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” 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 Item 1A and in Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations,”~~Operations” of this report, these factors include, but are not limited to:

These and other factors are discussed in the Risk Factors described in Item 1A of this report, and in Item 7 — “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.

Pinnacle West’s other subsidiaries are El Dorado, BCE and 4CA. Additional information related to these subsidiaries is provided later in this report.

Our reportable business segment is our regulated electricity segment, which consists of traditional regulated retail and wholesale electricity businesses (primarily electric service to Native Load customers) and related activities, and includes electricity generation, transmission and distribution.

APS currently provides electric service to approximately 1.2 million customers. We own or lease ~~6,236~~6,015 MW of regulated generation capacity (which is expected to increase by 510 MW upon completion of the Ocotillo Modernization Project by the middle of 2019) and we hold a mix of both long-term and short-term purchased power agreements for additional capacity, including a variety of agreements for the purchase of renewable energy. During ~~2016,~~2018, no single purchaser or user of energy accounted for more than ~~1.1%~~2.7% of our electric revenues.

The following map shows APS’s retail service territory, including the locations of its generating facilities and principal transmission lines.

APS has ownership interests in or leases the coal, nuclear, gas, oil and solar generating facilities described below. For additional information regarding these facilities, see Item 2.

Four Corners — Four Corners is located in the northwestern corner of New Mexico, and was originally a 5-unit coal-fired power plant. APS owns 100% of Units 1, 2 and 3, which were retired as of December 30, 2013. APS operates the plant and owns 63% of Four Corners Units 4 and 5 following the acquisition of SCE’s interest in Units 4 and 5 described below. APS has a total entitlement from Four Corners of 970 MW. Additionally, 4CA, a wholly-owned subsidiary of Pinnacle West, ~~owns~~owned 7% of Units 4 and 5 from July 2016 through July 2018 following its acquisition of El Paso's interest in these units described below.

On December 30, 2013, APS purchased SCE’s 48% interest in each of Units 4 and 5 of Four Corners. ~~The final purchase price for the interest was approximately $182 million. In connection with APS’s prior retail~~

NTEC ~~has~~had the option to purchase the 7% interest within a certain timeframe pursuant to an option granted to NTEC. On December 29, 2015, NTEC provided notice of its intent to exercise the option. The purchase did not occur during the originally contemplated timeframe. Concurrent with the settlement of the 2016 Coal Supply Agreement ~~contains~~matter described in Note 10, NTEC and 4CA agreed to allow for the purchase by NTEC of the 7% interest, consistent with the option. On June 29, 2018, 4CA and NTEC entered into an asset purchase agreement providing for the sale to NTEC of 4CA's 7% interest in Four Corners. Completion of the sale was subject to the receipt of approval by FERC, which was received on July 2, 2018, and the sale transaction closed on July 3, 2018. NTEC purchased the 7% interest at 4CA’s book value, approximately $70 million, and will pay 4CA the purchase price over a period of four years pursuant to a secured interest-bearing promissory note. 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% ~~shortfall obligations~~interest in the event NTEC ~~does~~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. Such payments are due to 4CA at the end of each calendar year. A $10 million payment was due to 4CA at December 31, 2017, which NTEC satisfied by directing to 4CA a prepayment from APS of a portion of a future mine reclamation obligation. The balance of the amount under this formula due December 31, 2018 for calendar year 2017 is approximately $20 million, which was paid to 4CA on December 14, 2018. The balance of the amount under this formula at December 31, 2018 for calendar year 2018 (up to the date that NTEC purchased the 7% interest) is approximately $10 million, which is due to 4CA at December 31, 2019.

APS, on behalf of the Four Corners participants, negotiated amendments to an existing facility lease with the Navajo Nation, which extends the Four Corners leasehold interest from 2016 to 2041. The Navajo Nation approved these amendments in March 2011. The effectiveness of the amendments also required the approval of the DOI, as did a related federal rights-of-way grant. A federal environmental review was undertaken as part of the DOI review process, and culminated in the issuance by DOI of a record of decision on July 17, 2015 justifying the agency action extending the life of the plant and the adjacent mine.

On April 20, 2016, several environmental groups filed a lawsuit against OSM and other federal agencies in the District of Arizona in connection with their issuance of the approvals that extended the life of Four Corners and the adjacent mine. The lawsuit alleges that these federal agencies violated both the Endangered Species Act ("ESA") and the National Environmental Policy Act ("NEPA") in providing the

On September 15, 2016, NTEC, the company that owns the adjacent mine, filed a motion to intervene for the purpose of dismissing the lawsuit based on NTEC's tribal sovereign immunity. ~~Because~~On September 11, 2017, the ~~court has placed a stay on all litigation deadlines pending its decision regarding~~Arizona District Court issued an order granting NTEC's motion, ~~to dismiss,~~dismissing the ~~schedule~~litigation with prejudice, and terminating the proceedings. On November 9, 2017, the environmental group plaintiffs appealed the district court order dismissing their lawsuit. Oral argument for ~~briefing and the anticipated timeline~~this appeal has been scheduled for ~~completion of this litigation will likely be extended.~~March 2019. We cannot predict whether this appeal will be successful and, if it is successful, the outcome of ~~this matter or its potential effect on Four Corners.~~further district court proceedings.

Cholla — Cholla was originally a 4-unit coal-fired power plant, which is located in northeastern Arizona. APS operates the plant and owns 100% of Cholla Units 1, 2 and 3. PacifiCorp owns Cholla Unit 4,

APS purchases all of Cholla’s coal requirements from a coal supplier ~~an affiliate of Peabody Energy Corporation,~~ that mines all of the coal under long-term leases of coal reserves with the federal and state governments and private landholders. On April 13, 2016, Peabody Energy Corporation and certain affiliated entities filed a petition for relief under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Missouri. Under the Coal Supply Agreement, dated December 21, 2005, Peabody suppliedThe Cholla coal to APS and PacifiCorp (collectively, the “Buyers”) for use at Cholla. APS believes that the Coal Supply Agreement terminated automatically on April 13, 2016 as a result of Peabody's bankruptcy filing. The Buyers filed a motion requesting that the Bankruptcy Court enter an order determining that the Buyers are authorized to enforce the termination provisions in the Coal Supply Agreement.

Navajo ~~Generating Station~~Plant — The Navajo Plant is a 3-unit coal-fired power plant located in northern Arizona. Salt River Project operates the plant and APS owns a 14% interest in ~~Navajo~~ Units 1, 2 and 3. APS has a total entitlement from the Navajo Plant of 315 MW. The Navajo Plant’s coal requirements are purchased from a supplier with long-term leases from the Navajo Nation and the Hopi Tribe. The Navajo Plant is under contract with its coal supplier through 2019, with extension rights through 2026. The Navajo Plant site is leased from the Navajo Nation and is also subject to an easement from the federal government. ~~The current lease expires in 2019.~~

~~On February 13, 2017, the~~The co-owners of the Navajo Plant ~~voted not to pursue continued operation of the plant beyond December 2019, the expiration of the current lease term,~~ and ~~to pursue a new lease or lease extension with~~ the Navajo Nation agreed that ~~would~~the Navajo Plant will remain in operation until December 2019 under the existing plant lease. The co-owners and the Navajo Nation executed a lease extension on November 29, 2017 that will allow for decommissioning activities to begin after the plant ceases operations in December ~~2019 instead of later this year.~~2019. Various stakeholders, including regulators, tribal representatives, the plant's coal supplier and ~~others interested in the continued operation of the plant intend to meet~~DOI have been meeting to determine if an alternate solution can be reached that would permit continued operation of the plant beyond 2019. WeAlthough we cannot predict whether any alternate ~~solutions~~plans will be found that would be acceptable to all of the stakeholders and feasible to ~~implement.~~ implement, we believe it is probable that the current owners of the Navajo Plant will cease plant operations in 2019.

APS is currently

On February 14, 2017, the ACC opened a docket titled "ACC Investigation Concerning the Future of the Navajo Generating Station" with the stated goal of engaging stakeholders and negotiating a sustainable pathway for the Navajo Plant to continue operating in some form after December 2019. APS cannot predict the outcome of this proceeding.

Palo Verde ~~Nuclear~~ Generating Station — Palo Verde is a 3-unit nuclear power plant located approximately 50 miles west of Phoenix, Arizona. APS operates the plant and owns 29.1% of Palo Verde Units 1 and 3 and approximately 17% of Unit 2. In addition, APS leases approximately 12.1% of Unit 2, resulting in a 29.1% combined ownership and leasehold interest in that unit. APS has a total entitlement from Palo Verde of 1,146 MW.

Palo Verde Leases — In 1986, APS entered into agreements with three separate lessor trust entities in order to sell and lease back approximately 42% of its share of Palo Verde Unit 2 and certain common facilities. The leaseback was originally scheduled to expire at the end of 2015 and contained options to renew the leases or to purchase the leased property for fair market value at the end of the lease terms. On July 7, 2014, APS exercised the fixed rate lease renewal options. The exercise of the renewal options resulted in APS retaining the assets through 2023 under one lease and 2033 under the other two leases. At the end of the lease renewal periods, 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. See Note 18 for additional information regarding the Palo Verde Unit 2 sale leaseback transactions.

Palo Verde Operating Licenses — Operation of each of the three Palo Verde Units requires an operating license from the NRC. The NRC issued full power operating licenses for Unit 1 in June 1985, Unit 2 in April 1986 and Unit 3 in November 1987, and issued renewed operating licenses for each of the three units in April 2011, which extended the licenses for Units 1, 2 and 3 to June 2045, April 2046 and November 2047, respectively.

Palo Verde Fuel Cycle — The participant owners of Palo Verde ~~participants~~ are continually identifying their future nuclear fuel resource needs and negotiating arrangements to fill those needs. The fuel cycle for Palo Verde is comprised of the following stages:

The participants have contracted for 100% of Palo Verde’s requirements for fuel ~~assembly~~ fabrication ~~services~~ through ~~2024.~~2027. In 2018, a fabrication contract was executed with a new fabrication supplier for Unit 2, and the existing fabrication contract was renegotiated for Units 1 and 3.

Spent Nuclear Fuel and Waste Disposal — The Nuclear Waste Policy Act of 1982 (“NWPA”) required the DOE to accept, transport, and dispose of spent nuclear fuel and high level waste generated by the nation’s nuclear power plants by 1998. The DOE’s obligations are reflected in a contract for Disposal of Spent Nuclear Fuel and/or High-Level Radioactive Waste (the “Standard Contract”) with each nuclear power plant. The DOE failed to begin accepting spent nuclear fuel by 1998. APS is directly and indirectly involved in several legal proceedings related to the DOE’s failure to meet its statutory and contractual obligations regarding acceptance of spent nuclear fuel and high level waste.

APS Lawsuit for Breach of Standard Contract — In December 2003, APS, acting on behalf of itself and the ~~participant owners of~~ Palo Verde participants, filed a lawsuit against the DOE in the United States Court of Federal Claims ("Court of Federal Claims") for damages incurred due to the DOE’s breach of the Standard Contract. The Court of Federal Claims ruled in favor of APS and the Palo Verde participants in October 2010 and awarded $30.2 million in damages to APS and the Palo Verde participants for costs incurred through December 2006.

The One-Mill Fee — In 2011, the National Association of Regulatory Utility Commissioners and the Nuclear Energy Institute challenged the DOE’s 2010 determination of the adequacy of the one tenth of a cent

DOE’s Construction Authorization Application for Yucca Mountain — The DOE had planned to meet its NWPA and Standard Contract disposal obligations by designing, licensing, constructing, and operating a permanent geologic repository at Yucca Mountain, Nevada. In June 2008, the DOE submitted its Yucca Mountain construction authorization application to the NRC, but in March 2010, the DOE filed a motion to dismiss with prejudice the Yucca Mountain construction authorization application. Several interested parties have also intervened in the NRC proceeding. Additionally, a number of interested parties filed a variety of lawsuits in different jurisdictions around the country challenging the DOE’s authority to withdraw the Yucca Mountain construction authorization application and the NRC’s cessation of its review of the Yucca Mountain construction authorization application. The cases have been consolidated into one matter at the D.C. Circuit. In August 2013, the D.C. Circuit ordered the NRC to resume its review of the application with available appropriated funds.

Publication of Volumes 3 and 4 does not signal whether or when the NRC might authorize construction of the repository.

Waste Confidenceand Continued Storage — On June 8, 2012, the D.C. Circuit issued its decision on a challenge by several states and environmental groups of the NRC’s rulemaking regarding temporary storage and permanent disposal of high level nuclear waste and spent nuclear fuel. The petitioners had challenged the NRC’s 2010 update to the agency’s ~~Waste Confidence Decision~~waste confidence decision and temporary storage rule (“Waste Confidence Decision”).

The D.C. Circuit found that the agency’s ~~2010~~ Waste Confidence Decision update constituted a major federal action, which, consistent with NEPA, requires either an environmental impact statement or a finding of no significant impact from the agency’s actions. The D.C. Circuit found that the NRC’s evaluation of the environmental risks from spent nuclear fuel was deficient, and therefore remanded the ~~2010~~ Waste Confidence Decision update for further action consistent with NEPA.

On September 6, 2012, the NRC Commissioners issued a directive to the NRC staff to proceed directly with development of a generic environmental impact statement to support an updated Waste Confidence

In September 2013, the NRC issued its draft Generic Environmental Impact Statement (“GEIS”) to support an updated Waste Confidence Decision. On August 26, 2014, the NRC approved a final rule on the environmental effects of continued storage of spent nuclear fuel. Renamed as the Continued Storage Rule, the NRC’s decision adopted the findings of the GEIS regarding the environmental impacts of storing spent fuel at any reactor site after the reactor’s licensed period of operations. As a result, those generic impacts do not need to be re-analyzed in the environmental reviews for individual licenses. Although Palo Verde had not been involved in any licensing actions affected by the D.C. Circuit’s June 8, 2012, decision, the NRC lifted its suspension on final licensing actions on all nuclear power plant licenses and renewals that went into effect when the D.C. Circuit issued its June 2012 decision. The final Continued Storage Rule was subject to continuing legal challenges before the NRC and the Court of Appeals. In June 2016, the D.C. Circuit issued its final decision, rejecting all remaining legal challenges to the Continued Storage Rule. On August 8, 2016, the D.C. Circuit denied a petition for rehearing.

