Pinnacle West Capital (PNW) Risk Analysis

Like many companies in the electric utility industry, our workforce is maturing, with approximately 26.1% of employees eligible to retire by the end of 2030. Although we have undertaken efforts to recruit, train and develop new employees, we face increased competition for talent. We are subject to other employee workforce factors, such as the availability and retention of qualified personnel and the need to negotiate collective bargaining agreements with union employees. These or other employee workforce factors could negatively impact our business, financial condition, or results of operations.

Assured supplies of water are important for APS's generating plants. Water in the southwestern United States is limited, and various parties have made conflicting claims regarding the right to access and use such limited supplies of water. Both groundwater and surface water in areas important to the operation of APS's generating plants have been and are the subject of inquiries, claims and legal proceedings. In addition, the region in which APS's power plants are located suffers from prolonged drought conditions, which could potentially affect the plants' water supplies. Climate change is projected to exacerbate such drought conditions. Colorado River water supplies for Arizona are subject to shortage declarations that substantially limit the quantity of water available to the state. Due to stressed surface water and groundwater supplies, there is focus on the increased use of treated effluent to supplement statewide water supplies, which could increase competition for the treated effluent that some APS generating plants rely on. APS's inability to access sufficient supplies of water, along with that of its customers, could have a material adverse impact on our business and results of operations.

We derive essentially all of our revenues and earnings from our wholly-owned subsidiary, APS.  Accordingly, our cash flow and our ability to pay dividends on our common stock is dependent upon the earnings and cash flows of APS and its distributions to us.  APS is a separate and distinct legal entity and has no obligation to make distributions to us. APS's financing agreements may restrict its ability to pay dividends, make distributions or otherwise transfer funds to us.  In addition, an ACC financing order requires APS to maintain a common equity ratio of at least 40% and does not allow APS to pay common dividends if the payment would reduce its common equity below that threshold.  The common equity ratio, as defined in the ACC order, is total shareholder equity divided by the sum of total shareholder equity and long-term debt, including current maturities of long-term debt.

Modification of the ACC's retail electric competition rules or other efforts of deregulation and other factors, such as customers installing behind the meter technologies or large customers developing large, utility scale generation projects to serve their energy needs, may result increased competition, which could have a significant adverse impact on APS's business and results of operations.

