared value,” meaning solutions that address societal and environmental challenges in a way that also delivers business value. Our commitment extends beyond implementing sustainability practices; we are dedicated to working with our stakeholders to identify and address the sustainability issues that we are uniquely positioned to impact through our business. In 2020, in support of our clean energy commitment and the growing focus on ESG within our organization, we increased our efforts by dedicating a new Sustainability Department at Pinnacle West to integrating ESG best practices into the everyday work of the Company.

As a first step, the Company engaged the Electric Power Research Institute (“EPRI”) and leveraged input from employees, large customers, limited-income advocates, economic development groups, environmental non-governmental organizations, leading sustainability academics and other stakeholders to identify and assess the sustainability issues that matter most. In total, 23 Priority Sustainability Issues (“PSIs”) were identified and prioritized. The most critical category, Integral Shared Value, includes four issues deemed most important and most able to be impacted by our actions: clean energy, customer experience, energy access and reliability and safety and health. These Integral PSIs provide the foundation for informing our strategic direction, creating a framework for incorporating best practices and driving enterprise-wide alignment and accountability. In 2021, the Company engaged EPRI for the second phase of this work, focused on benchmarking best practices within these four Integral Shared Value PSIs. We will utilize the benchmarking information to identify opportunities for further improvement in our ESG performance.

In 2021, the Company established a Social Issues Committee Framework. The goal of the framework is to provide a process for considering emergent social issues, and for determining whether or how best to engage. The committee’s responsibility is to determine, using a set of principles grounded in the APS Promise and the PSIs, whether engagement on specific emergent social issues is appropriate and, if so, how best to engage.

In 2021, the Company finalized an ESG Strategic Framework to guide our work. The framework is based upon three foundational pillars: ESG Policy Advocacy (we advocate for policy that supports our clean energy goals); Driving Performance (improving our ESG performance in the most important areas, including our PSIs); and effectively communicating and amplifying our ESG story to our various stakeholders, including investors, customers, employees and beyond. The framework will guide and shape our ESG work moving forward.

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Regulatory Overview

On October 31, 2019, APS filed an application with the ACC (the “2019 Rate Case”) seeking an increase in annual retail base rates of $69 million. This amount includes recovery of the deferral and rate base effects of the Four Corners SCR project that ~~is currently~~was the subject of a separate ~~proceeding (see “SCR~~proceeding. See “Four Corners SCR Cost Recovery” in Note 4). It also reflects a net credit to base rates of approximately $115 million primarily due to the prospective inclusion of rate refunds currently provided through the TEAM. The proposed total annual revenue increase in APS’s application is $184 million. The average annual customer bill impact of APS’s request is an increase of 5.6% (the average annual bill impact for a typical APS residential customer is 5.4%).

The principal provisions of APS’s application were:

•a test year comprised of ~~twelve~~12 months ended June 30, 2019, adjusted as described below;

•an original cost rate base of $8.87 billion, which approximates the ACC-jurisdictional portion of the book value of utility assets, net of accumulated depreciation and other credits;

•the following proposed capital structure and costs of capital:


	Capital Structure		Cost of Capital
Long-term debt	45.3	%	4.1	%
Common stock equity	54.7	%	10.15	%
Weighted-average cost of capital			7.41	%

•a 1% return on the increment of fair value rate base above APS’s original cost rate base, as provided for by Arizona law;

•a Base Fuel Rate of $0.030168 per kWh;

•a number of proposed rate and program changes for residential customers, including:

▪a super off-peak period during the winter months for APS’s time-of-use with demand rates;

▪additional $1.25 million in funding for APS’s limited-income crisis bill program; and

▪a flat bill/subscription rate pilot program;

•proposed rate design changes for commercial customers, including an experimental program designed to provide access to market pricing for up to 200 MW of medium and large commercial customers;

•recovery of the deferral and rate base effects of the construction and operating costs of the Ocotillo modernization ~~project (see~~project. See Note 4 for a discussion of the 2017 Settlement ~~Agreement);~~Agreement; and

•continued recovery of the remaining investment and other costs related to the retirement and closure of the Navajo ~~Plant (see~~Plant. See Note 4 for details related to the resulting regulatory ~~asset).~~asset.

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nonrecovery of the deferral and rate base effects of the construction and operating costs of the Four Corners SCR project pending further consideration, and (vi) the recovery of the deferral and rate base effects of the construction and operating costs of the Ocotillo modernization project.

The filed ACC Staff and intervenor testimony include additional recommendations, some of which materially differ from APS’s filed application.On November 6, 2020, APS filed its rebuttal testimony and the principal provisions which differ from its initial application include, among other things, (i) a ~~(i)~~ $169 million revenue increase, (ii) average annual customer bill increase of 5.14%, (iii) return on equity of 10%, (iv) return on the increment of fair value rate base of 0.8%, (v) new cost recovery adjustor mechanism, the Advanced Energy Mechanism, ~~(“AEM”),~~ to enable more timely recovery of clean investments as APS pursues its clean energy commitment, (vi) recognition that securitization is a potentially useful financing tool to recover the remaining book value of retiring assets and effectuate a transition to a cleaner energy future that APS intends to pursue, provided legislative hurdles are addressed, and (vii) the CCT plan related to the closure or future closure of coal-fired generation facilities of which $25 million would be funds that are not recoverable through rates with a proposal that the remainder be funded by customers over 10 years.

The CCT plan includes the following proposed components:(i) $100 million that will be paid over 10 years to the Navajo Nation for a sustainable transition to a post-coal economy, which would be funded by customers, (ii) $1.25 million that will be paid over five years to the Navajo Nation to fund an economic development organization, which would be funds not recoverable through rates, (iii) $10 million to facilitate electrification projects within the Navajo Nation, which would be funded equally by funds not recoverable through rates and by customers, (iv) $2.5 million per year in transmission revenue sharing to be paid to the Navajo Nation beginning after the closure of the Four Corners ~~Power Plant~~ through 2038, which would be funds not recoverable through rates, (v) $12 million that will be paid over five years to the Navajo County Communities surrounding Cholla Power Plant, which would primarily be funded by customers, and (vi) $3.7 million that will be paid over five years to the Hopi Tribe related to APS’s ownership interests in the Navajo ~~Generating Station,~~Plant, which would primarily be funded by customers. In 2021, APS committed an additional $900,000 to be paid to the Hopi Tribe related to APS’s ownership interests in the Navajo Plant.

In RUCO’s surrebuttal, the recommended revenue decrease changed to $50.1 million, or an average annual customer bill decrease of 1.52%.

On August 2, 2021, the Administrative Law Judge issued a Recommended Opinion and Order in ~~APS’s rate case~~the 2019 Rate Case (the “2019 Rate Case ROO”). and issued corrections on September 10 and September 20, 2021. The 2019 Rate Case ROO ~~recommends,~~recommended, among other things, (i) a ~~(i)~~ $111 million ~~base~~decrease in annual revenue ~~decrease,~~requirements, (ii) a return on equity ~~for original cost rate base~~ of 9.16%, (iii) a ~~0.15%~~0.30% return on the increment of fair value rate base greater than original cost, with total fair value rate of return further adjusted to include a ~~0.10%~~0.03% reduction to return on equity resulting in an effective fair value rate of return of ~~0.05%~~4.95%, (iv) the nonrecovery of the deferral and rate base effects of the operating costs and construction of the Four Corners SCR project (see ~~"Four~~“Four Corners SCR Cost ~~Recovery"~~ ~~in Note 4~~Recovery” below for additional ~~information)~~information), (v) the recovery of the deferral and rate base effects of the operating costs and construction of the Ocotillo modernization project, which includes a reduction in the return on the deferral, ~~and~~ (vi) a 15% disallowance of annual amortization of Navajo Plant regulatory asset ~~recovery.~~ recovery, (vii) the denial of the request to defer until APS’s next general rate case the increase or decrease in its Arizona property taxes attributable to tax rate changes, and (viii) a collaborative process to review and recommend revisions to APS’s adjustment mechanisms within 12 months after the date of the decision.The 2019 Rate Case ROO also recommended that the CCT plan include the following components: (i) $50 million that will be paid over 10 years to the Navajo Nation, (ii) $5 million that will be paid over five

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years to the Navajo County Communities surrounding Cholla Power Plant, and (iii) $1.675 million that will be paid to the Hopi Tribe related to APS’s ownership interests in the Navajo ~~Generating Station.~~ Plant.These amounts would be recoverable from APS’s customers through the ~~RES.~~ RES adjustment mechanism.APS ~~expects to file an exception~~filed exceptions on September 13, 2021, regarding the disallowance of the SCR cost deferrals andplant investments that was recommended in the 2019 Rate Case ROO, among other issues.

On October 6, 2021 and ~~APS is continuing~~October 27, 2021, the ACC voted on various amendments to ~~evaluate any additional exceptions it may file.~~the 2019 Rate Case ROO that would result in, among other things, (i) a return on equity of 8.70%, (ii) the recovery of the deferral and rate base effects of the operating costs and construction of the Four Corners SCR project, with the exception of $215.5 million (see “Four Corners SCR Cost Recovery” below), (iii) that the CCT plan include the following components: (a) a payment of $1 million to the Hopi Tribe within 60 days of the 2019 Rate Case decision, (b) a payment of $10 million over three years to the Navajo Nation, (c) a payment of $500,000 to the Navajo County communities within 60 days of the 2019 Rate Case decision, (d) up to $1.25 million for electrification of homes and businesses on the Hopi reservation and (e) up to $1.25 million for the electrification of homes and businesses on the Navajo Nation reservation. These payments and expenditures are attributable to the future closures of Four Corners and Cholla, along with the prior closure of the Navajo Plant and all ordered payments and expenditures would be recoverable through rates, and (iv) a change in the residential on-peak time-of-use period from 3 p.m. to 8 p.m. to 4 p.m. to 7 p.m. Monday through Friday, excluding holidays. The 2019 Rate Case ROO, ~~will be discussed~~as amended, results in a total annual revenue decrease for APS of $4.8 million, excluding temporary CCT payments and expenditures. On November 2, 2021, the ACC approved the 2019 Rate Case ROO, as amended. On November 24, 2021, APS filed with the ACC an application for rehearing of the 2019 Rate Case and the application was deemed denied on December 15, 2021, as the ACC did not act upon it. On December 17, 2021, APS filed its Notice of Direct Appeal at ~~an upcoming ACC open meeting.~~the Arizona Court of Appeals and a Petition for Special Action with the Arizona Supreme Court, requesting review of the disallowance of $215 million of Four Corners SCR plant investments and deferrals (see “Four Corners SCR Cost Recovery” below for additional information) and the 20 basis point penalty reduction to the return on equity. On February 8, 2022, the Arizona Supreme Court declined to accept jurisdiction on APS’s Petition for Special Action. The appeal at the Arizona Court of Appeals is proceeding in the normal course. APS cannot predict the outcome of this proceeding.

