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: : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : 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THIS ANNUAL REPORT CONTAINS 35 PERCENT RECYCLED PAPER

PROCESSED CHLORINE FREE.

economy by prudently investing in new technology and

infrastructure to power resurgent growth. In keeping with our

company’s traditions, we will maintain a competitive edge in

energy efficiency, employee productivity and financial stability.

OUR STRONG FOUNDATION + When we say this is a well-run

company, it is not marketing hype. By nearly any standard, we

have made great strides in our operating performance. In 2008,

we set a new company record for electric reliability, made more

progress toward returning the Palo Verde Nuclear Generating

Station to excellence and established new performance records

for our fossil power stations. The Four Corners Power Plant, with

an 86 percent capacity factor, and the Cholla Power Plant with

87 percent, both rank in the upper reaches of the top 25 percent

of coal-fired power stations nationally.

During last summer’s peak demand periods, all three units at

Palo Verde – the nation’s largest power producer – generated

clean, inexpensive, uninterrupted power for 100 continuous

days. For 2008, the plant achieved an overall capacity factor

of 84 percent. Our Palo Verde team will accept nothing less

than a full return to the top ranks of nuclear performance.

Our commitment to technology leads the industry in many

areas including the accelerated installation of smart meters,

an award-winning consumer Web site, and powerful new

tools for analyzing, predicting and responding to equipment

problems. Last year, we won our industry’s most coveted honor,

the Edison Electric Institute’s Edison Award, for developing state-

of-the-art predictive tools that have the potential to virtually

eliminate catastrophic failure of large transformers.

Technology in the hands of our skilled and motivated employees

drives productivity. As a result of the effective use of technology

and our employees’ outstanding work ethic, we have doubled

our customer base over the last 20 years, while reducing our

number of employees by 10 percent. We have established

new company records for reliability and increased customer

satisfaction. Yet we have increased our residential prices only

11 percent since 1995, a mere one-fourth the rate of inflation.

In early 2008, we identified warning signs of the impending

economic downturn and took appropriate measures to

prepare for it. As a result, in 2008 APS eliminated about 300

APS Retail CustomersServed Per Employee

98

199

230

1988 1998 2008

P 03

On August 28, 2008, the worst thunderstorm in a generation

ripped through metropolitan Phoenix, toppling 150 power

poles and cutting off power to 80,000 APS customers. As the

storm clouds rolled in, our dedicated, hard-working employees

responded both quickly and effectively. Everyone called upon

in this emergency, including linemen, dispatchers, vegetation

crews, support personnel and managers worked around the

clock and restored power to virtually all customers before the

end of the Labor Day weekend.

The combined effort was efficient, impressive and often heroic.

Over the years, Arizonans have come to expect this superb

level of performance from our workforce. The storm response

proved the validity of our processes and systems as well as

the dedication of our people. Our information technology

infrastructure showed its worth as our network carried critical

information to the linemen in their service trucks, pinpointing

outages and prioritizing repairs to benefit the largest number

of customers.

It was a proud moment that again proved your company is

well-run and expertly operated.

THE ECONOMIC STORM + Now we are using that same reliance on

our core strengths to weather a different kind of storm – a severe

economic downturn that may surpass anything seen in our

lifetimes. You know the story. Credit markets seized up, real

estate prices fell, unemployment rose and consumers slowed

their spending.

These global factors affect everyone and every company, and

APS will continue to confront them. We have seen customer

growth slow from three-to-four percent during the previous

decade to just over one percent last year. Our real estate

subsidiary, SunCor, has struggled amid declining real estate

prices and tight credit markets.

But just as we were prepared for the worst thunderstorm in

three decades, we are also solidly positioned to weather this

economic storm.

When economic growth eventually returns to the U.S., Arizona’s

economy will likely grow at a rate exceeding the nation as

a whole. Accordingly, we will prepare for the 21st century

To Our Shareholders

LETTER TO SHAREHOLDERS

recovering fuel costs, a process for approving new generation

and a method for recovering renewable and energy efficiency

investments. For the first time in more than a decade, we

also received approval from federal regulators to increase

transmission rates, and the Arizona Corporation Commission

(ACC) approved recovery of those prices from retail customers.

In March of 2008, we filed a general rate case with the ACC.

The request directly addresses the issue of earnings attrition

and suggests several means to mitigate its effects. APS is also

seeking higher levels of spending on energy efficiency and

new pricing options that would allow customers to better

manage their energy bills. That rate case is still pending before

the ACC, and we anticipate a decision sometime in late 2009.

In December of last year, the ACC granted APS an interim

rate increase of $65 million, subject to refund if a decision in

our general rate case results in a lower increase. We believe

the Commission’s approval of this interim increase is a positive

step that should help prevent the credit rating agencies from

downgrading our debt ratings.

OUR PAST, OUR FUTURE + As we prepare for the return of

economic and customer growth in Arizona, our priorities are

to provide outstanding customer service, reasonable prices for

customers and fair returns for investors. We can accomplish

STRATEGIC OBJECTIVES

+ PROVIDE ARIzONA ELECTRICITY

CUSTOMERS WITH OUTSTANDING SERVICE

AND RELIABLE ENERGY AT FAIR PRICES.

+ FOCUS ON SUPERIOR LONG-TERM

TOTAL RETURNS FOR SHAREHOLDERS.

+ IMPLEMENT BUSINESS PRACTICES

THAT SUPPORT A STRONG ECONOMY,

A HEALTHY ENVIRONMENT AND PROSPEROUS

COMMUNITIES FOR ARIzONA.

+ ACTIVELY MANAGE OUR COSTS

AND BUSINESS RISKS.

+ WORK WITH REGULATORS TO

ACHIEVE POSITIVE REGULATORY

OUTCOMES THAT BENEFIT BOTH

CUSTOMERS AND SHAREHOLDERS.

+ MAXIMIzE THE LONG-TERM

VALUE OF OUR ASSETS.

+ CAPTURE GROWTH OPPORTUNITIES

IN OUR ELECTRICITY MARKETS.

+ INCREASE OUR RESOURCE PORTFOLIO

CONSISTENT WITH OUR NATIVE LOAD,

ENVIRONMENTAL FACTORS, CASH FLOW

AND MARKET CONDITIONS.

P 05

employee positions and cut operating budgets by $14 million.

As the economic downturn became increasingly severe, we

deferred more than $700 million of capital expenditure projects

over the next several years, trimmed $50 million from our 2009

operating budget and are continuing workforce reductions of

an additional 250 positions. We are confident we can continue

to control expenses and improve cash flow consistent with our

cost management culture.

Although our stock price declined 24 percent last year, the

utility average declined 28 percent and the broader market

38 percent. In addition, our stock paid a dividend with an

average yield over 6 percent for the last year.

In 2008, we produced nearly six times more electricity from

renewable resources than we did in 2006. That is just the

beginning. In February of 2008, we announced plans for the

Solana Generating Station, the world’s largest solar power plant.

When completed in 2012, this 280-megawatt concentrating

solar facility will allow APS to provide more solar electricity per

customer than any other major utility nationwide. We believe

we are making sustained progress toward establishing Arizona

as the Solar Capital of the World.

OUR RESOURCE PLAN + Building on our leadership in renewable

energy, we have developed a comprehensive Resource Plan

that envisions producing nearly half our customers’ new energy

needs through 2025 with solar and other renewable energy

sources. We are also working to help our customers improve

the energy efficiency of their homes and businesses.

This Resource Plan, prepared with a broad range of public

input gathered from more than 120 meetings with more than

1,300 community leaders, constitutes a major step forward into

Arizona’s energy future. Paying for major generating facilities

like Solana will require broad public support, regulatory

commitment and a strong financial position.

OUR REGULATORY PROGRESS + In the last few years, we have

worked with our regulators to fashion a new regulatory

environment. This environment has produced two base rate

increases (including our first since 1991), a mechanism for


In keeping with our company’s traditions, we will maintain a competitive edge in energy efficiency, employee productivity and financial stability.

APS Renewable Energy Capacity

Electricity Savings from APS Energy Efficiency Programs

Electric Outages per APS Customer

1998 2008 2018PROJECTED

157

1,267

0.3 megawatts of energy capacity

1998 2003 2008

34,000

254,700

27,000megawatt-hours

of electricity

2000 2004 2008

1.060.94

1.42

outages

2008 ANNUAL REPORTP 07

these priorities only if we have access to the capital markets

on favorable terms. To further enhance our liquidity, we issued

$500 million of long-term debt in February of 2009.

Especially during times of turmoil in the financial markets, it is

essential that APS maintain its ability to access capital invest-

ment – for conventional wires, new “smart” electric distribution

technology and large-scale generating stations. Anything less

could present a great risk to our company, our customers and

our state’s future economy.

Looking ahead, we know there will be more storms to weather,

more challenges to meet and more opportunities to capture.

You can be assured, our stellar team will continue to approach

each day with the vision, work ethic and integrity you have

come to expect from Pinnacle West.

WILLIAM J. POST Chairman & CEO, Pinnacle West

DONALD E. BRANDT President & COO, Pinnacle West

AFTER 38 YEARS OF SERVICE AND 13 YEARS AS CHIEF EXECUTIVE OFFICER, I AM

RETIRING FROM THIS GREAT COMPANY. I AM GRATEFUL FOR THE OPPORTUNITY YOU,

OUR COMPANY’S OWNERS, HAVE GIVEN ME TO WORK WITH THE MOST OUTSTANDING GROUP

OF EMPLOYEES IN OUR INDUSTRY. DURING MY TENURE AS CEO, WE HAVE NAVIGATED

THE MOST TURBULENT REGULATORY CHALLENGES IN OUR INDUSTRY’S HISTORY, ADDED

50 PERCENT MORE CUSTOMERS AND 2,200 MEGAWATTS OF NEW GENERATING CAPACITY,

ACHIEVED GREATLY IMPROVED GENERATING PERFORMANCE, KEPT OUR PRICE INCREASES

SUBSTANTIALLY BELOW INFLATION AND ATTAINED OUR HIGHEST LEVELS OF CUSTOMER

SATISFACTION AND RELIABILITY.

THIS APRIL, I WILL TURN OVER THE KEYS TO OUR COMPANY TO NEW CHAIRMAN AND

CEO DON BRANDT. AS YOUR COMPANY’S PRESIDENT, DON HAS PROVEN HIS ABILITY

TO ACT DECISIVELY AND COURAGEOUSLY ON BEHALF OF INVESTORS, EMPLOYEES,

CUSTOMERS AND OUR ARIzONA COMMUNITIES. I HAVE THE UTMOST CONFIDENCE

DON WILL CONTINUE TO BUILD UPON OUR SUCCESSES WHILE BRINGING HIS OWN

SKILLS AND INCISIVE JUDGMENT TO BEAR FOR THE BENEFIT OF OUR COMPANY.


A NOTE FROM BILL POST

Just as we were prepared for the worst thunderstorm in three decades, we’re solidly positioned to weather this economic storm.

+ OVER THE LAST DECADE, APS ADDED

300,000 CUSTOMERS. HOWEVER, THROUGH ADDED EFFICIENCY

THE COMPANY’S WORKFORCE NUMBERS

HAVE REMAINED STABLE.

+ APS RANKED

SECONDAMONG ALL INVESTOR-OWNED

ELECTRIC UTILITIES IN THE WEST

IN THE 2008 J.D. POWER AND

ASSOCIATES RESIDENTIAL CUSTOMER

SATISFACTION SURVEY.

+ IN 2008, APS’ OCOTILLO AND

YUCCA POWER PLANTS CELEBRATED

26 & 24 YEARSRESPECTIVELY WITHOUT

A LOST-TIME ACCIDENT.

+ IN APRIL 2008, APS EARNED THE

2008 BUSINESS ETHICS AWARDFROM THE ARIzONA BETTER BUSINESS

BUREAU. THE COMPANY WAS LAUDED FOR

ITS ETHICAL APPROACH TO BUSINESS

AND COMMUNITY.

EFFICIENCY IN ACTION

2008 ANNUAL REPORT P 09

EFFICIENT EMPLOYEES

Powered by ingenuity and hard work.

At Pinnacle West, efficiency begins with our employees. In order to serve one of the fastest-growing regions of the country, our people have combined an unrivaled work ethic with state-of-the-art technology and improved processes. The result has been improved customer satisfaction and new standards of performance.

STEPPING UP WHEN LINES WENT DOWN 08/28/08 + When massive storms hit the Valley of the Sun just before Labor Day weekend, extreme winds snapped trees, damaged homes and knocked down 150 power poles, leaving 80,000 APS customers without electricity. Fortunately, when the lines went down, APS employees stepped up. Thanks to their hard work and dedication, electricity was restored to nearly all affected homes within 48 hours.

THE POWER OF EFFICIENCY

The Four Corners Power Plant, with an 86 percent capacity factor, and the Cholla Power Plant with 87 percent, both rank in the upper reaches of the top 25 percent of coal-fired power stations nationally.

THE POWER OF EFFICIENCY 2008 ANNUAL REPORT

EFFICIENT OPERATIONS

Setting new standards of excellence.

APS and its employees have been serving Arizona for more than 123 years. We know the environment, we know the communities and we know the challenges of powering this growing state. Despite the demands, our charge is clear: provide our customers safe, reliable and increasingly efficient energy at an affordable price.

EFFICIENCY BY THE TON 01/19/08 + At 5:22 in the morning, Unit 3 at the Palo Verde Nuclear Generating Station completed its synchronization to the electric grid after a 100-plus day refueling outage. This refueling outage was especially notable because the plant officially completed the replacement of the final two of six new steam generators. Along with other efficiency improvements, the new steam generators, which weigh in at 800 tons each, help increase the plant’s capacity by 210 megawatts.

+ FOR THE SECOND CONSECUTIVE YEAR,

APS SET A NEW RECORD FOR ELECTRIC

RELIABILITY. IN 2008, THE AVERAGE

APS CUSTOMER EXPERIENCED LESS THAN

ONE DISTRIBUTION OUTAGE. THIS IS A

51% IMPROVEMENT SINCE 2000.

+ IN 2008, APS’ COAL-POWERED

PLANTS ACHIEVED A COMBINED

CAPACITY FACTOR OF

86% OUTPACING THE INDUSTRY AVERAGE

OF 75 PERCENT.*

+ EMPLOYEES AT THE PALO VERDE

NUCLEAR GENERATING STATION CONTINUED

THEIR HARD WORK TO RESTORE THE PLANT

TO ITS POSITION AS ONE OF THE TOP

OPERATING POWER PLANTS NATIONWIDE.

DURING ARIzONA’S SUMMER PEAK ENERGY

SEASON, ALL THREE UNITS AT PALO

VERDE OPERATED SIMULTANEOUSLY FOR

100 CONTINUOUS DAYS.

+ FOR THE

FIFTH CONSECUTIVE YEAR OUR COMPANY WAS NAMED TO

CORPORATE KNIGHTS’ GLOBAL 100 -

A LIST OF THE WORLD’S MOST

SUSTAINABLE CORPORATIONS.

*Note: Industry coal capacity factor reflects

2007 data. Industry numbers for 2008 were not

available at press time.

P 10


+ THROUGH MARCH OF 2009, MORE THAN

7 MILLION ULTRA-EFFICIENT CFL BULBS HAD BEEN SOLD THROUGH AN APS

DISCOUNT PROGRAM. THE BULBS WILL

SAVE AN ESTIMATED 2.1 BILLION

KILOWATT-HOURS OF ENERGY

DURING THEIR LIFETIMES.

+ OUR CONSUMER WEB SITE -

APS.COM - RECENTLY RANKED

SIXTH OUT OF 111 UTILITY SITES IN A NATIONAL SURVEY AND CONTINUES

TO PROVIDE CUSTOMERS WITH SUPERIOR

CONVENIENCE AND INTERACTIVITY.

+ OUR CUSTOMERS CAN NOW LEND A HAND

IN CREATING A CLEANER ENERGY FUTURE

THROUGH APS’ GREEN CHOICE RATE. GREEN

CHOICE ALLOWS CUSTOMERS TO PAY A

PREMIUM AND CHOOSE HOW MUCH - UP TO

100% - OF THEIR POWER COMES FROM RENEWABLE

ENERGY SOURCES.

+ FOR THE

THIRD CONSECUTIVE YEAR, APS EARNED AN ENERGY STAR PARTNER

OF THE YEAR AWARD FROM THE U.S.

ENVIRONMENTAL PROTECTION AGENCY AND

THE FEDERAL DEPARTMENT OF ENERGY.

THE COMPANY WAS HONORED FOR ITS

ENERGY STAR HOMES PROGRAM WHICH

EDUCATES AND ENCOURAGES NEW HOME-

BUILDERS TO USE ENERGY EFFICIENT

MATERIALS AND PRODUCTS.

In 2008, we produced nearly six times more electricity from renewable resources than we did in 2006.

P 13 2008 ANNUAL REPORT



EFFICIENT ENERGY

Getting more out of every megawatt.

In order to meet Arizona’s growing electricity demand, we’re making every megawatt accomplish more. This includes investing more than $26 million each year in award-winning efficiency programs and providing discounts on energy-efficient equipment and products to ensure our customers are using energy wisely.

A SOLAR-POWERED PARTNERSHIP 09/04/08 + Last fall, a partnership of APS, the City of Phoenix and the NBA’s Phoenix Suns made a powerful announcement. They shared the news that the Suns’ home at the U.S. Airways Center would soon be partially powered by solar panels installed on the Center’s parking garage. The new system will provide enough clean, renewable energy to power the equivalent of 26 Suns home games. The photovoltaic panels will also allow the Suns and APS to eliminate the generation of more than 440,000 pounds of carbon dioxide (CO2) each year – the equivalent CO2 absorbing power of 46 acres of pine trees.


EFFICIENT FUTURE

Investing in a better tomorrow.

By 2025, APS is expected to add another 600,000 customers – a 55 percent increase. We’re preparing to meet this added demand by investing in new infrastructure and technologies to ensure our customers’ energy future is cleaner, more efficient, more responsive and more reliable.

PIONEERING TECHNOLOGY FOR A SAFER INDUSTRY 06/16/08 + For the second time in the company’s history, APS earned the electric industry’s highest honor, the Edison Electric Institute’s Edison Award. The award recognized APS’ innovation in developing the landmark Transformer Oil Analysis and Notification (TOAN) system, which monitors major transformers in near real time and allows the company to take necessary preventative actions. The net result of this system is that catastrophic transformer fires may one day be a thing of the past for the electric utility industry, increasing work safety and saving millions of dollars.

+ AS OF MARCH 2009, APS HAD

REPLACED MORE THAN

150,000 CUSTOMER ELECTRIC METERS WITH NEW “SMART” METER TECHNOLOGY.

THE SMART METERS WILL DRAMATICALLY

ENHANCE THE ABILITIES OF OUR

CUSTOMERS TO MANAGE AND CUSTOMIzE

THEIR ENERGY USE.

+ IN 2008, APS ANNOUNCED THE

SOLANA GENERATING STATION WHICH,

WHEN COMPLETED IN

2012, WILL BE THE LARGEST SOLAR

POWER PLANT IN THE WORLD. USING

CONCENTRATING SOLAR TECHNOLOGY,

SOLANA WILL BE ABLE TO PROVIDE

POWER EVEN AFTER THE SUN SETS.

+ OUR COMPANY’S ENVIRONMENTAL

LEADERSHIP ISN’T LIMITED TO SOLANA.

IN 2008, APS ALSO ADDED WIND AND

BIOMASS CAPACITY TO OUR GROWING

RENEWABLE ENERGY PORTFOLIO. BY

2025 APS EXPECTS TO GENERATE MORE

THAN 15 PERCENT OF ITS POWER

FROM RENEWABLE SOURCES.

+ AFTER GATHERING THE INPUT

OF MORE THAN

1,300 COMMUNITY LEADERSAPS COMPLETED A RESOURCE PLAN

TO ADDRESS ARIzONA’S SHORT- AND

LONG-TERM ENERGY NEEDS. AMONG

THE RECOMMENDATIONS ARE PLANS

FOR INCREASED RENEWABLE ENERGY

AND IMPROVED ENERGY EFFICIENCY

FOR CUSTOMERS. THE FULL RESOURCE

PLAN CAN BE VIEWED AT

WWW.THEPOWEROFEFFICIENCY.COM.

P 142008 ANNUAL REPORT


2008 2007 2006

YEAR ENDED DECEMBER 31,

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Operating revenues $ 3,367 $ 3,317 $ 3,208

Fuel and purchased power (1,330 ) (1,241 ) (1,066 )

Other operating expenses (1,560 ) (1,461 ) (1,525 )

Operating income 477 615 617

Net other income (expense) (1 ) 20 31

Interest expense (197 ) (185 ) (176 )

Income taxes (65 ) (151 ) (156 )

Income from continuing operations 214 299 316

Income from discontinued operations—net of tax 28 8 11

Net income $ 242 $ 307 $ 327

DECEMBER 31,

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

Current assets $ 882 $ 907 $ 936

Investments and other assets 910 1,079 1,049

Property, plant and equipment—net 8,917 8,436 7,882

Deferred debits 911 740 951

Total assets $ 11,620 $ 11,162 $ 10,818

LIAbILITIES AND COMMON STOCk EquITy

Current liabilities, excluding current

maturities of long–term debt $ 1,328 $ 1,180 $ 922

Long–term debt 3,209 3,291 3,234

Deferred credits and other 3,637 3,159 3,216

Total common stock equity 3,446 3,532 3,446

Total liabilities and common stock equity $ 11,620 $ 11,162 $ 10,818

YEAR ENDED DECEMBER 31,

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Cash and cash equivalents at beginning of year $ 56 $ 87 $ 154

Net cash flow provided by operating activities 814 658 394

Net cash flow used for investing activities (815 ) (873 ) (569 )

Net cash flow provided by financing activities 50 184 108

Cash and cash equivalents at end of year $ 105 $ 56 $ 87

COMPLETE AUDITED CONSOLIDATED FINANCIAL STATEMENTS CAN BE

FOUND IN OUR ANNUAL REPORT ON FORM 10-K ONLINE AT PINNACLEWEST.COM.

Condensed Consolidated Financial Statements (DOLLARS IN MILLIONS)

2008 ANNUAL REPORT

Pinnacle West Highlights (DOLLARS AND SHARES IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

2008 2007 2006

STOCK SUMMARY

Stock price per share—year–end $ 32.13 $ 42.41 $ 50.69

Market capitalization—year–end $ 3,243 $ 4,263 $ 5,067

Common shares outstanding—year–end 100.9 100.5 100.0

PER SHARE HIGHLIGHTS (DILUTED)

Earnings per share—continuing operations $ 2.12 $ 2.96 $ 3.16

Earnings per share—net income $ 2.40 $ 3.05 $ 3.27 Indicated annual dividend—year–end $ 2.10 $ 2.10 $ 2.10

Book value—year–end $ 34.16 $ 35.15 $ 34.48

CAPITAL EXPENDITURES $ 904 $ 1,064 $ 870

OPERATING STATISTICS

Retail electric sales (GWH) 28,793 29,171 27,970

Total electric sales (GWH) 35,383 41,998 48,411

Average retail revenue (per kWh) 10.06 ¢ 9.51 ¢ 8.97 ¢

Generating capacity owned—year–end (MW) 6,274 6,158 6,158

Generation output (GWH) 28,034 27,839 27,548

System peak load (MW) 7,026 7,128 7,220

Electric customers—year–end 1,111,544 1,101,491 1,075,269

Employees—year–end 7,500 7,600 7,400

Stock Performance Comparison (VALUE OF $100 INVESTED AS OF DECEMBER 31, 2003 WITH DIVIDENDS REINVESTED)

P 16FINANCIAL INFORMATION

2003 2004 2005 2006 2007 2008

$200

$150

$100

$50

$0

Pinnacle West 100 116 113 145 127 103

S&P 500 INDEX 100 111 116 135 142 90

EEI ELECTRIC INDEX 100 123 143 172 201 149

2008 ANNUAL REPORT

Officers

ARIZONA PubLIC SERVICE

WILLIAM J. POST Chairman of the Board

DONALD E. bRANDT Chief Executive Officer

DONALD G. RObINSON (55) 1978 President & Chief Operating Officer

RANDALL k. EDINGTON (55) 2007 Executive Vice President & Chief Nuclear Officer

STEVEN M. WHEELER (60) 2001 Executive Vice President, Customer Service & Regulation

JOHN R. DENMAN (66) 1964 Senior Vice President, Fossil Operations***

JAMES R. HATFIELD Senior Vice President & Chief Financial Officer

NANCy C. LOFTIN Senior Vice President, General Counsel & Secretary

MARk A. SCHIAVONI (53) 2009 Senior Vice President, Fossil Operations

RObERT S. bEMENT (53) 2007 Vice President, Operations, PVNGS

DENNIS L. bROWN

(58) 1973 Vice President & Chief Information Officer

DENISE R. DANNER (53) 2009 Vice President & Controller

EDWARD Z. FOX (55) 1995 Vice President & Chief Sustainability Officer

DANIEL T. FROETSCHER (47) 1980 Vice President, Energy Delivery

CHRIS N. FROGGATT Vice President & Treasurer

JEFFREy b. GuLDNER (43) 2004 Vice President, Rates & Regulation

DAVID A. HANSEN (49) 1980 Vice President, Power Marketing & Trading

JOHN H. HESSER (53) 1978 Vice President, Engineering, PVNGS

WARREN C. kOTZMANN (59) 1989 Vice President, Strategic Initiatives & Risk

TAMMy D. MCLEOD (47) 1995 Vice President & Chief Customer Officer

DWIGHT C. MIMS (59) 2007 Vice President, Regulatory Affairs & Plant Improvement, PVNGS

LORI S. SuNDbERG (45) 2007 Vice President, Human Resources

SuNCOR DEVELOPMENT

DONALD E. bRANDT Chairman of the Board

STEVEN A. bETTS (50) 2005 President & Chief Executive Officer

APS ENERGy SERVICES

JAMES R. LODGE (48) 1982 President

EL DORADO INVESTMENT

DONALD E. bRANDT Chairman of the Board, President & Chief Executive Officer

†The year in which the individual was first employed within the Pinnacle West group of companies.

*Mr. Post will retire as Chairman of the Board and Chief Executive Officer of Pinnacle West, and Chairman of the Board of APS, effective April 30, 2009.

**Effective April 30, 2009, Mr. Brandt will assume the roles of Pinnacle West Chairman of the Board, President and Chief Executive Officer as well as Chairman of the Board and Chief Executive Officer of APS.

***Mr. Denman announced he will retire effective December 31, 2009.

PINNACLE WEST

WILLIAM J. POST (58) 1973† Chairman of the Board & Chief Executive Officer*

DONALD E. bRANDT (54) 2002 President & Chief Operating Officer**

JAMES R. HATFIELD (51) 2008 Senior Vice President & Chief Financial Officer

NANCy C. LOFTIN (55) 1985 Senior Vice President, General Counsel & Secretary

RObERT S. AIkEN (52) 1986 Vice President, Federal Affairs

CHRIS N. FROGGATT (51) 1986 Vice President & Treasurer

bARbARA M. GOMEZ (54) 1978 Vice President, Controller & Chief Accounting Officer

MARTIN L. SHuLTZ (64) 1979 Vice President, Government Affairs

P 18BOARD OF DIRECTORS & OFFICERS

01 SuSAN CLARk-JOHNSON (62) 2008† President, Gannett Newspaper Division, Gannett Co., Inc. Committees: Corporate Governance; Finance, Nuclear & Operating; Human Resources

02 W. DOuGLAS PARkER (47) 2007 Chairman & Chief Executive Officer, U.S. Airways Committees: Audit; Corporate Governance; Finance, Nuclear & Operating

03 PAMELA GRANT (70) 1980 Civic Leader Committees: Audit; Corporate Governance; Human Resources

04 bRuCE J. NORDSTROM (59) 1997 President & Certified Public Accountant, Nordstrom & Associates, P.C. Committees: Audit, Chairman; Corporate Governance; Finance, Nuclear & Operating

†The year in which the individual first joined the Board of a Pinnacle West company.

*Mr. Post announced he will retire as Chairman of the Board and Chief Executive Officer effective April 30, 2009. He will remain as a member of the Board of Directors.

**Mr. Brandt assumes the duties of Chairman of the Board and Chief Executive Officer effective April 30, 2009.

05 MICHAEL L. GALLAGHER (64) 1997 Chairman Emeritus, Gallagher & Kennedy, P.A. Committees: Finance, Nuclear & Operating, Chairman; Corporate Governance

06 WILLIAM J. POST (58) 1994 Chairman of the Board & Chief Executive Officer* Committee: Finance, Nuclear & Operating

07 DONALD E. bRANDT (54) 2009 President & Chief Operating Officer** Committee: Finance, Nuclear & Operating

08 EDDIE bASHA (71) 1999 Chairman of the Board, Bashas’ Committees: Audit; Corporate Governance; Human Resources

09 WILLIAM L. STEWART (65) 1998 Committees: Finance, Nuclear & Operating; Corporate Governance

10 HuMbERTO S. LOPEZ (63) 1995 President, HSL Properties, Inc. Committees: Audit; Corporate Governance; Human Resources

11 THE REV. bILL JAMIESON (65) 1991 President, Micah Institute, Asheville, North Carolina Committees: Audit; Corporate Governance; Human Resources

12 kATHRyN L. MuNRO (60) 1999 Principal, Bridgewest L.L.C. Committees: Audit; Corporate Governance, Chairman; Finance, Nuclear & Operating

13 ROy A. HERbERGER, JR. (66) 1992 President Emeritus, Thunderbird School of Global Management Committees: Corporate Governance; Finance, Nuclear & Operating; Human Resources, Chairman

board of Directors

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Shareholder Information

STOCk LISTING Ticker symbol: PNW on New York Stock Exchange

CORPORATE HEADquARTERS 400 North 5th Street Phoenix, Arizona 85004 Mailing address: P.O. Box 53999 Phoenix, AZ 85072-3999 Main telephone number: (602) 250-1000

CORPORATE WEb SITE pinnaclewest.com

TRANSFER AGENT AND REGISTRAR BNY Mellon Shareowner Services P.O. Box 358015 Pittsburgh, PA 15252-8015 (800) 457-2983 bnymellon.com/shareowner/isd

SHAREHOLDER ADMINISTRATIVE INFORMATION Company contact: Jacqueline Patterson (602) 250-5511 [email protected]

ANNuAL MEETING OF SHAREHOLDERS Wed, May 20, 2009 at 10:30 a.m. (MST) Herberger Theater 222 E. Monroe St. Phoenix, AZ 85004

INVESTORS ADVANTAGE PLAN AND SHAREHOLDER ACCOuNT INFORMATION Pinnacle West offers a direct stock purchase plan. Any interested investor may purchase Pinnacle West common stock through the Investors Advantage Plan. Features of the Plan include a variety of options for reinvesting dividends, direct deposit of cash dividends, automatic monthly investment, certificate safekeeping and more. An Investors Advantage Plan prospectus and enrollment materials may be obtained by calling BNY Mellon Shareowner Services at (800) 457-2983, at the Bank’s Web site—bnymellon.com/shareowner/isd or by writing to: BNY Mellon Shareowner Services P.O. Box 358015 Pittsburgh, PA 15252-8015

FORM 10-k Pinnacle West’s 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission is available on our Web site or by writing to the Office of the Secretary.

STATISTICAL REPORT A detailed Statistical Report for Financial Analysis for 2003 to 2008 is available on our Web site.

CORPORATE RESPONSIbILITy REPORT The Pinnacle West Corporate Responsibility Report is available on our Web site.

INVESTOR RELATIONS CONTACTS Rebecca L. Hickman, Director (602) 250-5668 Lisa Malagon, Manager (602) 250-5671

ASSOCIATION FOR INVESTORS The Arizona Investment Council represents the interests of investors in Arizona utilities. If interested, send your name and address to: Arizona Investment Council 2100 N. Central Ave. #210 Phoenix, AZ 85004 (602) 257-9200 arizonaic.org

2008 ANNUAL REPORT: : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : 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: : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : 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ON JUNE 12, 2008, IN ACCORDANCE WITH SECTION 303A.12 OF

THE NEW YORK STOCK EXCHANGE’S LISTED COMPANY MANUAL, OUR

CHIEF EXECUTIVE OFFICER CERTIFIED TO THE NEW YORK STOCK

EXCHANGE THAT HE WAS NOT AWARE OF ANY VIOLATION BY PINNACLE

WEST CAPITAL CORPORATION OF NYSE CORPORATE GOVERNANCE LISTING

STANDARDS AS OF SUCH DATE. IN ADDITION, ON FEBRUARY 20, 2009,

OUR CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER EACH

FILED A CERTIFICATION UNDER SECTION 302 OF THE SARBANES-

OXLEY ACT (REGARDING THE QUALITY OF PINNACLE WEST’S PUBLIC

DISCLOSURE) AS EXHIBITS TO OUR ANNUAL REPORT ON FORM

10-K FOR FISCAL YEAR 2008.

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UNITED STATESSECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K(Mark One)

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

For the transition period from to Commission Registrants; State of Incorporation; IRS EmployerFile Number Addresses; and Telephone Number Identification No.

1-8962

PINNACLE WEST CAPITAL CORPORATION(An Arizona corporation)400 North Fifth Street, P.O. Box 53999Phoenix, Arizona 85072-3999(602) 250-1000

86-0512431

1-4473

ARIZONA PUBLIC SERVICE COMPANY(An Arizona corporation)400 North Fifth Street, P.O. Box 53999Phoenix, Arizona 85072-3999(602) 250-1000

86-0011170

Securities registered pursuant to Section 12(b) of the Act:

Title Of Each Class Name Of Each Exchange On Which Registered

PINNACLE WEST CAPITAL CORPORATION Common Stock, New York Stock Exchange No Par Value ARIZONA PUBLIC SERVICE COMPANY None None

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

PINNACLE WEST CAPITAL CORPORATION Yes þ No o

ARIZONA PUBLIC SERVICE COMPANY Yes þ No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

PINNACLE WEST CAPITAL CORPORATION Yes o No þ

ARIZONA PUBLIC SERVICE COMPANY Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filing requirements for the past 90 days.

PINNACLE WEST CAPITAL CORPORATION Yes þ No o

ARIZONA PUBLIC SERVICE COMPANY Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or in any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reportingcompany” in Rule 12b-2 of the Exchange Act. (Check one): PINNACLE WEST CAPITALCORPORATION

Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o (Do not check if a smaller reporting company) ARIZONA PUBLIC SERVICE COMPANY Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o (Do not check if a smaller reporting company)

Indicate by check mark whether each registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

State the aggregate market value of the voting and non-voting common equity held by non-affiliates, computed byreference to the price at which the common equity was last sold, or the average bid and asked price of such common equity,as of the last business day of each registrant’s most recently completed second fiscal quarter: PINNACLE WEST CAPITAL CORPORATION $3,085,816,962 as of June 30, 2008ARIZONA PUBLIC SERVICE COMPANY $0 as of June 30, 2008

The number of shares outstanding of each registrant’s common stock as of February 16, 2009 PINNACLE WEST CAPITAL CORPORATION 100,990,779 sharesARIZONA PUBLIC SERVICE COMPANY

Common Stock, $2.50 par value, 71,264,947 shares. PinnacleWest Capital Corporation is the sole holder of Arizona PublicService Company’s Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Pinnacle West Capital Corporation’s definitive Proxy Statement relating to its Annual Meeting of Shareholders tobe held on May 20, 2009 are incorporated by reference into Part III hereof.

Arizona Public Service Company meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-Kand is therefore filing this form with the reduced disclosure format allowed under that General Instruction.

This combined Form 10-K is separately filed by Pinnacle West Capital Corporation and Arizona Public Service Company.Each registrant is filing on its own behalf all of the information contained in this Form 10-K that relates to such registrantand, where required, its subsidiaries. Except as stated in the preceding sentence, neither registrant is filing any informationthat does not relate to such registrant, and therefore makes no representation as to any such information.

TABLE OF CONTENTS Page

GLOSSARY 1 PART I 3

Item 1. Business 3 Item 1A. Risk Factors 24 Item 1B. Unresolved Staff Comments 35 Item 2. Properties 35 Item 3. Legal Proceedings 37 Item 4. Submission of Matters to a Vote of Security HoldersSupplemental Item

3738

Executive Officers of Pinnacle West 38 PART II 41

Item 5. Market for Registrants’ Common Equity, Pinnacle West Related Stockholder Matters and Issuer Purchasesof Equity Securities 41

Item 6. Selected Financial Data 43 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 45 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 77 Item 8. Financial Statements and Supplementary Data 78 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 164 Item 9A. Controls and Procedures 164 Item 9B. Other Information 165

PART III 165

Item 10. Directors, Executive Officers and Corporate Governance of Pinnacle West 165 Item 11. Executive Compensation 165 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 165 Item 13. Certain Relationships and Related Transactions, and Director Independence 167 Item 14. Principal Accountant Fees and Services 167

PART IV 169

Item 15. Exhibits and Financial Statement Schedules 169 SIGNATURES 208

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GLOSSARY

ACC – Arizona Corporation Commission

ADEQ – Arizona Department of Environmental Quality

AFUDC – Allowance for Funds Used During Construction

ALJ – Administrative Law Judge

ANPP – Arizona Nuclear Power Project, also known as Palo Verde

APS – Arizona Public Service Company, a subsidiary of the Company

APSES – APS Energy Services Company, Inc., a subsidiary of the Company

Base Fuel Rate – the portion of APS’ retail base rates attributable to fuel and purchased power costs

Cholla – Cholla Power Plant

Clean Air Act – Clean Air Act, as amended

Company – Pinnacle West Capital Corporation

DOE – United States Department of Energy

EITF – FASB’s Emerging Issues Task Force

El Dorado – El Dorado Investment Company, a subsidiary of the Company

EPA – United States Environmental Protection Agency

ERMC – Energy Risk Management Committee

FASB – Financial Accounting Standards Board

FERC – United States Federal Energy Regulatory Commission

FIN – FASB Interpretation Number

FIP – Federal Implementation Plan

Fitch – Fitch, Inc.

Four Corners – Four Corners Power Plant

GAAP – accounting principles generally accepted in the United States of America

IRS – United States Internal Revenue Service

kW – kilowatt, one thousand watts

kWh – kilowatt-hour, one thousand watts per hour

Moody’s – Moody’s Investors Service

MW – megawatt, one million watts

MWh – megawatt-hour, one million watts per hour

Native Load – retail and wholesale sales supplied under traditional cost-based rate regulation

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Note – a Note to Pinnacle West’s Consolidated Financial Statements in Item 8 of this report (references to the SupplementalNotes to APS’ Financial Statements are preceded by an “S,” e.g., Note S-1)

NPC – Nevada Power Company

NRC – United States Nuclear Regulatory Commission

OCI – other comprehensive income

Off-System Sales – sales of electricity from generation owned or contracted by the Company that is over and above theamount required to serve APS’ retail customers and traditional wholesale contracts

Palo Verde – Palo Verde Nuclear Generating Station

Pinnacle West – Pinnacle West Capital Corporation, the Company

Pinnacle West Energy (PWEC) – Pinnacle West Energy Corporation, a subsidiary of the Company, dissolved as of August 31,2006

Pinnacle West Marketing & Trading – Pinnacle West Marketing & Trading Co., LLC, a subsidiary of the Company

PRP – potentially responsible parties under Superfund

PSA – power supply adjustor approved by the ACC to provide for recovery or refund of variations in actual fuel andpurchased power costs compared with the Base Fuel Rate

PWEC Dedicated Assets – the following power plants, each of which was transferred by Pinnacle West Energy to APS onJuly 29, 2005: Redhawk Units 1 and 2, West Phoenix Units 4 and 5 and Saguaro Unit 3

Salt River Project – Salt River Project Agricultural Improvement and Power District

SEC – United States Securities and Exchange Commission

Secured Revolver – SunCor’s principal loan facility, which is secured primarily by an interest in land, commercial properties,land contracts and homes under construction

SFAS – Statement of Financial Accounting Standards

Silverhawk – Silverhawk Power Station

Standard & Poor’s – Standard & Poor’s Corporation

SunCor – SunCor Development Company, a subsidiary of the Company

Superfund – Comprehensive Environmental Response, Compensation and Liability Act

TCA – transmission cost adjustor

TEP – Tucson Electric Power Company

VIE – variable-interest entity

West Phoenix – West Phoenix Power Plant

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INTRODUCTION

Filing Format

This Annual Report on Form 10-K is a combined report being filed by two separate registrants: Pinnacle West and APS.The information required with respect to each company is set forth within the applicable items.

The Management’s Discussion and Analysis of Financial Condition and Results of Operations included under Item 7 ofthis report is divided into the following two sections:

• Pinnacle West Consolidated—This section describes the financial condition and results of operations of PinnacleWest and its subsidiaries on a consolidated basis. It includes discussions of Pinnacle West’s regulated utility andnon-utility operations. A substantial part of Pinnacle West’s revenues and earnings is derived from its regulated utility,APS.

• APS—This section includes a detailed description of the results of operations and contractual obligations of APS.

Item 8 of this report includes Consolidated Financial Statements of Pinnacle West and Financial Statements of APS.Item 8 also includes Notes to Pinnacle West’s Consolidated Financial Statements, the majority of which also relates to APS,and Supplemental Notes to APS’ Financial Statements.

PART I

ITEM 1. BUSINESS

OVERVIEW

General

Pinnacle West was incorporated in 1985 under the laws of the State of Arizona and owns all of the outstanding equitysecurities of APS, its major subsidiary. APS is a vertically-integrated electric utility that provides either retail or wholesaleelectric service to most of the State of Arizona, with the major exceptions of about one-half of the Phoenix metropolitan area,the Tucson metropolitan area and Mohave County in northwestern Arizona.

Pinnacle West’s other principal subsidiary is SunCor, which is engaged in real estate development activities in the westernUnited States. See “Business of SunCor Development Company” in this Item 1. Pinnacle West’s other first-tier subsidiaries,APSES and El Dorado are discussed in “Business of Other Subsidiaries” in this Item 1.

Pinnacle West Energy, which owned and operated unregulated generating plants, transferred the PWEC Dedicated Assetsto APS on July 29, 2005 and sold its 75% ownership interest in Silverhawk to NPC on January 10, 2006. As a result,Pinnacle West Energy no longer owned any generating plants and was dissolved as of August 31, 2006.

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Business Segments

Pinnacle West has two principal business segments (determined by products, services and the regulatory environment):

• the regulated electricity segment (accounting for 93% of operating revenues in 2008), which consists of traditionalregulated retail and wholesale electricity businesses (primarily electric service to Native Load customers) and relatedactivities, and includes electricity generation, transmission and distribution; and

• the real estate segment (accounting for 4% of operating revenues in 2008), which consists of SunCor’s real estatedevelopment and investment activities.

Electric power demand is generally a seasonal business. In Arizona, demand for power peaks during the hot summermonths. See Note 17 for financial information about the business segments.

APS ACC Proceedings

The key issue affecting Pinnacle West’s and APS’ financial outlook is adequate and timely retail rate treatment by theACC. See “2008 General Rate Case” in Note 3 for a discussion of APS’ pending retail rate case before the ACC.

Employees

At December 31, 2008, Pinnacle West employed approximately 7,500 people, including the employees of its subsidiaries.Of these employees, approximately 6,900 were employees of APS, including employees at jointly-owned generating facilities(approximately 3,300 employees) for which APS serves as the generating facility manager. Approximately 600 people wereemployed by Pinnacle West and its other subsidiaries. Pinnacle West’s principal executive offices are located at 400 NorthFifth Street, Phoenix, Arizona 85004 (telephone 602-250-1000).

Available Information

Pinnacle West makes available free of charge on or through its website, (www.pinnaclewest.com) the following filings assoon as reasonably practicable after they are electronically filed with, or furnished to, the SEC: its Annual Report on Form10-K, its Quarterly Reports on Form 10-Q, its Current Reports on Form 8-K and amendments to those reports filed orfurnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), and its proxystatement filed pursuant to Section 14(a) of the Exchange Act.

Pinnacle West also has a Corporate Governance webpage. You can access Pinnacle West’s Corporate Governancewebpage through its internet site, www.pinnaclewest.com, by clicking on the “About Us” link to the heading “CorporateCommitments.” Pinnacle West posts the following on its Corporate Governance webpage:

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• Corporate Governance Guidelines;

• Board Committee Summary;

• Charters for Pinnacle West’s Audit Committee, Corporate Governance Committee, Finance, Nuclear and OperatingCommittee and Human Resources Committee;

• Code of Ethics for Financial Professionals;

• Ethics Policy and Standards of Business Practices;

• Director Independence Standards;

• Executive Officer Stock Ownership Guidelines; and

• Restricted Stock Retention Policy.

Pinnacle West will post any amendments to the Code of Ethics and Ethics Policy and Standards of Business Practices, andany waivers that are required to be disclosed by the rules of either the SEC or the New York Stock Exchange, on its website.The information on Pinnacle West’s website is not incorporated by reference into this report.

You can request a copy of these documents, excluding exhibits, by contacting Pinnacle West at the following address:Pinnacle West Capital Corporation, Office of the Secretary, Station 9068, P.O. Box 53999, Phoenix, Arizona 85072-3999(telephone 602-250-3252).

Forward-Looking Statements

This document contains forward-looking statements based on current expectations, and neither Pinnacle West nor APSassumes any obligation to update these statements or make any further statements on any of these issues, except as requiredby applicable law. These forward-looking statements are often identified by words such as “estimate,” “predict,” “hope,”“may,” “believe,” “anticipate,” “plan,” “expect,” “require,” “intend,” “assume” and similar words. Because actual results maydiffer materially from expectations, we caution readers not to place undue reliance on these statements. A number of factorscould cause future results to differ materially from historical results, or from results or outcomes currently expected or soughtby Pinnacle West or APS. In addition to the Risk Factors described in Item 1A of this report, these factors include, but are notlimited to:

• state and federal regulatory and legislative decisions and actions, including the outcome or timing of the pending ratecase of APS;

• increases in our capital expenditures and operating costs and our ability to achieve timely and adequate rate recoveryof these increased costs;

• our ability to reduce capital expenditures and other costs while maintaining reliability and customer service levels,and unexpected developments that would limit us from achieving all or some of our planned capital expenditurereductions;

• volatile fuel and purchased power costs, including fluctuations in market prices for natural gas, coal, uranium andother fuels used in our generating facilities, availability of supplies of such commodities, and our ability to recover thecosts of such commodities;

• the outcome and resulting costs of regulatory, legislative and judicial proceedings, both current and future, includingthose related to environmental matters and climate change;

• the availability of sufficient water supplies to operate our generation facilities, including as the result of droughtconditions;

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• the potential for additional restructuring of the electric industry, including decisions impacting wholesale competitionand the introduction of retail electric competition in Arizona;

• regional, national and international economic and market conditions, including the strength of the housing, credit andfinancial markets;

• the potential adverse impact of current economic conditions on our results of operations;

• the cost of debt and equity capital and access to capital markets;

• changes in the market price of our common stock;

• restrictions on dividends or other burdensome provisions in new or existing credit agreements;

• our ability, or the ability of our subsidiaries, to meet debt service obligations;

• current credit ratings remaining in effect for any given period of time;

• the performance of the stock market and the changing interest rate environment, which affect the value of our nucleardecommissioning trust, pension, and other postretirement benefit plan assets, the amount of required contributions toPinnacle West’s pension plan and contributions to APS’ nuclear decommissioning trust funds, as well as the reportedcosts of providing pension and other postretirement benefits and our ability to recover such costs;

• volatile market liquidity, any deteriorating counterparty credit and the use of derivative contracts in our business(including the interpretation of the subjective and complex accounting rules related to these contracts);

• changes in accounting principles generally accepted in the United States of America, the interpretation of thoseprinciples and the impact of the adoption of new accounting standards;

• customer growth and energy usage;

• weather variations affecting local and regional customer energy usage;

• power plant performance and outages;

• transmission outages and constraints;

• the completion of generation and transmission construction in the region, which could affect customer growth and thecost of power supplies;

• risks inherent in the operation of nuclear facilities, such as environmental, regulatory, health and financial risks, riskof terrorist attack, planned and unplanned outages, and unfunded decommissioning costs;

• the ability of our power plant participants to meet contractual or other obligations;

• technological developments in the electric industry;

• the results of litigation and other proceedings resulting from the California and Pacific Northwest energy situations;

• the performance of Pinnacle West’s subsidiaries and any resulting effects on its cash flow;

• the strength of the real estate market and economic and other conditions affecting the real estate market in SunCor’smarket areas, which include Arizona, Idaho, New Mexico and Utah; and

• other uncertainties, all of which are difficult to predict and many of which are beyond the control of Pinnacle Westand APS.

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REGULATION AND COMPETITION

Retail

The ACC regulates APS’ retail electric rates and its issuance of securities. The ACC must also approve any transfer orencumbrance of APS’ property used to provide retail electric service and approve or receive prior notification of certaintransactions between Pinnacle West, APS and their respective affiliates.

APS is subject to varying degrees of competition from other investor-owned utilities in Arizona (such as Southwest GasCorporation), as well as cooperatives, municipalities, electrical districts and similar types of governmental or non-profitorganizations. In addition, some customers, particularly industrial and large commercial customers, may own and operategeneration facilities to meet their own energy requirements.

In 1999, the ACC approved rules for the introduction of retail electric competition in Arizona. As a result, as of January 1,2001, all of APS’ retail customers were eligible to choose alternate energy suppliers. However, there are currently no activeretail competitors offering unbundled energy or other utility services to APS’ customers. In 2000, an Arizona Superior Courtfound that the rules were in part unconstitutional and in other respects unlawful, the latter finding being primarily onprocedural grounds, and invalidated all ACC orders authorizing competitive electric services providers to operate in Arizona.In 2004, the Arizona Court of Appeals invalidated some, but not all of the rules and upheld the invalidation of the ordersauthorizing competitive electric service providers. In 2005, the Arizona Supreme Court declined to review the Court ofAppeals decision.

To date, the ACC has taken no final or substantive action on either the rules or the prior orders authorizing competitiveelectric service providers in response to the final Court of Appeals decision. However, as a result of a new request forauthorization to provide competitive retail electric service by Sempra Energy Solutions, LLC, the ACC directed the ACCstaff to investigate whether such retail competition was in the public interest and what legal impediments remain tocompetition in light of the Court of Appeals decision referenced above. The ACC staff’s report on the results of itsinvestigation is due to be filed with the ACC on December 31, 2009. At present, only limited electric retail competition existsin Arizona and only with certain entities not regulated by the ACC. APS cannot predict when, and the extent to which,additional competitors will re-enter APS’ service territory.

Wholesale

General

The FERC regulates rates for wholesale power sales and transmission services. See “Formula Transmission Tariff” inNote 3 for information regarding APS’ transmission rates. During 2008, approximately 6.3% of APS’ electric operatingrevenues resulted from such sales and services. APS’ wholesale activity primarily consists of managing fuel and purchasedpower risks in connection with the costs of serving retail customer energy requirements. APS also sells, in the wholesalemarket, its generation output that is not needed for APS’ Native Load and, in doing so, competes with other utilities, powermarketers and independent power producers. Additionally, subject to specified parameters, APS markets, hedges and tradesin electricity and fuels.

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BUSINESS OF ARIZONA PUBLIC SERVICE COMPANY

General

APS was incorporated in 1920 under the laws of the State of Arizona and currently has approximately 1.1 millioncustomers. APS does not distribute any products. During 2008, no single purchaser or user of energy accounted for more than1.8% of electric revenues. See “Overview” and “Regulation and Competition” above for additional background informationabout APS.

At December 31, 2008, APS employed approximately 6,900 people, including employees at jointly-owned generatingfacilities for which APS serves as the generating facility manager. APS’ principal executive offices are located at 400 NorthFifth Street, P.O. Box 53999, Phoenix, Arizona 85072-3999 (telephone 602-250-1000).

Portfolio Resources

APS’ sources of energy during 2008 were: coal – 37.4%; nuclear – 24.2%; purchased power – 20.3%; and gas – 18.1%. Inaccordance with GAAP, a substantial portion of APS’ purchased power expense is netted against wholesale sales on theConsolidated Statements of Income. See Note 18. The disclosure below provides a more detailed description of each of APS’current sources of energy.

Generation Facilities

APS’ portfolio of owned or leased generating capacity is provided in the table below: Capacity (kW)

Coal: Units 1, 2 and 3 at Four Corners 560,000 15% owned Units 4 and 5 at Four Corners 225,000 Units 1, 2 and 3 at Cholla 641,000 14% owned Units 1, 2 and 3 at the Navajo Generating Station 315,000

Subtotal 1,741,000

Gas or Oil:

Two steam units at Ocotillo and two steam units at Saguaro 430,000 Twenty-four combustion turbine units 1,088,000 Seven combined cycle units 1,862,000

Subtotal 3,380,000

Nuclear:

29.1% owned or leased Units 1, 2 and 3 at Palo Verde 1,147,122

Solar 5,816

Total 6,273,938

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Coal Fueled Generating Facilities

Four Corners – Four Corners is a coal-fired power plant located in the northwestern corner of New Mexico. APS operatesthe plant and owns 100% of Four Corners Units 1, 2 and 3 and 15% of Units 4 and 5. APS purchases all of Four Corners’coal requirements from a supplier with a long-term lease of coal reserves with the Navajo Nation. The Four Corners coalcontract runs through 2016, with options on APS’ part to extend the contract for five to fifteen additional years. The FourCorners plant site is leased from the Navajo Nation and is also subject to an easement from the federal government. See“Plant and Transmission Line Leases and Easements on Indian Lands” below for additional information.

Cholla – Cholla is a coal-fired power plant located in northeastern Arizona. APS operates the plant and owns 100% ofCholla Units 1, 2 and 3. PacifiCorp owns Cholla Unit 4 and APS operates that unit for PacifiCorp. Cholla’s common facilitiesare jointly owned by APS and PacifiCorp. APS purchases most of Cholla’s coal requirements from coal suppliers that mineall of the coal under long-term leases of coal reserves with the Navajo Nation, the federal government and privatelandholders. There are currently two coal contracts in place with two separate suppliers for Cholla. One supplier is rampingdown its supply to the plant, which will be complete in 2009, and the other is ramping up its supply to the plant to provideCholla’s full coal requirement by 2010. This agreement runs through 2024. Additionally, APS may purchase a portion ofCholla’s coal requirements on the spot market to take advantage of competitive pricing options and to supplement coalrequired for increased operating capacity. APS believes that the current fuel contracts and competitive fuel supply optionsensure the continued operation of Cholla for its useful life. In addition, APS has a long-term coal transportation contract.

Navajo Generating Station – The Navajo Generating Station is a coal-fired power plant located in northern Arizona. SaltRiver Project operates the plant and APS owns a 14% interest in Navajo Units 1, 2 and 3. The Navajo Generating Station’scoal requirements are purchased from a supplier with long-term leases from the Navajo Nation and the Hopi Tribe. TheNavajo Generating Station is under contract with its coal supplier through 2011, with options to extend through 2019. TheNavajo Generating Station plant site is leased from the Navajo Nation and is also subject to an easement from the federalgovernment. See “Plant and Transmission Line Leases and Easements on Indian Lands” below for additional information.

See Note 11 for information regarding APS’ coal mine reclamation obligations.

Natural Gas Fueled Generating Facilities

APS has seven natural gas power plants located throughout Arizona, consisting of Redhawk, located near the Palo VerdeNuclear Generating Station; Ocotillo, located in Tempe; Sundance, located in Coolidge; West Phoenix, located in southwestPhoenix; Saguaro, located north of Tucson; Douglas, located in the town of Douglas; and Yucca, located near Yuma. APSowns and operates each plant with the exception of one combustion turbine unit and one steam unit at Yucca that are operatedby APS and owned by the Imperial Irrigation District.

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Nuclear Generating Facility

Palo Verde Nuclear Generating Station – Palo Verde is a nuclear power plant located about 50 miles west of Phoenix,Arizona. APS operates the plant and owns 29.1% of Palo Verde Units 1 and 3 and about 17% of Unit 2. In addition, APSleases about 12.1% of Unit 2, resulting in a 29.1% combined interest in that Unit. See “Palo Verde Leases” below foradditional information regarding the Palo Verde Unit 2 sale leaseback transactions.

Palo Verde Fuel Cycle – The fuel cycle for Palo Verde is comprised of the following stages:

• mining and milling of uranium ore to produce uranium concentrates;

• conversion of uranium concentrates to uranium hexafluoride;

• enrichment of uranium hexafluoride;

• fabrication of fuel assemblies;

• utilization of fuel assemblies in reactors; and

• storage and disposal of spent nuclear fuel.

The Palo Verde participants are continually identifying their future resource needs and negotiating arrangements to fillthose needs. The Palo Verde participants have contracted for all of Palo Verde’s requirements for uranium concentrates andconversion services through 2011. The participants have also contracted for all of Palo Verde’s enrichment services through2013 and all of Palo Verde’s fuel assembly fabrication services until at least 2015.

Spent Nuclear Fuel and Waste Disposal – See “Palo Verde Nuclear Generating Station” in Note 11 for a discussion ofspent nuclear fuel and waste disposal.

Palo Verde Leases – In 1986, APS sold about 42% of its share of Palo Verde Unit 2 and certain common facilities in threeseparate sale leaseback transactions. APS accounts for these leases as operating leases. The leases, which have terms of29.5 years, contain options to renew the leases or to purchase the property for fair market value at the end of the lease terms.We are analyzing this matter, and will continue to do so as we approach the end of the lease terms, to determine which optionor options to pursue. See Notes 9 and 20 for additional information regarding the Palo Verde Unit 2 sale leasebacktransactions.

Regulatory – Operation of each of the three Palo Verde units requires an operating license from the NRC. The NRC issuedfull power operating licenses for Unit 1 in June 1985, Unit 2 in April 1986 and Unit 3 in November 1987. The full poweroperating licenses, each valid for a period of approximately 40 years, authorize APS, as operating agent for Palo Verde, tooperate the three Palo Verde units at full power. APS applied for renewed operating licenses for Palo Verde Unit 1, Unit 2 andUnit 3 on December 15, 2008 for a period of 20 years beyond the expirations of the current licenses. The NRC is currentlyreviewing the application.

NRC Inspection – On February 22, 2007, the NRC issued a “white” finding (low to moderate safety significance) due toelectrical output issues with the Unit 3 emergency diesel generator that occurred in 2006. Under the NRC’s Action Matrix,this finding, coupled with a previous NRC “yellow” finding relating to a 2004 matter involving Palo Verde’s safety injectionsystems, resulted in Palo Verde Unit 3 being placed in the “multiple/repetitive degraded cornerstone” column of the NRC’sAction Matrix (“Column 4”), which has resulted in an enhanced NRC inspection regime.

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Although only Palo Verde Unit 3 is in NRC’s Column 4, in order to adequately assess the need for improvements, APS’management conducted site-wide assessments of equipment and operations.

On June 21, 2007, the NRC issued an initial confirmatory action letter confirming APS’ commitments regarding specificactions APS will take to improve Palo Verde’s performance. From October 1, 2007 through November 2, 2007, a team ofNRC inspectors performed on-site in-depth inspections of Palo Verde’s equipment and operations. The NRC’s inspectionresults were documented in an NRC letter to APS dated February 1, 2008 (the “Inspection Report”). The Inspection Reportindicated that the facility is being operated safely, but also identified certain performance deficiencies. Based on its review ofthe APS Palo Verde improvement plan, the NRC issued a revised confirmatory action letter (the “Revised CAL”) onFebruary 15, 2008 that outlines the actions APS must take in order for the NRC to return the Palo Verde site to the NRC’sroutine inspection and assessment process. This Revised CAL was anticipated as part of the NRC’s inspection procedure anda substantial majority of the actions required therein was contained in APS’ improvement plan.

The NRC has continued to provide increased oversight at Palo Verde. The Palo Verde management team has implementeda substantial majority of its improvement plan and has been subject to routine periodic NRC inspections throughout 2008. OnFebruary 5, 2009, APS submitted a letter to the NRC stating that it has completed a substantial majority of the actionscontained in the Revised CAL and believes the Revised CAL can be closed. APS will continue cooperating fully with theNRC throughout this process and anticipates receiving a response from the NRC within the next several months related to theclosure of the Revised CAL.

Nuclear Decommissioning Costs – The NRC rules on financial assurance requirements for the decommissioning ofnuclear power plants provide that a licensee may use a trust as the exclusive financial assurance mechanism if the licenseerecovers estimated total decommissioning costs through cost-of-service rates or through a “non-bypassable charge.” The“non-bypassable systems benefits” charge is the charge that the ACC has approved for APS’ recovery of certain types ofcosts. “Non-bypassable” means that if a customer chooses to take energy from an “energy service provider” other than APS,the customer will still have to pay this charge as part of the customer’s APS electric bill.

Other mechanisms are prescribed, including prepayment, if the requirements for exclusive reliance on an external sinkingfund mechanism are not met. APS currently relies on an external sinking fund mechanism to meet the NRC financialassurance requirements for its interests in Palo Verde Units 1, 2 and 3. The decommissioning costs of Palo Verde Units 1, 2and 3 are currently included in APS’ ACC jurisdictional rates. Decommissioning costs are recoverable through anon-bypassable system benefits charge, which allows APS to maintain its external sinking fund mechanism. See Note 12 foradditional information about APS’ nuclear decommissioning costs.

Palo Verde Liability and Insurance Matters – See “Palo Verde Nuclear Generating Station” in Note 11 for a discussion ofthe insurance maintained by the Palo Verde participants, including APS, for Palo Verde.