Palo Verde has sufficient capacity at its on-site independent spent fuel storage installation (“ISFSI”) to store all of the nuclear fuel that will be irradiated during the initial operating license period, which ends in December 2027. Additionally, Palo Verde has sufficient capacity at its on-site ISFSI to store a portion of the fuel that will be irradiated during the period of extended operation, which ends in November 2047. If uncertainties regarding the United States government’s obligation to accept and store spent fuel are not favorably resolved, APS will evaluate alternative storage solutions that may obviate the need to expand the ISFSI to accommodate all of the fuel that will be irradiated during the period of extended operation.

Nuclear Decommissioning Costs — APS currently relies on an external sinking fund mechanism to meet the NRC financial assurance requirements for decommissioning its interests in Palo Verde Units 1, 2 and 3. The decommissioning costs of Palo Verde Units 1, 2 and 3 are currently included in APS’s ACC jurisdictional rates. Decommissioning costs are recoverable through a non-bypassable system benefits charge (paid by all retail customers taking service from the APS system). Based on current nuclear decommissioning trust asset balances, site specific decommissioning cost studies, anticipated future contributions to the decommissioning trusts, and return projections on the asset portfolios over the expected remaining operating life of the facility, we are on track to meet the current site specific decommissioning costs for Palo Verde at the time the units are expected to be decommissioned. See Note 19 for additional information about APS’s nuclear decommissioning trusts.

Palo Verde Liability and Insurance Matters — See “Palo Verde ~~Nuclear~~ Generating Station — Nuclear Insurance” in Note 10 for a discussion of the insurance maintained by the Palo Verde participants, including APS, for Palo Verde.

~~Additionally,~~ APS owns and operates more than forty small solar systems around the state. Together they have the capacity to produce approximately 4 MW of renewable energy. This fleet of solar systems includes a 3 MW facility located at the Prescott Airport and 1 MW of small solar systems in various locations across Arizona. APS has also developed solar photovoltaic distributed energy systems installed as part of the Community Power Project in Flagstaff, Arizona. The Community Power Project, approved by the ACC on April 1, 2010, iswas a pilot program through which APS owns, operates and receives energy from approximately 1 MW of solar photovoltaic distributed energy systems located within a certain test area in Flagstaff, Arizona. The pilot program is now complete, and as part of the 2017 Rate Case Decision, the participants have been transferred to the Solar Partner Program described below. Additionally, APS owns 12 MW of solar photovoltaic systems installed across Arizona through the ACC-approved Schools and Government Program.

Purchased Power Contracts

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See "Business of Arizona Public Service Company - Energy Sources and Resource Planning - Generation Facilities - Coal-Fueled Generating ~~Facilities - Navajo Generating Station"~~Facilities" above for information regarding future plans for the Cholla Plant, Four Corners Plant, Navajo Plant and Ocotillo Plant. See "Business of Arizona Public Service Company - Energy Sources and Resource Planning - Purchased Power Contracts" above for information regarding future plans for purchased power contracts.

In 2015, APS and the CAISO, the operator for the majority of California's transmission grid, signed an agreement for APS to begin participation in the Energy Imbalance Market (“EIM”). APS's participation in the EIM began on October 1, 2016. The EIM allows for rebalancing supply and demand in 15-minute blocks, with dispatching every five minutes before the energy is needed, instead of the traditional one hour blocks. APS ~~expects~~continues to expect that its participation in EIM will lower its fuel costs, improve visibility and situational awareness for system operations in the Western Interconnection power grid, and improve integration of APS’s renewable resources.

On April 21, 2015, the RES rules were amended to require utilities to report on all eligible renewable resources in their service territory, irrespective of whether the utility owns renewable energy credits associated with such renewable energy. The rules allow the ACC to consider such information in determining whether APS has satisfied the requirements of the RES. See "Clean Resource Energy Standard and Tariff" in Note 3 for information regarding an additional renewable energy standards proposal.

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APS’s strategy to achieve its RES requirements includes executing purchased power contracts for new facilities, ongoing development of distributed energy resources and procurement of new facilities to be owned by APS. See "Energy Sources and Resource Planning - Generation Facilities - Solar Facilities" above for information regarding APS-owned solar facilities.

The following table summarizes APS’s renewable energy sources currently in operation and under ~~development.~~development as of December 31, 2018. 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.

Competitive Environment and Regulatory Oversight

The ACC regulates APS’s retail electric rates and its issuance of securities. The ACC must also approve any significant transfer or encumbrance of APS’s property used to provide retail electric service and approve or receive prior notification of certain transactions between Pinnacle West, APS and their respective affiliates. (See Note 3 for information regarding ACC's regulation of APS's retail electric rates.)

APS is subject to varying degrees of competition from other investor-owned electric and gas utilities in Arizona (such as Southwest Gas Corporation), as well as cooperatives, municipalities, electrical districts and similar types of governmental or non-profit organizations. In addition, some customers, particularly industrial and large commercial customers, may own and operate generation facilities to meet some or all of their own energy requirements. This practice is becoming more popular with customers installing or having installed products such as rooftop solar panels to meet or supplement their energy needs.

On May 9, 2013, the ACC voted to re-examine the facilitation of a deregulated retail electric market in Arizona. The ACC subsequently opened a docket for this matter and received comments from a number of interested parties on the considerations involved in establishing retail electric deregulation in the state. One of these considerations was whether various aspects of a deregulated market, including setting utility rates on a “market” basis, would be consistent with the requirements of the Arizona Constitution. On September 11, 2013, after receiving legal advice from the ACC staff, the ACC voted 4-1 to close the current docket and await full Arizona Constitutional authority before any further examination of this matter. The motion approved by the ACC also included opening one or more new dockets in the future to explore options to offer more rate choices to customers and innovative changes within the existing cost-of-service regulatory model that could include elements of competition. The ACC opened a docket on November 4, 2013 to explore technological advances and innovative changes within the electric utility industry. A series of workshops in this docket were held in 2014 and another in February of 2015.

On November 17, 2018, the ACC voted 5-0 to again re-examine retail competition. A Special Open Meeting Workshop was held on December 3, 2018. No ~~further workshops~~substantive action was taken, but interested parties were asked to submit written comments and respond to a list of questions from ACC Staff. Those comments and responses are ~~scheduled and no actions were taken as a~~still being submitted. The ACC is planning at least one more workshop on the issue in 2019. APS cannot predict whether these efforts will result ~~of these workshops.~~in any changes.

FERC regulates rates for wholesale power sales and transmission services. (See Note 3 for information regarding APS’s transmission rates.) During ~~2016,~~2018, approximately ~~3.5%~~4.7% of APS’s electric operating revenues resulted from such sales and services. APS’s wholesale activity primarily consists of managing fuel and purchased power supplies to serve retail customer energy requirements. APS also sells, in the wholesale market, its generation output that is not needed for APS’s Native Load and, in doing so, competes with other utilities, power marketers and independent power producers. Additionally, subject to specified parameters, APS hedges both electricity and fuels. The majority of these activities are undertaken to mitigate risk in APS’s portfolio.

On August 25, 2016, Commissioner Burns, individually and not by action of the ACC as a whole, ~~filed~~served subpoenas in APS’s then current retail rate proceeding toon 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.

Legislative Initiatives. There have been no recent successful attempts by Congress to pass legislation that would regulate greenhouse gas ("GHG") emissions, and it is ~~doubtful~~unclear at this time whether the ~~115~~116^th Congress will consider a climate change bill. In the event climate change legislation ultimately passes, the actual economic and operational impact of such legislation on APS depends on a variety of factors, none of which can be fully known until a law is written and enacted and the specifics of the resulting program are established. These factors include the terms of the legislation with regard to allowed GHG emissions; the cost to reduce emissions; in the event a cap-and-trade program is established, whether any permitted emissions allowances will be allocated to source operators free of cost or auctioned (and, if so, the cost of those allowances in the marketplace) and

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We cannot predict the outcome of EPA's regulatory actions related to the ~~Company. On the other hand, if ADEQ selects a mass-based approach~~August 2015 carbon pollution standards for EGU's, including any actions related to ~~compliance with~~EPA's repeal proposal for the Clean Power Plan ~~our annual cost of compliance could be material. These costs could include costs~~or additional rulemaking actions to ~~acquire mass-based compliance allowances.~~

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, 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, two RID environmental and engineering contractors filed an ancillary ~~lawsuits~~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 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 two 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. In addition, APS and certain other parties not named in the remaining RID service provider lawsuit may be brought into the litigation via third-party complaints filed by the current direct 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.

At this time, the lower court proceedings in the Gila River adjudication are in the process of determining the specific hydro-geologic testing protocols for determining which groundwater wells located outside of the subflow zone of the Gila River should be subject to the adjudication court’s jurisdiction. A hearing to determine this jurisdictional test question was held in March of 2018 in front of a special master, and a draft decision based on the evidence heard during that hearing was issued on May 17, 2018. The decision of the special master, which was finalized on November 14, 2018, but which is subject to further review by the trial court judge, accepts the proposed hydro-geologic testing protocols supported by APS and other industrial users of groundwater. Upon a final decision by the trial court judge in this matter, further proceedings thereafter will be dedicated to determining the specific hydro-geologic testing protocols for subflow depletion determinations. The determinations made in this final stage of the proceedings will ultimately govern the adjudication of rights for parties, such as APS, that rely on groundwater extraction to support their industrial operations. At this time, APS cannot predict the outcome of these proceedings.

On July 31, 2014, Pinnacle West announced its creation of a wholly-owned subsidiary, BCE. ~~BCE will~~BCE's focus is on new growth opportunities that leverage the Company’s core expertise in the electric energy industry. BCE’s first initiative is 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 transmission opportunities within the eleven 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. TransCanyon continues to pursue transmission development opportunities in the western United States consistent with its strategy.

On March 29, 2016, TransCanyon entered into a strategic alliance agreement with Pacific Gas and Electric Company ("PG&E") to jointly pursue competitive transmission opportunities solicited by the CAISO,

El Dorado owns minority interests in several energy-related investments and Arizona community-based ventures. El Dorado’s short-term goal is to prudently realize the value of its existing investments. As of December 31, ~~2016,~~2018, El Dorado had total assets of approximately ~~$11~~$8 million. El Dorado is not expected to contribute in any material way to our future financial performance, nor will it require any material amounts of capital over the next three years.

As of December 31, 2018, 4CA had total assets of approximately $72 million, primarily consisting of a note receivable from NTEC. See "Business of Arizona Public Service Company - Energy Sources and Resource Planning - Generating Facilities - Coal-Fueled Generating Facilities - Four Corners" above for information regarding ~~4CA. As of December 31, 2016,~~ 4CA ~~had total assets of approximately $69 million.~~ and the note receivable from NTEC.

Pinnacle West has received grand jury subpoenas issued in connection with an investigation by the office of the United States Attorney for the District of Arizona. The subpoenas seek information principally pertaining to the 2014 statewide election races in Arizona for Secretary of State and for positions on the ACC. The subpoenas request records involving certain Pinnacle West officers and employees, including the Company’s Chief Executive Officer, as well as communications between Pinnacle West personnel and a former ACC Commissioner. Pinnacle West is cooperating fully with the United States Attorney’s office in this matter.

Pinnacle West, APS and El Dorado are all incorporated in the State of Arizona. BCE and 4CA are incorporated in Delaware. Additional information for each of these companies is provided below:

The APS number includes employees at jointly-owned generating facilities (approximately ~~2,628~~2,526 employees) for which APS serves as the generating facility manager. Approximately ~~1,613~~1,330 APS employees are union employees, represented by the International Brotherhood of Electrical Workers ("IBEW") or. In January 2018, the United Security Professionals of America ("USPA"). APS concluded negotiations with IBEW representatives over the new collective bargaining agreement in April 2015, and the new agreement is in place until March 31, 2018. The contract provides an average wage increase of 2.0% for the first year, 2.25% for the second year and 3.0% for the third year. The Company concluded negotiations with the ~~USPA over~~IBEW and approved a two-year extension of the ~~terms of a new collective bargaining agreement in May of 2014,~~contract set to expire on April 1, 2018. Under the extension, union members received wage increases for 2018 and ~~the new agreement is in place until May 31, 2017.~~2019; there were no other changes. The current contract expires on April 1, 2020.

You can request a copy of these documents, excluding exhibits, by contacting Pinnacle West at the following address: Pinnacle West Capital Corporation, Office of the Corporate Secretary, Mail Station 8602, P.O. Box 53999, Phoenix, Arizona 85072-3999 (telephone 602-250-4400).

In addition to the factors affecting specific business operations identified in the description of these operations contained elsewhere in this report, set forth below are risks and uncertainties that could affect our financial results. Unless otherwise indicated or the context otherwise requires, the following risks and uncertainties apply to Pinnacle West and its subsidiaries, including APS.

APS must comply in good faith with all applicable statutes, regulations, rules, tariffs, and orders of agencies that regulate APS’s business, including FERC, NRC, EPA, the ACC, and state and local governmental agencies. These agencies regulate many aspects of APS’s utility operations, including safety and performance, emissions, siting and construction of facilities, customer service and the rates that APS can charge retail and wholesale customers. Failure to comply can subject APS to, among other things, fines and penalties. For example, under the Energy Policy Act of 2005, FERC can impose penalties ~~(up to one~~(approximately $1.2 million dollars per day per violation) for failure to comply with mandatory electric reliability standards. APS is also required to have numerous permits, approvals and certificates from these agencies. APS believes the necessary permits, approvals and certificates have been obtained for its existing operations and that APS’s business is conducted in accordance with applicable laws in all material respects. However, changes in regulations or the imposition of new or revised laws or regulations could have an adverse impact on our results of operations. We are also unable to predict the impact on our business and operating results from pending or future regulatory activities of any of these agencies.

