To support our overall insurance program, Pinnacle West established a captive insurance cell to insure certain risks of Pinnacle West and our subsidiaries. The Captive is a protected separate cell captive insurance company sponsored by Energy Insurance Services, Inc (“EISI”). EISI is owned by Energy Insurance Mutual Limited Company and allows participating member sponsoring organizations, such as Pinnacle West, to insure risks using captive entities. Pinnacle West, through its contractual rights, has a controlling financial interest in the separate protected Captive cell’s assets. Pinnacle West obtains all the benefits from the Captive and makes all the primary controlling decisions that economically impact the Captive. As a separate protected cell, Pinnacle West is the Captive’s only participant. The Captive is a VIE for which Pinnacle West is the primary beneficiary. Accordingly, Pinnacle West consolidates the Captive.

Under a mutual business program participation agreement between the Captive and EISI, EISI will issue policies, make claim disbursements, claim expenses and other underwriting fees on behalf of the Captive, as necessary.

The Captive insures Pinnacle West and its subsidiaries for terrorism coverage, excess liability including certain wildfire coverage, excess property insurance, and excess employment practice liability. The Captive policies exclude nuclear liability at Palo Verde. See Note 10 for details regarding nuclear liability insurance. Claim payments to the insureds can only be made up to the amount of the Captive’s available assets. In the event that claims exceed the Captive’s available assets, Pinnacle West may be required to provide additional funding to the Captive. In addition to policies obtained through the Captive, Pinnacle West also has insurance policies purchased through third-party insurers that may provide coverage if a loss event occurs.

As a result of consolidation, we eliminate intercompany transactions between Pinnacle West and the Captive and record the Captive’s assets, liabilities and third-party operating activities. In consolidation, the Captive’s insurance premium revenues derived from Pinnacle West policies are eliminated against the insurance premium expense recorded by Pinnacle West and our subsidiaries relating to insurance policy coverage provided by the Captive. Consolidation primarily resulted in Pinnacle West reflecting the Captive’s investment holdings on its Condensed Consolidated Balance Sheets, and the Captive’s investment gains and losses reflected through earnings on Pinnacle West’s Condensed Consolidated Statements of Income.

Consolidation of the Captive resulted in an increase in Pinnacle West’s net income for the three months ended March 31, 2025 and March 31, 2024 of $0.7 million and zero, respectively. Amounts are fully attributable to Pinnacle West shareholders. Consolidation impacts the Pinnacle West Condensed Consolidated Income Statement’s operations and maintenance expense and other income line items.

Pinnacle West’s Condensed Consolidated Balance Sheets as of March 31, 2025 and December 31, 2024 include $35 million and $34 million, respectively, of assets relating to the Captive that is reported within the other special use funds line item. See Notes 13 and 14 for additional details on these investment holdings.

In 1986, APS entered into agreements with three separate variable interest entities (“VIEs”) lessor trust entities in order to sell and lease back interests in Palo Verde Unit 2 and related common facilities. APS will retain the assets through 2033 under all three lease agreements. APS will be required to make payments relating to the three leases in total of approximately $21 million annually for the period 2025 through 2033. At the end of the lease period, APS will have the option to purchase the leased assets at their fair market value, extend the leases for up to two years, or return the assets to the lessors.

The leases’ terms give APS the ability to utilize the assets for a significant portion of the assets’ economic life, and therefore provide APS with the power to direct activities of the VIEs that most

As a result of consolidation, we eliminate lease accounting and instead recognize depreciation expense, resulting in an increase in net income of $4 million for both the three months ended March 31, 2025 and 2024. The increase in net income is entirely attributable to the noncontrolling interests. Income attributable to Pinnacle West shareholders is not impacted by the consolidation.


	March 31, 2025		December 31, 2024
Palo Verde sale leaseback property, plant and equipment, net of accumulated depreciation	$	81,589	$	82,556
Equity — Noncontrolling interests	107,474		103,167

APS is exposed to losses relating to these VIEs upon the occurrence of certain events that APS does not consider to be reasonably likely to occur. Under certain circumstances (for example, the Nuclear Regulatory Commission (“NRC”)) issuing specified violation orders with respect to Palo Verde or the occurrence of specified nuclear events), APS would be required to make specified payments to the VIEs’ noncontrolling equity participants and take title to the leased Unit 2 interests, which, if appropriate, may be required to be written-down in value. If such an event were to occur during the lease periods, APS may be required to pay the noncontrolling equity participants approximately $345 million beginning in 2025, and up to $501 million over the lease extension terms.