Long-Term Debt and Liquidity Matters

6 Months Ended

Jun. 30, 2024

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

Pinnacle West

On April 10, 2023, Pinnacle West replaced its $200 million revolving credit facility that would have matured on May 28, 2026, with a new $200 million revolving credit facility that matures on April 10, 2028. Pinnacle West has the option to increase the amount of the facility up to a total of $300 million upon the satisfaction of certain conditions and with the consent of the lenders. Interest rates are based on Pinnacle West’s senior unsecured debt credit ratings and the agreement includes a sustainability-linked pricing metric which permits an interest rate reduction or increase by meeting or missing targets related to specific environmental and employee health and safety sustainability objectives. The facility is available to support Pinnacle West’s general corporate purposes, including support for Pinnacle West’s $200 million commercial paper program, for bank borrowings or for issuances of letters of credit. At June 30, 2024, Pinnacle West had no outstanding borrowings under its revolving credit facility, no letters of credit outstanding under the credit facility, and $76 million of outstanding commercial paper borrowings. The weighted-average interest rate for the outstanding borrowings on June 30, 2024, was 5.46%.

On February 28, 2024, Pinnacle West entered into various equity forward sale agreements (the “Equity Forward Sale Agreements”), which may be settled with Pinnacle West common stock or cash. At June 30, 2024, Pinnacle West could have settled the Equity Forward Sale Agreements with the issuance of 11,240,601 shares of common stock, which would have provided cash liquidity to Pinnacle West of $726 million. See Note 10.

Convertible Senior Notes. In June 2024, Pinnacle West issued $525 million of 4.75% convertible senior notes due 2027 (the “Convertible Notes”), which are senior unsecured obligations of Pinnacle West, and will mature on June 15, 2027. The Convertible Notes bear interest at a fixed rate of 4.75% per year, payable semiannually in arrears on June 15 and December 15 of each year, beginning on December 15, 2024. Proceeds from the Convertible Notes were used to repay APS’s 364-day $350 million term loan facility that matures on December 10, 2024 and commercial paper borrowings.

Prior to March 15, 2027, the holders of the Convertible Notes may elect at their option to convert all or any portion of their Convertible Notes under the following limited circumstances:

•during any calendar quarter (and only during such calendar quarter), if the sale price of Pinnacle West common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter, is greater than or equal to 130% of the conversion price on each applicable trading day;

•during the five business day period after any 10 consecutive trading day period (“Measurement Period”) in which the trading price per $1,000 principal amount of Convertible Notes for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price of Pinnacle West common stock and the conversion rate on such trading day; or

•upon the occurrence of certain corporate events, as defined in the Convertible Notes’ indenture.

On or after March 15, 2027, until the maturity date, the holders of the Convertible Notes may elect at their option to convert all or any portion of their notes. Upon conversion, Pinnacle West will pay cash up to the aggregate principal amount of the Convertible Notes converted and at Pinnacle West’s sole discretion, pay or deliver cash, shares of Pinnacle West common stock or a combination of both, in respect to the remainder, if any, of Pinnacle West’s conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted. At June 30, 2024, the initial conversion rate, which is subject to certain adjustments as set forth in the indenture, is 10.8338 shares of common stock per $1,000 principal amount of Convertible Notes, which is equivalent to an initial conversion price of approximately $92.30 per share of Pinnacle West’s common stock. The conversion rate is not subject to adjustment for any accrued and unpaid interest.

If Pinnacle West undergoes a fundamental change, as defined in the Convertible Notes’ indenture, then, subject to certain conditions, holders of the Convertible Notes may require Pinnacle West to repurchase for cash all or any portion of its Convertible Notes at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

As of June 30, 2024, the conditions allowing holders to convert their Convertible Notes, were not met, and as a result, the Convertible Notes were classified as long term debt on Pinnacle West’s Condensed Consolidated Balance Sheet with a carrying amount of $518 million, including unamortized debt issuance costs of $7 million. The estimated fair value of the Convertible Notes as of June 30, 2024 was $530 million (Level 2 within the fair value hierarchy).