The NRC has broad authority under federal law to impose safety-related, security-related and other licensing requirements for the operation of nuclear ~~generation~~generating facilities. Events at nuclear facilities of other operators or impacting the industry generally may lead the NRC to impose additional requirements and regulations on all nuclear ~~generation~~generating facilities, including Palo Verde. In the event of noncompliance with its requirements, the NRC has the authority to impose a progressively increased inspection regime that could ultimately result in the shut-down of a unit or civil penalties, or both, depending upon the NRC’s assessment of the severity of the situation, until compliance is achieved. The increased costs resulting from penalties, a heightened level of scrutiny and implementation of plans to achieve compliance with NRC requirements may adversely affect APS’s financial condition, results of operations and cash flows.

APS is, or may become, subject to numerous environmental laws and regulations affecting many aspects of its present and future operations, including air emissions of conventional pollutants and greenhouse gases, water quality, discharges of wastewater and waste streams originating from fly ash and bottom ash handling facilities, solid waste, hazardous waste, and coal combustion products, which consist of bottom ash, fly ash, and air pollution control wastes. These laws and regulations can result in increased capital, operating, and other costs, particularly with regard to enforcement efforts focused on power plant emissions obligations. These laws and regulations generally require APS to obtain and comply with a wide variety of environmental licenses, permits, and other approvals. If there is a delay or failure to obtain any required environmental regulatory approval, or if APS fails to obtain, maintain, or comply with any such approval, operations at affected facilities could be suspended or subject to additional expenses. In addition, failure to comply with applicable environmental laws and regulations could result in civil liability as a result of government

Environmental Clean Up. APS has been named as a PRP for a Superfund site in Phoenix, Arizona, and it could be named a PRP in the future for other environmental clean-up at sites identified by a regulatory body. APS cannot predict with certainty the amount and timing of all future expenditures related to environmental matters because of the difficulty of estimating clean-up costs. There is also uncertainty in quantifying liabilities under environmental laws that impose joint and several liability on all PRPs.

APS cannot assure that existing environmental regulations will not be revised or that new regulations seeking to protect the environment will not be adopted or become applicable to it. Revised or additional regulations that result in increased compliance costs or additional operating restrictions, particularly if those costs incurred by APS are not fully recoverable from APS’s customers, could have a material adverse effect on its financial condition, results of operations or cash flows. Due to current or potential future regulations or legislation coupled with trends in natural gas and coal prices, the economics of continuing to own certain resources, particularly coal facilities, 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.

In 1999, the ACC approved rules for the introduction of retail electric competition in Arizona. Retail competition could have a significant adverse financial impact on APS due to an impairment of assets, a loss of retail customers, lower profit margins or increased costs of capital. Although some very limited retail competition existed in APS’s service area in 1999 and 2000, there are currently no active retail competitors offering unbundled energy or other utility services to APS’s customers. This is in large part due to a 2004 Arizona Court of Appeals decision that found critical components of the ACC's rules to be violative of the Arizona Constitution. The ruling also voided the operating authority of all the competitive providers previously authorized by the ACC. On May 9, 2013, the ACC voted to re-examine the facilitation of a deregulated retail electric market in Arizona. The ACC subsequently opened a docket for this matter and received comments from a number of interested parties on the considerations involved in establishing retail electric deregulation in the state. One of these considerations is whether various aspects of a deregulated market, including setting utility rates on a “market” basis, would be consistent with the requirements of the Arizona Constitution. On September 11, 2013, after receiving legal advice from the ACC staff, the ACC voted 4-1 to close the current docket and await full Arizona Constitutional authority before any further examination of this matter. The motion approved by the ACC also included opening one or more new dockets in the future to explore options to offer more rate choices to customers and innovative changes within the existing cost-of-service regulatory model that could include elements of competition.

One of these options would be a continuation or expansion of APS’s existing AG (Alternative Generation) ~~- 1 pilot~~-X program, which essentially allows up to 200 MW of cumulative load to be served via a ~~buy-through~~buy-

~~Proposals~~In November 2018, the ACC voted to again re-examine retail competition. Interested parties were asked to submit written comments, which are still being submitted. In addition, proposals to enable or support retail electric competition may be made from time to time through ballot initiatives, legislative action or other forums in Arizona. The ACC held one workshop on retail competition in December 2018 and is planning at least one more workshop on the issue in 2019. We cannot predict future regulatory or legislative action that might result in increased competition.

Weather Conditions. Weather conditions directly influence the demand for electricity and affect the price of energy commodities. Electric power demand is generally a seasonal business. In Arizona, demand for power peaks during the hot summer months, with market prices also peaking at that time. As a result, APS’s overall operating results fluctuate substantially on a seasonal basis. In addition, APS has historically sold less power, and consequently earned less income, when weather conditions are milder. As a result, unusually mild weather could diminish APS’s financial condition, results of operations ~~and~~or cash flows.

Higher temperatures may decrease the snowpack, which might result in lowered soil moisture and an increased threat of forest fires. Forest fires could threaten APS’s communities and electric transmission lines and facilities. Any damage caused as a result of forest fires could negatively impact APS’s financial condition, results of operations or cash flows.

Effects of Energy Conservation Measures and Distributed Energy Resources. The ACC has enacted rules regarding energy efficiency that mandate a 22% cumulative annual energy savings requirement by 2020. This will likely increase participation by APS customers in energy efficiency and conservation programs and other demand-side management efforts, which in turn will impact the demand for electricity. The rules also include a requirement for the ACC to review and address financial disincentives, recovery of fixed costs and the recovery of net lost income/revenue that would result from lower sales due to increased energy efficiency requirements. To that end, the ~~settlement agreement in APS’s most recent retail rate case (the “2012 Settlement Agreement”) includes a mechanism, the~~ LFCR is designed to address these matters.

APS must also meet certain distributed energy requirements. A portion of APS’s total renewable energy requirement must be met with an increasing percentage of distributed energy resources (generally, small scale renewable technologies located on customers’ properties). The distributed energy requirement was 25% of the overall RES requirement of 3% in 2011 and increased to 30% of the applicable RES requirement for 2012 and subsequent years. Customer participation in distributed energy programs would result in lower demand, since customers would be meeting some of their own energy needs.

In addition to these rules and requirements, energy efficiency technologies and distributed energy resources continue to evolve, which may have similar impacts on demand for electricity. Reduced demand due to these energy efficiency requirements, distributed energy requirements and other emerging technologies, unless substantially offset through ratemaking mechanisms, could have a material adverse impact on APS’s financial condition, results of operations and cash flows.

Actual and Projected Customer and Sales Growth. Retail customers in APS's service territory increased ~~1.4%~~1.7% for the year ended December 31, ~~2016~~2018 compared with the prior year. For the three years ~~2014~~2016 through ~~2016,~~2018, APS’s retail customer growth averaged ~~1.3%~~1.6% per year. We currently project annual customer growth to be ~~1.5-2.5%~~1.5 - 2.5% for ~~2017~~2019 and to average in the range of ~~2.0-3.0%~~1.5 - 2.5% for ~~2017~~2019 through ~~2019~~2021 based on our assessment of ~~modestly~~ improving economic conditions in Arizona.

Retail electricity sales in kWh, adjusted to exclude the effects of weather variations, ~~were flat~~increased 0.1% for the year ended December 31, ~~2016~~2018 compared with the prior year. Improving economic conditions and customer growth ~~and an additional day of sales due to leap year~~ were ~~equally~~ offset by energy savings driven by

Actual customer and sales growth may differ from our projections as a result of numerous factors, such as economic conditions, customer growth, usage patterns and energy conservation, impacts of energy efficiency programs and growth in distributed renewable generation, and responses to retail price changes. Additionally, recovery of a substantial portion of our fixed costs of providing service is based upon the volumetric amount of our sales. If our customer growth rate does not continue to improve as projected, or if we experience acceleration of expected effects of customer conservation, energy efficiency or distributed renewable generation initiatives, we may be unable to reach our estimated sales projections, which could have a negative impact on our financial condition, results of operations and cash flows.

The operation of power generation, transmission and distribution facilities involves certain risks, including the risk of breakdown or failure of equipment, fuel interruption, and performance below expected levels of output or efficiency. Unscheduled outages, including extensions of scheduled outages due to mechanical failures or other complications, occur from time to time and are an inherent risk of APS’s business. Because our transmission facilities are interconnected with those of third parties, the operation of our facilities could be adversely affected by unexpected or uncontrollable events occurring on the larger transmission power grid, and the operation or failure of our facilities could adversely affect the operations of others. Concerns over physical security of these assets could include damage to certain of our facilities due to vandalism or other

Wildfires have the potential to affect the communities that APS serves and APS's vast network of electric transmission lines and facilities. The potential likelihood of wildfires has increased due to many of the same weather impacts existing in Arizona as those that led to the recent wildfires in Northern California. While we proactively take steps to mitigate wildfire risk in the areas of our electrical assets, given APS's expansive service territory, wildfire risk is always present. APS could be held liable for damages incurred as a result of wildfires that were caused by or enhanced due to APS's negligence. The Arizona liability standard is different from that of California, which generally imposes liability for resulting damages without regard to fault. Any damage caused to our assets, loss of service to our customers or liability imposed as a result of wildfires could negatively impact APS's financial condition, results of operations or cash flows.

Potential changes in regulatory standards, impacts of new and existing laws and regulations, including environmental laws and regulations, and the need to obtain various regulatory approvals create uncertainty surrounding our generation portfolio. The current abundance of low, stably priced natural gas, together with environmental and other concerns surrounding coal-fired generation resources, create strategic challenges as to the appropriate generation portfolio and fuel diversification mix. In addition, APS is required by the ACC to meet certain energy resource portfolio requirements, including those related to renewables development and energy efficiency measures. The development of any generation facility is subject to many risks, including those related to financing, siting, permitting, new and evolving technology, and the construction of sufficient transmission capacity to support these ~~facilities and stresses to generation and transmission resources from the intermittent generation characteristics of renewable resources.~~facilities. APS’s inability to adequately develop or acquire the necessary generation resources could have a material adverse impact on our business and results of operations.

In expressing concerns about the environmental and climate-related impacts from continued extraction, transportation, delivery and combustion of fossil fuels, environmental advocacy groups and other third parties have in recent years undertaken greater efforts to oppose the permitting and construction of fossil fuel

Assured supplies of water are important for APS’s generating plants. Water in the southwestern United States is limited, and various parties have made conflicting claims regarding the right to access and use such limited supply of water. Both groundwater and surface water in areas important to APS’s generating plants have been and are the subject of inquiries, claims and legal proceedings. In addition, the region in which APS’s power plants are located is prone to drought conditions, which could potentially affect the plants’ water supplies. APS’s inability to access sufficient supplies of water could have a material adverse impact on our business and results of operations.

Certain APS power plants and portions of certain APS transmission lines are located on Indian lands pursuant to leases, easements or other rights-of-way that are effective for specified periods. APS is unable to predict the final outcomes of pending and future approvals by the applicable sovereign governing bodies with respect to renewals of these leases, easements and rights-of-way.

APS has an ownership interest in and operates, on behalf of a group of participants, Palo Verde, which is the largest nuclear electric generating facility in the United States. Palo Verde constitutes approximately 18% of our owned and leased generation capacity. Palo Verde is subject to environmental, health and financial risks, such as the ability to obtain adequate supplies of nuclear fuel; the ability to dispose of spent nuclear fuel; the ability to maintain adequate reserves for decommissioning; potential liabilities arising out of the operation of these facilities; the costs of securing the facilities against possible terrorist attacks; and unscheduled outages due to equipment and other problems. APS maintains nuclear decommissioning trust funds and external insurance coverage to minimize its financial exposure to some of these risks; however, it is possible that damages could exceed the amount of insurance coverage. In addition, APS may be required under federal law to pay up to ~~$111~~$120.1 million (but not more than ~~$16.6~~$17.9 million per year) of liabilities arising out of a nuclear incident occurring not only at Palo Verde, but at any other nuclear power ~~plant~~reactor in the United States. Although we have no reason to anticipate a serious nuclear incident at Palo Verde, if an incident did occur, it could materially and adversely affect our results of operations and financial condition. A major incident at a nuclear facility anywhere in the world could cause the NRC to limit or prohibit the operation or licensing of any domestic nuclear unit and to promulgate new regulations that could require significant capital expenditures and/or increase operating costs.

APS’s operations include managing market risks related to commodity prices. APS is exposed to the impact of market fluctuations in the price and transportation costs of electricity, natural gas and coal to the extent that unhedged positions exist. We have established procedures to manage risks associated with these market fluctuations by utilizing various commodity derivatives, including exchange traded futures ~~and options~~ and over-the-counter forwards, options, and swaps. As part of our overall risk management program, we enter into derivative transactions to hedge purchases and sales of electricity and fuels. The changes in market value of such contracts have a high correlation to price changes in the hedged commodity. To the extent that commodity markets are illiquid, we may not be able to execute our risk management strategies, which could result in greater unhedged positions than we would prefer at a given time and financial losses that negatively impact our results of operations.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) contains measures aimed at increasing the transparency and stability of the over-the counter, or OTC, derivative markets and preventing excessive speculation. The Dodd-Frank Act could restrict, among other things, trading positions in the energy futures markets, require different collateral or settlement positions, or increase regulatory reporting over derivative positions. Based on the provisions included in the Dodd-Frank Act and the implementation of regulations, these changes could, among other things, impact our ability to hedge commodity price and interest rate risk or increase the costs associated with our hedging programs.

We are exposed to losses in the event of nonperformance or nonpayment by counterparties. We use a risk management process to assess and monitor the financial exposure of all counterparties. Despite the fact that the majority of APS’s trading counterparties are rated as investment grade by the rating agencies, there is still a possibility that one or more of these companies could default, which could result in a material adverse impact on our earnings for a given period.

Alternative energy technologies that produce power or reduce power consumption or emissions are being developed and commercialized, including renewable technologies such as photovoltaic (solar) cells, customer-sited generation, energy storage (batteries), and efficiency technologies. Advances in technology and equipment/appliance efficiency could reduce the demand for supply from conventional generation and increase the complexity of managing APS's information technology and power system operations, which could adversely affect APS’s business.