Alternative Generation Sources

In connection with its ongoing resource planning efforts, APS continues to focus on increasing the percentage of itsenergy that is produced by renewable resources. On November 1,

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2006, the ACC approved the Arizona Renewable Energy Standard and Tariff (the “Renewable Energy Standard”). Under theRenewable Energy Standard, electric utilities that are regulated by the ACC must supply an increasing percentage of theirretail electric energy sales from eligible renewable resources, including solar, wind, biomass, biogas and geothermaltechnologies. The renewable energy requirement increases from 1.5% in 2007 to 15% in 2025. The requirement for 2009 is2.0%. In addition, an increasing percentage of that requirement must be supplied from distributed resources (generallyspeaking, small-scale renewable technologies that are located on customers’ properties). The distributed resource requirementincreases from 5% of the overall renewable energy requirement in 2007 to 30% in 2012 and subsequent years. Therequirement for 2009 is 15%. APS currently has a diverse portfolio of renewable resources including wind, geothermal, solarand biomass, which collectively generate over 120 MW of renewable energy for our customers. All of the current renewablegeneration projects, except for solar, are acquired through long-term purchased power agreements.

On February 8, 2008, APS entered into a Renewable Energy Purchase and Sale Agreement under which APS agreed topurchase the energy and related renewable energy credits from a concentrated solar power plant for a period of thirty yearsafter the plant begins commercial operation. The plant, which will have a nameplate rating of 280 MW and a projected annualoutput of 900,000 MWh, will be located near Gila Bend, Arizona, which is about 70 miles southwest of Phoenix. Theagreement is subject to various conditions, including the developer obtaining project financing. If these conditions are met,commercial operation is expected in 2012.

On February 28, 2008, APS signed a Renewable Energy Purchase and Sale Agreement under which APS agreed topurchase the energy and related renewable energy credits from a wind power plant located in New Mexico for a period ofthirty years after the plant begins commercial operation in 2009. The plant has a nameplate rating of 100 MW and a projectedannual output of 300,000 MWh.

APS continues to actively consider opportunities to enhance its renewable energy portfolio, both to ensure its compliancewith the Renewable Energy Standard and to meet the needs of its customer base.

Purchased Power Agreements

In addition to its own available generating capacity, APS purchases electricity under various arrangements. APS’purchased power capacity under long-term contracts, as of December 31, 2008, is summarized in the table below. APS alsopurchases power through short-term markets to supplement its long-term resources and hedge its energy requirements.

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Capacity

Purchased Power Agreement Dates Available (MW)

Purchase Agreement (a) Year-round through February 2013 Up to 90Purchase Agreement (b) Year-round through June 15, 2010 238 Exchange Agreement (c) May 15 to September 15 annually through 2020 480 Tolling Agreement June 2007 through May 2017 500 Tolling Agreement June 2010 through October 2019 560 Day-Ahead Call Option Agreement

June 2007 through September 2015 (summerseasons)

500

Day-Ahead Call Option Agreement June 2007 through summer 2016 150 Wind Agreement December 2006 through December 2026 90 Wind Agreement July 19, 2009 through April 2039 100 Landfill Gas Agreement

Deliveries expected to commence in 2009;expires 2029

3

Landfill Gas Agreement

Deliveries expected to commence inSeptember 2009; expires 2029

3

Solar Agreement (d)

Deliveries expected to commence in 2012;expires 2042

250

Geothermal Agreement January 2006 through 2029 12 Biomass Agreement July 2008; expires 2023 14

(a) The capacity under this agreement varies by month, with a maximum capacity of 90 MW.

(b) The amount of electricity available to APS under this agreement is based in large part on customer demand and isadjusted annually. Effective June 16, 2007, the seller, Salt River Project, reduced the capacity available to APS by 150MW. Additionally, Salt River Project has elected to cancel this contract effective June 15, 2010.

(c) This is a seasonal capacity exchange agreement with PacifiCorp. Under this agreement, APS receives electricity fromPacifiCorp during the summer peak season (from May 15 to September 15) and APS returns a like amount of electricityto PacifiCorp during the winter season (from October 15 to February 15). Until 2020, APS and PacifiCorp each has 480MW of capacity and a related amount of energy available to it under the agreement for its respective seasons.Additionally, under a supplemental energy sales agreement, APS must also make additional offers of energy toPacifiCorp each year through October 31, 2020.

(d) See “Alternative Generation Sources” above for more information.

APS continually assesses its need for additional capacity resources to assure system reliability, although APS does notexpect to need new capacity, beyond current plans, until around 2015. APS remains committed to seeking proposals from thecompetitive wholesale market for filling its future resource needs, including renewable resource capacity.

Reserve Margin

APS’ 2008 peak one-hour demand on its electric system was recorded on August 1, 2008 at 7,025,900 kW, compared tothe 2007 peak of 7,545,100 kW recorded on August 13, 2007. Taking into account additional capacity then available to APSunder long-term purchase power contracts, as well as APS’ generating capacity, APS’ capability of meeting system demandon August 1, 2008, amounted to 6,883,000 kW, for an installed reserve margin of negative 2.3%. The power actuallyavailable to APS from its resources fluctuates from time to time due in part to planned and unplanned

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plant and transmission outages and technical problems. The available capacity from sources actually operable at the time ofthe 2008 peak amounted to 5,831,000 kW, for a margin of negative 21.9%. Firm purchases totaling 2,626,000 kW, includingshort-term seasonal purchases and unit contingent purchases, were in place at the time of the peak, ensuring the ability tomeet the load requirement with an actual reserve margin of 20.6%.

Resource Plan

On January 29, 2009, APS submitted a Resource Plan Report to the ACC proposing a diverse portfolio of generationresources to address the projected 60% increase in customer peak demand by 2025, which equates to approximately 6,500MW of new capacity resources and accounts for both new resources needed to meet growing customers loads as well asresources that will be needed to replace expiring long-term purchases. The primary components of the Resource Plan include:

• Energy efficiency initiatives;

• The acceleration of renewable energy sources by doubling the Renewable Energy Standard Requirement in 2015,resulting in the addition of over 1,650 MW of renewable resources by 2025;

• The potential for an addition of new baseload nuclear capacity after 2020 of up to 800 MW of capacity; and

• Peaking resources based on gas-fired resources, whether through wholesale purchases or the construction oracquisition of peaking capacity and/or potential additional deployment of demand response opportunities.

The Resource Plan would allow Arizona to increase its commitment to non-fossil fuel resources because it does notinclude new coal-fired generation resources. The Resource Plan states that the risk of future climate change legislation andthe resulting potential for significant increases in cost currently make coal-fired generation an unattractive resource choice.The Resource Plan also addresses the transmission infrastructure expansion that will be required to accommodate the newresources.

Under the Resource Plan, APS’ energy mix would change. Nuclear energy would increase to 32% of its mix, renewableenergy sources would increase to 16%, and energy efficiency would increase to 7%. Coal-fired energy would decrease to24% and gas-fired generation would decrease to 21%.

APS has requested the ACC to (a) either formally approve the Resource Plan or acknowledge that APS has considered allrelevant resources, risks and uncertainties and that the Resource Plan is reasonable and in the public interest; (b) determinethat the pursuit of renewable resources above the Renewable Energy Standard is in the public interest; (c) determine thattaking the initial steps to preserve APS’ ability to pursue a new nuclear baseload resource is in the public interest; and(d) determine that it is appropriate for APS to proceed to implement the Resource Plan. APS cannot predict the outcome ofthis matter.

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Transmission and Distribution Facilities

APS’ transmission facilities consist of approximately 5,825 pole miles of overhead lines and approximately 45 miles ofunderground lines, 5,601 miles of which are located in Arizona. APS’ distribution facilities consist of approximately 11,392miles of overhead lines and approximately 16,630 miles of underground primary cable, all of which are located in Arizona.APS shares ownership of some of its transmission facilities with other companies. The following table shows APS’jointly-owned interests in those transmission facilities recorded on the Consolidated Balance Sheets at December 31, 2008: Percent Owned (Weighted Average)

Palo Verde – Estrella 500KV System 55.5%ANPP 500KV System 35.8%Navajo Southern System 31.4%Four Corners Switchyards 27.5%Palo Verde – Yuma 500KV System 23.9%Phoenix – Mead System 17.1%

Plant and Transmission Line Leases and Easements on Indian Lands

The Navajo Generating Station and Four Corners are located on land held under leases from the Navajo Nation and alsounder easements from the federal government. The easement and lease for the Navajo Generating Station expire in 2019 andthe easement and lease for Four Corners expire in 2016. Each of the leases contains an option to extend for an additional25-year period from the end of the existing lease term, for a rental amount tied to the original rent payment adjusted based onan index. The easements do not contain an express renewal option and it is unclear what conditions to renewal or extension ofthe easements may be imposed. The ultimate cost of renewal of the Navajo Generating Station and Four Corners leases andeasements is uncertain. As noted above under “Portfolio Resources – Coal Fueled Generating Facilities,” the coal contractedfor use in these plants is also located on Indian reservations.

Certain portions of the transmission lines that carry power from several of our power plants are located on Indian landspursuant to easements or other rights-of-way that are effective for specified periods. Some of these rights-of-way haveexpired and our renewal applications have not yet been acted upon by the appropriate Indian tribes. Other rights expire atvarious times in the future and renewal action by the applicable tribe will be required at that time. The majority of ourtransmission lines residing on Indian lands are on the Navajo Nation. The Four Corners and Navajo Generating Station plantleases provide Navajo Nation consent to certain of the rights-of-way for transmission lines related to those plants at aspecified rental rate for the original term of the rights-of-way and for a like payment in any renewal period. In addition, a1985 amendment to the leases provides a formula for calculating payments for certain new and renewal rights-of-way.However, some of our rights-of-way are not covered by the leases, or are granted by other Indian tribes. In recent negotiationswith other utilities or companies for renewal of similar rights-of-way, certain of the affected Indian tribes have requiredpayments substantially in excess of amounts that we have paid in the past for such rights-of-way or that are typical for similarpermits across non-Indian lands; however, we are unaware of the underlying agreements and/or specific circumstancessurrounding these renewals. The ultimate cost of renewal of the rights-of-way for our transmission lines is

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uncertain. We are monitoring these rights-of-way and easement issues and have initiated discussions with the Navajo Nationregarding them. We are currently unable to predict the outcome of this matter.

Environmental Matters

EPA Environmental Regulation

Regional Haze Rules On April 22, 1999, the EPA announced final regional haze rules. These regulations required statesto submit state implementation plans (SIPs) by December 2007 to demonstrate “reasonable progress” towards achievingnatural visibility conditions in certain “Class I Areas,” including several on the Colorado Plateau. SIPs are required toconsider and potentially apply “best available retrofit technology” (BART) for certain older major stationary sources. Therules allow nine western states and Indian tribes to follow an alternate implementation plan and schedule for the Class IAreas. This alternate implementation plan is known as the Annex Rule.

On June 15, 2005, the EPA issued the Clean Air Visibility Rule, which amends the 1999 regional haze rules by providingguidelines, known as the BART guidelines, for states to use in determining which facilities must install controls and the typeof controls the facilities must use. The EPA also issued a Revised Annex Rule on October 13, 2006 to address a previouschallenge and court remand of that rule.

ADEQ is currently undertaking a rulemaking process to amend its SIP to reconcile it with the Revised Annex Rule and toimplement the Clean Air Visibility Rule requirements. ADEQ’s Regional Haze SIPs were due to EPA Region 9 inDecember 2007, but are actually expected to be submitted during 2009. As part of the rulemaking process, ADEQ isrequiring certain sources in the state to conduct BART analyses. Cholla and West Phoenix received letters from ADEQasserting that the plants are potentially subject to BART and requesting that we either perform a BART analysis on each plantor provide information demonstrating that we are not subject to BART. We completed a BART analysis for Cholla andsubmitted our BART recommendations to ADEQ on February 4, 2008. Our recommendations include the installation ofcertain pollution control equipment that we believe constitutes BART. Once we receive ADEQ’s final determination as towhat constitutes BART for Cholla, we will have five years to complete the installation of the equipment and to achieve theemission limits established by ADEQ. However, in order to coordinate with the plant’s other scheduled activities, we arecurrently implementing portions of our recommended plan for Cholla on a voluntary basis. Costs related to theimplementation of these portions of our recommended plan are included in our environmental expenditure estimates (see“Management’s Discussion and Analysis of Financial Condition and Results of Operation – Capital Expenditures” in Item 7).

Because we believed that ADEQ’s baseline modeling for West Phoenix may have contained some errors, we re-performedthe baseline modeling using correct input and have determined that West Phoenix is not subject to BART. We submitted thesefindings for West Phoenix to ADEQ, and ADEQ has verbally informed us that West Phoenix is not subject to BART.

In addition, EPA Region 9 requested us to perform a BART analysis for Four Corners. We completed the analysis andsubmitted it to the EPA on January 30, 2008. In December 2008, we provided additional data in response to a request fromthe EPA. Our recommendations include the installation of certain pollution control equipment that we believe constitutesBART. Once we

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receive the EPA’s final determination as to what constitutes BART for Four Corners, we will have five years to complete theinstallation of the equipment and to achieve the emission limits established by EPA Region 9. However, in order to coordinatewith the plant’s other scheduled activities, we will begin implementing initial portions of our recommended plan later thisyear for Four Corners on a voluntary basis. Costs related to the implementation of these portions of our recommended planare included in our environmental expenditure estimates (see “Management’s Discussion and Analysis of Financial Conditionand Results of Operation – Capital Expenditures” in Item 7).

While we continue to monitor this matter, at the present time we cannot predict whether the agencies will agree with ourBART recommendations or, if the agencies disagree with our recommendations, the nature of the BART controls the agenciesmay ultimately mandate and the resulting financial or operational impact.

Mercury On March 15, 2005, the EPA issued the Clean Air Mercury Rule (CAMR) to control mercury emissions fromcoal-fired power plants. This rule establishes performance standards limiting mercury emissions from coal-fired power plantsand establishes a two phased market-based emissions trading program. Under the trading program, the EPA has assigned eachstate a mercury emissions “budget” and each state must submit to the EPA a plan detailing how it will meet its “budget.”

In November 2006, ADEQ submitted a SIP to the EPA to implement the CAMR. ADEQ’s SIP generally incorporates theEPA’s model cap-and-trade program, but it includes additional requirements, including the requirement to meet a 90%mercury removal control level or 0.0087 lbs/GWh, whichever is greater, the requirement to obtain mercury allowances at a2:1 ratio for any emissions that fall below the specified control level, and the requirement, beginning in 2013, to considerclean coal technologies as part of permitting any new generation.

On February 8, 2008, the U.S. Court of Appeals for the D.C. Circuit vacated the CAMR and the EPA rule that allowed forthe creation of the CAMR, and on March 14, 2008, the court issued the mandate to vacate these rules. On May 20, 2008, theD.C. Circuit denied the EPA’s request to reconsider its decision. On October 17, 2008, the U.S. Solicitor General, on behalf ofthe EPA, petitioned the Supreme Court for a writ of certiorari to review the judgment of the D.C. Circuit Court of Appeals’vacatur of the CAMR. In filing the petition, the U.S. contended, among other things, that the Court of Appeals’ decision“effectively divests EPA of the discretion that Congress conferred on the agency to consider alternative regulatory approachesto combating air pollution from power plants.” Unless and until this decision is overturned, the law in effect prior to theadoption of the CAMR becomes the applicable law, and requires the EPA to develop an emission limit for mercury thatrepresents the maximum achievable control technology. It is expected to take the EPA several years to establish its standard,followed by a period of several years during which existing plants would implement any controls needed to comply with thestandard.

The court’s ruling also invalidates CAMR-based portions of ADEQ’s mercury rule (the trading provisions of the rule),although the state-only emission limits remain in effect. On July 25, 2008, the Arizona Utilities Group (comprised of APS,Arizona Electric Power Cooperative, Salt River Project, Tucson Electric Power Company, and Tri-State Generation andTransmission Association) filed with ADEQ a Petition for Reconsideration and Repeal of the state mercury rule. The petitionasserts that ADEQ does not have statutory authority to administer and enforce the state mercury rule, in light of the vacatur ofthe CAMR and the requirement that EPA promulgate a Maximum Achievable Control Technology (“MACT”) standard.ADEQ granted the petition in part

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and agreed to begin rulemaking efforts to repeal those portions of ADEQ’s mercury rule that are no longer valid in light ofthe vacatur of the federal CAMR. However, ADEQ denied the petition with respect to certain compliance deadlines and,unless the Arizona Utilities Group reaches an agreement with ADEQ on revisions to the state mercury rule, APS and otherswill have to comply with the 90% mercury removal or 0.0087 lbs/GWh levels discussed above by 2013. On February 17,2009, APS signed a consent order with ADEQ under which APS will strive to achieve 50% mercury removal commencing in2011 and will fully comply with the ADEQ mercury rule by 2016, rather than by 2013 as the rule currently prescribes.

While we continue to monitor this matter, we cannot predict the final outcome of the petition to the Supreme Court,additional actions by ADEQ resulting from the federal court’s decision or the Arizona Utilities Group petition, or the scope,timing or impact of any alternate rules that may be enacted to address mercury emissions.

We have installed, and continue to install, certain of the equipment necessary to meet the current mercury standards.However, due to the U.S. Court of Appeals decision described above, we will monitor the type and timing of any necessaryequipment installation. The estimated costs expected to be incurred over the next three years for such equipment are includedin our environmental expenditure estimates (see “Management’s Discussion and Analysis of Financial Condition and Resultsof Operation – Capital Expenditures” in Item 7).

Federal Implementation Plan In September 1999, the EPA proposed FIPs to set air quality standards at certain powerplants, including Four Corners and the Navajo Generating Station. On September 12, 2006, the EPA proposed revised FIPs toestablish air quality standards at both of these plants.

Four Corners FIP

On April 30, 2007, the EPA adopted a source specific FIP to set air quality standards at Four Corners. The FIP essentiallyfederalizes the requirements contained in the New Mexico State Implementation Plan, which Four Corners has historicallyfollowed. The FIP also includes a requirement to maintain and enhance dust suppression methods. On July 2, 2007, APS fileda petition for review in the United States District Court of Appeals for the Tenth Circuit seeking revisions to the FIP to clarifycertain requirements and allow operational flexibility. The Sierra Club intervened in this action. On July 6, 2007, the SierraClub and other parties filed a petition for review with the same court challenging the FIP’s compliance with the Clean Air Actand we have intervened in their action. In our lawsuit, we challenge two key provisions of the FIP: a 20% opacity limit oncertain fugitive dust emissions, which the EPA filed a motion to remand and vacate in early December 2007, and a 20% stackopacity limit on Units 4 and 5. Briefing in this case is now complete, and oral arguments as requested by the EPA werecompleted in May 2008. After briefing was completed, the EPA voluntarily moved to vacate the fugitive dust provisions ofthe FIP. The court has not yet ruled on that motion; however, in light of that motion, APS asked for, and the EPA granted, anadministrative stay of the fugitive dust provisions, and the Navajo Nation EPA amended our Four Corners permit to specifythat those requirements do not apply unless and until the court denies the EPA’s motion. Although we cannot predict theoutcome or the timing of these matters, we do not believe that they will have a material adverse impact on our financialposition, results of operations or cash flows.

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Navajo Generating Station FIP

The proposed FIP for the Navajo Generating Station is still pending. APS cannot currently predict the effect of thisproposed FIP on its financial position, results of operations or cash flows, or whether the proposed FIP will be adopted in itscurrent form.

Superfund Superfund establishes liability for the cleanup of hazardous substances found contaminating the soil, water orair. Those who generated, transported or disposed of hazardous substances at a contaminated site are among those who arePRPs. PRPs may be strictly, and often jointly and severally, liable for clean-up. On September 3, 2003, the EPA advised APSthat the EPA considers APS to be a PRP in the Motorola 52nd Street Superfund Site, Operable Unit 3 (OU3) in Phoenix,Arizona. APS has facilities that are within this Superfund site. APS and Pinnacle West have agreed with the EPA to performcertain investigative activities of the APS facilities within OU3. Because the investigation has not yet been completed andultimate remediation requirements are not yet finalized, at the present time neither APS nor Pinnacle West can accuratelyestimate the expenditures that may be required.

By letter dated April 25, 2008, the EPA informed APS that it may be a PRP in the Gila River Indian ReservationSuperfund Site in Maricopa County, Arizona. APS, along with three other electric utility companies, owns a parcel ofproperty on which a transmission pole and a portion of a transmission line are located. The property abuts the Gila RiverIndian Community boundary and, at one time, may have been part of an airfield where crop dusting took place. Currently, theEPA is only seeking payment from APS and four other PRPs for past cleanup-related costs involving contamination from thecrop dusting. Based upon the total amount of cleanup costs reported by the EPA in its letter to APS, we do not expect that theresolution of this matter will have a material adverse impact on our financial position, results of operations, or cash flows.

Manufactured Gas Plant Sites APS is currently investigating properties, which it now owns or which were previouslyowned by it or its corporate predecessors, that were at one time sites of, or sites associated with, manufactured gas plants.APS is taking action to voluntarily remediate these sites. APS does not expect these matters to have a material adverse effecton its financial position, results of operations, cash flows or liquidity.

Navajo Nation Environmental Issues

Four Corners and the Navajo Generating Station are located on the Navajo Reservation and are held under easementsgranted by the federal government as well as leases from the Navajo Nation. See “Portfolio Resources – Coal FueledGenerating Facilities” above for additional information regarding these plants.

In July 1995, the Navajo Nation enacted the Navajo Nation Air Pollution Prevention and Control Act, the Navajo NationSafe Drinking Water Act and the Navajo Nation Pesticide Act (collectively, the “Navajo Acts”). The Navajo Acts purport togive the Navajo Nation Environmental Protection Agency authority to promulgate regulations covering air quality, drinkingwater and pesticide activities, including those activities that occur at Four Corners and the Navajo Generating Station. OnOctober 17, 1995, the Four Corners participants and the Navajo Generating Station participants each filed a lawsuit in theDistrict Court of the Navajo Nation, Window Rock District, challenging the applicability of the Navajo Acts as to FourCorners and the Navajo Generating

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Station. The Court has stayed these proceedings pursuant to a request by the parties, and the parties are seeking to negotiate asettlement.

In April 2000, the Navajo Tribal Council approved operating permit regulations under the Navajo Nation Air PollutionPrevention and Control Act. APS believes the regulations fail to recognize that the Navajo Nation did not intend to assertjurisdiction over Four Corners and the Navajo Generating Station. On July 12, 2000, the Four Corners participants and theNavajo Generating Station participants each filed a petition with the Navajo Supreme Court for review of the operatingpermit regulations. Those proceedings have been stayed, pending the settlement negotiations mentioned above. APS cannotcurrently predict the outcome of this matter.

On May 18, 2005, APS, Salt River Project, as the operating agent for the Navajo Generating Station, and the NavajoNation executed a Voluntary Compliance Agreement (“VCA”) to resolve their disputes regarding the Navajo Nation AirPollution Prevention and Control Act. On March 21, 2006, the EPA determined that the Navajo Nation was eligible for“treatment as a state” for the purpose of entering into a supplemental delegation agreement with the EPA to administer theClean Air Act Title V, Part 71 federal permit program over Four Corners and the Navajo Generating Station. The EPA enteredinto the supplemental delegation agreement with the Navajo Nation on the same day. Because the EPA’s approval wasconsistent with the requirements of the VCA, APS sought dismissal of the pending litigation in the Navajo Nation SupremeCourt, as well as the pending litigation in the Navajo Nation District Court to the extent the claims relate to the Clean AirAct, and the Courts have dismissed the claims accordingly. The agreement does not address or resolve any dispute relating toother Navajo Acts. APS cannot currently predict the outcome of this matter.

Water Supply

Assured supplies of water are important for APS’ generating plants. At the present time, APS has adequate water to meetits needs. However, conflicting claims to limited amounts of water in the southwestern United States have resulted innumerous court actions.

Both groundwater and surface water in areas important to APS’ operations have been the subject of inquiries, claims andlegal proceedings, which will require a number of years to resolve. APS is one of a number of parties in a proceeding, filedMarch 13, 1975, before the Eleventh Judicial District Court in New Mexico to adjudicate rights to a stream system fromwhich water for Four Corners is derived. An agreement reached with the Navajo Nation in 1985, however, provides that ifFour Corners loses a portion of its rights in the adjudication, the Navajo Nation will provide, for an agreed upon cost,sufficient water from its allocation to offset the loss.

A summons served on APS in early 1986 required all water claimants in the Lower Gila River Watershed in Arizona toassert any claims to water on or before January 20, 1987, in an action pending in Maricopa County, Arizona, Superior Court.Palo Verde is located within the geographic area subject to the summons. APS’ rights and the rights of the other Palo Verdeparticipants to the use of groundwater and effluent at Palo Verde are potentially at issue in this action. As operating agent ofPalo Verde, APS filed claims that dispute the court’s jurisdiction over the Palo Verde participants’ groundwater rights andtheir contractual rights to effluent relating to Palo Verde. Alternatively, APS seeks confirmation of such rights. Five of APS’other power plants are also located within the geographic area subject to the summons. APS’ claims dispute the court’sjurisdiction over its groundwater rights with respect to these plants. Alternatively, APS seeks

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confirmation of such rights. In November 1999, the Arizona Supreme Court issued a decision confirming that certaingroundwater rights may be available to the federal government and Indian tribes. In addition, in September 2000, the ArizonaSupreme Court issued a decision affirming the lower court’s criteria for resolving groundwater claims. Litigation on both ofthese issues has continued in the trial court. In December 2005, APS and other parties filed a petition with the ArizonaSupreme Court requesting interlocutory review of a September 2005 trial court order regarding procedures for determiningwhether groundwater pumping is affecting surface water rights. The Court denied the petition in May 2007, and the trial courtis now proceeding with implementation of its 2005 order. No trial date concerning APS’ water rights claims has been set inthis matter.

APS has also filed claims to water in the Little Colorado River Watershed in Arizona in an action pending in the ApacheCounty, Arizona, Superior Court, which was originally filed on September 5, 1985. APS’ groundwater resource utilized atCholla is within the geographic area subject to the adjudication and, therefore, is potentially at issue in the case. APS’ claimsdispute the court’s jurisdiction over its groundwater rights. Alternatively, APS seeks confirmation of such rights. A number ofparties are in the process of settlement negotiations with respect to certain claims in this matter. Other claims have beenidentified as ready for litigation in motions filed with the court. No trial date concerning APS’ water rights claims has beenset in this matter.

Although the above matters remain subject to further evaluation, APS does not expect that the described litigation willhave a material adverse impact on its financial position, results of operations, cash flows or liquidity.

The Four Corners region, in which Four Corners is located, has been experiencing drought conditions that may affect thewater supply for the plants if adequate moisture is not received in the watershed that supplies the area. APS is continuing towork with area stakeholders to implement agreements to minimize the effect, if any, on future operations of the plant. Theeffect of the drought cannot be fully assessed at this time, and APS cannot predict the ultimate outcome, if any, of the droughtor whether the drought will adversely affect the amount of power available, or the price thereof, from Four Corners.

Climate Change

Legislative and Regulatory Initiatives. In the past several years, the United States Congress has considered bills that wouldregulate domestic greenhouse gas emissions, but such bills have not yet received sufficient Congressional approval to becomelaw; however, there is growing consensus that some form of regulation or legislation is likely to occur in the near future at thefederal level with respect to greenhouse gas emissions. In 2007, the United States Supreme Court ruled that greenhouse gasesfit within the Clean Air Act’s broad definition of “air pollutant” and, as a result, the EPA has the authority to regulategreenhouse gas emissions of new motor vehicles under the Clean Air Act. The court held that the only way the EPA canavoid regulating greenhouse gases is if it determines that the emissions do not contribute to climate change, or if the EPAprovides a reasonable explanation for why it cannot or will not exercise its discretion to regulate these emissions. While thisdecision applies only to emissions from new motor vehicles, if the EPA determines that greenhouse gas emissions canreasonably be anticipated to endanger public health or welfare, this determination will likely impact other Clean Air Actprograms as well, and could potentially result in new regulatory requirements for our power plants.

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In addition to federal legislative initiatives, state specific initiatives may also impact our business. While Arizona has notyet enacted any state specific legislation regarding greenhouse gas emissions, AB 32 is a California statute mandating thereduction of greenhouse gas emissions to 1990 levels by 2020. In December 2008, the California Air Resources Board issueda final scoping plan which is intended to form the basis of rules required under AB 32. On January 1, 2012, the regulationsbased on the 2009 scoping plan will become effective. We are monitoring this and other state legislative developments toevaluate whether, and the extent to which, any resulting statutes or rules in California or other states may affect our business,including our sales into the impacted states or the ability of our out-of-state power plant participants to meet their obligations.

If any emission reduction legislation or regulations are enacted, we will assess our compliance alternatives, which mayinclude replacement of existing equipment, installation of additional pollution control equipment, purchase of allowances,curtailing certain operations, or other actions. Although associated capital expenditures or operating costs resulting fromgreenhouse gas emission regulations or legislation could be material, we believe that we would be able to recover the costs ofthese environmental compliance initiatives through our rates.

Regional Initiative. In 2007, six western states (Arizona, California, New Mexico, Oregon, Utah and Washington) and twoCanadian provinces (British Columbia and Manitoba) entered into an accord, the Western Climate Initiative (the “Initiative”),to reduce greenhouse gas emissions from automobiles and certain industries, including utilities. Montana, Quebec andOntario have also joined the Initiative. In August 2007, the Initiative participants set a goal of reducing greenhouse gasemissions 15% below 2005 levels by 2020. Since May 2008, several draft documents have been issued for public comment.We are reviewing the recommendations and requirements in these documents, which currently provide only a generalframework for the proposed program. Over the next year, the Initiative participants intend to develop detailed rules to morefully establish and define the program. Since details are not yet available, such as the number of allowances each source mayreceive, we are unable to quantify the potential financial and operational impacts on our business. In addition, we believe thatthe implementation of any such program in Arizona would require legislative action. As a result, while we continue tomonitor the progress and impact of the Initiative, at the present time we cannot predict what detailed form it will ultimatelytake, whether it will be implemented or, if it is implemented, what impact it will have on our operations.

Company Response to Climate Change Initiatives. We have undertaken a number of initiatives to address emissionconcerns, including renewable energy procurement and development, promotion of programs and rates related to energyconservation, renewable energy use and energy efficiency, and implementation of an active technology innovation effort toevaluate potential emerging new technologies. APS currently has a diverse portfolio of renewable resources including wind,geothermal, solar and biomass and we are focused on increasing the percentage of our energy that is produced by renewableresources. (See “Portfolio Resources – Alternative Generation Sources” above.) In January 2009, we submitted a ResourcePlan Report to the ACC proposing our future plans for additional diverse resources. See “Portfolio Resources – ResourcePlan” above for information regarding the Resource Plan Report, which was designed, in part, to increase Arizona’scommitment to non-fossil resources.

In addition, we are currently developing a Climate Management Report to comply with an ACC order that directed APS toundertake a climate management plan, carbon emission reduction study and commitment and action plan with public inputand ACC review. We expect to complete the report in early 2009.

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In January 2008, APS joined the Climate Registry as a Founding Reporter. Founding Reporters are companies thatvoluntarily joined the non-profit organization before May 2008 to measure and report greenhouse gas emissions in acommon, accurate and transparent manner consistent across industry sectors and borders. Pinnacle West has also reported,and will continue to report, greenhouse gas emissions in its annual Corporate Responsibility Report, which is available on ourwebsite (www.pinnaclewest.com). In addition to emissions data, the report provides information related to the Company, itsapproach to sustainability and its workplace and environmental performance. The information on Pinnacle West’s website,including the Corporate Responsibility Report, is not incorporated by reference into this report.

BUSINESS OF SUNCOR DEVELOPMENT COMPANY

SunCor was incorporated in 1965 under the laws of Arizona and is a developer of residential, commercial and industrialreal estate projects in Arizona, Idaho, New Mexico and Utah. The principal executive offices of SunCor are located at 80 EastRio Salado Parkway, Suite 410, Tempe, Arizona 85281 (telephone 480-317-6800). SunCor and its subsidiaries hadapproximately 480 employees at December 31, 2008.

At December 31, 2008, SunCor had total assets of about $547 million. SunCor’s assets consist primarily of land withimprovements, commercial buildings, golf courses and other real estate investments. SunCor focuses on real estatedevelopment of master-planned communities, and mixed-use residential, commercial, office and industrial projects.

SunCor projects include six master-planned communities and several commercial and residential projects. Four of themaster-planned communities and the commercial and residential projects are in Arizona. Other master-planned communitiesare located in Idaho, New Mexico and Utah.

SunCor’s operating revenues were approximately $131 million in 2008, $213 million in 2007 and $400 million in 2006.SunCor’s net loss was approximately $26 million in 2008. SunCor’s net loss in 2008 included a $53 million (pre-tax) realestate impairment charge. SunCor’s net income was approximately $24 million in 2007 and $61 million in 2006. Certaincomponents of SunCor’s real estate sales activities, which are included in the real estate segment, are required to be reportedas discontinued operations on Pinnacle West’s Consolidated Statements of Income in accordance with SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets.” See Notes 22 and 23.

See “Liquidity and Capital Resources – Other Subsidiaries – SunCor” in “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” in Item 7 for a discussion of SunCor’s long-term debt, liquidity and capitalrequirements.

BUSINESS OF OTHER SUBSIDIARIES

APSES was incorporated in 1998 under the laws of Arizona and provides energy-related products and services (such asenergy master planning, energy use consultation and facility audits, cogeneration analysis and installation, and projectmanagement) and competitive commodity-related energy services (such as direct access commodity contracts, energyprocurement and energy supply consultation) to commercial and industrial retail customers in the western United States.Recently, APSES has discontinued its commodity-related energy services (see Note 22). APSES had

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approximately 60 employees as of December 31, 2008. APSES’ principal offices are located at 60 E. Rio Salado Parkway,Suite 1001, Tempe, Arizona 85281 (telephone 602-744-5060).

APSES had a net loss of $1 million in 2008, a net loss of $4 million in 2007 and a net loss of $3 million in 2006. AtDecember 31, 2008, APSES had total assets of $70 million.

El Dorado was incorporated in 1983 under the laws of Arizona. El Dorado owns minority interests in several energy-related investments and Arizona community-based ventures. El Dorado’s short-term goal is to prudently realize the value ofits existing investments. On a long-term basis, Pinnacle West may use El Dorado, when appropriate, for investments that arestrategic to the business of generating, distributing and marketing electricity. El Dorado’s offices are located at 400 NorthFifth Street, Phoenix, Arizona 85004 (telephone 602-250-3517).

El Dorado had a net loss of $10 million in 2008, a net loss of $6 million in 2007 and a net loss of $4 million in 2006.Income taxes related to El Dorado are recorded by Pinnacle West. At December 31, 2008, El Dorado had total assets of$28 million.

ITEM 1A. RISK FACTORS

In addition to the factors affecting specific business operations identified in connection with the description of theseoperations contained elsewhere in this report, set forth below are risks and uncertainties that could affect our financial results.Unless otherwise indicated or the context otherwise requires, the following risks and uncertainties apply to Pinnacle West andits subsidiaries, including APS.

APS is subject to comprehensive government regulation by several federal, state and local regulatory agencies thatcould have a material adverse impact on its business, liquidity and results of operations.

APS is subject to comprehensive regulation by several federal, state and local regulatory agencies that significantlyinfluence its business, liquidity and results of operations. The ACC regulates APS’ retail electric rates and APS’ issuance ofsecurities. The ACC must also approve any transfer of APS’ property used to provide retail electric service and approve orreceive prior notification of certain transactions between us, APS and our respective affiliates. While approved electric ratesare intended to permit APS to recover its costs of service and earn a reasonable rate of return, the profitability of APS isaffected by the rates it may charge. Consequently, our financial condition and results of operations are dependent upon thesatisfactory resolution of APS’ retail rate proceedings and ancillary matters which are before or which may come before theACC. Decisions made by the ACC could have a material adverse impact on our results of operations, financial position orliquidity.

APS is required to have numerous permits, approvals and certificates from the agencies that regulate APS’ business. TheFERC, the NRC, the EPA, and the ACC regulate many aspects of our utility operations, including siting and construction offacilities, customer service and, as noted in the preceding paragraph, the rates that APS can charge customers. We believe thenecessary permits, approvals and certificates have been obtained for APS’ existing operations and that APS’ business isconducted in accordance with applicable laws in all material respects. However, changes in regulations or the imposition ofadditional regulations could have an adverse impact on our results of operations. We are also unable to predict the impact onour business and operating results from pending or future regulatory activities of any of these agencies.

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The NRC has broad authority under federal law to impose licensing and safety-related requirements for the operation ofnuclear generation facilities. In the event of noncompliance, the NRC has the authority to impose monetary civil penalties ora progressively increased inspection regime that could ultimately result in the shut down of a unit, or both, depending uponthe NRC’s assessment of the severity of the situation, until compliance is achieved. In early 2007, the NRC placed Palo VerdeUnit 3 in the “multiple/repetitive degraded cornerstone” column of the NRC’s Action Matrix (“Column 4”), which hasresulted in an enhanced NRC inspection regime, including on-site in-depth inspections of Palo Verde equipment andoperations. Although only Palo Verde Unit 3 is in NRC’s Column 4, in order to adequately assess the need for improvements,APS management has been conducting site-wide assessments of equipment and operations. APS continues to cooperate fullywith the NRC throughout this process. The enhanced NRC inspection regime and APS’ ongoing commitment to theconservatively safe operation of Palo Verde could result in NRC action or an APS decision to shut down one or more units inthe event of noncompliance with operating requirements or in light of other operational considerations.

APS is subject to numerous environmental laws and regulations that may increase its cost of operations, impact itsbusiness plans, or expose it to environmental liabilities.

APS is subject to numerous environmental laws and regulations affecting many aspects of its present and futureoperations, including air emissions, water quality, wastewater discharges, solid waste, hazardous waste, and coal combustionproducts, which consist of bottom ash, fly ash and air pollution control wastes. These laws and regulations can result inincreased capital, operating, and other costs, particularly with regard to enforcement efforts focused on power plant emissionsobligations. These laws and regulations generally require APS to obtain and comply with a wide variety of environmentallicenses, permits, inspections and other approvals. If there is a delay in obtaining any required environmental regulatoryapproval, or if APS fails to obtain, maintain or comply with any such approval, operations at affected facilities could besuspended or subject to additional expenses. In addition, failure to comply with applicable environmental laws andregulations could result in civil liability or criminal penalties. Both public officials and private individuals may seek toenforce applicable environmental laws and regulations. We cannot predict the outcome (financial or operational) of anyrelated litigation that may arise.

In addition, we may be a responsible party for environmental clean up at sites identified by a regulatory body. We cannotpredict with certainty the amount and timing of all future expenditures related to environmental matters because of thedifficulty of estimating clean-up costs. There is also uncertainty in quantifying liabilities under environmental laws thatimpose joint and several liability on all potentially responsible parties.

We cannot be sure that existing environmental regulations will not be revised or that new regulations seeking to protect theenvironment will not be adopted or become applicable to us. Revised or additional regulations that result in increasedcompliance costs or additional operating restrictions, particularly if those costs incurred by APS are not fully recoverablefrom APS’ customers, could have a material adverse effect on our financial position, results of operations or cash flows.

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Concern over climate change could result in significant legislative and regulatory efforts to limit greenhouse gasemissions or related litigation, which may increase APS’ cost of operations.

Concern over climate change, deemed by many to be induced by rising levels of greenhouse gases in the atmosphere, hasled to significant legislative and regulatory efforts to limit CO2, which is a major byproduct of the combustion of fossil fuel,and other greenhouse gas emissions. In addition, lawsuits have been filed against companies that emit greenhouse gases,including a lawsuit filed against us and several other utilities, seeking damages related to climate change. In the past severalyears, the United States Congress has considered bills that would regulate domestic greenhouse gas emissions, but such billshave not received sufficient Congressional approval to date to become law; however, there is growing consensus that someform of regulation or legislation is likely to occur in the near future at the federal level with respect to greenhouse gasemissions. In addition, in 2007, the United States Supreme Court ruled that greenhouse gases fit within the Clean Air Act’sbroad definition of “air pollutant” and, as a result, the EPA has the authority to regulate greenhouse gas emissions of newmotor vehicles under the Clean Air Act. If the United States Congress, or individual states or groups of states in which weoperate, ultimately pass legislation regulating the emissions of greenhouse gases, any resulting limitations on generationfacility CO2 and other greenhouse gas emissions could result in the creation of substantial additional capital expenditures andoperating costs in the form of taxes, emissions allowances or required equipment upgrades and could have a material adverseimpact on all fossil fuel fired generation facilities (particularly coal fired facilities, which constitute approximately 28% ofour generation capacity). If the EPA determines that greenhouse gas emissions can reasonably be anticipated to endangerpublic health or welfare, this determination may impact other Clean Air Act Programs and could potentially result in newregulatory requirements for our power plants, which could also result in substantial additional costs. Excessive costs tocomply with future legislation or regulations could force APS and other similarly-situated electric power generators to closesome coal-fired facilities.

There are inherent risks in the ownership and operation of nuclear facilities, such as environmental, health,regulatory and financial risks and the risk of terrorist attack.

Through APS, we have an ownership interest in and operate, on behalf of a group of owners, Palo Verde, which is thelargest nuclear electric generating facility in the United States. Palo Verde is subject to environmental, health and financialrisks such as the ability to dispose of spent nuclear fuel; the ability to maintain adequate reserves for decommissioning;potential liabilities arising out of the operation of these facilities; the costs of securing the facilities against possible terroristattacks; and unscheduled outages due to equipment and other problems. APS maintains nuclear decommissioning trust fundsand external insurance coverage to minimize its financial exposure to some of these risks; however, it is possible thatdamages could exceed the amount of insurance coverage.

The NRC has broad authority under federal law to impose licensing and safety-related requirements for the operation ofnuclear generation facilities. In the event of noncompliance, the NRC has the authority to impose monetary civil penalties ora progressively increased inspection regime, which could ultimately result in the shut down of a unit, or both, dependingupon its assessment of the severity of the situation, until compliance is achieved. See the first risk factor above for adiscussion of the enhanced NRC inspection regime currently in effect at Palo Verde and the related operational and regulatoryimplications. In addition, although we have no reason to anticipate a serious nuclear incident at Palo Verde, if an incident didoccur, it could materially and

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adversely affect our results of operations and financial condition. A major incident at a nuclear facility anywhere in the worldcould cause the NRC to limit or prohibit the operation or licensing of any domestic nuclear unit.

The operation of Palo Verde requires licenses that need to be periodically renewed and/or extended. In December 2008,we applied for renewed operating licenses for all three Palo Verde units for 20 years beyond the expirations of the currentlicenses. We do not anticipate any problems renewing these licenses. However, as a result of potential terrorist threats andincreased public scrutiny of utilities, the licensing process could result in increased licensing or compliance costs that aredifficult or impossible to predict.

The operation of power generation facilities involves risks that could result in unscheduled power outages orreduced output, which could materially affect our results of operations.

The operation of power generation facilities involves certain risks, including the risk of breakdown or failure ofequipment, fuel interruption, and performance below expected levels of output or efficiency. Unscheduled outages, includingextensions of scheduled outages due to mechanical failures or other complications occur from time to time and are aninherent risk of our business. If APS’ facilities operate below expectations, we may lose revenue or incur additional expenses,including increased purchased power expenses.

The ownership and operation of power generation and transmission facilities on Indian lands could result inuncertainty related to continued easements and rights-of-way, which could have a significant impact on our business.

Certain portions of the transmission lines that carry power from several of our power plants are located on Indian landspursuant to easements or other rights-of-way that are effective for specified periods. We are currently unable to predict theoutcome of discussions with the appropriate Indian tribes with respect to future renewal of these easements and rights-of-way.

Deregulation or restructuring of the electric industry may result in increased competition, which could have asignificant adverse impact on our business and our results of operations.

In 1999, the ACC approved rules for the introduction of retail electric competition in Arizona. Retail competition couldhave a significant adverse financial impact on APS due to an impairment of assets, a loss of retail customers, lower profitmargins or increased costs of capital. Although some very limited retail competition existed in APS’ service area in 1999 and2000, there are currently no active retail competitors offering unbundled energy or other utility services to APS’ customers.As a result, we cannot predict when, and the extent to which, additional competitors will re-enter APS’ service territory.

As a result of changes in federal law and regulatory policy, competition in the wholesale electricity market has greatlyincreased due to a greater participation by traditional electricity suppliers, non-utility generators, independent powerproducers, and wholesale power marketers and brokers. This increased competition could affect APS’ load forecasts, plansfor power supply and wholesale energy sales and related revenues. As a result of the changing regulatory environment and

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the relatively low barriers to entry, we expect wholesale competition to increase, which could adversely affect our business.

Changes in technology may adversely affect our business.

Research and development activities are ongoing to improve alternative technologies to produce power, including fuelcells, micro turbines, clean coal and coal gasification, photovoltaic (solar) cells and improvements in traditional technologiesand equipment, such as more efficient gas turbines. Advances in these, or other technologies could reduce the cost of powerproduction, making APS’ generating facilities less competitive. In addition, advances in technology could reduce the demandfor power supply, which could adversely affect APS’ business.

Our results of operations can be adversely affected by weather conditions.

Weather conditions directly influence the demand for electricity and affect the price of energy commodities. Electricpower demand is generally a seasonal business. In Arizona, demand for power peaks during the hot summer months, withmarket prices also peaking at that time. As a result, our overall operating results fluctuate substantially on a seasonal basis. Inaddition, APS has historically sold less power, and consequently earned less income, when weather conditions are milder. Asa result, unusually mild weather could diminish our results of operations and harm our financial condition.

Higher temperatures may decrease the snowpack, which might result in lowered soil moisture and an increased threat offorest fires. Forest fires could threaten our communities and electric transmission lines. Any damage caused as a result offorest fires could negatively impact our results of operations.

Our results of operations can be adversely affected by current economic conditions.

Customer growth in APS’ service territory was 1.4% during 2008. Customer growth averaged 3% a year for the threeyears 2006 through 2008. We currently expect customer growth to decline, averaging about 1% per year for 2009 through2011 due to factors reflecting the economic conditions both nationally and in Arizona. We currently expect our retail salesgrowth in 2009 to be below average because of potential effects on customer usage from the economic conditions mentionedabove and retail rate increases, which would adversely affect our results of operations.

The lack of access to sufficient supplies of water could have a material adverse impact on our business and resultsof operations.

Assured supplies of water are important for APS’ generating plants. Water in the southwestern United States is limited andvarious parties have made conflicting claims regarding the right to access and use such limited supply of water. Bothgroundwater and surface water in areas important to APS’ generating plants have been the subject of inquiries, claims andlegal proceedings. In addition, the Four Corners region, in which Four Corners is located, has been experiencing droughtconditions that may affect the water supply for the plants if adequate moisture is not received in the watershed that suppliesthe area. Our inability to access sufficient supplies of water could have a material adverse impact on our business and resultsof operations.

Our cash flow largely depends on the performance of our subsidiaries.

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We conduct our operations primarily through subsidiaries. Substantially all of our consolidated assets are held by suchsubsidiaries. Accordingly, our cash flow is dependent upon the earnings and cash flows of these subsidiaries and theirdistributions to us. The subsidiaries are separate and distinct legal entities and have no obligation to make distributions to us.

The debt agreements of some of our subsidiaries may restrict their ability to pay dividends, make distributions orotherwise transfer funds to us. An ACC financing order requires APS to maintain a common equity ratio of at least 40% anddoes not allow APS to pay common dividends if the payment would reduce its common equity below that threshold. Thecommon equity ratio, as defined in the ACC order, is common equity divided by the sum of common equity and long-termdebt, including current maturities of long-term debt.

Our ability to meet our debt service obligations could be adversely affected because our debt securities arestructurally subordinated to the debt securities and other obligations of our subsidiaries.

Because we are structured as a holding company, all existing and future debt and other liabilities of our subsidiaries willbe effectively senior in right of payment to our debt securities. None of the indentures under which we or our subsidiariesmay issue debt securities limits our ability or the ability of our subsidiaries to incur additional debt in the future. The assetsand cash flows of our subsidiaries will be available, in the first instance, to service their own debt and other obligations. Ourability to have the benefit of their assets and cash flows, particularly in the case of any insolvency or financial distressaffecting our subsidiaries, would arise only through our equity ownership interests in our subsidiaries and only after theircreditors have been satisfied.

Our inability to reduce capital expenditures could materially and adversely affect our business, financial conditionand results of operation.

Unexpected developments that may prevent us from reducing capital expenditures and other costs while maintainingreliability and customer service levels could have a material adverse impact on our financial position, results of operations,cash flows or liquidity.

Financial market disruptions may increase our financing costs or limit our access to the credit markets, which mayadversely affect our liquidity and our ability to implement our financial strategy.

We rely on access to short-term money markets, longer-term capital markets and the bank markets as a significant sourceof liquidity and for capital requirements not satisfied by the cash flow from our operations. We believe that we will maintainsufficient access to these financial markets. However, certain market disruptions may increase our cost of borrowing oradversely affect our ability to access one or more financial markets. Such disruptions could include:

• continuation of the current economic downturn;

• the bankruptcy of an unrelated energy company;

• increased market prices for electricity and gas;

• terrorist attacks or threatened attacks on our facilities or those of unrelated energy companies;

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• changes in technology;

• mergers among financial institutions and the overall health of the banking industry; or

• the overall health of the utility or real estate industry.

In addition, the credit commitments of our lenders under our bank facilities may not be satisfied for a variety of reasons,including unexpected periods of financial distress, which could materially adversely affect the adequacy of our liquiditysources.

Changes in economic conditions could result in higher interest rates, which would increase our interest expense on ourdebt and reduce funds available to us for our current plans. Additionally, an increase in our leverage could adversely affect usby:

• increasing the cost of future debt financing;

• increasing our vulnerability to adverse economic and industry conditions;

• requiring us to dedicate a substantial portion of our cash flow from operations to payments on our debt, which wouldreduce funds available to us for operations, future business opportunities or other purposes; and

• placing us at a competitive disadvantage compared with our competitors that have less debt.

Recent sub-prime mortgage issues, the collapse of the credit markets, the weak housing market and the overall weakeningof the economy have adversely affected the financial markets, generally resulting in increased interest rates for corporatedebt, reduced access to the capital markets, and actual or potential downgrades of bond insurers and banks, among othernegative matters. In general, the Company and APS have been unable to access the commercial paper markets sinceSeptember 2008. As a result, existing bank lines have been used as a source of liquidity on which we depend. In addition, theinterest rates on certain issues of APS’ pollution control bonds that are periodically reset through auction processes haverecently increased. These bonds are supported by bond insurance policies provided by Ambac Assurance Corporation(“Ambac”), and the interest rates on those bonds are directly affected by the rating of the bond insurer. We do not expect,however, that any such increase will have a material adverse impact on our financial position, results of operations, cashflows or liquidity.

The 2007 and 2008 financial results of SunCor, our real estate subsidiary, reflect the weak real estate market and currenteconomic conditions. SunCor’s principal loan facility is secured primarily by an interest in land, commercial properties, landcontracts and homes under construction (the “Secured Revolver”). At December 31, 2008, SunCor had borrowings ofapproximately $120 million under this facility. The Secured Revolver matures on January 30, 2010. In addition to theSecured Revolver, at December 31, 2008, SunCor had approximately $68 million of outstanding debt under other creditfacilities that mature at various dates and also contain certain loan covenants. The majority of this indebtedness is due in2009, and SunCor is in the process of renegotiating these facilities.

If SunCor is unable to meet its financial covenants under the Secured Revolver or its other outstanding credit facilities,SunCor could be required to immediately repay its outstanding indebtedness under all of its credit facilities as a result ofcross-default provisions. Such a debt acceleration would have a material adverse impact on SunCor’s business and itsfinancial position. The Company has not guaranteed any SunCor indebtedness. As a result, the Company does not believethat SunCor’s inability to meet its financial covenants under the Secured Revolver or its other outstanding credit facilitieswould have a material adverse impact on Pinnacle West’s cash flows or liquidity, although any resulting SunCor losses wouldbe reflected in Pinnacle West’s consolidated financial statements.

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A reduction in our credit ratings could materially and adversely affect our business, financial condition and resultsof operations.

We cannot be sure that any of our current ratings will remain in effect for any given period of time or that a rating will notbe lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances in the future so warrant. Anydowngrade or withdrawal could adversely affect the market price of Pinnacle West’s and APS’ securities, limit our access tocapital and increase our borrowing costs, which would diminish our financial results. We would be required to pay a higherinterest rate in future financings, and our potential pool of investors and funding sources could decrease. In addition,borrowing costs under certain of our existing credit facilities depend on our credit ratings. A downgrade would also require usto provide substantial additional support in the form of letters of credit or cash or other collateral to various counterparties. Ifour short-term ratings were to be lowered, it could completely eliminate any possible future access to the commercial papermarket. We note that the ratings from rating agencies are not recommendations to buy, sell or hold our securities and thateach rating should be evaluated independently of any other rating.

The use of derivative contracts in the normal course of our business could result in financial losses that negativelyimpact our results of operations.

Our operations include managing market risks related to commodity prices and, subject to specified risk parameters,engaging in marketing and trading activities intended to profit from market price movements. We are exposed to the impactof market fluctuations in the price and transportation costs of electricity, natural gas and coal, to the extent that unhedgedpositions exist. We have established procedures to manage risks associated with these market fluctuations by utilizing variouscommodity derivatives, including exchange-traded futures and options and over-the-counter forwards, options, and swaps. Aspart of our overall risk management program, we enter into derivative transactions to hedge purchases and sales of electricityand fuels. 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, whichcould result in greater unhedged positions than we would prefer at a given time.

We are exposed to losses in the event of nonperformance or nonpayment by counterparties. We use a risk managementprocess to assess and monitor the financial exposure of all counterparties. Despite the fact that the majority of tradingcounterparties are rated as investment grade by the rating agencies, there is still a possibility that one or more of thesecompanies could default, which could result in a material adverse impact on our earnings for a given period.

Changing interest rates and market conditions could result in financial losses that negatively impact our results ofoperations.

Changing interest rates affect interest paid on variable-rate debt and interest earned on variable-rate securities in ourpension plan, other postretirement benefit plan and nuclear decommissioning trust funds. Our policy is to manage interestrates through the use of a combination of fixed-rate and floating-rate debt. The pension plan and other postretirement benefitliabilities are also impacted by the discount rate, which is the interest rate used to discount future pension and otherpostretirement benefit obligations. Declining interest rates impact the discount rate, and may result in increases in pensionand other postretirement benefit costs, cash contributions, regulatory assets, and charges to other comprehensive income. Thepension plan, other postretirement benefit and

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nuclear decommissioning trust funds also have risks associated with changing market values of fixed income and equityinvestments. A significant portion of the pension costs and other postretirement benefit costs and all of the nucleardecommissioning costs are recovered in regulated electricity prices.

The market price of our common stock may be volatile.

The market price of our common stock could be subject to significant fluctuations in response to factors such as thefollowing, some of which are beyond our control:

• variations in our quarterly operating results;

• operating results that vary from the expectations of management, securities analysts and investors;

• changes in expectations as to our future financial performance, including financial estimates by securities analysts andinvestors;

• developments generally affecting industries in which we operate, particularly the energy distribution and energygeneration industries;

• announcements by us or our competitors of significant contracts, acquisitions, joint marketing relationships, jointventures or capital commitments;

• announcements by third parties of significant claims or proceedings against us;

• favorable or adverse regulatory or legislative developments;

• our dividend policy;

• future sales by the Company of equity or equity-linked securities; and

• general domestic and international economic conditions.

In addition, the stock market in general has experienced volatility that has often been unrelated to the operatingperformance of a particular company. These broad market fluctuations may adversely affect the market price of our commonstock.

Our stock price could be affected because a substantial number of shares of our common stock could be availablefor sale in the future.

Sales in the public market of a substantial number of shares of common stock could depress the market price of thecommon stock and could impair our ability to raise capital through the sale of additional equity securities. Because of thenumber of shares of our common stock that we are authorized to issue under our articles of incorporation, a substantialnumber of shares of our common stock could be available for future sale.

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We may enter into credit and other agreements from time to time that restrict our ability to pay dividends.

Payment of dividends on our common stock may be restricted by credit and other agreements entered into by us from timeto time. There are currently no material restrictions on our ability to pay dividends under any such agreement.

Certain provisions of our articles of incorporation and bylaws and of Arizona law make it difficult for shareholdersto change the composition of our board and may discourage takeover attempts.

These provisions, which could preclude our shareholders from receiving a change of control premium, include thefollowing:

• restrictions on our ability to engage in a wide range of “business combination” transactions with an “interestedshareholder” (generally, any person who owns 10% or more of our outstanding voting power or any of our affiliatesor associates) or any affiliate or associate of an interested shareholder, unless specific conditions are met;

• anti-greenmail provisions of Arizona law and our bylaws that prohibit us from purchasing shares of our voting stockfrom beneficial owners of more than 5% of our outstanding shares unless specified conditions are satisfied;

• a requirement that shareholder action be taken only at an annual or special meeting or by unanimous written consent,and bylaws that require that only a majority of our Board of Directors, the Chairman of our Board of Directors, or ourPresident may call a special meeting of shareholders;

• advance notice procedures for nominating candidates to our Board of Directors or presenting matters at shareholdermeetings;

• shareholders may only remove a director with or without cause by a majority vote at a special meeting ofshareholders;

• the ability of the Board of Directors to increase the size of the Board and fill vacancies on the Board, whetherresulting from such increase, or from death, resignation, disqualification or otherwise; and

• the ability of our Board of Directors to issue additional shares of common stock and shares of preferred stock and todetermine the price and, with respect to preferred stock, the other terms, including preferences and voting rights, ofthose shares without shareholder approval.

In addition, we have adopted a shareholder rights plan that may have the effect of discouraging unsolicited takeoverproposals, including takeover proposals that could result in a premium over the market price of our common stock. Theshareholder rights plan will expire on March 26, 2009.

While these provisions have the effect of encouraging persons seeking to acquire control of us to negotiate with our Boardof Directors, they could enable the Board to hinder or

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frustrate a transaction that some, or a majority, of our shareholders might believe to be in their best interests and, in that case,may prevent or discourage attempts to remove and replace incumbent directors.

SunCor’s business and financial performance could continue to be adversely affected by a variety of factorsaffecting the real estate market.

SunCor’s business and financial performance could continue to be adversely affected by a variety of factors affecting thereal estate market, including:

• downward changes in general economic, real estate construction or other business conditions;

• the current economic down cycle for the homebuilding industry;

• the increase in foreclosures;

• reductions in mortgage availability, future increases in interest rates or increases in the effective costs of owning ahome, which could prevent potential customers from buying homes in SunCor’s developments;

• future increases in interest rates which could limit future sales of commercial property and land;

• competition for homebuyers or commercial customers or partners, which could reduce SunCor’s profitability;

• supply shortages and other risks related to the demand for skilled labor and building materials, which could increasecosts and delay deliveries; and

• government regulations, which could increase the cost and limit the availability of SunCor’s development,homebuilding and commercial projects.

As noted above (see the Risk Factor relating to “financial market disruptions”), at December 31, 2008, SunCor hadborrowings of approximately $120 million under its principal loan facility, the Secured Revolver. The Secured Revolvermatures on January 30, 2010. In addition to the Secured Revolver, at December 31, 2008, SunCor had approximately $68million of outstanding debt under other credit facilities that mature at various dates and also contain certain loan covenants.The majority of this indebtedness is due in 2009, and SunCor is in the process of renegotiating these facilities.


During 2008 the real estate market weakened significantly resulting in lower land and home sales and depressed real estateprices. As a result, in 2008 we recognized certain impairment charges. If conditions in the broader economy or the real estatemarkets worsen, or as a result of a change in SunCor’s strategy, we may be required to record additional impairements.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

Neither Pinnacle West nor APS has received written comments regarding its periodic or current reports from the SEC staffthat were issued 180 days or more preceding the end of its 2008 fiscal year and that remain unresolved.

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ITEM 2. PROPERTIES

Information Regarding Our Properties

See “Business of Arizona Public Service Company – Portfolio Resources” in Item 1 for the location and a description ofour principal properties.

See “Business of Arizona Public Service Company – Environmental Matters” and “Water Supply” in Item 1 with respectto matters having a possible impact on the operation of certain of APS’ power plants.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and CapitalResources” in Item 7 for a discussion of APS’ construction program.

Real Estate Segment Properties

See “Business of SunCor Development Company” in Item 1 for information regarding SunCor’s properties. Substantiallyall of SunCor’s debt is collateralized by interests in certain real property.

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ITEM 3. LEGAL PROCEEDINGS

See “Business of Arizona Public Service Company – Environmental Matters” and “Water Supply” in Item 1 with regard topending or threatened litigation and other disputes.

See Note 3 with respect to retail rate proceedings before the ACC.

See Note 11 with regard to a lawsuit against APS and the other Navajo Generating Station participants, for informationrelating to the FERC proceedings on California and Pacific Northwest energy market issues, and for information regarding abilling dispute with SRP.

ITEM 4. SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS

Not applicable.

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SUPPLEMENTAL ITEM.EXECUTIVE OFFICERS OF PINNACLE WEST

Pinnacle West’s executive officers are as follows: Name Age at February 20, 2009 Position(s) at February 20, 2009

William J. Post

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Chairman of the Board and Chief Executive Officer(1)

Donald E. Brandt

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President and Chief Operating Officer, and ChiefExecutive Officer of APS (1)

James R. Hatfield 51 Senior Vice President and Chief Financial Officer John R. Denman 66 Senior Vice President, Fossil Operations, APS Randall K. Edington

55

Executive Vice President and Chief Nuclear Officer,APS

Chris N. Froggatt 51 Vice President and Treasurer Barbara M. Gomez

54

Vice President, Controller and Chief AccountingOfficer

Nancy C. Loftin

55

Senior Vice President, General Counsel andSecretary

Donald G. Robinson 55 President and Chief Operating Officer, APS Lori S. Sundberg 45 Vice President, Human Resources, APS Steven M. Wheeler

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Executive Vice President, Customer Service andRegulation, APS

(1) Member of the Board of Directors.

