Letter from the CEO & CSO

Arizona Public Service is at the forefront of a changing energy industry. As our business undergoes a period of steady transformation, we are committed to innovative strategies and sustainable practices that will set the pace for our industry, deliver value to our customers and support a sustainable energy future for Arizona.

APS is a leader in embracing change and supporting new technologies, enabling customer choice and control, increasing the adoption of carbon-free resources, pioneering the next generation of energy efficiency programs and championing safety and security. As a result, APS customers benefit from reliable, affordable and increasingly clean energy and a smarter, more responsive energy grid.

Innovation

Faced with the challenges of managing peak demand, minimizing carbon emissions and integrating intermittent renewable energy, we are taking the lead in the economic deployment of controllable resources, such as energy storage and advanced inverters.

We have been a leader in the deployment of advanced meter technologies as well as intelligent grid devices, and over the next 15 years, we plan to add up to 500 megawatts of energy storage capacity. Energy storage enables us to support growing solar resources and offers additional flexibility by allowing electricity to be stored on the grid and deployed for later use.

Environmental Strategy

Approximately half of the energy we currently produce at APS is carbon free, which includes the Palo Verde Generating Station, the largest carbon-free power plant in the United States. We are increasing generation from natural gas from 26 percent to 33 percent of our total energy mix, reducing our coal generation from 21 percent to 11 percent, and increasing renewable energy from 12 percent to 18 percent ─ all by 2032.

One way APS reduces its environmental impact is by closing older, less-efficient coal units and upgrading environmental controls on newer units. Selective catalytic reduction (SCR) technology currently is employed at four of our power plants, and SCRs currently are being installed at two additional facilities. The installation of SCRs at the Four Corners Power Plant in 2018 will result in a 90 percent reduction of nitrogen oxide (NOx) at that facility.

In 2017, our dedication to environmental stewardship was recognized with our first “Leadership” rating from CDP (formerly the Carbon Disclosure Project) for climate change and water management due to our governance, strategy and risk management actions. Pinnacle West was one of only two U.S. utilities awarded Leadership ratings from CDP for both climate change and water management.

Employees

APS employees are critical to achieving our vision of creating a sustainable energy future for Arizona. Our workforce strengthens and energizes our company with a wide spectrum of backgrounds, viewpoints and ideas. We work to attract and develop a diverse workforce and leadership team that foster innovation, inclusion and high performance ─ valuable assets as we work to capture emerging opportunities in our changing industry and reflect the communities we serve.

Through extensive succession planning, we ensure that we are prepared to fill leadership roles with capable, experienced employees ─ not just at the executive level but throughout the company.

Flexible Resources

Flexible resources are vital in maintaining power reliability while keeping costs low for our customers. Developing a portfolio of flexible resources, such as the fast-ramping natural gas combustion turbines we are deploying in the Ocotillo Modernization Project, helps us effectively respond to customer demand and incorporate renewable resources while operating in an increasingly integrated regional market.

Microgrids provide an excellent example of a flexible resource that is particularly well suited for our system. Not only do microgrids provide needed backup power to customers who demand the highest level of reliability, such as data centers, but they also increase flexible capacity on our system to meet peak demand requirements and enhance reliability.

Consumer Engagement

Technologies such as rooftop solar and smart thermostats have given customers increased ability to control their energy usage. As more emerging technologies, such as battery storage, become commercially viable, they will continue to change how customers interact with their energy company. By being proactive and working with our customers to identify and respond to their changing needs, we remain well positioned to deliver value.

Under the rate review approved in 2017, our new rate plans match demand for affordability with a desire for modernized energy choices. To incentivize electricity usage when resources are least constrained, an updated time-of-use plan is now the standard rate for our new customers. Two optional demand rate plans provide customers with additional opportunities to save. These plans will work hand-in-hand with our proposed peak-focused and load-shifting energy efficiency programs to help customers save energy and money.

Sustainable Success

At APS, we take the long view on sustainable success. Strong financial performance reinforces our ability to invest in the innovation that powers our future success. By leading the industry in deploying new technologies and modernized rates, we are better able to adapt to a rapidly changing landscape and create value for our customers and our shareholders. Engaging our employees in meaningful ways and empowering them with advanced skills helps us retain and attract the talented professionals who will lead us into the future.

Our commitment to ensure a sustainable future for our company will continue to light our way to success ─ not just today but for years to come.

Donald E. Brandt

Donald E. Brandt
Chairman of the Board, President and Chief Executive Officer

Patrick Dinkel

Patrick Dinkel
Vice President, Environmental and Chief Sustainability Officer

Executive Summary

We achieve our vision—to create a sustainable energy future for Arizona—by balancing environmental stewardship, economic viability and social responsibilities. In 2017, we made strong advances along all three dimensions. Our investments in renewable energy, flexible generation units and pollution control equipment position us for a cleaner and more effective generation fleet. Paired with strong operational performance and strategic cost management controls, these actions create tremendous value for our shareholders, demonstrated by a new all-time share price high during 2017 and a total shareholder return of 12.7 percent. In 2017, Pinnacle West received an A rating from Morgan Stanley Capital International (MSCI) Environmental Sustainability and Governance (as of 10/27/17). These environmental and economic accomplishments are balanced with our commitment to social responsibility. During 2017 our employees volunteered 110,000 hours, and we gave $9.8 million back to our community.

To ensure continued focus on a sustainable energy future for Arizona, we have added specific responsibility for oversight of sustainability matters to the charter of the Nuclear and Operating Committee of the Pinnacle West Board of Directors. Such oversight elevates our commitment to sustainability to the highest level. Another important change is how we communicate our sustainability actions. Previously we had generated a large annual Corporate Responsibility Report. Based on input from numerous stakeholders requesting a succinct, regularly updated and web-based method of communicating sustainability efforts, we are shifting the majority of the content previously documented in a full Corporate Responsibility Report to our website. We also post our Political Participation Policy, which outlines our role in the political process as an advocate for a responsible and sustainable energy future for Arizona.

Financial Performance

Reporting for our quarterly and annual financial results, including quarterly presentations, news releases and webcast recordings, is available on the Earnings page.

Tier One Goals

2017 Chart

Report Methodology

This report focuses on APS, our primary subsidiary. It was prepared using guidance from the Global Reporting Initiatives guidelines for G4 and Electric Utilities Sector Supplement. Our greenhouse gas (GHG) emission and water usage data was third-party verified by Cameron Cole. All other information in this report is reviewed and verified internally.

Forward-Looking Statements

This report contains forward-looking statements based on current expectations. These forward-looking statements are often identified by words such as “estimate,” “predict,” “may,” “believe,” “plan,” “expect,” “require,” “intend,” “assume” and similar words. Because actual results may differ materially from expectations, we caution you not to place undue reliance on these statements. A number of factors could cause future results to differ materially from historical results, or from outcomes currently expected or sought by us. A discussion of some of these risks and uncertainties is contained in our annual report on Form 10-K and is available on our website at pinnaclewest.com, which you should review carefully before placing any reliance on our forward-looking statements, financial statements or disclosures. We assume no obligation to update any forward-looking statements, even if our internal estimates change, except as may be required by applicable law.

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