APS continues to pursue and implement advanced grid technologies, including transmission and distribution system technologies and digital meters enabling two-way communications between the utility and its customers. Many of the products and processes resulting from these and other alternative technologies have not yet been widely used or tested on a long-term basis, and their use on large-scale systems is not as established or mature as APS’s existing technologies and equipment. The implementation of new and additional technologies adds complexity to ~~the~~our information technology and operational technology systems, which could require additional infrastructure and resources. Widespread installation and acceptance of new technologies could also enable the entry of new market participants, such as technology companies, into the interface between APS and its customers and could have other unpredictable effects on APS’s traditional business model.

Deployment of renewable energy technologies is expected to continue across the western states and result in a larger portion of the overall energy production coming from these sources. These trends, which have benefited from historical and continuing government support for certain technologies, have the potential to put downward pressure on wholesale power prices throughout the western states which could make APS's existing generating facilities less economical and impact their operational patterns and long-term viability.

Like ~~most~~many companies in the electric utility industry, our workforce is maturing, with approximately ~~35%~~30% of employees eligible to retire by the end of ~~2019.~~2020. Although we have undertaken efforts to recruit, train and ~~train~~develop new employees, we face increased competition for talent. We are subject to other employee workforce factors, such as the availability and retention of qualified personnel and the need to negotiate collective bargaining agreements with union ~~employees and potential work stoppages.~~employees. These or other employee workforce factors could negatively impact our business, financial condition or results of operations.

~~Financial market disruptions~~APS has ownership interests in or ~~new rules~~leases the coal, nuclear, gas, oil and solar generating facilities described below. For additional information regarding these facilities, see Item 2.

Four Corners — Four Corners is located in the northwestern corner of New Mexico, and was originally a 5-unit coal-fired power plant. APS owns 100% of Units 1, 2 and 3, which were retired as of December 30, 2013. APS operates the plant and owns 63% of Four Corners Units 4 and 5 following the acquisition of SCE’s interest in Units 4 and 5 described below. APS has a total entitlement from Four Corners of 970 MW. Additionally, 4CA, a wholly-owned subsidiary of Pinnacle West, owned 7% of Units 4 and 5 from July 2016 through July 2018 following its acquisition of El Paso's interest in these units described below.

On December 30, 2013, APS purchased SCE’s 48% interest in each of Units 4 and 5 of Four Corners. Concurrently with the closing of the SCE transaction, BHP Billiton, the parent company of BNCC, the coal

NTEC had the option to purchase the 7% interest within a certain timeframe pursuant to an option granted to NTEC. On December 29, 2015, NTEC provided notice of its intent to exercise the option. The purchase did not occur during the originally contemplated timeframe. Concurrent with the settlement of the 2016 Coal Supply Agreement matter described in Note 10, NTEC and 4CA agreed to allow for the purchase by NTEC of the 7% interest, consistent with the option. On June 29, 2018, 4CA and NTEC entered into an asset purchase agreement providing for the sale to NTEC of 4CA's 7% interest in Four Corners. Completion of the sale was subject to the receipt of approval by FERC, which was received on July 2, 2018, and the sale transaction closed on July 3, 2018. NTEC purchased the 7% interest at 4CA’s book value, approximately $70 million, and will pay 4CA the purchase price over a period of four years pursuant to a secured interest-bearing promissory note. 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 ~~or limit our access~~and a specified rate of return, offset by revenue generated by 4CA’s power sales. Such payments are due to ~~various financial markets,~~4CA at the end of each calendar year. A $10 million payment was due to 4CA at December 31, 2017, which NTEC satisfied by directing to 4CA a prepayment from APS of a portion of a future mine reclamation obligation. The balance of the amount under this formula due December 31, 2018 for calendar year 2017 is approximately $20 million, which was paid to 4CA on December 14, 2018. The balance of the amount under this formula at December 31, 2018 for calendar year 2018 (up to the date that NTEC purchased the 7% interest) is approximately $10 million, which is due to 4CA at December 31, 2019.

APS, on behalf of the Four Corners participants, negotiated amendments to an existing facility lease with the Navajo Nation, which extends the Four Corners leasehold interest from 2016 to 2041. The Navajo Nation approved these amendments in March 2011. The effectiveness of the amendments also required the approval of the DOI, as did a related federal rights-of-way grant. A federal environmental review was undertaken as part of the DOI review process, and culminated in the issuance by DOI of a record of decision on July 17, 2015 justifying the agency action extending the life of the plant and the adjacent mine.

On April 20, 2016, several environmental groups filed a lawsuit against OSM and other federal agencies in the District of Arizona in connection with their issuance of the approvals that extended the life of Four Corners and the adjacent mine. The lawsuit alleges that these federal agencies violated both the Endangered Species Act ("ESA") and the National Environmental Policy Act ("NEPA") in providing the

On September 15, 2016, NTEC, the company that owns the adjacent mine, filed a motion to intervene for the purpose of dismissing the lawsuit based on NTEC's tribal sovereign immunity. On September 11, 2017, the Arizona District Court issued an order granting NTEC's motion, dismissing the litigation with prejudice, and terminating the proceedings. On November 9, 2017, the environmental group plaintiffs appealed the district court order dismissing their lawsuit. Oral argument for this appeal has been scheduled for March 2019. We cannot predict whether this appeal will be successful and, if it is successful, the outcome of further district court proceedings.

Cholla — Cholla was originally a 4-unit coal-fired power plant, which is located in northeastern Arizona. APS operates the plant and owns 100% of Cholla Units 1, 2 and 3. PacifiCorp owns Cholla Unit 4, and APS operates that unit for PacifiCorp. On September 11, 2014, APS announced that it would close its 260 MW Unit 2 at Cholla and cease burning coal at Units 1 and 3 by the mid-2020s if EPA approves 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, which was later addressed in the March 27, 2017 settlement agreement regarding APS's general retail case (the "2017 Settlement Agreement"). (See Note 3 for details related to the resulting regulatory asset and allowed recovery set forth in the 2017 Settlement Agreement.) APS believes that the environmental benefits of this proposal are greater in the long-term than the benefits that would have resulted from adding the emissions control equipment. APS closed Unit 2 on October 1, 2015. Following the closure of Unit 2, APS has a total entitlement from Cholla of 387 MW. In early 2017, EPA approved a final rule incorporating APS's compromise proposal, which took effect for Cholla on April 26, 2017.

APS purchases all of Cholla’s coal requirements from a coal supplier that mines all of the coal under long-term leases of coal reserves with the federal and state governments and private landholders. The Cholla coal contract runs through 2024. In addition, APS has a coal transportation contract that runs through 2019, with the ability to extend the contract annually through 2024.

Navajo Plant — The Navajo Plant is a 3-unit coal-fired power plant located in northern Arizona. Salt River Project operates the plant and APS owns a 14% interest in Units 1, 2 and 3. APS has a total entitlement from the Navajo Plant of 315 MW. The Navajo Plant’s coal requirements are purchased from a supplier with long-term leases from the Navajo Nation and the Hopi Tribe. The Navajo Plant is under contract with its coal supplier through 2019, with extension rights through 2026. The Navajo Plant site is leased from the Navajo Nation and is also subject to an easement from the federal government.

The co-owners of the Navajo Plant and the Navajo Nation agreed that the Navajo Plant will remain in operation until December 2019 under the existing plant lease. The co-owners and the Navajo Nation executed a lease extension on November 29, 2017 that will allow for decommissioning activities to begin after the plant ceases operations in December 2019. Various stakeholders, including regulators, tribal representatives, the plant's coal supplier and DOI have been meeting to determine if an alternate solution can be reached that would permit continued operation of the plant beyond 2019. Although we cannot predict whether any alternate plans will be found that would be acceptable to all of the stakeholders and feasible to implement, we believe it is probable that the current owners of the Navajo Plant will cease plant operations in 2019.

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 (see Note 3 for details related to the resulting regulatory asset)

~~Pinnacle West~~On February 14, 2017, the ACC opened a docket titled "ACC Investigation Concerning the Future of the Navajo Generating Station" with the stated goal of engaging stakeholders and negotiating a sustainable pathway for the Navajo Plant to continue operating in some form after December 2019. APS ~~rely on access~~cannot predict the outcome of this proceeding.

These coal-fueled plants face uncertainties, including those related to ~~credit markets as~~existing and potential legislation and regulation, that could significantly impact their economics and operations. See “Environmental Matters” below and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview and Capital Expenditures” in Item 7 for developments impacting these coal-fueled facilities. See Note 10 for information regarding APS’s coal mine reclamation obligations.

Palo Verde Generating Station — Palo Verde is a ~~significant source~~3-unit nuclear power plant located approximately 50 miles west of ~~liquidity~~Phoenix, Arizona. APS operates the plant and owns 29.1% of Palo Verde Units 1 and 3 and approximately 17% of Unit 2. In addition, APS leases approximately 12.1% of Unit 2, resulting in a 29.1% combined ownership and leasehold interest in that unit. APS has a total entitlement from Palo Verde of 1,146 MW.

Palo Verde Leases — In 1986, APS entered into agreements with three separate lessor trust entities in order to sell and lease back approximately 42% of its share of Palo Verde Unit 2 and certain common facilities. The leaseback was originally scheduled to expire at the end of 2015 and contained options to renew the leases or to purchase the leased property for fair market value at the end of the lease terms. On July 7, 2014, APS exercised the fixed rate lease renewal options. The exercise of the renewal options resulted in APS retaining the assets through 2023 under one lease and 2033 under the other two leases. At the end of the lease renewal periods, 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. See Note 18 for additional information regarding the Palo Verde Unit 2 sale leaseback transactions.

Palo Verde Operating Licenses — Operation of each of the three Palo Verde Units requires an operating license from the NRC. The NRC issued full power operating licenses for Unit 1 in June 1985, Unit 2 in April 1986 and Unit 3 in November 1987, and issued renewed operating licenses for each of the three units in April 2011, which extended the licenses for Units 1, 2 and 3 to June 2045, April 2046 and November 2047, respectively.

Palo Verde Fuel Cycle — The participant owners of Palo Verde are continually identifying their future nuclear fuel resource needs and negotiating arrangements to fill those needs. The fuel cycle for Palo Verde is comprised of the following stages:

The participants have contracted for 100% of Palo Verde’s requirements for fuel fabrication through 2027. In 2018, a fabrication contract was executed with a new fabrication supplier for Unit 2, and the ~~capital markets~~existing fabrication contract was renegotiated for ~~capital requirements not satisfied~~Units 1 and 3.

Spent Nuclear Fuel and Waste Disposal — The Nuclear Waste Policy Act of 1982 (“NWPA”) required the DOE to accept, transport, and dispose of spent nuclear fuel and high level waste generated by ~~cash flow from our operations. We believe that we will maintain sufficient access~~the nation’s nuclear power plants by 1998. The DOE’s obligations are reflected in a contract for Disposal of Spent Nuclear Fuel and/or High-Level Radioactive Waste (the “Standard Contract”) with each nuclear power plant. The DOE failed to ~~these financial markets. However, certain market disruptions or rules or regulations may cause our cost~~begin accepting spent nuclear fuel by 1998. APS is directly and indirectly involved in several legal proceedings related to the DOE’s failure to meet its statutory and contractual obligations regarding acceptance of ~~borrowing to increase generally, and/or otherwise adversely affect our ability to access these financial markets.~~spent nuclear fuel and high level waste.

APS Lawsuit for Breach of Standard Contract — In December 2003, APS, acting on behalf of itself and the Palo Verde participants, filed a lawsuit against the DOE in the United States Court of Federal Claims ("Court of Federal Claims") for damages incurred due to the DOE’s breach of the Standard Contract. The Court of Federal Claims ruled in favor of APS and the Palo Verde participants in October 2010 and awarded $30.2 million in damages to APS and the Palo Verde participants for costs incurred through December 2006.

The One-Mill Fee — In 2011, the National Association of Regulatory Utility Commissioners and the Nuclear Energy Institute challenged the DOE’s 2010 determination of the adequacy of the one tenth of a cent

DOE’s Construction Authorization Application for Yucca Mountain — The DOE had planned to meet its NWPA and Standard Contract disposal obligations by designing, licensing, constructing, and operating a permanent geologic repository at Yucca Mountain, Nevada. In June 2008, the DOE submitted its Yucca Mountain construction authorization application to the NRC, but in March 2010, the DOE filed a motion to dismiss with prejudice the Yucca Mountain construction authorization application. Several interested parties have also intervened in the NRC proceeding. Additionally, a number of interested parties filed a variety of ~~reasons, including new rules and regulations, periods of financial distress or liquidity issues affecting our lenders or financial markets, which could materially adversely affect~~lawsuits in different jurisdictions around the ~~adequacy of our liquidity sources~~country challenging the DOE’s authority to withdraw the Yucca Mountain construction authorization application and the ~~cost~~NRC’s cessation of ~~maintaining these sources.~~its review of the Yucca Mountain construction authorization application. The cases have been consolidated into one matter at the D.C. Circuit. In August 2013, the D.C. Circuit ordered the NRC to resume its review of the application with available appropriated funds.

Publication of Volumes 3 and 4 does not signal whether or when the NRC might authorize construction of the repository.

~~Changes in economic conditions, monetary policy, financial regulation~~Waste Confidenceand Continued Storage — On June 8, 2012, the D.C. Circuit issued its decision on a challenge by several states and environmental groups of the NRC’s rulemaking regarding temporary storage and permanent disposal of high level nuclear waste and spent nuclear fuel. The petitioners had challenged the NRC’s 2010 update to the agency’s waste confidence decision and temporary storage rule (“Waste Confidence Decision”).

The D.C. Circuit found that the agency’s Waste Confidence Decision update constituted a major federal action, which, consistent with NEPA, requires either an environmental impact statement or ~~other factors could~~a finding of no significant impact from the agency’s actions. The D.C. Circuit found that the NRC’s evaluation of the environmental risks from spent nuclear fuel was deficient, and therefore remanded the Waste Confidence Decision update for further action consistent with NEPA.

On September 6, 2012, the NRC Commissioners issued a directive to the NRC staff to proceed directly with development of a generic environmental impact statement to support an updated Waste Confidence Decision. The NRC Commissioners also directed the staff to establish a schedule to publish a final rule and environmental impact study within 24 months of September 6, 2012.