Consistent with the 2019 Rate Case decision, APS implemented the new rates effective as of December 1, 2021. On December 3, 2021, ACC Staff notified the ACC of a discrepancy between the written decision, which approved the change in time-of-use on-peak hours to 4 p.m. to 7 p.m. but did not explicitly approve the 10-months contemplated in APS’s verbal testimony to implement the new time-of-use hours. On December 16, 2021, the ACC ordered APS to complete the implementation of the time-of-use peak period by April 1, 2022. On January 12, 2022, the ACC voted to extend until September 1, 2022, the deadline to complete the implementation of the new on-peak hours for residential customers. In addition, the ACC ordered extensive compliance and reporting obligations and will be continuing to explore whether penalties or rebates would be owed to certain customers. APS cannot predict the outcome of this matter.

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completion of a census of the unelectrified homes and businesses in each that are also within APS service territory.

APS expects to file an application with the ACC for its next general retail rate case by the end of October 2022, allowing for a test year ending June 30, 2022.

See Note 4 for information regarding additional regulatory matters.

~~Arizona Attorney General Matter~~Four Corners SCR Cost Recovery

As part of APS’s 2019 Rate Case, APS ~~received civil investigative demands from the Office~~included recovery of the deferral and rate base effects of the Four Corners SCR project. On November 2, 2021, the 2019 Rate Case decision was approved by the ACC allowing approximately $194 million of SCR related plant investments and cost deferrals in rate base and to recover, depreciate and amortize in rates based on an end-of-life assumption of July 2031. The decision also included a partial and combined disallowance of $215.5 million on the SCR investments and deferrals. APS believes the SCR plant investments and related SCR cost deferrals were prudently incurred, and on December 17, 2021, APS filed its Notice of Direct Appeal at the Arizona ~~Attorney General, Civil Litigation Division, Consumer Protection & Advocacy Section (“Attorney General”) seeking information pertaining~~Court of Appeals requesting review of the $215.5 million disallowance and the appeal is proceeding in the normal course. Based on the partial recovery of these investments and cost deferrals in current rates and the uncertainty of the outcome of the legal appeals process, APS has not recorded an impairment or write-off relating to the ~~rate plan comparison tool offered~~SCR plant investments or deferrals as of June 30, 2022. If the 2019 Rate Case decision to APS customers and other related issues including implementation of rates from the 2017 Settlement Agreement and its Customer Education and Outreach Plan associated with the 2017 Settlement Agreement. APS fully cooperated with the Attorney General’s Office in this matter. On February 22, 2021 APS entered into a consent agreement with the Attorney General as a way to settle the matter. The settlement resulted in APS paying $24.75 million, $24disallow $215.5 million of ~~which~~the SCRs is ~~being returned~~ultimately upheld, APS will be required to ~~customers as restitution. While~~record a charge to its results of operations, net of tax, of approximately $154.4 million. We cannot predict the outcome of the legal challenges nor the timing of when this matter ~~has been resolved with~~will be resolved. See Note 4 for additional information regarding the ~~Attorney General, APS cannot predict whether additional inquiries or actions may be taken by the ACC.~~Four Corners SCR cost recovery.

Financial Strength and Flexibility

Pinnacle West and APS currently have ample borrowing capacity under their respective credit facilities and may readily access these facilities ensuring adequate liquidity for each company. Capital expenditures will be funded with internally generated cash and external financings, which may include issuances of long-term debt and Pinnacle West common stock.

Other Subsidiaries

Bright Canyon Energy. On July 31, 2014, Pinnacle West announced its creation of a wholly-owned subsidiary, BCE. BCE’s strategy is to develop, own, operate and acquire energy infrastructure in a manner that leverages the Company’s core expertise in the electric energy industry. In 2014, BCE formed a 50/50 joint venture with BHE U.S. Transmission LLC, a subsidiary of Berkshire Hathaway Energy Company. The joint venture, named TransCanyon, is pursuing independent electric transmission opportunities within the 11 states that comprise the Western Electricity Coordinating Council, excluding opportunities related to transmission service that would otherwise be provided under the tariffs of the retail service territories of the venture partners’ utility affiliates. As of June 30, 2022, BCE had total assets of approximately $77 million.

~~On December~~BCE has started construction on a microgrid facility in Los Alamitos, California (“Los Alamitos”) featuring 31 MW of solar, 20 ~~2019, BCE acquired minority ownership positions~~MW of battery storage, and 3 MW of backup generators. Supported by a long-term power purchase agreement with San Diego Gas and Electric Company, Los Alamitos will supply 20 MW of solar and battery storage capacity to the Southern California grid and provide resilient backup power in ~~two wind farms under development by Tenaska Energy, Inc.~~the event of a grid emergency to the Army and ~~Tenaska Energy Holdings, LLC, the 242 MW Clear Creek wind farm in Missouri (“Clear Creek”) and the 250 MW Nobles 2 wind farm in Minnesota (“Nobles 2”). Clear Creek achieved~~California National Guard at Joint Forces Training Base Los Alamitos. The Los Alamitos project is scheduled to achieve commercial operation in ~~May 2020~~2023. See Note 3

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regarding a credit agreement entered into by BCE to finance capital expenditures and ~~Nobles 2 achieved commercial operation~~related costs for this microgrid project.

BCE and Ameresco, Inc. jointly own a special purpose entity that is sponsoring the Kūpono Solar project. This project is a 42 MW solar and battery storage facility in ~~December 2020. Both wind farms deliver power~~Oʻahu, Hawaii that will supply clean renewable energy and capacity under ~~long-term~~a 20-year power purchase ~~agreements. BCE indirectly owns 9.9% of Clear Creek and 5.1% of Nobles 2.~~agreement with Hawaiian Electric Company, Inc. The Kūpono Solar project is expected to be completed in 2024.

El Dorado. El Dorado is a wholly-owned subsidiary of Pinnacle West. El Dorado owns debt investments and minority interests in several energy-related investments and Arizona community-based ventures. El Dorado committed to a $25 million investment in the Energy Impact Partners fund, which is an organization that focuses on fostering innovation and supporting the transformation of the utility industry. The investment will be made by El Dorado as investments are selected by the Energy Impact Partners fund. As of June 30, 2022, El Dorado has contributed approximately $11 million to the Energy Impact Partners fund. Additionally, El Dorado committed to a $25 million investment in invisionAZ Fund, which is a fund focused on analyzing, investing, managing and otherwise dealing with investments in privately held early stage and emerging growth technology companies and businesses primarily based in the State of Arizona, or based in other jurisdictions and having existing or potential strategic or economic ties to companies or other interests in the State of Arizona. ~~The investment will be made by~~As of June 30, 2022, El Dorado ~~as investments are selected by~~has contributed approximately $3 million to the invisionAZ Fund.

Key Financial Drivers

In addition to the continuing impact of the matters described above, many factors influence our financial results and our future financial outlook, including those listed below. We closely monitor these factors to plan for the Company’s current needs, and to adjust our expectations, financial budgets and forecasts appropriately.

Electric Operating Revenues. For the years ~~2018~~2019 through ~~2020,~~2021, retail electric revenues comprised approximately ~~95%~~94% of our total operating revenues. Our electric operating revenues are affected by customer growth or decline, variations in weather from period to period, customer mix, average usage per customer and the impacts of energy efficiency programs, distributed energy additions, electricity rates and tariffs, the recovery of PSA deferrals and the operation of other recovery mechanisms. These revenue transactions are affected by the availability of excess generation or other energy resources and wholesale market conditions, including competition, demand and prices.

Actual and Projected Customer and Sales Growth. Retail customers in APS’s service territory increased ~~2.2%~~2.1% for the six-month period ended June 30, ~~2021~~2022, compared with the prior-year period. For the three years ~~2018~~ through ~~2020,~~2021, APS’s customer growth averaged ~~2.0%~~2.2% per year. We currently project annual customer growth to be 1.5% to 2.5% for ~~2021~~2022, and ~~for 2021~~the average annual growth will be in the range of 1.5% to 2.5% through ~~2023~~2024 based on ~~our assessment of~~anticipated steady population growth in ~~Arizona.~~Arizona during that period.

Retail electricity sales in kWh, adjusted to exclude the effects of weather variations, increased ~~3.3%~~3.7% for the six-month period ended June 30, ~~2021~~2022, compared with the prior-year period. While steady customer growth was somewhat offset by energy savings driven by customer conservation, energy efficiency, and distributed renewable generation initiatives, the main drivers of positive sales for this period were ~~continued strong~~ residential sales being stronger than anticipated due to continued work-from-home policies, a strong improvement in sales to commercial and industrial customers, and the ramp-up of new data center customers.Though the total expected impact of COVID-19 on future sales ~~is currently~~remains unknown, APS experienced higher electric residential sales and lower electric commercial and industrial sales from the outset of the pandemic through April 2021.

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Beginning in May 2021, electric sales to commercial and industrial customers increased to levels in line with pre-COVID ~~sales. APS cannot predict whether~~ sales ~~from commercial~~ and ~~industrial customers has fully recovered, but it expects~~such sales ~~trends~~levels have remained to ~~continue normalizing during 2021 as business activity continues to recover and more people return to work.~~date.