The executive officers of Pinnacle West are elected no less often than annually and may be removed by the Board ofDirectors at any time. The terms served by the named officers in their current positions and their principal occupations (inaddition to those stated in the table) of such officers for the past five years have been as follows:

Mr. Post was elected Chairman of the Board effective February 2001, and Chief Executive Officer effectiveFebruary 1999. He has served as an officer of Pinnacle West since 1995 in the following capacities: from August 1999 toFebruary 2001 as President; from February 1997 to

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February 1999 as President; and from June 1995 to February 1997 as Executive Vice President. Mr. Post is also Chairman ofthe Board (since February 2001) of APS. He was President of APS from February 1997 until October 1998 and he was ChiefExecutive Officer from February 1997 until October 2002. Mr. Post has announced that he will retire effective April 30,2009. He will remain a member of the Company’s Board of Directors and APS’ Board of Directors.

Mr. Brandt was elected to the Board of Directors of the Company and APS in January 2009. Effective April 30, 2009,Mr. Brandt will continue to serve as President of Pinnacle West and will also assume the positions of Pinnacle West’sChairman of the Board and Chief Executive Officer. Also effective April 30, 2009, Mr. Brandt will continue to serve as ChiefExecutive Officer of APS and will assume the position of APS’ Chairman of the Board. Mr. Brandt was elected President andChief Operating Officer of Pinnacle West in March 2008. Prior to that time, he was Executive Vice President of PinnacleWest (September 2003 – March 2008) and Senior Vice President of Pinnacle West (December 2002 – September 2003). Hewas also elected Chief Financial Officer of Pinnacle West in December 2002. Mr. Brandt was also elected Chief ExecutiveOfficer of APS in March 2008. Mr. Brandt was elected President of APS in December 2006, a position he held untilJanuary 2009. Prior to that time, he was Executive Vice President of APS (September 2003 – December 2006) and SeniorVice President of APS (January 2003 – September 2003). He was also elected Chief Financial Officer of APS in January of2003.

Mr. Hatfield was elected to his present position effective July 2008. Prior to that time, he was Senior Vice President andChief Financial Officer of OGE Energy Corp. since 1999. His previous experience includes nearly 14 years with OGEEnergy Corp. in a variety of financial and management leadership roles, including serving as Vice President and Treasurer,and more than 28 years of electric and gas industry experience.

Mr. Denman was elected to his present position effective November 2007. Prior to that time, he was Vice President, FossilGeneration of APS (April 1997 – November 2007).

Mr. Edington was elected to his present position effective November 2007. Prior to that time, he was Senior VicePresident and Chief Nuclear Officer of APS (January 2007 – November 2007). He was previously with Entergy Corporation,serving as Site Vice President and Chief Nuclear Officer of Cooper Generating Station (2003 – January 2007).

Mr. Froggatt was elected to his present position for APS and Pinnacle West in December 2008. Prior to that time, he wasVice President and Controller of APS (October 2002 – December 2008), Vice President and Controller of Pinnacle West(August 1999 – October 2002), Controller of Pinnacle West (July 1999 – August 1999) and Controller of APS (July 1997 –July 1999).

Ms. Gomez was elected to her present position in December 2008. Prior to that time, she was Vice President and Treasurerof Pinnacle West and APS (February 2004 – December 2008), Treasurer of Pinnacle West (August 1999 – February 2004)and Manager, Treasury Operations of APS (1997 – 1999). She was also elected Treasurer of APS in October 1999 and VicePresident of APS in February 2004.

Ms. Loftin was elected to her present position effective November 2007. Prior to that time, she was Vice President,General Counsel and Secretary of Pinnacle West (October 2002 – November 2007) and Vice President and General Counsel(July 1999 – October 2002). She was also elected Vice President and General Counsel of APS in July 1999 and Secretary ofAPS in October 2002.

Mr. Robinson was elected to his present position effective January 2009. Prior to that time, he was Senior Vice President,Planning and Administration of APS (November 2007 – January 2009), Vice President, Planning of APS (September 2003 –November 2007), Vice President, Finance and Planning of APS (October 2002 – September 2003) and Vice President,Regulation and Planning of Pinnacle West (June 2001 – October 2002).

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Ms. Sundberg was elected Vice President, Human Resources of APS effective November 2007. Prior to that time, she waswith American Express Company, serving as Vice President, Employee Relations, Safety, Compliance & Embrace(January 2007 – November 2007) and Vice President, HR Relationship Leader, Global Corporate Travel Division(August 2003 – January 2007).

Mr. Wheeler was elected to his present position in September 2003. Prior to that time, he was Senior Vice President,Regulation, System Planning and Operations of APS (October 2002 – September 2003) and Senior Vice President,Transmission, Regulation and Planning of Pinnacle West and APS (June 2001 – October 2002).

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PART II

ITEM 5. MARKET FOR REGISTRANTS’ COMMON EQUITY, RELATEDSTOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Pinnacle West’s common stock is publicly held and is traded on the New York Stock Exchange. At the close of businesson February 16, 2009, Pinnacle West’s common stock was held of record by approximately 29,295 shareholders.

QUARTERLY STOCK PRICES AND DIVIDENDS PAID PER SHARESTOCK SYMBOL: PNW Dividends

2008 High Low Close Per Share

1st Quarter $42.92 $34.08 $35.08 $0.525 2nd Quarter 37.39 30.26 30.77 0.525 3rd Quarter 37.88 30.34 34.41 0.525 4th Quarter 35.83 26.27 32.13 0.525 Dividends

2007 High Low Close Per Share

1st Quarter $51.67 $46.43 $48.25 $0.525 2nd Quarter 50.68 39.38 39.85 0.525 3rd Quarter 41.76 36.79 39.51 0.525 4th Quarter 44.50 39.04 42.41 0.525

APS’ common stock is wholly-owned by Pinnacle West and is not listed for trading on any stock exchange. As a result,there is no established public trading market for APS’ common stock.

The chart below sets forth the dividends paid on APS’ common stock for each of the four quarters for 2008 and 2007.

Common Stock Dividends(Dollars in Thousands)

Quarter 2008 2007

1st Quarter $42,500 $42,500 2nd Quarter 42,500 42,500 3rd Quarter 42,500 42,500 4th Quarter 42,500 42,500

The sole holder of APS’ common stock, Pinnacle West, is entitled to dividends when and as declared out of funds legallyavailable therefor. As of December 31, 2008, APS did not have any outstanding preferred stock.

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Issuer Purchases of Equity Securities

The following table contains information about our purchases of our common stock during the fourth quarter of 2008. Total Total Number of Number of Shares Purchased Maximum Number of Shares Average as Part of Publicly Shares that May Yet Be Purchased Price Paid Announced Plans Purchased Under the

Period (1) per Share or Programs Plans or Programs

October 1 – October 31, 2008 24 $ 29.61 — — November 1 – November 30, 2008 — — — — December 1 – December 31, 2008 — — — —

Total 24 $ 29.61 — —

(1) Represents shares of common stock withheld by Pinnacle West to satisfy tax withholding obligations upon the vesting ofrestricted stock.

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ITEM 6. SELECTED FINANCIAL DATAPINNACLE WEST CAPITAL CORPORATION

SELECTED CONSOLIDATED FINANCIAL DATA 2008 2007 2006 2005 2004 (dollars in thousands, except per share amounts)

OPERATING RESULTS Operating revenues:

Regulated electricity segment $ 3,127,383 $ 2,918,163 $ 2,635,036 $ 2,237,145 $ 2,035,247 Real estate segment 131,067 212,586 399,798 338,031 350,315 Marketing and trading (a) 66,897 138,247 136,748 179,895 227,040 Other revenues 41,729 48,018 36,172 61,221 42,816

Total operating revenues $ 3,367,076 $ 3,317,014 $ 3,207,754 $ 2,816,292 $ 2,655,418

Income from continuing operations(b) $ 213,557 $ 298,744 $ 316,265 $ 227,288 $ 242,887

Discontinued operations – net ofincome taxes (c) 28,568 8,399 10,990 (51,021) 308

Net income $ 242,125 $ 307,143 $ 327,255 $ 176,267 $ 243,195

COMMON STOCK DATA Book value per share – year-end $ 34.16 $ 35.15 $ 34.48 $ 34.58 $ 32.14 Earnings (loss) per weighted-

average common shareoutstanding: Continuing operations – basic $ 2.12 $ 2.98 $ 3.18 $ 2.36 $ 2.66 Net income – basic $ 2.40 $ 3.06 $ 3.29 $ 1.83 $ 2.66 Continuing operations – diluted $ 2.12 $ 2.96 $ 3.16 $ 2.35 $ 2.65 Net income – diluted $ 2.40 $ 3.05 $ 3.27 $ 1.82 $ 2.66

Dividends declared per share $ 2.10 $ 2.10 $ 2.025 $ 1.925 $ 1.825 Weighted-average common shares

outstanding – basic 100,690,838 100,255,807 99,417,008 96,483,781 91,396,904 Weighted-average common shares

outstanding – diluted 100,964,920 100,834,871 100,010,108 96,589,949 91,532,473 BALANCE SHEET DATA Total assets $ 11,620,093 $ 11,162,209 $ 10,817,900 $10,588,485 $ 9,875,456

Liabilities and equity: Current liabilities $ 1,505,928 $ 1,344,449 $ 923,338 $ 1,608,863 $ 1,590,460 Long-term debt less current

maturities 3,031,603 3,127,125 3,232,633 2,608,455 2,584,985 Deferred credits and other 3,636,583 3,159,024 3,215,813 2,946,203 2,749,815

Total liabilities 8,174,114 7,630,598 7,371,784 7,163,521 6,925,260 Common stock equity 3,445,979 3,531,611 3,446,116 3,424,964 2,950,196

Total liabilities and equity $ 11,620,093 $ 11,162,209 $ 10,817,900 $10,588,485 $ 9,875,456

(a) Reflects reclassifications of APSES’ discontinued commodity-related energy services revenue for the years 2004through 2008. See Note 22.

(b) Includes a $32 million after tax real estate impairment charge in 2008. (See Note 23.) Also includes regulatorydisallowance of $8 million after tax in 2007 and $84 million after tax in 2005. (See Note 3.)

(c) Amounts primarily related to Silverhawk, SunCor and APSES discontinued operations. See Note 22.

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SELECTED FINANCIAL DATAARIZONA PUBLIC SERVICE COMPANY

2008 2007 2006 2005 2004 (dollars in thousands)

OPERATING RESULTS Electric operating revenues $ 3,133,496 $ 2,936,277 $2,658,513 $2,270,793 $2,197,121 Fuel and purchased power costs 1,289,883 1,151,392 969,767 688,982 763,254 Other operating expenses 1,408,213 1,358,890 1,290,804 1,200,198 1,104,886

Operating income 435,400 425,995 397,942 381,613 328,981 Other income (deductions) 836 20,870 27,584 (69,171) 15,328 Interest deductions – net of AFUDC 173,892 162,925 155,796 141,963 144,682

Net income $ 262,344 $ 283,940 $ 269,730 $ 170,479 $ 199,627

BALANCE SHEET DATA Total assets $10,963,577 $10,321,402 $9,948,766 $9,143,643 $8,069,564

Liabilities and equity:

Common stock equity $ 3,339,150 $ 3,351,441 $3,207,473 $2,985,225 $2,232,402 Long-term debt less current

maturities 2,850,242 2,876,881 2,877,502 2,479,703 2,267,094

Total capitalization 6,189,392 6,228,322 6,084,975 5,464,928 4,499,496 Current liabilities 1,267,768 1,055,706 806,556 1,021,084 1,154,702 Deferred credits and other 3,506,417 3,037,374 3,057,235 2,657,631 2,415,366

Total liabilities and equity $10,963,577 $10,321,402 $9,948,766 $9,143,643 $8,069,564

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

The following discussion should be read in conjunction with Pinnacle West’s Consolidated Financial Statements and APS’Financial Statements and the related Notes that appear in Item 8 of this report.

OVERVIEW

Pinnacle West owns all of the outstanding common stock of APS. APS is a vertically-integrated electric utility thatprovides retail and wholesale electric service to most of the state of Arizona, with the major exceptions of about one-half ofthe Phoenix metropolitan area, the Tucson metropolitan area and Mohave County in northwestern Arizona. APS hashistorically accounted for a substantial part of our revenues and earnings, and is expected to continue to do so.

While customer growth in APS’ service territory has been an important driver of our revenues and earnings, it hassignificantly slowed, reflecting recessionary economic conditions both nationally and in Arizona. Customer growth averaged3% a year for the three years 2006 through 2008. We currently expect customer growth and retail electricity sales growth(excluding the effects of weather variations) to average about 1% per year during 2009 through 2011. We currently projectthat our customer growth will begin to accelerate as the economy recovers.

The near-term economic conditions are reflected in the recent volatility and disruption of the credit markets, as discussedin detail under “Liquidity and Capital Resources – Pinnacle West Consolidated” below. Despite these conditions, PinnacleWest and APS currently have ample borrowing capacity under their respective credit facilities and have been able to accessthese facilities, ensuring adequate liquidity for each company.

Our cash flows and profitability are affected by the electricity rates APS may charge and the timely recovery of coststhrough those rates. APS’ retail rates are regulated by the ACC and its wholesale electric rates (primarily for transmission) areregulated by the FERC. APS’ capital expenditure requirements, which are discussed below under “Liquidity and CapitalResources – Pinnacle West Consolidated,” are substantial because of increased costs related to environmental compliance andcontrols and system reliability, as well as continuing, though slowed, customer growth in APS’ service territory.

APS needs timely recovery through rates of its capital and operating expenditures to maintain adequate financial health.See “Factors Affecting Our Financial Outlook” below. On March 24, 2008, APS filed a rate case with the ACC, which itupdated on June 2, 2008, requesting, among other things, an increase in retail rates to help defray rising infrastructure costs,approval of an impact fee and approval of new conservation rates. See Note 3 for details regarding this rate case, includingthe ACC’s approval of an interim base rate surcharge pending the outcome of the case.

The 2007 and 2008 financial results of SunCor, our real estate subsidiary, reflect the weak real estate market and currenteconomic conditions, which have adversely affected SunCor’s ability to access capital. SunCor’s net loss in 2008 included a$53 million (pre-tax) real estate impairment charge. If conditions in the broader economy or the real estate markets worsen,or as a result of a change in SunCor’s strategy, we may be required to record additional impairments (see Note 23). Inaddition to SunCor’s Secured Revolver, under which approximately $120 million in borrowings were outstanding atDecember 31, 2008, SunCor had approximately $68 million of outstanding debt under other credit facilities that mature atvarious dates and also contain certain loan covenants. The majority of this indebtedness, except for the Secured Revolver, isdue in 2009, and SunCor is in the process of renegotiating these facilities. If SunCor is unable to meet its financial covenantsunder the Secured Revolver or its other outstanding credit facilities, SunCor could be required to immediately repay itsoutstanding indebtedness under all of its credit facilities as a result of cross-default provisions. Such a debt accelerationwould have a material adverse impact on SunCor’s business and its financial position. The Company has not guaranteed anySunCor indebtedness. As a result, the Company does not believe that SunCor’s inability to meet its financial covenants underthe Secured Revolver or its other outstanding credit facilities would have a material adverse impact on Pinnacle West’s cashflows or liquidity, although any resulting SunCor losses would be reflected in Pinnacle West’s consolidated financialstatements.

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Our other principal first tier subsidiaries, El Dorado and APSES, are not expected to have any material impact on ourfinancial results, or to require any material amounts of capital, over the next three years.

We continue to focus on solid operational performance in our electricity generation and delivery activities. In the deliveryarea, we focus on superior reliability and customer satisfaction. We plan to expand long-term energy resources and ourtransmission and distribution systems to meet the electricity needs of our growing retail customer base and to sustainreliability.

See “Factors Affecting Our Financial Outlook” below for a discussion of several factors that could affect our futurefinancial results.

PINNACLE WEST CONSOLIDATED –EARNINGS CONTRIBUTION BY BUSINESS SEGMENT

Pinnacle West’s two reportable business segments are:

• our regulated electricity segment, which consists of traditional regulated retail and wholesale electricity businesses(primarily electric service to Native Load customers) and related activities and includes electricity generation,transmission and distribution; and

• our real estate segment, which consists of SunCor’s real estate development and investment activities.

The following table presents income from continuing operations for our regulated electricity and real estate segments andreconciles those amounts to net income in total for the years ended 2008, 2007, and 2006 (dollars in millions): 2008 2007 2006

Regulated electricity segment $ 256 $ 274 $ 259 Real estate segment (a) (49) 14 50 All other (b) 7 11 7

Income from continuing operations 214 299 316 Income (loss) from discontinued operations – net of tax:

Real estate segment (c) 23 9 10 All other (b) 5 (1) 1

Net income $ 242 $ 307 $ 327

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(a) SunCor’s net loss in 2008 included a $32 million after-tax real estate impairment charge (see Note 23).

(b) Includes activities related to marketing and trading, APSES, Silverhawk and El Dorado. Income from discontinuedoperations for 2008 is primarily related to the resolution of certain tax issues associated with the sale of Silverhawk in2005. The 2007 loss is primarily related to an APSES project. None of these segments is a reportable segment.

(c) Primarily relates to sales of commercial properties.

PINNACLE WEST CONSOLIDATED – RESULTS OF OPERATIONS

2008 Compared with 2007

Our consolidated net income decreased approximately $65 million, to $242 million in 2008 from $307 million in 2007.The major factors that increased (decreased) our net income for the year ended December 31, 2008 compared with the prioryear are summarized in the following table (dollars in millions):

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Increase (Decrease)

Pretax After Tax

Regulated electricity segment: Impacts of retail rate increase effective July 1, 2007 and transmission rate increases:

Retail revenue increase primarily related to higher Base Fuel Rate $ 156 $ 95 Decreased deferred fuel and purchased power costs related to higher Base Fuel Rate (141) (86)Transmission rate increases (including related retail rates) 31 19

Lower mark-to-market valuations of fuel and purchased power contracts related to changesin market prices, net of related PSA deferrals (14) (9)

Regulatory disallowance in 2007 14 8 Higher retail sales primarily due to customer growth, excluding weather effects, partially

offset by lower average usage 21 13 Effects of weather on retail sales (43) (26)Operations and maintenance expense increases primarily due to:

Customer service and other costs, including distribution system reliability (30) (18)Generation costs, including more planned maintenance (18) (11)Employee severance costs (9) (5)

Higher depreciation and amortization primarily due to increased utility plant in service (18) (11)Income tax benefits related to prior years resolved in 2008 — 30 Income tax benefits related to prior years resolved in 2007 — (13)Higher interest expense, net of capitalized financing costs, primarily due to higher rates on

certain APS pollution control bonds and higher short-term debt balances (15) (9)Miscellaneous items, net 1 5

Decrease in regulated electricity segment net income (65) (18)Lower real estate segment income from continuing operations primarily due to:

Real estate impairment charge (Note 23) (53) (32)Lower land parcel sales resulting from the weak real estate market (40) (24)Lower sales of residential property resulting from the weak real estate market (4) (2)Higher other costs (7) (5)

Lower marketing and trading contribution primarily due to lower sales volumes (16) (10)Other miscellaneous items, net 14 6

Decrease in income from continuing operations $ (171) (85)

Increase in real estate segment income from discontinued operations primarily related to a2008 commercial property sale 14

Increase in other income from discontinued operations primarily related to the resolution in2008 of certain tax issues associated with the sale of Silverhawk in 2005 6

Decrease in net income $ (65)

Regulated Electricity Segment Revenues

Regulated electricity segment revenues were $209 million higher for the year ended December 31, 2008 compared withthe prior year primarily because of:

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• a $156 million increase in retail revenues due to a rate increase effective July 1, 2007;

• a $38 million increase in revenues from Off-System Sales due to higher prices and volumes;

• a $31 million increase due to transmission rate increases (including related retail rates);

• a $29 million increase in retail revenues primarily related to customer growth, excluding weather effects;

• a $26 million increase in revenues related to long-term traditional wholesale contracts;

• a $14 million increase in renewable energy surcharges which are offset by operations and maintenance expense;

• a $63 million decrease in retail revenue due to the effects of weather;

• a $47 million decrease in retail revenues related to recovery of PSA deferrals, which had no earnings effect because oflower amortization of the same amount recorded as fuel and purchased power expense; and

• a $25 million net increase due to miscellaneous factors.

Real Estate Segment Revenues

Real estate segment revenues were $82 million lower for the year ended December 31, 2008 compared with the prior yearprimarily because of:

• a $62 million decrease primarily due to lower sales of land parcels as a result of the weak real estate market;

• a $14 million decrease primarily due to lower residential property sales as a result of the weak real estate market; and

• a $6 million net decrease due to miscellaneous factors.

All Other Revenues

All other revenues were $78 million lower for the year ended December 31, 2008 compared with the prior year primarilybecause of planned reductions of marketing and trading activities.


Our consolidated net income decreased approximately $20 million, from $327 million for 2006 to $307 million for 2007.The major factors that increased (decreased) net income for the year ended December 31, 2007 compared with the prior yearare summarized in the following table (dollars in millions):

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Increase (Decrease)

Pretax After Tax

Regulated electricity segment: Higher retail sales primarily due to customer growth, excluding weather effects $ 46 $ 28 Effects of weather on retail sales 37 23 Impacts of retail rate increase effective July 1, 2007:

Revenue increase related to higher Base Fuel Rate 185 113 Decreased deferred fuel and purchased power costs related to higher Base Fuel Rate (171) (104)Non-fuel rate increase 6 4

Net changes in fuel and purchased power costs related to price: Higher fuel and purchased power costs related to increased commodity prices (121) (74)Increased deferred fuel and purchased power costs related to increased prices 115 70 Mark-to-market fuel and purchased power costs, net of related deferred fuel and

purchased power costs 18 11 Regulatory disallowance (see Note 3) (14) (8)Operations and maintenance increases primarily due to:

Increased generation costs, including increased maintenance and overhauls and PaloVerde performance improvement plan (25) (15)

Customer service and other costs (21) (13)Higher depreciation and amortization primarily due to increased utility plant in service (12) (7)Lower other income, net of expense, primarily due to lower interest income as a result of

lower investment balances and miscellaneous asset sales in prior year (15) (9)Income tax benefits resolved in 2007 related to prior years — 13 Income tax credits resolved in 2006 related to prior years — (14)Miscellaneous items, net 6 (3)

Increase in regulated electricity segment net income 34 15 Lower real estate segment income from continuing operations primarily due to:

Lower sales of residential property resulting from the continued slowdown in the westernUnited States real estate markets (47) (29)

Lower sales of land parcels (12) (7)Higher other costs (1) —

Higher marketing and trading contribution primarily due to higher mark-to-market gainsresulting from changes in forward prices and higher unit margins 6 3

Other miscellaneous items, net (2) 1

Decrease in income from continuing operations $ (22) (17)

Discontinued operations: Increased commercial property real estate sales (1)Other discontinued operations (2)

Decrease in net income $ (20)

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Regulated Electricity Segment Revenues

Regulated electricity segment revenues were $283 million higher for the year ended December 31, 2007 compared withthe prior year primarily because of:



• a $50 million increase in retail revenues due to the effects of weather;


• a $35 million decrease in retail revenues related to recovery of PSA deferrals, which had no earnings effect because ofamortization of the same amount recorded as fuel and purchased power expense (see Note 3); and


Real Estate Segment Revenues

Real estate segment revenues were $187 million lower for the year ended December 31, 2007 compared with the prioryear primarily because of:

• a $167 million decrease in residential property sales due to the continued slowdown in western United States realestate markets; and

• a $20 million decrease primarily due to lower sales of land parcels.

All Other Revenues

Other revenues were $13 million higher for the year ended December 31, 2007 compared with the prior year primarily asa result of increased sales by APSES of energy-related products and services.

LIQUIDITY AND CAPITAL RESOURCES – Pinnacle West Consolidated

Cash Flows

The following table presents net cash provided by (used for) operating, investing and financing activities for the yearsended December 31, 2008, 2007 and 2006 (dollars in millions):

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2008 2007 2006

Net cash flow provided by operating activities $ 814 $ 658 $ 394 Net cash flow used for investing activities (815) (873) (569)Net cash flow provided by financing activities 51 185 108

Net Increase (decrease) in cash and cash equivalents $ 50 $ (30) $ (67)


The increase of approximately $156 million in net cash provided by operating activities is primarily due to lower currentincome taxes; lower real estate investments resulting from the weak real estate market; and increased retail revenue related tohigher Base Fuel Rates, partially offset by increased collateral and margin cash provided as a result of changes in commodityprices.

The decrease of approximately $58 million in net cash used for investing activities is primarily due to a real estatecommercial property sale in 2008; lower levels of capital expenditures (see table and discussion below); and increasedcontributions in aid of construction related to changes in 2008 in APS’ line extension policy (see Note 3), partially offset bylower cash proceeds from the net sales and purchases of investment securities.

The decrease of approximately $134 million in net cash provided by financing activities is primarily due to the use of theproceeds from the sale of a real estate commercial property to pay down long-term debt in 2008, partially offset by higherlevels of short-term debt borrowings.


The increase of approximately $264 million in net cash provided by operating activities is primarily due to a decrease in2007 in the amount of cash collateral and margin cash returned to counterparties as a result of changes in commodity prices.

The increase of approximately $304 million in net cash used for investing activities is primarily due to the proceeds of$208 million received in 2006 from the 2005 sale of Silverhawk and an increase in cash used for capital expenditures andcapitalized interest (see table and discussion below), partially offset by higher cash proceeds from the net sales and purchasesof investments.

The increase of approximately $77 million in net cash provided by financing activities is primarily due to higher levels ofshort-term borrowings, partially offset by a decrease in net new long-term debt (issuances net of redemptions andrefinancing).

Liquidity

Capital Expenditure Requirements

The following table summarizes the actual capital expenditures for 2006, 2007 and 2008 and estimated capitalexpenditures, net of contributions in aid of construction, for the next three years:

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CAPITAL EXPENDITURES(dollars in millions)

Actual Estimated

2006 2007 2008 2009 2010 2011

APS Distribution $ 357 $ 372 $ 340 $ 276 $ 266 $ 356 Generation (a) 176 353 310 288 274 319 Transmission 113 138 163 275 99 185 Other (b) 16 37 43 44 37 50

Subtotal 662 900 856 883 676 910 SunCor (c) 201 161 41 14 70 175 Other 7 3 7 7 3 3

Total $ 870 $ 1,064 $ 904 $ 904 $ 749 $ 1,088

(a) Generation includes nuclear fuel expenditures of approximately $60 million to $80 million per year for 2009, 2010 and2011.

(b) Primarily information systems and facilities projects.

(c) Consists primarily of capital expenditures for residential, land development and retail and office building constructionreflected in “Real estate investments” and “Capital expenditures” on the Consolidated Statements of Cash Flows.

Distribution and transmission capital expenditures are comprised of infrastructure additions and upgrades, capitalreplacements, new customer construction and related information systems and facility costs. Examples of the types ofprojects included in the forecast include power lines, substations, line extensions to new residential and commercialdevelopments and upgrades to customer information systems, partially offset by contributions in aid of construction inaccordance with APS’ line extension policy.

Generation capital expenditures are comprised of various improvements to APS’ existing fossil and nuclear plants.Examples of the types of projects included in this category are additions, upgrades and capital replacements of various powerplant equipment such as turbines, boilers and environmental equipment. Environmental expenditures differ for each of theyears 2009, 2010 and 2011, with the lowest year estimated at approximately $25 million, and the highest year estimated atapproximately $80 million. We are also monitoring the status of certain environmental matters, which, depending on theirfinal outcome, could require modification to our environmental expenditures. (See “Business of Arizona Public ServiceCompany – Environmental Matters – EPA Environmental Regulation – Regional Haze Rules” and “Environmental Matters –EPA Environmental Regulation – Mercury” in Item 1.)

In early 2008, we announced and began implementing a cost reduction effort that included the elimination ofapproximately $200 million of capital expenditures for the years 2008 – 2012. These capital expenditure reductions arereflected in the estimates provided above. Due primarily to our reduced customer growth outlook as well as the deferral ofupgrades and other capital projects, we have identified additional capital expenditure reductions of over $500 million at APS(net of the

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change in amounts collected for projected line extensions) over the years 2009 – 2011. These reductions are across all areas –distribution, generation, transmission and general plant, and are reflected in the estimates provided above. (See “PinnacleWest Consolidated – Factors Affecting Our Financial Outlook – Customer and Sales Growth” below for additionalinformation on our growth outlook.)

Capital expenditures will be funded with internally generated cash and/or external financings, which may includeissuances of long-term debt and Pinnacle West common stock.

Pinnacle West (Parent Company)

Our primary cash needs are for dividends to our shareholders and principal and interest payments on our long-term debt.The level of our common stock dividends and future dividend growth will be dependent on a number of factors including, butnot limited to, payout ratio trends, free cash flow and financial market conditions.

On January 21, 2009, the Pinnacle West Board of Directors declared a quarterly dividend of $0.525 per share of commonstock, payable on March 2, 2009, to shareholders of record on February 2, 2009.

Our primary sources of cash are dividends from APS, external debt and equity financings and cash distributions from ourother subsidiaries, primarily SunCor. For the years 2006 through 2008, total distributions from APS were $510 million andtotal distributions received from SunCor were $15 million. For 2008, cash distributions from APS were $170 million andthere were no distributions from SunCor. An existing ACC order requires APS to maintain a common equity ratio of at least40% and prohibits APS from paying common stock dividends if the payment would reduce its common equity below thatthreshold. As defined in the ACC order, the common equity ratio is common equity divided by the sum of common equityand long-term debt, including current maturities of long-term debt. At December 31, 2008, APS’ common equity ratio, asdefined, was approximately 54%.

The credit and liquidity markets experienced significant stress beginning the week of September 15, 2008. While PinnacleWest’s and APS’ ability to issue commercial paper has been negatively impacted by the market stress, they have both beenable to access existing credit facilities, ensuring adequate liquidity. Cash on hand is being invested in money market fundsconsisting of U.S. Treasury and government agency securities and repurchase agreements collateralized fully by U.S.Treasury and government agency securities.

At December 31, 2008, Pinnacle West’s outstanding long-term debt, including current maturities, was $175 million.Pinnacle West has a $300 million revolving credit facility that terminates in December 2010. Credit commitments totalingapproximately $17 million from Lehman Brothers are no longer available due to its September 2008 bankruptcy filing. Theremaining $283 million revolver is available to support the issuance of up to $250 million in commercial paper (seediscussion above) or to be used as bank borrowings, including issuances of letters of credit of up to $94 million. AtDecember 31, 2008, Pinnacle West had outstanding $144 million of borrowings under its revolving credit facility andapproximately $7 million of letters of credit. Pinnacle West had no commercial paper outstanding at December 31, 2008. Ingeneral, the Company and APS have been unable to access the commercial paper markets since September 2008. AtDecember 31, 2008, Pinnacle West had remaining capacity available

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under its revolver of approximately $132 million and had cash and investments of approximately $6 million.

Pinnacle West sponsors a qualified defined benefit and account balance pension plan and a non-qualified supplementalexcess benefit retirement plan for the employees of Pinnacle West and our subsidiaries. IRS regulations require us tocontribute a minimum amount to the qualified plan. We contribute at least the minimum amount required under IRSregulations, but no more than the maximum tax-deductible amount. The minimum required funding takes into considerationthe value of plan assets and our pension obligation. The assets in the plan are comprised of fixed-income, equity andshort-term investments. Future year contribution amounts are dependent on plan asset performance and plan actuarialassumptions. We contributed $35 million to our pension plan in 2008. On a cash funded basis, which is based on InternalRevenue Code regulations, our preliminary estimate of the qualified plan’s funded status (market value of assets to liabilities)as of January 1, 2009 is 98.6%. The plan’s IRS cash funded status was 94.3% as of January 1, 2008. Most of the increasefrom the prior year was due to gains in the long-duration bonds and interest rate swaps that we utilized in 2008 to bettermatch the interest rate sensitivity of the plan’s assets to that of the plan’s liabilities. The required minimum contribution toour pension plan is estimated to be approximately $36 million in 2009 and approximately $25 million in 2010. The expectedcontribution to our other postretirement benefit plans in 2009 is estimated to be approximately $15 million. APS and othersubsidiaries fund their share of the contributions. APS’ share is approximately 96% of both plans.

See Note 3 for information regarding Pinnacle West’s approval from the ACC regarding a potential equity infusion intoAPS of up to $400 million.

In May 2007, Pinnacle West infused approximately $40 million of equity into APS, consisting of proceeds of stockissuances in 2006 under Pinnacle West’s Investors Advantage Plan (direct stock purchase and dividend reinvestment plan)and employee stock plans.

APS

APS’ capital requirements consist primarily of capital expenditures and mandatory redemptions of long-term debt. APSpays for its capital requirements with cash from operations and, to the extent necessary, equity infusions from Pinnacle Westand external financings. APS has historically paid its dividends to Pinnacle West with cash from operations. See “PinnacleWest (Parent Company)” above for a discussion of the common equity ratio that APS must maintain in order to pay dividendsto Pinnacle West.

APS’ outstanding long-term debt, including current maturities, was approximately $2.9 billion at December 31, 2008. APShas two committed revolving credit facilities totaling $900 million, of which $400 million terminates in December 2010 and$500 million terminates in September 2011. Credit commitments totaling about $34 million from Lehman Brothers are nolonger available due to its September 2008 bankruptcy filing. The remaining $866 million is available either to support theissuance of up to $250 million in commercial paper or to be used for bank borrowings, including issuances of letters of creditup to $583 million. At December 31, 2008, APS had borrowings of approximately $522 million and no letters of credit underits revolving lines of credit. APS had no commercial paper outstanding at December 31, 2008. In general, the Company andAPS have been unable to access the commercial paper markets since September 2008. At December 31, 2008, APS hadremaining capacity available under its revolvers of $344 million and had cash and investments of approximately $72 million.

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The interest rates on eleven issues of APS’ pollution control bonds, in the aggregate amount of approximately$343 million, are reset every seven days through auction processes. These bonds are supported by bond insurance policiesprovided by Ambac, and the interest rates on the bonds can be directly affected by the rating of the bond insurer. Certain bondinsurers, including Ambac, have had downgrades of their credit ratings. Downgrades of bond insurers result in downgrades ofthe insured bonds, which increases the possibility of a “failed auction” and results in higher interest rates during the failedauction periods. When auctions of APS bonds fail, the APS bondholders receive the maximum 14% annual interest rate forthe week of the failed auction. For the twelve months ended December 31, 2008, we had ninety-nine failed auctions, whichrepresented about 17% of all of our auctions. The average interest rate at December 31, 2008 on the auction rate securitieswas 12.4%. Bond auctions continued to fail through mid-January; however, since that time, we have had only one failure.The average interest rate at February 18, 2009 on the auction rate securities was 5.7%. We continue to closely monitor thismarket and, if market and business conditions allow, we are planning on refunding and reissuing these bonds during 2009.We do not expect, however, that our auction rate interest exposure will have a material adverse impact on our financialposition, results of operations, cash flows or liquidity.

On September 11, 2008, APS repurchased at par two series of pollution control bonds that had no credit enhancements.The repurchase included $7 million of its 1996 Series A Coconino County Pollution Control Bonds and $20 million of its1999 Series A Coconino County Pollution Control Bonds. APS borrowed funds under its revolving lines of credit tore-purchase the bonds as permitted under the bond indenture. APS intends to keep the $27 million outstanding until wecomplete our planned refunding and reissuance of these bonds, if market and business conditions allow, in 2009.

Although provisions in APS’ articles of incorporation and ACC financing orders establish maximum amounts of preferredstock and debt that APS may issue, APS does not expect any of these provisions to limit its ability to meet its capitalrequirements. On October 30, 2007, the ACC issued a financing order in which it approved APS’ request, subject to specifiedparameters and procedures, to increase (a) APS’ short-term debt authorization from 7% of APS’ capitalization to (i) 7% ofAPS’ capitalization plus (ii) $500 million (which is required to be used for purchases of natural gas and power) and (b) APS’long-term debt authorization from approximately $3.2 billion to $4.2 billion in light of the projected growth of APS and itscustomer base and the resulting projected financing needs. This financing order expires December 31, 2012; however, alldebt previously authorized and outstanding on December 31, 2012 will remain authorized and valid obligations of APS.

Other Financing Matters – See Note 3 for information regarding the PSA approved by the ACC. Although APS defersactual retail fuel and purchased power costs on a current basis, APS’ recovery of the deferrals from its ratepayers is subject toannual and, if necessary, periodic PSA adjustments.

See Note S-5 for information regarding an ACC order permitting Pinnacle West to infuse up to $400 million of equity intoAPS, on or before December 31, 2009, if Pinnacle West deems it appropriate to do so to strengthen or maintain APS’financial integrity.

See “Cash Flow Hedges” in Note 18 for information related to the change in our margin account.

Other Subsidiaries

SunCor – The weak real estate market and current economic conditions have adversely affected SunCor’s financial resultsand its ability to access capital. During the past three years,

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SunCor funded its cash requirements with cash from operations and its own external financings. SunCor’s capital needsconsist primarily of capital expenditures for land development and retail and office building construction. See the capitalexpenditures table above for actual capital expenditures during 2008 and projected capital expenditures for the next threeyears.

SunCor’s principal loan facility, the Secured Revolver, is secured primarily by an interest in land, commercial properties,land contracts and homes under construction. On February 19, 2009, SunCor and the Secured Revolver lenders extended thematurity date of the Secured Revolver to January 30, 2010 (classified as current maturities of long-term debt at December 31,2008). SunCor is required to repay amounts under the Secured Facility in order to reduce the lenders’ commitments to abalance of $100 million by December 31, 2009. The Secured Revolver requires compliance with certain loan covenantspertaining to debt to net worth, debt service, liquidity, cash flow coverage and restrictions on debt. In addition to the SecuredRevolver, at December 31, 2008, SunCor had approximately $68 million of outstanding debt under other credit facilities thatmature at various dates and also contain certain loan covenants. The majority of this indebtedness is due in 2009, and SunCoris in the process of renegotiating these facilities.


SunCor entered into a secured construction loan on April 13, 2007, in the amount of $60 million which was subsequentlyrepaid in June 2008.

On July 31, 2007, SunCor borrowed $12 million under a new secured construction loan. The loan matures on July 31,2009, and may be extended annually up to two years.

SunCor’s total outstanding debt was approximately $188 million as of December 31, 2008, including $120 million of debtclassified as current maturities of long-term debt under revolving lines of credit totaling $150 million. SunCor’s long-termdebt, including current maturities, was $183 million and total short-term debt was $5 million at December 31, 2008. SeeNotes 5 and 6. SunCor had cash and investments of approximately $27 million at December 31, 2008.

El Dorado – El Dorado expects minimal capital requirements over the next three years and intends to focus on prudentlyrealizing the value of its existing investments.

APSES – APSES expects minimal capital expenditures over the next three years.

Debt Provisions

Pinnacle West’s and APS’ debt covenants related to their respective bank financing arrangements include debt tocapitalization ratios. Certain of APS’ bank financing arrangements also include an interest coverage test. Pinnacle West andAPS comply with these covenants and each anticipates it will continue to meet these and other significant covenantrequirements. For both Pinnacle West and APS, these covenants require that the ratio of consolidated debt to total

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consolidated capitalization not exceed 65%. At December 31, 2008, the ratio was approximately 51% for Pinnacle West and49% for APS. The provisions regarding interest coverage require minimum cash coverage of two times. The interest coveragewas approximately 4.5 times under APS’ bank financing agreements as of December 31, 2008. Failure to comply with suchcovenant levels would result in an event of default which, generally speaking, would require the immediate repayment of thedebt subject to the covenants and could cross-default other debt. See further discussion of “cross-default” provisions below.

Neither Pinnacle West’s nor APS’ financing agreements contain “rating triggers” that would result in an acceleration of therequired interest and principal payments in the event of a rating downgrade. However, our bank financial agreements containa pricing grid in which the interest costs we pay are determined by our current credit ratings.

All of Pinnacle West’s loan agreements contain “cross-default” provisions that would result in defaults and the potentialacceleration of payment under these loan agreements if Pinnacle West or APS were to default under certain other materialagreements. All of APS’ bank agreements contain cross-default provisions that would result in defaults and the potentialacceleration of payment under these bank agreements if APS were to default under certain other material agreements.Pinnacle West and APS do not have a material adverse change restriction for revolver borrowings.

See Note 6 for further discussions.

Credit Ratings

The ratings of securities of Pinnacle West and APS as of February 18, 2009 are shown below. The ratings reflect therespective views of the rating agencies, from which an explanation of the significance of their ratings may be obtained. Thereis no assurance that these ratings will continue for any given period of time. The ratings may be revised or withdrawn entirelyby the rating agencies if, in their respective judgments, circumstances so warrant. Any downward revision or withdrawal mayadversely affect the market price of Pinnacle West’s or APS’ securities and serve to increase the cost of and limit access tocapital. It may also require substantial additional collateral related to certain derivative instruments, natural gastransportation, fuel supply, and other energy-related contracts. Moody’s Standard & Poor’s Fitch

Pinnacle West Senior unsecured (a) Baa3 (P) BB+ (prelim) N/A Commercial paper P -3 A-3 F3 Outlook Stable Stable Negative

APS

Senior unsecured Baa2 BBB- BBBSecured lease obligation bonds Baa2 BBB- BBBCommercial paper P -2 A-3 F3 Outlook Stable Stable Stable

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(a) Pinnacle West has a shelf registration under SEC Rule 415. Pinnacle West currently has no outstanding, rated seniorunsecured securities. However, Moody’s assigned a provisional (P) rating and Standard & Poor’s assigned a preliminary(prelim) rating to the senior unsecured securities that can be issued under such shelf registration.

Off-Balance Sheet Arrangements

In 1986, APS entered into agreements with three separate VIE lessors in order to sell and lease back interests in PaloVerde Unit 2. The leases are accounted for as operating leases in accordance with GAAP. We are not the primary beneficiaryof the Palo Verde VIEs and, accordingly, do not consolidate them (see Note 9).

APS is exposed to losses under the Palo Verde sale leaseback agreements upon the occurrence of certain events that APSdoes not consider to be reasonably likely to occur. Under certain circumstances (for example, the NRC issuing specifiedviolation orders with respect to Palo Verde or the occurrence of specified nuclear events), APS would be required to assumethe debt associated with the transactions, make specified payments to the equity participants, and take title to the leased Unit2 interests, which, if appropriate, may be required to be written down in value. If such an event had occurred as ofDecember 31, 2008, APS would have been required to assume approximately $174 million of debt and pay the equityparticipants approximately $162 million.

Guarantees and Letters of Credit

We have issued parental guarantees and letters of credit and obtained surety bonds on behalf of our subsidiaries. Ourparental guarantees for Pinnacle West Marketing & Trading relate to commodity energy products. As required by Arizonalaw, Pinnacle West has also obtained a $10 million bond on behalf of APS in connection with the interim base rate surchargeapproved by the ACC in December 2008. See “2008 General Rate Case — Interim Rate Surcharge” in Note 3. Our creditsupport instruments enabled APSES to offer energy-related products and commodity energy. Non-performance ornon-payment under the original contract by our subsidiaries would require us to perform under the guarantee or surety bond.No liability is currently recorded on the Consolidated Balance Sheets related to Pinnacle West’s current outstandingguarantees on behalf of our subsidiaries. At December 31, 2008, we had no guarantees that were in default. Our guaranteeshave no recourse or collateral provisions to allow us to recover amounts paid under the guarantees. We generally agree toindemnification provisions related to liabilities arising from or related to certain of our agreements, with limited exceptionsdepending on the particular agreement. See Note 21 for additional information regarding guarantees and letters of credit.

Contractual Obligations

The following table summarizes Pinnacle West’s consolidated contractual requirements as of December 31, 2008 (dollarsin millions):

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2010- 2012-

2009 2011 2013 Thereafter Total

Long-term debt payments, including interest: (a) APS $ 182 $ 957 $ 646 $ 3,549 $ 5,334 SunCor 178 4 2 — 184 Pinnacle West 10 187 — — 197

Total long-term debt payments, including interest 370 1,148 648 3,549 5,715

Short-term debt payments, including interest (b) 672 — — — 672 Purchased power and fuel commitments (c) 449 651 777 6,053 7,930 Operating lease payments 82 147 132 135 496 Nuclear decommissioning funding requirements 22 49 49 185 305 Purchase obligations (d) 69 76 33 172 350 Minimum pension funding requirement (e) 36 25 — — 61

Total contractual commitments $ 1,700 $ 2,096 $ 1,639 $10,094 $15,529

(a) The long-term debt matures at various dates through 2036 and bears interest principally at fixed rates. Interest onvariable-rate long-term debt is determined by using average rates at December 31, 2008 (see Note 6).

(b) The short-term debt is primarily related to bank borrowings at Pinnacle West, APS and SunCor under their respectiverevolving lines of credit (see Note 5).

(c) Our purchased power and fuel commitments include purchases of coal, electricity, natural gas, renewable energy andnuclear fuel (see Note 11).

(d) These contractual obligations include commitments for capital expenditures and other obligations.

(e) Future pension contributions are not determinable for plan years 2010 and beyond.

This table excludes $69 million in unrecognized tax benefits because the timing of the future cash outflows in uncertain.

CRITICAL ACCOUNTING POLICIES

In preparing the financial statements in accordance with GAAP, management must often make estimates and assumptionsthat affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financialstatements and during the reporting period. Some of those judgments can be subjective and complex, and actual results coulddiffer from those estimates. We consider the following accounting policies to be our most critical because of the uncertainties,judgments and complexities of the underlying accounting standards and operations involved.

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Regulatory Accounting

Regulatory accounting allows for the actions of regulators, such as the ACC and the FERC, to be reflected in our financialstatements. Their actions may cause us to capitalize costs that would otherwise be included as an expense in the currentperiod by unregulated companies. If future recovery of costs ceases to be probable, the assets would be written off as a chargein current period earnings. A major component of our regulatory assets is the retail fuel and power costs deferred under thePSA. APS defers for future rate recovery 90% of the difference between actual retail fuel and power costs and the amount ofsuch costs currently included in base rates. We had $795 million, including $8 million related to the PSA, of regulatory assetson the Consolidated Balance Sheets at December 31, 2008.

Also included in the balance of regulatory assets at December 31, 2008 is a regulatory asset of $473 million in accordancewith SFAS No. 158 for pension and other postretirement benefits. This regulatory asset represents the future recovery of thesecosts through retail rates as these amounts are charged to earnings. If these costs are disallowed by the ACC, this regulatoryasset would be charged to OCI and result in lower future earnings.

In addition, we had $588 million of regulatory liabilities on the Consolidated Balance Sheets at December 31, 2008, whichprimarily are related to removal costs. See Notes 1 and 3 for more information.

Pensions and Other Postretirement Benefit Accounting

Changes in our actuarial assumptions used in calculating our pension and other postretirement benefit liability andexpense can have a significant impact on our earnings and financial position. The most relevant actuarial assumptions are thediscount rate used to measure our liability and net periodic cost, the expected long-term rate of return on plan assets used toestimate earnings on invested funds over the long-term, and the assumed healthcare cost trend rates. We review theseassumptions on an annual basis and adjust them as necessary.

The following chart reflects the sensitivities that a change in certain actuarial assumptions would have had on theDecember 31, 2008 reported pension liability on the Consolidated Balance Sheets and our 2008 reported pension expense,after consideration of amounts capitalized or billed to electric plant participants, on Pinnacle West’s Consolidated Statementsof Income (dollars in millions):

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Increase (Decrease)

Impact on Impact on Pension PensionActuarial Assumption (a) Liability Expense

Discount rate: Increase 1% $(241) $ (8)Decrease 1% 277 14

Expected long-term rate of return on plan assets: Increase 1% — (7)Decrease 1% — 7

(a) Each fluctuation assumes that the other assumptions of the calculation are held constant while the rates are changed byone percentage point.

The following chart reflects the sensitivities that a change in certain actuarial assumptions would have had on theDecember 31, 2008 reported other postretirement benefit obligation on the Consolidated Balance Sheets and our 2008reported other postretirement benefit expense, after consideration of amounts capitalized or billed to electric plantparticipants, on Pinnacle West’s Consolidated Statements of Income (dollars in millions): Increase (Decrease)

Impact on Other Impact on Other Postretirement Benefit PostretirementActuarial Assumption (a) Obligation Benefit Expense

Discount rate: Increase 1% $ (90) $ (5)Decrease 1% 104 5

Health care cost trend rate (b): Increase 1% 103 9 Decrease 1% (83) (7)

Expected long-term rate of return on plan assets – pretax: Increase 1% — (2)Decrease 1% — 2

(a) Each fluctuation assumes that the other assumptions of the calculation are held constant while the rates are changed byone percentage point.

(b) This assumes a 1% change in the initial and ultimate health care cost trend rate.

See Note 8 for further details about our pension and other postretirement benefit plans.

Derivative Accounting

Derivative accounting requires evaluation of rules that are complex and subject to varying interpretations. Our evaluationof these rules, as they apply to our contracts, determines whether we

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use accrual accounting (for contracts designated as normal) or fair value (mark-to-market) accounting. Mark-to-marketaccounting requires that changes in the fair value are recognized periodically in income unless certain hedge criteria are met.For cash flow hedges, the effective portion of changes in the fair value of the derivative is recognized in common stockequity (as a component of other comprehensive income (loss)).

See “Market Risks – Commodity Price Risk” below for quantitative analysis. See “Fair Value Measurements” below foradditional information on valuation. See Note 1 for discussion on accounting policies and Note 18 for a further discussion onderivative and energy trading accounting.

Fair Value Measurements

We apply fair value measurements to derivative instruments, nuclear decommissioning trusts and cash equivalents. Weadopted SFAS No. 157, “Fair Value Measurements,” for our financial assets and liabilities on January 1, 2008. SFAS No. 157defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transactionbetween market participants at the measurement date. SFAS No. 157 establishes criteria to be considered when measuringfair value and expands disclosures about fair value measurements. In accordance with SFAS No. 157 we use inputs, orassumptions that market participants would use, to determine fair market value, and the significance of a particular inputdetermines how the instrument is classified in the fair value hierarchy. We utilize valuation techniques that maximize the useof observable inputs and minimize the use of unobservable inputs. The determination of fair value sometimes requiressubjective and complex judgment. Our assessment of the inputs and the significance of a particular input to fair valuemeasurement may affect the valuation of the instruments and their placement within the fair value hierarchy. Actual resultscould differ from our estimates of fair value. See Note 14 for further fair value measurement discussion, Note 1 for discussionon accounting policies and Note 18 for a further discussion on derivative and energy trading accounting.

Our nuclear decommissioning trusts invest in fixed income securities and equity securities. The fair values of thesesecurities are based on observable inputs for identical or similar assets. See Note 12 for further discussion of our nucleardecommissioning trusts.

Real Estate Investment Impairments

We had real estate investments of $415 million and home inventory of $51 million on our consolidated balance sheets atDecember 31, 2008. We assess impairment of these assets in accordance with SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets.” For purposes of evaluating impairment, we classify our real estate assets,such as land under development, land held for future development, and commercial property, as “held and used.” Whenevents or changes in circumstances indicate that the carrying value of real estate assets considered held and used may not berecoverable, we compare the undiscounted cash flows that we estimate will be generated by each asset to its carrying amount.If the carrying amount exceeds the undiscounted cash flows, we adjust the asset to fair value and recognize an impairmentcharge. The adjusted value becomes the new book value (carrying amount) for held and used assets. We may have real estateassets classified as held and used with fair values that are lower than their carrying amounts, but are not deemed to beimpaired because the undiscounted cash flows exceed the carrying amounts.

Real estate home inventory is considered to be held for sale for the purposes of evaluating impairment in accordance withthe provisions of SFAS No. 144. Home inventories are reported at

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the lower of carrying amount or fair value less cost to sell. Fair value less cost to sell is evaluated each period to determine ifit has changed. Losses (and gains not to exceed any cumulative loss previously recognized) are reported as adjustments to thecarrying amount.

We determine fair value for our real estate assets primarily based on the future cash flows that we estimate will begenerated by each asset discounted for market risk. Our impairment assessments and fair value determinations requiresignificant judgment regarding key assumptions such as future sales prices, future construction and land development costs,future sales timing, and discount rates. The assumptions are specific to each project and may vary among projects. Thediscount rates we used to determine fair values at December 31, 2008 ranged from 17% to 27%. Due to the judgment andassumptions applied in the estimation process, with regard to impairments, it is possible that actual results could differ fromthose estimates. If conditions in the broader economy or the real estate markets worsen, or as a result of a change in SunCor’sstrategy, we may be required to record additional impairments.

OTHER ACCOUNTING MATTERS

See Note 14 for a discussion of SFAS No. 157, “Fair Value Measurements,” which we adopted effective January 1, 2008,and the following related accounting guidance:

• FASB Staff Position, No. 157-2, “Effective Date of FASB Statement No. 157”

• FASB Staff Position, No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset IsNot Active”

See Notes 18 and S-3 for discussions of FASB Staff Position No. FIN 39-1, “Amendment of FASB Interpretation No. 39,Offsetting of Amounts Related to Certain Contracts” (FIN 39-1), which we adopted January 1, 2008.

SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” was effective for us on January 1,2008. This guidance provides companies with an option to report selected financial assets and liabilities at fair value. We didnot elect the fair value option for any of our financial assets or liabilities. Therefore, SFAS No. 159 did not have an impact onour financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” Thisguidance requires enhanced disclosures about derivative instruments and hedging activities. The Statement is effective for uson January 1, 2009. It did not have a material impact on our financial statements.

In December 2008, the FASB issued FASB Staff Position No. 132(R)-1, “Employers’ Disclosures about PostretirementBenefit Plan Assets.” This guidance requires enhanced employer disclosures about plan assets of a defined benefit pension orother postretirement plan. The guidance is effective for us on December 31, 2009. We do not expect it to have a materialimpact on our financial statements.

See Note 4 for a discussion of FIN 48 on accounting for uncertainty in income taxes, which was adopted January 1, 2007.

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FACTORS AFFECTING OUR FINANCIAL OUTLOOK

Factors Affecting Operating Revenues, Fuel and Purchased Power Costs

General Electric operating revenues are derived from sales of electricity in regulated retail markets in Arizona and fromcompetitive retail and wholesale power markets in the western United States. For the years 2006 through 2008, retail electricrevenues comprised approximately 91% of our total electric operating revenues. Our electric operating revenues are affectedby electricity sales volumes related to customer growth, variations in weather from period to period, customer mix, averageusage per customer, electricity rates and tariffs and the recovery of PSA deferrals. Off-System Sales of excess generationoutput, purchased power and natural gas are included in regulated electricity segment revenues and related fuel andpurchased power because they are credited to APS’ retail customers through the PSA. These revenue transactions are affectedby the availability of excess economic generation or other energy resources and wholesale market conditions, includingdemand and prices. Competitive retail sales of energy and energy-related products and services are made by APSES incertain western states that have opened to competition.

Rate Proceedings Our cash flows and profitability are affected by the rates APS may charge and the timely recovery ofcosts through those rates. APS’ retail rates are regulated by the ACC and its wholesale electric rates (primarily fortransmission) are regulated by the FERC. APS’ capital expenditure requirements, which are discussed below under “Liquidityand Capital Resources – Pinnacle West Consolidated,” are substantial because of environmental compliance and controls,system reliability, and continuing, though slowed, customer growth in APS’ service territory. APS needs timely recoverythrough rates of its capital and operating expenditures to maintain adequate financial health. On March 24, 2008, APS filed arate case with the ACC, which it updated on June 2, 2008, requesting, among other things, an increase in retail rates to helpdefray rising infrastructure costs, approval of an impact fee and approval of new conservation rates. See Note 3 for detailsregarding this rate case, including the ACC’s approval of an interim base rate surcharge pending the outcome of the case.

Fuel and Purchased Power Costs Fuel and purchased power costs included on our Consolidated Statements of Incomeare impacted by our electricity sales volumes, existing contracts for purchased power and generation fuel, our power plantperformance, transmission availability or constraints, prevailing market prices, new generating plants being placed in servicein our market areas, our hedging program for managing such costs and, since April 1, 2005, PSA deferrals and theamortization thereof. See Note 3 for information regarding the PSA. APS’ recovery of PSA deferrals from its ratepayers issubject to annual and, if necessary, periodic PSA adjustments.

Customer and Sales Growth The customer and sales growth referred to in this paragraph apply to Native Loadcustomers and sales to them. Customer growth in APS’ service territory was 1.4% during 2008. Customer growth averaged3% a year for the three years 2006 through 2008. We currently expect customer growth to decline, averaging about 1% peryear for 2009 through 2011 due to factors reflecting the economic conditions both nationally and in Arizona. For the threeyears 2006 through 2008, APS’ actual retail electricity sales in kilowatt-hours grew at an average annual rate of 2.9%;adjusted to exclude the effects of weather variations, such retail sales growth averaged 2.9% a year. We currently estimatethat total retail electricity sales in kilowatt-hours will grow 1% on average per year during 2009 through 2011, excluding theeffects of weather variations. We currently expect our retail sales growth in 2009 to be below average because of potentialeffects on customer usage from the economic conditions mentioned above and retail rate increases (see Note 3).

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Actual sales growth, excluding weather-related variations, may differ from our projections as a result of numerous factors,such as economic conditions, customer growth, usage patterns and responses to retail price changes. Our experience indicatesthat a reasonable range of variation in our kilowatt-hour sales projection attributable to such economic factors under normalbusiness conditions can result in increases or decreases in annual net income of up to $10 million.

Weather In forecasting retail sales growth, we assume normal weather patterns based on historical data. Historicalextreme weather variations have resulted in annual variations in net income in excess of $20 million. However, ourexperience indicates that the more typical variations from normal weather can result in increases or decreases in annual netincome of up to $10 million.

Wholesale Market Our marketing and trading activities focus primarily on managing APS’ risks relating to fuel andpurchased power costs in connection with its costs of serving Native Load customer demand. Our marketing and tradingactivities include, subject to specified parameters, marketing, hedging and trading in electricity and fuels. See “FormulaTransmission Tariff” in Note 3 for information regarding APS’ recent filing with the FERC requesting a change to theformula rate.

Other Factors Affecting Financial Results

Operations and Maintenance Expenses Operations and maintenance expenses are impacted by growth, power plantoperations, maintenance of utility plant (including generation, transmission, and distribution facilities), inflation, outages,higher-trending pension and other postretirement benefit costs and other factors.

Depreciation and Amortization Expenses Depreciation and amortization expenses are impacted by net additions toutility plant and other property (such as new generation, transmission, and distribution facilities), and changes in depreciationand amortization rates. See “Capital Expenditures” above for information regarding planned additions to our facilities.

Property Taxes Taxes other than income taxes consist primarily of property taxes, which are affected by the value ofproperty in-service and under construction, assessment ratios, and tax rates. The average property tax rate for APS, whichcurrently owns the majority of our property, was 7.8% of the assessed value for 2008, 8.3% of the assessed value for 2007and 8.9% of assessed value for 2006. We expect property taxes to increase as we add new utility plant (including newgeneration, transmission and distribution facilities) and as we improve our existing facilities. See “Capital Expenditures”above for information regarding planned additions to our facilities.

Interest Expense Interest expense is affected by the amount of debt outstanding and the interest rates on that debt. (SeeNote 6.) The primary factors affecting borrowing levels are expected to be our capital expenditures, long-term debtmaturities, and internally generated cash flow. Capitalized interest offsets a portion of interest expense while capital projectsare under construction. We stop accruing capitalized interest on a project when it is placed in commercial operation.

Climate Change Recent concern over climate change could have a significant impact on our capital expenditures andoperating costs in the form of taxes, emissions allowances or required equipment upgrades. The timing and type ofcompliance measures and related costs are impacted by current and future regulatory and legislative actions, which we areclosely monitoring. See “Business of Arizona Public Service Company – Climate Change” in Item 1 for more informationregarding climate change initiatives.

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Retail Competition Although some very limited retail competition existed in Arizona in 1999 and 2000, there arecurrently no active retail electric service providers providing unbundled energy or other utility services to APS’ customers.We cannot predict when, and the extent to which, additional electric service providers will re-enter APS’ service territory.

Subsidiaries SunCor’s net loss was approximately $26 million in 2008. SunCor’s net loss in 2008 included a $53 million(pre-tax) real estate impairment charge. SunCor’s net income was approximately $24 million in 2007 and $61 million in2006. See Note 23 for further discussion. This estimate reflects continuation of the slowdown in the western United Statesreal estate markets. See “Liquidity and Capital Resources – Other Subsidiaries – SunCor” and Note 6 for a discussion ofSunCor’s long-term debt, liquidity, and capital requirements.

The historical results of APSES and El Dorado are not indicative of future performance.

General Our financial results may be affected by a number of broad factors. See “Forward-Looking Statements” and“Risk Factors” above for further information on such factors, which may cause our actual future results to differ from thosewe currently seek or anticipate.

Market Risks

Our operations include managing market risks related to changes in interest rates, commodity prices and investments heldby our nuclear decommissioning trust fund.

Interest Rate and Equity Risk

We have exposure to changing interest rates. Changing interest rates will affect interest paid on variable-rate debt and themarket value of fixed income securities held by our nuclear decommissioning trust fund (see Note 12). The nucleardecommissioning trust fund also has risks associated with the changing market value of its investments. Nucleardecommissioning costs are recovered in regulated electricity prices.