In September 2013, the NRC issued its draft Generic Environmental Impact Statement (“GEIS”) to support an updated Waste Confidence Decision. On August 26, 2014, the NRC approved a final rule on the environmental effects of continued storage of spent nuclear fuel. Renamed as the Continued Storage Rule, the NRC’s decision adopted the findings of the GEIS regarding the environmental impacts of storing spent fuel at any reactor site after the reactor’s licensed period of operations. As a result, ~~in higher interest rates, which would increase interest expense on our existing variable rate debt and new debt we expect~~those generic impacts do not need to ~~issue~~be re-analyzed in the ~~future,~~environmental reviews for individual licenses. Although Palo Verde had not been involved in any licensing actions affected by the D.C. Circuit’s June 8, 2012, decision, the NRC lifted its suspension on final licensing actions on all nuclear power plant licenses and ~~thus reduce funds available~~renewals that went into effect when the D.C. Circuit issued its June 2012 decision. The final Continued Storage Rule was subject to uscontinuing legal challenges before the NRC and the Court of Appeals. In June 2016, the D.C. Circuit issued its final decision, rejecting all remaining legal challenges to the Continued Storage Rule. On August 8, 2016, the D.C. Circuit denied a petition for ~~our current plans.~~rehearing.

Palo Verde has sufficient capacity at its on-site independent spent fuel storage installation (“ISFSI”) to store all of the nuclear fuel that will be irradiated during the initial operating license period, which ends in December 2027. Additionally, ~~an increase in our leverage, whether as~~Palo Verde has sufficient capacity at its on-site ISFSI to store a ~~result of these factors or otherwise, could adversely affect us by:~~

~~A downgrade~~Nuclear Decommissioning Costs — APS currently relies on an external sinking fund mechanism to meet the NRC financial assurance requirements for decommissioning its interests in Palo Verde Units 1, 2 and 3. The decommissioning costs of ~~our credit ratings could materially~~Palo Verde Units 1, 2 and ~~adversely affect our business, financial condition~~3 are currently included in APS’s ACC jurisdictional rates. Decommissioning costs are recoverable through a non-bypassable system benefits charge (paid by all retail customers taking service from the APS system). Based on current nuclear decommissioning trust asset balances, site specific decommissioning cost studies, anticipated future contributions to the decommissioning trusts, and ~~results~~return projections on the asset portfolios over the expected remaining operating life of ~~operations.~~the facility, we are on track to meet the current site specific decommissioning costs for Palo Verde at the time the units are expected to be decommissioned. See Note 19 for additional information about APS’s nuclear decommissioning trusts.

~~Our current ratings are set forth~~Palo Verde Liability and Insurance Matters — See “Palo Verde Generating Station — Nuclear Insurance” in ~~“Liquidity and Capital Resources — Credit Ratings” in Item 7. We cannot be sure that any~~Note 10 for a discussion of ~~our current ratings will remain in effect~~the insurance maintained by the Palo Verde participants, including APS, for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances in the future so warrant. Any downgrade or withdrawal could adversely affect the market price of Pinnacle West’s and APS’s securities, limit our access to capital and increase our borrowing costs, which would diminish our financial results. We would be required to pay a higher interest rate for future financings, and our potential pool of investors and funding sources could decrease. In addition, borrowing costs under our existing credit facilities depend on our credit ratings. A downgrade could also require us to provide additional support in the form of letters of credit or cash or other collateral to various counterparties. If our short-term ratings were to be lowered, it could severely limit access to the commercial paper market. We note that the ratings from rating agencies are not recommendations to buy, sell or hold our securities and that each rating should be evaluated independently of any other rating.Palo Verde.

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Asset Purchase Agreement and Coal Supply Matters. On December 30, 2013, APS purchased SCE’s 48% interest in each of Units 4 and 5 of Four Corners. The final purchase price for the interest was approximately $182 million. In connection with APS’s prior general retail rate case with the ACC, the ACC reserved the right to review the prudence of the Four Corners transaction for cost recovery purposes upon the closing of the transaction. On December 23, 2014, the ACC approved rate adjustments related to APS’s acquisition of SCE’s interest in Four Corners resulting in a revenue increase of $57.1 million on an annual basis. ~~On February 23, 2015, the ACC~~This decision ~~approving the rate adjustments~~ was ~~appealed. APS has intervened~~appealed and, is actively participating in the proceeding. The Arizona Court of Appeals suspended the appeal pending the Arizona Supreme Court's decision in the SIB matter discussed below. On August 8, 2016, the Arizona Supreme Court issued its opinion in the SIB matter, andon September 26, 2017, the Arizona Court of Appeals ~~has now ordered supplemental briefing~~affirmed the ACC's decision on ~~how that SIB decision should affect the challenge to~~ the Four Corners rate adjustment. ~~We cannot predict when or how this matter will be resolved.~~

NTEC ~~has~~had the option to purchase the 7% interest within a certain timeframe pursuant to an option granted to NTEC. On December 29, 2015, NTEC provided notice of its intent to exercise the option. The purchase did not occur during the originally contemplated timeframe. Concurrent with the settlement of the 2016 Coal Supply Agreement ~~contains~~matter described in Note 10, NTEC and 4CA agreed to allow for the purchase by NTEC of the 7% interest, consistent with the option. On June 29, 2018, 4CA and NTEC entered into an asset purchase agreement providing for the sale to NTEC of 4CA's 7% interest in Four Corners. Completion of the sale was subject to the receipt of approval by FERC, which was received on July 2, 2018, and the sale transaction closed on July 3, 2018. NTEC purchased the 7% interest at 4CA’s book value, approximately $70 million, and will pay 4CA the purchase price over a period of four years pursuant to a secured interest-bearing promissory note. 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.

Lease Extension. APS, on behalf of the Four Corners participants, negotiated amendments to an existing facility lease with the Navajo Nation, which extends the Four Corners leasehold interest from 2016 to

On February 14, 2017, the ACC opened a docket titled "ACC Investigation Concerning the Future of the Navajo Generating Station" with the stated goal of engaging stakeholders and negotiating a sustainable pathway for the Navajo Plant to continue operating in some form after December 2019. APS cannot predict the outcome of this proceeding.

For additional information, see "Business of Arizona Public Service Company - Energy Sources and Resource Planning - Generation Facilities - Coal-Fueled Generating Facilities - Navajo Plant."

Natural ~~Gas~~.Gas. APS has six natural gas power plants located throughout Arizona, including Ocotillo. Ocotillo iswas originally a 330 MW 4-unit gas plant located in the metropolitan Phoenix area. In early 2014, APS announced a project to modernize the plant, which involves retiring two older 110 MW steam units, adding five 102 MW combustion turbines and maintaining two existing 55 MW combustion turbines. In total, this increases the capacity of the site by 290 MW to 620 MW, with completion targeted by ~~summer~~the middle of 2019. (See Note 3 for ~~proposed~~details of the rate recovery in our ~~current retail rate case filing.~~2017 Rate Case Decision.) ~~On September 9, 2016, Maricopa County issued a final permit decision that authorizes construction~~For additional information, see "Business of ~~the Ocotillo modernization project.~~Arizona Public Service Company - Energy Sources and Resource Planning - Generation Facilities - Coal-Fueled Generating Facilities - Natural Gas and Oil-Fueled Generating Facilities."

Transmission and Delivery. APS ~~is working~~continues to work closely with customers, stakeholders, and regulators to identify and plan for transmission needs that ~~continue to~~ support new customers, system reliability, access to markets and renewable energy development. The capital expenditures table presented in the "Liquidity and Capital Resources" section below includes new APS transmission projects, ~~through 2019,~~ along with other transmission costs for upgrades and replacements. APS is also working to establish and expand advanced grid technologies throughout its service

Energy Storage. APS deploys a number of advanced technologies on its system, including energy storage. Storage can provide capacity, improve power quality, be utilized for system regulation, integrate renewable generation, and can be used to defer certain traditional infrastructure investments. Battery storage can also aid in integrating higher levels of renewables 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 battery storage projects to evaluate the potential benefits for customers and further our understanding of how storage works with other advanced technologies and the grid. We are preparing for additional battery 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 this agreement is scheduled to begin in 2021. APS issued a request for proposal for approximately 106 MW of battery storage to be located at up to five of its AZ Sun sites. Based upon our evaluation of the RFP responses, APS has decided to expand the initial phase of battery deployment to 141 MW by adding a sixth AZ Sun site. In February 2019, we contracted for the 141 MW and anticipate such facilities could be in service by mid-2020. Additionally, in February 2019, APS signed two 20-year power purchase agreements for energy storage totaling 150 MW. Service under these agreements are scheduled to begin in 2021. We plan to install at least an additional 660 MW of APS-owned solar plus battery storage and stand-alone battery storage systems by the summer of 2025, with the first 260 MW being procured in 2019 (60 MW on additional AZ Sun sites and 100 MW of solar plus 100 MW of battery storage).

On August 15, 2017, the ACC approved (by a vote of 4-1), the 2017 Settlement Agreement without material modifications. On August 18, 2017, the ACC issued 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 Administrative Law Judge to be a complaint filed pursuant to Arizona Revised Statute §40-246 and not a request for rehearing. Arizona Revised Statute §40-246 requires the ACC to hold a hearing regarding any complaint alleging that a public service corporation is in violation of any commission order or that the rates being charged are not just and reasonable if the complaint is signed by at least twenty-five customers of the public service corporation. The Complaint alleged that APS is “in violation of commission order” [sic]. On February 13, 2018, the complainant filed an amended Complaint alleging that the rates and charges in the 2017 Rate Case Decision are not just and reasonable. The complainant requested that the ACC hold a hearing on the amended Complaint to determine if the average bill impact on residential customers of the rates and charges approved in the 2017 Rate Case Decision is greater than 4.54% (the average annual bill impact for a typical APS residential customer estimated by APS) and, if so, what effect the alleged greater bill impact has on APS's revenues and the overall reasonableness and justness of APS's rates and charges, in order to determine if there is sufficient evidence to warrant a full-scale rate hearing. The ACC held a hearing on this matter beginning in September 2018 and the hearing was concluded on October 1, 2018. Post-hearing briefing was concluded on December 14, 2018. APS expects a recommended opinion and order from the judge within the first quarter of 2019. APS cannot predict the outcome of this matter.

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 and file a report by May 3, 2019. 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 January 9, 2019, the ACC Commissioners voted to open a docket for this matter. APS does not believe that the rate review will have a material impact on our financial position, results of operations or cash flows. However, depending upon the results of the rate review, the ACC may take further actions, including potentially attempting to reopen the 2017 Rate Case Decision. APS cannot predict the outcome of this matter.

Renewable Energy. The ACC approved the RES in 2006. The renewable energy requirement is 7%9% of retail electric sales in ~~2017~~2019 and increases annually until it reaches 15% in 2025. In ~~the~~APS’s 2009 ~~Settlement Agreement,~~general retail rate case settlement agreement, APS agreed to exceed the RES standards, committing to use APS’s best efforts to ~~obtain~~have 1,700 GWh of new renewable resources ~~to be~~ in service by year-end 2015, in addition to its RES renewable resource commitments. APS met its settlement commitment ~~and RES target for 2016.~~in 2015. A component of the RES targets development of distributed energy systems. For additional information, see “Business of Arizona Public Service Company-Energy Sources and Resource Planning - Current and Future Resources-Renewable Energy Standard.”

On July 1, 2016, APS filed its 2017 RES Implementation Plan and proposed a budget of approximately $150 million. APS’s budget request included additional funding to process the high volume of residential rooftop solar interconnection requests and also requested a permanent waiver of the residential distributed energy requirement for 2017 contained in the RES rules. On April 7, 2017, APS filed an amended 2017 RES Implementation Plan and updated budget request which included the revenue neutral transfer of specific revenue requirements into base rates in accordance with the 2017 Settlement Agreement. On August 15, 2017, the ACC approved the 2017 RES Implementation Plan.

On June 30, 2017, APS filed its 2018 RES Implementation Plan and proposed a budget of approximately $90 million. APS’s budget request supports existing approved projects and commitments and includes the anticipated transfer of specific revenue requirements into base rates in accordance with the 2017 Settlement Agreement and also requests a permanent waiver of the residential distributed energy requirement for 2018 contained in the RES rules. APS's 2018 RES budget request is lower than the 2017 RES budget due in part to a certain portion of the RES being collected by APS in base rates rather than through the RES adjustor.

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 Decision. APS Solar Communities is a three-year program authorizing APS to spend $10 million - $15 million in capital costs each year to install utility-owned distributed generation ("DG") systems for low to moderate income residential homes, buildings of 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 June 12, 2018, the ACC approved the 2018 RES Implementation Plan.

On June 29, 2018, APS filed its 2019 RES Implementation Plan and proposed a budget of approximately $89.9 million. APS’s budget request supports existing approved projects and commitments and requests a permanent waiver of the residential distributed energy requirement for 2019 contained in the RES rules. The ACC has not yet ruled on the ~~Company’s 2017~~2019 RES Implementation Plan.

In September of 2016, the ACC initiated a proceeding which will examine the possible modernization and expansion of the RES. On January 30, 2018, ACC Commissioner Tobin proposed a plan in this proceeding which would broaden the RES to include a series of energy policies tied to clean energy sources (the "Energy Modernization Plan"). The ~~ACC noted that many~~Energy Modernization Plan includes replacing the current RES standard with a new standard called the Clean Resource Energy Standard and Tariff ("CREST"), which incorporates the proposals in the Energy Modernization Plan. A set of CREST rules for the ~~provisions of~~ACC's consideration was issued by Commissioner Tobin's office on July 5, 2018. See Note 3 for more information on the ~~original rule may no longer be appropriate,~~RES and the underlying economic assumptions associated with the rule have changed dramatically. The proceeding will review such issues as the rapidly declining cost of solar generation, an increased interest in community solar projects, energy storage options, and the decline in fossil fuel generation due to stringent EPA regulations. The proceeding will also examine the feasibility of increasing the standard to 30% of retail sales by 2030, in contrast to the current standard of 15% of retail sales by 2025. APS cannot predict the outcome of this proceeding.Energy Modernization Plan.