For the three years ~~2018~~ through ~~2020,~~2021, annual retail electricity sales ~~were about flat,~~growth averaged 1.7%, adjusted to exclude the effects of weather variations. We currently project that annual retail electricity sales in kWh will increase in the range of ~~1.0%~~1.5% to ~~2.0%~~2.5% for ~~2021~~2022, and ~~for 2021~~average annual growth will be in the range of 3.5% to 4.5% through ~~2023,~~2024, including the effects of customer conservation, energy efficiency and distributed renewable generation initiatives, but excluding the effects of weather ~~variations and excluding~~variations. This projected sales growth range includes the impacts of ~~several~~ new, large manufacturing facilities, ~~opening operations~~which are expected to contribute to average annual growth in ~~Metro Phoenix. The impact~~the range of ~~the new, large manufacturing facilities is likely~~1.0% to ~~increase the expected annual sales growth rate as early as 2022, but demand from these customers remains uncertain at this point.~~ 2.0% through 2024.This projected sales growth range also includes our estimated contributions of several large data centers, but not all, and we will continue to estimate contributions and evaluate sales guidance as these customers develop more usage history.These estimates could be further impacted by ~~slower than~~changes in the expected growth of the Arizona economy, slower than expected ramp-up of the new data centers, larger manufacturing facilities not coming to Arizona as expected, a change in the duration of remote work, changes in the expected commercial and industrial expansions, or acceleration of the expected effects of customer conservation, energy efficiency and distributed renewable generation initiatives.

Actual sales growth, excluding weather-related variations, may differ from our projections as a result of numerous factors, such as economic conditions, customer growth, usage patterns and energy conservation, ramp-up of data centers, impacts of energy efficiency programs and growth in ~~distributed generation,~~DG, and responses to retail price changes. Based on past experience, a 1% variation in our annual residential and small commercial and industrial kWh sales projections ~~attributable to such economic factors~~ under normal business conditions can result in increases or decreases in annual net income of approximately $20 million, and a 1% variation in our annual large commercial and industrial kWh sales projections under normal business conditions can result in increases or decreases in annual net income of approximately $5 million.

Weather. In forecasting the retail sales growth numbers provided above, we assume normal weather patterns based on historical data. Historically, extreme weather variations have resulted in annual variations in net income in excess of $25 million. However, our experience indicates that the more typical variations from normal weather can result in increases or decreases in annual net income of up to $15 million.

Fuel and Purchased Power Costs. Fuel and purchased power costs included on our Condensed Consolidated Statements of Income are impacted by our electricity sales volumes, existing contracts for purchased power and generation fuel, our power plant performance, transmission availability or constraints, prevailing market prices, new generating plants being placed in service in our market areas, changes in our generation resource allocation, our hedging program for managing such costs and PSA deferrals and the related amortization.

Operations and Maintenance Expenses. Operations and maintenance expenses are impacted by customer and sales growth, power plant operations, maintenance of utility plant (including generation, transmission, and distribution facilities), inflation, unplanned outages, planned outages (typically scheduled in the spring and fall), renewable energy and demand side management related expenses (which are offset by the same amount of operating revenues) and other factors.

Depreciation and Amortization Expenses. Depreciation and amortization expenses are impacted by net additions to utility plant and other property (such as new generation, transmission, and distribution

facilities), and changes in depreciation and amortization rates. See “Liquidity and Capital Resources” below for information regarding the planned additions to our facilities.

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Property Taxes. Taxes other than income taxes consist primarily of property taxes, which are affected by the value of property in-service and under construction, assessment ratios, and tax rates. The average property tax rate in Arizona for APS, which owns essentially all of our property, was ~~10.8%~~10.7% of the assessed value for 2021, 10.8% for 2020 and 10.9% for ~~2019 and 11.0% for 2018.~~2019. We expect property taxes to increase as we add new generating units and continue with improvements and expansions to our existing generating units and transmission and distribution ~~facilities.~~facilities, though these increases may be partially offset by the impacts of recent legislative changes reducing both property tax assessment ratios and rates in Arizona.

Pension and other postretirement non-service credits - net. Pension and other postretirement non-service credits can be impacted by changes in our actuarial assumptions. The most relevant actuarial assumptions are the discount rate used to measure our net periodic costs/credit, the expected long-term rate of return on plan assets used to estimate earnings on invested funds over the long-term, the mortality assumptions and the assumed healthcare cost trend rates. We review these assumptions on an annual basis and adjust them as necessary.

Interest Expense. Interest expense is affected by the amount of debt outstanding and the interest rates on that debt (see Note 3). The primary factors affecting borrowing levels are expected to be our capital expenditures, long-term debt maturities, equity issuances and internally generated cash flow. An allowance for borrowed funds used during construction offsets a portion of interest expense while capital projects are under construction. We stop accruing AFUDC on a project when it is placed in commercial operation.

Income Taxes. Income taxes are affected by the amount of pretax book income, income tax rates, certain deductions and non-taxable items, such as AFUDC. In addition, income taxes may also be affected by the settlement of issues with taxing authorities. On December 22, 2017, the Tax Act was enacted and was generally effective on January 1, 2018. Changes impacting the Company include a reduction in the corporate tax rate to 21%, revisions to the rules related to tax bonus depreciation, limitations on interest deductibility and an associated exception for certain public utilities, and requirements that certain excess deferred tax amounts of regulated utilities be normalized. See Note 14 for details of the impacts on the Company as of June 30, 2021. In APS’s 2017 rate case decision, the ACC approved a Tax Expense Adjustor Mechanism which will be used to pass through the income tax effects to retail customers of the Tax Act. (See Note 4 for details of the TEAM.)

RESULTS OF OPERATIONS

Pinnacle West’s only reportable business segment is our regulated electricity segment, which consists of traditional regulated retail and wholesale electricity businesses (primarily sales supplied under traditional cost-based rate regulation) and related activities and includes electricity generation, transmission and distribution.

Operating Results — Three-month period ended June 30, ~~2021~~2022, compared with three-month period ended June 30, ~~2020.~~2021.

Our consolidated net income attributable to common shareholders for the three months ended June 30, ~~2021~~2022, was ~~$216~~$164 million, compared with consolidated net income attributable to common shareholders of ~~$194~~$216 million for the prior-year period. The results reflect ~~an increase~~a decrease of approximately ~~$25~~$51 million for the regulated electricity segment, which include higher depreciation and amortization expense primarily due to ~~higher~~the absence of the Ocotillo modernization project and the Four Corners SCR project regulatory deferrals that ended upon the 2019 Rate Case effective date (see Note 4), increased plant assets and updated depreciation rates. In addition, the results reflect lower revenue driven by ~~customer usage~~the Lost Fixed Cost Recovery (“LFCR”) alternative revenue treatment and ~~growth and the effects of weather, and higher pension and other postretirement non-service credits, partially offset by~~ higher operations and maintenance ~~expense, higher depreciation expense and higher~~expense. These negative factors were partially offset by lower income ~~taxes, including lower amortization of excess deferred~~ taxes.

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The following table presents net income attributable to common shareholders by business segment compared with the prior-year period:

Three Months Ended
June 30,
2021 2020 Net Change
(dollars in millions)
Regulated Electricity Segment:
Operating revenues less fuel and purchased power expenses $ 726 $ 690 $ 36
Operations and maintenance (228) (218) (10)
Depreciation and amortization (158) (152) (6)
Taxes other than income taxes (60) (57) (3)
Pension and other postretirement non-service credits - net 28 14 14
All other income and expenses, net 18 19 (1)
Interest charges, net of allowance for borrowed funds used during construction (58) (58) —
Income taxes (47) (41) (6)
Less income related to noncontrolling interests (Note 6) (4) (5) 1
Regulated electricity segment income 217 192 25
All other (1) 2 (3)
Net Income Attributable to Common Shareholders $ 216 $ 194 $ 22


	Three Months Ended June 30,
	2022		2021		Net Change
	(dollars in millions)
Regulated Electricity Segment:
Operating revenues less fuel and purchased power expenses	$	708	$	726	$	(18)
Operations and maintenance	(244)		(228)		(16)
Depreciation and amortization	(186)		(158)		(28)
Taxes other than income taxes	(54)		(60)		6
Pension and other postretirement non-service credits - net	25		28		(3)
All other income and expenses, net	10		18		(8)
Interest charges, net of allowance for borrowed funds used during construction	(62)		(58)		(4)
Income taxes	(27)		(47)		20
Less income related to noncontrolling interests (Note 6)	(4)		(4)		—
Regulated electricity segment income	166		217		(51)
All other	(2)		(1)		(1)
Net Income Attributable to Common Shareholders	$	164	$	216	$	(52)

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Operating revenues less fuel and purchased power expenses. Regulated electricity segment operating revenues less fuel and purchased power expenses were ~~$36~~$18 million ~~higher~~lower for the three months ended June 30, ~~2021~~2022, compared with the prior-year period. The following table summarizes the major components of this change:


		Increase (Decrease)							Increase (Decrease)
		Operating revenues		Fuel and purchased power expenses		Net change			Operating revenues		Fuel and purchased power expenses		Net change
		(dollars in millions)							(dollars in millions)

Impact of new retail base rates from 2019 ACC general rate case effective December 1, 2021								Impact of new retail base rates from 2019 ACC general rate case effective December 1, 2021	$	(37)	$	—	$	(37)
LFCR alternative revenue treatment (Note 4)								LFCR alternative revenue treatment (Note 4)	(16)		—		(16)
Lower transmission revenues (Note 4)								Lower transmission revenues (Note 4)	(4)		—		(4)
Effects of weather								Effects of weather	(5)		(2)		(3)
Changes in net fuel and purchased power costs, including off-system sales margins and related deferrals								Changes in net fuel and purchased power costs, including off-system sales margins and related deferrals	72		72		—
Higher renewable energy regulatory surcharges, partially offset by operations and maintenance costs								Higher renewable energy regulatory surcharges, partially offset by operations and maintenance costs	6		4		2
Higher retail revenue due to customer growth and changes in customer usage patterns, partially offset by the impacts of energy efficiency and distributed generation	Higher retail revenue due to customer growth and changes in customer usage patterns, partially offset by the impacts of energy efficiency and distributed generation	$	39	$	12	$	27	Higher retail revenue due to customer growth and changes in customer usage patterns, partially offset by the impacts of energy efficiency and distributed generation	11		7		4
Effects of weather		9		3		6
Higher renewable energy regulatory surcharges, partially offset by operations and maintenance costs		2		(1)		3
Higher transmission revenues (Note 4)		1		—		1
Changes in net fuel and purchased power costs, including off-system sales margins and related deferrals		19		20		(1)

