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Rating Action:

Moody's upgrades Pinnacle West Capital and Arizona Public Service; outlooks are stable

02 Jun 2015

Approximately $3.6 billion of rated debt affected

New York, June 02, 2015 -- Moody's Investors Service upgraded the senior unsecured and issuer ratings of Pinnacle West Capital Corporation (Pinnacle) to A3 from Baa1 and the senior unsecured and issuer ratings of Arizona Public Service Company (APS) to A2 from A3. Moody's also upgraded APS' commercial paper rating to P-1 from P-2 and affirmed Pinnacle's P-2 commercial paper rating. The rating outlooks for Pinnacle and APS are stable.

RATINGS RATIONALE

"The upgrade of Pinnacle and APS' ratings is driven by a strong financial profile that we expect to continue under a constructive and credit supportive Arizona regulatory environment " said Jeffrey Cassella, Assistant Vice President.

Pinnacle's A3 rating is one-notch lower than the rating of APS to reflect the structural subordination of the parent's obligations to creditors at the utility level. In addition, Pinnacle's rating reflects the stable cash flows (i.e. upstream dividends) provided by its principal operating subsidiary, APS, a regulated vertically-integrated electric utility in Arizona. APS' A2 rating is driven by the constructive Arizona regulatory environment, which allow for a broad suite of timely recovery mechanisms; solid customer and load growth in Arizona compared to the national average and effective cost controls, which allows APS to earn close to its authorized ROE and drives its strong financial metrics. Pinnacle currently has only $125 million of parent company debt due in 2017 and the occasional commercial paper borrowings.

The Arizona Corporation Commission (ACC) has made significant progress in developing a credit supportive framework for the state's investor-owned regulated utilities. Actions taken by the ACC have included: 1) shortening the time taken to finalize rate case orders; 2) providing a strong suite of rate recovery mechanisms; and 3) tackling the difficult cost-shift issue associated with distributed generation. These actions are credit positive for APS and have enabled APS to earn close to its allowed return on equity and generate strong financial metrics including cash flow from operations pre-working capital (CFO pre-W/C) to debt of 29.1% in 2014.

On November 14, 2013, the ACC voted to impose a charge of 70 cents per kilowatt (kW) system per month on residential rooftop solar customers that installed panels after December 31, 2013. The fee equates to about $4.90 per month on the 7-kW system that homeowners in Arizona typically install.

On April 2, 2015, APS asked the ACC to increase its monthly grid access charge to $3.00 per kW, which equates to about a $21 monthly charge for a typical residential solar customer. Under the proposal, solar customers will also have the option to enroll in an existing rate plan that includes time of use rates and a demand charge. APS is requesting an effective date of August 1, 2015 for the new rates. The application with the ACC on the increased surcharge is pending.

While the surcharge does not have a material financial impact on APS' financial metrics since the fixed charge imposed on future rooftop solar customers does not increase the utilities' revenues, but it does reduce the impact of the revenue cost-shift on non-rooftop solar customers. An increase in the surcharge would support our view that the ACC is proactive in monitoring the cost-shift issue that arises with rooftop solar distributed generation.

As a predominately regulated business and with little parent holding company debt, Pinnacle's rating outlook is based on that of APS. APS' stable rating outlook reflects our expectation that the regulatory environment in Arizona remains credit supportive and economic growth in Arizona continues to regain the strength that existed prior to the financial downturn. The stable outlook incorporates our view that APS will maintain stable cash flows given the timely rate recovery mechanisms allowed by the ACC, such that APS' financial metrics will remain consistent with A2 rated US regulate utilities, including CFO pre-W/C to debt of at least 25%. The stable outlook also reflects APS' planned rate base expansion will receive constructive rate relief through enhanced recovery mechanisms and that planned capital expenditures will be financed in a manner that is consistent with the entities' current financial position.

What Could Change the Rating -- Up

Pinnacle's rating could be upgraded if APS' rating was upgraded. APS' rating could be upgraded with continued credit supportiveness of the Arizona regulatory environment that led to meaningfully greater predictability including timely recovery of prudently incurred costs and investments; and maintenance of strong financial metrics including CFO pre-W/C to debt in the high 20% range on a sustained basis.

What Could Change the Rating -- Down

Pinnacle's rating could be downgraded if Pinnacle increased its leverage or increased its overall risk profile through investments in unregulated activities. Additionally, Pinnacle's rating could be downgraded if APS' rating was downgraded. APS' rating could be downgraded if we believe the Arizona regulatory environment were to become less credit supportive or predictable such that there is an adverse rate case ruling or cost recovery disallowances; or if APS experienced prolonged operational difficulties or increased non-recoverable costs causing financial metrics to weaken including CFO pre-W/C to debt below 22% on a sustained basis.

Ratings Upgraded Include:

..Pinnacle West Capital Corporation

....Issuer Rating, upgraded to A3 from Baa1

....Senior Unsecured Rating, upgraded to A3 from Baa1

....Shelf Registration: Senior Unsecured Rating, upgraded to (P)A3 from (P)Baa1

....Commercial Paper Rating, affirmed at P-2

..Arizona Public Service Company

....Issuer Rating, upgraded to A2 from A3

....Senior Unsecured Rating, upgraded to A2 from A3

....Commercial Paper Rating, upgraded to P-1 from P-2

....Shelf Registration: Senior Unsecured Rating, upgraded to (P)A2 from (P)A3

..Issuer: Coconino County Pollution Control Corp., AZ (Supported by Arizona Public Service Company)

....Senior Unsecured Revenue Bonds, Upgraded to A2 from A3

....Senior Unsecured Revenue Bonds, Upgraded to P-1 from P-2

..Issuer: Farmington (City of) NM (Supported by Arizona Public Service Company)

....Senior Unsecured Revenue Bonds, Upgraded to A2 from A3

..Issuer: Maricopa (County of) AZ, Poll. Ctrl. Corp. (Supported by Arizona Public Service Company)

....Senior Unsecured Revenue Bonds, Upgraded to A2 from A3

..Issuer: Maricopa Co. Pollution Control Corp., AZ (Supported by Arizona Public Service Company)

....Senior Unsecured Revenue Bonds, Upgraded to A2 from A3

....Senior Unsecured Revenue Bonds, Upgraded to P-1 from P-2

....Underlying Senior Unsecured Revenue Bonds, Upgraded to A2 from A3

..Issuer: Navajo County Pollution Control Corp., AZ (Supported by Arizona Public Service Company)

....Senior Unsecured Revenue Bonds, Upgraded to A2 from A3

..Issuer: PVNGS II Funding Corp., Inc. (Supported by Arizona Public Service Company)

....Senior Secured Sec. Lease Oblig. Bond, Upgraded to A2 from A3

Outlook Actions:

..Issuer: Arizona Public Service Company

....Outlook, Changed To Stable From Positive

..Issuer: Pinnacle West Capital Corporation

....Outlook, Changed To Stable From Positive

..Issuer: PVNGS II Funding Corp., Inc.

....Outlook, Changed To Stable From Positive

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in December 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Phoenix, AZ, Pinnacle West Capital Corporation is a holding company whose principal operating subsidiary, Arizona Public Service Company, is a regulated vertically-integrated electric utility providing electric service to about 1.2 million homes and businesses in most of Arizona.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jeffrey F. Cassella
Asst Vice President - Analyst
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

William L. Hess
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's upgrades Pinnacle West Capital and Arizona Public Service; outlooks are stable
No Related Data.
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