Pinnacle West sponsors a qualified defined benefit and account balance pension plan (The Pinnacle West Capital Corporation Retirement Plan) and a non-qualified supplemental excess benefit retirement plan for the employees of Pinnacle West and its subsidiaries. All new employees participate in the account balance plan. Defined benefit plans specify the amount of benefits a plan participant is to receive using information about the participant. The pension plan covers nearly all employees. The supplemental excess benefit retirement plan covers officers of the Company and highly compensated employees designated for participation by the Board of Directors. Our employees do not contribute to the plans. We calculate the benefits based on age, years of service and pay.

Pinnacle West also sponsors other postretirement benefit plans (Pinnacle West Capital Corporation Group Life and Medical Plan and Pinnacle West Capital Corporation Post-65 Retiree Health Reimbursement Arrangement) for the employees of Pinnacle West and its subsidiaries. These plans provide medical and life

insurance benefits to retired employees. Employees must retire to become eligible for these retirement benefits, which are based on years of service and age. For the medical insurance plan, retirees make contributions to cover a portion of the plan costs. For the life insurance plan, retirees do not make contributions. We retain the right to change or eliminate these benefits.

Pinnacle West uses a December 31 measurement date each year for its pension and other postretirement benefit plans. The market-related value of our plan assets is their fair value at the measurement date. See Note 14 for further discussion of how fair values are determined. Due to subjective and complex judgments, which may be required in determining fair values, actual results could differ from the results estimated through the application of these methods.

A significant portion of the changes in the actuarial gains and losses of our pension and postretirement plans is attributable to APS and therefore is recoverable in rates. Accordingly, these changes are recorded as a regulatory asset or regulatory liability.

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



	Pension									Other Benefits
	2019			2018			2017			2019			2018			2017
Service cost-benefits earned during the period	$	49,902		$	56,669		$	54,858		$	18,369		$	21,100		$	17,119
Interest cost on benefit obligation	136,843			124,689			129,756			29,894			28,147			29,959
Expected return on plan assets	(171,884		)	(182,853		)	(174,271		)	(38,412		)	(42,082		)	(53,401		)
Amortization of:
Prior service cost (credit)	—			—			81			(37,821		)	(37,842		)	(37,842		)
Net actuarial loss	42,584			32,082			47,900			—			—			5,118
Net periodic benefit cost (benefit)	$	57,445		$	30,587		$	58,324		$	(27,970	)	$	(30,677	)	$	(39,047	)
Portion of cost charged to expense	$	30,312		$	10,120		$	27,295		$	(19,859	)	$	(21,426	)	$	(18,274	)



	Pension						Other Benefits
	2019			2018			2019			2018
Change in Benefit Obligation
Benefit obligation at January 1	$	3,190,626		$	3,394,186		$	676,771		$	753,393
Service cost	49,902			56,669			18,369			21,100
Interest cost	136,843			124,689			29,894			28,147
Benefit payments	(177,882		)	(184,161		)	(32,486		)	(31,540		)
Actuarial (gain) loss	413,625			(200,757		)	54,376			(94,329		)
Benefit obligation at December 31	3,613,114			3,190,626			746,924			676,771
Change in Plan Assets
Fair value of plan assets at January 1	2,733,476			3,057,027			723,677			1,022,371
Actual return on plan assets	602,030			(201,078		)	144,095			(40,354		)
Employer contributions	150,000			50,000			—			—
Benefit payments	(167,155		)	(172,473		)	(30,278		)	(72,453		)
Transfer to active union medical account	—			—			—			(185,887		)
Fair value of plan assets at December 31	3,318,351			2,733,476			837,494			723,677
Funded Status at December 31	$	(294,763	)	$	(457,150	)	$	90,570		$	46,906

The Pinnacle West Capital Corporation Retirement Plan is more than 100% funded on an accumulated benefits obligation basis at December 31, 2019, therefore the only pension plan with an accumulated benefits obligation in excess of plan assets in 2019 is a non-qualified supplemental excess benefit retirement plan.



	Pension						Other Benefits
	2019			2018			2019		2018
Noncurrent asset	$	—		$	—		$	90,570	$	46,906
Current liability	(14,578		)	(13,980		)	—		—
Noncurrent liability	(280,185		)	(443,170		)	—		—
Net amount recognized	$	(294,763	)	$	(457,150	)	$	90,570	$	46,906



	Pension						Other Benefits
	2019			2018			2019			2018
Net actuarial loss	$	735,186		$	794,292		$	12,238		$	63,544
Prior service credit	—			—			(189,912		)	(227,733		)
APS’s portion recorded as a regulatory (asset) liability	(660,223		)	(733,351		)	177,209			163,767
Income tax expense (benefit)	(18,546		)	(15,083		)	570			561
Accumulated other comprehensive loss	$	56,417		$	45,858		$	105		$	139



	Pension		Other Benefits
Net actuarial loss	$	33,642	$	—
Prior service credit	—		(37,575		)
Total amounts estimated to be amortized from accumulated other comprehensive loss (gain) and regulatory assets (liabilities) in 2020	$	33,642	$	(37,575	)



