Fitch Upgrades Pinnacle West & Subsidiary Arizona Public Service to 'BBB+'

  Fitch Upgrades Pinnacle West & Subsidiary Arizona Public Service to 'BBB+'

Business Wire

NEW YORK -- May 17, 2013

Fitch Ratings has taken the following rating actions on Pinnacle West Capital
Corp. (PNW) and its subsidiaries:

Pinnacle West Capital Corp.:

--Long-term Issuer Default Rating (IDR) upgraded to 'BBB+' from 'BBB';

--Short-term IDR upgraded to 'F2' from 'F3';

--Commercial paper upgraded to 'F2' from 'F3'.

Arizona Public Service Co. (APS):

--Long-term IDR upgraded to 'BBB+' from 'BBB';

--Short-term IDR upgraded to 'F2' from 'F3';

--Senior unsecured upgraded to 'A-' from 'BBB+';

--Commercial paper upgraded to 'F2' from 'F3'.

PVNGS II Funding Corp.

--Secured lease obligation bonds upgraded to 'A-' from 'BBB+'.

The Rating Outlook is Stable.

Approximately $3.4 billion of long term debt is affected by the rating action.

The upgrade reflects strong operating performance in 2012 and the constructive
outcome of APS' settled 2010 General Rate Case (GRC), which will provide a
tailwind for improved earnings and credit ratios this year. The ratings also
consider APS' solid liquidity position, manageable debt maturities, low
leverage, and the financial support from its corporate parent, PNW, including
anticipated equity infusions agreed to in APS' settlement of its 2008 GRC.

Stable Outlook: The Stable Outlook reflects the relatively predictable
earnings and cashflows of PNW's core regulated operating subsidiary, APS, a
vertically integrated electric utility subsidiary. Substantially all of PNW's
consolidated long-term debt resides at APS, except for a $125 million term
loan which matures in 2015.

KEY RATING DRIVERS

--Constructive settlement of 2010 GRC;

--Four-year GRC stay-out through May of 2015;

--Low leverage;

--Large Capex program including environmental upgrades at coal plants.

Strong Coverage Measures

Strong Operating Performance: APS' EBITDA to interest coverage improved to
6.4x for the LTM period ending March 31, 2013 as compared with 6.0x for 2012,
and primarily reflects new rates effective July 1, 2012 as per APS' recently
settled 2010 GRC. The improved earnings also reflect cooler than normal winter
weather in APS' service territory, improved customer growth, and new
transmission rates. Leverage, as measured by debt to EBITDA, was low at 2.5x.
Credit metrics compare well to 'BBB+' guideline ratios and peers. Going
forward, Fitch expects EBITDA and FFO coverage Metrics to approximate
5.0x-6.0x, and for FFO/Debt leverage metrics to remain above 22% through 2015.

GENERAL RATE CASE SETTLEMENT

Constructive 2010 GRC Settlement: The Arizona Corporation Commission (ACC)
approved the regulatory settlement agreement as proposed by APS and other
parties in APS's 2010 GRC without material modifications on May 15, 2012. The
ACC approved an increase in nonfuel base rates of $116.3 million, which
represented roughly 60% of APS's requested amount based on an authorized
return on equity (ROE) of 10% for new rates effective July 1, 2012.
Additionally, per the terms of the settlement, APS agreed to a four-year
stay-out and is prohibited from filing its next rate case before May 31, 2015,
for rates effective on or after July 1, 2016, at the earliest. Controlling
operating costs will be key to maintaining credit quality.

