Item 2. PROPERTIES

Generation Facilities

APS’s portfolio of owned and leased generating facilities is provided in the table below:

See “Business of Arizona Public Service Company — Environmental Matters” in Item 1 with respect to matters having a possible impact on the operation of certain of APS’s generating facilities.

See “Business of Arizona Public Service Company” in Item 1 for a map detailing the location of APS’s major power plants and principal transmission lines.

Transmission and Distribution Facilities

Current Facilities. APS’s transmission facilities consist of approximately 6,070 pole miles of overhead lines and approximately 49 miles of underground lines, 5,847 miles of which are located in Arizona. APS’s distribution facilities consist of approximately 11,077 miles of overhead lines and approximately 18,071 miles of underground primary cable, all of which are located in Arizona. APS distribution facilities reflect an actual net gain of 169 miles in 2015. APS shares ownership of some of its transmission facilities with other companies. The following table shows APS’s jointly-owned interests in those transmission facilities recorded on the Consolidated Balance Sheets at December 31, 2015:

Expansion. Each year APS prepares and files with the ACC a ten-year transmission plan. In APS’s 2015 plan, APS projects it will develop 275 miles of new lines over the next ten years. One significant project currently under development is a new 500kV path that will span from the Palo Verde hub around the western and northern edges of the Phoenix metropolitan area and terminate at a bulk substation in the northeast part of Phoenix. The Palo Verde to Morgan System includes Palo Verde-Delaney-Sun Valley-Morgan. The project consists of four phases. The first phase, Morgan to Pinnacle Peak 500kV, is currently in-service. The second

and third phases, Delaney to Palo Verde 500kV and Delaney to Sun Valley 500kV, are under construction and are expected to be energized by May 2016. The fourth phase, Morgan to Sun Valley 500kV, has been permitted and is in final design and development. In total, the projects consist of over 100 miles of new 500kV lines, with many of those miles constructed with the capability to string a 230kV line as a second circuit.

APS continues to work with regulators to identify transmission projects necessary to support renewable energy facilities. Two such projects, which are included in APS’s 2015 transmission plan, are the Delaney to Palo Verde line and the North Gila to Hassayampa line, both of which are intended to support the transmission of renewable energy to Phoenix and California. The North Gila to Hassayampa line went into service in May 2015.

Physical Security Standards. On July 14, 2015, FERC approved version 2 of the proposed Physical Security Reliability Standard CIP-014 (CIP-014-2). As a result, CIP-014-2, the Physical Security Reliability Standard that requires transmission owners and operators to protect those critical transmission stations and substations and their associated primary control centers that, if rendered inoperable or damaged as a result of a physical attack, could result in widespread instability, uncontrolled separation or cascading within an interconnection, became effective on October 2, 2015, triggering a series of staggered, but interdependent obligations for APS. As required by the Physical Security Reliability Standard, APS determined its critical transmission stations and substations and associated primary control centers that will be required to comply with the standard by October 2, 2015. However, as contemplated under CIP-014-2, this verification has triggered additional requirements and obligations within the Physical Security Reliability Standard that are not yet due to be completed. These remaining obligations, which consist of a risk evaluation and development and verification of a physical security plan, are due to be completed by the end the third quarter of 2016. Until APS has completed all required activities under the Physical Security Reliability Standard, we cannot predict the extent of any financial or operational impacts on APS.

NERC Critical Infrastructure Protection Requirements. In 2014, APS initiated a comprehensive project to ensure compliance with Version 5 of NERC's Critical Infrastructure Protection Requirements (CIP V.5) which will become effective April 1, 2016. APS will be incurring incremental capital expenditures through 2017 associated with the CIP V.5 compliance implementation project estimated to be approximately $52 million.

Plant and Transmission Line Leases and Rights-of-Way on Indian Lands

The Navajo Plant and Four Corners are located on land held under leases from the Navajo Nation and also under rights-of-way from the federal government. The right-of-way and lease for the Navajo Plant expire in 2019 and the right-of-way and lease for Four Corners were scheduled to expire in 2016. In March, 2011, the Navajo Nation Council signed a resolution approving a 25-year extension to the existing Four Corners lease term and providing Navajo Nation consent to renewal of the related rights-of-way. The effectiveness of the lease amendment also required the approval of the DOI, as did the related federal rights-of-way grant. A federal environmental review was undertaken as part of the DOI review process, and culminated in the issuance by DOI of a record of decision on July 17, 2015. The record of decision provides the authority for the Bureau of Indian Affairs to sign the lease amendments and rights-of-way renewals, which occurred in late July 2015.

Certain portions of the transmission lines that carry power from several of our power plants are located on Indian lands pursuant to rights-of-way that are effective for specified periods. Some of these rights-of-way have expired and our renewal applications have not yet been acted upon by the appropriate Indian tribes or federal agencies. Other rights expire at various times in the future and renewal action by the applicable tribe or federal agencies will be required at that time. In recent negotiations, certain of the affected Indian tribes have

required payments substantially in excess of amounts that we have paid in the past for such rights-of-way. The ultimate cost of renewal of certain of the rights-of-way for our transmission lines is therefore uncertain.