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On June 1, 2016, ~~the Company~~APS filed its 2017 ~~DSM~~Demand Side Management Implementation Plan ("DSM Plan"), in which APS ~~proposes~~proposed programs and measures that specifically focus on reducing peak demand, shifting load to off-peak periods and educating customers about strategies to manage their energy and demand. The requested budget in the 2017 DSM ~~Implementation~~ Plan iswas $62.6 million. On January 27, 2017, APS filed an updated and modified 2017 DSM ~~Implementation~~ Plan that incorporated the proposed $4 million Residential Demand Response, Energy Storage and Load Management Program that was filed with the ACC on December 5, 2016 and requested that the budget for the 2017 DSM Plan be increased to $66.6 million. On August 15, 2017, the ACC approved the amended 2017 DSM Plan.

On September 1, 2017, APS filed its 2018 DSM Plan, which proposes modifications to the demand side management 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 seeks a reduced requested budget ~~increased~~of $52.6 million and requests a waiver of the EES for 2018. On November 14, 2017, APS filed an amended 2018 DSM Plan, which revised the allocations between budget items to ~~$66.6~~address customer participation levels, but kept the overall budget at $52.6 million. The ACC has not yet ruled on the ~~Company’s 2017~~APS 2018 amended DSM Plan.

On December 31, 2018, APS filed its 2019 DSM Plan, which requests a budget of $34.1 million and continues APS's focus on DSM strategies such as peak demand reduction, load shifting, storage and electrification strategies. The ACC has not yet ruled on the APS 2019 DSM Plan. See Note 3 for more information on demand side management.

Tax Expense Adjustor Mechanism and FERC Tax Filing. 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. On December 22, 2017 the Tax Cuts and Jobs Act (“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.

See Note 3 for additional details.

In accordance with the 2017 Rate Case Decision, APS filed its request for a second-year export energy price of 11.6 cents per kWh on May 1, 2018. This price reflects the 10% annual reduction discussed above. The new tariff became effective on October 1, 2018.

On January 23, 2017, The Alliance for Solar Choice ("TASC") sought rehearing of the ACC's decision regarding the value and cost of DG. TASC asserted that the ACC improperly ignored the Administrative Procedure Act, failed to give adequate notice regarding the scope of the proceedings, and relied on information that was not submitted 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.

Subpoena from Arizona Corporation Commissioner Robert Burns. On August 25, 2016, Commissioner 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.

On September 9, 2016, APS filed with the ACC 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 Commissioner 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, Commissioner 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

On August 4, 2017, Commissioner 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 Commissioner Burns’ amended complaint. On March 6, 2018, Commissioner 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 Commissioner 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. Commissioner 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, Commissioner Burns filed a notice of appeal. APS and Pinnacle West cannot predict the outcome of this matter.

Pinnacle West and APS currently have ample borrowing capacity under their respective credit facilities, and may readily access these facilities ensuring adequate liquidity for

Bright Canyon Energy.On July 31, 2014, Pinnacle West announced its creation of a wholly-owned subsidiary, BCE. ~~BCE will~~BCE's focus is on new growth opportunities that leverage the Company’s core expertise in the electric energy industry. BCE’s first initiative is 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 transmission opportunities within the eleven 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. TransCanyon continues to pursue transmission development opportunities in the western United States consistent with its strategy.

On March 29, 2016, TransCanyon entered into a strategic alliance agreement with PG&E to jointly pursue competitive transmission opportunities solicited by the CAISO, the operator for the majority of California's transmission grid. TransCanyon and PG&E intend to jointly engage in the development of future transmission infrastructure and compete to develop, build, own and operate transmission projects approved by the CAISO.

El Dorado. The operations of El Dorado are not expected to have any material impact on our financial results, or to require any material amounts of capital, over the next three years.

4CA. See "Four Corners - Asset Purchase Agreement and Coal Supply Matters" above for information regarding 4CA.

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 ~~2014~~2016 through ~~2016,~~2018, retail electric revenues comprised approximately ~~94%~~95% of our total ~~electric~~ 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 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, impacts of energy efficiency programs and growth in ~~distributed generation,~~DG, and responses to retail price changes. Based on past experience, a reasonable range of variation in our kWh sales projections attributable to such economic factors

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 $20 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 $10 million.

Fuel and Purchased Power Costs. Fuel and purchased power costs included on our 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. See Note 2 for discussion of new accounting guidance related to the presentation of net periodic pension and postretirement benefit costs.

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 ~~"Capital Expenditures"~~"Liquidity and Capital Resources" below for information regarding the planned additions to our ~~facilities.~~facilities and income tax impacts related to bonus depreciation.

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. See Note ~~3 regarding deferral~~2 for discussion of ~~certain costs pursuant~~new accounting guidance related to ~~an ACC order.~~the presentation of net periodic pension and postretirement benefit costs.

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 ~~11.2%~~11.0% of the assessed value for ~~2016, 11.0%~~2018, 11.2% for ~~2015~~2017 and ~~10.7% for 2014.~~2016. 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. ~~(See Note 3 for property tax deferrals contained in the 2012 Settlement Agreement.)~~

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. ~~The prospects for broad-based federal~~On December 22, 2017, the Tax Act was enacted and was generally effective on January 1, 2018. Changes which will impact the Company include a reduction in the corporate tax ~~reform have increased due~~rate to 21%, revisions to the ~~results~~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 4 for details of the ~~2016 elections. Any such reform may impact~~impacts on the ~~Company's effective tax~~Company as of December 31, 2018.) In APS's recent general retail rate case, the ACC approved a Tax Expense

Interest Expense. Interest expense is affected by the amount of debt outstanding and the interest rates on that debt (see Note 6). 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.

Pinnacle West’s only reportable business segment is our regulated electricity segment, which consists of traditional regulated retail and wholesale electricity businesses (primarily electric service to Native Load customers) and related activities and includes electricity generation, transmission and distribution.

Our consolidated net income attributable to common shareholders for the year ended December 31, ~~2016~~2018 was ~~$442~~$511 million, compared with ~~$437~~$488 million for the prior year. The results reflect an increase of approximately $4$19 million for the regulated electricity segment primarily due to higher revenue resulting from the retail regulatory settlement effective August 19, 2017, higher transmission revenues, higher retail revenues due to customer growth and ~~changes in~~higher average effective prices due to customer usage patterns and ~~related pricing,~~changes relating to customer program eligibility, partially offset by higher operations and maintenance expense ~~primarily related to transmission, distribution~~ and ~~customer service costs.~~higher depreciation and amortization.

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

Operations and maintenance. Operations and maintenance expenses increased ~~$38~~$89 million for the year ended December 31, ~~2016~~2018 compared with the ~~prior year~~prior-year period primarily because of:

Additionally, stock compensation costs were flat compared to the prior year as a $12 million increase in costs was offset by a one-time $12 million reduction for the adoption of new stock compensation guidance (See Notes 2 and 15);

Taxes other than income taxes. Taxes other than income taxes were $29 million higher for the year ended December 31, 2018 compared with the prior-year period primarily due to higher property values and the amortization of our property tax deferral regulatory asset.

Pension and other postretirement non-service credits, net. Pension and other postretirement non-service credits, net were $25 million higher for the year ended December 31, 2018 compared to the prior-year period primarily due to higher market returns and the adoption of new pension and other postretirement accounting guidance in 2018 (see Notes 2 and 7).

All other income and expenses, net. All other income and expenses, net were $30 million higher for the year ended December 31, 2018 compared with the prior-year period primarily due to the debt return on the Four Corners SCR deferrals (Note 3) and increased allowance for equity funds used during ~~construction and the gain on sale of a transmission line.~~construction.

Interest charges, net of allowance for borrowed funds used during ~~construction~~.construction. Interest charges, net of allowance for borrowed funds used during construction, ~~increased $7~~were $20 million higher for the year ended December 31, ~~2016~~2018 compared with the ~~prior year,~~prior-year period primarily ~~because of~~due to higher debt balances in the current ~~year.~~period.

Income taxes. Income taxes were $122 million lower for the year ended December 31, 2018 compared with the prior-year period primarily due to the effects of the federal tax reform and lower pretax income in the current year period, partially offset by certain non-deductible costs (See Note 4).

Our consolidated net income attributable to common shareholders for the year ended December 31, ~~2015~~2017 was ~~$437~~$488 million, compared with ~~$398~~$442 million for the prior year. The results reflect an increase of approximately ~~$34~~$48 million for the regulated electricity segment primarily due to higher revenue resulting from the ~~Four Corners-related rate change, lower operations and maintenance expenses, and~~retail regulatory settlement effective August 19, 2017, higher transmission revenues, higher retail ~~sales~~revenues due to customer growth and ~~changes in~~higher average effective prices due to customer usage patterns and ~~related pricing,~~changes relating to customer program eligibility, partially offset by higher depreciation and ~~amortization. The all other segment's income was~~amortization primarily due to increased plant in service and higher ~~by $5 million primarily related to El Dorado's investment losses in 2014.~~depreciation and amortization rates.

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

Operations and maintenance. Operations and maintenance expenses ~~decreased $40~~increased $10 million for the year ended December 31, ~~2015~~2017 compared with the prior year primarily because of:

~~A decrease~~

Depreciation and amortization. Depreciation and amortization expenses were ~~$77~~$47 million higher for the year ended December 31, ~~2015~~2017 compared with the prior year primarily related ~~to:~~

~~An increase~~Taxes other than income taxes. Taxes other than income taxes were $17 million higher for the year ended December 31, 2017 compared with the prior year primarily due to higher property values and the amortization of ~~$10~~our property tax deferral regulatory asset.

Pension and other postretirement non-service credits, net. Pension and other postretirement non-service credits, net were $5 million ~~related~~higher for the year ended December 31, 2017 compared to the ~~regulatory treatment of the Palo Verde sale leaseback, which is offset in noncontrolling interests; and~~

Interest charges, net of allowance for borrowed funds used during construction. Interest charges, net of allowance for borrowed funds used during construction, ~~decreased $6~~increased $12 million for the year ended December 31, ~~2015~~2017 compared with the prior year, primarily because of ~~lower interest rates on our~~higher debt balances in the current year.

Income taxes.Income taxes were ~~$15~~$19 million higher for the year ended December 31, ~~2015~~2017 compared with the prior year primarily due to the effects of higher pretax income in the current ~~year.~~year and the effects of the federal tax reform, partially offset by a lower effective tax rate primarily due to stock compensation. The stock compensation guidance requires all excess income tax benefits and deficiencies arising from share-based payments to be recognized in earnings in the period they occur, which causes effective tax rate fluctuations when stock compensation payouts occur.

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 December 31, ~~2016,~~2018, APS’s common equity ratio, as defined, was 54%. Its total shareholder equity was approximately ~~$4.9~~$5.7 billion, and total capitalization was approximately ~~$9.1~~$10.5 billion. Under this order, APS would be prohibited from paying dividends if such payment would reduce its total shareholder equity below approximately ~~$3.6~~$4.2 billion,

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.

The following tables present net cash provided by (used for) operating, investing and financing activities for the years ended December 31, ~~2016, 2015~~2018, 2017 and ~~2014~~2016 (dollars in millions):

~~2016~~2018 Compared with ~~2015.~~ 2017. Pinnacle West’s consolidated net cash provided by operating activities was ~~$1,023~~$1,277 million in ~~2016~~2018 compared to ~~$1,094~~$1,118 million in ~~2015.~~2017. The ~~decrease~~increase of ~~$71~~$159 million in net cash provided is primarily due to higher cash receipts from operating activities as a result of the retail regulatory settlement effective August 19, 2017, higher transmission receipts and higher receipts due to customer growth and higher average effective prices. These items are partially offset by higher payments for operations and maintenance, ~~costs.~~income taxes, other taxes and interest. The difference between APS and Pinnacle West's net cash provided by operating activities primarily relates to Pinnacle West's cash payments for 4CA's operating costs and differences in other operating cash payments.

~~2015~~2017 Compared with ~~2014.~~ 2016. Pinnacle West’s consolidated net cash provided by operating activities was ~~$1,094~~$1,118 million in ~~2015~~2017 compared to ~~$1,100~~$1,023 million in ~~2014, a decrease~~2016. The increase of $6$95 million in net cash ~~provided. The decrease~~ provided

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 ~~116%~~110% funded as of January 1, ~~2016~~2019 and ~~115%~~117% as of January 1, ~~2017.~~2018. Under GAAP, the qualified pension plan was ~~88%~~90% funded as of January 1, ~~2016~~2019 and 95% funded as of January 1, ~~2017.~~2018. See Note 7 for additional details. The assets in the plan are comprised of fixed-income, equity, real estate, and short-term investments. Future year contribution amounts are dependent on plan asset performance and plan actuarial assumptions. We ~~have~~ made ~~voluntary~~ contributions to our pension plan oftotaling $50 million in 2018, $100 million in ~~2016,~~2017, and $100 million in ~~2015 and $175 million in 2014.~~2016. The minimum required contributions for the pension plan are zero for the next three years. We expect to make voluntary contributions up to a total of ~~$300~~$350 million during the ~~2017-2019~~2019-2021 period. With regard to ~~our~~ contributions to our other postretirement benefit ~~plans,~~plan, we did not make a contribution in 2018. We made a contribution of approximately $1 million in each of ~~2016, 2015~~2017 and ~~2014.~~2016. We do not expect to make any contributions ~~of less than $1 million in total for~~over the next three years to our other postretirement benefit plans. In 2018, the Company was reimbursed $72 million for prior years retiree medical claims from the other postretirement benefit plan trust assets.

Because of plan changes in 2014, the Company sought IRS approval to move approximately $186 million of other postretirement benefit trust assets into a new trust account to pay for active union employee medical costs. In December 2016, FERC approved a methodology for determining the amount of other postretirement benefit trust assets to transfer into a new trust account to pay for active union employee medical costs. On January 2, 2018, these funds were moved to the new trust account, which is included in the other special use funds on the Consolidated Balance Sheets. The Company and the IRS executed a final Closing Agreement on March 2, 2018. The Company made an informational filing with FERC during February 2018. It is the Company’s understanding that completion of these regulatory requirements permits access to approximately $186 million for the sole purpose of paying active union employee medical benefits.