Good Liquidity: As of March 31, 2013, PNW had total consolidated liquidity
available of $1.2 billion including $25 million of cash and cash equivalents.
PNW maintains liquidity through a $200 million unsecured credit facility which
matures in November 2016. APS maintains liquidity through two $500 million
unsecured credit facilities which mature in November 2016 and April 2018,
respectively. Additionally, PNW and APS can upsize their $200 million and $500
million credit facilities to $300 million and $700 million with consent of the
lenders. Fitch notes that there were no borrowings against these facilities as
of March 31, 2013. The credit facilities are subject to a maximum debt to
capitalization covenant of 65% and as of March 31, 2013 both PNW and APS were
in compliance with debt to capitalization ratios of 45.2% and 43.7%. PNW's
revolving credit facility contains cross-default provisions to APS, while APS'
revolving credit facilities do not contain cross-defaults to PNW. As of March
31st 2013, PNW and APS were in compliance with all financial covenants under
these facilities.

Manageable Maturities: In the intermediate term, PNW's long-term debt
maturities are sizable, with $1.5 billion scheduled to mature through 2016 as
follows (includes capital lease obligations): $123 million in 2013, $540
million in 2014, $470 million in 2015, and $358 million in 2016. Fitch expects
PNW to refinance these maturities upon expiry.

Strong Nuclear Performance: On the operating front, APS's generating
facilities exhibited solid operating performance in 2012 with meaningful
improvement achieved at the Palo Verde Nuclear Generating Station (PVNGS). In
2012, the PVNGS successfully refueled units 2 and 3, and recorded its best
generation year ever producing over 31.9 million megawatt-hours (Mwh), with an
overall capacity factor of 92.3%, significantly improved from 79% in 2007.
Fitch notes that PVNGS set a new generation record for a power plant of any
fuel type and is the only U.S. generating facility to ever produce more than
30 million Mwh.

CAPITAL EXPENDITURES

Large Capital Spending Program a Key Growth Driver: Capex at APS is projected
to average $1.2 billion per annum through 2015 and includes investments
associated with the purchase of Southern California Edison Company's interest
in units 4 and 5 at the Four Corners coal-generating facility for $253 million
by 2013 and related emissions control upgrades. Other investments include the
construction of new transmission capacity, increased efficiency programs,
installation of advanced meters, and increased renewable generation,
specifically under the AZ Sun program. APS is increasing its renewable
generation capacity to meet renewable portfolio standard targets in the state.
For the LTM period ending March 31, 2013, Fitch notes that both APS and PNW
generated positive FCF. Going forward, Fitch expects APS to fund the majority
of estimated capex internally and the balance with external financing, which
will moderately pressure leverage metrics. Going forward, leverage, as
measured by debt to EBITDA is expected to moderately increase to 3.0x by 2015.
Fitch anticipates external funding requirements to be financed via a balanced
mix of equity and debt.

COMPANY PROFILE

PNW is a parent holding company that derives substantially all of its revenue
from its wholly-owned operating subsidiary, APS. APS is a vertically
integrated regulated electric utility that accounted for virtually all
consolidated revenues, earnings, cashflows and assets. For 2012, 2011, 2010,
and 2009, APS approximated 100%, 100%, 97%, and 99%, of PNW's consolidated
revenues, respectively. APS is the largest electric utility in Arizona,
serving 1.1 million customers in a 34,646 square mile service territory.

Rating Sensitivities

No positive rating actions are expected at this time.

What could cause future Negative Rating Action?

Greater-than-anticipated increases in operating and other expense could erode
credit quality. An unexpected, prolonged base load generating facility outage
could lead to adverse credit rating actions.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', Aug. 8, 2012;

--'Rating North American Utilities, Gas and Water Companies', May 16, 2011;

--'Recovery Ratings and Notching Criteria for Utilities', Nov. 13, 2012;

--'Parent and Subsidiary Rating Linkage', Aug. 8, 2012.

Applicable Criteria and Related Research

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Rating North American Utilities, Power, Gas, and Water Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=625129

Recovery Ratings and Notching Criteria for Utilities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693750

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=791402

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Contact:

Fitch Ratings
Primary Analyst
Daniel Neama
Associate Director
+1-212-908-0561
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
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Senior Director
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or
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or
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