Lower refunds in the current year related to the Tax Act (Note 4)								Lower refunds in the current year related to the Tax Act (Note 4)	38		—		38
Miscellaneous items, net	Miscellaneous items, net	(2)		(2)		—		Miscellaneous items, net	(1)		1		(2)
Total	Total	$	68	$	32	$	36	Total	$	64	$	82	$	(18)

Operations and maintenance. Operations and maintenance expenses increased ~~$10~~$16 million for the three months ended June 30, ~~2021~~2022, compared with the prior-year period primarily because of:

•An increase of $12 ~~million related to employee benefits;~~

•~~An increase of $4~~ million primarily related to a decreased recovery from contributions of administrative and general costs from Palo Verde owners;

•An increase of $3$6 million related to transmission, distribution and customer service;

•An increase of $4 million primarily related to strategic planning consulting costs;

•An increase of $2 million primarily related to costs for renewable energy and similar regulatory programs, which are partially offset in operating revenues and purchased power;

•A decrease of $6$8 million ~~primarily~~ related to ~~customer support funds, personal protective equipment and other health and safety-related costs for COVID-19 response;~~employee benefits;

•A decrease of $5$4 million ~~for~~in non-nuclear generation costs ~~related~~primarily due to ~~transmission and distribution;~~lower planned outages; and

•An increase of $2$4 million for corporate resources and other miscellaneous factors.

Depreciation and amortization. Depreciation and amortization expenses were $6$28 million higher for the three months ended June 30, ~~2021~~2022, compared to the prior-year period primarily due to ~~increased plant in service~~$15 million for the

Table of ~~$7 million, partially offset by the regulatory deferrals for the~~ Contents

Ocotillo modernization project and the Four Corners SCR project regulatory deferrals recorded in the prior year period that ended upon the 2019 Rate Case effective date and the related 2022 regulatory deferral amortization, and $13 million related to increased plant in service and updated depreciation rates.

Taxes other than income taxes. Taxes other than income taxes were $6 million lower for the three months ended June 30, 2022, compared with the prior-year period primarily due to the impacts of ~~$1 million.~~recent legislative changes reducing both property tax assessment ratios and rates in Arizona and property tax deferrals that ended upon the 2019 Rate Case effective date.

Pension and other postretirement non-service credits, net. Pension and other postretirement non-service credits, net were ~~$14~~$3 million ~~higher~~lower for the three months ended June 30, ~~2021~~2022, compared to the prior-year period primarily due to actual market returns ~~exceeding~~being lower than estimated returns in ~~2020.~~2021.

Interest charges, net of allowance for borrowed funds used during construction. Interest charges, net of allowance for borrowed funds used during construction were $4 million higher for the three months ended June 30, 2022, compared to the prior-year period primarily due to higher debt balances in the current period, partially offset by higher allowance for borrowed funds due to increased capital expenditures.

Income taxes. Income taxes were $6$20 million ~~higher~~lower for the three months ended June 30, ~~2021~~2022, compared with the prior-year period primarily due to ~~higher~~lower pre-tax income.

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Operating Results — Six-month period ended June 30, ~~2021~~2022, compared with six-month period ended June 30, ~~2020.~~2021.

Our consolidated net income attributable to common shareholders for the six months ended June 30, ~~2021~~2022, was ~~$251~~$181 million, compared with consolidated net income attributable to common shareholders of ~~$224~~$251 million for the prior-year period. The results reflect ~~an increase~~a decrease of approximately ~~$32~~$69 million for the regulated electricity segment, which include higher depreciation and amortization expense primarily due to the absence of the Ocotillo modernization project and the Four Corners SCR project regulatory deferrals that ended upon the 2019 Rate Case effective date (see Note 4), increased plant assets and updated depreciation rates. In addition, the results reflect lower revenue driven by the LFCR alternative revenue treatment and higher operations and maintenance expense. These negative factors were partially offset by higher revenue driven by ~~higher~~ customer usage and growth, ~~and usage, lower refunds in the current year related to the Tax Act, the effects of weather and higher~~increased transmission revenue and ~~higher pension and other postretirement non-service credits, partially offset by higher~~lower income ~~taxes, including lower amortization of excess deferred taxes, higher operations and maintenance expense and higher depreciation expense.~~ taxes.

The following table presents net income attributable to common shareholders by business segment compared with the prior-year period:

Six Months Ended
June 30,
2021 2020 Net Change
(dollars in millions)
Regulated Electricity Segment:
Operating revenues less fuel and purchased power expenses $ 1,222 $ 1,162 $ 60
Operations and maintenance (458) (439) (19)
Depreciation and amortization (317) (307) (10)
Taxes other than income taxes (118) (113) (5)
Pension and other postretirement non-service credits - net 56 28 28
All other income and expenses, net 33 34 (1)
Interest charges, net of allowance for borrowed funds used during construction (114) (113) (1)
Income taxes (42) (21) (21)
Less income related to noncontrolling interests (Note 6) (9) (10) 1
Regulated electricity segment income 253 221 32
All other (2) 3 (5)
Net Income Attributable to Common Shareholders $ 251 $ 224 $ 27


	Six Months Ended June 30,
	2022		2021		Net Change
	(dollars in millions)
Regulated Electricity Segment:
Operating revenues less fuel and purchased power expenses	$	1,225	$	1,222	$	3
Operations and maintenance	(462)		(458)		(4)
Depreciation and amortization	(373)		(317)		(56)
Taxes other than income taxes	(112)		(118)		6
Pension and other postretirement non-service credits - net	49		56		(7)
All other income and expenses, net	20		33		(13)
Interest charges, net of allowance for borrowed funds used during construction	(123)		(114)		(9)
Income taxes	(31)		(42)		11
Less income related to noncontrolling interests (Note 6)	(9)		(9)		—
Regulated electricity segment income	184		253		(69)
All other	(3)		(2)		(1)
Net Income Attributable to Common Shareholders	$	181	$	251	$	(70)

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Operating revenues less fuel and purchased power expenses.Regulated electricity segment operating revenues less fuel and purchased power expenses were ~~$60~~$3 million higher for the six months ended June 30, ~~2021~~2022, compared with the prior-year period. The following table summarizes the major components of this change:


		Increase (Decrease)							Increase (Decrease)
		Operating revenues		Fuel and purchased power expenses		Net change			Operating revenues		Fuel and purchased power expenses		Net change
		(dollars in millions)							(dollars in millions)

Lower refunds in the current year related to the Tax Act (Note 4)								Lower refunds in the current year related to the Tax Act (Note 4)	$	69	$	—	$	69
Higher retail revenue due to customer growth and changes in customer usage patterns, partially offset by the impacts of energy efficiency and distributed generation	Higher retail revenue due to customer growth and changes in customer usage patterns, partially offset by the impacts of energy efficiency and distributed generation	$	40	$	13	$	27	Higher retail revenue due to customer growth and changes in customer usage patterns, partially offset by the impacts of energy efficiency and distributed generation	33		16		17
Lower refunds in the current year related to the Tax Act (Note 4)		17		—		17
Effects of weather		14		4		10
Higher transmission revenues (Note 4)	Higher transmission revenues (Note 4)	5		—		5		Higher transmission revenues (Note 4)	7		—		7
Higher renewable energy regulatory surcharges, partially offset by operations and maintenance costs	Higher renewable energy regulatory surcharges, partially offset by operations and maintenance costs	3		(1)		4		Higher renewable energy regulatory surcharges, partially offset by operations and maintenance costs	11		4		7
Changes in net fuel and purchased power costs, including off-system sales margins and related deferrals	Changes in net fuel and purchased power costs, including off-system sales margins and related deferrals	25		27		(2)		Changes in net fuel and purchased power costs, including off-system sales margins and related deferrals	134		132		2
Effects of weather								Effects of weather	(7)		(2)		(5)
LFCR alternative revenue treatment (Note 4)								LFCR alternative revenue treatment (Note 4)	(27)		—		(27)
Impact of new retail base rates from 2019 ACC general rate case effective December 1, 2021								Impact of new retail base rates from 2019 ACC general rate case effective December 1, 2021	(67)		—		(67)
Miscellaneous items, net	Miscellaneous items, net	(3)		(2)		(1)		Miscellaneous items, net	(2)		(2)		—
Total	Total	$	101	$	41	$	60	Total	$	151	$	148	$	3

Operations and maintenance. Operations and maintenance expenses increased ~~$19~~$4 million for the six months ended June 30, ~~2021~~2022, compared with the prior-year period primarily because of:

•An increase of ~~$19~~$12 million primarily related to ~~employee benefits;~~a decreased recovery from contributions of administrative and general costs from Palo Verde owners;

•An increase of $9$7 million ~~in fossil generation~~for costs ~~primarily due~~related to ~~higher planned outages~~transmission, distribution and ~~higher operating costs;~~customer service;

•An increase of $3$7 million primarily related to costs for renewable energy and similar regulatory programs, which are partially offset in operating revenues and purchased power;

•~~A decrease~~An increase of $5 million primarily related to ~~customer support funds, personal protective equipment and other health and safety-related costs for COVID-19 response; and~~strategic planning consulting costs;

•A decrease of $7$19 million in non-nuclear generation costs primarily due to lower planned outages and lower operating costs;

•A decrease of $14 million related to employee benefits; and

•An increase of $6 million for corporate resources and other miscellaneous factors.