~~2016~~2018 Compared with ~~2015.~~ 2017. Pinnacle West’s consolidated net cash used for investing activities was $1,193 million in 2018, compared to $1,429 million in 2017. The decrease of $236 million in net cash used primarily related to decreased capital expenditures. The difference between APS and Pinnacle West's net cash used for investing activities primarily relates to Pinnacle West's investing cash activity related to 4CA.

2017 Compared with 2016. Pinnacle West’s consolidated net cash used for investing activities was $1,429 million in 2017, compared to $1,252 million in ~~2016, compared to $1,066 million in 2015.~~2016. The increase of ~~$186~~$177 million in net cash used primarily related to increased capital expenditures.

~~2015 Compared with 2014.~~ Pinnacle West’s consolidated net cash used for investing activities was $1,066 million in 2015, compared to $923 million in 2014, an increase of $143 million in net cash used primarily related to increased capital expenditures.

Generation capital expenditures are comprised of various additions and improvements to APS’s clean resources, including nuclear plants, renewables and projected future new resources. Generation capital expenditures also include improvements to existing fossil ~~renewable and nuclear~~ plants. Examples of the types of projects included in ~~this category~~the forecast of generation capital expenditures are additions of roof top solar systems, new clean resources, and upgrades and capital replacements of various nuclear and fossil power plant equipment, such as turbines, boilers and environmental equipment. We have not included estimated costs for Cholla's compliance with EPA’s regional haze rule since we have challenged the rule judicially and we have proposed a compromise strategy to EPA, which would allow us to avoid expenditures related to environmental control equipment. (See Note 10 for details regarding the status of the final rule for Cholla and a related executive memorandum.) We are monitoring the status of ~~other~~ environmental matters, which, depending on their final outcome, could require modification to our planned environmental expenditures.

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.

~~2016~~2018 Compared with ~~2015.~~ 2017. Pinnacle West’s consolidated net cash used for financing activities was $92 million in 2018, compared to $316 million of net cash provided in 2017, an increase of $408 million in net

APS’s consolidated net cash used by financing activities was $76 million in 2018, compared to $244 million of net cash provided in 2017, an increase of $320 million in net cash used. The increase in net cash used by financing activities includes $254 million in lower issuances of long-term debt, higher long-term debt repayments of $182 million and higher dividend payments of $19 million through December 31, 2018, which are partially offset by $136 million in lower net short-term debt.

2017 Compared with 2016. Pinnacle West’s consolidated net cash provided by financing activities was $316 million in 2017, compared to $198 million in 2016, ~~compared to $4 million in 2015,~~ an increase of ~~$194~~$118 million in net cash provided. The ~~increase in~~ net cash provided by financing activities ~~is primarily due to a $325 million net increase in short-term borrowings and $45~~includes $245 million in lower long-term debt repayments and $155 million higher issuances of long-term debt through December 31, 2017, partially offset by ~~$149~~a $259 million net decrease in short-term borrowings and $16 million of higher dividend payments.

APS’s consolidated net cash provided by financing activities was $244 million in 2017, compared to $196 million in 2016, an increase of $48 million in net cash provided. The net cash provided by financing activities includes $370 million in lower long-term debt repayments and $108 million in higher equity infusions from Pinnacle West, partially offset by $143 million lower issuances of long-term debt through December 31, ~~2016 (see below).~~

Significant Financing Activities. On December ~~21, 2016,~~19, 2018, the Pinnacle West Board of Directors declared a dividend of ~~$0.655~~$0.7375 per share of common stock, payable on March 1, ~~2017~~2019 to shareholders of record on February 1, ~~2017.~~2019. During ~~2016,~~2018, Pinnacle West increased its indicated annual dividend from ~~$2.50~~$2.78 per share to ~~$2.62~~$2.95 per share. For the year ended December 31, ~~2016,~~2018, Pinnacle West's total dividends paid per share of common stock were ~~$2.53~~$2.82 per share, which resulted in dividend payments of ~~$274~~$309 million.

On May 30, 2018, APS purchased all $32 million of Maricopa County, Arizona Pollution Control Corporation Pollution Control Revenue Refunding Bonds, 2009 Series C, due 2029. These bonds were classified as current maturities of long-term debt on our Consolidated Balance Sheets at December ~~27, 2016, Pinnacle West infused cash to~~31, 2017.

On June 26, 2018, APS repaid at maturity APS's $50 million term loan facility.

On August 9, 2018, APS issued $300 million of ~~$42 million. APS~~4.20% unsecured senior notes that mature on August 15, 2048. The net proceeds from the sale of the notes were used ~~these funds~~ to repay commercial paper borrowings.

On ~~April 22, 2016,~~November 30, 2018, APS ~~entered into a~~repaid its $100 million term loan facility that ~~matures~~would have matured April 22, 2019. ~~Interest rates are based on APS's senior unsecured debt credit ratings. APS used the proceeds to repay and refinance existing short-term indebtedness.~~

On December ~~6, 2016,~~21, 2018, Pinnacle West entered into a $150 million term loan facility that matures December 2020. The proceeds were used for general corporate purposes.

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.

On June 28, 2018, Pinnacle West refinanced its 364-day $125 million unsecured revolving credit facility that would have matured on July 30, 2018 with a new 364-day $150 million credit facility that matures June 27, 2019. Borrowings under the ~~first quarter of 2016, APS increased its commercial paper program from $250~~facility bear interest at LIBOR plus 0.70% per annum. At December 31, 2018, Pinnacle West had $54 million ~~to $500 million.~~outstanding under the facility.

On ~~May 13, 2016,~~July 12, 2018, Pinnacle West replaced its $200 million revolving credit facility that would have matured in May ~~2019,~~2021, with a new $200 million facility that matures in ~~May 2021.~~July 2023. 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. At December 31, ~~2016,~~2018, Pinnacle West had no outstanding borrowings under its credit facility, no letters of credit outstanding and ~~$1.7~~$22 million inof commercial paper borrowings.

At December 31, ~~2016,~~2018, APS had two revolving credit facilities totaling $1 billion, including a $500 million credit facility that matures in ~~September 2020~~June 2022 and the above-mentioned $500 million ~~facility that matures in May 2021.~~facility. 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. These facilities are available to support APS’s $500 million commercial paper program, for bank borrowings or for issuances of letters of credit. At December 31, ~~2016,~~2018, APS had ~~$135.5 million of~~no commercial paper outstanding and no outstanding borrowings or letters of credit under its revolving credit facilities.

Pinnacle West’s and APS’s debt covenants related to their respective bank financing arrangements include maximum debt to capitalization ratios. Pinnacle West and APS comply with this covenant. For both Pinnacle West and APS, this covenant requires that the ratio of consolidated debt to total consolidated capitalization not exceed 65%. At December 31, ~~2016,~~2018, the ratio was approximately ~~48%~~50% for Pinnacle West and ~~47%~~46% 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.

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.

See Note 6 for further discussions of liquidity matters.

The ratings of securities of Pinnacle West and APS as of February ~~17, 2017~~15, 2019 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. 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 downward revision to our credit ratings.

See Note 18 for a discussion of the impacts on our financial statements of consolidating certain VIEs.

The following table summarizes Pinnacle West’s consolidated contractual requirements as of December 31, ~~2016~~2018 (dollars in millions):

This table excludes ~~$36~~$41 million in unrecognized tax benefits because the timing of the future cash outflows is uncertain. Estimated minimum required pension contributions are zero for ~~2017, 2018~~2019, 2020 and ~~2019~~2021 (see Note 7).

In preparing the financial statements in accordance with ~~accounting principles generally accepted in the United States of America (“GAAP”),~~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. We consider the following accounting policies to be our most critical because of the uncertainties, judgments and complexities of the underlying accounting standards and operations involved.

Regulatory accounting allows for the actions of regulators, such as the ACC and FERC, to be reflected in our financial statements. Their actions may cause us to capitalize costs that would otherwise be included as an expense in the current period by unregulated companies. Regulatory assets represent incurred costs that have been deferred because they are probable of future recovery in customer rates. Regulatory liabilities generally represent amounts collected in rates to recover costs expected to be incurred in the future or amounts collected in excess of costs ~~that have already been collected from~~incurred and are refundable to customers. Management continually assesses whether our regulatory assets are probable of future recovery by considering factors such as applicable regulatory environment changes and recent rate orders to other regulated entities in the same jurisdiction. This determination reflects the current political and regulatory climate in Arizona and is subject to change in the future. If future recovery of costs ceases to be probable, the assets would be written off as a charge in current period earnings, except for pension benefits which would be charged to OCI and result in lower future earnings. We had ~~$1,420~~$1,510 million of regulatory assets and ~~$1,049~~$2,492 million of regulatory liabilities on the Consolidated Balance Sheets at December 31, ~~2016.~~

See Notes 1 and 3 for more information.

Changes in our actuarial assumptions used in calculating our pension and other postretirement benefit liability and expense can have a significant impact on our earnings and financial position. The most relevant actuarial assumptions are the discount rate used to measure our liability and net periodic cost, 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.

On January 1, 2018, we adopted new accounting standard ASU 2017-07, Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This new standard changed our income statement presentation of net periodic benefit cost and allows only the service cost component of periodic net benefit cost to be eligible for capitalization. See Note 2 for additional information.

The following chart reflects the sensitivities that a change in certain actuarial assumptions would have had on the December 31, ~~2016~~2018 reported pension liability on the Consolidated Balance Sheets and our ~~2016~~2018 reported pension expense, after consideration of amounts capitalized or billed to electric plant participants, on Pinnacle West’s Consolidated Statements of Income (dollars in millions):

See ~~Note~~Notes 2 and 7 for further details about our pension and other postretirement benefit plans.

We recognize an ARO for the future decommissioning or retirement of our tangible long-lived assets for which a legal obligation exists. The ARO liability represents an estimate of the fair value of the current obligation related to decommissioning and the retirement of those assets. ARO measurements inherently involve uncertainty in the amount and timing of settlement of the liability. We use an expected cash flow approach to measure the amount we recognize as an ARO. This approach applies probability weighting to discounted future cash flow scenarios that reflect a range of possible outcomes. The scenarios consider settlement of the ARO at the expiration of the asset’s current license or lease term and expected decommissioning dates. The fair value of an ARO is recognized in the period in which it is incurred. The associated asset retirement costs are capitalized as part of the carrying value of the long-lived asset and are depreciated over the life of the related assets. In addition, we accrete the ARO liability to reflect the passage of time. Changes in these estimates and assumptions could materially affect the amount of the recorded ARO for these assets. In accordance with GAAP accounting, APS accrues removal costs for its regulated utility assets, even if there is no legal obligation for removal.

AROs as of December 31, 2018 are described further in Note 11.

Our operations include managing market risks related to changes in interest rates, commodity prices and investments held by our nuclear decommissioning trust fund and benefit plan assets.

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 trust, ~~fund~~other special use funds (see Note 13 and Note 19), and benefit plan assets. The nuclear decommissioning trust, ~~fund~~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.

The tables below present contractual balances of our consolidated long-term and short-term debt at the expected maturity dates, as well as the fair value of those instruments on December 31, ~~2016~~2018 and ~~2015.~~2017. The interest rates presented in the tables below represent the weighted-average interest rates as of December 31, ~~2016~~2018 and ~~2015~~2017 (dollars in millions):

The tables below present contractual balances of APS’s long-term and short-term debt at the expected maturity dates, as well as the fair value of those instruments on December 31, ~~2016~~2018 and ~~2015.~~2017. The interest rates presented in the tables below represent the weighted-average interest rates as of December 31, ~~2016~~2018 and ~~2015~~2017 (dollars in millions):

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 fuels. The changes in market value of such contracts have a high correlation to price changes in the hedged commodities.

The table below shows the fair value of maturities of our derivative contracts (dollars in millions) at December 31, ~~2016~~2018 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,” for more discussion of our valuation methods.

We are exposed to losses in the event of non-performance or non-payment by counterparties. See Note 16 for a discussion of our credit valuation adjustment policy.

See “Market and Credit Risks” in Item 7 above for a discussion of quantitative and qualitative disclosures about market risks.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f), for Pinnacle West. Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control — Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, ~~2016.~~2018. The effectiveness of our internal control over financial reporting as of December 31, ~~2016~~2018 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein and also relates to the Company’s consolidated financial statements.

~~We have audited~~2018 Compared with 2017. Pinnacle West’s consolidated net cash provided by operating activities was $1,277 million in 2018 compared to $1,118 million in 2017. The increase of $159 million in net cash provided is primarily due to higher cash receipts from operating activities as a result of the ~~accompanying~~retail regulatory settlement effective August 19, 2017, higher transmission receipts and higher receipts due to customer growth and higher average effective prices. These items are partially offset by higher payments for operations and maintenance, income taxes, other taxes and interest. The difference between APS and Pinnacle West's net cash provided by operating activities primarily relates to Pinnacle West's cash payments for 4CA's operating costs and differences in other operating cash payments.

2017 Compared with 2016. Pinnacle West’s consolidated ~~balance sheets~~net cash provided by operating activities was $1,118 million in 2017 compared to $1,023 million in 2016. The increase of $95 million in net cash provided

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 110% funded as of January 1, 2019 and 117% as of January 1, 2018. Under GAAP, the qualified pension plan was 90% funded as of January 1, 2019 and 95% funded as of January 1, 2018. See Note 7 for additional details. The assets in the plan are comprised of fixed-income, equity, real estate, and short-term investments. Future year contribution amounts are dependent on plan asset performance and plan actuarial assumptions. We made contributions to our pension plan totaling $50 million in 2018, $100 million in 2017, and $100 million in 2016. The minimum required contributions for the pension plan are zero for the next three years. We expect to make voluntary contributions up to a total of $350 million during the 2019-2021 period. With regard to contributions to our other postretirement benefit plan, we did not make a contribution in 2018. We made a contribution of approximately $1 million in each of 2017 and 2016. We do not expect to make any contributions over the next three years to our other postretirement benefit plans. In 2018, the Company was reimbursed $72 million for prior years retiree medical claims from the other postretirement benefit plan trust assets.

