APS Resource Management February 10, 2017

APS Resource Management Purpose: Optimize the use of APS resources to provide the lowest cost reliable power to our customers Total fuel and purchased power costs are about $1B per year: APS Confidential Proprietary

APS Resource Management What we do: Forecast system load (total customer demand) and renewable resource production Economically commit resources to meet demand Procure and arrange for delivery of necessary fuel supplies Make sales and purchases based off market prices and generation costs Limit exposure to commodity prices through execution of commodity hedge program Integrate maintenance into plans Negotiate and manage long-term wholesale power contracts APS Confidential Proprietary

Resource Management - Key Tools Load Forecasting Models Renewable Forecasting Tools (services) Unit Commitment and Dispatch Models Fuel Forecasting and Management Transmission Procurement Electricity Market Transacting Systems Real-time View of Load, Generating Units, Transmission, Market Prices, Gas Pipelines Support Functions: Settlement (Back Office) Energy Risk Management Legal Resource Planning and Acquisition APS Confidential Proprietary

APS Resource Management – Trading 3 Years to Next Month Current Month to Next Day Current Day to Present Time Term Trading Commodity hedge program Long-term transmission procurement Outage planning Forward sales/purchases Short-Term Trading Load and weather forecasting Coordination of maintenance with power plants Next day to balance of the month power and gas trading Next day transmission procurement Real-Time Trading Balance supply and demand Load & weather forecasting Economic dispatch of generators Respond to unanticipated events Intraday power and gas trading Transmission procurement Coordinate with power plants on emergent issues Analysis Support Scheduling

Transmission Operations Operations Functions Generation Resources APS - Owned Generation Long-Term Contracts Resource Ops Dispatch of generation Ensure sufficient reserves to meet reliability needs Buy/Sell with wholesale market Meet fuel requirements Transmission Operations Electric system operations System Reliability Balancing Provide transmission services to 3rd parties Wholesale Market Utilities Merchant Generators Traders Gas Producers CAISO Buy & Sell Customers Retail Wholesale Energy Production Orders APS Confidential Proprietary

Five Major Categories of Resources Nuclear Palo Verde Coal Four Corners Cholla Navajo Natural Gas Intermediate Units Redhawk, Gila River, Arlington West Phoenix Units 1-5 Ocotillo Steamers Natural Gas Peaking Units Sundance Yucca West Phoenix, Saguaro, and Ocotillo GTs Renewables (utility-scale) Wind Solar Geothermal/Biomass Reliable source of carbon-free around-the-clock power Lowest operating cost Affordable source of around-the-clock power Relatively expensive and time consuming to start/stop Large, high efficiency units, with longer ramps and longer minimum up and down times Reliable and Flexible to System Demands Small, less efficient units, quick start that can be online in 10-30 minutes Very flexible Clean source of energy with low long-term costs Inflexible, must take energy as it is produced (non-dispatchable) 1,146 MWs 1,672 MWs 3,151 MWs 1,017 MWs 840

2016 - Well Balanced Energy Portfolio 26% 11% 10% 21% 32%

Renewable Plants Overview 1 2 3 5 4 Arizona New Mexico California 7 9 8 11 10 12 13 14 15/18 16 6 17 19 20 AZ Sun Operating Plants Generating Facility Capacity COD 13) Paloma 17 09/12/11 14) Cotton Center 10/24/11 15) Hyder 16 10/31/11 16) Chino Valley 19 11/25/12 17) Foothills 03/18/13 18 12/27/13 18) Hyder II 14 12/17/13 21) Gila Bend 32 10/17/14 22) Luke AFB 10 09/18/15 23) City of Phoenix EPC In Development 24) Red Rock 40 03/01/17 23 22 21 24 7

Transmission, Generation & Trading Hubs Palo Verde Four Corners Mead = 500 kV = 345 kV = 230 kV = 69 kV APS Confidential Proprietary

Natural Gas Pipelines Serving Arizona APS Confidential Proprietary

Commodity Hedge Program Purpose: Dampen price risk and volatility for APS customers Program is systematic and independently monitored by Risk Management Parameters: 3 year rolling program Current volumes: Approximately 150 BCF of natural gas Equivalent to 19,800 GWHs Notional value of $421M Purpose of this program is to promote price stability for our customers by mitigating one of the major components of price risk. We have not made any changes to the program in the last year. We have just continued to execute on the approved program. Highlight magnitude of program (notional value of $420 M at the end of March) Hedge program parameters: Year 1 is 85% +/- 2% Year 2 is 50-60% Year 3 is 30-40% Backup info: At end of March, MTM of hedge was $(90)M Collateral outstanding for the hedge was $11M APS Confidential Proprietary

Daily Communications and Coordination 7:30AM Daily Management Meeting Review current day plan, next day plan, and near term outlook Includes updates from Term Trading and weather 8:00AM Fossil Generation Morning Call Present current and projected next day plan to Fossil Generation 8:30AM Resource Operations Daily Coordination Call with Energy Control Center (ECC) Discuss Daily Plan and current transmission and generation constraints 1:00PM Daily Resource Operations Turnover Meeting Short Term plan for next day turned over to Real-Time Real-Time update of current and next day gas plan Daily compliance updates APS Confidential Proprietary

Energy Imbalance Market (EIM) “the newest tool”

Variability of Net Load Intra-hour Minutes Customer demand constantly fluctuates Demand can trend up/down during the hour Renewable output can vary (intermittency)

The Role of EIM - Finding the Optimal Solution Hedging up to 3 years Month Ahead Day Ahead Hour Ahead Inside the Hour Ramp APS Generation Units Up/Down for Balancing With EIM Hedging up to 3 years Month Ahead Day Ahead Hour Ahead 15 minute 5 minute Ahead Inside of 5 minutes

EIM is an easily-scalable extension of the real-time market Supports integration of renewables by sharing diverse resources across a larger geographical area Enhances reliability through improved situational awareness in ISO and EIM footprint Brings down costs by allowing access to a wider array of resources Balancing authorities maintain control and responsibility for the reliability of their system Today: Each BA must balance loads and resources w/in its borders. Limited pool of balancing resources Inflexibility High levels of reserves Economic inefficiencies Increased costs to integrate wind/solar In an EIM: The market dispatches resources across BAs to balance energy Diversity of balancing resources Increased flexibility Decreased flexible reserves More economically efficient Decreased integration cost Puget Sound Energy and Arizona Public Service are working with the ISO to begin participation in fall of 2016.

EIM Footprint

Focus on Solar

Solar Resource Growth California - Renewable Portfolio Standard 50% energy production by 2030 Rooftop solar is in addition Utility scale solar currently over 8,000 MW APS utility scale - 500 MW rooftop > 500MW growing at 10-12 MW per month

APS Load Shape Prior to Significant Rooftop Solar – Late fall day Flat load middle of day MW Review 3 Hour

Rooftop Solar Impact on APS Load Shape (Late Fall Day 2014 versus 2006) MW 4 Hour

Factoring in all Obligations and Operating Limitations Over Gen 5 Hour

Average Hourly Market Prices (Mar-16) Mid-day prices below 1 cent/kWH Note – blue is day-ahead and green is real-time

Longer Term Solutions Creating operational flexibility across generation fleet Wholesale market changes that diversify load and resources EIM participation Developed new wholesale trading options (Trough hours and evening peak products starting soon) Storage options Retail rate design changes 8

CAISO Load Shape Reaches 2020 Minimum Load Level Already 9

Renewable Curtailment in CAISO 10