As of June 30, 2024, based on Pinnacle West’s average stock price and the relevant terms of the Convertible Notes, there were no shares of Pinnacles West’s common stock included in basic or diluted EPS relating to the potential conversion of the Convertible Notes. See Note 10.

Floating Rate Notes. Additionally, in June 2024, Pinnacle West completed the sale of $350 million Floating Rate Notes due 2026 (the “Floating Rate Notes”). The Floating Rate Notes are senior unsecured obligations of Pinnacle West and will mature on June 10, 2026. The Floating Rate Notes bear a variable interest rate of Compounded SOFR plus 82 basis points per year. Proceeds were used to repay a portion of Pinnacle West’s $450 million term loan maturing in December 2024 and the full amount of Pinnacle West’s $175 million term loan maturing in December 2024.

On June 6, 2024, Pinnacle West repaid $250 million of its $450 million term loan which matures in December 2024.

APS

On April 10, 2023, APS replaced its two $500 million revolving credit facilities that would have matured on May 28, 2026, with a new $1.25 billion revolving credit facility that matures on April 10, 2028. APS has the option to increase the amount of the facility by up to a maximum of $400 million, for a total of $1.65 billion, upon the satisfaction of certain conditions and with the consent of the lenders. Interest rates are based on APS’s senior unsecured debt credit ratings and the agreement includes a sustainability-linked pricing metric which permits an interest rate reduction or increase by meeting or missing targets related to specific environmental and employee health and safety sustainability objectives. The facility is available to support APS’s general corporate purposes, including support for APS’s commercial paper program, which was increased from $750 million to $1 billion on April 10, 2023, for bank borrowings or for issuances of letters of credit. At June 30, 2024, APS had no outstanding borrowings under its revolving credit facility, no letters of credit outstanding under the credit facility, and $456 million of outstanding commercial paper borrowings. The weighted-average interest rate for the outstanding borrowings on June 30, 2024, was 5.43%.

APS is currently authorized to receive up to $150 million annually in equity infusions from Pinnacle West without seeking ACC approval. On October 27, 2023, APS sought approval from the ACC to receive from Pinnacle West in 2024 up to an additional $500 million in equity infusions above the authorized limit of $150 million, and the ACC approved the increased equity infusion limit for 2024 on January 9, 2024, and subsequently issued the order on January 24, 2024.

On June 12, 2024, Pinnacle West contributed $450 million into APS in the form of an equity infusion. APS used this contribution to repay short-term indebtedness.

On December 15, 2022, the ACC issued a financing order reaffirming the previous short-term debt authorization equal to the sum of (i) 7% of APS’s capitalization, and (ii) $500 million (which is required to be used for costs relating to purchases of natural gas and power) and approving APS’s application filed April 6, 2022 requesting to increase the long-term debt limit from $7.5 billion to $8.0 billion and to exclude financing lease power purchase agreements (“PPAs”) from the definition of long-term debt for purposes of the ACC financing orders.

On April 19, 2024, APS submitted an application to the ACC requesting to further increase the long-term debt limit from $8.0 billion to $9.5 billion and to increase Pinnacle West’s permitted yearly equity infusions to equal up to 2.5% of Pinnacle West’s consolidated assets each calendar year on a three-year rolling average basis. APS cannot predict the outcome of this matter.

On December 12, 2023, APS entered into an agreement for a new 364-day $350 million term loan facility that matures on December 10, 2024. Borrowings under the facility bear interest at SOFR plus 1.0% per

annum. On February 9, 2024, APS drew the full amount of $350 million, which APS subsequently paid off in full on June 6, 2024.

On May 9, 2024, APS issued $450 million of 5.7% senior unsecured notes that mature August 15, 2034. The net proceeds from the sale were used to repay short-term indebtedness consisting of commercial paper and for general corporate purposes.

On June 17, 2024, APS repaid its $250 million 3.35% senior unsecured notes at maturity from commercial paper borrowings.

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

Debt Fair Value

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


	As of June 30, 2024				As of December 31, 2023
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Pinnacle West	$	1,567,173	$	1,558,831	$	1,123,731	$	1,095,935
APS	7,489,052		6,486,298		7,291,891		6,459,718
Total	$	9,056,225	$	8,045,129	$	8,415,622	$	7,555,653