	Benefit Obligations As of December 31,				Benefit Costs For the Years Ended December 31,
	2019		2018		2019		2018		2017
Discount rate – pension	3.30	%	4.34	%	4.34	%	3.65	%	4.08	%
Discount rate – other benefits	3.42	%	4.39	%	4.39	%	3.71	%	4.17	%
Rate of compensation increase	4.00	%	4.00	%	4.00	%	4.00	%	4.00	%
Expected long-term return on plan assets - pension	N/A		N/A		6.25	%	6.05	%	6.55	%
Expected long-term return on plan assets - other benefits	N/A		N/A		5.40	%	5.40	%	6.05	%
Initial healthcare cost trend rate (pre-65 participants)	7.00	%	7.00	%	7.00	%	7.00	%	7.00	%
Initial healthcare cost trend rate (post-65 participants)	4.75	%	4.75	%	4.75	%	4.75	%	5.00	%
Ultimate healthcare cost trend rate	4.75	%	4.75	%	4.75	%	4.75	%	5.00	%
Number of years to ultimate trend rate (pre-65 participants)	6		7		7		8		4

In selecting the pretax expected long-term rate of return on plan assets, we consider past performance and economic forecasts for the types of investments held by the plan. For 2020, we are assuming a 5.75% long-term rate of return for pension assets and 5.00% (before tax) for other benefit assets, which we believe is reasonable given our asset allocation in relation to historical and expected performance.

In selecting our healthcare trend rates, we consider past performance and forecasts of healthcare costs. A one percentage point change in the assumed initial and ultimate healthcare cost trend rates would have the following effects on our December 31, 2019 amounts (dollars in thousands):



	1% Increase		1% Decrease
Effect on other postretirement benefits expense, after consideration of amounts capitalized or billed to electric plant participants	$	9,299	$	(3,827	)
Effect on service and interest cost components of net periodic other postretirement benefit costs	9,434		(7,257		)
Effect on the accumulated other postretirement benefit obligation	124,073		(97,710		)

The Board of Directors has delegated oversight of the pension and other postretirement benefit plans’ assets to an Investment Management Committee (“Committee”). The Committee has adopted investment policy statements (“IPS”) for the pension and the other postretirement benefit plans’ assets. The investment strategies for these plans include external management of plan assets, and prohibition of investments in Pinnacle West securities.

The overall strategy of the pension plan’s IPS is to achieve an adequate level of trust assets relative to the benefit obligations. To achieve this objective, the plan’s investment policy provides for mixes of investments including long-term fixed income assets and return-generating assets. The target allocation between return-generating and long-term fixed income assets is defined in the IPS and is a function of the plan’s funded status. The plan’s funded status is reviewed on at least a monthly basis.

Changes in the value of long-term fixed income assets, also known as liability-hedging assets, are intended to offset changes in the benefit obligations due to changes in interest rates. Long-term fixed income assets consist primarily of fixed income debt securities issued by the U.S. Treasury and other government agencies, U.S. Treasury Futures Contracts, and fixed income debt securities issued by corporations. Long-term fixed income assets may also include interest rate swaps, and other instruments.

Return-generating assets are intended to provide a reasonable long-term rate of investment return with a prudent level of volatility. Return-generating assets are composed of U.S. equities, international equities, and alternative investments. International equities include investments in both developed and emerging markets. Alternative investments include investments in real estate, private equity and various other strategies. The plan may also hold investments in return-generating assets by holding securities in partnerships, common and collective trusts and mutual funds.

As of December 31, 2019, the asset allocation for other postretirement benefit plan assets is governed by the IPS for those plans, which provides for different asset allocation target mixes depending on the characteristics of the liability. Some of these asset allocation target mixes vary with the plan’s funded status. The following table presents the actual allocations of the investment for the other postretirement benefit plan at December 31, 2019:

See Note 14 for a discussion on the fair value hierarchy and how fair value methodologies are applied. The plans invest directly in fixed income, U.S. Treasury Futures Contracts, and equity securities, in addition to investing indirectly in fixed income securities, equity securities and real estate through the use of mutual funds, partnerships and common and collective trusts. Equity securities held directly by the plans are valued using quoted active market prices from the published exchange on which the equity security trades, and are classified as Level 1. U.S. Treasury Futures Contracts are valued using the quoted active market prices from the exchange on which they trade, and are classified as Level 1. Fixed income securities issued by the U.S. Treasury held directly by the plans are valued using quoted active market prices, and are classified as Level 1. Fixed income securities issued by corporations, municipalities, and other agencies are primarily valued using quoted inactive market prices, or quoted active market prices for similar securities, or by utilizing calculations which incorporate observable inputs such as yield, maturity and credit quality. These instruments are classified as Level 2.

Mutual funds, partnerships, and common and collective trusts are valued utilizing a Net Asset Value (NAV) concept or its equivalent. Mutual funds, which includes exchange traded funds (ETFs), are classified as Level 1 and valued using a NAV that is observable and based on the active market in which the fund trades.