Weather Conditions.  Weather conditions directly influence the demand for electricity and affect the price of energy commodities.  Electric power demand is generally a seasonal business.  In Arizona, demand for power peaks during the hot summer months, with market prices also peaking at that time.  As a result, APS's overall operating results fluctuate substantially on a seasonal basis.  In addition, APS has historically sold less power, and consequently earned less income, when weather conditions are milder.  As a result, unusually mild weather could diminish APS's financial condition, results of operations, or cash flows. Apart from the impact on electricity demand, weather conditions related to prolonged high temperatures or extreme heat events present operational challenges. In the southwestern United States, where APS conducts its business, the effects of climate change are projected to increase the overall average temperature, lead to more extreme temperature events, and exacerbate prolonged drought conditions leading to the declining availability of water resources. Extreme heat events and rising temperatures are projected to reduce the generation capacity of thermal-power plants and decrease the efficiency of the transmission grid. These operational risks related to rising temperatures and extreme heat events could affect APS's financial condition, results of operations, or cash flows. Higher temperatures may decrease the snowpack, which might result in lowered soil moisture and an increased threat of wildfires.  Wildfires could threaten APS's communities and electric transmission lines and facilities.  Any damage caused as a result of wildfires could negatively impact APS's financial condition, results of operations, or cash flows. In addition, the decrease in snowpack can also lead to reduced water supplies in the areas where APS relies upon non-renewable water resources to supply cooling and process water for electricity generation. Prolonged and extreme drought conditions can also affect APS's long-term ability to access the water resources necessary for thermal electricity generation operations. Reductions in the availability of water for power plant cooling could negatively impact APS's financial condition, results of operations, or cash flows. Effects of Energy Conservation Measures and Distributed Energy Resources.  APS customers participate in energy efficiency and conservation programs and other DSM efforts, which in turn impact the demand for electricity.  APS must also meet certain distributed renewable energy requirements.  A portion of APS's total renewable energy requirement must be met with an increasing percentage of distributed renewable energy resources (generally, small-scale renewable technologies located on customers' properties).  The distributed renewable energy requirement is 30% of the applicable RES requirement for 2012 and subsequent years (APS was granted a waiver of this requirement in its 2026 RES Implementation Plan).  Customer participation in distributed renewable energy programs would result in lower demand since customers would be meeting some of their own energy needs. In addition to these rules and requirements, energy efficiency technologies and distributed energy resources continue to evolve, which may have similar impacts on the demand for electricity. Reduced demand due to these energy efficiency requirements, distributed energy requirements and other emerging technologies, unless substantially offset through ratemaking mechanisms, could have a material adverse impact on APS's financial condition, results of operations and cash flows. Actual and Projected Customer and Sales Growth.  Actual sales growth, excluding weather-related variations, may differ from our projections as a result of numerous factors, such as macroeconomic conditions, current and future economic, regulatory, business, and other conditions, such as the Arizona housing market, customer growth, usage patterns and energy conservation, slower ramp-up of and/or fewer large data centers and manufacturing facilities, slower than expected commercial and industrial expansions, impacts of energy efficiency programs and growth in DG, responses to retail price changes, changes in regulatory standards, and impacts of new and existing laws and regulations, including environmental laws and regulations. Based on past experience, a 1% variation in our annual residential and small commercial and industrial kWh sales projections under normal business conditions can result in increases or decreases in annual net income of approximately $25 million, and a 1% variation in our annual large commercial and industrial kWh sales projections under normal business conditions can result in increases or decreases in annual net income of approximately $7 million. Recent industry trends and projections of load growth reflect significant demand from data centers to support AI as well as onshoring of manufacturing, such as advanced semiconductor manufacturing. These data centers and large manufacturers may locate their operations within service territories other than our own. If they do choose to locate within our service territory, we may not be able to provide sufficient electric service within the time period they require due to capital or other constraints. APS may need to accelerate development plans of the related generation and transmission facilities to serve these potential customers, which may necessitate alternative financing structures, such as the novel subscription model we are pursuing in an effort to ensure growth pays for growth and reduce cross-subsidization of customer classes, as well as ACC approval. APS may not be able to secure facilities or regulatory approval to support these customers in a timely manner. Additionally, the future demand from these customers may not be realized to the extent currently projected and significant uncertainties exist regarding the future energy demand associated with data centers and AI. The difficulty in forecasting these demands and the additional risk of these arrangements could lead to stranded costs and other effects that could have material adverse impacts on APS's financial condition, results of operations, and cash flows.

APS's operations include managing market risks related to commodity prices.  APS is exposed to the impact of market fluctuations in the price and transportation costs of electricity, natural gas, and coal to the extent that unhedged positions exist.  We have established procedures to manage risks associated with these market fluctuations by utilizing various commodity derivatives, including exchange traded futures and over-the-counter ("OTC") forwards, options, and swaps.  As part of our overall risk management program, we enter into derivative transactions to hedge purchases and sales of electricity and natural gas.  The changes in market value of such contracts have a high correlation to price changes in the hedged commodity.  To the extent that commodity markets are illiquid, we may not be able to execute our risk management strategies, which could result in greater unhedged positions than we would prefer at a given time and financial losses that negatively impact our results of operations. The Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") contains measures aimed at increasing the transparency and stability of the over-the-counter derivative markets and preventing excessive speculation. The Dodd-Frank Act could restrict, among other things, trading positions in the energy futures markets, require different collateral or settlement positions, or increase regulatory reporting over derivative positions. Based on the provisions included in the Dodd-Frank Act and the implementation of regulations, these changes could, among other things, impact our ability to hedge commodity price and interest rate risk or increase the costs associated with our hedging programs. We are exposed to losses in the event of nonperformance or nonpayment by counterparties.  We use a risk management process to assess and monitor the financial exposure of all counterparties.  Despite the fact that the majority of APS's trading counterparties are rated as investment grade by the rating agencies, there is still a possibility that one or more of these companies could default, which could result in a material adverse impact on our earnings for a given period.