Depreciation and amortization. Depreciation and amortization expenses were ~~$10~~$56 million higher for the six months ended June 30, ~~2021~~2022, compared to the prior-year period primarily due to ~~increased plant in service~~$31 million for the

Table of ~~$13 million, partially offset by the regulatory deferrals for the~~ Contents

Ocotillo modernization project and the Four Corners SCR project regulatory deferrals recorded in the prior year period that ended upon the 2019 Rate Case effective date and the related 2022 regulatory deferral amortization, and $26 million related to increased plant in service and updated depreciation rates.

Taxes other than income taxes. Taxes other than income taxes were $6 million lower for the six months ended June 30, 2022, compared with the prior-year period primarily due to the impacts of ~~$3 million.~~recent legislative changes reducing both property tax assessment ratios and rates in Arizona and property tax deferrals that ended upon the 2019 Rate Case effective date.

Pension and other postretirement non-service credits, net. Pension and other postretirement non-service credits, net were ~~$28~~$7 million ~~higher~~lower for the six months ended June 30, ~~2021~~2022, compared to the prior-year period primarily due to actual market returns ~~exceeding~~being lower than estimated returns in ~~2020.~~2021.

~~Income taxes.~~Interest charges, net of allowance for borrowed funds used during construction. ~~Income taxes~~Interest charges, net of allowance for borrowed funds used during construction were ~~$21~~$9 million higher for the six months ended June 30, ~~2021~~2022, compared to the prior-year period primarily due to higher debt balances in the current period, partially offset by higher allowance for borrowed funds due to increased capital expenditures.

Income taxes. Income taxes were $11 million lower for the six months ended June 30, 2022, compared with the prior-year period primarily due to lower pre-tax income, partially offset by lower amortization of excess deferred taxes and ~~higher pre-tax income, partially offset by a~~the net operating loss carryback benefit that the Company recognized during the first quarter of 2021.

LIQUIDITY AND CAPITAL RESOURCES

Overview

Pinnacle West’s primary cash needs are for dividends to our shareholders and principal and interest payments on our indebtedness. The level of our common stock dividends and future dividend growth will be dependent on declaration by our Board of Directors and based on a number of factors, including our financial condition, payout ratio, free cash flow and other factors.

Our primary sources of cash are dividends from APS and external debt and equity issuances. An ACC order requires APS to maintain a common equity ratio of at least 40%. As defined in the related ACC order, the common equity ratio is defined as total shareholder equity divided by the sum of total shareholder equity and long-term debt, including current maturities of long-term debt. At June 30, ~~2021,~~2022, APS’s common equity ratio, as defined, was 51%. Its total shareholder equity was approximately ~~$6.3~~$6.8 billion and total capitalization was approximately ~~$12.3~~$13.2 billion. Under this order, APS would be prohibited from paying dividends if such payment would reduce its total shareholder equity below approximately ~~$4.9~~$5.3 billion, assuming APS’s total capitalization remains the same. This restriction does not materially affect Pinnacle West’s ability to meet its ongoing cash needs or ability to pay dividends to shareholders.

APS’s capital requirements consist primarily of capital expenditures and maturities of long-term debt. APS funds its capital requirements with cash from operations and, to the extent necessary, external debt financing and equity infusions from Pinnacle West.

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Summary of Cash Flows

Our consolidated change in cash and cash equivalents for the period ended June 30, 2021 compared to December 31, 2020 was a decrease of $46 million. The change is primarily driven by cash used for capital expenditures, fuel and purchased power and operations and maintenance cost, which is partially offset by higher cash receipts of electric revenues, increased short-term debt borrowings and lower long-term debt repayments. The following tables present net cash provided by (used for) operating, investing and financing activities (dollars in millions):

Pinnacle West Consolidated


		Six Months Ended June 30,				Net			Six Months Ended June 30,				Net
		2021		2020		Change			2022		2021		Change
Net cash flow provided by operating activities	Net cash flow provided by operating activities	$	313	$	370	$	(57)	Net cash flow provided by operating activities	$	588	$	313	$	275
Net cash flow used for investing activities	Net cash flow used for investing activities	(650)		(653)		3		Net cash flow used for investing activities	(794)		(650)		(144)
Net cash flow provided by financing activities	Net cash flow provided by financing activities	291		280		11		Net cash flow provided by financing activities	225		291		(66)
Net change in cash and cash equivalents	Net change in cash and cash equivalents	$	(46)	$	(3)	$	(43)	Net change in cash and cash equivalents	$	19	$	(46)	$	65

Arizona Public Service Company


		Six Months Ended June 30,				Net			Six Months Ended June 30,				Net
		2021		2020		Change			2022		2021		Change
Net cash flow provided by operating activities	Net cash flow provided by operating activities	$	315	$	378	$	(63)	Net cash flow provided by operating activities	$	600	$	315	$	285
Net cash flow used for investing activities	Net cash flow used for investing activities	(657)		(656)		(1)		Net cash flow used for investing activities	(765)		(657)		(108)
Net cash flow provided by financing activities	Net cash flow provided by financing activities	297		274		23		Net cash flow provided by financing activities	184		297		(113)
Net change in cash and cash equivalents	Net change in cash and cash equivalents	$	(45)	$	(4)	$	(41)	Net change in cash and cash equivalents	$	19	$	(45)	$	64

Operating Cash Flows

Six-month period ended June 30, ~~2021~~2022, compared with six-month period ended June 30, ~~2020.~~2021. Pinnacle West’s consolidated net cash provided by operating activities was $588 million in 2022, compared to $313 million in 2021, ~~compared to $370 million in 2020, a decrease~~an increase of ~~$57~~$275 million in net cash provided by operating activities primarily due to ~~$109 million higher fuel and purchased power costs and $10 million higher payments for operations and maintenance cost, partially offset by $18~~$181 million higher cash receipts from electric revenues, ~~and $45~~$51 million other changes in working ~~capital.~~capital, $41 million change in cash collateral posted in 2022, $13 million lower payments for operations and maintenance costs, partially offset by $8 million lower interest payments.

Retirement plans and other postretirement benefits. Pinnacle West sponsors a qualified defined benefit pension plan and a non-qualified supplemental excess benefit retirement plan for the employees of Pinnacle West and our subsidiaries. The requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”) require us to contribute a minimum amount to the qualified plan. We contribute at least the minimum amount required under ERISA regulations, but no more than the maximum tax-deductible amount. The minimum required funding takes into consideration the value of plan assets and our pension benefit obligations. Under ERISA, the qualified pension plan was ~~124%~~138% funded as of January 1, ~~2021~~2022, and ~~117%~~131% as of January 1, 2020. Under GAAP, the qualified pension plan was 104% funded as of January 1, 2021 and 97% funded as of January 1, 2020. See Note 5 for additional details. The assets in the plan are comprised of fixed-income, equity, real estate, and short-term investments. 2021. Future year contribution amounts are dependent on plan asset performance and plan actuarial assumptions. We have not made voluntary contributions to our pension plan year-to-date in ~~2021.~~2022. The minimum required contributions for the pension plan are zero ~~for the next three~~

~~years. We expect to make voluntary contributions up to $100 million in 2021~~ and ~~zero in 2022 and 2023. We~~we do not expect to make any contributions ~~over this period~~in 2022, 2023 or 2024. With regard to contributions to our other postretirement benefit ~~plans.~~plan, we have not made a contribution year-to-date in 2022 and do not expect to make any contributions in 2022, 2023 or 2024. We ~~continue to~~continually monitor ~~COVID-19~~financial market volatility and its impact on our retirement plans and other postretirement benefits, but we believe, ~~due to~~ our liability driven investment strategy ~~which~~ helps to minimize the impact of market volatility on our plan’s funded ~~status,~~status. For instance, our pension plan’s funded status, as measured for ~~GAAP~~accounting principles generally accepted in the United States of America (“GAAP”) purposes, is still above ~~95%~~

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107% funded as of ~~June 30, 2021.~~December 31, 2021, and our postretirement benefit plans have a funded status, also as measured for GAAP purposes at December 31, 2021, in excess of 145%. See Note 5 for additional details.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act ~~allows~~allowed employers to defer payments of the employer share of Social Security payroll taxes that would have otherwise been owed from March 27, 2020, through December 31, 2020. We deferred the cash payment of the employer’s portion of Social Security payroll taxes for the period July 1, 2020, through December 31, 2020, that was approximately $18 million. We paid approximately $9 million on December 28, 2021, and will pay the second half of this cash deferral by December 31, ~~2021 and the remainder by December 31,~~ 2022.

Investing Cash Flows

Six-month period ended June 30, ~~2021~~2022, compared with six-month period ended June 30, ~~2020.~~2021. Pinnacle West’s consolidated net cash used for investing activities was $794 million in 2022, compared to $650 million in 2021, ~~compared to $653 million in 2020, a decrease~~an increase of $3$144 million primarily related to ~~investing cash activity related to 4CA, partially offset by~~ increased capital ~~expenditures.~~expenditures and BCE investment activity.

Capital Expenditures. The following table summarizes the estimated capital expenditures for the next three years:

Capital Expenditures

(dollars in millions)


		Estimated for the Year Ended December 31,
		2021		2022		2023			2022		2023		2024
APS	APS							APS
Generation:	Generation:							Generation:
Clean:	Clean:							Clean:
Nuclear Generation	Nuclear Generation	$	114	$	116	$	125	Nuclear Generation	$	110	$	120	$	110
Renewables and Energy Storage Systems (“ESS”) (a)	Renewables and Energy Storage Systems (“ESS”) (a)	200		276		281		Renewables and Energy Storage Systems (“ESS”) (a)	230		210		450

Other Generation (b)	Other Generation (b)	203		190		187		Other Generation (b)	250		270		190
Distribution	Distribution	577		556		549		Distribution	510		530		500
Transmission	Transmission	185		181		179		Transmission	250		210		210
Other (c)	Other (c)	221		181		179		Other (c)	175		185		190
Total APS	Total APS	$	1,500	$	1,500	$	1,500	Total APS	$	1,525	$	1,525	$	1,650

(a)APS Solar Communities program, energy storage, renewable projects, and other clean energy ~~projects~~projects.