The tables below present contractual balances of our consolidated long-term and short-term debt at the expected maturitydates as well as the fair value of those instruments on December 31, 2008 and 2007. The interest rates presented in the tablesbelow represent the weighted-average interest rates as of December 31, 2008 and 2007 (dollars in thousands):

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Pinnacle West – Consolidated Variable-Rate Fixed-Rate

Short-Term Debt Long-Term Debt Long-Term Debt Interest Interest Interest

2008 Rates Amount Rates Amount Rates Amount

2009 2.24% $670,469 3.88% $173,619 4.62% $ 4,027 2010 — — 3.99% 2,042 5.66% 1,137 2011 — — 6.22% 2,259 6.23% 576,250 2012 — — 6.00% 16 6.50% 376,338 2013 — — 6.00% 1,864 6.00% 231 Years thereafter — — 8.30% 539,145 5.64% 1,540,229

Total $670,469 $718,945 $2,498,212

Fair value $670,469 $718,945 $2,107,635

Variable-Rate Fixed-Rate



2008 5.54% $340,661 7.33% $159,337 4.65% $ 4,436 2009 — — 7.20% 71,054 5.76% 1,050 2010 — — 9.20% 201 5.71% 1,104 2011 — — 8.91% 2,284 6.23% 576,218 2012 — — 9.50% 103 6.50% 376,293 Years thereafter — — 3.77% 567,239 5.64% 1,540,462

Total $340,661 $800,218 $2,499,563

Fair value $340,661 $800,218 $2,414,301

The tables below present contractual balances of APS’ long-term debt at the expected maturity dates as well as the fairvalue of those instruments on December 31, 2008 and 2007. The interest rates presented in the tables below represent theweighted-average interest rates as of December 31, 2008 and 2007 (dollars in thousands):

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APS Variable-Rate Fixed-Rate



2009 2.09% $521,684 — $ — 5.62% $ 874 2010 — — — — 5.60% 1,012 2011 — — — — 6.37% 401,208 2012 — — — — 6.50% 376,325 2013 — — — — 6.00% 231 Years thereafter — — 8.30% 539,145 5.64% 1,540,229

Total $521,684 $539,145 $2,319,879

Fair value $521,684 $539,145 $1,935,160

Variable-Rate Fixed-Rate



2008 5.36% $218,000 — $ — 5.66% $ 978 2009 — — — — 5.60% 934 2010 — — — — 5.59% 1,012 2011 — — — — 6.37% 401,208 2012 — — — — 6.50% 376,293 Years thereafter — — 3.76% 565,855 5.64% 1,540,462

Total $218,000 $565,855 $2,320,887

Fair value $218,000 $565,855 $2,235,624

Commodity Price Risk

We are exposed to the impact of market fluctuations in the commodity price and transportation costs of electricity andnatural gas. Our energy risk management committee, consisting of officers and key management personnel, overseescompany-wide energy risk management activities and monitors the results of marketing and trading activities to ensurecompliance with our stated energy risk management and trading policies. We manage risks associated with these marketfluctuations by utilizing various commodity instruments that qualify as derivatives, including exchange-traded futures andoptions and over-the-counter forwards, options and swaps. As part of our risk management program, we use such instrumentsto hedge purchases and sales of electricity and fuels. The changes in market value of such contracts have a high correlation toprice changes in the hedged commodities.

The following tables show the net pretax changes in mark-to-market of our derivative positions in 2008 and 2007 (dollarsin millions):

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2008 2007

Mark-to-market of net positions at beginning of year $ 40 $ 15 Recognized in earnings:

Change in mark-to-market losses for future period deliveries (4) (2)Mark-to-market gains realized including ineffectiveness during the period (5) (15)

Decrease (increase) in regulatory asset (111) 55 Recognized in OCI:

Change in mark-to-market losses for future period deliveries (a) (138) (1)Mark-to-market gains realized during the period (64) (12)Change in valuation techniques — —

Mark-to-market of net positions at end of year $ (282) $ 40

(a) The changes in mark-to-market recorded in OCI are due primarily to changes in forward natural gas prices.

The tables below show the fair value of maturities of our derivative contracts (dollars in millions) at December 31, 2008by maturities and by the type of valuation that is performed to calculate the fair values. See Note 1, “Derivative Accounting”and “Fair Value Measurements,” for more discussion of our valuation methods. Total fair Source of Fair Value 2009 2010 2011 2012 2013 Years thereafter value

Prices actively quoted $ (50) $ (4) $ — $ — $ — $ — $ (54)Prices provided by other

external sources (122) (53) (43) (3) — — (221)Prices based on models and

other valuation methods — (1) 5 4 (3) (12) (7)

Total by maturity $ (172) $ (58) $ (38) $ 1 $ (3) $ (12) $ (282)

The table below shows the impact that hypothetical price movements of 10% would have on the market value of our riskmanagement and trading assets and liabilities included on Pinnacle West’s Consolidated Balance Sheets at December 31,2008 and 2007 (dollars in millions):

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December 31, 2008 December 31, 2007

Gain (Loss) Gain (Loss)

Price Up 10% Price Down 10% Price Up 10% Price Down 10%

Mark-to-market changes reported in: Earnings

Electricity $ 2 $ (2) $ 3 $ (3)Natural gas 3 (3) 4 (4)

Regulatory asset (liability) or OCI (a) Electricity 20 (20) 45 (45)Natural gas 64 (64) 85 (85)

Total $ 89 $ (89) $ 137 $ (137)

(a) These contracts are hedges of our forecasted purchases of natural gas and electricity. The impact of these hypotheticalprice movements would substantially offset the impact that these same price movements would have on the physicalexposures being hedged. To the extent the amounts are eligible for inclusion in the PSA, the amounts are recorded aseither a regulatory asset or liability.

Credit Risk

We are exposed to losses in the event of non-performance or non-payment by counterparties. See Note 1, “DerivativeAccounting” for a discussion of our credit valuation adjustment policy. See Note 18 for further discussion of credit risk.

ARIZONA PUBLIC SERVICE COMPANY – RESULTS OF OPERATIONS

Regulatory Matters

See Note 3 for information about rate matters affecting APS.


APS’ net income decreased approximately $22 million, to $262 million in 2008 from $284 million in 2007. The majorfactors that increased (decreased) net income for the year ended December 31, 2008 compared with the prior year aresummarized in the following table (dollars in millions):

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Increase (Decrease)

Pretax After Tax

Impacts of retail rate increase effective July 1, 2007 and transmission rate increases: Retail revenue increase primarily related to higher Base Fuel Rate $ 156 $ 95 Decreased deferred fuel and purchased power costs related to higher Base Fuel Rate (141) (86)Transmission rate increases (including related retail rates) 31 19

Lower mark-to-market valuations of fuel and purchased power contracts related to changes inmarket prices, net of related PSA deferrals (14) (9)

Regulatory disallowance in 2007 14 8 Higher retail sales primarily due to customer growth, excluding weather effects, partially offset

by lower average usage 21 13 Effects of weather on retail sales (43) (26)Operations and maintenance expense increases primarily due to:

Customer service and other costs, including distribution system reliability (31) (19)Generation costs, including more planned maintenance (18) (11)Employee severance costs (9) (5)

Higher depreciation and amortization primarily due to increased utility plant in service (18) (11)Income tax benefits related to prior years resolved in 2008 — 29 Income tax benefits related to prior years resolved in 2007 — (11)Higher interest expense, net of capitalized financing costs, primarily due to higher rates on

certain APS pollution control bonds and higher short-term debt balances (11) (6)Other miscellaneous items, net (2) (2)

Decrease in net income $ (65) $ (22)

Electric operating revenues were $197 million higher for the year ended December 31, 2008 compared with the prior yearprimarily because of:



• a $31 million increase due to transmission rate increases (including related retail rates);


• a $26 million increase in revenues related to long-term traditional wholesale contracts;

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• a $14 million increase in renewable energy surcharges which are offset by operations and maintenance expense;

• a $63 million decrease in retail revenue due to the effects of weather;

• a $47 million decrease in retail revenues related to recovery of PSA deferrals, which had no earnings effect because oflower amortization of the same amount recorded as fuel and purchased power expense; and



Our net income increased approximately $14 million, to $284 million for 2007 from $270 million for 2006. The majorfactors that increased (decreased) net income for the year ended December 31, 2007 compared with the prior year arecontained in the following table (dollars in millions):

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Increase (Decrease)

Pretax After Tax

Higher retail sales primarily due to customer growth, excluding weather effects $ 46 $ 28 Effects of weather on retail sales 37 23 Impacts of retail rate increase effective July 1, 2007:

Revenue increase related to higher Base Fuel Rate 185 113 Decreased deferred fuel and purchased power costs related to higher Base Fuel Rate (171) (104)Non-fuel rate increase 6 4

Net changes in fuel and purchased power costs related to price: Higher fuel and purchased power costs related to increased commodity prices (121) (74)Increased deferred fuel and purchased power costs related to increased prices 115 70 Mark-to-market fuel and purchased power costs, net of related deferred fuel and purchased

power costs 18 11 Regulatory disallowance (14) (8)Operations and maintenance increases primarily due to:

Increased generation costs, including increased maintenance and overhauls and Palo Verdeperformance improvement plan (25) (15)

Customer service and other costs (19) (11)Higher depreciation and amortization primarily due to increased utility plant in service (12) (7)Lower other income, net of expense, primarily due to lower interest income as a result of lower

investment balances and miscellaneous asset sales in prior year (7) (4)Income tax benefits resolved in 2007 related to prior years — 11 Income tax credits resolved in 2006 related to prior years — (11)

Higher interest expense, net of capitalized financing costs, primarily due to higher debtbalances and higher rates (7) (4)

Lower marketing and trading contribution primarily due to lower mark-to-market gainsbecause of changes in forward prices (7) (4)

Other miscellaneous items, net 2 (4)

Increase in net income $ 26 $ 14

Electric operating revenues were $278 million higher for the year ended December 31, 2007 compared with the prior yearprimarily because of:



• a $50 million increase in retail revenues due to the effects of weather;

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• a $35 million decrease in retail revenues related to recovery of PSA deferrals, which had no earnings effect because ofamortization of the same amount recorded as fuel and purchased power expense (see Note 3); and


LIQUIDITY AND CAPITAL RESOURCES – ARIZONA PUBLIC SERVICE COMPANY

Cash Flows

The following table presents APS’ net cash provided by (used for) operating, investing and financing activities for theyears ended December 31, 2008, 2007 and 2006 (dollars in millions): 2008 2007 2006

Net cash flow provided by operating activities $ 785 $ 766 $ 394 Net cash flow used for investing activities (879) (881) (714)Net cash flow provided by financing activities 114 86 352

Net increase (decrease) in cash and cash equivalents $ 20 $ (29) $ 32


The increase of approximately $19 million in net cash provided by operating activities is primarily due to lower currentincome taxes and increased retail revenue related to higher Base Fuel Rates, partially offset by increased collateral andmargin cash provided as a result of changes in commodity prices.

The decrease of approximately $2 million in net cash used for investing activities is primarily due to lower levels ofcapital expenditures (see table and discussion above) and increased contributions in aid of construction related to changes in2008 in our line extension policy (see Note 3), substantially offset by lower cash proceeds from the net sales and purchases ofinvestment securities.

The increase of approximately $28 million in net cash provided by financing activities is primarily due to higher levels ofshort-term borrowings, partially offset by decreased equity infusions from Pinnacle West and the repurchase of pollutioncontrol bonds (see Note 6).


The increase of approximately $372 million in net cash provided by operating activities is primarily due to a decrease in2007 in the amount of cash collateral and margin cash returned to counterparties as a result of changes in commodity prices.

The increase of approximately $167 million in net cash used for investing activities is primarily due to an increase in cashused for capital expenditures (see table and discussion above) and

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increased allowance for borrowed funds used during construction, partially offset by higher cash proceeds from the net salesand purchases of investment securities.

The decrease of approximately $266 million in net cash provided by financing activities is primarily due to a decrease innet new long-term debt (issuances net of redemptions and refinancing) and a decrease in equity infusions from Pinnacle West,partially offset by higher levels of short-term borrowings to fund day-to-day operations and liquidity needs.

Liquidity

For additional discussion see “Liquidity and Capital Resources – Pinnacle West Consolidated.”

Contractual Obligations

The following table summarizes contractual requirements for APS as of December 31, 2008 (dollars in millions): 2010- 2012-

2009 2011 2013 Thereafter Total

Long-term debt payments, including interest (a) $ 182 $ 956 $ 646 $ 3,549 $ 5,333 Short-term debt payments, including interest 523 — — — 523 Purchased power and fuel commitments (b) 449 651 777 6,053 7,930 Operating lease payments 76 135 122 121 454 Nuclear decommissioning funding requirements 22 49 49 185 305 Purchase obligations (c) 69 76 33 172 350 Minimum pension funding requirement (d) 35 24 — — 59

Total contractual commitments $ 1,356 $ 1,891 $ 1,627 $10,080 $14,954

(a) The long-term debt matures at various dates through 2036 and bears interest principally at fixed rates. Interest onvariable-rate long-term debt is determined by using average rates at December 31, 2008 (see Note 6).

(b) APS’ purchased power and fuel commitments include purchases of coal, electricity, natural gas, renewable energy andnuclear fuel (see Note 11).

(c) These contractual obligations include commitments for capital expenditures and other obligations.

(d) Future pension contributions are not determinable for plan years 2010 and beyond.

This table excludes $68 million in unrecognized tax benefits because the timing of the future cash outflows is uncertain.

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ITEM 7A. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK

See “Factors Affecting Our Financial Outlook” in Item 7 above for a discussion of quantitative and qualitative disclosuresabout market risk.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS ANDFINANCIAL STATEMENT SCHEDULES

Page

Management’s Report on Internal Control Over Financial Reporting (Pinnacle West Capital Corporation) 79 Report of Independent Registered Public Accounting Firm 80 Pinnacle West Consolidated Statements of Income for 2008, 2007 and 2006 82 Pinnacle West Consolidated Balance Sheets as of December 31, 2008 and 2007 83 Pinnacle West Consolidated Statements of Cash Flows for 2008, 2007 and 2006 85 Pinnacle West Consolidated Statements of Changes in Common Stock Equity for 2008, 2007 and 2006 86 Notes to Pinnacle West’s Consolidated Financial Statements 87 Management’s Report on Internal Control Over Financial Reporting (Arizona Public Service Company) 142 Report of Independent Registered Public Accounting Firm 143 APS Statements of Income for 2008, 2007 and 2006 145 APS Balance Sheets as of December 31, 2008 and 2007 146 APS Statements of Cash Flows for 2008, 2007 and 2006 148 APS Statements of Changes in Common Stock Equity for 2008, 2007 and 2006 149 Supplemental Notes to APS’ Financial Statements 151 Financial Statement Schedules for 2008, 2007 and 2006

Pinnacle West Schedule I – Condensed Statements of Income for 2008, 2007 and 2006 159 Pinnacle West Schedule I – Condensed Balance Sheets as of December 31, 2008 and 2007 160 Pinnacle West Schedule I – Condensed Statements of Cash Flows for 2008, 2007 and 2006 161 Pinnacle West Schedule II – Reserve for Uncollectibles for 2008, 2007 and 2006 162 APS Schedule II – Reserve for Uncollectibles for 2008, 2007 and 2006 163

See Note 13 and S-2 for the selected quarterly financial data (unaudited) required to be presented in this Item.

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MANAGEMENT’S REPORT ON INTERNAL CONTROLOVER FINANCIAL REPORTING

(PINNACLE WEST CAPITAL CORPORATION)

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as suchterm is defined in Exchange Act Rules 13a-15(f), for Pinnacle West Capital Corporation. Management conducted anevaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control –Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on ourevaluation under the framework in Internal Control – Integrated Framework, our management concluded that our internalcontrol over financial reporting was effective as of December 31, 2008. The effectiveness of our internal control overfinancial reporting as of December 31, 2008 has been audited by Deloitte & Touche LLP, an independent registered publicaccounting firm, as stated in their report which is included herein and also relates to the Company’s consolidated financialstatements.

February 19, 2009

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders ofPinnacle West Capital CorporationPhoenix, Arizona

We have audited the accompanying consolidated balance sheets of Pinnacle West Capital Corporation and subsidiaries (the“Company”) as of December 31, 2008 and 2007, and the related consolidated statements of income, changes in commonstock equity, and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included thefinancial statement schedules listed in the Index at Item 15. We also have audited the Company’s internal control overfinancial reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible forthese financial statements and financial statement schedules, for maintaining effective internal control over financialreporting, and for its assessment of the effectiveness of internal control over financial reporting, included in theaccompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express anopinion on these financial statements and financial statement schedules and an opinion on the Company’s internal controlover financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (UnitedStates). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement and whether effective internal control over financial reporting was maintained inall material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates madeby management, and evaluating the overall financial statement presentation. Our audit of internal control over financialreporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a materialweakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe thatour audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’sprincipal executive and principal financial officers, or persons performing similar functions, and effected by the company’sboard of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets ofthe company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directors of the company; and (3) provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assetsthat could have a material effect on the financial statements.

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Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to error or fraud may not be prevented or detected ona timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to futureperiods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financialposition of the Company as of December 31, 2008 and 2007, and the results of their operations and their cash flows for eachof the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in theUnited States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basicconsolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as ofDecember 31, 2008, based on the criteria established in Internal Control – Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission.

As reflected in the consolidated statements of changes in common stock equity, the Company adopted Statement of FinancialAccounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,effective December 31, 2006.

/s/ Deloitte & Touche LLP

DELOITTE & TOUCHE LLPPhoenix, ArizonaFebruary 19, 2009

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PINNACLE WEST CAPITAL CORPORATIONCONSOLIDATED STATEMENTS OF INCOME

(dollars and shares in thousands, except per share amounts) Year Ended December 31,

2008 2007 2006

OPERATING REVENUES Regulated electricity segment $3,127,383 $2,918,163 $2,635,036 Real estate segment 131,067 212,586 399,798 Marketing and trading 66,897 138,247 136,748 Other revenues 41,729 48,018 36,172

Total 3,367,076 3,317,014 3,207,754

OPERATING EXPENSES Regulated electricity segment fuel and purchased power 1,284,116 1,140,923 960,649 Real estate segment operations 149,125 192,972 324,861 Real estate impairment charge (Note 23) 53,250 — — Marketing and trading fuel and purchased power 45,572 100,462 105,415 Operations and maintenance 807,852 728,340 684,020 Depreciation and amortization 390,358 372,102 358,605 Taxes other than income taxes 125,336 128,210 128,395 Other expenses 34,171 38,925 28,415

Total 2,889,780 2,701,934 2,590,360

OPERATING INCOME 477,296 615,080 617,394

OTHER Allowance for equity funds used during construction 18,636 21,195 14,312 Other income (Note 19) 12,078 24,694 44,028 Other expense (Note 19) (31,576) (25,857) (27,777)

Total (862) 20,032 30,563

INTEREST EXPENSE Interest charges 216,290 208,521 196,826 Capitalized interest (18,820) (23,063) (20,989)

Total 197,470 185,458 175,837

INCOME FROM CONTINUING OPERATIONS BEFORE INCOMETAXES 278,964 449,654 472,120

INCOME TAXES (Note 4) 65,407 150,910 155,855

INCOME FROM CONTINUING OPERATIONS 213,557 298,744 316,265 INCOME FROM DISCONTINUED OPERATIONS

Net of income tax expense of $18,489, $5,582 and $7,133 (Note 22) 28,568 8,399 10,990

NET INCOME $ 242,125 $ 307,143 $ 327,255

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING –BASIC 100,691 100,256 99,417

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING –DILUTED 100,965 100,835 100,010

EARNINGS PER WEIGHTED – AVERAGE COMMON SHARE

OUTSTANDING Income from continuing operations – basic $ 2.12 $ 2.98 $ 3.18

Net income – basic 2.40 3.06 3.29 Income from continuing operations – diluted 2.12 2.96 3.16 Net income – diluted 2.40 3.05 3.27

DIVIDENDS DECLARED PER SHARE $ 2.10 $ 2.10 $ 2.025

See Notes to Pinnacle West’s Consolidated Financial Statements.

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PINNACLE WEST CAPITAL CORPORATIONCONSOLIDATED BALANCE SHEETS

(dollars in thousands) December 31,

2008 2007

ASSETS CURRENT ASSETS

Cash and cash equivalents $ 105,245 $ 56,321 Customer and other receivables 292,682 349,134 Accrued utility revenues 100,089 106,873 Allowance for doubtful accounts (3,383) (4,782)Materials and supplies (at average cost) 173,252 149,759 Fossil fuel (at average cost) 29,752 27,792 Deferred income taxes (Note 4) 79,729 31,510 Home inventory (Notes 1 and 23) 50,688 98,729 Assets from risk management and trading activities (Note 18) 32,581 57,605 Other current assets 21,847 33,988

Total current assets 882,482 906,929

INVESTMENTS AND OTHER ASSETS

Real estate investments – net (Notes 1, 6 and 23) 415,296 532,600 Assets from long-term risk management and trading activities (Note 18) 33,675 48,928 Nuclear decommissioning trust (Note 12) 343,052 379,347 Other assets 117,935 117,941

Total investments and other assets 909,958 1,078,816

PROPERTY, PLANT AND EQUIPMENT (Notes 1, 6, 9 and 10)

Plant in service and held for future use 12,264,805 11,640,739 Less accumulated depreciation and amortization 4,141,546 4,004,944

Net 8,123,259 7,635,795 Construction work in progress 572,354 625,577 Intangible assets, net of accumulated amortization of $282,196 and $252,122 131,722 105,746 Nuclear fuel, net of accumulated amortization of $55,343 and $68,375 89,323 69,271

Total property, plant and equipment 8,916,658 8,436,389

DEFERRED DEBITS

Deferred fuel and purchased power regulatory asset (Notes 1, 3 and 4) 7,984 110,928 Other regulatory assets (Notes 1, 3 and 4) 787,506 514,353 Other deferred debits 115,505 114,794

Total deferred debits 910,995 740,075

TOTAL ASSETS $11,620,093 $11,162,209


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PINNACLE WEST CAPITAL CORPORATIONCONSOLIDATED BALANCE SHEETS

(dollars in thousands) December 31,

2008 2007

LIABILITIES AND COMMON STOCK EQUITY CURRENT LIABILITIES

Accounts payable $ 261,029 $ 323,346 Accrued taxes 109,798 269,628 Accrued interest 40,741 39,836 Short-term borrowings (Note 5) 670,469 340,661 Current maturities of long-term debt (Note 6) 177,646 163,773 Customer deposits 78,745 80,010 Liabilities from risk management and trading activities (Note 18) 69,585 24,510 Other current liabilities 97,915 102,685

Total current liabilities 1,505,928 1,344,449

LONG-TERM DEBT LESS CURRENT MATURITIES (Note 6) 3,031,603 3,127,125

DEFERRED CREDITS AND OTHER

Deferred income taxes (Note 4) 1,403,318 1,243,743 Regulatory liabilities (Notes 1, 3 and 4) 587,586 642,564 Liability for asset retirements (Note 12) 275,970 281,903 Liabilities for pension and other postretirement benefits (Note 8) 675,788 504,603 Liabilities from risk management and trading activities (Note 18) 126,532 4,701 Other 567,389 481,510

Total deferred credits and other 3,636,583 3,159,024

COMMITMENTS AND CONTINGENCIES (SEE NOTES) COMMON STOCK EQUITY (Note 7)

Common stock, no par value; authorized 150,000,000 shares; issued 100,948,436 atend of 2008 and 100,525,470 at end of 2007 2,151,323 2,135,787

Treasury stock at cost; 59,827 shares at end of 2008 and 39,505 at end of 2007 (2,854) (2,054)

Total common stock 2,148,469 2,133,733

Accumulated other comprehensive income (loss): Pension and other postretirement benefits (Note 8) (47,547) (39,336)Derivative instruments (99,151) 23,473

Total accumulated other comprehensive loss (146,698) (15,863)

Retained earnings 1,444,208 1,413,741

Total common stock equity 3,445,979 3,531,611

TOTAL LIABILITIES AND COMMON STOCK EQUITY $11,620,093 $11,162,209


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PINNACLE WEST CAPITAL CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands) Year Ended December 31,

2008 2007 2006

CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 242,125 $ 307,143 $ 327,255 Adjustments to reconcile net income to net cash provided by operating

activities: Depreciation and amortization including nuclear fuel 423,969 403,896 386,760 Deferred fuel and purchased power (80,183) (196,136) (252,849)Deferred fuel and purchased power amortization 183,126 231,106 265,337 Deferred fuel and purchased power regulatory disallowance — 14,370 — Allowance for equity funds used during construction (18,636) (21,195) (14,312)Real estate impairment charge 53,250 — — Deferred income taxes 158,024 (58,027) 27,738 Change in mark-to-market valuations 9,074 17,579 28,464

Changes in current assets and liabilities: Customer and other receivables 80,834 62,850 9,189 Materials, supplies and fossil fuel (25,453) (29,776) (9,094)Other current assets 8,734 (10,040) (890)Accounts payable (69,439) (42,004) (46,055)Home inventory 48,041 (56,883) 11,563 Other current liabilities (18,279) 43,421 (566)

Expenditures for real estate investments (21,168) (121,316) (126,229)Other changes in real estate assets 18,211 82,521 34,990 Change in margin and collateral accounts – assets 17,450 (37,371) (249,792)Change in margin and collateral accounts – liabilities (132,416) 19,284 (46,444)Change in unrecognized tax benefits (94,551) 25,178 — Change in other long-term assets 6,104 (23,826) 17,541 Change in other long-term liabilities 24,751 47,162 30,896

Net cash flow provided by operating activities 813,568 657,936 393,502

CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (935,577) (960,390) (788,982)Contributions in aid of construction 60,292 41,809 51,203 Capitalized interest (18,820) (23,063) (20,990)Proceeds from the sale of Silverhawk — — 207,620 Proceeds from sale of investment securities — 69,225 1,406,704 Purchases of investment securities — (36,525) (1,439,404)Proceeds from nuclear decommissioning trust sales 317,619 259,026 254,651 Investment in nuclear decommissioning trust (338,361) (279,768) (275,393)Proceeds from sale of commercial real estate investments 94,171 58,139 39,621 Other 5,517 (1,807) (3,763)

Net cash flow used for investing activities (815,159) (873,354) (568,733)

CASH FLOWS FROM FINANCING ACTIVITIES Issuance of long-term debt 96,934 230,571 757,636

Repayment and reacquisition of long-term debt (181,491) (162,060) (527,864)Short-term borrowings – net 331,741 304,911 9,911 Dividends paid on common stock (204,247) (210,473) (201,220)Common stock equity issuance 3,687 24,089 39,548 Other 3,891 (2,509) 30,427

Net cash flow provided by financing activities 50,515 184,529 108,438

NET INCREASE (DECREASE) IN CASH AND CASH

EQUIVALENTS 48,924 (30,889) (66,793) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 56,321 87,210 154,003

CASH AND CASH EQUIVALENTS AT END OF YEAR $ 105,245 $ 56,321 $ 87,210

Supplemental disclosure of cash flow information Cash paid during the period for:

Income taxes, net of refunds $ 24,233 $ 204,643 $ 157,245 Interest, net of amounts capitalized $ 191,085 $ 193,533 $ 153,503


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PINNACLE WEST CAPITAL CORPORATIONCONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY


2008 2007 2006

COMMON STOCK (Note 7) Balance at beginning of year $2,135,787 $2,114,550 $2,067,377 Issuance of common stock 10,845 24,089 39,420 Other 4,691 (2,852) 7,753

Balance at end of year 2,151,323 2,135,787 2,114,550

TREASURY STOCK (Note 7) Balance at beginning of year (2,054) (449) (1,245)Purchase of treasury stock (1,387) (1,964) (229)Reissuance of treasury stock used for stock compensation, net 587 359 1,025

Balance at end of year (2,854) (2,054) (449)

RETAINED EARNINGS Balance at beginning of year 1,413,741 1,319,747 1,193,712 Net income 242,125 307,143 327,255 Common stock dividends (211,405) (210,473) (201,220)Cumulative effect of change in accounting for income taxes (Note 4) — (2,676) — Other (253) — —

Balance at end of year 1,444,208 1,413,741 1,319,747

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Balance at beginning of year (15,863) 12,268 165,120 Pension and other postretirement benefits (Note 8):

Unrealized actuarial loss, net of tax benefit of ($7,801) and($13,573) (11,053) (21,976) —

Prior service cost, net of tax benefit of ($495) — (769) — Amortization to income:

Actuarial loss, net of tax expense of $1,578 and $1,670 2,437 2,214 — Prior service cost, net of tax expense of $222 and $252 343 391 — Transition obligation, net of tax expense of $40 and $43 62 67 —

Minimum pension liability adjustment, net of tax expense(benefit) of $28,425 — — 44,086

Adjustment to reflect a change in accounting (SFAS No. 158), net oftax expense of $22,412 — — 33,928

Derivative instruments: Net unrealized gain (loss), net of tax expense (benefit) of ($54,490),

($414) and ($137,606) (83,093) (785) (214,777)Reclassification of net realized gain to income, net of tax benefit of

($24,786), ($4,679) and ($10,308) (39,531) (7,273) (16,089)

Balance at end of year (146,698) (15,863) 12,268

TOTAL COMMON STOCK EQUITY $3,445,979 $3,531,611 $3,446,116

COMPREHENSIVE INCOME Net income $ 242,125 $ 307,143 $ 327,255 Other comprehensive loss (130,835) (28,131) (186,780)

Comprehensive income $ 111,290 $ 279,012 $ 140,475


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PINNACLE WEST CAPITAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Consolidation and Nature of Operations

Pinnacle West’s Consolidated Financial Statements include the accounts of Pinnacle West and our subsidiaries: APS,SunCor, APSES, El Dorado, Pinnacle West Marketing & Trading and Pinnacle West Energy (dissolved as of August 31,2006). Intercompany accounts and transactions between the consolidated companies have been eliminated.

APS is a vertically-integrated electric utility that provides either retail or wholesale electric service to substantially all ofthe state of Arizona, with the major exceptions of about one-half of the Phoenix metropolitan area, the Tucson metropolitanarea and Mohave County in northwestern Arizona. SunCor is a developer of residential, commercial and industrial real estateprojects in Arizona, New Mexico, Idaho and Utah. APSES provides energy-related projects and competitive commodityenergy to commercial and industrial retail customers in competitive markets in the western United States. Recently, APSEShas discontinued its commodity-related energy services (see Note 22). El Dorado is an investment firm. Pinnacle WestMarketing & Trading began operations in early 2007. These operations were previously conducted by a division of PinnacleWest through the end of 2006. By the end of 2008, substantially all the contracts were transferred to APS or expired.

Accounting Records and Use of Estimates

Our accounting records are maintained in accordance with accounting principles generally accepted in the United States ofAmerica (GAAP). The preparation of financial statements in accordance with GAAP requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at thedate of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates.

Derivative Accounting

We are exposed to the impact of market fluctuations in the commodity price and transportation costs of electricity andnatural gas. We manage risks associated with these market fluctuations by utilizing various instruments that qualify asderivatives, including exchange-traded futures and options and over-the-counter forwards, options and swaps. As part of ouroverall risk management program, we use such instruments to hedge purchases and sales of electricity and fuels. The changesin market value of such contracts have a high correlation to price changes in the hedged transactions.

We account for our derivative contracts in accordance with SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities,” as amended. SFAS No. 133 requires that entities recognize all derivatives as either assets or liabilities onthe balance sheet and measure those instruments at fair value. Changes in the fair value of derivative instruments are eitherrecognized periodically in income or, if certain hedge criteria are met, in common stock equity (as a component of othercomprehensive income (loss)). To the extent the amounts that would otherwise be recognized in income are eligible to berecovered through the PSA, the amounts will be recorded as either a regulatory asset or liability and have no effect onearnings. SFAS No. 133 provides a scope

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exception for contracts that meet the normal purchases and sales criteria specified in the standard. Contracts that do not meetthe definition of a derivative are accounted for on an accrual basis with the associated revenues and costs recorded at the timethe contracted commodities are delivered or received.

Under fair value (mark-to-market) accounting, derivative contracts for the purchase or sale of energy commodities arereflected at fair market value, net of valuation adjustments, as current or long-term assets and liabilities from riskmanagement and trading activities on the Consolidated Balance Sheets.

We determine fair value in accordance with SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair valueas the price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageousmarket for the asset or liability in an orderly transaction between willing market participants on the measurement date. Inputsto fair value include observable and unobservable data. We maximize the use of observable inputs and minimize the use ofunobservable inputs when measuring fair value.

We determine fair market value using actively-quoted prices for identical instruments when available. When activelyquoted prices are not available for the identical instruments we use prices for similar instruments or other corroborativemarket information or prices provided by other external sources. Quarterly and calendar year quotes from independentbrokers are converted into monthly prices using historical relationships. We consider broker quotes observable inputs whenthe quote is binding on the broker, we can validate the quote with market transactions, or we can determine that the inputs thebroker used to arrive at the quoted price are observable.

For options, long-term contracts and other contracts for which price quotes are not available, we use unobservable inputs,such as models and other valuation methods, to determine fair market value. The valuation models we employ utilize spotprices, forward prices, historical market data and other factors to forecast future prices. The primary valuation technique weuse to calculate the fair value of contracts where price quotes are not available is based on the extrapolation of forwardpricing curves using observable market data for more liquid delivery points in the same region and actual transactions at themore illiquid delivery points. We also value option contracts using a variation of the Black-Scholes option-pricing model.

For non-exchange traded contracts, we calculate fair market value based on the average of the bid and offer price,discounted to reflect net present value. We maintain certain valuation adjustments for a number of risks associated with thevaluation of future commitments. These include valuation adjustments for liquidity and credit risks based on the financialcondition of counterparties. The liquidity valuation adjustment represents the cost that would be incurred if all unmatchedpositions were closed-out or hedged.

The credit valuation adjustment represents estimated credit losses on our overall exposure to counterparties, taking intoaccount netting arrangements, expected default experience for the credit rating of the counterparties and the overalldiversification of the portfolio. Counterparties in the portfolio consist principally of major energy companies, municipalities,local distribution companies and financial institutions. We maintain credit policies that management believes minimizeoverall credit risk. Determination of the credit quality of counterparties is based upon a number of factors, including creditratings, financial condition, project economics and collateral requirements. When

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applicable, we employ standardized agreements that allow for the netting of positive and negative exposures associated witha single counterparty.

The use of models and other valuation methods to determine fair market value often requires subjective and complexjudgment. Actual results could differ from the results estimated through application of these methods. Our marketing andtrading portfolio includes structured activities hedged with a portfolio of forward purchases that protects the economic valueof the sales transactions. Our practice is to hedge within timeframes established by the ERMC.

See Note 14 for additional information about fair value measurements. See Note 18 for additional information about ourderivative and energy trading accounting policies.

Regulatory Accounting

APS is regulated by the ACC and the FERC. The accompanying financial statements reflect the rate-making policies ofthese commissions. For regulated operations, we prepare our financial statements in accordance with SFAS No. 71,“Accounting for the Effects of Certain Types of Regulation.” SFAS No. 71 requires a cost-based, rate-regulated enterprise toreflect the impact of regulatory decisions in its financial statements. As a result, we capitalize certain costs that would beincluded as expense in the current period by unregulated companies. Regulatory assets represent incurred costs that havebeen deferred because they are probable of future recovery in customer rates. Regulatory liabilities generally representexpected future costs that have already been collected from customers.

Management continually assesses whether our regulatory assets are probable of future recovery by considering factorssuch as applicable regulatory environment changes and recent rate orders to other regulated entities in the same jurisdiction.This determination reflects the current political and regulatory climate in the state and is subject to change in the future. Iffuture recovery of costs ceases to be probable, the assets would be written off as a charge in current period earnings.

A component of our regulatory assets is the retail fuel and power costs deferred under the PSA. APS defers for future raterecovery or refund 90% of the difference between actual retail fuel and purchased power costs and the amount of such costscurrently included in base rates, subject to specified parameters. (See Note 3).

Also included in the balance of regulatory assets at December 31, 2008 is a regulatory asset for pension and otherpostretirement benefits in accordance with SFAS No. 158. This regulatory asset represents the future recovery of these coststhrough retail rates as these amounts are charged to earnings. If these costs are disallowed by the ACC, this regulatory assetwould be charged to OCI and result in lower future earnings.

The detail of regulatory assets is as follows (dollars in millions):

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December 31,

2008 2007

Pension and other postretirement benefits $ 473 $ 338 Deferred fuel and purchased power – mark-to-market 118 7 Regulatory asset for deferred income taxes 51 40 Deferred compensation 30 30 Transmission vegetation management 20 6 Demand side management 17 3 Coal reclamation 17 18 Competition rules compliance charge (a) 16 25 Loss on reacquired debt 16 16 Deferred fuel and purchased power (a) (Note 3) 8 111 Other 29 31

Total regulatory assets (b) $ 795 $ 625

(a) Subject to a carrying charge.

(b) There are no regulatory assets for which regulators have allowed recovery of costs but not allowed a return by exclusionfrom rate base.

The detail of regulatory liabilities is as follows (dollars in millions): December 31,

2008 2007

Removal costs (a) $ 388 $ 392 Regulatory liability related to asset retirement obligations 103 153 Tax benefit of Medicare subsidy 16 35 Deferred gains on utility property 20 20 Spent nuclear fuel 22 11 Renewable energy standard 22 10 Deferred interest income (b) 8 13 Other 9 9

Total regulatory liabilities $ 588 $ 643

(a) In accordance with SFAS No. 71, APS accrues for removal costs for its regulated assets, even if there is no legalobligation for removal.

(b) Subject to a carrying charge.

Utility Plant and Depreciation

Utility plant is the term we use to describe the business property and equipment that supports electric service, consistingprimarily of generation, transmission and distribution facilities. We report utility plant at its original cost, which includes:

• material and labor;

• contractor costs;

• capitalized leases;

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• construction overhead costs (where applicable); and

• capitalized interest or an allowance for funds used during construction.

We expense the costs of plant outages, major maintenance and routine maintenance as incurred. We charge retired utilityplant to accumulated depreciation. Liabilities associated with the retirement of tangible long-lived assets are recognized atfair value as incurred and capitalized as part of the related tangible long-lived assets. Accretion of the liability due to thepassage of time is an operating expense and the capitalized cost is depreciated over the useful life of the long-lived asset. SeeNote 12.

APS records a regulatory liability for the asset retirement obligations related to its regulated assets. This regulatoryliability represents the difference between the amount that has been recovered in regulated rates and the amount calculatedunder SFAS No. 143 “Accounting for Asset Retirement Obligations,” as interpreted by FIN 47. APS believes it can recoverin regulated rates the costs calculated in accordance with SFAS No. 143.

We record depreciation on utility plant on a straight-line basis over the remaining useful life of the related assets. Theapproximate remaining average useful lives of our utility property at December 31, 2008 were as follows:

• Fossil plant – 16 years;

• Nuclear plant – 18 years;

• Other generation – 31 years;

• Transmission – 42 years;

• Distribution – 33 years; and

• Other – 7 years.

For the years 2006 through 2008, the depreciation rates ranged from a low of 1.11% to a high of 12.46%. The weighted-average rate was 3.08% for 2008, 3.11% for 2007 and 3.14 % for 2006. We depreciate non-utility property and equipmentover the estimated useful lives of the related assets, ranging from 3 to 34 years.

Investments

El Dorado accounts for its investments using either the equity method (if significant influence) or the cost method (if lessthan 20% ownership).

Our investments in the nuclear decommissioning trust fund are accounted for in accordance with SFAS No. 115,“Accounting for Certain Investments in Debt and Equity Securities.” See Note 12 for more information on these investments.

Capitalized Interest

Capitalized interest represents the cost of debt funds used to finance non-regulated construction projects. The rate used tocalculate capitalized interest was a composite rate of 5.2% for 2008, 5.8% for 2007 and 6.8% for 2006. Capitalized interestceases when construction is complete.

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Allowance for Funds Used During Construction

AFUDC represents the approximate net composite interest cost of borrowed funds and an allowed return on the equityfunds used for construction of regulated utility plant. APS’ allowance for borrowed funds is included in capitalized interest onthe Consolidated Financial Statements. Plant construction costs, including AFUDC, are recovered in authorized rates throughdepreciation when completed projects are placed into commercial operation.

AFUDC was calculated by using a composite rate of 7.0% for 2008, 8.2% for 2007 and 8.0% for 2006. APS compoundsAFUDC monthly and ceases to accrue AFUDC when construction work is completed and the property is placed in service.

Electric Revenues

We derive electric revenues from sales of electricity to our regulated Native Load customers and sales to other partiesfrom our marketing and trading activities. Revenues related to the sale of electricity are generally recorded when service isrendered or electricity is delivered to customers. The billing of electricity sales to individual Native Load customers is basedon the reading of their meters, which occurs on a systematic basis throughout the month. Unbilled revenues are estimated byapplying an average revenue/kWh to the number of estimated kWhs delivered but not billed. Differences historically betweenthe actual and estimated unbilled revenues are immaterial. We exclude sales taxes and franchise fees on electric revenuesfrom both revenue and taxes other than income taxes.

Revenues from our Native Load customers and non-derivative instruments are reported on a gross basis on PinnacleWest’s Consolidated Statements of Income. In the electricity business, some contracts to purchase energy are netted againstother contracts to sell energy. This is called a “book-out” and usually occurs for contracts that have the same terms (quantitiesand delivery points) and for which power does not flow. We net these book-outs, which reduces both revenues and purchasedpower and fuel costs.

All gains and losses (realized and unrealized) on energy trading contracts that qualify as derivatives are included inmarketing and trading revenues on the Consolidated Statements of Income on a net basis.

Real Estate Revenues

SunCor recognizes revenue from land, home and qualifying commercial operating assets sales in full, provided (a) theincome is determinable, that is, the collectibility of the sales price is reasonably assured or the amount that will not becollectible can be estimated, and (b) the earnings process is virtually complete, that is, SunCor is not obligated to performsignificant activities after the sale to earn the income. Unless both conditions exist, recognition of all or part of the income ispostponed under the percentage of completion method per SFAS No. 66, “Accounting for Sales of Real Estate.” SunCorrecognizes income only after the asset title has passed. Commercial property and management revenues are recorded over theterm of the lease or period in which services are provided. In addition, see Note 22 – Discontinued Operations.

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Real Estate Investments

Real estate investments primarily include SunCor’s land, home inventory, commercial property and investments in jointventures. Land includes acquisition costs, infrastructure costs, capitalized interest and property taxes directly associated withthe acquisition and development of each project. Home inventory consists of construction costs, improved lot costs,capitalized interest and property taxes on homes and condos under construction. Homes under construction are classified as“real estate investments” on the Consolidated Balance Sheets; upon completion of construction they are transferred to “homeinventory” with the expectation that they will be sold in a timely manner.

For the purposes of evaluating impairment in accordance with the provisions of SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets,” we classify our real estate assets, including land under development, landheld for future development, and commercial property as “held and used.” When events or changes in circumstances indicatethat the carrying values of real estate assets considered held and used may not be recoverable, we compare the undiscountedcash flows that we estimate will be generated by each asset to its carrying amount. If the carrying amount exceeds theundiscounted cash flows, we adjust the asset to fair value and recognize an impairment charge. The adjusted value becomesthe new book value (carrying amount) for held and used assets.

Real estate home inventory is considered to be held for sale for purposes of evaluating impairment in accordance with theprovisions of SFAS No. 144. Home inventories are reported at the lower of carrying amount or fair value less costs to sell.Fair value less costs to sell is evaluated each period to determine if it has changed. Losses (and gains not to exceed anycumulative loss previously recognized) are reported as adjustments to the carrying amount.

Investments in joint ventures for which SunCor does not have a controlling financial interest are not consolidated, but areaccounted for using the equity method of accounting. In addition, see Note 22 – Discontinued Operations and Note 23 – RealEstate Impairment Charge.

Cash and Cash Equivalents

We consider all highly liquid investments with a maturity of three months or less at acquisition to be cash equivalents.

Nuclear Fuel

APS amortizes nuclear fuel by using the unit-of-production method. The unit-of-production method is based on actualphysical usage. APS divides the cost of the fuel by the estimated number of thermal units it expects to produce with that fuel.APS then multiplies that rate by the number of thermal units produced within the current period. This calculation determinesthe current period nuclear fuel expense.

APS also charges nuclear fuel expense for the interim storage and permanent disposal of spent nuclear fuel. The DOE isresponsible for the permanent disposal of spent nuclear fuel and charges APS $0.001 per kWh of nuclear generation. SeeNote 11 for information on spent nuclear fuel disposal and Note 12 for information on nuclear decommissioning costs.

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Income Taxes

Income taxes are provided using the asset and liability approach prescribed by SFAS No. 109, “Accounting for IncomeTaxes” and FIN 48, “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109.” We fileour federal income tax return on a consolidated basis and we file our state income tax returns on a consolidated or unitarybasis. In accordance with our intercompany tax sharing agreement, federal and state income taxes are allocated to eachfirst-tier subsidiary as though each first-tier subsidiary filed a separate income tax return. Any difference between that methodand the consolidated (and unitary) income tax liability is attributed to the parent company. The income tax liability accountsreflect the tax and interest associated with management’s estimate of the largest amount of tax benefit that is greater than 50%likely of being realized upon settlement for all known and measurable tax exposures. See Note 4.

Intangible Assets

We have no goodwill recorded and have separately disclosed other intangible assets, primarily APS’ software, on PinnacleWest’s Consolidated Balance Sheets in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” Theintangible assets are amortized over their finite useful lives. Amortization expense was $33 million in 2008, $37 million in2007 and $39 million in 2006. Estimated amortization expense on existing intangible assets over the next five years is $29million in 2009, $27 million in 2010, $21 million in 2011, $18 million in 2012 and $13 million in 2013. At December 31,2008, the weighted average remaining amortization period for intangible assets was 8 years.

2. New Accounting Standards

See Note 14 for a discussion of SFAS No. 157, “Fair Value Measurements,” which we adopted effective January 1, 2008,and the following related accounting guidance:

• FASB Staff Position, No. 157-2, “Effective Date of FASB Statement No. 157”

• FASB Staff Position, No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset IsNot Active”

See Notes 18 and S-3 for discussions of FASB Staff Position No. FIN 39-1, “Amendment of FASB Interpretation No. 39,Offsetting of Amounts Related to Certain Contracts” (FIN 39-1), which we adopted January 1, 2008.

SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” was effective for us on January 1,2008. This guidance provides companies with an option to report selected financial assets and liabilities at fair value. We didnot elect the fair value option for any of our financial assets or liabilities. Therefore, SFAS No. 159 did not have an impact onour financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” Thisguidance requires enhanced disclosures about derivative instruments and hedging activities. The Statement is effective for uson January 1, 2009. It did not have a material impact on our financial statements.

In December 2008, the FASB issued FASB Staff Position No. 132(R)-1, “Employers’ Disclosures about PostretirementBenefit Plan Assets.” This guidance requires enhanced employer’s disclosures about plan assets of a defined benefit pensionor other postretirement plan. The guidance

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is effective for us on December 31, 2009. We do not expect it to have a material impact on our financial statements.

See Note 4 for a discussion of FIN 48 on accounting for uncertainty in income taxes, which was adopted January 1, 2007.

3. Regulatory Matters

2008 General Rate Case

APS Request – On June 2, 2008, APS filed with the ACC updated financial statements, testimony and other data in thegeneral rate case originally filed on March 24, 2008. As requested by the ACC staff, the updated information reflects a testyear ended December 31, 2007, rather than the September 30, 2007 test year used in APS’ original filing. As a result of theupdated filing, APS is requesting a net retail rate increase of $278.2 million effective no later than October 1, 2009, whichrepresents a base rate increase of $448.2 million less the reclassification of $170 million of fuel and purchased powerrevenues from the existing PSA to base rates. As proposed by APS, the updated request would result in an average rateincrease of 8.5% for existing customers plus the establishment of a new growth-related impact fee to be charged to newconnections.

The key financial provisions of the updated request include:

• an increase of $264.3 million in non-fuel base rates and a net increase of $13.9 million for fuel and purchased powercosts reflected in base rates, and recovery of up to $53 million of such increases through the impact fee;

• a rate base of $5.4 billion, which approximates the ACC-jurisdictional portion of the book value of utility assets, netof accumulated depreciation and other credits, as of December 31, 2007, which includes certain adjustments, such asthe inclusion of Units 5 and 6 of the Yucca Power Plant (near Yuma in southwestern Arizona), the steam generatorreplacement at Palo Verde Unit 3, environmental upgrades to APS coal plants, and other plant additions underconstruction at the end of the test year that are currently in service or expected to go into service before the proposedrates are requested to become effective;

• the following proposed capital structure and costs of capital: Capital Structure Cost of Capital

Long-term debt 46.2% 5.77%Common stock equity 53.8% 11.50%Weighted-average cost of capital 8.86%

• a Base Fuel Rate of $0.0388 per kWh based on estimated 2010 prices (compared to the current Base Fuel Rate of$0.0325 per kWh);

• an attrition adjustment of $79.3 million to address erosion in APS’ earnings and return on equity through 2010; and

• a new super-peak residential time-of-use rate and a commercial and industrial critical peak pricing proposal to alloweligible customers additional options to manage their electric bills, as well as other conservation-related rate designproposals.

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The update also requests that the ACC adopt certain goals for APS to improve its financial strength, which include:allowing APS’ internal cash flow generation to cover its operating and capital costs of providing service; stabilizing andimproving APS’ credit ratings; and providing a meaningful and ongoing opportunity for APS to achieve a reasonable returnon the fair value of its property.

In addition, APS requested various modifications to the Environmental Improvement Surcharge and the Demand SideManagement Adjustment Clause that would allow APS to expand its conservation and demand-side management programsand support environmental upgrades to APS facilities in response to and in anticipation of future environmental requirements.

Interim Rate Surcharge – On December 18, 2008, the ACC approved an emergency interim base rate surcharge for APS.This surcharge became effective for retail customer bills issued after December 31, 2008 and will continue in effect until adecision in the general rate case becomes effective. This surcharge is expected to increase annual pretax retail revenuesapproximately $65.2 million, and is subject to refund with interest pending the final outcome of APS’ general retail rate case.In June 2008, APS had requested an interim increase of approximately $115 million in annual pretax retail revenues.

The decision requires that APS (a) examine its operations and expenses, targeting additional cuts of at least $20 million,report the results of its study to the ACC no later than March 18, 2009, and reinvest the savings and surcharge revenues “ininfrastructure and technology necessary to serve APS customers and reduce the need for external debt financing”; (b) filewith the ACC periodic reports of communications with credit ratings agencies; and (c) post a $10 million bond or letter ofcredit until the ACC issues a final order in APS’ general retail rate case.

ACC Staff Rate Case Recommendation – On December 19, 2008, the ACC staff and other intervenors filed their initialwritten testimony with the ACC in the general retail rate case. In its filed testimony, the ACC staff recommends a number ofcost disallowances and test-year adjustments that decrease APS’ base rate request by $141.6 million. The principalcomponents of the revenue increase recommended by the ACC staff are $155.1 million for non-fuel increases and $11.4million for fuel and purchased power costs reflected in base rates (net of the reclassification of $140.1 million of existingPSA revenues to base rates).

In its recommendations, the ACC staff also proposed, among other things:

• A Base Fuel Rate of $0.0377 per kWh;

• A weighted-average cost of capital of 8.58%, based on a return on common equity of 11.0% and APS’ proposedcapital structure;

• A reduction to APS’ proposed rate base of $57 million, the majority of which ($45 million) results from the exclusionof post test-year plant placed into service after December 31, 2008;

• Exempting low income customers from any rate increase;

• That APS engage in a dialogue with the ACC concerning opportunities to expand the use of renewable energy beyondcurrent ACC mandated requirements; and

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• That APS should propose in its rebuttal testimony a means to provide customers with greater rate stability, such as theuse of a three-year interval between base rate filings.

The ACC staff also recommended that the ACC reject the following APS proposals:

• The $79.3 million attrition adjustment; and

• Modifications to APS’ line extension policy that would have resulted in the establishment of the growth-relatedimpact fee referenced above.

Other Intervenors’ Recommendations – Other intervenors in the rate case include the Arizona Residential UtilityConsumer Office (“RUCO”), an office established by the Arizona legislature to represent the interests of residential utilityconsumers before the ACC; and Arizonans for Electric Choice and Competition (“AECC”), a coalition that advocates onbehalf of commercial and industrial utility customers. These other intervenors’ testimony includes the followingrecommendations:

• RUCO recommends no net rate change after reclassification of $170.0 million of PSA revenues to base rates, basedon a rate base of $4.9 billion, a base fuel rate of $0.0388 per kWh, APS’ proposed capital structure, and a return oncommon equity of 9.6%.

• AECC recommends that APS’ request be reduced by $101.4 million (of which $42.5 million was a reduction in fueland purchased power expense).

Settlement Discussions and Procedural Schedule – On January 30, 2009, APS began settlement discussions with theparties to the general rate case. An ACC ALJ has issued a procedural order staying the procedural schedule in the rate casefor thirty days to allow the parties to participate in settlement discussions. While it is in effect, the stay vacates previouslyestablished dates for testimony filings and the discovery process. Additional stays may be requested by the parties, dependingon the settlement discussions. Hearings in the rate case were previously scheduled to begin on April 2, 2009.

2007 Retail Rate Order

In June 2007, the ACC issued an order in a general retail rate case that APS filed in late 2005. The order approved a$322 million increase in APS’ annual retail base revenues, effective July 1, 2007, which included a $315 million fuel-relatedincrease and a $7 million non-fuel related increase. The order also authorized APS’ recovery of approximately $34 million of2005 PSA deferrals through a temporary PSA surcharge over a twelve-month period beginning July 1, 2007, disallowedapproximately $14 million in 2007 of 2005 PSA deferrals because it found the Palo Verde outage costs giving rise to thoseamounts resulted from APS’ imprudence, modified the PSA in various respects and increased the Base Fuel Rate. In addition,the order provided that the 2007 PSA adjustor, which took effect on February 1, 2007 and that was scheduled to expire onJanuary 31, 2008, remain in effect as long as necessary to allow APS to collect $46 million of PSA deferrals resulting fromthe mid-2007 implementation of the new Base Fuel Rate. The 2007 PSA adjustor expired as of the last billing cycle inJuly 2008.

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PSA Mechanism

The PSA, which the ACC initially approved in 2005 as a part of APS’ 2003 rate case, and which was modified by theACC in 2007, provides for the adjustment of retail rates to reflect variations in retail fuel and purchased power costs. ThePSA is subject to specified parameters and procedures, including the following:

• APS records deferrals for recovery or refund to the extent actual retail fuel and purchased power costs vary from theBase Fuel Rate;

• under a 90/10 sharing arrangement, APS defers 90% of the difference between retail fuel and purchased power costs(excluding certain costs, such as renewable energy resources and the capacity components of long-term purchasepower agreements acquired through competitive procurement) and the Base Fuel Rate; APS absorbs 10% of the retailfuel and purchased power costs above the Base Fuel Rate and retains 10% of the benefit from the retail fuel andpurchased power costs that are below the Base Fuel Rate;

• an adjustment is made annually each February 1st and goes into effect automatically unless suspended by the ACC;

• the PSA uses a forward-looking estimate of fuel and purchased power costs to set the annual PSA rate, which will bereconciled to actual costs experienced for each PSA Year (February 1 through January 31) (see the following bulletpoint); and

• the PSA rate includes (a) a “Forward Component,” under which APS recovers or refunds differences betweenexpected fuel and purchased power costs for the upcoming calendar year and those embedded in the Base Fuel Rate;(b) an “Historical Component,” under which differences between actual fuel and purchased power costs and thoserecovered through the combination of the Base Fuel Rate and the Forward Component are recovered during the nextPSA Year; and (c) a “Transition Component,” under which APS may seek mid-year PSA changes due to largevariances between actual fuel and purchased power costs and the combination of the Base Fuel Rate and the ForwardComponent.

PSA Balance

The following table shows the changes in the deferred fuel and purchased power regulatory asset for the year endedDecember 31, 2008 and 2007 (dollars in millions):

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Year Ended

December 31,

2008 2007

Beginning balance $ 111 $ 160 Deferred fuel and purchased power costs-current period 78 189 Regulatory disallowance — (14)Interest on deferred fuel and purchased power 2 7 Amounts recovered through revenues (183) (231)

Ending balance $ 8 $ 111

The PSA annual adjustor rate is reset for a “PSA Year” effective for a twelve-month period beginning February 1 eachyear. The PSA rate for the PSA Year that began February 1, 2008 was set at $0.004 per kWh. The PSA rate for the PSA yearthat began February 1, 2009 was set at $0.0053 per kWh. The PSA rate may not be increased more than $0.004 per kWh in ayear without permission of the ACC. Any uncollected deferrals during the 2009 PSA Year resulting from this limit will beincluded in the historical component of the PSA rate for the PSA Year beginning February 1, 2010.

Formula Transmission Tariff

In July 2008, the FERC approved an Open Access Transmission Tariff for APS to move from fixed rates to a formularate-setting methodology in order to more accurately reflect the costs that APS incurs in providing transmission services. Theformula rate is updated each year effective June 1 on the basis of APS’ actual cost of service, as disclosed in APS’ FERCForm 1 report for the previous fiscal year, and projected capital expenditures. A large portion of the rate represents chargesfor transmission services to serve APS’ retail customers (“Retail Transmission Charges”). In order to recover the RetailTransmission Charges, APS must file an application with the ACC under the transmission cost adjustor (“TCA”) mechanism,by which changes in Retail Transmission Charges can be reflected in APS’ retail rates.

In 2008, APS was authorized to implement increases in its annual transmission revenues based on calculations filed withthe FERC using data for its 2006 and 2007 fiscal years. Increases in APS’ annual transmission revenues of $28 millionbecame effective March 1, 2008 and $15 million became effective June 1, 2008. The ACC allowed APS to reflect the relatedincreased Retail Transmission Charges in its retail rates through the TCA resulting in increases of annual retail revenues of$27 million effective March 1, 2008 and $13 million effective July 3, 2008.

Equity Infusion Approval

On May 2, 2008, Pinnacle West filed a notice with the ACC that would allow Pinnacle West to infuse up to $400 millionof equity into APS in the event Pinnacle West deems it appropriate to do so to strengthen or maintain APS’ financial integrity.Under Arizona law and implementing regulatory decisions, Pinnacle West is required to give such notice at least 120 daysprior to an equity infusion into APS that exceeds $150 million in a single calendar year. On August 6, 2008, the ACC issuedan order permitting the infusion to occur on or before December 31, 2009.

On November 8, 2005, the ACC approved Pinnacle West’s request to infuse more than $450 million of equity into APSduring 2005 or 2006. These infusions consisted of about $250 million of the proceeds of Pinnacle West’s common equityissuance on May 2, 2005 and about $210 million of the proceeds from the sale of Silverhawk in January 2006. In May 2007,Pinnacle West infused

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approximately $40 million of equity into APS, consisting of proceeds of stock issuances in 2006 under Pinnacle West’sInvestors Advantage Plan (direct stock purchase and dividend reinvestment plan) and employee stock plans.

Federal

FERC Order

On August 11, 2004, Pinnacle West, APS, Pinnacle West Energy, and APSES (collectively, the “Pinnacle WestCompanies”) submitted to the FERC an update to their three-year market-based rate review pursuant to the FERC’s orderimplementing a new generation market power analysis. On December 20, 2004, the FERC issued an order approving thePinnacle West Companies’ market-based rates for control areas other than those of APS, Public Service Company of NewMexico (“PNM”) and Tucson Electric Power Company (“TEP”). The FERC staff required the Pinnacle West Companies tosubmit additional data with respect to these control areas, and the Pinnacle West Companies did so.

On April 17, 2006, the FERC issued an order revoking the Pinnacle West Companies’ authority to make sales atmarket-based rates in the APS control area (the “April 17 Order”). The FERC found that the Pinnacle West Companies failedto provide the necessary information about the calculation of transmission imports into the APS control area to allow theFERC to make a determination regarding FERC’s generation market power “screens” in the APS control area. The FERCfound that the Pinnacle West Companies may charge market-based rates in the PNM and TEP control areas.

On August 13, 2007, the FERC issued an order on rehearing, reinstating the authority of the Pinnacle West Companies tomake sales at market-based rates in all seasons for sales outside of the Phoenix Valley, and in all seasons except the summerfor sales within the Phoenix Valley. The Pinnacle West Companies submitted a compliance filing implementing this order tothe FERC on October 12, 2007. This compliance filing was accepted conditionally by the FERC in an order issuedJanuary 17, 2008. In compliance with the January 17, 2008 order, the Pinnacle West Companies filed a revised mitigationplan to implement cost-based rates for sales in the Phoenix Valley during the summer months. On May 30, 2008, the FERCissued a letter order accepting our mitigation plan. The first summer period under this cost-based mitigation began on June 1,2008. This proceeding is now concluded.

4. Income Taxes

Certain assets and liabilities are reported differently for income tax purposes than they are for financial statementspurposes. The tax effect of these differences is recorded as deferred taxes. We calculate deferred taxes using the currentincome tax rates.

APS has recorded a regulatory asset and a regulatory liability related to income taxes on its Balance Sheets in accordancewith SFAS No. 71. The regulatory asset is for certain temporary differences, primarily the allowance for equity funds usedduring construction. The regulatory liability relates to deferred taxes resulting primarily from pension and otherpostretirement benefits. APS amortizes these amounts as the differences reverse.

As a result of a change in IRS guidance, we claimed a tax deduction related to an APS tax accounting method change onour 2001 federal consolidated income tax return. The accelerated deduction resulted in a $200 million reduction in the currentincome tax liability and a corresponding increase in the plant-related deferred tax liability. Our 2001 federal consolidatedincome tax return was the subject of an IRS review and the IRS finalized its examination in the second quarter of 2008,

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which included a settlement on the tax accounting method change and favorable resolution of other various tax matters. As aresult of this settlement and the lapse of federal statutes prior to 2005, we recognized net income tax benefits ofapproximately $30 million, including approximately $23 million related to interest.

We adopted FIN 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109,” onJanuary 1, 2007. The effect of applying the new guidance was not significantly different in terms of tax impacts from theapplication of our previous policy. Accordingly, the impact to retained earnings upon adoption was immaterial. In addition,the guidance required us to reclassify certain tax benefits, which had the effect of increasing accrued taxes and deferred debitsby approximately $50 million to better reflect the expected timing of the payment of taxes and interest. The following is atabular reconciliation of the total amounts of unrecognized tax benefits, excluding interest and penalties, at the beginning andend of the period that are included in accrued taxes and other deferred credits on the Consolidated Balance Sheets (dollars inthousands): 2008 2007

Total unrecognized tax benefits, January 1 $157,869 $132,691 Additions for tax positions of the current year 12,923 — Additions for tax positions of prior years 32,510 65,022 Reductions for tax positions of prior years for:

Changes in judgment (4,454) (37,419)Settlements with taxing authorities (35,812) (2,425)Lapses of applicable statute of limitations (99,718) —

Total unrecognized tax benefits, December 31 $ 63,318 $157,869

Included in the balance of unrecognized tax benefits at December 31, 2008 and 2007 were approximately $16 million and$5 million, respectively, of tax positions that, if recognized, would decrease our effective tax rate.

