PNWPinnacle West Capital

On January 5, 2023, the ACC opened a new docket to explore the possibility of modifications to the ACC’s historical test year rules. The ACC requested comments and held two workshops exploring ways to reduce regulatory lag, including alternative ratemaking structures such as future test years, hybrid test years, and formula rates. On December 3, 2024, the ACC approved a policy statement regarding formula rate plans. The policy statement allows provides regulated utilities with the opportunity to propose formula rate plans in future rate cases. Proposed plans must be based on a historical test year, include an annual update with a true-up On March 28, 2025, the Residential Utility Consumer Office (“RUCO”), the Arizona Large Customer Group (“ALCG”), and an earnings test individual customer filed a lawsuit challenging the ACC’s authority to ensure a utility earns within a 20 basis points band issue the formula rate policy statement outside of its authorized return on equity. Proposed plans should also include an annual meeting and challenge periods for stakeholder feedback. Utilities that implement Arizona’s formula rates also must file a full rulemaking process. On June 13, 2025, the lawsuit challenging the ACC’s formula rate case at least every five years unless an alternate schedule is set policy was dismissed by the ACC. Superior Court of Maricopa County. Following the dismissal, the plaintiffs filed an appeal with the Arizona Court of Appeals as well as a Petition for Special Action with the Arizona Supreme Court. The Supreme Court declined to exercise jurisdiction on the Petition for Special Action. The plaintiffs also filed a Petition for Special Action with the Arizona Court of Appeals, which has accepted jurisdiction to determine whether the case should be remanded back to the Superior Court for expedited consideration of the merits. On November 21, 2025, the Arizona Court of Appeals ruled that the issue should be remanded back to the Superior Court to determine whether the ACC’s formula rate policy must go through a formal rulemaking process. In response, APS, the ACC, and several other Arizona utility companies filed petitions for review of the Court of Appeals decision with the Arizona Supreme Court, which is pending at this time. APS cannot predict the outcome of this matter.

EPA Good Neighbor Proposal for Arizona. On March 15, 2023, EPA issued its final Good Neighbor Plan for 23 states in order to ensure that the cross-state transport of ozone forming emissions does not interfere with downwind state compliance with the National Ambient Air Quality Standards (“NAAQS”). NAAQS. Thermal power plant emission limitations are a key aspect of these regulations, which involve emission allowance trading for nitrogen oxide (“NOx”) NOx emissions. While Arizona was not among the 23 states subject to EPA’s March 2023 final action, EPA announced on January 23, 2024, that it was proposing to add Arizona and New Mexico (along with two other additional states) to EPA’s NOx emission allowance trading program finalized last year. That proposal involves adding these states to the Good Neighbor Plan and disapproving the corresponding provisions of each state’s State Implementation Plan. Because APS operates thermal power plants within Arizona and those portions of the Navajo Nation within New Mexico, APS’s power plants would be subject to EPA’s Good Neighbor Plan upon finalization of this proposal. EPA’s final Good Neighbor Plan is subject to ongoing judicial review in the D.C. Circuit Court of Appeals. On June 27, 2024, the U.S. Supreme Court granted a motion to stay the effectiveness of EPA’s final Good Neighbor Plan pending the resolution of the litigation. As such, APS will not be impacted by the Good Neighbor Plan until the outcome of this litigation is finalized. In addition, on December 19, 2024, EPA announced that it was withdrawing its proposal to add Arizona (along with other western states) to the federal Good Neighbor Plan. As such, while On March 12, 2025, EPA announced its intention to reconsider the Good Neighbor Plan and on January 30, 2026, EPA published a proposed rule in the Federal Register that would approve Arizona’s and New Mexico’s State Implementation Plans concerning the cross-state transport of ozone forming emissions. Such approval, if finalized as proposed, would remove APS’s operations in Arizona and New Mexico from the scope of future efforts to regulate such emissions. APS cannot predict the outcome of this pending regulatory action nor when EPA may elect take final action on this proposal. If finalized as proposed, this action would then be subject to resume work on judicial review and finalize this proposal in APS cannot predict the future, it is unlikely to do so over a near-term horizon. outcome of such litigation, if any arises. In addition, APS cannot predict the outcome of any future EPA efforts to add Arizona or New Mexico to a future federal program addressing the cross-state transport of ozone-forming emissions. Should a federal Good Neighbor Plan (which depends on action disapproving the Arizona State Implementation Plan) or whether the Good Neighbor Plan itself will remain in effect pending the outcome of judicial review in the D.C. Circuit Court of Appeals. Should program like the Good Neighbor Plan ultimately be imposed on APS and its operations in Arizona and New Mexico, it would have material impact on both the costs to operate current APS power plants and APS’s ability to develop new thermal generation to serve load. At this time, APS cannot predict the impact on the Company’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 current and future generation portfolio. The current regulatory standards, laws, Current laws and regulations as well as changes to those laws and regulations, including via judicial decisions and executive orders, create strategic challenges as to the in acquiring an 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, in addition to specific competitive resource procurement requirements. Operating, maintaining, and developing our generation and other assets requires significant capital expenditures and operations and maintenance costs that may be difficult to maintain at adequate levels while maintaining reliability. The development and operation of any generation facility these facilities is also subject to many other risks, including those related to financing, siting, permitting, new and evolving technology, extreme weather events, workforce issues, cybersecurity attacks, supply chain constraints for key equipment and critical spare parts, overreliance on or the existence of a small number of suppliers, access to fuel, and the construction of sufficient transmission capacity to support these facilities among others. Macroeconomic and geopolitical factors may also impact our ability to procure the generation and other equipment we need to meet customer demand. APS needs to develop or acquire new generation and other facilities, potentially modernize existing facilities, and/or contract for additional capacity in order to meet future resource needs and load forecasts. APS’s inability to do so could have a material adverse impact on our business and results of operations.

We are exposed to the impact of market fluctuations in the commodity price and transportation costs of electricity, natural gas, coal and in interest rates. We manage risks associated with market volatility by utilizing various physical and financial instruments including futures, forwards, options, and swaps. As part of our overall risk management program, we may use derivative instruments to hedge purchases and sales of electricity and natural gas as well as interest rate risk. The changes in market value of such contracts have a high correlation to price changes in the hedged transactions. We also enter into derivative instruments for economic hedging purposes. Contracts that have the same terms (quantities, delivery points and delivery periods) and for which power does not flow are netted, which reduces both revenues and fuel and purchased power expenses in our Consolidated Statements of Income, but does not impact our financial condition, net income, or cash flows.