Item 2. PROPERTIES

Generation Facilities

APS

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.

4CA

4CA, a wholly-owned subsidiary of Pinnacle West, purchased El Paso's 7% interest in Units 4 and 5 of Four Corners on July 6, 2016. See "Areas of Business Focus - Operational Performance, Reliability and Recent Developments - Four Corners - Asset Purchase Agreement and Coal Supply Matters" in Item 7 for additional information about 4CA's interest in Four Corners.

Transmission and Distribution Facilities

Current Facilities. APS’s transmission facilities consist of approximately 6,140 pole miles of overhead lines and approximately 49 miles of underground lines, 5,917 miles of which are located in Arizona. APS’s distribution facilities consist of approximately 11,144 miles of overhead lines and approximately 21,128 miles of underground primary cable, all of which are located in Arizona. APS distribution facilities reflect an actual net gain of 3,124 miles in 2016. 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, 2016:

Expansion. Each year APS prepares and files with the ACC a ten-year transmission plan. In APS’s 2017 plan, APS projects it will develop 52 miles of new transmission 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-Pinnacle Peak. The project consists of four phases. The first three phases, Morgan to Pinnacle Peak 500kV, Palo Verde to Delaney 500kV, and Delaney to Sun Valley 500kV are currently in-service. The fourth phase, Morgan to Sun Valley 500kV, has started construction and is expected to be energized by May 2018. 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 have been completed and were included in previous APS transmission plans, are the Delaney to Palo Verde line and the North Gila to Hassayampa line, both of which support the transmission of renewable energy to Phoenix and California. The North Gila to Hassayampa line went into service in May 2015 and the Delaney to Palo Verde line went into service in May 2016.

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 were required to comply with the standard by October 2, 2015. However, as contemplated under CIP-014-2, this verification triggered additional requirements and obligations within the Physical Security Reliability Standard. These remaining obligations, which consist of a risk evaluation and development and verification of a physical security plan, were largely completed in 2016 and the remaining activities are projected to be completed in the second and fourth quarters of 2017. 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 Reliability Standards. In 2014, APS initiated a comprehensive project to ensure compliance with Version 5 of NERC's Critical Infrastructure Protection Reliability Standards (CIP V.5), which will become effective pursuant to various implementation dates through 2018. APS completed a significant portion of its compliance implementation activities in June 2016, meeting an initial compliance date of July 1, 2016. APS will be incurring incremental capital expenditures through 2018 to meet further upcoming compliance deadlines associated with CIP V.5. Total expenditures are 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. APS, on behalf of the Four Corners participants, negotiated amendments to the facility lease with the Navajo Nation, which extends the Four Corners leasehold interest from 2016 to 2041. See "Areas of Business Focus - Operational Performance, Reliability and Recent Developments - Four Corners - Lease Extension" in Item 7 for additional information about the Four Corners right-of-way and lease matters. See "Navajo Plant" in Note 3 for information regarding future plans for the Navajo Plant.

Certain portions of our transmission lines 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.