Because of plan changes in 2014, the Company sought IRS approval to move approximately $186 million of other postretirement benefit trust assets into a new trust account to pay for active union employee medical costs. In December 2016, FERC approved a methodology for determining the amount of other postretirement benefit trust assets to transfer into a new trust account to pay for active union employee medical costs. On January 2, 2018, these funds were moved to the new trust account, which is included in the other special use funds on the Consolidated Balance Sheets. The Company and the IRS executed a final Closing Agreement on March 2, 2018. The Company made an informational filing with FERC during February 2018. It is the Company’s understanding that completion of these regulatory requirements permits access to approximately $186 million for the sole purpose of paying active union employee medical benefits.

2018 Compared with 2017. Pinnacle West’s consolidated net cash used for investing activities was $1,193 million in 2018, compared to $1,429 million in 2017. The decrease of $236 million in net cash used primarily related to decreased capital expenditures. The difference between APS and Pinnacle West's net cash used for investing activities primarily relates to Pinnacle West's investing cash activity related to 4CA.

2017 Compared with 2016. Pinnacle West’s consolidated net cash used for investing activities was $1,429 million in 2017, compared to $1,252 million in 2016. The increase of $177 million in net cash used primarily related to increased capital expenditures.

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

Generation capital expenditures are comprised of various additions and improvements to APS’s clean resources, including nuclear plants, renewables and projected future new resources. 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 roof top solar systems, new clean resources, 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.

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.

2018 Compared with 2017. Pinnacle West’s consolidated net cash used for financing activities was $92 million in 2018, compared to $316 million of net cash provided in 2017, an increase of $408 million in net

APS’s consolidated net cash used by financing activities was $76 million in 2018, compared to $244 million of net cash provided in 2017, an increase of $320 million in net cash used. The increase in net cash used by financing activities includes $254 million in lower issuances of long-term debt, higher long-term debt repayments of $182 million and higher dividend payments of $19 million through December 31, 2018, which are partially offset by $136 million in lower net short-term debt.

2017 Compared with 2016. Pinnacle West’s consolidated net cash provided by financing activities was $316 million in 2017, compared to $198 million in 2016, an increase of $118 million in net cash provided. The net cash provided by financing activities includes $245 million in lower long-term debt repayments and $155 million higher issuances of long-term debt through December 31, 2017, partially offset by a $259 million net decrease in short-term borrowings and $16 million of higher dividend payments.

APS’s consolidated net cash provided by financing activities was $244 million in 2017, compared to $196 million in 2016, an increase of $48 million in net cash provided. The net cash provided by financing activities includes $370 million in lower long-term debt repayments and $108 million in higher equity infusions from Pinnacle West, partially offset by $143 million lower issuances of long-term debt through December 31, 2017, $271 million net decrease in short-term borrowings and $16 million of higher dividend payments.

Significant Financing Activities. On December 19, 2018, the Pinnacle West Board of Directors declared a dividend of $0.7375 per share of common stock, payable on March 1, 2019 to shareholders of record on February 1, 2019. During 2018, Pinnacle West increased its indicated annual dividend from $2.78 per share to $2.95 per share. For the year ended December 31, 2018, Pinnacle West's total dividends paid per share of common stock were $2.82 per share, which resulted in dividend payments of $309 million.

On May 30, 2018, APS purchased all $32 million of Maricopa County, Arizona Pollution Control Corporation Pollution Control Revenue Refunding Bonds, 2009 Series C, due 2029. These bonds were classified as current maturities of long-term debt on our Consolidated Balance Sheets at December 31, 2017.

On June 26, 2018, APS repaid at maturity APS's $50 million term loan facility.

On August 9, 2018, APS issued $300 million of 4.20% unsecured senior notes that mature on August 15, 2048. The net proceeds from the sale of the notes were used to repay commercial paper borrowings.

On November 30, 2018, APS repaid its $100 million term loan facility that would have matured April 22, 2019.

On December 21, 2018, Pinnacle West entered into a $150 million term loan facility that matures December 2020. The proceeds were used for general corporate purposes.

Available Credit Facilities. Pinnacle West and ~~subsidiaries (the “Company”)~~APS maintain committed revolving credit facilities in order to enhance liquidity and provide credit support for their commercial paper programs.

On June 28, 2018, Pinnacle West refinanced its 364-day $125 million unsecured revolving credit facility that would have matured on July 30, 2018 with a new 364-day $150 million credit facility that matures June 27, 2019. Borrowings under the facility bear interest at LIBOR plus 0.70% per annum. At December 31, 2018, Pinnacle West had $54 million outstanding under the facility.

On July 12, 2018, Pinnacle West replaced its $200 million revolving credit facility that would have matured in May 2021, with a new $200 million facility that matures in July 2023. 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. At December 31, 2018, Pinnacle West had no outstanding borrowings under its credit facility, no letters of credit outstanding and $22 million of commercial paper borrowings.

At December 31, 2018, APS had two revolving credit facilities totaling $1 billion, including a $500 million credit facility that matures in June 2022 and the above-mentioned $500 million facility. 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. These facilities are available to support APS’s $500 million commercial paper program, for bank borrowings or for issuances of letters of credit. At December 31, 2018, APS had no commercial paper outstanding and no outstanding borrowings or letters of credit under its revolving credit facilities. See "Financial Assurances" in Note 10 for a discussion of APS's other outstanding letters of credit.

Pinnacle West’s and APS’s debt covenants related to their respective bank financing arrangements include maximum debt to capitalization ratios. Pinnacle West and APS comply with this covenant. For both Pinnacle West and APS, this covenant requires that the ratio of consolidated debt to total consolidated capitalization not exceed 65%. At December 31, 2018, the ratio was approximately 50% for Pinnacle West and 46% for APS. Failure to comply with such covenant levels would result in an event of default which, generally speaking, would require the immediate repayment of the debt subject to the covenants and could "cross-default" other debt. See further discussion of "cross-default" provisions below.

Neither Pinnacle West’s nor APS’s financing agreements contain "rating triggers" that would result in an acceleration of the required interest and principal payments in the event of a rating downgrade. However, our bank credit agreements contain a pricing grid in which the interest rates we pay for borrowings thereunder are determined by our current credit ratings.

All of Pinnacle West’s loan agreements contain "cross-default" provisions that would result in defaults and the potential acceleration of payment under these loan agreements if Pinnacle West or APS were to default under certain other material agreements. All of APS’s bank agreements contain "cross-default" provisions that would result in defaults and the potential acceleration of payment under these bank agreements if APS were to default under certain other material agreements. Pinnacle West and APS do not have a material adverse change restriction for credit facility borrowings.

See Note 6 for further discussions of liquidity matters.

The ratings of securities of Pinnacle West and APS as of February 15, 2019 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. 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 downward revision to our credit ratings.

See Note 18 for a discussion of the impacts on our financial statements of consolidating certain VIEs.

The following table summarizes Pinnacle West’s consolidated contractual requirements as of December 31, ~~2016~~2018 (dollars in millions):

This table excludes $41 million in unrecognized tax benefits because the timing of the future cash outflows is uncertain. Estimated minimum required pension contributions are zero for 2019, 2020 and ~~2015,~~2021 (see Note 7).

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. We consider the following accounting policies to be our most critical because of the uncertainties, judgments and complexities of the underlying accounting standards and operations involved.

Regulatory accounting allows for the actions of regulators, such as the ACC and FERC, to be reflected in our financial statements. Their actions may cause us to capitalize costs that would otherwise be included as an expense in the current period by unregulated companies. Regulatory assets represent incurred costs that have been deferred because they are probable of future recovery in customer rates. Regulatory liabilities generally represent amounts collected in rates to recover costs expected to be incurred in the future or amounts collected in excess of costs incurred and are refundable to customers. Management continually assesses whether our regulatory assets are probable of future recovery by considering factors such as applicable regulatory environment changes and recent rate orders to other regulated entities in the same jurisdiction. This determination reflects the current political and regulatory climate in Arizona and is subject to change in the future. If future recovery of costs ceases to be probable, the assets would be written off as a charge in current period earnings, except for pension benefits which would be charged to OCI and result in lower future earnings. We had $1,510 million of regulatory assets and $2,492 million of regulatory liabilities on the Consolidated Balance Sheets at December 31, 2018.

See Notes 1 and 3 for more information.

Changes in our actuarial assumptions used in calculating our pension and other postretirement benefit liability and expense can have a significant impact on our earnings and financial position. The most relevant actuarial assumptions are the discount rate used to measure our liability and net periodic cost, 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 ~~related consolidated statements~~assumed healthcare cost trend rates. We review these assumptions on an annual basis and adjust them as necessary.

On January 1, 2018, we adopted new accounting standard ASU 2017-07, Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This new standard changed our income ~~comprehensive income, changes~~statement presentation of net periodic benefit cost and allows only the service cost component of periodic net benefit cost to be eligible for capitalization. See Note 2 for additional information.

The following chart reflects the sensitivities that a change in ~~equity,~~certain actuarial assumptions would have had on the December 31, 2018 reported pension liability on the Consolidated Balance Sheets and our 2018 reported pension expense, after consideration of amounts capitalized or billed to electric plant participants, on Pinnacle West’s Consolidated Statements of Income (dollars in millions):

The following chart reflects the sensitivities that a change in certain actuarial assumptions would have had on the December 31, 2018 other postretirement benefit obligation and our 2018 reported other postretirement benefit expense, after consideration of amounts capitalized or billed to electric plant participants, on Pinnacle West’s Consolidated Statements of Income (dollars in millions):

See Notes 2 and 7 for further details about our pension and other postretirement benefit plans.

We recognize an ARO for the future decommissioning or retirement of our tangible long-lived assets for which a legal obligation exists. The ARO liability represents an estimate of the fair value of the current obligation related to decommissioning and the retirement of those assets. ARO measurements inherently involve uncertainty in the amount and timing of settlement of the liability. We use an expected cash flow approach to measure the amount we recognize as an ARO. This approach applies probability weighting to discounted future cash flow scenarios that reflect a range of possible outcomes. The scenarios consider settlement of the ARO at the expiration of the asset’s current license or lease term and expected decommissioning dates. The fair value of an ARO is recognized in the period ~~ended December 31, 2016. Our audits also included~~in which it is incurred. The associated asset retirement costs are capitalized as part of the ~~financial statement schedules listed~~carrying value of the long-lived asset and are depreciated over the life of the related assets. In addition, we accrete the ARO liability to reflect the passage of time. Changes in these estimates and assumptions could materially affect the ~~Index at Item 15. We also have audited~~amount of the ~~Company’s internal control over financial reporting~~recorded ARO for these assets. In accordance with GAAP accounting, APS accrues removal costs for its regulated utility assets, even if there is no legal obligation for removal.

AROs as of December 31, ~~2016, based~~2018 are described further in Note 11.

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Our operations include managing market risks related to changes in ~~conditions, or that~~interest rates, commodity prices and investments held by our nuclear decommissioning trust fund and benefit plan assets.

We have exposure to changing interest rates. Changing interest rates will affect interest paid on variable-rate debt and the ~~degree~~market value of ~~compliance~~fixed income securities held by our nuclear decommissioning trust, other special use funds (see Note 13 and Note 19), and benefit plan assets. The nuclear decommissioning trust, other special use funds and benefit plan assets also have risks associated with the ~~policies or procedures may deteriorate.~~changing market value of their equity and other non-fixed income investments. Nuclear decommissioning and benefit plan costs are recovered in regulated electricity prices.

InThe tables below present contractual balances of our ~~opinion,~~consolidated long-term and short-term debt at the ~~consolidated financial statements referred to above present fairly,~~expected maturity dates, as well as the fair value of those instruments on December 31, 2018 and 2017. The interest rates presented in ~~all material respects,~~ the ~~financial position of Pinnacle West Capital Corporation and subsidiaries~~tables below represent the weighted-average interest rates as of December 31, ~~2016~~2018 and ~~2015,~~2017 (dollars in millions):

The tables below present contractual balances of APS’s long-term and short-term debt at the ~~results~~expected maturity dates, as well as the fair value of ~~their operations~~those instruments on December 31, 2018 and ~~their cash flows for each of the three years~~2017. The interest rates presented in the ~~period ended December 31, 2016, in conformity with accounting principles generally accepted in~~tables below represent the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reportingweighted-average interest rates as of December 31, ~~2016,~~2018 and 2017 (dollars in millions):

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 fuels. The changes in market value of such contracts have a high correlation to price changes in the hedged commodities.

The table below shows the fair value of maturities of our derivative contracts (dollars in millions) at December 31, 2018 by maturities and by the type of valuation that is performed to calculate the fair values, classified in their entirety based on the ~~criteria established~~lowest level of input that is significant to the fair value measurement. See Note 1, “Derivative Accounting” and “Fair Value Measurements,” for more discussion of our valuation methods.

We are exposed to losses in the event of non-performance or non-payment by ~~the Committee~~counterparties. See Note 16 for a discussion of ~~Sponsoring Organizations~~our credit valuation adjustment policy.

See “Market and Credit Risks” in Item 7 above for a discussion of ~~the Treadway Commission.~~quantitative and qualitative disclosures about market risks.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f), for ~~APS.~~Pinnacle West. Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control — Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, ~~2016.~~2018. The effectiveness of our internal control over financial reporting as of December 31, ~~2016~~2018 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein and also relates to the Company’s consolidated financial statements.

2018 Compared with 2017. Pinnacle West’s consolidated net cash provided by operating activities was $1,277 million in 2018 compared to $1,118 million in 2017. The increase of $159 million in net cash provided is primarily due to higher cash receipts from operating activities as a result of the retail regulatory settlement effective August 19, 2017, higher transmission receipts and higher receipts due to customer growth and higher average effective prices. These items are partially offset by higher payments for operations and maintenance, income taxes, other taxes and interest. The difference between APS and Pinnacle West's net cash provided by operating activities primarily relates to Pinnacle West's cash payments for 4CA's operating costs and differences in other operating cash payments.

2017 Compared with 2016. Pinnacle West’s consolidated net cash provided by operating activities was $1,118 million in 2017 compared to $1,023 million in 2016. The increase of $95 million in net cash provided