We operate in a highly regulated industry that requires the continued operation of sophisticated information technology systems and network infrastructure. In the regular course of our business, we handle a range of sensitive security, customer, and business systems information. There appears to be an increasing level of activity, sophistication, and maturity of threat actors, including from both nation-state and non-nation state actors, that seek to exploit potential vulnerabilities in the electric utility industry and wish to disrupt the U.S. bulk power system, our information technology systems, generation (including our Palo Verde nuclear facility), transmission and distribution facilities, and other infrastructure facilities and systems and physical assets. We have been and could be the target of attacks, and the aforementioned systems are critical areas of cyber protection for us. We rely extensively on IT systems, networks, and services, including internet sites, data hosting and processing facilities, and other hardware, software and technical applications and platforms. Some of these systems are managed, hosted, provided, or used by third parties to assist in conducting our business. Malicious actors may attack vendors to disrupt the services these vendors provide to us or to use those vendors as a cyber conduit to attack us. As more third parties are involved in the operation of our business, there is a risk the confidentiality, integrity, privacy, or security of data held by, or accessible to, third parties may be compromised. In addition to the involvement of third parties and the associated security risks, we also face risks when integrating new IT systems, such as those associated with costs, operational efficiency, and security compliance. Our IT systems introduce layers of execution complexity and resource risks across the entire organization. If a significant cybersecurity event or breach were to occur, we may not be able to fulfill critical business functions and we could (i) experience property damage, disruptions to our business, theft of or unauthorized access to customer, employee, financial or system operation information or other information; (ii) experience loss of revenue or incur significant costs for repair, remediation and breach notification, and increased capital and operating costs to implement increased security measures; and (iii) be subject to increased regulation, litigation and reputational damage. If such disruptions or breaches are not detected quickly, their effects could be compounded or could delay our response or the effectiveness of our response and ability to limit our exposure to potential liability. These types of events as well as the impacts of integrating new IT systems could also require significant management attention and resources and could have a material adverse impact on our financial condition, results of operations, or cash flows. We develop and maintain systems and processes aimed at detecting and preventing information and cybersecurity incidents which require significant investment, maintenance, and ongoing monitoring and updating as technologies and regulatory requirements change. These systems and processes may be insufficient to mitigate the possibility of cybersecurity incidents, malicious social engineering, fraudulent or other malicious activities, and human error or malfeasance in the safeguarding of our data. We are subject to laws and rules issued by multiple government agencies concerning safeguarding and maintaining the confidentiality of our security, customer information and business information. One of these agencies, NERC, has issued comprehensive regulations and standards surrounding the security of bulk power systems and is continually in the process of developing updated and additional requirements with which the utility industry must comply. The NRC also has issued regulations and standards related to the protection of critical digital assets at commercial nuclear power plants. The increasing promulgation of NERC and NRC rules and standards will increase our compliance costs and our exposure to the potential risk of violations of the standards. Experiencing a cybersecurity incident could cause us to be non-compliant with applicable laws and regulations, such as those promulgated by NERC and the NRC, privacy laws, or contracts that require us to securely maintain confidential data, causing us to incur costs related to legal claims or proceedings and regulatory fines or penalties. The risk of these system-related events and security breaches occurring continues to intensify. We have experienced, and expect to continue to experience, threats and attempted intrusions to our information technology systems and we could experience such threats and attempted intrusions to our operational control systems. To date, we do not believe we have experienced a material breach or disruption to our network or information systems or our service operations. We may not be able to anticipate and prevent all cyberattacks or information security breaches, and our ongoing investments in security resources, talent, and business practices may not be effective against all threat actors. We maintain cyber insurance to provide coverage for a portion of the losses and damages that may result from a security breach of our information technology systems, but such insurance is subject to a number of exclusions and may not cover the total loss or damage caused by a breach. Coverage for cybersecurity events continues to evolve as the industry matures. In the future, adequate insurance may not be available at rates that we believe are reasonable, and the costs of responding to and recovering from a cyber incident may not be covered by insurance or recoverable in rates.