We reflect interest and penalties, if any, on unrecognized tax benefits in the consolidated statement of income as incometax expense. The amount of interest recognized in the consolidated statement of income related to unrecognized tax benefitswas a pre-tax benefit of $51 million for 2008 and pre-tax expense of $3 million for 2007.

The total amount of accrued liabilities for interest recognized in the consolidated balance sheets related to unrecognizedtax benefits as of December 31, 2008 and 2007 was $6 million and $57 million, respectively. To the extent that matters aresettled favorably, this amount could reverse and decrease our effective tax rate. Additionally, as of December 31, 2008, wehave recognized $1 million of interest expense to be paid on the underpayment of income taxes for certain adjustments thatwe have filed, or will file, with the IRS.

The tax year ended December 31, 2005 and all subsequent tax years remain subject to examination by the IRS. With fewexceptions, we are no longer subject to state income tax examinations by tax authorities for years before 1999. We do notanticipate that there will be any significant increases or decreases in our unrecognized tax benefits within the next 12 months.

The components of income tax expense are as follows (dollars in thousands):

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Year Ended December 31,

2008 2007 2006

Current: Federal $ (85,866) $183,547 $110,029 State 11,738 30,972 21,507

Total current (74,128) 214,519 131,536

Deferred: Income from continuing operations 158,024 (56,147) 31,452 Discontinued operations — (1,880) —

Total deferred 158,024 (58,027) 31,452

Total income tax expense 83,896 156,492 162,988 Less: income tax expense (benefit) on discontinued operations 18,489 5,582 7,133

Income tax expense – continuing operations $ 65,407 $150,910 $155,855

The following chart compares pretax income from continuing operations at the 35% federal income tax rate to income taxexpense – continuing operations (dollars in thousands): Year Ended December 31,

2008 2007 2006

Federal income tax expense at 35% statutory rate $ 97,637 $157,379 $165,242 Increases (reductions) in tax expense resulting from:

State income tax net of federal income tax benefit 9,601 16,801 17,250 Credits and favorable adjustments related to prior years resolved in

current year (28,873) (13,205) (14,028)Medicare Subsidy Part-D (1,993) (3,236) (3,156)Allowance for equity funds used during construction (see Note 1) (5,755) (6,899) (4,679)Other (5,210) 70 (4,774)

Income tax expense – continuing operations $ 65,407 $150,910 $155,855

The following table shows the net deferred income tax liability recognized on the Consolidated Balance Sheets (dollars inthousands): December 31,

2008 2007

Current asset $ 79,729 $ 31,510 Long-term liability (1,403,318) (1,243,743)

Accumulated deferred income taxes – net $(1,323,589) $(1,212,233)

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The components of the net deferred income tax liability were as follows (dollars in thousands): December 31,

2008 2007

DEFERRED TAX ASSETS Risk management and trading activities $ 132,383 $ 13,958 Regulatory liabilities:

Asset retirement obligation 194,326 214,607 Federal excess deferred income taxes 9,428 11,091 Tax benefit of Medicare subsidy 4,197 11,727 Other 9,789 26,579

Pension and other postretirement liabilities 281,053 211,192 Deferred gain on Palo Verde Unit 2 sale leaseback 12,665 14,408 Other 92,251 112,209

Total deferred tax assets 736,092 615,771

DEFERRED TAX LIABILITIES Plant-related (1,709,872) (1,538,183)Risk management and trading activities (20,732) (29,531)Regulatory assets:

Deferred fuel and purchased power (3,157) (43,661)Deferred fuel and purchased power – mark-to-market (46,593) (2,782)Pension and other postretirement benefits (186,916) (133,120)

Other (92,411) (80,727)

Total deferred tax liabilities (2,059,681) (1,828,004)


5. Lines of Credit and Short-Term Borrowings

Pinnacle West had a committed line of credit with various banks totaling $300 million at December 31, 2008 andDecember 31, 2007 due to terminate in December 2010. Credit commitments totaling approximately $17 million fromLehman Brothers are no longer available due to its September 2008 bankruptcy filing. The remaining $283 million revolveris available to support the issuance of up to $250 million in commercial paper or to be used as bank borrowings, includingissuances of letters of credit of up to $94 million. At December 31, 2008 Pinnacle West had $144 million of borrowingsunder its revolving credit facility and approximately $7 million of letters of credit. Pinnacle West had no commercial paperoutstanding at December 31, 2008. In general, the Company and APS have been unable to access the commercial papermarkets since September 2008. Pinnacle West had remaining capacity available under its revolver of approximately$132 million and had cash and investments of approximately $6 million. At December 31, 2007, Pinnacle West had noborrowings under the line of credit and approximately $5 million of letters of credit and commercial paper borrowings of$115 million. The commitment fees were 0.15 % in 2008 and 2007. The weighted average interest rates were 2.713% atDecember 31, 2008 and 5.73% at December 31, 2007. All Pinnacle West and APS bank lines of credit and commercial paperagreements are unsecured.

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APS had two committed revolving credit facilities totaling $900 million at December 31, 2008 and December 31, 2007, ofwhich $400 million terminates in December 2010 and $500 million terminates in September 2011. Credit commitmentstotaling about $34 million from Lehman Brothers are no longer available due to its September 2008 bankruptcy filing. Theremaining $866 million is available either to support the issuance of up to $250 million in commercial paper or to be used forbank borrowings, including issuances of letters of credit of up to $583 million. At December 31, 2008, APS had borrowingsof approximately $522 million and no letters of credit under its revolving lines of credit. APS had no commercial paperoutstanding as of December 31, 2008. In general, the Company and APS have been unable to access the commercial papermarkets since September 2008. At December 31, 2008, APS had remaining capacity available under its revolvers of$344 million and had cash and investments of approximately $72 million. At December 31, 2007, APS had borrowings of$218 million under its $500 million line of credit and $4 million of letters of credit issued under its $400 million line ofcredit. APS had no commercial paper outstanding at December 31, 2007. The commitment fees for the $500 million line ofcredit were 0.10% at December 31, 2008 and December 31, 2007. The commitment fees for the $400 million line of creditwere 0.11% at December 31, 2008 and December 31, 2007. The weighted average interest rates were 2.09% at December 31,2008 and 5.36% at December 31, 2007.

Although provisions in APS’ articles of incorporation and ACC financing orders establish maximum amounts of preferredstock and debt that APS may issue, APS does not expect any of these provisions to limit its ability to meet its capitalrequirements. On October 30, 2007, the ACC issued a financing order in which it approved APS’ request, subject to specifiedparameters and procedures, to increase (a) APS’ short-term debt authorization from 7% of APS’ capitalization to (i) 7% ofAPS’ capitalization plus (ii) $500 million (which is required to be used for purchases of natural gas and power) and (b) APS’long-term debt authorization from approximately $3.2 billion to $4.2 billion in light of the projected growth of APS and itscustomer base and the resulting projected financing needs. This financing order expires December 31, 2012; however, alldebt previously authorized and outstanding on December 31, 2012 will remain authorized and valid obligations of APS.

SunCor had two revolving lines of credit totaling $170 million at December 31, 2008, and December 31, 2007. The$150 million credit facility is secured and matures January 30, 2010 and the $20 million unsecured loan facility maturedJanuary 31, 2009. See Note 6 for additional information on the secured credit facility. The unsecured loan facility includesapproximately $5 million in borrowings. SunCor is currently in the process of renegotiating this facility and, if unable to doso, will repay the amounts outstanding. At December 31, 2008 and December 31, 2007 Suncor had borrowings of$120 million and $85 million under the $150 million credit facility. At December 31, 2008 and December 31, 2007 Suncorhad borrowings of $5 million and $9 million under the $20 million credit facility. The commitment fees ranged from 0.125%to 0.250% in 2008 and were 0.125% in 2007 for the $150 million line of credit. The commitment fees for the $20 million lineof credit were 0.50% in 2008 and 2007. The weighted-average interest rate was 4.11% at December 31, 2008 and 7.27% atDecember 31, 2007. Interest was based on LIBOR plus 2.0% for 2008 and 2007. SunCor had other short-term borrowings of$5 million at December 31, 2008 and $8 million at December 31, 2007. These loans are made up of multiple notes primarilywith variable interest rates based on LIBOR plus 2.5% at December 31, 2008 and 2007.

6. Long-Term Debt and Liquidity Matters

Substantially all of APS’ debt is unsecured. SunCor’s short and long-term debt is collateralized by interests in certain realproperty and Pinnacle West’s debt is unsecured. The following table presents the components of long-term debt on theConsolidated Balance Sheets outstanding at December 31, 2008 and 2007 (dollars in thousands):

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December 31, Maturity Interest

Dates (a) Rates 2008 2007

APS Pollution control bonds 2024-2034 (b) $ 539,145 $ 565,855 Pollution control bonds with senior notes 2029 5.05% 90,000 90,000 Unsecured notes 2011 6.375% 400,000 400,000 Unsecured notes 2012 6.50% 375,000 375,000 Unsecured notes 2033 5.625% 200,000 200,000 Unsecured notes 2015 4.650% 300,000 300,000 Unsecured notes 2014 5.80% 300,000 300,000 Unsecured notes 2035 5.50% 250,000 250,000 Unsecured notes 2016 6.25% 250,000 250,000 Unsecured notes 2036 6.875% 150,000 150,000 Secured note 2014 6.00% 1,258 1,430 Unamortized discount and premium (7,908) (8,883)Capitalized lease obligations 2009-2012 (c) 3,621 4,457

Subtotal (d) 2,851,116 2,877,859

SUNCOR Notes payable 2009-2013 (e) 182,804 237,671 Capitalized lease obligations 2009-2012 (f) 329 368

Subtotal 183,133 238,039

PINNACLE WEST Senior notes 2011 5.91% 175,000 175,000

Total long-term debt 3,209,249 3,290,898 Less current maturities 177,646 163,773

TOTAL LONG-TERM DEBT LESS CURRENTMATURITIES $3,031,603 $3,127,125

(a) This schedule does not reflect the timing of redemptions that may occur prior to maturity.

(b) The weighted-average rate was 8.3% at December 31, 2008 and 3.76% at December 31, 2007. Changes in short-terminterest rates would affect the costs associated with this debt. In addition, these amounts include $343 million of auctionrate debt securities backed by insurance at December 31, 2008 and 2007. On September 11, 2008, APS repurchased atpar two series of pollution control bonds that had no credit enhancements. The repurchase included $7 million of its1996 Series A Coconino County Pollution Control Bonds and $20 million of its 1999 Series A Coconino CountyPollution Control Bonds. APS borrowed funds under its revolving lines of credit to re-purchase the bonds, as permittedunder the bond indenture. APS intends to keep the $27 million outstanding until we complete our planned refunding andreissuance of these bonds, if market and business conditions allow, in 2009.

(c) The weighted-average interest rate was 5.51% at December 31, 2008 and December 31, 2007.

(d) APS’ long-term debt less current maturities was $2.850 billion at December 31, 2008 and $2.877 billion atDecember 31, 2007. APS’ current maturities of long-term debt were $1 million at December 31, 2008 and 2007.

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(e) SunCor had

$125 millionoutstanding atDecember 31,2008 under itsrevolving lines ofcredit. Theweighted-averageinterest rate was4.11% atDecember 31,2008. Theremainingamount ofapproximately$58 million atDecember 31,2008 was madeup of multiplenotes withvariable interestrates based on thelenders’ primerates plus 1.75%and 2.0% orLIBOR plus1.7%, 2.0%,2.25% and 2.5%.SunCor had$94 millionoutstanding atDecember 31,2007 under itsrevolving lines ofcredit. Theweighted-averageinterest rate was7.27% atDecember 31,2007. Theremainingamount ofapproximately$143 million atDecember 31,2007 was madeup of multiple

notes withvariable interestrates based on thelenders’ primerates plus 1.75%and 2.0% orLIBOR plus1.7%, 2.0% and2.25%. There isalso a note at afixed rate of4.25% atDecember 31,2008 and 2007.

(f) The weighted-average interestrate was 6.2% atDecember 31,2008 and 7.0% atDecember 31,2007.

The credit and liquidity markets experienced significant stress beginning the week of September 15, 2008. While PinnacleWest’s and APS’ ability to issue commercial paper has been negatively impacted by the market stress, they have both beenable to access existing credit facilities, ensuring adequate liquidity. Cash on hand is being invested in money market fundsconsisting of U.S. Treasury and government agency securities and repurchase agreements collateralized fully by U.S.Treasury and government agency securities.

The interest rates on eleven issues of APS’ pollution control bonds, in the aggregate amount of approximately$343 million, are reset every seven days through auction processes. These bonds are supported by bond insurance policiesprovided by Ambac, and the interest rates on the bonds can be directly affected by the rating of the bond insurer. Certain bondinsurers, including Ambac, have had downgrades of their credit ratings. Downgrades of bond insurers result in downgrades ofthe insured bonds, which increases the possibility of a “failed auction” and results in higher interest rates during the failedauction periods. When auctions of APS bonds fail, the APS bondholders receive the maximum 14% annual interest rate forthe week of the failed auction. For the twelve months ended December 31, 2008, we had ninety-nine failed auctions, whichrepresented about 17% of all of our auctions. The average interest rate at December 31, 2008 on the auction rate securitieswas 12.4%. Bond auctions continued to fail through mid-January; however, since that time, we have had only one failure.The average interest rate at February 18, 2009 on the auction rate securities was 5.7%. We continue to closely monitor thismarket and, if market and business conditions allow, we are planning on refunding and reissuing these bonds during 2009.We do not expect, however, that our auction rate interest exposure will have a material adverse impact on our financialposition, results of operations, cash flows or liquidity.

Pinnacle West’s and APS’ debt covenants related to their respective bank financing arrangements include debt tocapitalization ratios. Certain of APS’ bank financing arrangements also include an interest coverage test. Pinnacle West andAPS comply with these covenants and each anticipates it will continue to meet these and other significant covenantrequirements. For both Pinnacle West and APS, these covenants require that the ratio of consolidated debt to totalconsolidated capitalization cannot exceed 65%. At December 31, 2008, the ratio was approximately 51% for Pinnacle Westand 49% for APS. The provisions regarding interest coverage require a minimum cash coverage of 2 times. The interestcoverage was approximately 4.5 times under APS’ bank financing agreements as of December 31, 2008. Failure to complywith such covenant levels would result in an event of default which, generally speaking, would require the immediaterepayment of the debt subject to the covenants and could cross-default other debt. See further discussion of “cross-default”provisions below.

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Neither Pinnacle West’s nor APS’ financing agreements contain “rating triggers” that would result in an acceleration of therequired interest and principal payments in the event of a rating downgrade. However, our bank financing agreements containa pricing grid in which interest costs we pay are determined by our current credit ratings.

All of Pinnacle West’s loan agreements contain “cross-default” provisions that would result in defaults and the potentialacceleration of payment under these loan agreements if Pinnacle West or APS were to default under certain other materialagreements. All of APS’ bank agreements contain cross-default provisions that would result in defaults and the potentialacceleration of payment under these bank agreements if APS were to default under certain other material agreements.Pinnacle West and APS do not have a material adverse change restriction for revolver borrowings.

An existing ACC order requires APS to maintain a common equity ratio of at least 40%. As defined in the ACC order, thecommon equity ratio is common equity divided by the sum of common equity and long-term debt, including currentmaturities of long-term debt. At December 31, 2008, APS’ common equity ratio, as defined, was 54%. Its total commonequity was approximately $3.3 billion, and total capitalization was approximately $6.2 billion. APS would be prohibited frompaying dividends if the payment would reduce its common equity below approximately $2.5 billion, assuming APS’ totalcapitalization remains the same.

SunCor’s principal loan facility, the Secured Revolver, is secured primarily by an interest in land, commercial properties,land contracts and homes under construction. The Secured Revolver matures on January 30, 2010 (classified as currentmaturities of long-term debt at December 31, 2008). SunCor is required to repay amounts under the Secured Facility in orderto reduce the lenders’ commitments. The Secured Revolver requires compliance with certain loan covenants pertaining todebt to net worth, debt service, liquidity, cash flow coverage and restrictions on debt. In addition to the Secured Revolver, atDecember 31, 2008, SunCor had approximately $68 million in borrowings under other credit facilities that mature at variousdates and also contain certain loan covenants. The majority of this indebtedness is due in 2009, and SunCor is in the processof renegotiating these facilities.


As of December 31, 2008, the amount of SunCor’s net assets that could not be transferred to Pinnacle West in the form ofcash dividends as a result of the covenants mentioned above was approximately $224 million out of a total of approximately$263 million. As a result of the restrictions under the ACC order referenced above and contained in the SunCor loanfacilities, as of December 31, 2008, the restricted net assets of our subsidiaries exceeded 25% of our consolidated net assets(at December 31, 2008, our consolidated net assets were approximately $3.4 billion). These restrictions do not materiallyaffect Pinnacle West’s ability to meet its ongoing capital requirements.

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The following table shows principal payments due on Pinnacle West’s and APS’ total long-term debt and capitalized leaserequirements (dollars in millions): Pinnacle West- Year Consolidated APS

2009 $ 178 $ 1 2010 199 197 2011 578 401 2012 376 376 2013 2 — Thereafter 1,884 1,884

Total $ 3,217 $ 2,859

7. Common Stock and Treasury Stock

Our common stock and treasury stock activity during each of the three years 2008, 2007 and 2006 is as follows (dollars inthousands): Common Stock Treasury Stock

Shares Amount Shares Amount

Balance at December 31, 2005 99,077,133 $2,067,377 (20,058) $(1,245)Common stock issuance 883,933 39,420 — — Purchase of treasury stock (a) — — (5,505) (229)Reissuance of treasury stock for stock compensation

(net) — — 23,144 1,025 Other — 7,753 — —

Balance at December 31, 2006 99,961,066 2,114,550 (2,419) (449)

Common stock issuance 564,404 24,089 — — Purchase of treasury stock (a) — — (47,218) (1,964)Reissuance of treasury stock for stock compensation

(net) — — 10,132 359 Other — (2,852) — —

Balance at December 31, 2007 100,525,470 2,135,787 (39,505) (2,054)

Common stock issuance 422,966 10,845 — — Purchase of treasury stock (a) — — (39,022) (1,387)Reissuance of treasury stock for stock compensation

(net) — — 18,700 587 Other — 4,691 — —

Balance at December 31, 2008 100,948,436 $2,151,323 (59,827) $(2,854)

(a) Represents shares of common stock withheld from certain stock awards for tax purposes.

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8. Retirement Plans and Other Benefits

Pinnacle West sponsors a qualified defined benefit and account balance pension plan and a non-qualified supplementalexcess benefit retirement plan for the employees of Pinnacle West and its subsidiaries. All new employees participate in theaccount balance plan. Defined benefit plans specify the amount of benefits a plan participant is to receive using informationabout the participant. The pension plan covers nearly all employees. The supplemental excess benefit retirement plan coversofficers of the Company and highly compensated employees designated for participation by the Board of Directors. Ouremployees do not contribute to the plans. Generally, we calculate the benefits based on age, years of service and pay.

We also sponsor other postretirement benefits for the employees of Pinnacle West and our subsidiaries. We providemedical and life insurance benefits to retired employees. Employees must retire to become eligible for these retirementbenefits, which are based on years of service and age. For the medical insurance plans, retirees make contributions to cover aportion of the plan costs. For the life insurance plan, retirees do not make contributions. We retain the right to change oreliminate these benefits.

Pinnacle West uses a December 31 measurement date each year for its pension and other postretirement benefit plans. Themarket-related value of our plan assets is their fair value at the measurement date. The fair market value of investments in ourretirement and postretirement plans is determined using actively-quoted prices when available. When actively-quoted pricesare not available, we use prices provided by external sources, models or other valuation methods. The use of models andother valuation methods to determine fair market value often requires subjective and complex judgment. Actual results coulddiffer from the results estimated through the application of these methods.

A significant portion of the changes in the actuarial gains and losses of our pension and postretirement plans is attributableto APS and therefore is recoverable in rates. Accordingly, these changes are recorded as a regulatory asset.

The following table provides details of the plans’ net periodic benefit costs and the portion of these costs charged toexpense (including administrative costs and excluding amounts capitalized as overhead construction or billed to electric plantparticipants) (dollars in thousands):

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Pension Other Benefits

2008 2007 2006 2008 2007 2006

Service cost-benefits earnedduring the period $ 54,576 $ 51,803 $ 47,287 $ 17,793 $ 18,491 $ 19,968

Interest cost on benefitobligation 110,207 100,736 92,196 37,897 35,284 34,653

Expected return on plan assets (118,309) (107,165) (95,912) (43,609) (42,177) (36,930)Amortization of:

Transition (asset) obligation — — (645) 3,005 3,005 3,005 Prior service cost (credit) 2,455 2,957 2,401 (125) (125) (125)Net actuarial loss 11,145 16,331 23,366 2,372 3,929 8,662

Net periodic benefit cost $ 60,074 $ 64,662 $ 68,693 $ 17,333 $ 18,407 $ 29,233

Portion of cost charged toexpense $ 28,854 $ 28,063 $ 30,912 $ 8,325 $ 7,989 $ 13,155

APS share of cost charged toexpense $ 27,491 $ 26,548 $ 29,203 $ 7,932 $ 7,557 $ 12,428

The following table shows the plans’ changes in the benefit obligations and funded status for the years 2008 and 2007(dollars in thousands): Pension Other Benefits

2008 2007 2008 2007

Change in Benefit Obligation Benefit obligation at January 1 $1,720,844 $1,670,274 $ 605,125 $ 616,985 Service cost 54,576 51,803 17,793 18,491 Interest cost 110,207 100,736 37,897 35,284 Benefit payments (62,058) (52,168) (17,566) (17,763)Actuarial (gain) loss 61,087 (52,227) 12,016 (47,872)Plan amendments — 2,426 — —

Benefit obligation at December 31 1,884,656 1,720,844 655,265 605,125

Change in Plan Assets

Fair value of plan assets at January 1 1,318,939 1,214,229 499,764 480,638 Actual return on plan assets 132,449 101,138 (64,364) 26,952 Employer contributions 35,000 52,000 10,972 18,407 Benefit payments (56,016) (48,428) (17,066) (26,233)

Fair value of plan assets at December 31 1,430,372 1,318,939 429,306 499,764

Funded Status at December 31 $ (454,284) $ (401,905) $(225,959) $(105,361)

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The following table shows the projected benefit obligation and the accumulated benefit obligation for the pension plan inexcess of plan assets as of December 31, 2008 and 2007 (dollars in thousands): 2008 2007

Projected benefit obligation $1,884,656 $1,720,844 Accumulated benefit obligation 1,631,909 1,484,444 Fair value of plan assets 1,430,372 1,318,939

The following table shows the amounts recognized on the Consolidated Balance Sheets as of December 31, 2008 and2007 (dollars in thousands): Pension Other Benefits

2008 2007 2008 2007

Current asset $ — $ — $ 1,221 $ 1,321 Current liability (5,676) (3,984) — — Noncurrent liability (448,608) (397,921) (227,180) (106,682)

Net amount recognized $(454,284) $(401,905) $(225,959) $(105,361)

The following table shows the details related to accumulated other comprehensive loss as of December 31, 2008 and 2007(dollars in thousands): Pension Other Benefits

2008 2007 2008 2007

Net actuarial loss $ 304,335 $ 268,532 $ 224,624 $ 106,407 Prior service cost (credit) 9,946 12,401 (920) (1,045)Transition obligation — — 12,019 15,024 APS’ portion recorded as a regulatory asset (245,235) (221,787) (227,490) (116,425)Income tax benefit (27,239) (23,233) (2,493) (538)

Accumulated other comprehensive loss $ 41,807 $ 35,913 $ 5,740 $ 3,423

The following table shows the estimated amounts that will be amortized from accumulated other comprehensive loss andregulatory assets into net periodic benefit cost in 2009 (dollars in thousands): Other

Pension Benefits

Net actuarial loss $11,064 $11,094 Prior service cost (credit) 2,080 (125)Transition obligation — 3,004

Total amounts estimated to be amortized from accumulated other comprehensive income andregulatory assets in 2009 $13,144 $13,973

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The following table shows the weighted-average assumptions used for both the pension and other benefits to determinebenefit obligations and net periodic benefit costs: Benefit Costs Benefit Obligations For the Years Ended

As of December 31, December 31,

2008 2007 2008 2007 2006

Discount rate-pension 6.11% 6.25% 6.25% 5.90% 5.66%Discount rate-other benefits 6.13% 6.31% 6.31% 5.93% 5.68%Rate of compensation increase 4.00% 4.00% 4.00% 4.00% 4.00%Expected long-term return on plan assets N/A N/A 9.00% 9.00% 9.00%Initial health care cost trend rate 8.00% 8.00% 8.00% 8.00% 8.00%Ultimate health care cost trend rate 5.00% 5.00% 5.00% 5.00% 5.00%Number of years to ultimate trend rate 4 4 4 4 4

In selecting the pretax expected long-term rate of return on plan assets we consider past performance and economicforecasts for the types of investments held by the plan. For the year 2009, we are assuming a 8.25% long-term rate of returnon plan assets, which we believe is reasonable given our asset allocation in relation to historical and expected performance.

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A onepercentage point change in the assumed initial and ultimate health care cost trend rates would have the following effects(dollars in millions): 1% Increase 1% Decrease

Effect on other postretirement benefits expense, after consideration of amounts capitalizedor billed to electric plant participants $ 9 $ (7)

Effect on service and interest cost components of net periodic other postretirement benefitcosts 11 (8)

Effect on the accumulated other postretirement benefit obligation 103 (83)

Plan Assets

Pinnacle West’s qualified pension plan and other postretirement benefit plans’ asset allocation at December 31, 2008 and2007 is as follows:

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Pension Other Benefits

Asset Category: 2008 2007 Target Range 2008 2007 Target Range

Equity securities 40% 68% 40%-55% 52% 70% 40%-55%Fixed income 54 25 40%-55% 46 28 40%-55%Other 6 7 5%-10% 2 2 2%-5%

Total 100% 100% 100% 100%

The Board of Directors has delegated oversight of the plans’ assets to an Investment Management Committee, which hasadopted an investment policy. The investment policy sets forth the objective of providing for future pension benefits bymaximizing return consistent with acceptable levels of risk. The primary investment strategies are diversification of assets,stated asset allocation targets and ranges, prohibition of investments in Pinnacle West securities, and external management ofplan assets.

During 2008, Pinnacle West began utilizing long-duration bonds and interest-rate swaps to better match the interest-ratesensitivity of the plans’ assets to that of the plans’ liabilities. The actual return on plan assets for the year endingDecember 31, 2008, included the impact of unrealized gains related to our pension plan of approximately $495 million andunrealized gains related to our postretirement plan of approximately $65 million due to the strong performance of the U.S.Treasury bond market. In late 2008 and early 2009, we closed out the swap contracts and reinvested the proceeds intolong-term bonds.

Contributions

The required minimum contribution to our pension plan is estimated to be approximately $36 million in 2009 andapproximately $25 million in 2010. The contribution to our other postretirement benefit plans in 2009 is estimated to beapproximately $15 million. APS and other subsidiaries fund their share of the contributions. APS’ share is approximately96% of both plans.

Estimated Future Benefit Payments

Benefit payments, which reflect estimated future employee service, for the next five years and the succeeding five yearsthereafter are estimated to be as follows (dollars in thousands):

Year Pension Other Benefits (a)

2009 $ 68,795 $ 19,709 2010 75,553 22,039 2011 84,022 24,549 2012 94,205 27,135 2013 105,717 30,132 Years 2014-2018 702,148 196,470

(a) The expected future other benefit payments take into account the Medicare Part D subsidy.

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Employee Savings Plan Benefits

Pinnacle West sponsors a defined contribution savings plan for eligible employees of Pinnacle West and its subsidiaries. In2008, costs related to APS’ employees represented 96% of the total cost of this plan. In a defined contribution savings plan,the benefits a participant receives result from regular contributions participants make to their own individual account, theCompany’s matching contributions and earnings or losses on their investments. Under this plan, the Company matches apercentage of the participants’ contributions in cash which is then invested in the same investment mix as participants elect toinvest their own future contributions. At December 31, 2008, approximately 14% of total plan assets were in Pinnacle Weststock. Pinnacle West recorded expenses for this plan of approximately $8 million for 2008, $7 million for 2007 and$6 million for 2006. APS recorded expenses for this plan of approximately $8 million in 2008, $6 million in 2007 and$6 million in 2006.

9. Leases

In 1986, APS sold about 42% of its share of Palo Verde Unit 2 and certain common facilities in three separate saleleaseback transactions. APS accounts for these leases as operating leases. The gain resulting from the transaction ofapproximately $140 million was deferred and is being amortized to operations and maintenance expense over 29.5 years, theoriginal term of the leases. There are options to renew the leases or to purchase the property for fair market value at the endof the lease terms. We are analyzing this matter, and will continue to do so as we approach the end of the lease terms, todetermine which option or options to pursue. Rent expense is calculated on a straight-line basis. See Note 20 for a discussionof VIEs, including the VIE’s involved in the Palo Verde sale leaseback transactions.

In addition, we lease certain land, buildings, equipment, vehicles and miscellaneous other items through operating rentalagreements with varying terms, provisions and expiration dates.

Total lease expense recognized in the Consolidated Statements of Income was $74 million in 2008, $73 million in 2007and $72 million in 2006. APS’ lease expense was $67 million in 2008, $66 million in 2007 and $64 million in 2006.

The amounts to be paid for the Palo Verde Unit 2 leases are approximately $49 million per year for the years 2009 to2016.

Estimated future minimum lease payments for Pinnacle West’s and APS’ operating leases, excluding purchase poweragreements, are approximately as follows (dollars in millions):

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Pinnacle West

Year Consolidated APS

2009 $ 82 $ 76 2010 76 70 2011 71 65 2012 67 62 2013 65 60 Thereafter 135 121

Total future lease commitments $ 496 $ 454

10. Jointly-Owned Facilities

APS shares ownership of some of its generating and transmission facilities with other companies. Our share of operationsand maintenance expense and utility plant costs related to these facilities is accounted for using proportional consolidation.The following table shows APS’ interests in those jointly-owned facilities recorded on the Consolidated Balance Sheets atDecember 31, 2008 (dollars in thousands): Construction Percent Plant in Accumulated Work in Owned Service Depreciation Progress

Generating facilities: Palo Verde Units 1 and 3 29.1% $1,989,210 $1,032,195 $ 51,621 Palo Verde Unit 2 (see Note 9) 17.0% 670,204 309,143 26,693 Four Corners Units 4 and 5 15.0% 167,152 102,218 2,633 Navajo Generating Station Units 1, 2 and 3 14.0% 256,304 149,201 5,102 Cholla common facilities (a) 63.9%(b) 130,454 42,483 3,548

Transmission facilities: ANPP 500KV System 35.8%(b) 82,470 25,246 3,620 Navajo Southern System 31.4%(b) 41,690 12,998 559 Palo Verde – Yuma 500KV System 23.9%(b) 9,408 3,994 368 Four Corners Switchyards 27.5%(b) 3,459 1,339 — Phoenix – Mead System 17.1%(b) 36,032 5,577 — Palo Verde – Estrella 500KV System 55.5%(b) 78,078 5,044 —

(a) PacifiCorp owns Cholla Unit 4 and APS operates the unit for PacifiCorp. The common facilities at Cholla are jointly-owned.

(b) Weighted average of interests.

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11. Commitments and Contingencies

Palo Verde Nuclear Generating Station

Spent Nuclear Fuel and Waste Disposal

Nuclear power plant operators are required to enter into spent fuel disposal contracts with the DOE, and the DOE isrequired to accept and dispose of all spent nuclear fuel and other high-level radioactive wastes generated by domestic powerreactors. Although the Nuclear Waste Policy Act required the DOE to develop a permanent repository for the storage anddisposal of spent nuclear fuel by 1998, the DOE has announced that the repository cannot be completed before at least 2017.In November 1997, the United States Court of Appeals for the District of Columbia Circuit (D.C. Circuit) issued a decisionpreventing the DOE from excusing its own delay, but refused to order the DOE to begin accepting spent nuclear fuel. Basedon this decision and the DOE’s delay, a number of utilities, including APS (on behalf of itself and the other Palo Verdeowners), filed damages actions against the DOE in the Court of Federal Claims. APS is currently pursuing that damagesclaim. In August 2008, the United States Court of Appeals for the Federal Circuit issued decisions in three damages actionsbrought by other nuclear utilities that could result in a decrease in the amount of our recoverable damages; however,additional appeals in those actions are possible and APS continues to monitor the status of those actions. The trial in the APSmatter began on January 28, 2009. Testimony and evidence have been presented by both sides. The trial court has set apost-trial briefing schedule and is expected to hear closing arguments in the early summer of 2009.

APS currently estimates it will incur $132 million (in 2008 dollars) over the life of Palo Verde for its share of the costsrelated to the on-site interim storage of spent nuclear fuel. At December 31, 2008, APS had a regulatory liability of$22 million that represents amounts recovered in retail rates in excess of amounts spent for on-site interim spent fuel storage.

Nuclear Insurance

The Palo Verde participants have insurance for public liability resulting from nuclear energy hazards to the full limit ofliability under federal law. This potential liability is covered by primary liability insurance provided by commercial insurancecarriers in the amount of $300 million and the balance by an industry-wide retrospective assessment program. If losses at anynuclear power plant covered by the program exceed the accumulated funds, APS could be assessed retrospective premiumadjustments. The maximum assessment per reactor under the program for each nuclear incident is approximately$118 million, subject to an annual limit of $18 million per incident, to be periodically adjusted for inflation. Based on APS’interest in the three Palo Verde units, APS’ maximum potential assessment per incident for all three units is approximately$103 million, with an annual payment limitation of approximately $15 million.

The Palo Verde participants maintain “all risk” (including nuclear hazards) insurance for property damage to, anddecontamination of, property at Palo Verde in the aggregate amount of $2.75 billion, a substantial portion of which must firstbe applied to stabilization and decontamination. APS has also secured insurance against portions of any increased cost ofgeneration or purchased power and business interruption resulting from a sudden and unforeseen accidental outage of any ofthe three units. The property damage, decontamination, and replacement power coverages are provided by Nuclear ElectricInsurance Limited (NEIL). APS is subject to retrospective assessments under all NEIL policies if NEIL’s losses in any policyyear exceed

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accumulated funds. The maximum amount of retrospective assessments APS could incur under the current NEIL policiestotals approximately $21 million. The insurance coverage discussed in this and the previous paragraph is subject to certainpolicy conditions and exclusions.

Fuel and Purchased Power Commitments

Pinnacle West and APS are parties to various fuel and purchased power contracts with terms expiring between 2009 and2042 that include required purchase provisions. Pinnacle West and APS estimate the contract requirements to beapproximately $449 million in 2009; $364 million in 2010; $287 million in 2011; $397 million in 2012; $380 million in2013; and $6.1 billion thereafter. However, these amounts may vary significantly pursuant to certain provisions in suchcontracts that permit us to decrease required purchases under certain circumstances.

Of the various fuel and purchased power contracts mentioned above, some of those contracts have take-or-pay provisions.The contracts APS has for its coal supply include take-or-pay provisions. The current take-or-pay coal contracts have termsthat expire in 2024.

The following table summarizes our actual and estimated take-or-pay commitments (dollars in millions): Actual Estimated (a)

2006 2007 2008 2009 2010 2011 2012 2013 Thereafter

Coal take-or-paycommitments $67 $70 $81 $103 $83 $84 $86 $88 $ 421

(a) Total take-or-pay commitments are approximately $865 million. The total net present value of these commitments isapproximately $595 million.

Coal Mine Reclamation Obligations

APS must reimburse certain coal providers for amounts incurred for coal mine reclamation. APS’ coal mine reclamationobligation was approximately $91 million at December 31, 2008 and December 31, 2007 and is included in Deferred Creditsand Other on the Consolidated Balance Sheets.

California Energy Market Issues and Refunds in the Pacific Northwest

FERC

In July 2001, the FERC ordered an expedited fact-finding hearing to calculate refunds for spot market transactions inCalifornia during a specified time frame. APS was a seller and a purchaser in the California markets at issue and, to theextent that refunds are ordered, APS should be a recipient as well as a payor of such amounts. In addition, on March 19,2002, the State of California filed a complaint with the FERC alleging that wholesale sellers of power and energy, includingAPS, failed to properly file rate information at the FERC in connection with sales to California from 2000 to March 2002under market-based rates. Since 2004, the Ninth Circuit and the FERC have issued various decisions and orders involving theaforementioned issues, including decisions related to: entities subject to FERC jurisdiction and, therefore, potentially owingrefunds; applicable refund methodologies; the temporal scope and types of transactions that are properly

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subject to the refund orders; and the appropriate standard of review at the FERC on wholesale power contracts in the refundproceedings. A settlement, resolving APS’ issues with certain California parties for the current refund period, was approvedby the FERC in an order issued on June 30, 2008. The resolution of the claims related to the parties involved in thissettlement had no material adverse impact on our financial position, results of operations or cash flows. We currently believethe refund claims at the FERC related to the parties not involved in this settlement will have no material adverse impact onour financial position, results of operations or cash flows.

On March 26, 2003, the FERC made public a Final Report on Price Manipulation in Western Markets, prepared by its staffand covering spot markets in the West in 2000 and 2001. The report stated that a significant number of entities whoparticipated in the California markets during the 2000-2001 time period, including APS, may potentially have been involvedin arbitrage transactions that allegedly violated certain provisions of the Independent System Operator tariff. After reviewingthe matter, along with the data supplied by APS, the FERC staff moved to dismiss the claims against APS and to dismiss theproceeding. The motion to dismiss was granted by the FERC on January 22, 2004. Certain parties sought rehearing of thisorder; however, under the settlement agreement mentioned above, these parties withdrew their request for rehearing onJuly 22, 2008.

On July 25, 2001, the FERC also ordered an evidentiary proceeding to discuss and evaluate possible refunds for wholesalesales in the Pacific Northwest. The FERC affirmed the ALJ’s conclusion that the prices in the Pacific Northwest were notunreasonable or unjust and refunds should not be ordered in this proceeding. This decision was appealed to the U.S. Court ofAppeals for the Ninth Circuit. On August 24, 2007, the Ninth Circuit issued an opinion that remanded the proceeding to theFERC for further consideration. Petitions for rehearing of this opinion were filed. Although the FERC has not yet determinedwhether any refunds will ultimately be required, we do not expect that the resolution of these issues will have a materialadverse impact on our financial position, results of operations or cash flows.

Navajo Nation Litigation

In June 1999, the Navajo Nation served Salt River Project with a lawsuit filed in the United States District Court for theDistrict of Columbia (the “D.C. Lawsuit”) naming Salt River Project, several Peabody Coal Company entities (collectively,“Peabody”), Southern California Edison Company and other defendants, and citing various claims in connection with therenegotiations of the coal royalty and lease agreements under which Peabody mines coal for the Navajo Generating Stationand the Mohave Generating Station. APS is a 14% owner of the Navajo Generating Station, which Salt River Projectoperates. The D.C. Lawsuit alleges, among other things, that the defendants obtained a favorable coal royalty rate byimproperly influencing the outcome of a federal administrative process under which the royalty rate was to be adjusted. Thesuit seeks $600 million in damages, treble damages, punitive damages of not less than $1 billion, and the ejection ofdefendants “from all possessory interests and Navajo Tribal lands arising out of the [primary coal lease].” In July 2001, thecourt dismissed all claims against Salt River Project.

In January 2005, Peabody served APS with a lawsuit filed in the Circuit Court for the City of St. Louis naming APS andthe other Navajo Generating Station participants and seeking, among other things, a declaration that the participants “areobligated to reimburse Peabody for any royalty, tax, or other obligation arising out of the D.C. Lawsuit.” Based on APS’ownership interest in the Navajo Generating Station, APS could be liable for up to 14% of any such obligation. On July 10,

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2008, Peabody agreed to dismiss this litigation without prejudice. APS cannot currently predict whether the lawsuit will berefiled based upon the final outcome of the D.C. Lawsuit.

Superfund

Superfund establishes liability for the cleanup of hazardous substances found contaminating the soil, water or air. Thosewho generated, transported or disposed of hazardous substances at a contaminated site are among those who are PRPs. PRPsmay be strictly, and often are jointly and severally, liable for clean-up. On September 3, 2003, the EPA advised APS that theEPA considers APS to be a PRP in the Motorola 52nd Street Superfund Site, Operable Unit 3 (OU3) in Phoenix, Arizona.APS has facilities that are within this Superfund site. APS and Pinnacle West have agreed with the EPA to perform certaininvestigative activities of the APS facilities within OU3. Because the investigation has not yet been completed and ultimateremediation requirements are not yet finalized, at the present time neither APS nor Pinnacle West can accurately estimate theexpenditures that may be required.

Salt River Project

Salt River Project has notified APS that Salt River Project allegedly failed to bill APS for (a) energy losses under certainservice schedules of a power contract between the parties and (b) certain other charges under the contract. Salt River Projectasserts that certain of these failures to bill APS for such losses and charges may extend back to 1996 and, as a result, claimsthat APS owes it approximately $29 million. APS disputes that it is required to pay these amounts. No lawsuit or litigationhas been initiated in the matter at this time. We do not expect that resolution of this matter will have a material adverseimpact on our financial position, results of operations or cash flows.

Litigation

We are party to various other claims, legal actions and complaints arising in the ordinary course of business, including butnot limited to environmental matters related to the Clean Air Act, Navajo Nation issues and EPA and ADEQ issues. In ouropinion, the ultimate resolution of these matters will not have a material adverse effect on our financial position, results ofoperations or cash flows.

12. Asset Retirement Obligations

APS has asset retirement obligations for its Palo Verde nuclear facilities and certain other generation, transmission anddistribution assets. The Palo Verde asset retirement obligation primarily relates to final plant decommissioning. Thisobligation is based on the NRC’s requirements for disposal of radiated property or plant and agreements APS reached withthe ACC for final decommissioning of the plant. The non-nuclear generation asset retirement obligations primarily relate torequirements for removing portions of those plants at the end of the plant life or lease term.

Some of APS’ transmission and distribution assets have asset retirement obligations because they are subject to right ofway and easement agreements that require final removal. These agreements have a history of uninterrupted renewal that APSexpects to continue. As a result, APS cannot reasonably estimate the fair value of the asset retirement obligation related tosuch distribution and transmission assets.

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Additionally, APS has aquifer protection permits for some of its generation sites that require the closure of certainfacilities at those sites. The generation sites are strategically located to serve APS Native Load customers. Managementexpects to continuously use the sites and, thus, cannot estimate a potential closure date. The asset retirement obligationsassociated with our non-regulated assets are immaterial.

The following schedule shows the change in our asset retirement obligations for 2008 and 2007 (dollars in millions): 2008 2007

Asset retirement obligations at the beginning of year $ 282 $ 268 Changes attributable to:

Liabilities settled (2) (2)Accretion expense 19 20 Estimated cash flow revisions (23) (4)

Asset retirement obligations at the end of year $ 276 $ 282

In accordance with SFAS No. 71, APS accrues removal costs for its regulated utility assets, even if there is no legalobligation for removal. See detail of regulatory liabilities in Note 1.

To fund the costs APS expects to incur to decommission Palo Verde, APS established external decommissioning trusts inaccordance with NRC regulations. APS invests the trust funds in fixed income securities and domestic equity securities. APSapplies the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” in accountingfor investments in decommissioning trust funds, and classifies these investments as available for sale. As a result, we recordthe decommissioning trust funds at their fair value on our Consolidated Balance Sheets. Because of the ability of APS torecover decommissioning costs in rates and in accordance with the regulatory treatment for decommissioning trust funds, wehave recorded the offsetting amount of gains on investment securities in other regulatory liabilities or assets. The followingtable summarizes the fair value of APS’ nuclear decommissioning trust fund assets at December 31, 2008 and December 31,2007 (dollars in millions): Total Total Unrealized Unrealized

Fair Value Gains Losses

2008 Equity securities $ 113 $ 18 $ (18)Fixed income securities 228 10 (5)Net payables (a) 2 — —

Total $ 343 $ 28 $ (23)

2007 Equity securities $ 175 $ 68 $ — Fixed income securities 204 5 (1)

Total $ 379 $ 73 $ (1)

(a) Net payables relate to pending securities sales and purchases.

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The costs of securities sold are determined on the basis of specific identification. The following table sets forthapproximate gains and losses and proceeds from the sale of securities by the nuclear decommissioning trust funds (dollars inmillions): Year Ended December 31,

2008 2007 2006

Realized gains $ 7 $ 3 $ 9 Realized losses (8) (4) — Proceeds from the sale of securities 318 259 255

The fair value of fixed income securities, summarized by contractual maturities, at December 31, 2008 is as follows(dollars in millions): Fair Value

Less than one year $ 11 1 year - 5 years 41 5 years - 10 years 47 Greater than 10 years 129

Total $ 228

See Note 14 for a discussion of SFAS No. 157, “Fair Value Measurements,” which we adopted January 1, 2008.

13. Selected Quarterly Financial Data (Unaudited)

Consolidated quarterly financial information for 2008 and 2007 is as follows (dollars in thousands, except per shareamounts):

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2008 Quarter Ended 2008

March 31, June 30, September 30, December 31, Total

As originally reported: Operating revenues $736,738 $926,193 $1,079,975 Operations and maintenance 194,124 194,909 212,327 Operating income 38,798 178,875 273,913 Income taxes (557) 17,076 75,970 Income from continuing operations (4,668) 114,433 150,503 Net income (4,473) 133,862 151,586 APSES reclassifications (see Note

22): Operating revenues $ (27,006) $ (28,165) $ (7,074) Operations and maintenance (1,101) (1,209) (995) Operating income 1,643 (385) 1,978 Income taxes 650 (148) 789 Income from continuing operations 1,005 (229) 1,219 Net income — — — After APSES reclassifications: Operating revenues $709,732 $898,028 $1,072,901 $686,415 $3,367,076 Operations and maintenance 193,023 193,700 211,332 209,797 807,852 Operating income 40,441 178,490 275,891 (17,526) 477,296 Income taxes 93 16,928 76,759 (28,373) 65,407 Income from continuing operations (3,663) 114,204 151,722 (48,706) 213,557 Net income (4,473) 133,862 151,586 (38,850) 242,125

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2007 Quarter Ended 2007


As originally reported: Operating revenues $695,017 $862,902 $1,205,234 $757,985 $3,521,138 Operations and maintenance 171,578 177,310 178,419 207,398 734,705 Operating income 68,221 158,769 338,722 53,319 619,031 Income taxes 9,041 40,713 92,055 10,638 152,447 Income from continuing operations 16,464 79,237 201,718 3,713 301,132 Net income 16,530 78,994 208,708 2,911 307,143 APSES reclassifications (see Note

22): Operating revenues $ (44,501) $ (52,898) $ (57,814) $ (48,911) $ (204,124)Operations and maintenance (1,509) (1,466) (1,571) (1,819) (6,365)Operating income (3,264) 275 (2,188) 1,226 (3,951)Income taxes (1,277) 106 (852) 486 (1,537)Income from continuing operations (1,984) 165 (1,324) 755 (2,388)Net income — — — — After APSES reclassifications: Operating revenues $650,516 $810,004 $1,147,420 $709,074 $3,317,014 Operations and maintenance 170,069 175,844 176,848 205,579 728,340 Operating income 64,957 159,044 336,534 54,545 615,080 Income taxes 7,764 40,819 91,203 11,124 150,910 Income from continuing operations 14,480 79,402 200,394 4,468 298,744 Net income 16,530 78,994 208,708 2,911 307,143

Earnings per share: 2008 Quarter Ended

March 31, June 30, September 30, December 31,

As originally reported – Basic earnings per share: Income from continuing operations $(0.05) $1.14 $ 1.49 $ Net income (0.04) 1.33 1.50 After APSES reclassifications – Basic earnings per

share: Income from continuing operations $(0.04) $1.13 $ 1.51 $ (0.48)Net income (0.04) 1.33 1.50 (0.39) As originally reported – Diluted earnings per share: Income from continuing operations $(0.05) $1.13 $ 1.49 $ Net income (0.04) 1.33 1.50 After APSES reclassifications – Diluted earnings per

share: Income from continuing operations $(0.04) $1.13 $ 1.50 $ (0.48)Net income (0.04) 1.33 1.50 (0.39)

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2007 Quarter Ended

March 31, June 30, September 30, December 31,

As originally reported – Basic earnings per share: Income from continuing operations $0.16 $0.79 $ 2.01 $ 0.04 Net income 0.17 0.79 2.08 0.03 After APSES reclassifications – Basic earnings per

share: Income from continuing operations $0.14 $0.79 $ 2.00 $ 0.04 Net income 0.17 0.79 2.08 0.03 As originally reported – Diluted earnings per share: Income from continuing operations $0.16 $0.79 $ 2.00 $ 0.04 Net income 0.16 0.78 2.07 0.03 After APSES reclassifications – Diluted earnings per

share: Income from continuing operations $0.14 $0.79 $ 1.99 $ 0.04 Net income 0.16 0.78 2.07 0.03

14. Fair Value Measurements

We adopted SFAS No. 157, “Fair Value Measurements,” on January 1, 2008. This new standard defines fair value,establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The adoption ofSFAS No. 157 did not have a material impact on our financial statements.

In February 2008 the FASB issued FASB Staff Position No. 157-2 (FSP 157-2), “Effective Date of FASB StatementNo. 157,” which delayed the effective date of SFAS No. 157 for all nonrecurring fair value measurements of nonfinancialassets and liabilities by one year. In accordance with FSP 157-2 we delayed the adoption of SFAS No. 157 for ournonfinancial assets and liabilities, except those items recognized or disclosed at fair value on a recurring basis, untilJanuary 1, 2009. The adoption of SFAS No. 157 for our nonfinancial assets and liabilities did not have a material impact onour financial statements.

In October 2008, the FASB issued FASB Staff Position No. 157-3, “Determining the Fair Value of a Financial Asset Whenthe Market for That Asset Is Not Active.” This guidance clarifies the application of SFAS No. 157, “Fair ValueMeasurements,” in a market that is not active and provides guidance on key considerations in determining the fair value of afinancial asset when the market for the asset is not active. This guidance did not have a material impact on our financialstatements.

SFAS No. 157 requires companies to disclose the fair value of certain assets and liabilities according to a fair valuehierarchy. This hierarchy ranks the quality and reliability of the inputs used to determine fair values, which are then classifiedand disclosed in one of three categories. The three levels of the fair value hierarchy are:

Level 1 – Quoted prices in active markets for identical assets or liabilities. Active markets are those in which transactionsfor the asset or liability occur in sufficient frequency and volume to provide information on an ongoing basis. Thiscategory includes our derivative

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instruments that are exchange traded such as futures, cash equivalents invested in exchange traded money market funds,and nuclear decommissioning asset investments in Treasury securities.

Level 2 – Quoted prices in active markets for similar assets or liabilities; quoted prices in markets that are not active; andmodel-derived valuations whose inputs are observable. Derivative instruments in this category include non-exchangetraded contracts such as forwards, options, and swaps. This category also includes our nuclear decommissioning trustassets in bonds and commingled equity funds.

Level 3 – Model-derived valuations with unobservable inputs that are supported by little or no market activity. Instrumentsin this category include long dated derivative transactions where models are required due to the length of the transaction,options, and transactions in locations where observable market data does not exist.

As required by SFAS No. 157, assets and liabilities are classified based on the lowest level of input that is significant tothe fair value measurement. We maximize the use of observable inputs and minimize the use of unobservable inputs. Ourassessment of the significance of a particular input to the fair value measurement requires judgment, and may affect thevaluation of fair value assets and liabilities and their placement within the fair value hierarchy levels. We assess whether amarket is active by obtaining observable broker quotes, reviewing actual market transactions, and assessing the volume oftransactions.

Some of our derivative instrument transactions are valued based on unobservable inputs due to the long-term nature ofcontracts or the unique location of the transactions. Our long-dated energy transactions, consist of observable valuations forthe near term portion and unobservable valuations for the long-term portions of the transaction. When the unobservableportion is significant to the overall valuation of the transaction, the entire transaction is classified as Level 3. Ourclassification of instruments as Level 3 is primarily reflective of the long term nature of our energy transactions, and is notreflective of material inactive markets. For further discussion of how our derivative instruments are valued see Note 1.

The nuclear decommissioning trust invests in fixed income securities directly and equity securities indirectly throughcommingled funds. Commingled funds are valued based on the fund share price and are classified within Level 2. Thecommingled funds’ underlying investments would be Level 1 if the investments were held directly by the trust. Our trusteeprovides valuation of our nuclear decommissioning trust assets by using pricing services to determine fair market value. Weassess these valuations and verify pricing that can be supported by actual market transactions. The trust fund investmentshave been established to satisfy APS’ nuclear decommissioning obligations (see Note 12).

The following table presents the fair value at December 31, 2008 of our assets and liabilities that are measured at fairvalue on a recurring basis for Pinnacle West Consolidated and APS (dollars in millions):

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Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Counterparty Balance at Assets Inputs Inputs Netting & December 31, Pinnacle West: (Level 1) (Level 2) (Level 3) Other (a) 2008

Assets Cash Equivalents $ 75 $ — $ — $ — $ 75 Risk management and trading activities 31 76 51 (92) 66 Nuclear decommissioning trust 33 308 — 2 343

Total $ 139 $ 384 $ 51 $ (90) $ 484

Liabilities Risk management and trading activities $ (85) $ (297) $ (58) $ 244 $ (196)

(a) Primarily represents netting under master netting arrangements including margin and collateral. See Notes 12, 18 andS-3.

The following table shows the changes in fair value for assets and liabilities that are measured at fair value on a recurringbasis using Level 3 inputs for the twelve months ended December 31, 2008 for Pinnacle West Consolidated and APS (dollarsin millions): Twelve Months Ended

December 31, 2008

Net derivative asset balance at beginning of period $ 8 Total net gains (losses) realized/unrealized:

Included in earnings 6 Included in OCI (8)Deferred as a regulatory asset or liability (39)

Purchases, issuances, and settlements 10 Level 3 transfers (a) 16

Net derivative liability balance at end of period $ (7)

Net unrealized losses included in earnings related to instruments still held as of December 31, 2008 $ 7

(a) Transfers reflect fair market value as of the period prior to transfer.

We did not have any non-recurring fair value measurements during the period that required disclosure.

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On December 31, 2008, the carrying value of our long-term debt for Pinnacle West, excluding capitalized leaseobligations, was $3.21 billion, with an estimated fair value of $2.81 billion. The carrying value of our long-term debt forPinnacle West excluding capitalized lease obligations was $3.29 billion on December 31, 2007, with an estimated fair valueof $3.20 billion. On December 31, 2008, the carrying value of APS’ long-term debt, excluding capitalized lease obligations,was $2.85 billion, with an estimated fair value of $2.46 billion. The carrying value of APS’ long-term debt, excluding capitallease obligations, was $2.87 billion on December 31, 2007, with an estimated fair value of $2.79 billion. The fair valueestimates are based on quoted market prices of the same or similar issues.

15. Earnings Per Share

The following table presents earnings per weighted-average common share outstanding for the years ended December 31,2008, 2007 and 2006: 2008 2007 2006

Basic earnings per share: Income from continuing operations $ 2.12 $ 2.98 $ 3.18 Income (loss) from discontinued operations 0.28 0.08 0.11

Earnings per share – basic $ 2.40 $ 3.06 $ 3.29

Diluted earnings per share: Income from continuing operations $ 2.12 $ 2.96 $ 3.16 Income (loss) from discontinued operations 0.28 0.09 0.11

Earnings per share – diluted $ 2.40 $ 3.05 $ 3.27

Dilutive stock options and performance shares (which are contingently issuable) increased average common sharesoutstanding by approximately 274,000 shares in 2008, 579,000 shares in 2007 and 593,000 shares in 2006. Total averagecommon shares outstanding for the purposes of calculating diluted earnings per share were 100,964,920 shares in 2008,100,834,871 shares in 2007 and 100,010,108 shares in 2006.

Options to purchase 687,375 shares of common stock were outstanding at December 31, 2008 but were not included in thecomputation of diluted earnings per share because the options’ exercise prices were greater than the average market price ofthe common shares. Options to purchase shares of common stock that were not included in the computation of dilutedearnings per share were 114,213 at December 31, 2007 and 437,401 at December 31, 2006.

16. Stock-Based Compensation

Pinnacle West offers stock-based compensation plans for officers and key employees of Pinnacle West and oursubsidiaries.

The 2007 Long-Term Incentive Plan (“2007 Plan”) allows Pinnacle West to grant incentive and nonqualified stockoptions, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance share units,performance cash awards, dividend equivalents and

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stock to eligible individuals. We have reserved 8 million shares of common stock for issuance under the 2007 Plan plusadditional shares that become available for issuance under prior stock plans (“Prior Plans”). Under the 2007 Plan, any sharesof stock that are potentially deliverable under any award granted under a Prior Plan will be added to the number of shares ofstock available for grant under the 2007 Plan if the award expires or is cancelled or terminated without a delivery of suchshares to the participant. In addition, any shares of stock that have been issued in connection with any award granted under aPrior Plan will be added to the number of shares available for grant under the 2007 Plan if the award is cancelled, forfeited, orterminated such that those shares are returned to the Company. No more than 500,000 shares of stock may be granted to anyone participant during a calendar year. The maximum performance-based award (other than a performance cash award)payable to any one participant during a performance period is 500,000 shares of stock or the cash equivalent. The plan alsoprovides for the granting of new incentive and non-qualified stock options at a price per share equal to at least 100% of thefair market value of the common stock at the time of grant. The terms of the options cannot be longer than 10 years and theoptions cannot be repriced during their terms.

The 2002 Long-Term Incentive Plan (“2002 Plan”) relates to outstanding performance shares and stock options but nonew awards may be granted under the plan. Performance share awards under the 2002 Plan contain performance criteria thataffect the number of shares that ultimately vest.

The 1994 Long-Term Incentive Plan (“1994 Plan”) relates to outstanding options and restricted stock but no new awardsmay be granted under the plan. Options vested by thirds over a three-year period beginning one year after the date the optionwas granted and expire ten years from the date of the grant. The release of the restricted stock is based on employee holdingsof our common stock.

In 2006, Retention Unit Awards (“Retention Units”) were granted to key employees. Each Retention Unit represents theright to receive a cash payment equal to the fair market value of one share of Pinnacle West’s common stock, determined onpre-established valuation dates. The Company is required to redeem one-fourth of the Retention Units on the first businessday of calendar years 2007, 2008, 2009 and 2010. In addition, the employee will receive a cash payment equal to the amountof dividends that the employee would have received if the employee had owned the stock from the date of grant to the date ofpayment plus interest. The Retention Units will fully vest on January 2, 2010; for any employee that was eligible to retirebefore that date, the employee’s Retention Units immediately vested and the compensation expense was immediatelyrecognized as of the date of retirement eligibility. As this award is accounted for as a liability award, compensation costs,initially measured based on the Company’s stock price on the grant date, are remeasured at each balance sheet date, usingPinnacle West’s closing stock price. The amount of cash to settle the payment on the first business day of 2008 was$1.3 million and in 2007 was $1.6 million.

In 2008 and 2007 under the 2007 Plan, Restricted Stock Unit Awards (“Restricted Stock Units”) were granted to officersand key employees. Each officer and key employee had to elect to receive payment for the vested Restricted Stock Units incash or in fully transferable shares of stock. The fair value of the stock election is estimated on the date of the grant using theCompany’s closing stock price on the date of grant. Each Restricted Stock Unit cash election represents the right to receive acash payment equal to the fair market value of one share of Pinnacle West’s common stock, determined on pre-establishedvaluation dates. One-fourth of the Restricted Stock Units will be redeemed February 20th for four years following the year ofthe grant. In addition, the employee will receive a cash payment equal to the amount of dividends that the employee wouldhave received if

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the employee had owned the Restricted Stock Unit from the date of grant to the date of payment plus interest. RestrictedStock Units vest over a four-year period for the 2007 and the 2008 grant, unless the employee is eligible to retire, in whichcase the employee’s Restricted Stock Units are immediately vested (with the same redemption dates) and the compensationexpense is immediately recognized; however, the Restricted Stock Units will be redeemed on the pre-established redemptiondates. As the Restricted Stock Unit cash election award is accounted for as a liability award, the fair market value of theoutstanding Restricted Stock Unit cash election is re-measured at each balance sheet date, using Pinnacle West’s closing stockprice. The amount of cash required to settle the payment for the 2007 grant on February 20, 2008 was $1 million.

In 2008 under the 2007 Plan, performance shares were granted to officers and key employees. Performance share awardsunder the 2007 Plan contain performance criteria that affect the number of shares that ultimately vest. Generally, eachrecipient of performance shares is entitled to receive shares of common stock shortly after the end of a three-yearperformance period. The number of shares each recipient ultimately receives, if any, is based upon the percentile ranking ofPinnacle West’s earnings per share growth rate at the end of the three-year period as compared with the earnings per sharegrowth rate of all relevant companies in a specified utilities index. The fair value of the grant is estimated on the date of thegrant using the Company’s closing stock price on the date of the grant. Management evaluates the probability of meeting theperformance criteria at each balance sheet date and related compensation cost is amortized over the performance period on astraight-line basis. If the goals are not achieved, no compensation cost is recognized and any previously recognizedcompensation cost is reversed.

In 2008 under the 2007 Plan, restricted stock unit awards and performance shares were granted to a selected set of keyemployees of Pinnacle West on October 21, 2008. This award of performance shares follows the same vesting schedule as theperformance shares awarded in 2006, 2007 and 2008. The award of the restricted stock units follows the same vestingschedule as the 2007 and 2008 restricted stock units for the payment dates on February 20th.