(b)Includes generation environmental ~~projects~~projects.

(c)Primarily information systems and facilities ~~projects~~projects.

The table above does not include capital expenditures related to BCE projects.

Generation capital expenditures are comprised of various additions and improvements to APS’s

clean resources, including nuclear plants, renewables and ESS. Generation capital expenditures also include improvements to existing fossil plants. Examples of the types of projects included in the forecast of generation capital expenditures are additions of ~~renewable~~renewables and energy storage, and upgrades and capital replacements of

various nuclear and fossil power plant equipment, such as turbines, boilers, and environmental equipment. We are monitoring the status of environmental matters, which, depending on their final outcome, could require modification to our planned environmental expenditures.

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Distribution and transmission capital expenditures are comprised of infrastructure additions and upgrades, capital replacements, and new customer construction. Examples of the types of projects included in the forecast include power lines, substations, and line extensions to new residential and commercial developments.

Capital expenditures will be funded with internally generated cash and external financings, which may include issuances of long-term debt and Pinnacle West common stock.

Financing Cash Flows and Liquidity

Six-month period ended June 30, ~~2021~~2022, compared with six-month period ended June 30, ~~2020.~~2021. Pinnacle West’s consolidated net cash provided by financing activities was $225 million in 2022, compared to $291 million in 2021, ~~compared to $280~~a decrease of $66 million ~~in 2020, an increase of $11 million in net cash provided. The increase~~ in net cash provided by

financing activities is primarily due to ~~lower~~higher long-term debt repayments of ~~$800~~$150 million and a net decrease in short-term borrowing of $87 million, partially offset by ~~$939~~$176 million in ~~lower~~higher issuances of long-term ~~debt and a net increase in short-term borrowing of $158 million, partially offset by higher dividend payment of $11 million.~~debt.

APS’s consolidated net cash provided by financing activities was $184 million in 2022, compared to $297 million in 2021, ~~compared to $274~~a decrease of $113 million ~~in 2020, an increase of $23 million in net cash provided. The increase~~ in net cash provided by

financing activities is primarily due to ~~lower long-term debt repayments~~a net decrease in short-term borrowing of ~~$350~~$259 million, partially offset by ~~$592~~an equity infusion of $150 million in ~~lower issuances of long-term debt and a net increase in short-term borrowing of $275 million, partially offset by higher dividend payment of $11 million.~~2022.

Significant Financing Activities. On June ~~23, 2021,~~22, 2022, the Pinnacle West Board of Directors declared a dividend of ~~$0.83~~$0.85 per share of common stock, payable on September 1, ~~2021~~2022, to shareholders of record on August ~~2, 2021.~~1, 2022.

Available Credit Facilities. Pinnacle West and APS maintain committed revolving credit facilities in order to enhance liquidity and provide credit support for their commercial paper programs, to finance indebtedness, and other general corporate purposes. See Note 3 for more information on available credit facilities.

On May 5, 2020, Pinnacle West refinanced its 364-day $50 million term loan agreement with a new 364-day $31 million term loan agreement that would have matured May 4, 2021. Borrowings under the agreement bore interest at Eurodollar Rate plus 1.40% per annum. Pinnacle West repaid this agreement on April 27, 2021.

On December 23, 2020, Pinnacle West entered into a $150 million term loan facility that matures June 30, 2022. The proceeds were received on January 4, 2021 and used for general corporate purposes. We recognized the term loan facility as long-term debt upon settlement on January 4, 2021.

On May 28, 2021, Pinnacle West replaced its $200 million revolving credit facility that would have matured on July 11, 2023, with a new $200 million revolving credit facility that matures on May 28, 2026. Pinnacle West has the option to increase the amount of the facility up to a maximum of $300 million upon the satisfaction of certain conditions and with the consent of the lenders. Interest rates are based on Pinnacle West’s senior unsecured debt credit ratings and the agreement includes a sustainability-linked pricing metric which permits an interest rate reduction or increase by meeting or missing targets related to specific

environmental and employee health and safety sustainability objectives. The facility is available to support Pinnacle West’s general corporate purposes, including support for Pinnacle West's $200 million commercial paper program, for bank borrowings or for issuances of letters of credits. At June 30, 2021, Pinnacle West had no outstanding borrowings under its credit facility, no letters of credit outstanding under the credit facility and $9.7 million of outstanding commercial paper borrowings.

On May 28, 2021, APS replaced its two $500 million revolving credit facilities that would have matured in June 2022 and July 2023, with two new $500 million revolving credit facilities that total $1 billion and that mature on May 28, 2026. APS may increase the amount of each facility up to a maximum of $700 million, for a total of $1.4 billion, upon the satisfaction of certain conditions and with the consent of the lenders. Interest rates are based on APS’s senior unsecured debt credit ratings and the agreement includes a sustainability-linked pricing metric which permits an interest rate reduction or increase by meeting or missing targets related to specific environmental and employee health and safety sustainability objectives. These facilities are available to support APS’s general corporate purposes, including support for APS's $750 million commercial paper program, for bank borrowings or for issuances of letters of credit. At June 30, 2021, APS had no outstanding borrowings under its revolving credit facilities, no letters of credit outstanding under the credit facilities and $495 million of outstanding commercial paper borrowings.

~~See “Financial Assurances” in Note 8 for a discussion of separate outstanding letters of credit and surety bonds.~~

Other Financing Matters. See Note 7 for information related to the change in our margin and collateral accounts.

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 these covenants. For both Pinnacle West and APS, these covenants require that the ratio of consolidated debt to total consolidated capitalization not exceed 65%. At June 30, ~~2021,~~2022, the ratio was approximately ~~55%~~57% for Pinnacle West and 50% 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.

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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.

On December 17, 2020, the ACC issued a financing order that, subject to specified parameters and procedures, increased APS’s long-term debt limit from $5.9 billion to $7.5 billion, and authorized APS’s short-term debt authorization equal to the sum of (i) 7% of APS’s capitalization, and (ii) $500 million (which is required to be used for costs relating to purchases of natural gas and power). On April 6, 2022, APS filed an application with the ACC to increase the long-term debt limit under the terms required by APS from $7.5 billion to $8.0 billion (subject to appropriate regulatory treatment of PPA lease agreements) and to continue its authorization of short-term debt granted in the 2020 financing order. This application is pending the ACC’s review. APS cannot predict the outcome of this matter. See Note 3 for further discussions of liquidity matters.

Credit Ratings

The ratings of securities of Pinnacle West and APS as of July ~~29, 2021~~27, 2022, are shown below. We are disclosing these credit ratings to enhance understanding of our cost of short-term and long-term capital and our ability to access the markets for liquidity and long-term debt. The ratings reflect the respective views of the rating agencies, from which an explanation of the significance of their ratings may be obtained. There is no assurance that these ratings will continue for any given ~~period of time.~~period. The ratings may be revised or withdrawn entirely by the rating agencies if, in their respective judgments, circumstances so warrant. Any downward revision or withdrawal may adversely affect the market price of Pinnacle West’s or APS’s securities and/or result in an increase in the cost of, or limit access to, capital. Such revisions may also result in substantial additional cash or other collateral requirements related to certain derivative instruments, insurance policies, natural gas transportation, fuel supply, and other energy-related contracts. At this time, we believe we have sufficient available liquidity resources to respond to a potential downward revision to our credit ratings.

Moody’s

Standard & Poor’s

Fitch

Pinnacle West

Corporate credit rating

Baa1

BBB+

Senior unsecured

Baa1

BBB

BBB+

Commercial paper

P-2

A-2

Outlook

Negative

APS

Corporate credit rating

A-BBB+

Senior unsecured

BBB+

A-

Commercial paper

P-2

A-2

Outlook

Negative

~~Stable~~

Negative

~~APS~~

~~Corporate credit rating~~

A-

~~Senior unsecured~~

A-

~~Commercial paper~~

~~P-1~~

~~A-2~~

~~Outlook~~

~~Negative~~

~~Stable~~

Negative

~~Off-Balance Sheet Arrangements~~

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~~See Note 6 for a discussion of the impacts on our financial statements of consolidating certain VIEs.~~

Contractual Obligations

~~As of~~Pinnacle West has contractual obligations and other commitments that will need to be funded in the future, in addition to its capital expenditure programs. Material contractual obligations and other commitments are as follows:

•Pinnacle West and APS have material long-term debt obligations that mature at various dates through 2050 and bear interest principally at fixed rates. Interest on variable-rate long-term debt is determined by using average rates at June 30, ~~2021, our~~2022. See Note 3.

•Pinnacle West and APS maintain committed revolving credit facilities. See Note 3 for short-term debt details.

•Fuel and purchased power commitments include purchases of coal, electricity, natural gas, renewable energy, nuclear fuel, and natural gas transportation. See Notes 4 and 8. Purchase obligations includes capital expenditures and other obligations. Commitments related to purchased power lease contracts are also considered fuel and purchased power commitments have increased from the information provided in our 2020 Form 10-K. The increase is primarily due to new purchased power and energy storage commitments of approximately $624 million. The majority of the changes relate to 2026 and thereafter.commitments. See Note 8.

~~Other than~~•APS holds certain contracts to purchase renewable energy credits in compliance with the ~~item described above, there have been no material changes, as of June 30, 2021, outside~~RES. See Notes 4 and 8.

•APS is required to make payments to the normal course of business in contractual obligations from the information provided in our 2020 Form 10-K. See Note 3 for discussion regarding changes in our short-term and long-term debt obligations. See Note 6 for discussion regarding changes to our contractual obligationsnoncontrolling interests related to the Palo Verde sale leaseback ~~transactions.~~through 2033. See Note 6.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

In preparing the financial statements in accordance with GAAP, management must often make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period. Some of those judgments can be subjective and complex, and actual results could differ from those estimates. There have been no changes to our critical accounting policies and estimates since our ~~2020~~2021 Form 10-K. See “Critical Accounting Policies” in Item 7 of the ~~2020~~2021 Form 10-K for further details about our critical accounting ~~policies.~~policies and estimates.