Alternative energy technologies that produce power or reduce power consumption or emissions are being developed and commercialized, including renewable technologies such as photovoltaic (solar) cells, customer-sited generation, energy storage (batteries) and efficiency technologies.  Advances in technology and equipment/appliance efficiency could reduce the demand for supply from conventional generation, including carbon-free nuclear generation, and increase the complexity of managing APS's information technology and power system operations, which could adversely affect APS's business. Customer-sited alternative energy technologies present challenges to APS's operations due to misalignment with APS's existing operational needs. When these resources lack "dispatchability" and other elements of utility-side control, they are considered "unmanaged" resources. The cumulative effect of such unmanaged resources results in added complexity for APS's system management. APS continues to pursue and implement advanced grid technologies, including transmission and distribution system technologies and digital meters enabling two-way communications between the utility and its customers.  Many of the products and processes resulting from these and other alternative technologies, including energy storage technologies, have not yet been widely used or tested on a long-term basis, and their use on large-scale systems is not as established or mature as APS's existing technologies and equipment.  The implementation of new and additional technologies adds complexity to our information technology and operational technology systems, which could require additional infrastructure and resources. APS's strategy, including the timing of such strategy, in adopting new technologies, such as artificial intelligence, could also adversely impact APS's business. For example, if APS fails to strategically implement artificial intelligence, it could miss the opportunity for cost savings, face increasing costs on legacy systems, insufficiently integrate internal and external data sets, or invest in low data quality, risk misusing artificial intelligence, impact employee satisfaction with its implementation of or failure to implement artificial intelligence and other technologies. Widespread installation and acceptance of new technologies could also enable the entry of new market participants, such as technology companies, into the interface between APS and its customers and could have other unpredictable effects on APS's traditional business model. Deployment of renewable energy technologies is expected to continue across the western states and result in a larger portion of the overall energy production coming from these sources. These trends, which have benefited from historical and continuing government support for certain technologies, have the potential to put downward pressure on wholesale power prices throughout the western states which could make APS's existing generating facilities less economical and impact their operational patterns and long-term viability.

General economic factors that are beyond the Company's control impact the Company's forecasts and actual performance. These factors include interest rates; recession; inflation; stagflation; deflation; supply chain constraints; unemployment trends; sanctions, trade restrictions, military interventions and the threat or possibility of war; terrorism or other global or national unrest; and political or financial instability. In particular, in recent years the United States' economy experienced a substantial rise in the inflation rate and more recently in 2025 the Trump administration has implemented tariffs and discussed additional tariffs, which would further increase costs. The Company is currently evaluating the impact of the recent U.S. Supreme Court's decision regarding the validity of certain tariffs previously imposed under the International Emergency Powers Act, including whether any or all of the tariffs will be eligible for a refund as well as the potential for replacement tariffs under separate statutory authorities. Additionally, supply chains have been impacted and could be further impacted by inflation, tariffs, and other sociopolitical factors, resulting in equipment delays and increased costs. Any failure to recover these potential increased costs through our rates could have a material adverse impact on our financial condition, results of operations, or cash flows.

Wildfires have the potential to affect communities within APS's service territory and the surrounding areas, as well as APS's vast network of electric transmission and distribution lines and facilities. The potential likelihood and severity of wildfires has increased due to many of the same weather and climate change impacts existing in Arizona as those that led to catastrophic wildfires in other states. The continued expansion of the wildland urban interface has also increased wildfire risk to surrounding communities. Extreme weather events such as severe storms and strong wind gusts may also increase the likelihood of a wildfire in our service territory. APS has a Comprehensive Wildfire Mitigation Plan ("CWMP") that employs various strategies designed to prevent, mitigate, and respond to wildfire risks. APS's CWMP includes vegetation management and clearing protocols, operational measures and a public safety power shut off program ("PSPS") on certain feeders, among other practices. However, APS's fire mitigation efforts may be insufficient to prevent wildfires in APS's expansive service territory and surrounding areas and could result in claims alleging damages due to the use, non-use, timing, or effectiveness of such measures. In addition, APS could be sued regardless of fault for damages incurred as a result of wildfires and may not be able to recover all or a substantial portion of any such damages or costs from insurance or through rates. In addition, we could also experience credit rating downgrades, reputational harm, volatility in the market for our common stock, and significant financial distress upon the occurrence of a wildfire event. Furthermore, any damage caused to our assets, loss of service to our customers, or liability imposed as a result of wildfires could negatively impact APS's financial condition, results of operations, or cash flows.