On January 21, 2009 under the 2007 Plan, the Human Resources Committee approved payment of 2008 incentive awardsto officers in the form of Pinnacle West common stock pursuant to the 2007 Plan. This incentive award is included in stockcompensation expense in 2008.

The compensation cost that has been charged against Pinnacle West’s income for share-based compensation plans was$8 million in 2008, $6 million in 2007 and $13 million in 2006. The compensation cost that Pinnacle West has capitalizedwas immaterial in 2008, 2007 and 2006. Pinnacle West’s total income tax benefit recognized in the Consolidated Statementsof Income for share-based compensation arrangements was $3 million in 2008, $2 million in 2007 and $5 million in 2006.APS’ share of compensation cost that has been charged against income was $7 million in 2008, $6 million in 2007 and$12 million in 2006.

The following table is a summary of option activity under our equity incentive plans as of December 31, 2008 andchanges during the year:

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Weighted- Average Aggregate Weighted- Remaining Intrinsic Value Shares Average Exercise Contractual Term (dollars inOptions (in thousands) Price (Years) thousands)

Outstanding at January 1, 2008 861 $ 40.84 Exercised — — Forfeited or expired 165 45.18

Outstanding at December 31, 2008 696 39.81 2.6 $ —

Exercisable at December 31, 2008 696 39.81 2.6 $ —

There were no options granted during the years 2006 through 2008. The intrinsic value of options exercised was zero for2008, $2 million for 2007 and $5 million for 2006.

The following table is a summary of the status of stock compensation awards, other than options, as of December 31, 2008and changes during the year: Shares Weighted-Average Grant-DateNonvested shares (in thousands) Fair Value

Nonvested at January 1, 2008 379 $ 43.64 Granted 287 36.07 Vested 159 41.64 Forfeited 216 43.62

Nonvested at December 31, 2008 291 39.98

As of December 31, 2008, there was $7 million of total unrecognized compensation cost related to nonvested share-basedcompensation arrangements granted under the plans. That cost is expected to be recognized over a weighted-average periodof 2.3 years. The total fair value of shares vested during 2008 was $5 million, $6 million for 2007 and $10 million for 2006.

The following table is a summary of the amount and weighted-average grant date fair value of stock compensation awardsgranted, other than options, during the years ended December 31, 2008, 2007 and 2006:

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2008 2008 Grant 2007 2007 Grant 2006 Grant Shares/ Date Fair Shares/ Date Fair 2006 Date Fair

Units Value (a) Units Value (a) Shares Value (a)

Restricted stock awardunits 42,552 $37.00 27,026 $46.58 — $ —

Restricted cash awardunits 149,856 37.00 107,891 46.58 — —

Performance share awards 193,192 37.00 134,917 48.42 274,070 41.50 Stock ownership incentive

awards — — — — 12,526 41.50 Retention unit awards — — — — 123,197 49.92 Special grant — — 2,000 41.88 — — Special award restricted

stock award units 18,500 $31.82 — — — — Special award restricted

cash award units 13,750 $31.82 — — — — Special award performance

share awards 33,050 $31.82 — — — —

(a) Restricted stock units, performance shares, special grant and stock ownership incentive awards priced at the closingmarket price on the grant date.

Cash received from options exercised under our share-based payment arrangements was zero for 2008, $8 million for2007 and $22 million for 2006. The tax benefit realized for the tax deductions from option exercises of the share-basedpayment arrangements was zero for 2008, $1 million for 2007 and $2 million for 2006.

Pinnacle West’s current policy is to issue new shares to satisfy share requirements for stock compensation plans and itdoes not expect to repurchase any shares during 2009.

17. Business Segments

Pinnacle West’s two reportable business segments are:

• our regulated electricity segment, which consists of traditional regulated retail and wholesale electricity businesses(primarily electricity service to Native Load customers) and related activities and includes electricity generation,transmission and distribution; and

• our real estate segment, which consists of SunCor’s real estate development and investment activities.

Financial data for 2008, 2007 and 2006 is provided as follows (dollars in millions):

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Business Segments for the Year Ended December 31, 2008 Regulated Electricity

Segment Real Estate Segment All other (a) Total

Operating revenues $ 3,127 $ 131 $ 109 $ 3,367 Purchased power and fuel costs 1,284 — 46 1,330 Other operating expenses 927 203 40 1,170

Operating margin 916 (72) 23 867 Depreciation and amortization 383 5 2 390 Interest expense 189 6 2 197 Other expense (income) (4) (3) 8 1

Income from continuing operations before incometaxes 348 (80) 11 279

Income taxes 92 (31) 4 65

Income from continuing operations 256 (49) 7 214 Income from discontinued operations – net of income

tax expense of $18 million (see Note 22) — 23 5 28

Net income $ 256 $ (26) $ 12 $ 242

Total assets $10,951 $ 523 $ 146 $11,620

Capital expenditures $ 856 $ 41 $ 7 $ 904

Business Segments for the Year Ended December 31, 2007 Regulated Electricity

Segment Real Estate Segment All other (a) Total

Operating revenues $ 2,918 $ 212 $ 187 $ 3,317 Purchased power and fuel costs 1,141 — 100 1,241 Other operating expenses 836 193 60 1,089

Operating margin 941 19 27 987 Depreciation and amortization 366 4 2 372 Interest expense 180 4 1 185 Other expense (income) (18) (10) 8 (20)

Income from continuing operations before incometaxes 413 21 16 450

Income taxes 139 7 5 151

Income from continuing operations 274 14 11 299 Income from discontinued operations – net of income

tax expense of $6 million (see Note 22) — 9 (1) 8

Net income $ 274 $ 23 $ 10 $ 307

Total assets $10,356 $ 661 $ 145 $11,162

Capital expenditures $ 900 $ 161 $ 3 $ 1,064

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Business Segments for the Year Ended December 31, 2006 Regulated Electricity Real Estate

Segment Segment All other (a) Total

Operating revenues $ 2,635 $ 400 $ 173 $ 3,208 Purchased power and fuel costs 960 — 106 1,066 Other operating expenses 791 325 50 1,166

Operating margin 884 75 17 976 Depreciation and amortization 354 3 2 359 Interest expense 173 1 2 176 Other expense (income) (22) (11) 2 (31)

Income from continuing operations before income taxes 379 82 11 472 Income taxes 120 32 4 156

Income from continuing operations 259 50 7 316 Income from discontinued operations – net of income tax

expense of $7 million (see Note 22) — 10 1 11

Net income $ 259 $ 60 $ 8 $ 327

Capital expenditures $ 662 $ 201 $ 7 $ 870

(a) All other activities relate to marketing and trading, APSES, Silverhawk and El Dorado. Income from discontinuedoperations for 2008 is primarily related to the resolution of certain tax issues associated with the sale of Silverhawk in2005. None of these segments is a reportable segment.

18. Derivative and Energy Trading Accounting

We are exposed to the impact of market fluctuations in the commodity price and transportation costs of electricity, naturalgas, coal, and in interest rates. We manage risks associated with these market fluctuations by utilizing various instrumentsthat qualify as derivatives, including exchange-traded futures and options and over-the-counter forwards, options and swaps.As part of our overall risk management program, we use such instruments to hedge purchases and sales of electricity andfuels. As of December 31, 2008, we hedged certain exposures to the price variability of commodities for a maximum of 39months. The changes in market value of such contracts have a high correlation to price changes in the hedged transactions.

We recognize all derivatives, except those which qualify for a scope exception, as either assets or liabilities on the balancesheet and measure those instruments at fair value in accordance with SFAS No. 133, as amended by SFAS No. 149.Derivative commodity contracts for the physical delivery of purchase and sale quantities transacted in the normal course ofbusiness qualify for the normal purchase and sales exception and are accounted for under the accrual method of accounting.Changes in the fair value of derivative instruments are recognized periodically in income unless certain hedge criteria aremet. For cash flow hedges, the effective portion of changes in the fair value of the derivative is recognized in common stockequity (as a component of other comprehensive income (loss)). For fair value hedges, the gain or loss on the derivative aswell as the offsetting loss

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or gain on the hedged item associated with the hedged risk are recognized in earnings. We use cash flow hedges to limit ourexposure to cash flow variability on forecasted transactions. We use fair value hedges to limit our exposure to changes in fairvalue of an asset or liability.

For its regulated operations, APS defers for future rate recovery approximately 90% of gains and losses on derivatives thatwould otherwise be recognized in income pursuant to the PSA mechanism. In the following discussion, amounts that wouldotherwise be recognized in income will be recorded as either a regulatory asset or liability and have no effect on earnings tothe extent these amounts are eligible to be recovered through the PSA.

We assess hedge effectiveness both at inception and on a continuing basis. Hedge effectiveness is related to the degree towhich the derivative contract and the hedged item are correlated and is measured based on the relative changes in fair valuebetween the derivative contract and the hedged item over time. We exclude the time value of certain options from ourassessment of hedge effectiveness. Any change in the fair value resulting from ineffectiveness, or the amount by which thederivative contract and the hedged commodity are not directly correlated, is recognized immediately in net income.

Derivatives that do not qualify for a scope exception are classified as assets and liabilities from risk management andtrading activities on the Consolidated Balance Sheets. Certain of our non-trading derivatives qualify for cash flow hedgeaccounting treatment. Non-trading derivatives, or any portion thereof that are not effective hedges, are adjusted to fair valuethrough income. Realized gains and losses related to non-trading derivatives that qualify as cash flow hedges of expectedtransactions are recognized in revenue or purchased power and fuel expense as an offset to the related item being hedgedwhen the underlying hedged physical transaction impacts earnings. If it becomes probable that a forecasted transaction willnot occur, we discontinue the use of hedge accounting and recognize in income the unrealized gains and losses that werepreviously recorded in other comprehensive income (loss). In the event a non-trading derivative is terminated or settled, theunrealized gains and losses remain in other comprehensive income (loss), and are recognized in income when the underlyingtransaction impacts earnings.

All gains and losses (realized and unrealized) on trading contracts that qualify as derivatives are included in marketing andtrading revenues on the Consolidated Statements of Income on a net basis. Trading contracts that do not meet the definitionof a derivative are accounted for on an accrual basis with the associated revenues and costs recorded at the time thecontracted commodities are delivered or received.

In the electricity business, some contracts to purchase energy are netted against other contracts to sell energy. This iscalled “book-out” and usually occurs in contracts that have the same terms (quantities and delivery points) and for whichpower does not flow. We net these book-outs, which reduces both revenues and fuel and purchased power costs in ourConsolidated Statement of Income, but this does not impact our financial condition, net income or cash flows.

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Cash Flow Hedges

The changes in the fair value of our hedged positions included in the Consolidated Statements of Income, afterconsideration of amounts deferred under the PSA, for the years ended December 31, 2008, 2007 and 2006 are comprised ofthe following (dollars in thousands): 2008 2007 2006

Gains (losses) on the ineffective portion of derivatives qualifying forhedge accounting $(1,874) $1,430 $(5,666)

Losses from the change in options’ time value excluded frommeasurement of effectiveness — — (10)

Gains from the discontinuance of Cash flow hedges — 320 453

During 2009, we estimate that a net loss of $91 million before income taxes will be reclassified from accumulated othercomprehensive income as an offset to the effect of market price changes for the related hedged transactions. To the extent theamounts are eligible for inclusion in the PSA, the amounts will be recorded as either a regulatory asset or liability and haveno effect on earnings (see Note 3).

We adopted FASB Staff Position No. FIN 39-1, “Amendment of FASB Interpretation No. 39, Offsetting of AmountsRelated to Certain Contracts” (FIN 39-1) on January 1, 2008. In accordance with this guidance, we elected to offset the fairvalue amounts for derivative instruments, including collateral, executed with the same counterparty under a master nettingarrangement. The following table summarizes our assets and liabilities from risk management and trading activities inaccordance with FIN 39-1 at December 31, 2008 and 2007 (dollars in thousands): Investments Deferred Current and Other Current Credits and Net Asset December 31, 2008 Assets Assets Liabilities Other (Liability)

Mark-to-market $18,759 $ 33,675 $(190,478) $(144,331) $(282,375)Margin account 15,222 — 50,136 4,247 69,605 Collateral provided to counterparties 400 — 71,008 13,552 84,960 Collateral provided from counterparties (1,800) — (251) — (2,051)

Total $32,581 $ 33,675 $ (69,585) $(126,532) $(129,861)

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Investments Deferred Current and Other Current Credits and Net Asset December 31, 2007 Assets Assets Liabilities Other (Liability)

Mark-to-market $26,333 $ 48,928 $(30,786) $ (4,701) $39,774 Margin account 30,650 — 6,148 — 36,798 Collateral provided to counterparties 622 — 128 — 750 Collateral provided from counterparties — — — — —

Total $57,605 $ 48,928 $(24,510) $ (4,701) $77,322

We maintain a margin account with a broker to support our risk management and trading activities. Cash is deposited withthe broker in this account at the time futures or options contracts are initiated. The change in market value of these contracts(reflected in mark-to-market) requires adjustment of the margin account balance.

Credit Risk

We are exposed to losses in the event of nonperformance or nonpayment by counterparties. We have risk management andtrading contracts with many counterparties, including one counterparty for which a worst case exposure representsapproximately 60% of Pinnacle West’s $66 million of risk management and trading assets as of December 31, 2008. Thisexposure relates to a long-term traditional wholesale contract with a counterparty that has very high credit quality. Our riskmanagement process assesses and monitors the financial exposure of all counterparties. Despite the fact that the greatmajority of trading counterparties’ securities are rated as investment grade by the credit rating agencies, there is still apossibility that one or more of these companies could default, resulting in a material impact on consolidated earnings for agiven period. Counterparties in the portfolio consist principally of financial institutions, major energy companies,municipalities and local distribution companies. We maintain credit policies that we believe minimize overall credit risk towithin acceptable limits. Determination of the credit quality of our counterparties is based upon a number of factors,including credit ratings and our evaluation of their financial condition. To manage credit risk, we employ collateralrequirements, standardized agreements that allow for the netting of positive and negative exposures associated with a singlecounterparty. Valuation adjustments are established representing our estimated credit losses on our overall exposure tocounterparties. See Note 1. “Derivative Accounting,” for a discussion of our credit valuation adjustment policy.

See Note 14 for a discussion of SFAS No. 157, “Fair Value Measurements,” which we adopted January 1, 2008.

19. Other Income and Other Expense

The following table provides detail of other income and other expense for 2008, 2007 and 2006 (dollars in thousands):

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2008 2007 2006

Other income: Interest income $ 7,602 $ 11,656 $ 18,862 SunCor other income (a) 2,499 10,702 10,881 SO2 emission allowance sales and other — — 10,782 Investment gains – net — — 2,554 Miscellaneous 1,977 2,336 949

Total other income $ 12,078 $ 24,694 $ 44,028

Other expense:

Non-operating costs $(13,030) $(13,993) $(16,200)Investment losses – net (17,703) (2,341) — Miscellaneous (843) (9,523) (11,577)

Total other expense $(31,576) $(25,857) $(27,777)

(a) Includes equity earnings from a real estate joint venture that is a pass-through entity for tax purposes.

20. Variable-Interest Entities

In 1986, APS entered into agreements with three separate VIE lessors in order to sell and lease back interests in PaloVerde Unit 2. The leases are accounted for as operating leases in accordance with GAAP. We are not the primary beneficiaryof the Palo Verde VIEs and, accordingly, do not consolidate them (see Note 9).

APS is exposed to losses under the Palo Verde sale leaseback agreements upon the occurrence of certain events that APSdoes not consider to be reasonably likely to occur. Under certain circumstances (for example, the NRC issuing specifiedviolation orders with respect to Palo Verde or the occurrence of specified nuclear events), APS would be required to assumethe debt associated with the transactions, make specified payments to the equity participants, and take title to the leased Unit2 interests, which, if appropriate, may be required to be written down in value. If such an event had occurred as ofDecember 31, 2008, APS would have been required to assume approximately $174 million of debt and pay the equityparticipants approximately $162 million.

SunCor has certain land development arrangements that are required to be consolidated under FIN 46R, “Consolidation ofVariable Interest Entities.” The assets and non-controlling interests reflected in our Consolidated Balance Sheets related tothese arrangements were approximately $29 million at December 31, 2008 and $38 million at December 31, 2007.

21. Guarantees

We have issued parental guarantees and letters of credit and obtained surety bonds on behalf of some of our subsidiaries.Our parental guarantees for Pinnacle West Marketing & Trading and APS relate to commodity energy products. As requiredby Arizona law, Pinnacle West has also obtained a $10 million bond on behalf of APS in connection with the interim baserate surcharge approved by the ACC in December 2008. See “2008 General Rate Case – Interim Rate Surcharge” in Note 3.Our credit support instruments enable APSES to offer energy-related products and

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commodity energy. Non-performance or non-payment under the original contract by our subsidiaries would require us toperform under the guarantee or surety bond. No liability is currently recorded on the Consolidated Balance Sheets related toPinnacle West’s current outstanding guarantees on behalf of our subsidiaries. At December 31, 2008 we had no guaranteesthat were in default. Our guarantees have no recourse or collateral provisions to allow us to recover amounts paid under theguarantees. The amounts and approximate terms of our guarantees and surety bonds for each subsidiary at December 31,2008 are as follows (dollars in millions): Guarantees Surety Bonds Term Term

Amount (in years) Amount (in years)

Parental: Pinnacle West Marketing & Trading $ 2 1 $ — — APSES 14 1 11 1 APS — — 11 1

Total $ 16 $ 22

At December 31, 2008, Pinnacle West had approximately $7 million of letters of credit related to workers’ compensationexpiring in 2009. We intend to provide from either existing or new facilities for the extension, renewal or substitution of theletters of credit to the extent required.

APS has entered into various agreements that require letters of credit for financial assurance purposes. At December 31,2008, approximately $200 million of letters of credit were outstanding to support existing pollution control bonds ofapproximately $200 million. The letters of credit are available to fund the payment of principal and interest of such debtobligations and expire in 2010. APS has also entered into approximately $78 million of letters of credit to support certainequity lessors in the Palo Verde sale leaseback transactions (see Notes 9 and 20 for further details on the Palo Verde saleleaseback transactions). These letters of credit expire in 2010. APS intends to provide from either existing or new facilitiesfor the extension, renewal or substitution of the letters of credit to the extent required.

We enter into agreements that include indemnification provisions relating to liabilities arising from or related to certain ofour agreements; most significantly, APS has agreed to indemnify the equity participants and other parties in the Palo Verdesale leaseback transactions with respect to certain tax matters. Generally, a maximum obligation is not explicitly stated in theindemnification provisions and, therefore, the overall maximum amount of the obligation under such indemnificationprovisions cannot be reasonably estimated. Based on historical experience and evaluation of the specific indemnities, we donot believe that any material loss related to such indemnification provisions is likely.

22. Discontinued Operations

SunCor (real estate segment) – In 2008, 2007 and 2006, SunCor sold commercial properties, which are required to bereported as discontinued operations on Pinnacle West’s Consolidated Statements of Income in accordance with SFASNo. 144. As a result of the sales, we recorded a gain from discontinued operations of approximately $24 million ($40 millionpretax) in 2008; $10 million ($17 million pretax) in 2007; and $9 million ($15 million pretax) in 2006.

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Silverhawk – Includes activities related to the resolution of certain tax issues in 2008 associated with the sale ofSilverhawk in 2005.

Other – Includes activities related to the APSES discontinued commodity-related energy services in 2008, and theassociated revenues and costs that were reclassified to discontinued operations in 2008, 2007 and 2006.

The following table provides revenue, income (loss) before income taxes and income (loss) after taxes classified asdiscontinued operations in Pinnacle West’s Consolidated Statements of Income for the years ended December 31, 2008, 2007and 2006 (dollars in millions): 2008 2007 2006

Revenue: SunCor – commercial operations $ 1 $ 6 $ 3 Other (primarily APSES) (a) 67 204 195

Total revenue $ 68 $ 210 $ 198

Income (loss) before taxes:

SunCor – commercial operations $ 37 $ 15 $ 17 Silverhawk 13 — 1 Other (primarily APSES) (3) (1) —

Total income before taxes $ 47 $ 14 $ 18

Income (loss) after taxes:

SunCor – commercial operations $ 23 $ 9 $ 10 Silverhawk 8 — — Other (primarily APSES) (3) (1) 1

Total income after taxes $ 28 $ 8 $ 11

(a) APSES discontinued its commodity-related energy services in 2008 and the associated revenues and costs werereclassified to discontinued operations in 2008, 2007 and 2006.

23. Real Estate Impairment Charge

During 2008, particularly late in the year, the real estate market weakened significantly resulting from the severe liquidityshortages in the financial markets, oversupply of home inventories, tight credit markets and downward pressure on residentialand commercial property values. The effects of these factors have resulted in elevated cancellation rates, low sales absorptionrates and overall weak consumer confidence. In recent months, the overall economy has weakened significantly and fears of aprolonged recession are now pronounced due to rising unemployment levels, further deterioration in consumer confidenceand reduced consumer spending. Also, because of terms of renewal of SunCor’s Secured Revolver (see Note 6), during thefourth quarter of 2008, we revised forecasts related to potential disposal of certain assets classified as home inventory and asheld and used. These factors resulted in 2008 impairment charges of $24 million related to our home inventory, which isconsidered held for sale and $29 million related to our held and used assets. The held and used assets include a project underdevelopment, an office building, a golf course, and completed home lots in Arizona. We determine fair value for our realestate assets primarily based on the future cash flows that we estimate will be generated by each asset discounted for marketrisk. Our impairment assessments and fair value determinations require significant judgment regarding key assumptions suchas future sales prices, future construction and land development costs, future sales timing, and discount rates. Theassumptions are specific

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to each project and may vary among projects. The discount rates we used to determine fair values at December 31, 2008ranged from 17% to 27%. Due to the judgment and assumptions applied in the estimation process, with regard toimpairments, it is possible that actual results could differ from those estimates. If conditions in the broader economy or thereal estate markets worsen, or as a result of a change in SunCor’s strategy, we may be required to record additionalimpairments.

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MANAGEMENT’S REPORT ON INTERNAL CONTROLOVER FINANCIAL REPORTING

(ARIZONA PUBLIC SERVICE COMPANY)

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as suchterm is defined in Exchange Act Rules 13a-15(f), for Arizona Public Service Company. Management conducted anevaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control –Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on ourevaluation under the framework in Internal Control – Integrated Framework, our management concluded that our internalcontrol over financial reporting was effective as of December 31, 2008. The effectiveness of our internal control overfinancial reporting as of December 31, 2008 has been audited by Deloitte & Touche LLP, an independent registered publicaccounting firm, as stated in their report which is included herein and also relates to the Company’s financial statements.

February 19, 2009

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholder ofArizona Public Service CompanyPhoenix, Arizona

We have audited the accompanying balance sheets of Arizona Public Service Company (the “Company”) as of December 31,2008 and 2007, and the related statements of income, changes in common stock equity, and cash flows for each of the threeyears in the period ended December 31, 2008. Our audits also included the financial statement schedule listed in the Index atItem 15. We also have audited the Company’s internal control over financial reporting as of December 31, 2008, based oncriteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission. The Company’s management is responsible for these financial statements and financial statementschedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness ofinternal control over financial reporting, included in the accompanying Management’s Report on Internal Control OverFinancial Reporting. Our responsibility is to express an opinion on these financial statements and financial statementschedule and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (UnitedStates). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement and whether effective internal control over financial reporting was maintained inall material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates madeby management, and evaluating the overall financial statement presentation. Our audit of internal control over financialreporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a materialweakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe thatour audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’sprincipal executive and principal financial officers, or persons performing similar functions, and effected by the company’sboard of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets ofthe company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directors of the company; and (3) provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assetsthat could have a material effect on the financial statements.

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Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to error or fraud may not be prevented or detected ona timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to futureperiods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of theCompany as of December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the three years inthe period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States ofAmerica. Also, in our opinion, such financial statement schedule, when considered in relation to the basic financialstatements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also, in our opinion, theCompany maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008,based on the criteria established in Internal Control – Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission.

As reflected in the statements of changes in common stock equity, the Company adopted Statement of Financial AccountingStandards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, effectiveDecember 31, 2006. /s/ Deloitte & Touche LLP

DELOITTE & TOUCHE LLP Phoenix, ArizonaFebruary 19, 2009

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ARIZONA PUBLIC SERVICE COMPANYSTATEMENTS OF INCOME


2008 2007 2006

ELECTRIC OPERATING REVENUES $3,133,496 $2,936,277 $2,658,513 OPERATING EXPENSES

Fuel and purchased power 1,289,883 1,151,392 969,767 Operations and maintenance 787,270 710,077 665,631 Depreciation and amortization 383,098 365,430 353,057 Income taxes (Notes 4 and S-1) 113,799 155,735 144,127 Other taxes 124,046 127,648 127,989

Total 2,698,096 2,510,282 2,260,571

OPERATING INCOME 435,400 425,995 397,942

OTHER INCOME (DEDUCTIONS)

Income taxes (Notes 4 and S-1) 6,538 4,578 5,200 Allowance for equity funds used during construction 18,636 21,195 14,312 Other income (Note S-4) 6,231 16,727 31,902 Other expense (Note S-4) (30,569) (21,630) (23,830)

Total 836 20,870 27,584

INTEREST DEDUCTIONS

Interest on long-term debt 170,071 161,030 149,240 Interest on short-term borrowings 13,432 9,564 9,529 Debt discount, premium and expense 4,702 4,639 4,363 Allowance for borrowed funds used during construction (14,313) (12,308) (7,336)

Total 173,892 162,925 155,796

NET INCOME $ 262,344 $ 283,940 $ 269,730

See Notes to Pinnacle West’s Consolidated Financial Statements and Supplemental Notes to Arizona Public ServiceCompany’s Financial Statements.

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ARIZONA PUBLIC SERVICE COMPANYBALANCE SHEETS(dollars in thousands)

December 31,

2008 2007

ASSETS UTILITY PLANT (Notes 1, 6, 9 and 10)

Electric plant in service and held for future use $12,198,010 $11,582,862 Less accumulated depreciation and amortization 4,129,958 3,994,777

Net 8,068,052 7,588,085

Construction work in progress 571,977 622,693 Intangible assets, net of accumulated amortization of $280,633 and $250,268 131,243 105,225 Nuclear fuel, net of accumulated amortization of $55,343 and $68,375 89,323 69,271

Total utility plant 8,860,595 8,385,274

INVESTMENTS AND OTHER ASSETS

Nuclear decommissioning trust (Note 12) 343,052 379,347 Assets from risk management and trading activities (Note S-3) 33,675 41,603 Other assets 60,604 69,570

Total investments and other assets 437,331 490,520

CURRENT ASSETS

Cash and cash equivalents 71,544 52,151 Customer and other receivables 262,177 295,371 Accrued utility revenues 100,089 106,873 Allowance for doubtful accounts (3,155) (4,265)Materials and supplies (at average cost) 173,252 149,759 Fossil fuel (at average cost) 29,752 27,792 Assets from risk management and trading activities (Note S-3) 32,181 34,087 Deferred income taxes (Notes 4 and S-1) 79,694 38,707 Other 19,866 16,545


DEFERRED DEBITS

Deferred fuel and purchased power regulatory asset (Notes 1, 3, 4 and S-1) 7,984 110,928 Other regulatory assets (Notes 1, 3, 4 and S-1) 787,506 514,353 Unamortized debt issue costs 22,026 24,373 Other 82,735 78,934

Total deferred debits 900,251 728,588

TOTAL ASSETS $10,963,577 $10,321,402


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ARIZONA PUBLIC SERVICE COMPANYBALANCE SHEETS(dollars in thousands)

December 31,

2008 2007

LIABILITIES AND EQUITY CAPITALIZATION

Common stock $ 178,162 $ 178,162 Additional paid-in capital (Note 3) 2,117,789 2,105,466 Retained earnings 1,168,901 1,076,557 Accumulated other comprehensive income (loss):

Pension and other postretirement benefits (Note 8) (26,960) (21,782)Derivative instruments (98,742) 13,038

Common stock equity 3,339,150 3,351,441 Long-term debt less current maturities (Note 6) 2,850,242 2,876,881

Total capitalization 6,189,392 6,228,322

CURRENT LIABILITIES

Short-term borrowings 521,684 218,000 Current maturities of long-term debt (Note 6) 874 978 Accounts payable 233,529 239,923 Accrued taxes 219,129 374,444 Accrued interest 39,860 38,262 Customer deposits 77,452 71,376 Liabilities from risk management and trading activities (Note S-3) 69,585 19,921 Other 105,655 92,802

Total current liabilities 1,267,768 1,055,706

DEFERRED CREDITS AND OTHER

Deferred income taxes (Notes 4 and S-1) 1,401,412 1,250,028 Regulatory liabilities (Notes 1, 3, 4, and S-1) 587,586 642,564 Liability for asset retirements (Note 12) 275,970 281,903 Liabilities for pension and other postretirement benefits (Note 8) 635,327 469,945 Customer advances for construction 132,023 94,801 Liabilities from risk management and trading activities (Note S-3) 126,532 4,573 Other 347,567 293,560

Total deferred credits and other 3,506,417 3,037,374

COMMITMENTS AND CONTINGENCIES (SEE NOTES) TOTAL LIABILITIES AND EQUITY $10,963,577 $10,321,402


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ARIZONA PUBLIC SERVICE COMPANYSTATEMENTS OF CASH FLOWS


2008 2007 2006

CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 262,344 $ 283,940 $ 269,730 Adjustments to reconcile net income to net cash provided by

operating activities: Depreciation and amortization including nuclear fuel 416,709 395,890 381,173 Deferred fuel and purchased power (80,183) (196,136) (252,849)Deferred fuel and purchased power amortization 183,126 231,106 265,337 Deferred fuel and purchased power regulatory disallowance — 14,370 — Allowance for equity funds used during construction (18,636) (21,195) (14,312)Deferred income taxes 145,157 (44,478) (305)Change in mark-to-market valuations 7,792 (6,758) 6,893

Changes in current assets and liabilities: Customer and other receivables 47,566 23,882 20,970 Materials, supplies and fossil fuel (25,453) (29,776) (14,381)Other current assets 128 (8,056) 3,666 Accounts payable (5,915) (2,797) 5,825 Other current liabilities 8,150 34,033 68,803

Change in margin and collateral accounts – assets 17,850 11,252 (205,752)Change in margin and collateral accounts – liabilities (132,416) 27,624 (166,088)Change in unrecognized tax benefits (92,064) 27,773 — Change in other long-term assets 14,340 (23,577) 2,828 Change in other long-term liabilities 36,765 48,718 22,175

Net cash flow provided by operating activities 785,260 765,815 393,713

CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (910,189) (924,166) (699,946)Contributions in aid of construction 60,292 41,809 51,203 Allowance for borrowed funds used during construction (14,313) (12,308) (7,336)Proceeds from sale of investment securities — 69,225 1,259,203 Purchases of investment securities — (36,525) (1,291,903)Proceeds from nuclear decommissioning trust sales 317,619 259,026 254,651 Investment in nuclear decommissioning trust (338,361) (279,768) (275,393)Other 5,517 1,211 (4,470)

Net cash flow used for investing activities (879,435) (881,496) (713,991)

CASH FLOWS FROM FINANCING ACTIVITIES Issuance of long-term debt — — 395,481 Short-term borrowings – net 303,684 218,000 — Equity infusion 7,601 39,548 212,820 Dividends paid on common stock (170,000) (170,000) (170,000)Repayment and reacquisition of long-term debt (27,717) (1,586) (86,086)

Net cash flow provided by financing activities 113,568 85,962 352,215

NET INCREASE (DECREASE) IN CASH AND CASHEQUIVALENTS 19,393 (29,719) 31,937

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 52,151 81,870 49,933

CASH AND CASH EQUIVALENTS AT END OF YEAR $ 71,544 $ 52,151 $ 81,870

Supplemental disclosure of cash flow information: Cash paid during the year for:

Income taxes, net of refunds $ 56,728 $ 186,183 $ 117,831 Interest, net of amounts capitalized $ 167,592 $ 165,279 $ 131,183


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ARIZONA PUBLIC SERVICE COMPANYSTATEMENTS OF CHANGES IN COMMON STOCK EQUITY


2008 2007 2006

COMMON STOCK $ 178,162 $ 178,162 $ 178,162

ADDITIONAL PAID-IN CAPITAL 2,117,789 2,105,466 2,065,918

RETAINED EARNINGS Balance at beginning of year 1,076,557 960,405 860,675 Net income 262,344 283,940 269,730 Common stock dividends (170,000) (170,000) (170,000)Cumulative effect of change in accounting for income taxes (Note S-1) — 2,212 —

Balance at end of year 1,168,901 1,076,557 960,405

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Balance at beginning of year (8,744) 2,988 93,290 Pension and other postretirement benefits (Note 8):

Unrealized actuarial loss, net of tax benefit of ($5,075) and($15,126) (7,597) (23,304) —

Prior service cost, net of tax benefit of ($463) — (713) — Amortization to income:

Actuarial loss, net of tax expense of $1,393 and $1,238 2,130 1,908 — Prior service cost, net of tax expense of $189 and $212 289 327 —

Minimum pension liability adjustment, net of tax expense of $27,424 — — 42,731 Adjustment to reflect a change in accounting (SFAS No. 158), net of

tax expense of $27,760 — — 43,401 Derivative instruments:

Net unrealized gain (loss), net of tax expense (benefit) of ($56,149),$1,369, and ($111,367) (85,670) 2,040 (173,872)

Reclassification of net realized (gains) losses to income, net of taxexpense (benefit) of ($16,890), $5,164, and ($1,657) (26,110) 8,010 (2,562)

Balance at end of year (125,702) (8,744) 2,988

TOTAL COMMON STOCK EQUITY $3,339,150 $3,351,441 $3,207,473

COMPREHENSIVE INCOME Net income $ 262,344 $ 283,940 $ 269,730 Other comprehensive loss (116,958) (11,732) (133,703)

Total comprehensive income $ 145,386 $ 272,208 $ 136,027


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Certain notes to Arizona Public Service Company’s financial statements are combined with the notes to Pinnacle WestCapital Corporation’s consolidated financial statements. Listed below are the consolidated notes to Pinnacle West CapitalCorporation’s consolidated financial statements, the majority of which also relate to Arizona Public Service Company’sfinancial statements. In addition, listed below are the supplemental notes which are required disclosures for Arizona PublicService Company and should be read in conjunction with Pinnacle West Capital Corporation’s Consolidated Notes. Consolidated APS’ Supplemental

Footnote Reference Footnote Reference

Summary of Significant Accounting Policies Note 1 —New Accounting Standards Note 2 —Regulatory Matters Note 3 —Income Taxes Note 4 Note S-1Lines of Credit and Short-Term Borrowings Note 5 —Long-Term Debt and Liquidity Matters Note 6 —Common Stock and Treasury Stock Note 7 —Retirement Plans and Other Benefits Note 8 —Leases Note 9 —Jointly-Owned Facilities Note 10 —Commitments and Contingencies Note 11 —Asset Retirement Obligations Note 12 —Selected Quarterly Financial Data (Unaudited) Note 13 Note S-2Fair Value Measurements Note 14 —Earnings Per Share Note 15 —Stock-Based Compensation Note 16 —Business Segments Note 17 —Derivative and Energy Trading Accounting Note 18 Note S-3Other Income and Other Expense Note 19 Note S-4Variable Interest Entities Note 20 —Guarantees Note 21 —Discontinued Operations Note 22 —Related Party Transactions — Note S-5Real Estate Impairment Charge Note 23 —

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ARIZONA PUBLIC SERVICE COMPANYNOTES TO FINANCIAL STATEMENTS

S-1. Income Taxes

APS is included in Pinnacle West’s consolidated tax return. However, when Pinnacle West allocates income taxes to APS,it is done based upon APS’ taxable income computed on a stand-alone basis, in accordance with the tax sharing agreement.

Certain assets and liabilities are reported differently for income tax purposes than they are for financial statementspurposes. The tax effect of these differences is recorded as deferred taxes. We calculate deferred taxes using the currentincome tax rates.

APS has recorded a regulatory asset and a regulatory liability related to income taxes on its Balance Sheets in accordancewith SFAS No. 71. The regulatory asset is for certain temporary differences, primarily the allowance for equity funds usedduring construction. The regulatory liability relates to deferred taxes resulting primarily from pension and otherpostretirement benefits. APS amortizes these amounts as the differences reverse.

As a result of a change in IRS guidance, we claimed a tax deduction related to an APS tax accounting method change onour 2001 federal consolidated income tax return. The accelerated deduction resulted in a $200 million reduction in the currentincome tax liability and a corresponding increase in the plant-related deferred tax liability. Our 2001 federal consolidatedincome tax return was the subject of an IRS review and the IRS finalized its examination in the second quarter of 2008,which included a settlement on the tax accounting method change and favorable resolution of other various tax matters. As aresult of this settlement and the lapse of federal statutes prior to 2005, we recognized net income tax benefits ofapproximately $30 million, including approximately $23 million related to interest.

We adopted FIN 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109,” onJanuary 1, 2007. The effect of applying the new guidance was not significantly different in terms of tax impacts from theapplication of our previous policy. Accordingly, the impact to retained earnings upon adoption was immaterial. In addition,the guidance required us to reclassify certain tax benefits, which had the effect of increasing accrued taxes and deferred debitsby approximately $50 million to better reflect the expected timing of the payment of taxes and interest. The following is atabular reconciliation of the total amounts of unrecognized tax benefits, excluding interest and penalties, at the beginning andend of the period that are included in accrued taxes and other deferred credits on the Balance Sheets (dollars in thousands): 2008 2007

Total unrecognized tax benefits, January 1 $154,473 $126,700 Additions for tax positions of the current year 12,893 — Additions for tax positions of prior years 32,481 66,610 Reductions for tax positions of prior years for:

Changes in judgment (4,547) (37,419)Settlements with taxing authorities (35,812) (1,418)Lapses of applicable statute of limitations (97,079) —

Total unrecognized tax benefits, December 31 $ 62,409 $154,473

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Included in the balance of unrecognized tax benefits at December 31, 2008 and 2007 were approximately $15 million and$4 million, respectively, of tax positions that, if recognized, would decrease our effective tax rate.

We reflect interest and penalties, if any, on unrecognized tax benefits in the statement of income as income tax expense.The amount of interest recognized in the statement of income related to unrecognized tax benefits was a pre-tax benefit of$51 million for 2008 and a pre-tax expense of $3 million for 2007.

The total amount of accrued liabilities for interest recognized in the balance sheets related to unrecognized tax benefits asof December 31, 2008 and 2007 was $5 million and $56 million, respectively. To the extent that matters are settled favorably,this amount could reverse and decrease our effective tax rate. Additionally, as of December 31, 2008, we have recognized $1million of interest expense to be paid on the underpayment of income taxes for certain adjustments that we have filed, or willfile, with the IRS.

The tax year ended December 31, 2005 and all subsequent tax years remain subject to examination by the IRS. With fewexceptions, we are no longer subject to state income tax examinations by tax authorities for years before 1999. We do notanticipate that there will be any significant increases or decreases in our unrecognized tax benefits within the next 12 months.

The components of APS’ income tax expense are as follows (dollars in thousands): Year Ended December 31,

2008 2007 2006

Current: Federal $ (54,719) $168,607 $114,971 State 16,823 27,028 21,442

Total current (37,896) 195,635 136,413 Deferred 145,157 (44,478) 2,514

Total income tax expense $107,261 $151,157 $138,927

On the APS Statements of Income, federal and state income taxes are allocated between operating income and otherincome.

The following chart compares APS’ pretax income at the 35% federal income tax rate to income tax expense (dollars inthousands):

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2008 2007 2006

Federal income tax expense at 35% statutory rate $129,362 $152,284 $143,030 Increases (reductions) in tax expense resulting from:

State income tax net of federal income tax benefit 14,956 17,540 15,684 Credits and favorable adjustments related to prior years resolved in

current year (28,873) (11,432) (10,518)Medicare Subsidy Part-D (1,921) (3,100) (3,036)Allowance for equity funds used during construction (see Note 1) (5,755) (6,900) (4,656)Other (508) 2,765 (1,577)

Income tax expense $107,261 $151,157 $138,927

The following table shows the net deferred income tax liability recognized on the APS Balance Sheets (dollars inthousands): December 31,

2008 2007

Current asset $ 79,694 $ 38,707 Long-term liability (1,401,412) (1,250,028)


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The components of the net deferred income tax liability were as follows (dollars in thousands): December 31,

2008 2007

DEFERRED TAX ASSETS Regulatory liabilities:

Asset retirement obligation $ 194,326 $ 214,607 Federal excess deferred income tax 9,428 11,091 Tax benefit of Medicare subsidy 4,197 11,727 Other 9,789 26,579

Risk management and trading activities 132,383 12,112 Pension and other postretirement liabilities 265,156 197,620 Deferred gain on Palo Verde Unit 2 sale-leaseback 12,665 14,408 Other 110,019 116,491

Total deferred tax assets 737,963 604,635

DEFERRED TAX LIABILITIES

Plant-related (1,709,872) (1,538,183)Risk management and trading activities (20,732) (17,483)Regulatory assets:

Deferred fuel and purchased power (3,157) (43,661)Deferred fuel and purchased power – mark-to-market (46,593) (2,782)Pension and other postretirement benefits (186,916) (133,120)

Other (92,411) (80,727)

Total deferred tax liabilities (2,059,681) (1,815,956)


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S-2. Selected Quarterly Financial Data (Unaudited)

Quarterly financial information for 2008 and 2007 is as follows (dollars in thousands): 2008 Quarter Ended, 2008


Operating revenues $625,576 $831,083 $1,042,084 $634,753 $3,133,496 Operations and maintenance 188,135 187,819 206,526 204,790 787,270 Operating income 33,628 163,860 202,655 35,257 435,400 Net income (6,364) 125,382 159,754 (16,428) 262,344 2007 Quarter Ended, 2007


Operating revenues $538,260 $721,759 $1,047,062 $629,196 $2,936,277 Operations and maintenance 165,934 170,631 171,963 201,549 710,077 Operating income 40,589 109,643 238,144 37,619 425,995 Net income 4,317 75,090 204,257 276 283,940

S-3. Derivative and Energy Trading Accounting

APS is exposed to the impact of market fluctuations in the commodity price and transportation costs of electricity, naturalgas and coal. As part of its overall risk management program, APS uses various commodity instruments that qualify asderivatives to hedge purchases and sales of electricity and fuels. As of December 31, 2008, APS hedged certain exposures tothese risks for a maximum of 39 months.

Cash Flow Hedges

The changes in the fair value of APS’ hedged positions included in the APS Statements of Income, after consideration ofamounts deferred under the PSA, for the years ended December 31, 2008, 2007 and 2006 are comprised of the following(dollars in thousands): 2008 2007 2006

Gains (losses) on the ineffective portion of derivatives qualifying forhedge accounting $(1,874) $1,430 $(5,666)

Losses from the change in options’ time value excluded frommeasurement of effectiveness — — (10)

Gains from the discontinuance of cash flow hedges — 150 178

During 2009, APS estimates that a net loss of $91 million before income taxes will be reclassified from accumulated othercomprehensive income as an offset to the effect of market price changes for the related hedged transactions. To the extent theamounts are eligible for inclusion in the PSA, the amounts will be recorded as either a regulatory asset or liability and haveno effect on earnings (see Note 3).

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APS adopted FASB Staff Position No. FIN 39-1, “Amendment of FASB Interpretation No. 39, Offsetting of AmountsRelated to Certain Contracts” (FIN 39-1) on January 1, 2008. In accordance with this guidance, APS elected to offset the fairvalue amounts for derivative instruments, including collateral, executed with the same counterparty under a master nettingarrangement. The following table summarizes our assets and liabilities from risk management and trading activities inaccordance with FIN 39-1 at December 31, 2008 and 2007 (dollars in thousands): Investments Deferred and Other Current Credits and Net Asset December 31, 2008 Current Assets Assets Liabilities Other (Liability)

Mark-to-market $ 18,759 $ 33,675 $(190,478) $(144,331) $(282,375)Margin account 15,222 — 50,136 4,247 69,605 Collateral provided to counterparties — — 71,008 13,552 84,560 Collateral provided from counterparties (1,800) — (251) — (2,051)

Total $ 32,181 $ 33,675 $ (69,585) $(126,532) $(130,261)

Investments Deferred and Other Current Credits and Net Asset December 31, 2007 Current Assets Assets Liabilities Other (Liability)

Mark-to-market $ 2,815 $ 41,603 $(26,197) $ (4,573) $13,648 Margin account 30,650 — 6,148 — 36,798 Collateral provided to counterparties 622 — 128 — 750 Collateral provided from counterparties — — — — —

Total $ 34,087 $ 41,603 $(19,921) $ (4,573) $51,196

We maintain a margin account with a broker to support our risk management and trading activities. Cash is deposited withthe broker in this account at the time futures or options contracts are initiated. The change in market value of these contracts(reflected in mark-to-market) requires adjustment of the margin account balance.

See Note 18 for discussion of credit risk and see Note 14 for a discussion of SFAS No. 157, “Fair Value Measurements,”which we adopted January 1, 2008.

S-4. Other Income and Other Expense

The following table provides detail of APS’ other income and other expense for 2008, 2007 and 2006 (dollars inthousands):

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2008 2007 2006

Other income: Interest income $ 3,863 $ 10,961 $ 16,526 SO2 emission allowance sales and other (a) 392 1,001 10,782 Investment gains – net — 2,429 3,645 Miscellaneous 1,976 2,336 949

Total other income $ 6,231 $ 16,727 $ 31,902

Other expense:

Non-operating costs (a) $(10,538) $(12,712) $(15,415)Asset dispositions (5,779) (1,981) (1,851)Investment losses – net (9,438) — — Miscellaneous (4,814) (6,937) (6,564)

Total other expense $(30,569) $(21,630) $(23,830)

(a) As defined by the FERC, includes below-the-line non-operating utility income and expense (items excluded from utilityrate recovery).

S-5. Related Party Transactions

From time to time, APS enters into transactions with Pinnacle West or Pinnacle West’s other subsidiaries. The followingtable summarizes the amounts included in the APS Statements of Income and Balance Sheets related to transactions withaffiliated companies (dollars in millions): Year Ended December 31,

2008 2007 2006

Electric operating revenues: Pinnacle West Marketing & Trading (a) $4 $ 4 $ 6

Other:

Equity infusion from Pinnacle West $8 $40 $210

(a) Pinnacle West Marketing & Trading ended operations December 2008. These operations were conducted by a divisionof Pinnacle West through the end of 2006. By the end of 2008, substantially all the contracts were transferred to APS orexpired.

As of December 31,

2008 2007

Net affiliate receivables (payables): Pinnacle West Marketing & Trading (a) $ (1) $ 11 Pinnacle West (11) (9)

Total $ (12) $ 2

(a) Pinnacle West Marketing & Trading began operations in early 2007. These operations were conducted by a division ofPinnacle West through the end of 2006. By the end of 2008, substantially all the contracts were transferred to APS orexpired.

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Electric revenues include sales of electricity to affiliated companies at contract prices. However, these transactions aresettled net and reported net in accordance with EITF 03-11, “Reporting Realized Gains and Losses on Derivative InstrumentsThat Are Subject to FASB Statement No. 133 and Not ‘Held for Trading Purposes’ As Defined in EITF Issue No. 02-3.”

On May 2, 2008, Pinnacle West filed a notice with the ACC that would allow Pinnacle West to infuse up to $400 millionof equity into APS in the event Pinnacle West deems it appropriate to do so to strengthen or maintain APS’ financial integrity.Under Arizona law and implementing regulatory decisions, Pinnacle West is required to give such notice at least 120 daysprior to an equity infusion into APS that exceeds $150 million in a single calendar year. On August 6, 2008, the ACC issuedan order permitting the infusion to occur on or before December 31, 2009.

On November 8, 2005, the ACC approved Pinnacle West’s request to infuse more than $450 million of equity into APSduring 2005 or 2006. These infusions consisted of about $250 million of the proceeds of Pinnacle West’s common equityissuance on May 2, 2005 and about $210 million of the proceeds from the sale of Silverhawk in January 2006. In May 2007,Pinnacle West infused approximately $40 million of equity into APS, consisting of proceeds of stock issuances in 2006 underPinnacle West’s Investors Advantage Plan (direct stock purchase and dividend reinvestment plan) and employee stock plans.

Intercompany receivables primarily include amounts related to the intercompany sales of electricity. Intercompanypayables primarily include amounts related to the intercompany purchases of electricity. Intercompany receivables andpayables are generally settled on a current basis in cash.

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PINNACLE WEST CAPITAL CORPORATION HOLDING COMPANYSCHEDULE I – CONDENSED FINANCIAL INFORMATION OF REGISTRANT

CONDENSED STATEMENTS OF INCOME(in thousands)


2008 2007(a) 2006

Operating revenues $ 52 $ 6,708 $119,224

Operating expenses

Fuel and purchased power (19,970) (35,541) 101,360 Other operating expenses 9,016 5,659 9,607

Total (10,954) (29,882) 110,967

Operating income 11,006 36,590 8,257 Other

Equity in earnings of subsidiaries 226,893 287,078 324,504 Other income 1,248 225 2,208

Total 228,141 287,303 326,712 Interest expense 17,550 17,190 20,522

Income from continuing operations 221,597 306,703 314,447 Income tax benefit (12,374) (440) (12,898)

Income from continuing operations – net of income taxes 233,971 307,143 327,345 Income (loss) from discontinued operations 8,154 — (90)

Net income $242,125 $307,143 $327,255


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CONDENSED BALANCE SHEETS(in thousands)

Balance at December 31,

2008 2007 (a)

Assets Current assets

Cash and cash equivalents $ 6,262 $ 137 Customer and other receivables 65,576 82,003 Other current assets 367 1,262


Investments and other assets

Investments in subsidiaries 3,661,710 3,711,737 Deferred income taxes — 11,806 Other assets 20,029 23,591

Total investments and other assets 3,681,739 3,747,134

Total Assets $3,753,944 $3,830,536

Liabilities and Common Stock Equity Current liabilities

Accounts payable $ 6,310 $ 22,177 Accrued taxes (96,188) (86,081)Short-term borrowings 144,000 115,000 Deferred income taxes — 7,682 Liabilities from risk management and trading activities — 2 Other current liabilities 8,027 18,019

Total current liabilities 62,149 76,799

Long-term debt less current maturities 175,000 175,000 Deferred credits and other

Deferred income taxes 18,027 — Pension and other postretirement liabilities 27,300 22,248 Other 25,489 24,878

Total deferred credits and other 70,816 47,126

Common stock equity

Common stock 2,148,469 2,133,733 Accumulated other comprehensive income (loss) (146,698) (15,863)Retained earnings 1,444,208 1,413,741

Total common stock equity 3,445,979 3,531,611

Total Liabilities and Common Stock Equity $3,753,944 $3,830,536


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CONDENSED STATEMENTS OF CASH FLOWS(in thousands)

Year Ended December 31

2008 2007(a) 2006

Cash flows from operating activities Net Income $ 242,125 $ 307,143 $ 327,255 Adjustments to reconcile net income to net cash provided by operating

activities: Equity in earnings of subsidiaries – net (226,893) (287,078) (324,504)Depreciation and amortization 210 320 470 Deferred income taxes 31,954 (24,192) 30,384 Change in mark-to-market valuations (19,975) 53,228 21,698 Customer and other receivables 38,938 112,543 2,816 Accounts payable (14,134) (57,978) (55,675)Accrued taxes (5,230) 25,127 (49,529)Change in margin and collateral accounts – net — (11,602) 75,605 Other net (7,914) (104,968) (30,718)

Net cash flow (used for) provided by operating activities 39,081 12,543 (2,198)

Cash flows from investing activities Investments in subsidiaries (18,765) (83,993) (4,677)Repayments of loans from subsidiaries 10,194 14,996 18,065 Advances of loans to subsidiaries (22,554) (19,796) (15,379)Dividends received from subsidiaries 170,000 180,000 180,000 Purchases of investment securities — — (147,501)Proceeds from sale of investment securities — — 147,501

Net cash flow provided by investing activities 138,875 91,207 178,009

Cash flows from financing activities Issuance of long-term debt — — 175,000 Short-term borrowings and payments – net 28,729 87,371 27,900 Dividends paid on common stock (204,247) (210,473) (201,221)Repayment of long-term debt — (115) (298,687)Common stock equity issuance 3,687 19,593 35,834

Net cash flow used for financing activities (171,831) (103,624) (261,174)

Net increase (decrease) in cash and cash equivalents 6,125 126 (85,363)

Cash and cash equivalents at beginning of year 137 11 85,374

Cash and cash equivalents at end of year $ 6,262 $ 137 $ 11


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PINNACLE WEST CAPITAL CORPORATIONSCHEDULE II – RESERVE FOR UNCOLLECTIBLES

(dollars in thousands) Column C

Column B Additions Column E Balance at Charged to Charged Balance

Column A beginning cost and to other Column D at end ofDescription of period expenses accounts Deductions period

Reserve for uncollectibles: 2008 $4,782 $6,177 $ — $7,576 $3,383 2007 5,597 4,130 — 4,945 4,782 2006 4,979 4,096 — 3,478 5,597

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ARIZONA PUBLIC SERVICE COMPANYSCHEDULE II – RESERVE FOR UNCOLLECTIBLES

(dollars in thousands) Column C

Column B Additions Column E Balance at Charged to Charged Balance

Column A beginning cost and to other Column D at end ofDescription of period expenses accounts Deductions period

Reserve for uncollectibles: 2008 $4,265 $5,924 $ — $7,034 $3,155 2007 4,223 5,059 — 5,017 4,265 2006 3,568 4,096 — 3,441 4,223

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTSON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures

The term “disclosure controls and procedures” means controls and other procedures of a company that are designed toensure that information required to be disclosed by a company in the reports that it files or submits under the SecuritiesExchange Act of 1934 (the “Exchange Act”) (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, withinthe time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation,controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it filesor submits under the Exchange Act is accumulated and communicated to a company’s management, including its principalexecutive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisionsregarding required disclosure.

Pinnacle West’s management, with the participation of Pinnacle West’s Chief Executive Officer and Chief FinancialOfficer, have evaluated the effectiveness of Pinnacle West’s disclosure controls and procedures as of December 31, 2008.Based on that evaluation, Pinnacle West’s Chief Executive Officer and Chief Financial Officer have concluded that, as of thatdate, Pinnacle West’s disclosure controls and procedures were effective.

APS’ management, with the participation of APS’ Chief Executive Officer and Chief Financial Officer, have evaluated theeffectiveness of APS’ disclosure controls and procedures as of December 31, 2008. Based on that evaluation, APS’ ChiefExecutive Officer and Chief Financial Officer have concluded that, as of that date, APS’ disclosure controls and procedureswere effective.

(b) Management’s Annual Reports on Internal Control Over Financial Reporting

Reference is made to “Management’s Report on Internal Control Over Financial Reporting (Pinnacle West CapitalCorporation)” on page 79 of this report and “Management’s Report on Internal Control Over Financial Reporting (ArizonaPublic Service Company)” on page 142 of this report.

(c) Attestation Reports of the Registered Public Accounting Firm

Reference is made to “Report of Independent Registered Public Accounting Firm” on page 80 of this report and “Reportof Independent Registered Public Accounting Firm” on page 143 of this report on the internal control over financial reportingof Pinnacle West and APS, respectively.

(d) Changes In Internal Control Over Financial Reporting

The term “internal control over financial reporting” (defined in SEC Rule 13a-15(f)) refers to the process of a companythat is designed to provide reasonable assurance regarding the reliability of

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financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

No change in Pinnacle West’s or APS’ internal control over financial reporting occurred during the fiscal quarter endedDecember 31, 2008 that materially affected, or is reasonably likely to materially affect, Pinnacle West’s or APS’ internalcontrol over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERSAND CORPORATE GOVERNANCE OF PINNACLE WEST

Reference is hereby made to “Information About Our Board, Its Committees and Our Corporate Governance,” “Electionof Directors” and to “Section 16(a) Beneficial Ownership Reporting Compliance” in the Pinnacle West Proxy Statementrelating to the Annual Meeting of Shareholders to be held on May 20, 2009 (the “2009 Proxy Statement”) and to theSupplemental Item – “Executive Officers of Pinnacle West” in Part I of this report.

Pinnacle West has adopted a Code of Ethics for Financial Professionals that applies to professional employees in the areasof finance, accounting, internal audit, energy risk management, marketing and trading financial control, tax, investorrelations, and treasury and also includes Pinnacle West’s Chief Executive Officer, Chief Financial Officer, Controller,Treasurer, and officers holding substantially equivalent positions at Pinnacle West’s subsidiaries. The Code of Ethics forFinancial Professionals is posted on Pinnacle West’s website at www.pinnaclewest.com. Pinnacle West intends to satisfy therequirements under Item 5.05 of Form 8-K regarding disclosure of amendments to, or waivers from, provisions of the Codeof Ethics for Financial Professionals by posting such information on Pinnacle West’s website.

ITEM 11. EXECUTIVE COMPENSATION

Reference is hereby made to “Information About Our Board, Its Committees and Our Corporate Governance – How aredirectors compensated?” and “Executive Compensation” in the 2009 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND RELATED STOCKHOLDER MATTERS

Reference is hereby made to “Shares of Pinnacle West Stock Owned by Management and Large Shareholders” in the 2009Proxy Statement.

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Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth information as of December 31, 2008 with respect to our compensation plans and individualcompensation arrangements under which our equity securities are authorized for issuance.

EQUITY COMPENSATION PLAN INFORMATION Number of securities remaining available for future issuance Number of securities Weighted-average under equity to be issued upon exercise price of compensation plans exercise of outstanding (excluding securities outstanding options, options, warrants reflected in column warrants and rights and rights (a))

Plan Category (a)1 (b)2 (c)3

Equity compensation plans approved by security holders 1,987,375 $ 39.81 7,078,187 Equity compensation plans not approved by security holders — — —

Total 1,987,375 $ 39.81 7,078,187

1 This amount includes shares subject to outstanding options as well as shares subject to outstanding performance shareawards and restricted stock unit awards at the maximum amount of shares issuable under such awards. However, payoutof the performance share awards is contingent on the Company reaching certain levels of performance during athree-year performance period. If the performance criteria for these awards are not fully satisfied, the award recipientwill receive less than the maximum number of shares available under these grants and may receive nothing from thesegrants.

2 The weighted average exercise price in this column does not take performance share awards or restricted stock unitawards into account, as those awards have no exercise price.

3 Awards can take the form of options, stock appreciation rights, restricted stock, performance shares, performance shareunits, performance cash, stock grants, dividend equivalents, and restricted stock units..

Equity Compensation Plans Approved By Security Holders

Amounts in column (a) in the table above include shares subject to awards outstanding under three equity compensationplans that were approved by our shareholders: (a) the Pinnacle West Capital Corporation 1994 Long-Term Incentive Plan,under which no new stock awards may be granted; (b) the Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan(the “2002 Plan”), under which no new stock awards may be granted; and (c) the Pinnacle West Capital

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Corporation 2007 Long-Term Incentive Plan (the “2007 Plan”), which was approved by our shareholders at our 2007 annualmeeting of shareholders. Although we cannot issue additional awards under the 2002 Plan, shares subject to outstandingawards under the 2002 Plan that expire or are cancelled or terminated will be available for issuance under the 2007 Plan. SeeNote 16 of the Notes to Consolidated Financial Statements for additional information regarding these plans.

Equity Compensation Plans Not Approved By Security Holders

The Company does not have any equity compensation plans under which shares can still be issued that have not beenapproved by shareholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, ANDDIRECTOR INDEPENDENCE

Reference is hereby made to “Information About Our Board, Its Committees and Our Corporate Governance” and to“Related Party Transactions” in the 2009 Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANTFEES AND SERVICES

Pinnacle West

Reference is hereby made to “Audit Matters – What fees were paid to our independent registered public accountants in2007 and 2008?” and “What are the Audit Committee’s pre-approval policies?” in the 2009 Proxy Statement.

APS

The following fees were paid to APS’ independent registered public accountants, Deloitte & Touche LLP, for the last twofiscal years: Type of Service 2007 2008

Audit Fees (1) $1,921,601 $1,935,056 Audit-Related Fees (2) 178,840 233,025 Tax Fees (3) 7,751 8,400

(1) The aggregate fees billed for services rendered for the audit of annual financial statements and for review of financialstatements included in Reports on Form 10-Q.

(2) The aggregate fees billed for assurance services that are reasonably related to the performance of the audit or review ofthe financial statements that are not included in Audit Fees reported above, which primarily consist of fees for employeebenefit plan audits.

(3) The aggregate fees billed primarily for tax compliance and tax planning.

Pinnacle West’s Audit Committee pre-approves each audit service and non-audit service to be provided by APS’independent public accountants. The Audit Committee has delegated to the Chairman of the Audit Committee the authority topre-approve audit and non-audit services to be

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performed by the independent public accountants if the services are not expected to cost more than $50,000. The Chairmanmust report any pre-approval decisions to the Audit Committee at its next scheduled meeting. All of the services performedby Deloitte & Touche LLP for APS were pre-approved by the Audit Committee.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Financial Statements and Financial Statement Schedules

See the Index to Financial Statements and Financial Statement Schedule in Part II, Item 8.

Exhibits Filed

The documents listed below are being filed or have previously been filed on behalf of Pinnacle West or APS and areincorporated herein by reference from the documents indicated and made a part hereof. Exhibits not identified as previouslyfiled are filed herewith.