~~OTHER ACCOUNTING MATTERS~~

In July 2021, a new accounting standard, ASU 2021-05, was issued that amends lessor’s accounting treatment for certain lease transactions with variable lease payments. The new guidance will be effective for us on January 1, 2022, with no expected material impacts. See Note 17 for additional information related to this new accounting standard.

MARKET AND CREDIT RISKS

Market Risks

Our operations include managing market risks related to changes in interest rates, commodity prices, investments held by our ~~Nuclear Decommissioning Trusts,~~nuclear decommissioning trusts, other special use funds and benefit plan assets.

Interest Rate and Equity Risk

We have exposure to changing interest rates. Changing interest rates will affect interest paid on variable-rate debt and the market value of fixed income securities held by our ~~Nuclear Decommissioning Trusts,~~nuclear decommissioning trusts, other special use funds (see ~~Note~~Notes 11 and ~~Note~~ 12), and benefit plan assets. The ~~Nuclear Decommissioning Trusts,~~nuclear decommissioning trusts, other special use funds and benefit plan assets also have risks associated with the changing market value of their equity and other non-fixed income investments. Nuclear decommissioning and benefit plan costs are recovered in regulated electricity prices.

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Commodity Price Risk

We are exposed to the impact of market fluctuations in the commodity price and transportation costs of electricity and natural gas. Our risk management committee, consisting of officers and key management personnel, oversees company-wide energy risk management activities to ensure compliance with our stated energy risk management policies. We manage risks associated with these market fluctuations by utilizing various commodity instruments that may qualify as derivatives, including futures, forwards, options and swaps. As part of our risk management program, we use such instruments to hedge purchases and sales of electricity and natural gas. The changes in market value of such contracts have a high correlation to price changes in the hedged commodities.

The following table shows the net pretax changes in mark-to-market of ~~our~~APS’s derivative positions (dollars in millions):

Six Months Ended
June 30,
2021 2020
Mark-to-market of net positions at beginning of period $ (13) $ (71)
Decrease in regulatory asset 122 1
Recognized in OCI:
Mark-to-market losses realized during the period — 1
Change in valuation techniques — —
Mark-to-market of net positions at end of period $ 109 $ (69)


	Six Months Ended June 30,
	2022		2021
Mark-to-market of net positions at beginning of period	$	107	$	(13)
Increase in regulatory liability	179		122



Mark-to-market of net positions at end of period	$	286	$	109

APS had no activities or amounts recognized in OCI during the six months ended June 30, 2022 and 2021.

The table below shows the fair value of maturities of ~~our~~APS’s derivative contracts (dollars in millions) at June 30, ~~2021~~2022, by maturities and by the type of valuation that is performed to calculate the fair values, classified in their entirety based on the lowest level of input that is significant to the fair value measurement. See Note 1, “Derivative Accounting” and “Fair Value Measurements” in Item 8 of our ~~2020~~2021 Form 10-K and Note 11 for more discussion of our valuation methods.


Source of Fair Value	Source of Fair Value	2021		2022		2023		2024		2025		Total Fair Value		Source of Fair Value	2022		2023		2024		2025		2026		Total Fair Value
Observable prices provided by other external sources	Observable prices provided by other external sources	$	40	$	30	$	10	$	3	$	—	$	83	Observable prices provided by other external sources	$	128	$	108	$	45	$	—	$	—	$	281
Prices based on unobservable inputs	Prices based on unobservable inputs	26		—		—		—		—		26		Prices based on unobservable inputs	(1)		3		3		—		—		5
Total by maturity	Total by maturity	$	66	$	30	$	10	$	3	$	—	$	109	Total by maturity	$	127	$	111	$	48	$	—	$	—	$	286

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The table below shows the impact that hypothetical price movements of 10% would have on the market value of our risk management assets and liabilities included on Pinnacle West’s Condensed Consolidated Balance Sheets (dollars in millions):


		June 30, 2021				December 31, 2020					June 30, 2022				December 31, 2021
		Gain (Loss)				Gain (Loss)					Gain (Loss)				Gain (Loss)
		Price Up 10%		Price Down 10%		Price Up 10%		Price Down 10%			Price Up 10%		Price Down 10%		Price Up 10%		Price Down 10%
Mark-to-market changes reported in:	Mark-to-market changes reported in:									Mark-to-market changes reported in:
Regulatory asset (liability) (a)	Regulatory asset (liability) (a)									Regulatory asset (liability) (a)
Electricity	Electricity	$	6	$	(6)	$	4	$	(4)	Electricity	$	7	$	(7)	$	—	$	—
Natural gas	Natural gas	47		(47)		49		(49)		Natural gas	60		(60)		50		(50)
Total	Total	$	53	$	(53)	$	53	$	(53)	Total	$	67	$	(67)	$	50	$	(50)

(a)These contracts are economic hedges of our forecasted purchases of natural gas and electricity. The impact of these hypothetical price movements would substantially offset the impact that these same price movements would have on the physical exposures being hedged. To the extent the amounts are eligible for inclusion in the PSA, the amounts are recorded as either a regulatory asset or liability.

Credit Risk

We are exposed to losses in the event of non-performance or non-payment by counterparties. See Note 7 for a discussion of our credit valuation adjustment policy.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See “Key Financial Drivers” and “Market and Credit Risks” in Item 2 above for a discussion of quantitative and qualitative disclosures about market risks.

Item 4. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures

The term “disclosure controls and procedures” means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (15 U.S.C. 78a et seq.), is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to a company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Pinnacle West’s management, with the participation of Pinnacle West’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of Pinnacle West’s disclosure controls and procedures as of June 30, ~~2021.~~2022. Based on that evaluation, Pinnacle West’s Chief Executive Officer and Chief Financial Officer have concluded that, as of that date, Pinnacle West’s disclosure controls and procedures were effective.

Table of Contents

APS’s management, with the participation of APS’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of APS’s disclosure controls and procedures as of June 30, ~~2021.~~2022. Based on that evaluation, APS’s Chief Executive Officer and Chief Financial Officer have concluded that, as of that date, APS’s disclosure controls and procedures were effective.

(b) Changes in Internal Control Over Financial Reporting

The term “internal control over financial reporting” (defined in SEC Rule 13a-15(f)) refers to the process of a company that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

No change in Pinnacle West’s or APS’s internal control over financial reporting occurred during the fiscal quarter ended June 30, ~~2021~~2022, that materially affected, or is reasonably likely to materially affect, Pinnacle West’s or APS’s internal control over financial reporting.

~~100~~96

Table of Contents

PART II — OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

See “Business of Arizona Public Service Company — Environmental Matters” in Item 1 of the ~~2020~~2021 Form 10-K with regard to pending or threatened litigation and other matters.

See Note 4 for ACC and FERC-related matters.

See Note 8 for information regarding environmental matters, Superfund-related matters and other disputes.

Item 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A — Risk Factors in the ~~2020~~2021 Form 10-K and Part II, Item 1A — Risk Factors in the 2022 1st Quarter 10-Q, which could materially affect the business, financial condition, cash flows or future results of Pinnacle West and APS. The risks described in the ~~2020~~2021 Form 10-K and 2022 1st Quarter 10-Q are not the only risks facing Pinnacle West and APS. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect the business, financial condition, cash flows and/or operating results of Pinnacle West and APS.

Item 5. OTHER INFORMATION

In July and August 2021, the Company entered into an amended Key Executive Employment and Severance Agreements (“KEESA”) with Ms. Maria Lacal, Executive Vice President and Chief Nuclear Officer of Palo Verde Generating Station, APS, Mr. Theodore Geisler, Senior Vice President and Chief Financial Officer of Pinnacle West and APS, and Mr. Robert E. Smith, Executive Vice President General Counsel and Chief Development Officer of Pinnacle West and APS and other select officers. The KEESA was amended to better align it with current market practice, including adding the following provisions: (i) providing for a Section 280G “net better” cutback provision; and (ii) providing for the severance benefits to also apply in the event of certain involuntary terminations that occur within six months prior to a Change of Control (as defined in the KEESA). The foregoing description of the terms of the KEESA does not purport to be complete, and is qualified in its entirety by reference to the full text thereof, a copy of which is filed as Exhibit 10.4 to this Form 10-Q, and incorporated herein by reference.None.

~~101~~97

Table of Contents

Item 6. EXHIBITS

(a) Exhibits

Exhibit No.

Registrant(s)

Description

~~10.1~~

~~Pinnacle West~~

Amended and Restated Five-Year Credit Agreement dated as of May 28, 2021, among Pinnacle West, as Borrower, Barclays Bank PLC, as Agent, Co-Sustainability Structuring Agent and Issuing Bank, and the lenders and other parties thereto

~~10.2~~

~~Pinnacle West APS~~

Amended and Restated Five-Year Credit Agreement dated as of May 28, 2021, among APS, as Borrower, Barclays Bank PLC, as Agent, Co-Sustainability Structuring Agent and Issuing Bank, and the lenders and other parties thereto

~~10.3~~

~~Pinnacle West APS~~

Five-Year Credit Agreement dated as of May 28, 2021, among APS, as Borrower, Barclays Bank PLC, as Agent, Co-Sustainability Structuring Agent and Issuing Bank, and the lenders and other parties thereto

~~10.4~~

~~Pinnacle West APS~~

~~Key Executive Employment and Severance Agreement between Pinnacle West and certain executive officers of Pinnacle West and its subsidiaries~~

~~10.5~~

~~Pinnacle West APS~~

Four Corners Project Co-Tenancy Agreement, conformed copy up through and including Amendment No. 13, dated June 25, 2021, among APS, Public Service Company of New Mexico, SRP, Tucson Electric Power Company and Navajo Transitional Energy Company, LLC

31.1

Pinnacle West

Certificate of Jeffrey B. Guldner, Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended

31.2

Pinnacle West

Certificate of ~~Theodore N. Geisler,~~Andrew Cooper , Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended

31.3

APS

Certificate of ~~Jeffrey B. Guldner,~~J e f f r e y B .G u l d n e r , Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended

31.4

APS

Certificate of ~~Theodore N. Geisler,~~Andrew Cooper , Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended

32.1*

Pinnacle West

Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*

APS

Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

Pinnacle West

APS

XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.

