ANNUAL REPORT - s2.q4cdn.com

[Pages:231]2016

ANNUAL REPORT

PINNACLE WEST CAPITAL CORPORATION

THIS ANNUAL REPORT FEATURES PHOTOGRAPHY BY SUZANNE MATHIA

Suzanne is a photographer and author whose work regularly appears in National Geographic and publications for the Nature Conservancy. Her photographs capture the diversity and intense beauty of Arizona's immense landscape and reflect her curiosity, patience and ability to see the world in new and creative ways.

Featured Work: Labyrinth (Cover), Paradise Found (Pg 5), Weathering Pit Ridge (Pg 8-9), Wotan's Throne (Pg 12), Desert Wave (Pg 15).

PINNACLE WEST CAPITAL CORPORATION COMBINES A SOLID FOUNDATION AND A CLEAR STRATEGY TO BUILD SHAREHOLDER VALUE...

Superior reliability and operating performance across our business Excellent customer service and deep community involvement Affordable electricity rates A balanced, high-performing power generation portfolio A constructive regulatory environment Targeted investments in innovative technologies Solid financial results

...WITH A SHARPENED FOCUS ON OUR CORE UTILITY BUSINESS.

THE APS VISION ? Creating a sustainable energy future for Arizona.

THE APS MISSION ? We safely and efficiently generate and deliver reliable energy to meet the changing needs of our customers.

| PINNACLE WEST ANNUAL REPORT 1

DONALD E. BRANDT chairman, president and chief executive officer

APS is consistently among

the best-performing

electricity companies in America for

dependable service.

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DEAR FELLOW SHAREHOLDERS...

Pinnacle West achieved another year of outstanding results in 2016 by consistently delivering on our commitments to the customers who depend on us, the communities we serve, our dedicated employees and the shareholders who trust us with their investments.

Through efficient operations and prudent financial management, your company recorded net income of $442 million, or $3.95 per share, in 2016. That compares favorably with net income of $437 million in 2015. The company's strong performance earned a consolidated return on average common equity of 9.44 percent.

For the fifth consecutive year, our Board of Directors approved an increase in the dividend, raising it by 5 percent to $2.62 per share annually. Our goal remains to provide investors with steady dividend growth of approximately 5 percent per year.

Pinnacle West stock hit new 52-week highs 27 times in 2016, and on July 5 reached what was then an all-time closing high of $82.56--a record that was eclipsed in early 2017. Total shareholder value increased $1.8 billion in 2016. Although general market conditions have contributed to our stock's record-setting performance, the real credit for this accomplishment goes to our dedicated employees who have worked hard for many years to position the company for success.

The appreciation of Pinnacle West stock, together with our dividend payout, provided shareholders with a total return of 25 percent in 2016. This significantly outpaced the return of the S&P 1500 Electric Utilities Index (16 percent) and the S&P 500 Index (12 percent). Pinnacle West shareholders have earned a total return of 65 percent over the last three years and 97 percent over the last five.

Our balance sheet remains strong, allowing us to earn A- ratings or better from each of the major credit rating agencies, a distinction that exceeds the majority of other electricity companies.

| PINNACLE WEST ANNUAL REPORT 3

Reclaimed water accounted for 74 percent of the water used in our generating facilities in 2016.

COMMITTED TO ARIZONA ? Arizona's economy continued to grow in 2016 and remains an integral part of our value proposition. Our home state offers desirable places to live, competitive low costs and an attractive business climate that combine to promise sustained long-term growth. The important positive economic factors include:

The metropolitan Phoenix area, which represents two-thirds of our customer base, has placed third among the country's top 15 metro areas for growth.

Construction, financial services and healthcare, among other sectors, are all producing job growth at above-average rates.

Vacancy rates in office and retail space have fallen to pre-recession levels, and housing construction in 2016 reached levels not seen since 2007.

Our primary subsidiary, Arizona Public Service (APS), benefits from the state's growing economy while helping to power that growth. We provide the clean, reliable and affordable electricity an expanding economy requires, and we partner closely with economic development organizations to attract new businesses to

the state. In 2016, those efforts brought more than 20 new companies to our service area, adding an estimated 5,000 new jobs.

Should the Arizona Corporation Commission (ACC) act favorably on our pending rate request, our planned investment of $3.5 billion in the energy grid over the next three years will further stimulate the economy, create opportunities for suppliers and generate tax revenue for local governments. And, we have proposed new economic development rate options to encourage more businesses to relocate or expand in our service territory.

COMMITTED TO OUR CUSTOMERS ? APS consistently ranks among the bestperforming electricity companies in America for dependable service, and in 2016 we continued to make investments that expand, maintain and modernize Arizona's energy grid. Through these efforts, we anticipate growth in rate base of 6 to 7 percent through 2019.

Through investments in the high-voltage transmission system, we strive to improve reliability and redundancy, increase access to power markets, and support the continued development of renewable energy. APS completed three transmission projects in 2016,

| 4 PINNACLE WEST ANNUAL REPORT

ELECTRIC UTILITIES INDEX S&P 500 PINNACLE WEST

16% 12%

TOTAL SHAREHOLDER RETURN

25%

27twentyseven

TIMES PINNACLE WEST STOCK HIT A 52-WEEK HIGH IN 2016

phoenix is the

third

fastest growing

AMONG AMERICA'S TOP 15 METRO AREAS

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