Exhibit DateNo. Registrant(s) Description Previously Filed as Exhibit: a Filed

3.1

Pinnacle West

Articles of Incorporation, restatedas of May 21, 2008

3.1 to Pinnacle West/APS June 30,2008 Form 10-Q Report, File Nos.1-8962 and 1-4473

8-7-08

3.2

Pinnacle West

Pinnacle West Capital CorporationBylaws, amended as ofJanuary 21, 2009

3.3

APS

Articles of Incorporation, restatedas of May 25, 1988

4.2 to APS’ Form S-3 RegistrationNos. 33-33910 and 33-55248 bymeans of September 24, 1993Form 8-K Report, File No. 1-4473

9-29-93

3.4

APS

Arizona Public Service CompanyBylaws, amended as ofDecember 16, 2008

4.1

Pinnacle West

Specimen Certificate of PinnacleWest Capital CorporationCommon Stock, no par value

4.12 to Pinnacle West April 29, 2005Form 8-K Report, File No. 1-8962

5-2-05

169

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Exhibit Date

No. Registrant(s) Description Previously Filed as Exhibit: a Filed

4.2

Pinnacle WestAPS

Indenture dated as of January 1,1995 among APS and The Bankof New York Mellon, as Trustee

4.6 to APS’ Registration StatementNos. 33-61228 and 33-55473 bymeans of January 1, 1995 Form 8-KReport, File No. 1-4473

1-11-95

4.2a

Pinnacle WestAPS

First Supplemental Indenturedated as of January 1, 1995


1-11-95

4.3

Pinnacle WestAPS

Indenture dated as ofNovember 15, 1996 between APSand The Bank of New York, asTrustee

4.5 to APS’ Registration StatementsNos. 33-61228, 33-55473, 33-64455and 333- 15379 by means ofNovember 19, 1996 Form 8-K Report,File No. 1-4473

11-22-96

4.3a

Pinnacle WestAPS

First Supplemental Indenturedated as of November 15, 1996

4.6 to APS’ Registration StatementsNos. 33-61228, 33-55473, 33-64455and 333-15379 by means ofNovember 19, 1996 Form 8-K Report,File No. 1-4473

11-22-96

4.3b

Pinnacle WestAPS

Second Supplemental Indenturedated as of April 1, 1997

4.10 to APS’ Registration StatementNos. 33-55473, 33-64455 and333-15379 by means of April 7, 1997Form 8-K Report, File No. 1-4473

4-9-97

4.3c

Pinnacle WestAPS

Third Supplemental Indenturedated as of November 1, 2002

10.2 to Pinnacle West’s March 31,2003 Form 10-Q Report, FileNo. 1-8962

5-15-03

170

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Exhibit Date


4.4

Pinnacle West

Indenture dated as of December 1,2000 between the Company andThe Bank of New York, asTrustee, relating to SeniorUnsecured Debt Securities

4.1 to Pinnacle West’s RegistrationStatement No. 333-52476

12-21-00

4.5

Pinnacle West

Indenture dated as of December 1,2000 between the Company andThe Bank of New York, asTrustee, relating to SubordinatedUnsecured Debt Securities

4.2 to Pinnacle West’s RegistrationStatement No. 333-52476

12-21-00

4.6

Pinnacle WestAPS

Indenture dated as of January 15,1998 between APS and The Bankof New York Mellon TrustCompany N.A. (successor toJPMorgan Chase Bank, N.A.,formerly known as The ChaseManhattan Bank), as Trustee


1-16-98

4.6a

Pinnacle West

APS Fifth Supplemental Indenturedated as of October 1, 2001

4.1 to APS’ September 30, 2001 Form10-Q, File No. 1-4473

11-6-01

4.6b

Pinnacle WestAPS

Sixth Supplemental Indenturedated as of March 1, 2002

4.1 to APS’ Registration StatementNos. 333-63994 and 333-83398 bymeans of February 26, 2002Form 8-K Report, File No. 1-4473

2-28-02

4.6c

Pinnacle WestAPS

Seventh Supplemental Indenturedated as of May 1, 2003

4.1 to APS’ Registration StatementNo. 333-90824 by means of May 7,2003 Form 8-K Report, FileNo. 1-4473

5-9-03

171

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Exhibit Date


4.6d

Pinnacle WestAPS

Eighth Supplemental Indenturedated as of June 15, 2004

4.1 to APS’ Registration StatementNo. 333-106772 by means of June 24,2004 Form 8-K Report, FileNo. 1-4473

6-28-04

4.6e

Pinnacle WestAPS

Ninth Supplemental Indenturedated as of August 15, 2005

4.1 to APS’ Registration StatementsNos. 333-106772 and 333-121512 bymeans of August 17, 2005 Form 8-KReport, File No. 1-4473

8-22-05

4.6f

APS

Tenth Supplemental Indenturedated as of August 1, 2006

4.1 to APS’ July 31, 2006 Form 8-KReport, File No. 1-4473

8-2-06

4.7

Pinnacle West

Amended and Restated RightsAgreement, dated as of March 26,1999, between Pinnacle WestCapital Corporation andBankBoston, N.A., as RightsAgent, including (i) as Exhibit Athereto the form of AmendedCertificate of Designation ofSeries A Participating PreferredStock of Pinnacle West CapitalCorporation, (ii) as Exhibit Bthereto the form of RightsCertificate and (iii) as Exhibit Cthereto the Summary of Right toPurchase Preferred Shares

4.1 to Pinnacle West’s March 22,1999 Form 8-K Report, FileNo. 1-8962

4-19-99

4.7a

Pinnacle West

Amendment to Rights Agreement,effective as of January 1, 2002


5-15-02

172

Table of Contents

Exhibit Date


4.8

Pinnacle West

Second Amended and RestatedInvestor’s Advantage Plan datedas of June 23, 2004

4.4 to Pinnacle West’s June 23, 2004Form 8-K Report, File No. 1-8962

8-9-04

4.8a

Pinnacle West

Third Amended and RestatedInvestors Advantage Plan dated asof November 25, 2008

4.1 to Pinnacle West’s Form S-3Registration StatementNo. 333-155641

11-25-08

4.9

Pinnacle West

Agreement, dated March 29,1988, relating to the filing ofinstruments defining the rights ofholders of long-term debt not inexcess of 10% of the Company’stotal assets

4.1 to Pinnacle West’s 1987Form 10-K Report, File No. 1-8962

3-30-88

4.9a

Pinnacle WestAPS

Agreement, dated March 21,1994, relating to the filing ofinstruments defining the rights ofholders of APS long-term debt notin excess of 10% of APS’ totalassets

4.1 to APS’ 1993 Form 10-K Report,File No. 1-4473

3-30-94

10.1.1

Pinnacle WestAPS

Two separate DecommissioningTrust Agreements (relating toPVNGS Units 1 and 3,respectively), each dated July 1,1991, between APS and MellonBank, N.A., as DecommissioningTrustee

10.2 to APS’ September 30, 1991Form 10-Q Report, File No. 1-4473

11-14-91

173

Table of Contents

Exhibit Date


10.1.1a

Pinnacle WestAPS

Amendment No. 1 toDecommissioning TrustAgreement (PVNGS Unit 1),dated as of December 1, 1994

10.1 to APS’ 1994 Form 10- KReport, File No. 1-4473

3-30-95

10.1.1b

Pinnacle WestAPS

Amendment No. 1 toDecommissioning TrustAgreement (PVNGS Unit 3),dated as of December 1, 1994


3-30-95

10.1.1c

Pinnacle WestAPS

Amendment No. 2 to APSDecommissioning TrustAgreement (PVNGS Unit 1) datedas of July 1, 1991

10.4 to APS’ 1996 Form 10-K Report, File No. 1-4473

3-28-97

10.1.1d

Pinnacle WestAPS

Amendment No. 2 to APSDecommissioning TrustAgreement (PVNGS Unit 3) datedas of July 1, 1991


3-28-97

10.1.1e

Pinnacle WestAPS

Amendment No. 3 to theDecommissioning TrustAgreement (PVNGS Unit 1),dated as of March 18, 2002


5-15-02

10.1.1f

Pinnacle WestAPS

Amendment No. 3 to theDecommissioning TrustAgreement (PVNGS Unit 3),dated as of March 18, 2002

10.4 to Pinnacle West’s March 2002Form 10-Q Report, File No. 1-8962

5-15-02

10.1.1g

Pinnacle WestAPS

Amendment No. 4 to theDecommissioning TrustAgreement (PVNGS Unit 1),dated as of December 19, 2003


3-15-04

174

Table of Contents

Exhibit Date


10.1.1h

Pinnacle WestAPS

Amendment No. 4 to theDecommissioning TrustAgreement (PVNGS Unit 3),dated as of December 19, 2003


3-15-04

10.1.1i

Pinnacle WestAPS

Amendment No. 5 to theDecommissioning TrustAgreement (PVNGS Unit 1),dated as of May 1, 2007

10.1 to Pinnacle West/APS March 31,2007 Form 10-Q Report, File Nos.1-8962 and 1-4473

5-9-07

10.1.1j

Pinnacle WestAPS

Amendment No. 5 to theDecommissioning TrustAgreement (PVNGS Unit 3),dated as of May 1, 2007

10.2 to Pinnacle West/APS March 31,2007 Form 10-Q Report, File Nos.1-8962 and 104473

5-9-07

10.1.2

Pinnacle WestAPS

Amended and RestatedDecommissioning TrustAgreement (PVNGS Unit 2) datedas of January 31, 1992, amongAPS, Mellon Bank, N.A., asDecommissioning Trustee, andState Street Bank and TrustCompany, as successor to TheFirst National Bank of Boston, asOwner Trustee under two separateTrust Agreements, each with aseparate Equity Participant, and asLessor under two separate FacilityLeases, each relating to anundivided interest in PVNGS Unit2


3-26-92

175

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Exhibit Date


10.1.2a

Pinnacle WestAPS

First Amendment to Amended andRestated Decommissioning TrustAgreement (PVNGS Unit 2),dated as of November 1, 1992


3-30-93

10.1.2b

Pinnacle WestAPS

Amendment No. 2 to Amendedand Restated DecommissioningTrust Agreement (PVNGS Unit2), dated as of November 1, 1994


3-30-95

10.1.2c

Pinnacle WestAPS

Amendment No. 3 to Amendedand Restated DecommissioningTrust Agreement (PVNGS Unit2), dated as of June 20, 1996

10.1 to APS’ June 30, 1996Form 10-Q Report, File No. 1-4473

8-9-96

10.1.2d

Pinnacle WestAPS

Amendment No. 4 to Amendedand Restated DecommissioningTrust Agreement (PVNGS Unit 2)dated as of December 16, 1996

APS 10.5 to APS’ 1996 Form 10-KReport, File No. 1-4473

3-28-97

10.1.2e

Pinnacle WestAPS

Amendment No. 5 to theAmended and RestatedDecommissioning TrustAgreement (PVNGS Unit 2),dated as of June 30, 2000


5-15-02

10.1.2f

Pinnacle WestAPS

Amendment No. 6 to theAmended and RestatedDecommissioning TrustAgreement (PVNGS Unit 2),dated as of March 18, 2002


5-15-02

176

Table of Contents

Exhibit Date


10.1.2g

Pinnacle WestAPS

Amendment No. 7 to theAmended and RestatedDecommissioning TrustAgreement (PVNGS Unit 2),dated as of December 19, 2003


3-15-04

10.1.2h

Pinnacle WestAPS

Amendment No. 8 to theAmended and RestatedDecommissioning TrustAgreement (PVNGS Unit 2),dated as of April 1, 2007

10.1.2h to Pinnacle West’s 2007 Form10-K Report, File No. 1-8962

2-27-08

10.2.1b

Pinnacle WestAPS

Arizona Public Service CompanyDeferred Compensation Plan, asrestated, effective January 1,1984, and the second and thirdamendments thereto, datedDecember 22, 1986, andDecember 23, 1987 respectively


3-8-89

10.2.1ab

Pinnacle WestAPS

Third Amendment to the ArizonaPublic Service Company DeferredCompensation Plan, effective asof January 1, 1993

10.3A to APS’ 1993 Form 10-KReport, File No. 1-4473

3-30-94

10.2.1bb

Pinnacle WestAPS

Fourth Amendment to the ArizonaPublic Service Company DeferredCompensation Plan effective as ofMay 1, 1993


11-10-94

177

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Exhibit Date


10.2.1cb

Pinnacle WestAPS

Fifth Amendment to the ArizonaPublic Service Company DeferredCompensation Plan effectiveJanuary 1, 1997


3-28-97

10.2.1db

Pinnacle WestAPS

Sixth Amendment to the ArizonaPublic Service Company DeferredCompensation Plan effectiveJanuary 1, 2001

10.8A to Pinnacle West’s 2000Form 10-K Report, File No. 1-8962

3-14-01

10.2.2b

Pinnacle WestAPS

Directors’ Deferred CompensationPlan, as restated, effective January1, 1986


8-13-86

10.2.2ab

Pinnacle WestAPS

Second Amendment to theArizona Public Service CompanyDirectors’ Deferred CompensationPlan, effective as of January 1,1993


3-30-94

10.2.2bb

Pinnacle WestAPS

Third Amendment to the ArizonaPublic Service CompanyDirectors’ Deferred CompensationPlan, effective as of May 1, 1993


11-10-94

10.2.2cb

Pinnacle WestAPS

Fourth Amendment to the ArizonaPublic Service CompanyDirectors Deferred CompensationPlan, effective as of January 1,1999


3-30-00

178

Table of Contents

Exhibit Date


10.2.3b

Pinnacle WestAPS

Trust for the Pinnacle WestCapital Corporation, ArizonaPublic Service Company andSunCor Development CompanyDeferred Compensation Plansdated August 1, 1996


3-30-00

10.2.3ab

Pinnacle WestAPS

First Amendment datedDecember 7, 1999 to the Trust forthe Pinnacle West CapitalCorporation, Arizona PublicService Company and SunCorDevelopment Company DeferredCompensation Plans


3-30-00

10.2.4b

Pinnacle WestAPS

Pinnacle West CapitalCorporation, Arizona PublicService Company, SunCorDevelopment Company and ElDorado Investment CompanyDeferred Compensation Plan asamended and restated effectiveJanuary 1, 1996


3-29-96

10.2.4ab

Pinnacle WestAPS

First Amendment effective as ofJanuary 1, 1999, to the PinnacleWest Capital Corporation,Arizona Public Service Company,SunCor Development Companyand El Dorado InvestmentCompany Deferred CompensationPlan


3-30-00

179

Table of Contents

Exhibit Date

No. Registrant(s) Description Previously Filed as Exhibit:a Filed

10.2.4bb

Pinnacle WestAPS

Second Amendment effectiveJanuary 1, 2000 to the PinnacleWest Capital Corporation,Arizona Public Service Company,SunCor Development Companyand El Dorado InvestmentCompany Deferred CompensationPlan


3-30-00

10.2.4cb

Pinnacle WestAPS

Third Amendment to the PinnacleWest Capital Corporation,Arizona Public Service Company,SunCor Development Companyand El Dorado InvestmentCompany Deferred CompensationPlan, effective as of January 1,2002


5-15-03

10.2.4db

Pinnacle WestAPS

Fourth Amendment to thePinnacle West CapitalCorporation, Arizona PublicService Company, SunCorDevelopment Company and ElDorado Investment CompanyDeferred Compensation Plan,effective January 1, 2003

10.64 to Pinnacle West/APS 2005Form 10-K Report, File Nos. 1-8962and 1-4473

3-13-06

10.2.5b

Pinnacle WestAPS

Schedules of William J. Post andJack E. Davis to Arizona PublicService Company DeferredCompensation Plan, as amended

10.3A to Pinnacle West 2002Form 10-K Report, File No. 1-8962

3-31-03

180

Table of Contents

Exhibit Date


10.2.6b

Pinnacle WestAPS

Deferred Compensation Plan of2005 for Employees of PinnacleWest Capital Corporation andAffiliates

10.3.1b

Pinnacle WestAPS

Pinnacle West Capital CorporationSupplement Excess BenefitRetirement Plan, amended andrestated as of January 1, 2003


3-15-04

10.3.1ab

Pinnacle WestAPS

Pinnacle West Capital CorporationSupplemental Excess BenefitRetirement Plan, as amended andrestated, dated December 18, 2003

10.48b to Pinnacle West/APS 2005Form 10-K Report, File Nos. 1-8962and 1-4473

3-13-06

10.3.2b

Pinnacle WestAPS

Pinnacle West Capital CorporationSupplemental Excess BenefitRetirement Plan of 2005

10.4.1b

Pinnacle WestAPS

Letter Agreement datedDecember 21, 1993, between APSand William L. Stewart


3-30-95

10.4.2b

Pinnacle WestAPS

Letter Agreement datedAugust 16, 1996 between APSand William L. Stewart


3-28-97

10.4.3b

Pinnacle WestAPS

Letter Agreement datedOctober 3, 1997 between APS andWilliam L. Stewart


11-12-97

181

Table of Contents

Exhibit Date


10.4.4b

Pinnacle WestAPS

Letter Agreement datedDecember 13, 1999 between APSand William L. Stewart


3-30-00

10.4.4ab

Pinnacle WestAPS

Amendment to Letter Agreement,effective as of January 1, 2002,between APS and William L.Stewart

10.1 to Pinnacle West’s June 30, 2002Form 10-Q Report, File No. 1-8962

8-13-02

10.4.5b

Pinnacle WestAPS

Letter Agreement dated June 28,2001 between Pinnacle WestCapital Corporation and SteveWheeler


3-31-03

10.4.6b

APS

Letter Agreement datedDecember 20, 2006 between APSand Randall K. Edington


2-28-07

10.4.7b

APS

Letter Agreement dated July 22,2008 between APS and RandallK. Edington

10.3 to Pinnacle West/APS June 30,2008 Form 10-Q Report, FileNo. 1-4473

8-07-08

10.4.8b

Pinnacle WestAPS

Letter Agreement dated June 17,2008 between Pinnacle West/APSand James R. Hatfield


8-07-08

10.4.9b

APS

Description of 2008 Palo VerdeSpecific CompensationOpportunity for Randall K.Edington


8-07-08

10.4.10b

APS

Supplemental Agreement datedDecember 26, 2008 between APSand Randall K. Edington

182

Table of Contents

Exhibit Date


10.5.1bd

Pinnacle WestAPS

Key Executive Employment andSeverance Agreement betweenPinnacle West and certainexecutive officers of PinnacleWest and its subsidiaries


3-13-06

10.5.1abd

Pinnacle WestAPS

Form of Amended and RestatedKey Executive Employment andSeverance Agreement betweenPinnacle West and certain officersof Pinnacle West and itssubsidiaries

10.4 to Pinnacle West/APSSeptember 30, 2007 Form 10-QReport, File Nos. 1-8962 and 1-4473

11-5-07

10.5.2bd

Pinnacle WestAPS

Form of Key ExecutiveEmployment and SeveranceAgreement between PinnacleWest and certain officers ofPinnacle West and its subsidiaries

10.3 to Pinnacle West/APSSeptember 30, 2007 Form 10-QReport, File Nos. 1-8962 and 1-4473

11-5-07

10.6.1b

Pinnacle WestAPS

Pinnacle West Capital Corporation1994 Long-Term Incentive Plan,effective as of March 23, 1994

Appendix A to the Proxy Statementfor the Plan Report for PinnacleWest’s 1994 Annual Meeting ofShareholders, File No. 1-8962

4-15-94

10.6.1ab

Pinnacle WestAPS

First Amendment datedDecember 7, 1999 to the PinnacleWest Capital Corporation 1994Long-Term Incentive Plan


3-30-00

10.6.2b

Pinnacle West

APS Pinnacle West Capital Corporation2002 Long-Term Incentive Plan

10.5A to Pinnacle West’s 2002Form 10-K Report

3-31-03

183

Table of Contents

Exhibit Date


10.6.2abd

Pinnacle WestAPS

Performance Share Agreementunder the Pinnacle West CapitalCorporation 2002 Long-TermIncentive Plan

10.1 to Pinnacle West/APSDecember 9, 2005 Form 8-K Report,File Nos. 1-8962 and 1-4473

12-15-05

10.6.2bbd

Pinnacle WestAPS


10.1 to Pinnacle West/APSDecember 31, 2005 Form 8-K Report,File Nos. 1-8962 and 1-4473

2-1-06

10.6.2cd

Pinnacle WestAPS

Performance Accelerated StockOption Agreement under PinnacleWest Capital Corporation 2002Long-Term Incentive Plan


3-16-05

10.6.2dbd

Pinnacle WestAPS

Stock Ownership IncentiveAgreement under Pinnacle WestCapital Corporation 2002Long-Term Incentive Plan


3-16-05

10.6.2ebd

Pinnacle WestAPS



3-13-06

10.6.3b

Pinnacle West

Pinnacle West Capital Corporation2000 Director Equity Plan

99.1 to Pinnacle West’s RegistrationStatement on Form S-8(No. 333-40796), File No. 1-8962)

7-3-00

10.6.4b

Pinnacle West

Pinnacle West Capital Corporation2007 Long-Term Incentive Plan

Appendix B to the Proxy Statementfor Pinnacle West’s 2007 AnnualMeeting of Shareholders, FileNo. 1-8962

4-20-07

184

Table of Contents

Exhibit Date


10.6.4ab

Pinnacle West

First Amendment to the PinnacleWest Capital Corporation 2007Long-Term Incentive Plan

10.2 to Pinnacle West/APS April 18,2007 Form 8-K Report, FileNo. 1-8962

4-20-07

10.6.4bb

Pinnacle West

Description of Annual StockGrants to Non-EmployeeDirectors

10.1 to Pinnacle West/APSSeptember 30, 2007 Form 10-QReport, File No. 1-8962

11-5-07

10.6.4cb

Pinnacle West

Description of Stock Grant to W.Douglas Parker

10.2 to Pinnacle West/APSSeptember 30, 2007 Form 10-QReport, File No. 1-8962

11-5-07

10.6.4db

Pinnacle West

Description of Annual StockGrants to Non-EmployeeDirectors


8-07-08

10.6.5bd

Pinnacle WestAPS

Summary of 2009 CEO VariableIncentive Plan and OfficerVariable Incentive Plan

10.7.1

Pinnacle WestAPS

Indenture of Lease with NavajoTribe of Indians, Four CornersPlant

5.01 to APS’ Form S-7 RegistrationStatement, File No. 2-59644

9-1-77

10.7.1a

Pinnacle WestAPS

Supplemental and AdditionalIndenture of Lease, includingamendments and supplements tooriginal lease with Navajo Tribeof Indians, Four Corners Plant


9-1-77

10.7.1b

Pinnacle WestAPS

Amendment and SupplementNo. 1 to Supplemental andAdditional Indenture of LeaseFour Corners, dated April 25,1985

10.36 to Pinnacle West’s RegistrationStatement on Form 8-B Report, FileNo. 1-8962

7-25-85

185

Table of Contents

Exhibit Date


10.7.2

Pinnacle WestAPS

Application and Grant ofmulti-party rights-of-way andeasements, Four Corners PlantSite


9-1-77

10.7.2a

Pinnacle WestAPS

Application and AmendmentNo. 1 to Grant of multi-partyrights-of-way and easements, FourCorners Power Plant Site datedApril 25, 1985

10.37 to Pinnacle West’s RegistrationStatement on Form 8-B, FileNo. 1-8962

7-25-85

10.7.3

Pinnacle WestAPS

Application and Grant of ArizonaPublic Service Company rights-of-way and easements, FourCorners Plant Site


9-1-77

10.7.3a

Pinnacle WestAPS

Application and AmendmentNo. 1 to Grant of Arizona PublicService Company rights-of-wayand easements, Four CornersPower Plant Site dated April 25,1985

10.38 to Pinnacle West’s RegistrationStatement on Form 8-B, FileNo. 1-8962

7-25-85

10.7.4

Pinnacle West

APS Four Corners Project Co-TenancyAgreement Amendment No. 6


3-14-01

10.8.1

Pinnacle West

APS Indenture of Lease, Navajo Units1, 2, and 3

5(g) to APS’ Form S-7 RegistrationStatement, File No. 2-36505

3-23-70

10.8.2

Pinnacle WestAPS

Application of Grant of rights-of-way and easements, NavajoPlant

5(h) to APS Form S-7 RegistrationStatement, File No. 2-36505

3-23-70

186

Table of Contents

Exhibit Date


10.8.3

Pinnacle WestAPS

Water Service ContractAssignment with the United StatesDepartment of Interior, Bureau ofReclamation, Navajo Plant

5(l) to APS’ Form S-7 RegistrationStatement, File No. 2-394442

3-16-71

10.8.4

Pinnacle WestAPS

Navajo Project Co-TenancyAgreement dated as of March 23,1976, and Supplement No. 1thereto dated as of October 18,1976, Amendment No. 1 dated asof July 5, 1988, and AmendmentNo. 2 dated as of June 14, 1996;Amendment No. 3 dated as ofFebruary 11, 1997; AmendmentNo. 4 dated as of January 21,1997; Amendment No. 5 dated asof January 23, 1998; AmendmentNo. 6 dated as of July 31, 1998


3-13-06

10.8.5

Pinnacle WestAPS

Navajo Project ParticipationAgreement dated as ofSeptember 30, 1969, andAmendment and Supplement No.1 dated as of January 16, 1970,and Coordinating CommitteeAgreement No. 1 dated as ofSeptember 30, 1971


3-13-06

187

Table of Contents

Exhibit Date


10.9.1

Pinnacle WestAPS

Arizona Nuclear Power ProjectParticipation Agreement, datedAugust 23, 1973, among APS SaltRiver Project AgriculturalImprovement and Power District,Southern California EdisonCompany, Public ServiceCompany of New Mexico, ElPaso Electric Company, SouthernCalifornia Public PowerAuthority, and Department ofWater and Power of the City ofLos Angeles, and amendments1-12 thereto

10. 1 to APS’ 1988 Form 10-KReport, File No. 1-4473

3-8-89

10.9.1a

Pinnacle WestAPS

Amendment No. 13, dated as ofApril 22, 1991, to ArizonaNuclear Power ProjectParticipation Agreement, datedAugust 23, 1973, among APS,Salt River Project AgriculturalImprovement and Power District,Southern California EdisonCompany, Public ServiceCompany of New Mexico, ElPaso Electric Company, SouthernCalifornia Public PowerAuthority, and Department ofWater and Power of the City ofLos Angeles

10.1 to APS’ March 31, 1991Form 10-Q Report, File No. 1-4473

5-15-91

188

Table of Contents

Exhibit Date


10.9.1b

Pinnacle WestAPS

Amendment No. 14 to ArizonaNuclear Power ProjectParticipation Agreement, datedAugust 23, 1973, among APS,Salt River Project AgriculturalImprovement and Power District,Southern California EdisonCompany, Public ServiceCompany of New Mexico, ElPaso Electric Company, SouthernCalifornia Public PowerAuthority, and Department ofWater and Power of the City ofLos Angeles


8-14-00

10.10.1

Pinnacle WestAPS

Asset Purchase and PowerExchange Agreement datedSeptember 21, 1990 between APSand PacifiCorp, as amended as ofOctober 11, 1990 and as ofJuly 18, 1991


8-8-91

10.10.2

Pinnacle WestAPS

Long-Term Power TransactionAgreement dated September 21,1990 between APS andPacifiCorp, as amended as ofOctober 11, 1990, and as ofJuly 8, 1991


8-8-91

189

Table of Contents

Exhibit Date


10.10.2a

Pinnacle WestAPS

Amendment No. 1 dated April 5,1995 to the Long-Term PowerTransaction Agreement and AssetPurchase and Power ExchangeAgreement between PacifiCorpand APS


3-29-96

10.10.3

Pinnacle WestAPS

Restated Transmission Agreementbetween PacifiCorp and APSdated April 5, 1995


3-29-96

10.10.4

Pinnacle WestAPS

Contract among PacifiCorp, APSand United States Department ofEnergy Western Area PowerAdministration, Salt Lake AreaIntegrated Projects for FirmTransmission Service dated May5, 1995


3-29-96

10.10.5

Pinnacle WestAPS

Reciprocal Transmission ServiceAgreement between APS andPacifiCorp dated as of March 2,1994


3-29-96

10.11.1

Pinnacle WestAPS

Amended and RestatedReimbursement Agreementamong APS, the Banks partythereto, and JPMorgan ChaseBank, as Administrative Agentand Issuing Bank, dated as ofJuly 22, 2002


3-16-05

190

Table of Contents

Exhibit Date


10.11.2

Pinnacle WestAPS

Three-Year Credit Agreementdated as of May 21, 2004 betweenAPS as Borrower, and the banks,financial institutions and otherinstitutional lenders and initialissuing banks listed on thesignature pages thereof


3-16-05

10.11.3

Pinnacle WestAPS

Amended and Restated Five-YearCredit Agreement dated as ofDecember 9, 2005 between APS,as Borrower, Citibank, N.A., asAgent, and the lenders and otherparties thereto


3-13-06

10.11.4

Pinnacle West

$200,000,000 Senior NotesUncommitted Master ShelfAgreement dated as ofFebruary 28, 2006

10.96 to Pinnacle West 2005Form 10-K Report, File No. 1-8962

3-13-06

10.11.5

Pinnacle West

Amended and Restated CreditAgreement dated as ofDecember 9, 2005 amongPinnacle West CapitalCorporation, as Borrower,JPMorgan Chase Bank, N.A., asAgent, and the other agent partiesthereto

10.97 to Pinnacle West 2005Form 10-K Report, File No. 1-8962

3-13-06

191

Table of Contents

Exhibit Date


10.11.5a

Pinnacle West

First Amendment to Amended andRestated Credit Agreement, datedas of May 15, 2006,supplementing and amending theAmended and Restated CreditAgreement, dated as ofDecember 9, 2005, amongPinnacle West CapitalCorporation, as Borrower,JPMorgan Chase Bank, N.A. asAgent and the other parties thereto


8-8-06

10.11.6

Pinnacle WestAPS

Credit Agreement dated as ofOctober 19, 2004 among PinnacleWest, other lenders, andJPMorgan Chase Bank, asAdministrative Agent

10.1 to Pinnacle West’s September 30,2004 Form 10-Q Report, FileNo. 1-8962

11-8-04

10.11.7

APS

$500,000,000 Five-Year CreditAgreement dated as ofSeptember 28, 2006 amongArizona Public Service Companyas Borrower, Bank of America,N.A. as Administrative Agent andIssuing Bank, The Bank of NewYork as Syndication Agent andIssuing Bank and the other partiesthereto

10.1 to APS’ September 2006Form 10-Q Report, File No. 1-4473

11-8-06

192

Table of Contents

Exhibit Date


10.11.8

Pinnacle WestAPS

Amended and RestatedReimbursement Agreementamong Arizona Public ServiceCompany, The Banks partythereto and JPMorgan ChaseBank, N.A., as AdministrativeAgent and Issuing Bank, andBarclays Bank PLC, asSyndication Agent, dated as ofMay 19, 2005

99.6 to PinnacleWest/APS June 30,2005 Form 10-Q Report, File Nos.1-8962 and 1-4473

8-9-05

10.12.1c

Pinnacle WestAPS

Facility Lease, dated as of August1, 1986, between U.S. BankNational Association, successor toState Street Bank and TrustCompany, as successor to TheFirst National Bank of Boston, inits capacity as Owner Trustee, asLessor, and APS, as Lessee


10-24-86

10.12.1ac

Pinnacle WestAPS

Amendment No. 1, dated as ofNovember 1, 1986, to FacilityLease, dated as of August 1, 1986,between U.S. Bank NationalAssociation, successor to StateStreet Bank and Trust Company,as successor to The First NationalBank of Boston, in its capacity asOwner Trustee, as Lessor, andAPS, as Lessee

10.5 to APS’ September 30, 1986Form 10-Q Report by means ofAmendment No. 1 on December 3,1986 Form 8, File No. 1-4473

12-4-86

193

Table of Contents

Exhibit Date


10.12.1bc

Pinnacle WestAPS

Amendment No. 2 dated as ofJune 1, 1987 to Facility Leasedated as of August 1, 1986between U.S. Bank NationalAssociation, successor to StateStreet Bank and Trust Company,as successor to The First NationalBank of Boston, as Lessor, andAPS, as Lessee


3-8-89

10.12.1cc

Pinnacle WestAPS

Amendment No. 3, dated as ofMarch 17, 1993, to Facility Lease,dated as of August 1, 1986,between U.S. Bank NationalAssociation, successor to StateStreet Bank and Trust Company,as successor to The First NationalBank of Boston, as Lessor, andAPS, as Lessee


3-30-93

10.12.2

Pinnacle WestAPS

Facility Lease, dated as ofDecember 15, 1986, between U.S.Bank National Association,successor to State Street Bank andTrust Company, as successor toThe First National Bank ofBoston, in its capacity as OwnerTrustee, as Lessor, and APS, asLessee

10.1 to APS’ November 18, 1986Form 8-K Report, File No. 1-4473

1-20-87

194

Table of Contents

Exhibit Date


10.12.2a

Pinnacle WestAPS

Amendment No. 1, dated as ofAugust 1, 1987, to Facility Lease,dated as of December 15, 1986,between U.S. Bank NationalAssociation, successor to StateStreet Bank and Trust Company,as successor to The First NationalBank of Boston, as Lessor, andAPS, as Lessee

4.13 to APS’ Form S-3 RegistrationStatement No. 33-9480 by means ofAugust 1, 1987 Form 8-K Report, FileNo. 1-4473

8-24-87

10.12.2b

Pinnacle WestAPS

Amendment No. 2, dated as ofMarch 17, 1993, to Facility Lease,dated as of December 15, 1986,between U.S. Bank NationalAssociation, successor to StateStreet Bank and Trust Company,as successor to The First NationalBank of Boston, as Lessor, andAPS, as Lessee


3-30-93

10.13.1

Pinnacle WestAPS

Agreement No. 13904 (Optionand Purchase of Effluent) withCities of Phoenix, Glendale,Mesa, Scottsdale, Tempe, Town ofYoungtown, and Salt RiverProject Agricultural Improvementand Power District, datedApril 23, 1973


3-19-92

195

Table of Contents

Exhibit Date


10.13.2

Pinnacle WestAPS

Agreement between PinnacleWest Energy Corporation andArizona Public Service Companyfor Transportation and Treatmentof Effluent by and betweenPinnacle West Energy Corporationand APS dated as of the 10th dayof April, 2001


3-16-05

10.13.3

Pinnacle WestAPS

Agreement for the Transfer andUse of Wastewater and Effluentby and between APS, SRP andPWE dated June 1, 2001


3-16-05

10.13.4

Pinnacle WestAPS

Agreement for the Sale andPurchase of Wastewater Effluentdated November 13, 2000, by andbetween the City of Tolleson,Arizona, APS and SRP


3-16-05

10.13.5

Pinnacle WestAPS

Operating Agreement for theCo-Ownership of WastewaterEffluent dated November 16,2000 by and between APS andSRP


3-16-05

196

Table of Contents

Exhibit Date


10.13.6

Pinnacle WestAPS

Agreement for the Sale andPurchase of Wastewater Effluentwith City of Tolleson and SaltRiver Agricultural Improvementand Power District, dated June 12,1981, including AmendmentNo. 1 dated as of November 12,1981 and Amendment No. 2 datedas of June 4, 1986

10.4 to APS’ 1991 Form 10-K Report,File 1-4473

3-19-92

10.14.1

Pinnacle WestAPS

Contract, dated July 21, 1984,with DOE providing for thedisposal of nuclear fuel and/orhigh-level radioactive waste,ANPP

10.31 to Pinnacle West’s Form S-14Registration Statement, FileNo. 2-96386

3-13-85

10.15.1

Pinnacle West

APS Territorial Agreement betweenAPS and Salt River Project


5-15-98

10.15.2

Pinnacle WestAPS

Power Coordination Agreementbetween APS and Salt RiverProject


5-15-98

10.15.3

Pinnacle WestAPS

Memorandum of Agreementbetween APS and Salt RiverProject


5-15-98

10.15.3a

Pinnacle WestAPS

Addendum to Memorandum ofAgreement between APS and SaltRiver Project dated as of May 19,1998

10.2 to APS’ May 19, 1998 Form 8-KReport, File No. 1-4473

6-26-98

12.1

Pinnacle West

Ratio of Earnings to FixedCharges

197

Table of Contents

Exhibit Date


12.2

APS

Ratio of Earnings to FixedCharges

12.3

Pinnacle West

Ratio of Earnings to CombinedFixed Charges and PreferredStock Dividend Requirements

21.1 Pinnacle West Subsidiaries of Pinnacle West 23.1

Pinnacle West

Consent of Deloitte & ToucheLLP

23.2

APS

Consent of Deloitte & ToucheLLP

31.1

Pinnacle West

Certificate of William J. Post,Chief Executive Officer, pursuantto Rule 13a-14(a) andRule 15d-14(a) of the SecuritiesExchange Act, as amended

31.2

Pinnacle West

Certificate of James R. Hatfield,Chief Financial Officer, pursuantto Rule 13a-14(a) andRule 15d-14(a) of the SecuritiesExchange Act, as amended

31.3

APS

Certificate of Donald E. Brandt,Chief Executive Officer, pursuantto Rule 13a-14(a) andRule 15d-14(a) of the SecuritiesExchange Act, as amended

198

Table of Contents

Exhibit Date


31.4

APS

Certificate of James R. Hatfield,Chief Financial Officer, pursuantto Rule 13a-14(a) andRule 15d-14(a) of the SecuritiesExchange Act, as amended

32.1

Pinnacle West

Certification of Chief ExecutiveOfficer and Chief FinancialOfficer, pursuant to 18 U.S.C.Section 1850, as adopted pursuantto Section 906 of theSarbanes-Oxley Act of 2002

32.2

APS

Certification of Chief ExecutiveOfficer and Chief FinancialOfficer, pursuant to 18 U.S.C.Section 1850, as adopted pursuantto Section 906 of theSarbanes-Oxley Act of 2002

99.1

Pinnacle WestAPS

Collateral Trust Indenture amongPVNGS II Funding Corp., Inc.,APS and Chemical Bank, asTrustee


3-30-93

99.1a

Pinnacle WestAPS

Supplemental Indenture toCollateral Trust Indenture amongPVNGS II Funding Corp., Inc.,APS and Chemical Bank, asTrustee


3-30-93

199

Table of Contents

Exhibit Date


99.2c

Pinnacle West

Participation

28.1 to APS’ September 30, 1992Form

11-9-92

APS

Agreement, dated as of August 1,1986, among PVNGS FundingCorp., Inc., Bank of AmericaNational Trust and SavingsAssociation, State Street Bank andTrust Company, as successor toThe First National Bank ofBoston, in its individual capacityand as Owner Trustee, ChemicalBank, in its individual capacityand as Indenture Trustee, APS,and the Equity Participant namedtherein

10-Q Report, File No. 1-4473

99.2ac

Pinnacle WestAPS

Amendment No. 1 dated as ofNovember 1, 1986, toParticipation Agreement, dated asof August 1, 1986, amongPVNGS Funding Corp., Inc.,Bank of America National Trustand Savings Association, StateStreet Bank and Trust Company,as successor to The First NationalBank of Boston, in its individualcapacity and as Owner Trustee,Chemical Bank, in its individualcapacity and as Indenture Trustee,APS, and the Equity Participantnamed therein

10.8 to APS’ September 30, 1986Form 10-Q Report by means ofAmendment No. 1, on December 3,1986 Form 8, File No. 1-4473

12-4-86

200

Table of Contents

Exhibit Date


99.2bc

Pinnacle WestAPS

Amendment No. 2, dated as ofMarch 17, 1993, to ParticipationAgreement, dated as of August 1,1986, among PVNGS FundingCorp., Inc., PVNGS II FundingCorp., Inc., State Street Bank andTrust Company, as successor toThe First National Bank ofBoston, in its individual capacityand as Owner Trustee, ChemicalBank, in its individual capacityand as Indenture Trustee, APS,and the Equity Participant namedtherein


3-30-93

99.3c

Pinnacle WestAPS

Trust Indenture, Mortgage,Security Agreement andAssignment of Facility Lease,dated as of August 1, 1986,between State Street Bank andTrust Company, as successor toThe First National Bank ofBoston, as Owner Trustee, andChemical Bank, as IndentureTrustee


10-24-86

201

Table of Contents

Exhibit Date


99.3ac

Pinnacle WestAPS

Supplemental Indenture No. 1,dated as of November 1, 1986 toTrust Indenture, Mortgage,Security Agreement andAssignment of Facility Lease,dated as of August 1, 1986,between State Street Bank andTrust Company, as successor toThe First National Bank ofBoston, as Owner Trustee, andChemical Bank, as IndentureTrustee

10.6 to APS’ September 30, 1986Form 10-Q Report by means ofAmendment No. 1 on December 3,1986 Form 8, File No. 1-4473

12-4-86

99.3bc

Pinnacle WestAPS

Supplemental Indenture No. 2 toTrust Indenture, Mortgage,Security Agreement andAssignment of Facility Lease,dated as of August 1, 1986,between State Street Bank andTrust Company, as successor toThe First National Bank ofBoston, as Owner Trustee, andChemical Bank, as LeaseIndenture Trustee


3-30-93

99.4c

Pinnacle WestAPS

Assignment, Assumption andFurther Agreement, dated as ofAugust 1, 1986, between APS andState Street Bank and TrustCompany, as successor to TheFirst National Bank of Boston, asOwner Trustee


10-24-86

202

Table of Contents

Exhibit Date


99.4ac

Pinnacle WestAPS

Amendment No. 1, dated as ofNovember 1, 1986, toAssignment, Assumption andFurther Agreement, dated as ofAugust 1, 1986, between APS andState Street Bank and TrustCompany, as successor to TheFirst National Bank of Boston, asOwner Trustee

10.10 to APS’ September 30, 1986Form 10-Q Report by means ofAmendment No. l on December 3,1986 Form 8, File No. 1-4473

12-4-86

99.4bc

Pinnacle WestAPS

Amendment No. 2, dated as ofMarch 17, 1993, to Assignment,Assumption and FurtherAgreement, dated as of August 1,1986, between APS and StateStreet Bank and Trust Company,as successor to The First NationalBank of Boston, as Owner Trustee


3-30-93

99.5

Pinnacle WestAPS

Participation Agreement, dated asof December 15, 1986, amongPVNGS Funding Report Corp.,Inc., State Street Bank and TrustCompany, as successor to TheFirst National Bank of Boston, inits individual capacity and asOwner Trustee, Chemical Bank,in its individual capacity and asIndenture Trustee under a TrustIndenture, APS, and the OwnerParticipant named therein


11-9-92

203

Table of Contents

Exhibit Date


99.5a

Pinnacle WestAPS

Amendment No. 1, dated as ofAugust 1, 1987, to ParticipationAgreement, dated as ofDecember 15, 1986, amongPVNGS Funding Corp., Inc. asFunding Corporation, State StreetBank and Trust Company, assuccessor to The First NationalBank of Boston, as OwnerTrustee, Chemical Bank, asIndenture Trustee, APS, and theOwner Participant named therein

28.20 to APS’ Form S-3 RegistrationStatement No. 33-9480 by means of aNovember 6, 1986 Form 8-K Report,File No. 1-4473

8-10-87

99.5b

Pinnacle WestAPS

Amendment No. 2, dated as ofMarch 17, 1993, to ParticipationAgreement, dated as ofDecember 15, 1986, amongPVNGS Funding Corp., Inc.,PVNGS II Funding Corp., Inc.,State Street Bank and TrustCompany, as successor to TheFirst National Bank of Boston, inits individual capacity and asOwner Trustee, Chemical Bank,in its individual capacity and asIndenture Trustee, APS, and theOwner Participant named therein


3-30-93

204

Table of Contents

Exhibit Date


99.6

Pinnacle WestAPS

Trust Indenture, MortgageSecurity Agreement andAssignment of Facility Lease,dated as of December 15, 1986,between State Street Bank andTrust Company, as successor toThe First National Bank ofBoston, as Owner Trustee, andChemical Bank, as IndentureTrustee


1-20-87

99.6a

Pinnacle WestAPS

Supplemental Indenture No. 1,dated as of August 1, 1987, toTrust Indenture, Mortgage,Security Agreement andAssignment of Facility Lease,dated as of December 15, 1986,between State Street Bank andTrust Company, as successor toThe First National Bank ofBoston, as Owner Trustee, andChemical Bank, as IndentureTrustee

4.13 to APS’ Form S-3 RegistrationStatement No. 33-9480 by means ofAugust 1, 1987 Form 8-K Report, FileNo. 1-4473

8-24-87

205

Table of Contents

Exhibit Date


99.6b

Pinnacle WestAPS

Supplemental Indenture No. 2 toTrust Indenture Mortgage,Security Agreement andAssignment of Facility Lease,dated as of December 15, 1986,between State Street Bank andTrust Company, as successor toThe First National Bank ofBoston, as Owner Trustee, andChemical Bank, as LeaseIndenture Trustee


3-30-93

99.7

Pinnacle WestAPS

Assignment, Assumption andFurther Agreement, dated as ofDecember 15, 1986, between APSand State Street Bank and TrustCompany, as successor to TheFirst National Bank of Boston, asOwner Trustee


1-20-87

99.7a

Pinnacle WestAPS

Amendment No. 1, dated as ofMarch 17, 1993, to Assignment,Assumption and FurtherAgreement, dated as ofDecember 15, 1986, between APSand State Street Bank and TrustCompany, as successor to TheFirst National Bank of Boston, asOwner Trustee


3-30-93

99.8c

Pinnacle West

APS Indemnity Agreement dated as ofMarch 17, 1993 by APS


3-30-93

206

Table of Contents

Exhibit Date


99.9

Pinnacle WestAPS

Extension Letter, dated as ofAugust 13, 1987, from thesignatories of the ParticipationAgreement to Chemical Bank

28.20 to APS’ Form S-3 RegistrationStatement No. 33-9480 by means of aNovember 6, 1986 Form 8-K Report,File No. 1-4473

8-10-87

99.10

Pinnacle WestAPS

Arizona Corporation CommissionOrder, Decision No. 61969, datedSeptember 29, 1999, including theRetail Electric Competition Rules


11-15-99

99.11

Pinnacle West

Purchase Agreement by andamong Pinnacle West EnergyCorporation and GenWest, L.L.C.and Nevada Power Company,dated June 21, 2005


8-9-05

a Reports filed under File No. 1-4473 and 1-8962 were filed in the office of the Securities and Exchange Commissionlocated in Washington, D.C.

b Management contract or compensatory plan or arrangement to be filed as an exhibit pursuant to Item 15(b) of Form10-K.

c An additional document, substantially identical in all material respects to this Exhibit, has been entered into, relating toan additional Equity Participant. Although such additional document may differ in other respects (such as dollaramounts, percentages, tax indemnity matters, and dates of execution), there are no material details in which suchdocument differs from this Exhibit.

d Additional agreements, substantially identical in all material respects to this Exhibit have been entered into withadditional persons. Although such additional documents may differ in other respects (such as dollar amounts and datesof execution), there are no material details in which such agreements differ from this Exhibit.

207

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: February 20, 2009PINNACLE WEST CAPITALCORPORATION (Registrant)

/s/ William J. Post (William J. Post, Chairman of the

Board of Directors and Chief ExecutiveOfficer)

Power of Attorney

We, the undersigned directors and executive officers of Pinnacle West Capital Corporation, hereby severally appointJames R. Hatfield, Chris N. Froggatt and Nancy C. Loftin, and each of them, our true and lawful attorneys with full power tothem and each of them to sign for us, and in our names in the capacities indicated below, any and all amendments to thisAnnual Report on Form 10-K filed with the Securities and Exchange Commission.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the dates indicated.

Signature Title Date

/s/ William J. Post

(William J. Post, Chairmanof the Board of Directors and

Chief Executive Officer)

Principal Executive Officerand Director

February 20, 2009

/s/ James R. Hatfield

(James R. Hatfield,Senior Vice President andChief Financial Officer)

Principal Financial Officerand Principal Accounting Officer

February 20, 2009

208

Table of Contents


/s/ Edward N. Basha, Jr.

(Edward N. Basha, Jr.)

Director

February 20, 2009

/s/ Donald E. Brandt

(Donald E. Brandt)

Director

February 20, 2009

/s/ Susan Clark-Johnson

(Susan Clark-Johnson)

Director

February 20, 2009

/s/ Michael L. Gallagher

(Michael L. Gallagher)

Director

February 20, 2009

/s/ Pamela Grant

(Pamela Grant)

Director

February 20, 2009

/s/ Roy A. Herberger, Jr.

(Roy A. Herberger, Jr.)

Director

February 20, 2009

/s/ William S. Jamieson

(William S. Jamieson)

Director

February 20, 2009

/s/ Humberto S. Lopez

(Humberto S. Lopez)

Director

February 20, 2009

/s/ Kathryn L. Munro

(Kathryn L. Munro)

Director

February 20, 2009

/s/ Bruce J. Nordstrom

(Bruce J. Nordstrom)

Director

February 20, 2009

/s/ W. Douglas Parker

(W. Douglas Parker)

Director

February 20, 2009

/s/ William L. Stewart

(William L. Stewart)

Director

February 20, 2009

209

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ARIZONA PUBLIC SERVICE COMPANY

(Registrant)

Date: February 20, 2009 /s/ Donald E. Brandt (Donald E. Brandt, Chief Executive Officer)

Power of Attorney

We, the undersigned directors and executive officers of Arizona Public Service Company, hereby severally appoint JamesR. Hatfield, Chris N. Froggatt and Nancy C. Loftin, and each of them, our true and lawful attorneys with full power to themand each of them to sign for us, and in our names in the capacities indicated below, any and all amendments to this AnnualReport on Form 10-K filed with the Securities and Exchange Commission.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the dates indicated.


/s/ William J. Post

(William J. Post, Chairmanof the Board of Directors)

Director

February 20, 2009


(Donald E. Brandt,Chief Executive Officer)

Principal Executive Officer

February 20, 2009

/s/ James R. Hatfield

(James R. Hatfield,Senior Vice President and Chief

Financial Officer)

Principal Financial Officerand Principal Accounting

Officer

February 20, 2009

210

Table of Contents


/s/ Edward N. Basha, Jr.

(Edward N. Basha, Jr.)

Director

February 20, 2009


(Donald E. Brandt)

Director

February 20, 2009

/s/ Susan Clark-Johnson

(Susan Clark-Johnson)

Director

February 20, 2009

/s/ Michael L. Gallagher

(Michael L. Gallagher)

Director

February 20, 2009

/s/ Pamela Grant

(Pamela Grant)

Director

February 20, 2009

/s/ Roy A. Herberger, Jr.

(Roy A. Herberger, Jr.)

Director

February 20, 2009

/s/ William S. Jamieson

(William S. Jamieson)

Director

February 20, 2009

/s/ Humberto S. Lopez

(Humberto S. Lopez)

Director

February 20, 2009

/s/ Kathryn L. Munro

(Kathryn L. Munro)

Director

February 20, 2009

/s/ Bruce J. Nordstrom

(Bruce J. Nordstrom)

Director

February 20, 2009

/s/ W. Douglas Parker

(W. Douglas Parker)

Director

February 20, 2009

/s/ William L. Stewart

(William L. Stewart)

Director

February 20, 2009

211

Exhibit 3.2

BYLAWS

OF

PINNACLE WEST CAPITAL CORPORATION(Amended as of January 21, 2009)

I. REFERENCES; SENIORITY

1.01. References. Any reference herein made to law will be deemed to refer to the law of the State of Arizona, includingany applicable provision or provisions of Chapters 1-17 and Chapter 23 of Title 10, Arizona Revised Statutes (or itssuccessor), as at any given time in effect. Any reference herein made to the Articles will be deemed to refer to the applicableprovision or provisions of the Articles of Incorporation of the Company, and all amendments thereto, as at any given time onfile with the Arizona Corporation Commission (this reference to that Commission being intended to include any successor tothe incorporating and related functions being performed by that Commission at the date of the initial adoption of theseBylaws).

1.02. Seniority. Except as indicated in Part X of these Bylaws, the law and the Articles (in that order of precedence) willin all respects be considered senior and superior to these Bylaws, with any inconsistency to be resolved in favor of the law

and the Articles (in that order of precedence), and with these Bylaws to be deemed automatically amended from time to timeto eliminate any such inconsistency which may then exist.

1.03. Shareholders of Record. Except as otherwise required by law and subject to any procedure established by theCompany pursuant to Arizona Revised Statutes Section 10-723 (or any comparable successor provision), the word“shareholder” as used herein shall mean one who is a holder of record of shares of capital stock in the Company.

II. SHAREHOLDERS MEETINGS

2.01. Annual Meetings. An annual meeting of shareholders shall be held for the election of directors at such date, timeand place, either within or without the State of Arizona, as may be designated by resolution of the Board of Directors fromtime to time. Any other proper business may be transacted at the annual meeting. A special meeting may be called and held inlieu of an annual meeting pursuant to the provisions of Section 2.02 below, and the same proceedings (including the electionof directors) may be conducted thereat as at a regular meeting. Any director elected at any annual meeting, or special meetingin lieu of an annual meeting, will continue in office until the election of his or her successor, subject to his or her (a) earlierresignation pursuant to Section 6.01 below, (b) removal pursuant to Section 3.13 below, or (c) death or disqualification.

1

2.02. Special Meetings. Except as otherwise required by law, special meetings of the shareholders may be held wheneverand wherever called by the Chairman of the Board, the President, or a majority of the Board of Directors, but such specialmeetings may not be called by any other person or persons. Business transacted at any special meeting of shareholders shallbe limited to the purposes stated in the notice.

2.03. Notice. Notice of any meeting of the shareholders will be given as provided by law to each shareholder entitled tovote at such meeting and, if required by law, to each other shareholder of the Company. Any such notice may be waived asprovided by law.

2.04. Right to Vote. For each meeting of the shareholders, the Board of Directors will fix in advance a record date ascontemplated by law, and the shares of stock and the shareholders “entitled to vote” (as that or any similar term is hereinused) at any meeting of the shareholders will be determined as of the applicable record date. The Secretary (or in his or herabsence an Assistant Secretary) will see to the making and production of any record of shareholders entitled to vote orotherwise entitled to notice of shareholders meetings, in either case which is required by law. Any voting entitlement may beexercised through proxy, or in such other manner as specifically provided by law, in accordance with the applicable law. Inthe event of contest, the burden of proving the validity of any undated or irrevocable proxy will rest with the person seekingto exercise the same. A telegram, cablegram, or facsimile appearing to have been transmitted by a shareholder (or by his orher duly authorized attorney-in-fact) or other means of voting by telephone or electronic transmission may be accepted as asufficiently written and executed proxy if otherwise permitted by law.

2.05. Notice of Shareholder Business and Nominations.

(a) Annual Meetings of Shareholders. (1) Nominations of persons for election to the Board of Directors of theCompany and the proposal of business to be considered by the shareholders may be made at an annual meeting ofshareholders only (a) pursuant to the Company’s notice of meeting (or any supplement thereto), (b) by or at thedirection of the Board of Directors or (c) by any shareholder of the Company who was a shareholder at the time thenotice provided for in this Section 2.05 is delivered to the Secretary of the Company, who is entitled to vote at themeeting and who complies with the notice procedures set forth in this Section 2.05.

(2) For nominations or other business to be properly brought before an annual meeting by a shareholder pursuantto clause (c) of paragraph (a)(1) of this Section 2.05, the shareholder must have given timely notice thereof inwriting to the Secretary of the Company and any such proposed business other than the nominations ofpersons for election to the Board of Directors must constitute a proper matter for shareholder action. To betimely, a shareholder notice shall

be delivered to the Secretary at the principal executive offices of the Company not later than the close ofbusiness (a) with respect to business to be brought before the meeting, on the ninetieth (90th) day nor earlierthan the close of business on the one hundred twentieth (120th) day prior to the first anniversary of thepreceding year’s annual meeting (provided, however, that in the event that the date of the annual meeting ischanged by more than thirty (30) days from such anniversary date, notice by the shareholder must be sodelivered not earlier than the close of business on the one hundred twentieth (120th) day prior to such annualmeeting and not later than the close of business on the later of the ninetieth (90th) day prior to such annualmeeting or the tenth (10th) day following the day on which public announcement of the date of such meetingis first made by the Company), and (b) with respect to nominations of persons to be elected to the Board ofDirectors, the one-hundred eightieth (180th) day prior to the date of the meeting at which the election is tooccur. In no event shall the public announcement of an adjournment or postponement of an annual meetingcommence a new time period (or extend any time period) for the giving of a shareholder’s notice as describedabove.

(3) In addition to meeting the timely notice requirements of paragraph (a)(2) of this Section 2.05, in order fornominations or other business to be properly brought before an annual meeting by a shareholder pursuant toclause (c) of paragraph (a)(1) of this Section 2.05, such shareholder’s notice shall set forth: (a) as to eachperson whom the shareholder proposes to nominate for election as a director, (i) all information relating tosuch person that is required to be disclosed in solicitations of proxies for election of directors in an electioncontest, or is otherwise required, in each case pursuant to and in accordance with Regulation 14A under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), and (ii) and such person’s writtenconsent to being named in the proxy statement as a nominee and to serving as a director if elected; (b) as toany other business that the shareholder proposes to bring before the meeting, a brief description of thebusiness desired to be brought before the meeting, the text of the proposal or business (including the text ofany resolutions proposed for consideration and, in the event that such business includes a proposal to amendthe Bylaws of the Company, the language for the proposed amendment), the reasons for conducting suchbusiness at the meeting, and any material

interest in such business of such shareholder and the beneficial owner, if any, on whose behalf the proposal ismade; and (c) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf thenomination or proposal is made, (i) the name and address of such shareholder, as they appear on theCompany’s books, and of such beneficial owner, (ii) the class and number of shares of capital stock of theCompany that are owned beneficially and of record by such shareholder and such beneficial owner, (iii) arepresentation that the shareholder is a holder of record of stock of the Company entitled to vote at suchmeeting and intends to appear in person or by proxy at the meeting to propose such business or nomination,and (iv) a representation whether the shareholder or the beneficial owner, if any, intends or is part of a groupthat intends (A) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of theCompany’s outstanding capital stock required to approve or adopt the proposal or elect the nominee and/or(B) otherwise to solicit proxies from shareholders in support of such proposal or nomination. The foregoingnotice requirements of clauses (b) and (c) of paragraph (a)(3) of this Section 2.05 shall be deemed satisfied bya shareholder if the shareholder has notified the Company of his or her intention to present a proposal at anannual meeting in compliance with Rule 14a-8 (or any successor thereof) promulgated under the ExchangeAct and such shareholder’s proposal has been included in a proxy statement that has been prepared by theCompany to solicit proxies for such annual meeting. The Company may require any proposed nominee tofurnish such other information as it may reasonably require to determine the eligibility of such proposednominee to serve as a director of the Company.

(b) Special Meetings of Shareholders. Only such business shall be conducted at a special meeting of shareholders asshall have been brought before the meeting pursuant to the Company’s notice of meeting.

(c) General. (1) Only such persons who are nominated in accordance with the procedures set forth in this Section 2.05shall be eligible to be elected at an annual or special meeting of shareholders of the Company to serve as directorsand only such business shall be conducted at a meeting of shareholders as shall have been brought before themeeting in accordance with the procedures set forth in this Section 2.05. Except as otherwise provided by law, theChairman of the meeting shall have the power and duty (a) to determine whether a nomination or any businessproposed to be

brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forthin this Section 2.05 (including whether the shareholder or beneficial owner, if any, on whose behalf the nominationor proposal is made solicited (or is part of a group that solicited) or did not so solicit, as the case may be, proxies insupport of such shareholder’s nominee or proposal in compliance with such shareholder’s representation asrequired by clause (a)(2)(c)(iv) of this Section 2.05) and (b) if any proposed nomination or business was not madeor proposed in compliance with this Section 2.05, to declare that such nomination shall be disregarded or that suchproposed business shall not be transacted. Notwithstanding the foregoing provisions of this Section 2.05, if theshareholder (or a qualified representative of the shareholder) does not appear at the annual meeting of shareholdersof the Company to present a nomination or business, such nomination shall be disregarded and such business shallnot be transacted, notwithstanding that proxies in respect of such vote may have been received by the Company.For purposes of this Section 2.05, to be considered a qualified representative of the shareholder, a person must beauthorized by a writing executed by such shareholder or an electronic transmission delivered by such shareholder toact for such shareholder as proxy at the meeting of shareholders and such person must produce such writing orelectronic transmission, or a reliable reproduction of the writing or electronic transmission, at the meeting ofshareholders.

(2) For purposes of this Section 2.05, “public announcement” shall mean disclosure in a press release reported bythe Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filedby the Company with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of theExchange Act.

(3) Notwithstanding the foregoing provisions of this Section 2.05, a shareholder shall also comply with allapplicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the mattersset forth in this Section 2.05. Nothing in this Section 2.05 shall be deemed to affect any rights (a) of shareholders torequest inclusion of proposals in the Company’s proxy statement pursuant to Rule 14a-8 of the Exchange Act or(b) of the holders of any series of Preferred Stock to elect directors pursuant to any applicable provisions of theArticles.

2.06. Right to Attend. Except only to the extent of persons designated by the Board of Directors or the Chairman of themeeting to assist in the conduct of the meeting (as referred to in Sections 2.08 and 2.09 below) and except as otherwisepermitted by the Board or such Chairman, the persons entitled to attend any meeting of

shareholders may be confined to (i) shareholders entitled to vote thereat and other shareholders entitled to notice of themeeting and (ii) the persons upon whom proxies valid for purposes of the meeting have been conferred or their dulyappointed substitutes (if the related proxies confer a power of substitution); provided, however, that the Board of Directors orthe Chairman of the meeting may establish rules limiting the number of persons referred to in clause (ii) as being entitled toattend on behalf of any shareholder so as to preclude such an excessively large representation of such shareholder at themeeting as, in the judgment of the Board or such Chairman, would be unfair to other shareholders represented at the meetingor be unduly disruptive of the orderly conduct of business at such meeting (whether such representation would result fromfragmentation of the aggregate number of shares held by such shareholder for the purpose of conferring proxies, from thenaming of an excessively large proxy delegation by such shareholder or from employment of any other device). A personotherwise entitled to attend any such meeting will cease to be so entitled if, in the judgment of the Chairman of the meeting,such person engages thereat in disorderly conduct impeding the proper conduct of the meeting in the interests of allshareholders as a group.