~~102~~

101.SCH

Pinnacle West

APS

XBRL Taxonomy Extension Schema Document

101.CAL

Pinnacle West

APS

XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

Pinnacle West

APS

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Pinnacle West

APS

XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF

Pinnacle West

APS

XBRL Taxonomy Definition Linkbase Document

104

Pinnacle West

APS

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*Furnished herewith as an Exhibit.

~~103~~98

Table of Contents

In addition, Pinnacle West and APS hereby incorporate the following Exhibits pursuant to Exchange Act Rule 12b-32 and Regulation §229.10(d) by reference to the filings set forth below:

Exhibit No.

Registrant(s)

Description

Previously Filed as Exhibit(1)

Date Filed

3.1

Pinnacle West

Pinnacle West Capital Corporation Bylaws, amended as of February 19, 2020

3.1 to Pinnacle West/APS February 25, 2020 Form 8-K Report, File Nos. 1-8962 and 1-4473

2/25/2020

3.2

Pinnacle West

Articles of Incorporation, restated as of May 21, 2008

3.1 to Pinnacle West/APS June 30, 2008 Form 10-Q Report, File Nos. 1-8962 and 1-4473

8/7/2008

3.3

APS

Articles of Incorporation, restated as of May 25, 1988

4.2 to APS’s Form S-3 Registration Nos. 33-33910 and 33-55248 by means of September 24, 1993 Form 8-K Report, File No. 1-4473

9/29/1993

3.4

APS

Amendment to the Articles of Incorporation of Arizona Public Service Company, amended May 16, 2012

3.1 to Pinnacle West/APS May 22, 2012 Form 8-K Report, File Nos. 1-8962 and 1-4473

5/22/2012

3.5

APS

Arizona Public Service Company Bylaws, amended as of December 16, 2008

3.4 to Pinnacle West/APS December 31, 2008 Form 10-K, File Nos. 1-8962 and 1-4473

2/20/2009

(1) Reports filed under File Nos. 1-4473 and 1-8962 were filed in the office of the Securities and Exchange Commission located in Washington, D.C.

~~104~~99

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

PINNACLE WEST CAPITAL CORPORATION

(Registrant)

Dated:

August ~~5, 2021~~3, 2022

By:

/s/ ~~Theodore N. Geisler~~Andrew Cooper

~~Theodore N. Geisler~~Andrew Cooper

Senior Vice President and

Chief Financial Officer

(Principal Financial Officer and

Officer Duly Authorized to sign this Report)

ARIZONA PUBLIC SERVICE COMPANY

(Registrant)

Dated:

August ~~5, 2021~~3, 2022

By:

/s/ ~~Theodore N. Geisler~~Andrew Cooper

~~Theodore N. Geisler~~Andrew Cooper

Senior Vice President and

Chief Financial Officer

(Principal Financial Officer and

Officer Duly Authorized to sign this Report)

~~105~~100


		Page

Forward-Looking Statements		2
Part I		4
Item 1.	Financial Statements	4
	Pinnacle West Capital Corporation	5
	Arizona Public Service Company	12
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	7467
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	~~100~~95
Item 4.	Controls and Procedures	~~100~~95

Part II		~~101~~97
Item 1.	Legal Proceedings	~~101~~97
Item 1A.	Risk Factors	~~101~~97
Item 5.	Other Information	~~101~~97
Item 6.	Exhibits	~~102~~98
Signatures		~~105~~100


	Three Months Ended June 30, 2020
	Common Stock			Treasury Stock			Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Noncontrolling Interests		Total
	Shares	Amount		Shares	Amount
Balance, April 1, 2020	112,563,610	$	2,664,387	(72,302)	$	(7,000)	$	2,867,610	$	(55,579)	$	127,414	$	5,596,832
Net income		—			—		193,585		—		4,874		198,459
Other comprehensive loss		—			—		—		(2,296)		—		(2,296)
Dividends on common stock ($1.57 per share)		—			—		(176,086)		—		—		(176,086)
Issuance of common stock	27,514	1,131			—		—		—		—		1,131
Purchase of treasury stock (a)		—		(12,346)	(924)		—		—		—		(924)
Reissuance of treasury stock for stock-based compensation and other		—		48,665	4,734		—		—		—		4,734

Other		—			—		—		—		(1)		(1)
Capital activities by noncontrolling interests		—			—		—		—		(11,372)		(11,372)
Balance, June 30, 2020	112,591,124	$	2,665,518	(35,983)	$	(3,190)	$	2,885,109	$	(57,875)	$	120,915	$	5,610,477


	Six Months Ended June 30, 2020
	Common Stock			Treasury Stock			Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Noncontrolling Interests		Total
	Shares	Amount		Shares	Amount
Balance, Jan 1, 2020	112,540,126	$	2,659,561	(103,546)	$	(9,427)	$	2,837,610	$	(57,096)	$	122,540	$	5,553,188
Net income		—			—		223,578		—		9,747		233,325
Other comprehensive loss		—			—		—		(779)		—		(779)
Dividends on common stock ($1.57 per share)		—			—		(176,079)		—		—		(176,079)
Issuance of common stock	50,998	5,957			—		—		—		—		5,957
Purchase of treasury stock (a)		—		(33,070)	(3,010)		—		—		—		(3,010)
Reissuance of treasury stock for stock-based compensation and other		—		100,633	9,247		—		—		—		9,247
Capital activities by noncontrolling interests		—			—		—		—		(11,372)		(11,372)
Balance, June 30, 2020	112,591,124	$	2,665,518	(35,983)	$	(3,190)	$	2,885,109	$	(57,875)	$	120,915	$	5,610,477


	June 30, 2021		December 31, 2020
ASSETS

PROPERTY, PLANT AND EQUIPMENT
Plant in service and held for future use	$	21,233,344	$	20,834,424
Accumulated depreciation and amortization	(7,275,617)		(7,107,058)
Net	13,957,727		13,727,366
Construction work in progress	1,062,911		937,384
Palo Verde sale leaseback, net of accumulated depreciation (Note 6)	96,101		98,036
Intangible assets, net of accumulated amortization	279,755		282,415
Nuclear fuel, net of accumulated amortization	109,110		113,645
Total property, plant and equipment	15,505,604		15,158,846

INVESTMENTS AND OTHER ASSETS
Nuclear decommissioning trusts (Notes 11 and 12)	1,223,088		1,138,435
Other special use funds (Notes 11 and 12)	358,436		254,509
Other assets	68,248		46,010
Total investments and other assets	1,649,772		1,438,954

CURRENT ASSETS
Cash and cash equivalents	11,954		57,310
Customer and other receivables	357,023		312,644
Accrued unbilled revenues	223,918		132,197
Allowance for doubtful accounts (Note 2)	(22,769)		(19,782)
Materials and supplies (at average cost)	340,672		314,745
Fossil fuel (at average cost)	25,074		19,552

Assets from risk management activities (Note 7)	82,309		2,931
Deferred fuel and purchased power regulatory asset (Note 4)	300,912		175,835
Other regulatory assets (Note 4)	119,890		115,878
Other current assets	51,482		47,593
Total current assets	1,490,465		1,158,903

DEFERRED DEBITS
Regulatory assets (Note 4)	1,173,977		1,133,987
Operating lease right-of-use assets (Note 15)	717,411		503,475
Assets for pension and other postretirement benefits (Note 5)	400,414		495,673
Other	37,210		34,413
Total deferred debits	2,329,012		2,167,548

TOTAL ASSETS	$	20,974,853	$	19,924,251


	Three Months Ended June 30, 2021						Three Months Ended June 30, 2020
	Purchased Power Lease Contracts		Land, Property & Equipment Leases		Total		Purchased Power Lease Contracts		Land, Property & Equipment Leases		Total
Operating lease cost	$	29,514	$	4,598	$	34,112	$	17,221	$	4,651	$	21,872
Variable lease cost	40,539		256		40,795		40,821		255		41,076
Short-term lease cost	0		1,260		1,260		0		996		996
Total lease cost	$	70,053	$	6,114	$	76,167	$	58,042	$	5,902	$	63,944


	Six Months Ended June 30, 2021						Six Months Ended June 30, 2020
	Purchased Power Lease Contracts		Land, Property & Equipment Leases		Total		Purchased Power Lease Contracts		Land, Property & Equipment Leases		Total
Operating lease cost	$	29,514	$	9,239	$	38,753	$	17,221	$	9,304	$	26,525
Variable lease cost	62,027		510		62,537		61,394		498		61,892
Short-term lease cost	0		2,249		2,249		0		1,786		1,786
Total lease cost	$	91,541	$	11,998	$	103,539	$	78,615	$	11,588	$	90,203


	June 30, 2021
Year	Purchased Power Lease Contracts		Land, Property & Equipment Leases		Total
2021 (remaining six months of 2021)	$	95,596	$	7,762	$	103,358
2022	103,744		11,872		115,616
2023	106,161		9,544		115,705
2024	108,634		6,955		115,589
2025	111,166		5,181		116,347
2026	75,099		3,989		79,088
Thereafter	39,106		34,444		73,550
Total lease commitments	639,506		79,747		719,253
Less imputed interest	25,803		17,613		43,416
Total lease liabilities	$	613,703	$	62,134	$	675,837


	Six Months Ended June 30, 2021		Six Months Ended June 30, 2020
Cash paid for amounts included in the measurement of lease liabilities — operating cash flows:	$	13,068	$	7,624
Right-of-use operating lease assets obtained in exchange for operating lease liabilities	248,694		434,997


	June 30, 2021		December 31, 2020
Weighted average remaining lease term	6 years		6 years
Weighted average discount rate (a)	1.72	%	1.69	%