Common and collective trusts are maintained by banks or investment companies and hold certain investments in accordance with a stated set of objectives (such as tracking the performance of the S&P 500 Index). The trust's shares are offered to a limited group of investors, and are not traded in an active market. Investments in common and collective trusts are valued using NAV as a practical expedient and, accordingly, are not classified in the fair value hierarchy. The NAV for trusts investing in exchange traded equities, and fixed income securities is derived from the market prices of the underlying securities held by the trusts. The

Investments in partnerships are also valued using the concept of NAV as a practical expedient and, accordingly, are not classified in the fair value hierarchy. The NAV for these investments is derived from the value of the partnerships' underlying assets. The plan's partnerships holdings relate to investments in high-yield fixed income instruments and assets of privately held portfolio companies. Certain partnerships also include funding commitments that may require the plan to contribute up to $50 million to these partnerships; as of December 31, 2019, approximately $38 million of these commitments have been funded.

The plans’ trustee provides valuation of our plan assets by using pricing services that utilize methodologies described to determine fair market value. We have internal control procedures to ensure this information is consistent with fair value accounting guidance. These procedures include assessing valuations using an independent pricing source, verifying that pricing can be supported by actual recent market transactions, assessing hierarchy classifications, comparing investment returns with benchmarks, and obtaining and reviewing independent audit reports on the trustee’s internal operating controls and valuation processes.



	Level 1		Level 2		Other (a)		Total
Pension Plan:
Cash and cash equivalents	$	9,370	$	—	$	—	$	9,370
Fixed income securities:
Corporate	—		1,541,729		—		1,541,729
U.S. Treasury	406,112		—		—		406,112
Other (b)	—		92,240		—		92,240
Common stock equities (c)	250,829		—		—		250,829
Mutual funds (d)	185,928		—		—		185,928
Common and collective trusts:
Equities	—		—		392,403		392,403
Real estate	—		—		171,645		171,645
Fixed Income	—		—		98,065		98,065
Partnerships	—		—		103,796		103,796
Short-term investments and other (e)	—		—		66,234		66,234
Total	$	852,239	$	1,633,969	$	832,143	$	3,318,351
Other Benefits:
Cash and cash equivalents	$	2,184	$	—	$	—	$	2,184
Fixed income securities:
Corporate	—		202,640		—		202,640
U.S. Treasury	353,650		—		—		353,650
Other (b)	—		7,999		—		7,999
Common stock equities (c)	146,316		—		—		146,316
Mutual funds (d)	14,351		—		—		14,351
Common and collective trusts:
Equities	—		—		83,648		83,648
Real estate	—		—		19,806		19,806
Short-term investments and other (e)	2,881		—		4,019		6,900
Total	$	519,382	$	210,639	$	107,473	$	837,494



	Level 1		Level 2		Other (a)		Total
Pension Plan:
Cash and cash equivalents	$	451	$	—	$	—	$	451
Fixed income securities:
Corporate	—		1,237,744		—		1,237,744
U.S. Treasury	372,649		—		—		372,649
Other (b)	—		78,902		—		78,902
Common stock equities (c)	196,661		—		—		196,661
Mutual funds (d)	120,976		—		—		120,976
Common and collective trusts:
Equities	—		—		272,926		272,926
Real estate	—		—		165,123		165,123
Fixed Income	—		—		86,483		86,483
Partnerships	—		—		125,217		125,217
Short-term investments and other (e)	—		—		76,344		76,344
Total	$	690,737	$	1,316,646	$	726,093	$	2,733,476
Other Benefits:
Cash and cash equivalents	$	93	$	—	$	—	$	93
Fixed income securities:
Corporate	—		163,286		—		163,286
U.S. Treasury	318,017		—		—		318,017
Other (b)	—		7,531		—		7,531
Common stock equities (c)	129,199		—		—		129,199
Mutual funds (d)	10,963		—		—		10,963
Common and collective trusts:
Equities	—		—		65,720		65,720
Real estate	—		—		19,054		19,054
Short-term investments and other (e)	3,633		—		6,181		9,814
Total	$	461,905	$	170,817	$	90,955	$	723,677

Future year contribution amounts are dependent on plan asset performance and plan actuarial assumptions. We made contributions to our pension plan totaling $150 million in 2019, $50 million in 2018, and $100 million in 2017. The minimum required contributions for the pension plan are zero for the next three years. We expect to make voluntary contributions up to $100 million per year during the 2020-2022 period. With regard to contributions to our other postretirement benefit plan, we did not make a contribution in 2019 and 2018. We made a contribution of approximately $1 million in 2017. We do not expect to make any contributions over the next three years to our other postretirement benefit plans. The Company was

Pinnacle West sponsors a defined contribution savings plan for eligible employees of Pinnacle West and its subsidiaries. In 2019, costs related to APS’s employees represented 99% of the total cost of this plan. In a defined contribution savings plan, the benefits a participant receives result from regular contributions participants make to their own individual account, the Company’s matching contributions and earnings or losses on their investments. Under this plan, the Company matches a percentage of the participants’ contributions in cash which is then invested in the same investment mix as participants elect to invest their own future contributions. Pinnacle West recorded expenses for this plan of approximately $11 million for 2019, $11 million for 2018, and $10 million for 2017.