2.07. Quorum. Except as otherwise provided by law, the Articles or these Bylaws, at each meeting of shareholders thepresence in person or by proxy of the holders of a majority in voting power of the outstanding shares of stock entitled to voteat the meeting shall be necessary and sufficient to constitute a quorum.

2.08. Election Inspectors. The Board of Directors, in advance of any shareholders meeting may appoint an electioninspector or inspectors to act at such meeting (and any adjournment thereof). If an election inspector or inspectors are not soappointed, the Chairman of the meeting may or, upon the request of any person entitled to vote at the meeting will, makesuch appointment. If any person appointed as an inspector fails to appear or to act, a substitute may be appointed by theChairman of the meeting. If appointed, the election inspector or inspectors (acting through a majority of them if there bemore than one) will determine the number of shares outstanding, the authenticity, validity and effect of proxies, thecredentials of persons purporting to be shareholders or persons named or referred to in proxies, and the number of sharesrepresented at the meeting in person and by proxy; they will receive and count votes, ballots and consents and announce theresults thereof; they will hear and determine all challenges and questions pertaining to proxies and voting; and, in general,they will perform such acts as may be proper to conduct elections and voting with complete fairness to all shareholders. Nosuch election inspector need be a shareholder of the Company.

2.09. Organization and Conduct of Meetings. Each shareholders meeting will be called to order and thereafter chairedby the Chairman of the Board if there then is one; or, if not, or if the Chairman of the Board is absent or so requests, then bythe President; or if both the Chairman of the Board and the President are unavailable, then by such other officer of theCompany or such shareholder as may be appointed by the Board of Directors. The Secretary (or in his or her absence anAssistant Secretary) of the Company will act as secretary of each shareholders meeting; if neither the Secretary nor anAssistant Secretary is in attendance, the Chairman of the meeting may

appoint any person (whether a shareholder or not) to act as secretary thereat. After calling a meeting to order, the Chairmanthereof may require the registration of all shareholders intending to vote in person, and the filing of all proxies, with theelection inspector or inspectors, if one or more have been appointed (or, if not, with the secretary of the meeting). After theannounced time for such filing of proxies has ended, no further proxies or changes, substitutions or revocations of proxieswill be accepted. If directors are to be elected, a tabulation of the proxies so filed will, if any person entitled to vote in suchelection so requests, be announced at the meeting (or adjournment thereof) prior to the closing of the election polls.

Absent a showing of bad faith on his or her part, the Chairman of a meeting will, among other things, have absoluteauthority to determine the order of business to be conducted at such meeting and to establish rules for, and appoint personnelto assist in, preserving the orderly conduct of the business of the meeting (including any informal, or question and answer,portions thereof). Rules, regulations or procedures regarding the conduct of the business of a meeting, whether adopted by theBoard of Directors or prescribed by the Chairman of the meeting, may include, without limitation, the following: (i) theestablishment of an agenda or order of business for the meeting; (ii) rules and procedures for maintaining order at the meetingand the safety of those present; (iii) limitations on attendance at or participation in the meeting to shareholders of record ofthe Company, their duly authorized and constituted proxies (subject to Section 2.06) or such other persons as the Chairman ofthe meeting shall determine; (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof; and(v) limitations on the time allotted to questions or comments by participants. Unless and to the extent determined by theBoard of Directors or the Chairman of the meeting, meetings of shareholders shall not be required to be held in accordancewith the rules of parliamentary procedure. Any informational or other informal session of shareholders conducted under theauspices of the Company after the conclusion of or otherwise in conjunction with any formal business meeting of theshareholders will be chaired by the same person who chairs the formal meeting, and the foregoing authority on his or her partwill extend to the conduct of such informal session.

2.10. Voting. The number of shares voted on any matter submitted to the shareholders which is required to constitute theiraction thereon or approval thereof will be determined in accordance with applicable law, the Articles, and these Bylaws, ifapplicable. No ballot or change of vote will be accepted after the polls have been declared closed following the ending of theannounced time for voting.

2.11. Shareholder Approval or Ratification. The Board of Directors may submit any contract or act for approval orratification at any duly constituted meeting of the shareholders, the notice of which either includes mention of the proposedsubmittal or is waived as provided in Section 2.03 above. Except as otherwise required by law (e.g., Arizona Revised StatutesSection 10-863), if any contract or act so submitted is approved or ratified by a majority of the votes cast thereon at suchmeeting, the same will be valid and as binding upon the Company and all of its shareholders as it would be if approved andratified by each and every shareholder of the Company.

2.12. Control Share Act. The provisions of Section 10-2721 through and including Section 10-2727 of the ArizonaRevised Statutes shall not apply to the Company.

2.13. Adjournments. Any meeting of shareholders, annual or special, may adjourn from time to time to reconvene at thesame or some other place, and notice need not be given of any such adjourned meeting if the time and place thereof areannounced at the meeting at which the adjournment is taken. At the adjourned meeting the Company may transact anybusiness that might have been transacted at the original meeting. If the adjournment is for more than one hundred and twentydays, or if after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shallbe given to each shareholder of record entitled to vote at the meeting.

III. BOARD OF DIRECTORS

3.01. Membership. The Board of Directors of the corporation shall consist of not less than nine (9) nor more thantwenty-one (21) shareholders of the Company or of any parent corporation thereof. Each director shall be elected annuallyand hold office in the manner provided by law and in the Articles (Art. Fifth). The Board will have the exclusive power toincrease or decrease its size within such limits. Any vacancy occurring in the Board, whether by reason of death, resignation,disqualification or otherwise, may be filled by the directors as contemplated by law and as provided in the Articles (Art.Fifth). Any such increase in the size of the Board, and the filling of any vacancy created thereby, will require action by amajority of the whole membership of the Board as comprised immediately before such increase.

3.02. Qualifications. In order to qualify as a director, a person must be the owner of one or more shares of the capitalstock of the Company or of any parent corporation thereof at the time of assuming office (except as may otherwise beprovided in these Bylaws or in the Articles) and for so long thereafter as such person remains in office. A person will cease toqualify as a director if he or she (i) is in good faith determined by a majority of the other directors then in office to bephysically or mentally incapable of competent performance as a director for a period, starting with inception of theincapacity, that has extended or is likely to extend for more than six months or (ii) has failed to attend six successive regularmeetings of the Board (as determined in accordance with Section 3.03 below) unless and to the extent such failure is waivedby a majority of the other directors then in office; however, disqualification pursuant to clause (i) or (ii) of this sentence willnot preclude the subsequent election or appointment of such person as a director by the shareholders or the Board if amajority of the directors in office immediately prior to the submission of such person for election or appointment shalldetermine that his or her prior incapacity or principal reason for prior non-attendance no longer exists. A person who has beena full-time employee of the Company within twelve months prior to the date of any election will not qualify for election as adirector on that date unless he or she then remains a full-time employee of the Company or unless the Board of Directorsspecifically authorizes the election of such person. A person who has qualified by employment status for his or her most

recent election as a director may serve throughout the term for which such person was elected, notwithstanding the cessationof full-time employment by the Company between the date of such election and the end of such term, subject, however, to hisor her otherwise remaining qualified for such office.

3.03. Regular Meetings. A regular annual meeting of the directors is to be held as soon as practicable after theadjournment of each annual shareholders meeting either at the place of the shareholders meeting or at such other place as thedirectors elected at the shareholders meeting may have been informed of at or before the time of their election. Regularmeetings, other than the annual ones, may be held at such intervals at such places and at such times as the Board of Directorsmay provide.

3.04. Special Meetings. Special meetings of the Board of Directors may be held whenever and wherever called for by theChairman of the Board, the President or the number of directors which would be required to constitute a quorum.

3.05. Notice. No notice need be given of regular meetings of the Board of Directors. Notice of the time and place (but notnecessarily the purpose or all of the purposes) of any special meeting will be given to each director in person or by telephone,or via mail, telegram, facsimile, or other electronic transmission addressed in the manner appearing on the Company’srecords. Notice to any director of any such special meeting will be deemed given sufficiently in advance when (i) if given bymail, the same is deposited in the United States mail at least four days before the meeting date, with postage thereon prepaid,(ii) if given by telegram, the same is delivered to the telegraph office for fast transmittal at least 48 hours prior to theconvening of the meeting, (iii) if given by facsimile or other electronic transmission, the same is received by the director oran adult member of his or her office staff or household, at least 24 hours prior to the convening of the meeting, or (iv) ifpersonally delivered or given by telephone, the same is handed, or the substance thereof is communicated over the telephoneto the director or to an adult member of his or her office staff or household, at least 24 hours prior to the convening of themeeting. Any such notice may be waived as provided by law. No call or notice of a meeting of directors will be necessary ifeach of them waives the same in writing or by attendance. Any meeting, once properly called and noticed (or as to which calland notice have been waived as aforesaid) and at which a quorum is formed, may be adjourned to another time and place by amajority of those in attendance.

3.06. Quorum; Voting. A quorum for the transaction of business at any meeting or adjourned meeting of the directors willconsist of a majority of those then in office. Any matter submitted to a meeting of the directors will be resolved by a majorityof the votes cast thereon, except as otherwise required by these Bylaws (§§ 3.01 and 3.02 above and § 3.07 below), by law orby any applicable Article. Where action by a majority of the whole membership is required, such requirement will be deemedto relate to a majority of the directors in office at the time the action is taken. In computing any such majority, whether forpurposes of determining the presence of a quorum or the adequacy of the vote on any proposed action, any unfilled vacanciesat the time existing in the membership of the Board will be excluded from the computation.

3.07. Executive Committee. The Board of Directors may, by resolution adopted by a majority of the whole Board, namethree or more of its members as an Executive Committee. Such Executive Committee will have and may exercise the powersof the Board of Directors in the management of the business and affairs of the Company while the Board is not in session,except only as precluded by law or where action other than by a majority of the votes cast is required by these Bylaws, or thelaw (all as referred to in Section 3.06 above), and subject to such limitations as may be included in any applicable resolutionpassed by a majority of the whole membership of the Board. A majority of those named to the Executive Committee willconstitute a quorum.

3.08. Other Committees. The Board of Directors may designate one or more additional committees, each committee toconsist of one or more of the directors of the Company. The Board of Directors may designate one or more directors asalternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee.Any such committee, to the extent permitted by law and to the extent provided in the resolution of the Board of Directors,shall have and may exercise all the powers and authority of the Board of Directors in the management of the business andaffairs of the Company, and may authorize the seal of the Company to be affixed to all papers that may require it.

3.09. Committee Functioning. Notice requirements and related waiver provisions for meetings of the ExecutiveCommittee and other committees of the Board will be the same as those set forth in Section 3.05 above for meetings of theBoard of Directors. Except as provided in the next two succeeding sentences, a majority of those named to the ExecutiveCommittee or any other committee of the Board will constitute a quorum at any meeting thereof (with the effect of departureof committee members from a meeting and the computation of a majority of committee members to be in accordance with theapplicable policies of Section 3.06 above), and any matter submitted to a meeting of any such committee will be resolved bya majority of the votes cast thereon. No distinction will be made among ex-officio or other members of any such committeefor quorum, voting or other purposes, except that the membership of any committee (including the Executive Committee), inperforming any function vested in it as herein contemplated, may be deemed to exclude any officer or employee of theCompany, in either case, or other person having a direct or indirect personal interest in any proposed exercise of suchfunction, whose exclusion for that purpose is deemed appropriate by a majority of the other members of such committeeproposing to perform such function. All committees are to keep regular minutes of the transactions of their meetings.

3.10. Action by Telephone or Consent. Any meeting of the Board or any committee thereof may be held by conferencetelephone or similar communications equipment as permitted by law, in which case any required notice of such meeting maygenerally describe the arrangements (rather than the place) for the holding thereof, and all other provisions herein containedor referred to will apply to such meeting as though it were physically held at a single place. Action may also be taken by theBoard or any committee thereof without a meeting if the members thereof consent in writing thereto as contemplated by law.

3.11. Presumption of Assent. A director of the Company who is present at a meeting of the Board of Directors, or of anycommittee when corporate action is taken is deemed to have assented to the action taken unless either (i) the director objectsat the beginning of the meeting or promptly on the director’s arrival to holding it or transacting business at the meeting;(ii) the director’s dissent or abstention from the action taken is entered in the minutes of the meeting; or (iii) the directordelivers written notice of the director’s dissent or abstention to the presiding officer of the meeting before its adjournment orto the Company before 5:00 P.M. on the next business day after the meeting. The right of dissent or abstention is not availableto a director who votes in favor of the action taken.

3.12. Compensation. By resolution of the Board, the directors may be paid their expenses, if any, of attendance at eachmeeting of the Board of Directors, or of any committee, and may be paid a fixed sum for attendance at each such meetingand/or a stated salary as a director or committee member. No such payment will preclude any director from serving theCompany in any other capacity and receiving compensation therefor.

3.13. Removal. Any director or the entire Board of Directors may be removed, with or without cause, only at a specialmeeting of shareholders called for that purpose, if the votes cast in favor of such removal exceed the votes cast against suchremoval, except that if less than the entire Board of Directors is to be removed, no one of the directors may be removed if thevotes cast against the director’s removal would be sufficient to elect the director if then cumulatively voted at an election forthe class of directors of which the director is a part.

IV. OFFICERS — GENERAL

4.01. Elections and Appointments. The directors may elect or appoint one or more of the officers of the Companycontemplated in Part V below. Any such election or appointment will regularly take place at the annual meeting of thedirectors, but elections of officers may be held at any other meeting of the Board. A person elected or appointed to any officewill continue to hold that office until the election or appointment of his or her successor, subject to action earlier takenpursuant to Section 4.04 or 6.01 below. Any person may hold more than one office.

4.02. Additional Appointments. In addition to the officers contemplated in Part V below, the Board of Directors maycreate other corporate positions, and appoint persons thereto, with such authority to perform such duties as may be prescribedfrom time to time by the Board of Directors, by the President or by the superior officer of any person so appointed.Notwithstanding such additional appointments, only those persons whose offices are described in Part V are to be consideredan officer of the Company unless the resolution or other Board action appointing such person expressly states that suchperson is to be considered an officer of the Company. Each of such persons (in the order designated by the Board or thesuperior officer of such person) will be vested with all of the powers and charged with all of the duties of his or her superiorofficer in the event of such superior officer’s absence or disability.

4.03. Bonds and Other Requirements. The Board of Directors may require any officer or other appointee to give bond tothe Company (with sufficient surety, and conditioned upon the faithful performance of the duties of his or her office orposition) and to comply with such other conditions as may from time to time be required of him or her by the Board.

4.04. Removal or Delegation. Provided that a majority of the whole membership thereof concurs therein, the Board ofDirectors may remove any officer of the Company as provided by law and declare his or her office or offices vacant orabolished or, in the case of the absence or disability of any officer or for any other reason considered sufficient, maytemporarily delegate his or her powers and duties to any other officer or to any director. Similar action may be taken by theBoard of Directors in regard to appointees designated pursuant to Section 4.02 above.

4.05. Salaries. Officer salaries may from time to time be fixed by the Board of Directors or (except as to his or her own)be left to the discretion of the Chief Executive Officer or the President. No officer will be prevented from receiving a salaryby reason of the fact that he or she is also a director of the Company.

V. SPECIFIC OFFICERS, FUNCTIONS AND POWERS

5.01. Chairman of the Board. The Board of Directors may elect a Chairman to serve as a general executive officer of theCompany and, if specifically designated as such by the Board, as the Chief Executive Officer of the Company. If elected, theChairman will preside at all meetings of the directors and be vested with such other powers and duties as the Board may fromtime to time delegate to him or her.

5.02. Chief Executive Officer. Subject to the control of the Board of Directors exercised as hereinafter provided, theChief Executive Officer of the Company will supervise its business and affairs and the performance of their respective dutiesby all other officers, by appointees designated pursuant to Section 4.02 above, and by such additional appointees to suchadditional positions (corporate, divisional or otherwise) as the Chief Executive Officer may designate, with authority on hisor her part to delegate the foregoing duty of supervision to such extent and to such person or persons as may be determinedby the Chief Executive Officer. Except as otherwise indicated from time to time by resolution of the Board of Directors, itsmanagement of the business and affairs of the Company will be implemented through the office of the Chief ExecutiveOfficer.

5.03. President and Vice Presidents. Unless specified to the contrary by resolution of the Board of Directors, thePresident will be the Chief Executive Officer of the Company. In addition to the supervisory functions above set forth on thepart of the Chief Executive Officer or in lieu thereof if a contrary specification is made by the Board relative to the ChiefExecutive Officer, the President will be vested with such powers and duties as the Board may from time to time designate.Vice Presidents may be elected by the Board of Directors to perform such duties as may be designated by the Board or beassigned or delegated to them by their respective superior officers. The

Board may identify (i) one or more Vice Presidents as “Executive” or “Senior” Vice Presidents and (ii) the President or anyVice President as “General Manager” of the Company and the title of any Vice President may include words indicative of hisor her particular area of responsibility and authority. Vice Presidents will succeed to the responsibilities and authority of thePresident, in the event of his or her absence or disability, in the order consistent with their respective titles or regular duties oras specifically designated by the Board of Directors.

5.04. Treasurer and Secretary. The Treasurer and Secretary each will perform all such duties normally associated withhis or her office (including, in the case of the Secretary, the giving of notice and the preparation and retention of minutes ofcorporate proceedings and the custody of corporate records and the seal of the Company) as are not assigned to a VicePresident of the Company, along with such other duties as may be designated by the Board or be assigned or delegated tothem by their respective superior officers. The Board may appoint one or more Assistant Treasurers or Assistant Secretaries,each of whom (in the order designated by the Board or their respective superior officers) will be vested with all of the powersand charged with all of the duties of the Treasurer or the Secretary (as the case may be) in the event of his or her absence ordisability.

5.05. Specific Powers. Except as may otherwise be specifically provided in a resolution of the Board of Directors, any ofthe officers referred to in this Part V will be a proper officer to authenticate records of the Company and to sign on behalf ofthe Company any deed, bill of sale, assignment, option, mortgage, pledge, note, bond, debenture, evidence of indebtedness,application, consent (to service of process or otherwise), agreement, indenture or other instrument of importance to theCompany. Any such officer may represent the Company at any meeting of the shareholders or members of any corporation,association, partnership, joint venture or other entity in which this Company then has an interest, and may vote such interestin person or by proxy appointed by him or her, provided that the Board of Directors may from time to time confer theforegoing authority upon any other person or persons.

VI. RESIGNATIONS AND VACANCIES

6.01. Resignations.

(a) Any director, committee member or officer may resign from his or her office at any time by written notice as specifiedin accordance with Arizona Revised Statutes Sections 10-807 and 10-843. The acceptance of a resignation will not berequired to make it effective.

(b) Except as prohibited by law or by the Articles, any nominee for election as a director at a meeting of shareholdersduly called and at which a quorum is present, in an uncontested election, who receives a greater number of votes cast“withheld” for his or her election than “for” such election shall promptly tender his or her resignation forconsideration to the Corporate Governance Committee or its successor. The Corporate

Governance Committee or its successor shall evaluate the director’s tendered resignation taking into account the bestinterests of the Company and its shareholders and shall recommend to the Board of Directors whether to accept orreject such resignation. In making its recommendation, the Corporate Governance Committee or its successor mayconsider, among other things, the effect of the exercise of cumulative voting in the election. The Board of Directorsshall act within 120 days following certification of the shareholder vote and publicly disclose its decision and theunderlying rationale. Any director who tenders his or her resignation pursuant to this provision shall not participate inany committee or Board of Director consideration thereof.

6.02. Vacancies. If the office of any director, committee member or officer becomes vacant by reason of his or her death,resignation, disqualification, removal or otherwise, the Board of Directors may choose a successor to hold office for theunexpired term.

VII. INDEMNIFICATION AND RATIFICATION

7.01. Indemnification. In order to induce qualified persons to serve the Company (and any other corporation, jointventure, partnership, trust or other enterprise at the request of the Company) as directors and officers, the Company shallindemnify any and all of its directors and officers, or former directors and officers to the fullest extent permitted by applicablelaw as it presently exists or may hereafter be amended.

7.02. Ratification; Special Committee. Any transaction involving the Company, any of its subsidiary corporations or anyof its directors, officers, employees or agents which at any time is questioned in any manner or context (including ashareholders derivative suit), on the ground of lack of authority, conflict of interest, misleading or omitted statement of fact orlaw, nondisclosure, miscomputation, improper principles or practices of accounting, inadequate records, defective or irregularexecution or any similar ground, may be investigated and/or ratified (before or after judgment), or an election may be madenot to institute or pursue a claim or legal proceedings on account thereof or to accept or approve a negotiated settlement withrespect thereto (before or after the institution of legal proceedings), by the Board of Directors or by a special committeethereof comprised of one or more disinterested directors (that is, a director or directors who did not participate in thequestioned transaction with actual knowledge of the questioned aspect or aspects thereof). Such a special committee may bevalidly formed and fully empowered to act, in accordance with the purposes and duties assigned thereto, by resolution orresolutions of the Board of Directors, notwithstanding (i) the inclusion of Board members who are not disinterested asaforesaid among those who form a quorum at the meeting or meetings at which one or more members of such specialcommittee are elected or appointed to the Board or to such special committee or at which such committee is formed orempowered, or their inclusion among the directors who vote upon or otherwise participate in taking any of the foregoingactions, or (ii) the taking of any of such actions by the disinterested members of the Board (or a majority of such members)whose

number is not sufficient to constitute a quorum or a majority of the membership of the full Board. Any such specialcommittee so comprised will, to the full extent consistent with its purposes and duties as expressed in such resolution orresolutions, have all of the authority and powers of the full Board and its Executive Committee (the same as though it werethe full Board and/or its Executive Committee in carrying out such purposes and duties) and will function in accordance withSection 3.09 above. No other provisions of these Bylaws which may at any time appear to conflict with any provisions of thisSection 7.02, and no defect or irregularity in the formation, empowering or functioning of any such special committee, willserve to impede, impair or bring into question any action taken or purported to be taken by such committee or the validity ofany such action. Any ratification of a transaction pursuant to this Section 7.02 will have the same force and effect as if thetransaction has been duly authorized originally. Any such ratification, and any election made pursuant to this Section 7.02with respect to claims, legal proceedings or settlements, will be binding upon the Company and its shareholders and willconstitute a bar to any claim or the execution of any judgment in respect of the transaction involved in such ratification orelection.

VIII. SEAL

8.01. Form Thereof. The seal of the Company will have inscribed thereon the name of the Company, the state and year ofits incorporation and the words “SEAL”.

IX. STOCK CERTIFICATES

9.01. Form Thereof. Shares shall be issued in uncertificated form pursuant to the customary arrangements for issuingshares in such form. This requirement shall not apply to shares represented by a certificate until the certificate is surrenderedto the Company. Notwithstanding the foregoing, every holder of stock represented by certificates and, upon request anyholder of uncertificated shares, shall be entitled to have a certificate in such form as approved by the Board of Directors.

9.02. Ownership. The Company will be entitled to treat the registered owner of any share as the absolute owner thereofand accordingly, will not be bound to recognize any beneficial, equitable or other claim to, or interest in, such share on thepart of any other person, whether or not it has notice thereof, except as may expressly be provided by Chapter 8 of Title 47,Arizona Revised Statutes (or its successor), as at the time in effect, or other applicable law.

9.03. Transfers. Transfer of stock will be made on the books of the Company as follows: (i) with respect to certificatedshares, only upon surrender of the certificate therefor, duly endorsed by an appropriate person, with such assurance of thegenuineness and effectiveness of the endorsement as the Company may require, all as contemplated by Chapter 8 of Title 47,Arizona Revised Statutes (or its successor), as at the time in effect, and/or upon submission of any affidavit, other documentor notice which the Company considers necessary; and (ii) with respect to uncertificated shares, upon compliance with thecustomary procedures for transferring shares in uncertificated form.

9.04. Lost Certificates. In the event of the loss, theft or destruction of any certificate representing capital stock of thisCompany, the Company may issue (or, in the case of any such stock as to which a transfer agent and/or registrar have beenappointed, may direct such transfer agent and/or registrar to countersign, register and issue) a replacement certificate in lieuof that alleged to be lost, stolen or destroyed, and cause the same to be delivered to the owner of the stock representedthereby, provided that the owner shall have submitted such evidence showing the circumstances of the alleged loss, theft ordestruction, and his or her ownership of the certificate as the Company considers satisfactory, together with any other factorswhich the Company considers pertinent, and further provided that an indemnity agreement and/or indemnity bond shall havebeen provided in form and amount satisfactory to the Company and to its transfer agent and/or registrar, if applicable.

X. EMERGENCY BYLAWS

10.01. Emergency Conditions. The emergency Bylaws provided in this Part X will be as effective in the event of anemergency as prescribed in Arizona Revised Statutes Section 10-207.D. To the extent not inconsistent with the provisions ofthis Part X, these Bylaws will remain in effect during such emergency and upon its termination, these emergency Bylaws willcease to be operative.

10.02. Board Meetings. During any such emergency, a meeting of the Board of Directors or any of its committees may becalled by any officer or director of the Company. Notice of the time and place of the meeting will be given by the personcalling the same to those of the directors whom it may be feasible to reach by any available means of communication. Suchnotice will be given so much in advance of the meeting as circumstances permit in the judgment of the person calling thesame. At any Board or committee meeting held during any such emergency, a quorum will consist of a majority of those whocould reasonably be expected to attend the meeting if they were willing to do so, but in no event more than a majority ofthose to whom notice of such meeting is required to have been given as above provided.

10.03. Certain Actions. The Board of Directors, either before or during any such emergency, may provide and from timeto time modify lines of succession in the event that during such an emergency any or all officers, appointees, employees oragents of the Company are for any reason rendered incapable of discharging their duties. The Board, either before or duringany such emergency, may, effective in the emergency, change the head office or designate several alternative head offices ofthe Company, or authorize the officers to do so.

10.04. Liability. No director, officer, appointee, employee or agent acting in accordance with these emergency Bylawswill be liable except for willful misconduct.

10.05. Modifications. These emergency Bylaws will be subject to repeal or change by further action of the Board ofDirectors, but no such repeal or change will modify the provisions of Section 10.04 with respect to action taken prior to thetime of such repeal or change. Any amendment of these emergency Bylaws may make any

further or different provisions that may be practical and necessary for the circumstances of the emergency.

XI. DIVIDENDS

11.01. Declaration. Subject to such restrictions or requirements as may be imposed by law or the Company’s Articles oras may otherwise be binding upon the Company, the Board of Directors may from time to time declare dividends on stock ofthe Company outstanding on the dates of record fixed by the Board, to be paid in cash, in property or in shares of theCompany’s stock on or as of such payment or distribution dates as the Board may prescribe.

XII. BUSINESS COMBINATIONS

12.01. Definitions. In these Bylaws, the following definitions shall apply:

1. “Affiliate” means a person that directly or indirectly controls, is controlled by, or is under common control with aspecified person.

2. “Announcement date,” when used in reference to any business combination, means the date of the first publicannouncement of the final, definitive proposal for the business combination.

3. “Associate,” when used to indicate a relationship with any person, means any of the following:

(a) Any corporation or organization of which the person is an officer, director, or partnership or is, directly orindirectly, the beneficial owner of ten percent (10%) or more of any class or series of shares entitled to vote orother equity interest;

(b) Any trust or estate in which the person has a substantial beneficial interest or as to which the person serves astrustee or personal representative or in a similar fiduciary capacity; or

(c) Any relative or spouse of the person, or any relative of the spouse, residing in the home of the person.

4. “Beneficial owner,” when used with respect to shares or other securities, includes any person who, directly orindirectly through any agreement, arrangement, relationship, understanding, or otherwise, whether or not inwriting, has or shares the power to vote, or direct the voting of the shares or securities or has or shares the power todispose of or direct the disposition of the shares or securities, except that:

(a) A person is not deemed the beneficial owner of shares or securities tendered pursuant to a tender or exchangeoffer made by the person or any of the person’s affiliates or associates until the tendered shares or securitiesare accepted for purchase or exchange; and

(b) A person is not deemed the beneficial owner of shares or securities with respect to which the person has thepower to vote or direct the voting arising solely from a revocable proxy given in response to a proxysolicitation required to be made and made in accordance with the applicable rules and regulations under theSecurities Exchange Act of 1934, as amended, and is not then reportable under that act on a Schedule 13D orcomparable report.

5. “Beneficial ownership” includes the right to acquire shares or securities through the exercise of options, warrants,or rights, the conversion of convertible securities, or otherwise. The shares or securities subject to the options,warrants, rights, or conversion privileges held by a person are deemed to be outstanding for the purpose ofcomputing the percentage of outstanding shares or securities of the class or series owned by the person but are notdeemed to be outstanding for the purpose of computing the percentage of the class or series owned by any otherperson. A person is deemed the beneficial owner of shares and securities beneficially owned by the spouse of theperson or any relative of the spouse residing in the home of the person, any trust or estate in which the person ownsten percent (10%) or more of the total beneficial interest or serves as trustee or personal representative, anycorporation or entity in which the person owns ten percent (10%) or more of the equity and any affiliate of theperson.

6. “Business combination,” when used in reference to the Company and any interested shareholder of the Company,means any of the following:

(a) Any merger or consolidation of the Company or any subsidiary of the Company with either:

(i) The interested shareholder; or

(ii) Any other domestic or foreign corporation, whether or not itself an interested shareholder of theCompany, that is, or after the merger would be, an affiliate or associate of the interested shareholder,except that the foregoing does not include the merger of a wholly-owned subsidiary of the Company intothe

Company or the merger of two or more wholly-owned subsidiaries of the Company.

(b) Any exchange, pursuant to a plan of exchange under the laws of the State of Arizona or a comparable statuteof any other state or jurisdiction, of shares of the Company or any subsidiary of the Company for shares ofeither:

(i) The interested shareholder; or

(ii) Any other domestic or foreign corporation, whether or not itself an interested shareholder of theCompany, that is, or after the exchange would be, an affiliate or associate of the interested shareholder.

(c) Any sale, lease, exchange, mortgage, pledge, transfer, or other disposition, in a single transaction or a series oftransactions, to or with the interested shareholder or any affiliate or associate of the interested shareholder, ofassets of the Company or any subsidiary of the Company to which any of the following applies:

(i) Has an aggregate market value equal to ten percent (10%) or more of the aggregate market value of allthe assets, determined on a consolidated basis, of the Company.

(ii) Has an aggregate market value equal to ten percent (10%) or more of the aggregate market value of allthe outstanding shares of the Company.

(iii) Represents ten percent (10%) or more of the earning power or net income, determined on a consolidatedbasis, of the Company.

(d) The issuance or transfer by the Company or any subsidiary of the Company, in a single transaction or a seriesof transactions, of any shares of the Company or any subsidiary of the Company that have an aggregatemarket value equal to five percent (5%) or more of the aggregate market value of all the outstanding shares ofthe Company to the interested shareholder or any affiliate or associate of the interested shareholder, exceptpursuant to the exercise of warrants or rights to purchase shares offered or a dividend or distribution paid ormade pro rata to all shareholders of the Company.

(e) The adoption of any plan or proposal for the liquidation or dissolution of the Company, or any reincorporationof the Company in another state or jurisdiction, proposed by, on behalf of, or pursuant to any agreement,arrangement, or understanding, whether or not in writing, with the interested shareholder or any affiliate orassociate of the interested shareholder.

(f) Any reclassification of securities, including any share dividend or split, reverse share split, or otherdistribution of shares in respect of shares, recapitalization of the Company, merger or consolidation of theCompany with any subsidiary of the Company exchange of shares of the Company with any subsidiary of theCompany or other transaction, whether or not with or into or otherwise involving the interested shareholder,proposed by, on behalf of, or pursuant to any agreement, arrangement, or understanding, whether or not inwriting, with the interested shareholder or any affiliate or associate of the interested shareholder that has theeffect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class orseries of shares entitled to vote, or securities that are exchangeable for or convertible into or that carry a rightto acquire shares entitled to vote, of the Company or any subsidiary of the Company that is, directly orindirectly, owned by the interested shareholder or any affiliate or associate of the interested shareholder,except as a result of immaterial changes due to fractional share adjustments.

(g) Any receipt by the interested shareholder or any affiliate or associate of the interested shareholder of thebenefit, directly or indirectly, except proportionately as a shareholder of the Company, of any loans, advances,guarantees, pledges, or other financial assistance or any tax credits or other tax advantages provided by orthrough the Company or any subsidiary of the Company (other than expense account advances made in theordinary course of business).

7. “Consummation date,” with respect to any business combination, means the date of consummation of the businesscombination or, in the case of a business combination as to which a shareholder vote is taken, the later of:

(i) The business day before the vote; or

(ii) Twenty (20) days before the date of consummation of the business combination.

8. “Control,” “controlling,” “controlled by” or “under common control with” means the possession, directly orindirectly, of the power to direct or cause the direction of the management and policies of a person, whetherthrough the ownership of voting securities, by contract, or otherwise. A person’s beneficial ownership of tenpercent (10%) or more of the voting power of the Company’s outstanding shares entitled to vote in the election ofdirectors creates a presumption that the person has control of the Company. A person is not considered to havecontrol of the Company if the person holds voting power, in good faith and not for the purpose of avoiding anyprovision of law as an agent, bank, broker, nominee, custodian, or trustee for one or more beneficial owners who donot individually or as a group have control of the Company.

9. “Interested shareholder,” when used in reference to the Company means any person, other than the Company orany subsidiary of the Company, that is either:

(a) The beneficial owner, directly or indirectly, of ten percent (10%) or more of the voting power of theoutstanding shares entitled to vote of the Company; or

(b) An affiliate or associate of the Company who at any time within the three (3) year period immediately beforethe date in question was the beneficial owner of ten percent (10%) or more of the voting power of the thenoutstanding shares entitled to vote of the Company.

10. “Market value,” when used in reference to shares or property of the Company, means the following:

(a) In the case of shares, the highest closing sale price during the thirty (30) day period immediately preceding thedate in question of a share on the composite tape for New York Stock Exchange listed shares or, if the sharesare not quoted on the composite tape or not listed on the New York Stock Exchange, on the principal UnitedStates securities exchange registered under the Securities Exchange Act of 1934, as amended, on which theshare are listed or, if the shares are not listed on any such exchange, on the National Association of SecuritiesDealers, Inc. Automated Quotations National Market System or, if the shares are not quoted on the NationalAssociation of Securities Dealers, Inc. Automated Quotations National Market System, the highest closing bidquotation during the thirty (30) day period preceding the date in question of a share on the NationalAssociation of Securities Dealers, Inc. Automated

Quotations System or any system then in use or, if no such quotation is available, the fair market value on thedate in question of a share as determined in good faith by the Board of the Company.

(b) In the case of property other than cash or shares, the fair market value of the property on the date in questionas determined in good faith by the Board of the Company.

11. “Person” means any natural person, partnership, corporation, group, association, venture, firm, or other entity(other than the Company, any subsidiary of the Company, or a trustee or fiduciary holding stock for the benefit ofthe employees of the Company or its subsidiaries or any one of its subsidiaries, pursuant to one or more employeebenefit plans). If two or more persons act as a partnership, limited partnership, syndicate, or other group pursuant toany agreement, arrangement, relationship, understanding, or otherwise, whether or not in writing, for the purposesof acquiring, owning, or voting shares of the Company, all members of the partnership, syndicate, or other groupshall be deemed a person. Person does not include a licensed broker, dealer, or underwriter that purchases shares ofthe Company solely for purposes of resale to the public that is not acting in concert with an interested shareholder.

12. “Share acquisition date,” with respect to any person and the Company, means the date that the person first becomesan interested shareholder of the Company.

12.02. Business Combination with Interested Shareholders; Approved by Directors.

1. Except as set forth in these Bylaws, the Company may not engage in any business combination or vote, consent orotherwise act to authorize a subsidiary of the Company to engage in any business combination with respect to,proposed by, or on behalf of, or pursuant to any agreement, arrangement or understanding, whether or not inwriting, with any interested shareholder of the Company or any affiliate or associate of the interested shareholderfor a period of three (3) years after the interested shareholder’s share acquisition date, unless the businesscombination or the acquisition of shares made by the interested shareholder on the interested shareholder’s shareacquisition date is approved by a committee of the Board of Directors of the Company before the interestedshareholder’s share acquisition date. The committee shall be formed in accordance with subsection 4 of thisSection 12.02.

2. If a good faith definitive proposal regarding a business combination is made in writing to the Board of Directors ofthe Company, a committee of the Board formed in accordance with subsection 4 of this Section 12.02 shallconsider and take action on the proposal. Unless the committee responds affirmatively in writing within forty-five(45) days after receipt of the proposal by the Company, the committee shall be considered to have disapproved thebusiness combination.

3. If a good faith definitive proposal to acquire shares is made in writing to the Board of Directors of the Company, acommittee of the Board of Directors formed in accordance with subsection 4 of this Section 12.02 shall considerand take action on the proposal. Unless the committee responds affirmatively in writing within forty-five (45) daysafter receipt of the proposal by the Company, the committee shall be considered to have disapproved the shareacquisition.

4. When a business combination or acquisition of shares is proposed pursuant to this Section 12.02, the Board ofDirectors shall promptly form a committee composed of all of the Board’s disinterested Directors. The committeeshall take action on the proposal by the affirmative vote of a simple majority of the committee members. Thecommittee is not subject to any direction or control by the Board with respect to the committee’s consideration ofor any action concerning a business combination or acquisition of shares pursuant to this Section 12.02. Acommittee formed pursuant to this subsection shall be composed of one or more members. Only disinterestedDirectors may be members of a committee formed pursuant to this subsection. However, if the Board of Directorshas no disinterested Directors, the Board shall select three or more disinterested persons to be committee members.For purposes of this subsection, a Director or person is disinterested if the Director or person is not an interestedshareholder or an affiliate thereof or a present or former officer or employee of the Company or an affiliate orassociate of the Company or of the interested shareholder or of any affiliate or associate of the interestedshareholder.

12.03. Requirements after Three Years. Except for the provisions of Sections 12.02 and 12.04, the Company may notengage at any time in any business combination or vote, consent, or otherwise act to authorize a subsidiary of the Company toengage in any business combination with respect to, proposed by, on behalf of, or pursuant to any agreement, arrangement, orunderstanding, whether or not in writing, with an interested shareholder of the Company or any affiliate or associate of theinterested shareholder other than a business combination meeting all the requirements of this Article XII, the Articles, and therequirements specified in any of the following:

1. A business combination with respect to which the consummation date is no less than three years after the shareacquisition date, approved by the Board of Directors of the Company before the interested shareholder’s shareacquisition date, or as to which the acquisition of shares made by the interested shareholder on the interestedshareholder’s acquisition date had been approved by the Board of Directors before the interested shareholder’sshare acquisition date.

2. A business combination approved by the affirmative vote of the holders of a majority of the outstanding sharesentitled to vote not beneficially owned by the interested shareholder proposing the business combination or anyaffiliate or associate of the interested shareholder proposing the business combination at a meeting called for thatpurpose no earlier than three years after the interested shareholder’s share acquisition date.

3. A business combination, with respect to which the consummation date is no earlier than three years after theinterested shareholder’s share acquisition date, that meets all of the following conditions:

(a) The aggregate amount of the cash and the market value as of the consummation date of consideration otherthan cash to be received per share by holders of outstanding common shares of the Company in the businesscombination is at least equal to the higher of the following:

(i) The highest per share price paid by the interested shareholder, at a time when the interested shareholderwas the beneficial owner, directly or indirectly, of five percent (5%) or more of the outstanding sharesentitled to vote of the Company, for any common shares of the same class or series acquired by it withinthe three (3) year period immediately before the announcement date with respect to the businesscombination or within the three (3) year period immediately before, or in, the transaction in which theinterested shareholder became an interested shareholder, whichever is higher, plus, in either case, interestcompounded annually from the earliest date on which the highest per share acquisition price was paidthrough the consummation date at the rate for one year United States treasury obligations from time totime in effect less the aggregate amount of any cash dividends paid, and the market value of anydividends paid

other than in cash, per common share since the earliest date, up to the amount of the interest.

(ii) The market value per common share on the announcement date with respect to the business combinationor on the interested shareholder’s share acquisition date, whichever is higher, plus interest compoundedannually from that date through the consummation date at the rate for one year United States treasuryobligations from time to time in effect less the aggregate amount of any cash dividends paid and themarket value of any dividends paid other than in cash, per common share since that date, up to theamount of the interest.

(b) The aggregate amount of the cash and the market value as of the consummation date of considerationother than cash to be received per share by holders of outstanding shares of any class or series of shares,other than common shares, of the Company in the business combination is at least equal to the highest ofthe following, whether or not the interested shareholder has previously acquired any shares of the class orseries:

(i) The highest per share price paid by the interested shareholder, at a time when the interestedshareholder was the beneficial owner, directly or indirectly, of five percent (5%) or more of theoutstanding shares entitled to vote of the Company, for any shares of the class or series acquired byit within the three (3) year period immediately before the announcement date with respect to thebusiness combination or within the three (3) year period immediately before, or in, the transaction inwhich the interested shareholder became an interested shareholder, whichever is higher, plus, ineither case, interest compounded annually from the earliest date on which the highest per shareacquisition price was paid through the consummation date at the rate for one year United Statestreasury obligations from time to time in effect less the aggregate amount of any cash dividends paidand the market value of any dividends paid other than in cash, per share of the class or

series since such earliest date, up to the amount of the interest.

(ii) The highest preferential amount per share to which the holders of shares of the class or series areentitled in the event of any voluntary liquidation, dissolution, or winding up of the Company, plusthe aggregate amount of any unpaid dividends declared or due as to which the holders are entitledbefore payment of dividends on some other class or series of shares, unless the aggregate amount ofthe dividends is included in the preferential amount.

(iii) The market value per share of the class or series on the announcement date with respect to thebusiness combination or on the interested shareholder’s share acquisition date, whichever is higher,plus interest compounded annually from that date through the consummation date at the rate for oneyear United States treasury obligations from time to time in effect less the aggregate amount of anycash dividends paid and the market value of any dividends paid other than in cash, per share of theclass or series since that date, up to the amount of the interest.

(c) The consideration to be received by holders of a particular class or series of outstanding shares, includingcommon shares, of the Company in the business combination is in cash or in the same form as theinterested shareholder has used to acquire the largest number of shares of the class or series of sharespreviously acquired by it and the consideration is distributed promptly.

(d) The holders of all outstanding shares of the Company not beneficially owned by the interestedshareholder immediately before the consummation date with respect to the business combination areentitled to receive in the business combination cash or other consideration for the shares in compliancewith subdivisions (a), (b) and (c).

(e) After the interested shareholder’s share acquisition date and before the consummation date with respectto the business combination, the interested shareholder has not become the beneficial owner of anyadditional shares entitled to vote of the Company except:

(i) As part of the transaction that resulted in the interested shareholder becoming an interestedshareholder;

(ii) By virtue of proportionate share splits, share dividends, or other distributions of shares in respect ofshares not constituting a business combination;

(iii) Through a business combination meeting all of the conditions of Section 12.02 and this paragraph;or

(iv) Through purchase by the interested shareholder at any price that, if the price had been paid in anotherwise permissible business combination the announcement date and consummation date ofwhich were the date of the purchase, would have satisfied the requirements of subdivisions (a),(b) and (c) of this Section.

12.04. Application. This Article XII does not apply to any business combination of the Company with an interestedshareholder of the Company who became an interested shareholder inadvertently, if the interested shareholder both:

1. As soon as practicable, divests itself of a sufficient amount of the shares entitled to vote of the Company so that itno longer is the beneficial owner, directly or indirectly, of ten percent (10%) or more of the outstanding sharesentitled to vote of the Company.

2. Would not at any time within the three (3) year period preceding the announcement date with respect to thebusiness combination have been an interested shareholder except for the inadvertent acquisition.

XIII. LIMITATION ON SHARE REPURCHASES

13.01. Limitation on Share Repurchases. The Company shall not, directly or indirectly, purchase or agree to purchaseany shares entitled to vote from a person who

beneficially owns more than five per cent (5%) of the voting stock of the Company for more than the “average market price”of the shares if the shares have been beneficially owned by the person or persons for less than three (3) years, unless either(i) the purchase or agreement to purchase is approved at a meeting of shareholders by the affirmative vote of the holders of amajority of the voting stock entitled to vote excluding shares beneficially owned by such person, by any of such person’saffiliates or associates, or by any officer or director of the Company or (ii) the Company makes an offer, of at least equalvalue per share, to all holders of shares of such class or series and to all holders of any class or series into which the sharesmay be converted.

13.02. Definitions. For the purposes of this Article, “average market price” means the average closing sale price duringthe thirty trading days immediately preceding the purchase of the shares in question, or if the person or persons havecommenced a tender offer or have announced an intention to seek control of the Company, during the thirty trading dayspreceding the earlier of the commencement of the tender offer or the making of the announcement, of a share on thecomposite tape for New York Stock Exchange listed shares or, if the shares are not quoted on the composite tape or not listedon the New York Stock Exchange, on the principal United States securities exchange registered under the SecuritiesExchange Act of 1934, as amended, on which the shares are listed or, if the shares are not listed on any such exchange, on theNational Association of Securities Dealers, Inc. Automated Quotations National Market System or, if the shares are notquoted on the National Association of Securities Dealers, Inc. Automated Quotations National Market System, the averageclosing bid quotation, during the thirty trading days preceding the purchase of the shares in questions of a share on theNational Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or if the person orpersons have commenced a tender offer or have announced an intention to seek control of the issuing public corporation,during the thirty trading days preceding the earlier of the commencement of the tender offer or the making of theannouncement, except that if no quotation is available the average market price is the fair market value on the date ofpurchase of the shares in question of a share as determined in good faith by the Board of Directors of the Company.

XIV. AMENDMENTS

14.01. Amendment of Bylaws. These Bylaws may be altered, amended, supplemented, repealed, or temporarily orpermanently suspended, in whole or in part, or replacement Bylaw provisions adopted by: (i) the affirmative vote of amajority of the directors then in office; or (ii) the affirmative vote of a majority of the votes cast on such matter(s) at ameeting of shareholders.

Exhibit 3.4

BYLAWSOF

ARIZONA PUBLIC SERVICE COMPANY(Amended as of December 16, 2008)

I. REFERENCES; SENIORITY

1.01. References. Any reference herein made to law will be deemed to refer to the law of the State of Arizona, includingany applicable provision or provisions of Chapters 1-17 and Chapter 23 of Title 10, Arizona Revised Statutes (or itssuccessor), as at any given time in effect. Any reference herein made to the Articles will be deemed to refer to the applicableprovision or provisions of the Articles of Incorporation of the Company, and all amendments thereto, as at any given time onfile with the Arizona Corporation Commission (this reference to that Commission being intended to include any successor tothe incorporating and related functions being performed by that Commission at the date of the initial adoption of theseBylaws).

1.02. Seniority. Except as indicated in Part X of these Bylaws, the law and the Articles (in that order of precedence) willin all respects be considered senior and superior to these Bylaws, with any inconsistency to be resolved in favor of the lawand the Articles (in that order of precedence), and with these Bylaws to be deemed automatically amended from time to timeto eliminate any such inconsistency which may then exist.

1.03. Shareholders of Record. Except as otherwise required by law and subject to any procedure established by theCompany pursuant to Arizona Revised Statutes Section 10-723 (or any comparable successor provision), the word“shareholder” as used herein shall mean one who is a holder of record of shares of capital stock in the Company.

II. SHAREHOLDERS MEETINGS

2.01. Annual Meetings. An annual meeting of shareholders shall be held for the election of directors at such date, timeand place, either within or without the State of Arizona, as may be designated by resolution of the Board of Directors fromtime to time. Any other proper business may be transacted at the annual meeting. A special meeting may be called and held inlieu of an annual meeting pursuant to the provisions of Section 2.02 below, and the same proceedings (including the electionof directors) may be conducted thereat as at a regular meeting. Any director elected at any annual meeting, or special meetingin lieu of an annual meeting, will continue in office until the election of his or her successor, subject to his or her (a) earlierresignation pursuant to Section 6.01 below, (b) removal pursuant to Section 3.12 below, or (c) death or disqualification.

2.02. Special Meetings. Except as otherwise required by law, special meetings of the shareholders may be held wheneverand wherever called by the Chairman of the

Board, the President, or a majority of the Board of Directors, but such special meetings may not be called by any other personor persons. Business transacted at any special meeting of shareholders shall be limited to the purposes stated in the notice.

2.03. Notice. Notice of any meeting of the shareholders will be given as provided by law to each shareholder entitled tovote at such meeting and, if required by law, to each other shareholder of the Company. Any such notice may be waived asprovided by law.

2.04. Right to Vote. For each meeting of the shareholders, the Board of Directors will fix in advance a record date ascontemplated by law, and the shares of stock and the shareholders “entitled to vote” (as that or any similar term is hereinused) at any meeting of the shareholders will be determined as of the applicable record date. If no record date is so fixed bythe Board of Directors, the record date for determination of shareholders shall be as provided by law. The Secretary (or in hisor her absence an Assistant Secretary) will see to the making and production of any record of shareholders entitled to vote orotherwise entitled to notice of shareholders meetings, in either case which is required by law. Any voting entitlement may beexercised through proxy, or in such other manner as specifically provided by law, in accordance with the applicable law. Inthe event of contest, the burden of proving the validity of any undated or irrevocable proxy will rest with the person seekingto exercise the same. A telegram, cablegram, or facsimile appearing to have been transmitted by a shareholder (or by his orher duly authorized attorney-in-fact) or other means of voting by telephone or electronic transmission may be accepted as asufficiently written and executed proxy if otherwise permitted by law.

2.05. Right to Attend. Except only to the extent of persons designated by the Board of Directors or the Chairman of themeeting to assist in the conduct of the meeting (as referred to in Sections 2.07 and 2.08 below) and except as otherwisepermitted by the Board or such Chairman, the persons entitled to attend any meeting of shareholders may be confined to(i) shareholders entitled to vote thereat and other shareholders entitled to notice of the meeting and (ii) the persons uponwhom proxies valid for purposes of the meeting have been conferred or their duly appointed substitutes (if the related proxiesconfer a power of substitution); provided, however, that the Board of Directors or the Chairman of the meeting may establishrules limiting the number of persons referred to in clause (ii) as being entitled to attend on behalf of any shareholder so as topreclude such an excessively large representation of such shareholder at the meeting as, in the judgment of the Board or suchChairman, would be unfair to other shareholders represented at the meeting or be unduly disruptive of the orderly conduct ofbusiness at such meeting (whether such representation would result from fragmentation of the aggregate number of sharesheld by such shareholder for the purpose of conferring proxies, from the naming of an excessively large proxy delegation bysuch shareholder or from employment of any other device). A person otherwise entitled to attend any such meeting will ceaseto be so entitled if, in the judgment of the Chairman of the meeting, such person engages thereat in disorderly conductimpeding the proper conduct of the meeting in the interests of all shareholders as a group.

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2.06. Quorum. Except as otherwise provided by law, the Articles or these Bylaws, at each meeting of shareholders thepresence in person or by proxy of the holders of a majority in voting power of the outstanding shares of stock entitled to voteat the meeting shall be necessary and sufficient to constitute a quorum.

2.07. Election Inspectors. The Board of Directors, in advance of any shareholders meeting may appoint an electioninspector or inspectors to act at such meeting (and any adjournment thereof). If an election inspector or inspectors are not soappointed, the Chairman of the meeting may or, upon the request of any person entitled to vote at the meeting will, makesuch appointment. If any person appointed as an inspector fails to appear or to act, a substitute may be appointed by theChairman of the meeting. If appointed, the election inspector or inspectors (acting through a majority of them if there bemore than one) will determine the number of shares outstanding, the authenticity, validity and effect of proxies, thecredentials of persons purporting to be shareholders or persons named or referred to in proxies, and the number of sharesrepresented at the meeting in person and by proxy; they will receive and count votes, ballots and consents and announce theresults thereof; they will hear and determine all challenges and questions pertaining to proxies and voting; and, in general,they will perform such acts as may be proper to conduct elections and voting with complete fairness to all shareholders. Nosuch election inspector need be a shareholder of the Company.

2.08. Organization and Conduct of Meetings. Each shareholders meeting will be called to order and thereafter chairedby the Chairman of the Board if there then is one; or, if not, or if the Chairman of the Board is absent or so requests, then bythe President; or if both the Chairman of the Board and the President are unavailable, then by such other officer of theCompany or such shareholder as may be appointed by the Board of Directors. The Secretary (or in his or her absence anAssistant Secretary) of the Company will act as secretary of each shareholders meeting; if neither the Secretary nor anAssistant Secretary is in attendance, the Chairman of the meeting may appoint any person (whether a shareholder or not) toact as secretary thereat. After calling a meeting to order, the Chairman thereof may require the registration of all shareholdersintending to vote in person, and the filing of all proxies, with the election inspector or inspectors, if one or more have beenappointed (or, if not, with the secretary of the meeting). After the announced time for such filing of proxies has ended, nofurther proxies or changes, substitutions or revocations of proxies will be accepted. If directors are to be elected, a tabulationof the proxies so filed will, if any person entitled to vote in such election so requests, be announced at the meeting (oradjournment thereof) prior to the closing of the election polls.

Absent a showing of bad faith on his or her part, the Chairman of a meeting will, among other things, have absoluteauthority to determine the order of business to be conducted at such meeting and to establish rules for, and appoint personnelto assist in, preserving the orderly conduct of the business of the meeting (including any informal, or question and answer,portions thereof). Rules, regulations or procedures regarding the conduct of the business of a meeting, whether adopted by theBoard of Directors or prescribed by the Chairman of the meeting, may include, without limitation, the

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following: (i) the establishment of an agenda or order of business for the meeting; (ii) rules and procedures for maintainingorder at the meeting and the safety of those present; (iii) limitations on attendance at or participation in the meeting toshareholders of record of the Company, their duly authorized and constituted proxies (subject to Section 2.05) or such otherpersons as the Chairman of the meeting shall determine; (iv) restrictions on entry to the meeting after the time fixed for thecommencement thereof; and (v) limitations on the time allotted to questions or comments by participants. Unless and to theextent determined by the Board of Directors or the Chairman of the meeting, meetings of shareholders shall not be required tobe held in accordance with the rules of parliamentary procedure. Any informational or other informal session of shareholdersconducted under the auspices of the Company after the conclusion of or otherwise in conjunction with any formal businessmeeting of the shareholders will be chaired by the same person who chairs the formal meeting, and the foregoing authority onhis or her part will extend to the conduct of such informal session.

2.09. Voting. The number of shares voted on any matter submitted to the shareholders which is required to constitute theiraction thereon or approval thereof will be determined in accordance with applicable law, the Articles, and these Bylaws, ifapplicable. No ballot or change of vote will be accepted after the polls have been declared closed following the ending of theannounced time for voting.

2.10. Shareholder Approval or Ratification. The Board of Directors may submit any contract or act for approval orratification at any duly constituted meeting of the shareholders, the notice of which either includes mention of the proposedsubmittal or is waived as provided in Section 2.03 above. Except as otherwise required by law (e.g., Arizona Revised StatutesSection 10-863), if any contract or act so submitted is approved or ratified by a majority of the votes cast thereon at suchmeeting, the same will be valid and as binding upon the Company and all of its shareholders as it would be if approved andratified by each and every shareholder of the Company.

2.11. Adjournments. Any meeting of shareholders, annual or special, may adjourn from time to time to reconvene at thesame or some other place, and notice need not be given of any such adjourned meeting if the time and place thereof areannounced at the meeting at which the adjournment is taken. At the adjourned meeting the Company may transact anybusiness that might have been transacted at the original meeting. If the adjournment is for more than one hundred and twentydays, or if after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shallbe given to each shareholder of record entitled to vote at the meeting.

2.12. Shareholder Action by Written Consent. Any action required or permitted to be taken at a meeting of theshareholders may be taken without a meeting if one (1) or more consents in writing, setting forth the action so taken, shall besigned by all of the shareholders entitled to vote with respect to the subject matter thereof. The consents shall be delivered tothe Company for inclusion in the minutes or filing with the Company’s records. Action taken by consent is effective when thelast shareholder signs the consent, unless the consent specifies a different effective date, except that if,

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by law, the action to be taken requires that notice be given to shareholders who are not entitled to vote on the matter, theeffective date shall not be prior to ten (10) days after the Company shall give such shareholders written notice of the proposedaction, which notice shall contain or be accompanied by the same material that would have been required if a formal meetinghad been called to consider the action. A consent signed under this section has the effect of a meeting vote and may bedescribed as such in any document.

III. BOARD OF DIRECTORS

3.01. Membership and Qualification. The Board of Directors will have the exclusive power to increase or decrease itssize within the limits fixed in the Articles (Art. Fifth). Any vacancy occurring in the Board, whether by reason of death,resignation, disqualification or otherwise, may be filled by the directors as contemplated by law and as provided in theArticles (Art. Fifth). Any such increase in the size of the Board, and the filling of any vacancy created thereby, will requireaction by a majority of the whole membership of the Board as comprised immediately before such increase. A person whohas been a full-time employee of the Company within twelve months prior to the date of any election will not qualify forelection as a director on that date unless he or she then remains a full-time employee of the Company or unless the Board ofDirectors specifically authorizes the election of such person. A person who has qualified by employment status for his or hermost recent election as a director may serve throughout the term for which such person was elected, notwithstanding thecessation of full-time employment by the Company between the date of such election and the end of such term, subject,however, to his or her otherwise remaining qualified for such office.

3.02. Regular Meetings. A regular annual meeting of the directors is to be held as soon as practicable after theadjournment of each annual shareholders meeting either at the place of the shareholders meeting or at such other place as thedirectors elected at the shareholders meeting may have been informed of at or before the time of their election. Regularmeetings, other than the annual ones, may be held at such intervals at such places and at such times as the Board of Directorsmay provide.

3.03. Special Meetings. Special meetings of the Board of Directors may be held whenever and wherever called for by theChairman of the Board, the President or the number of directors which would be required to constitute a quorum.

3.04. Notice. No notice need be given of regular meetings of the Board of Directors. Notice of the time and place (but notnecessarily the purpose or all of the purposes) of any special meeting will be given to each director in person or by telephone,or via mail, telegram, facsimile, or other electronic transmission addressed in the manner appearing on the Company’srecords. Notice to any director of any such special meeting will be deemed given sufficiently in advance when (i) if given bymail, the same is deposited in the United States mail at least four days before the meeting date, with postage thereon prepaid,(ii) if given by telegram, the same is delivered to the telegraph office for fast transmittal at least 48 hours prior to theconvening of the

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meeting, (iii) if given by facsimile or other electronic transmission, the same is received by the director or an adult member ofhis or her office staff or household, at least 24 hours prior to the convening of the meeting, or (iv) if personally delivered orgiven by telephone, the same is handed, or the substance thereof is communicated over the telephone to the director or to anadult member of his or her office staff or household, at least 24 hours prior to the convening of the meeting. Any such noticemay be waived as provided by law. No call or notice of a meeting of directors will be necessary if each of them waives thesame in writing or by attendance. Any meeting, once properly called and noticed (or as to which call and notice have beenwaived as aforesaid) and at which a quorum is formed, may be adjourned to another time and place by a majority of those inattendance.

3.05. Quorum; Voting. A quorum for the transaction of business at any meeting or adjourned meeting of the directors willconsist of a majority of those then in office. Any matter submitted to a meeting of the directors will be resolved by a majorityof the votes cast thereon, except as otherwise required by these Bylaws (§ 3.01 above and § 3.06 below), by law or by anyapplicable Article. Where action by a majority of the whole membership is required, such requirement will be deemed torelate to a majority of the directors in office at the time the action is taken. In computing any such majority, whether forpurposes of determining the presence of a quorum or the adequacy of the vote on any proposed action, any unfilled vacanciesat the time existing in the membership of the Board will be excluded from the computation.

3.06. Executive Committee. The Board of Directors may, by resolution adopted by a majority of the whole Board, namethree or more of its members as an Executive Committee. Such Executive Committee will have and may exercise the powersof the Board of Directors in the management of the business and affairs of the Company while the Board is not in session,except only as precluded by law or where action other than by a majority of the votes cast is required by these Bylaws, or thelaw (all as referred to in Section 3.05 above), and subject to such limitations as may be included in any applicable resolutionpassed by a majority of the whole membership of the Board. A majority of those named to the Executive Committee willconstitute a quorum.

3.07. Other Committees. The Board of Directors may designate one or more additional committees, each committee toconsist of one or more of the directors of the Company. The Board of Directors may designate one or more directors asalternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee.Any such committee, to the extent permitted by law and to the extent provided in the resolution of the Board of Directors,shall have and may exercise all the powers and authority of the Board of Directors in the management of the business andaffairs of the Company, and may authorize the seal of the Company to be affixed to all papers that may require it.

3.08. Committee Functioning. Notice requirements (and related waiver provisions) for meetings of the ExecutiveCommittee and other committees of the Board will be the same as those set forth in Section 3.04 above for meetings of theBoard of

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Directors. Except as provided in the next two succeeding sentences, a majority of those named to the Executive Committee orany other committee of the Board will constitute a quorum at any meeting thereof (with the effect of departure of committeemembers from a meeting and the computation of a majority of committee members to be in accordance with the applicablepolicies of Section 3.05 above), and any matter submitted to a meeting of any such committee will be resolved by a majorityof the votes cast thereon. No distinction will be made among ex-officio or other members of any such committee for quorum,voting or other purposes, except that the membership of any committee (including the Executive Committee), in performingany function vested in it as herein contemplated, may be deemed to exclude any officer or employee of the Company, ineither case, or other person, having a direct or indirect personal interest in any proposed exercise of such function, whoseexclusion for that purpose is deemed appropriate by a majority of the other members of such committee proposing to performsuch function. All committees are to keep regular minutes of the transactions of their meetings.

3.09. Action by Telephone or Consent. Any meeting of the Board or any committee thereof may be held by conferencetelephone or similar communications equipment as permitted by law in which case any required notice of such meeting maygenerally describe the arrangements (rather than the place) for the holding thereof, and all other provisions herein containedor referred to will apply to such meeting as though it were physically held at a single place. Action may also be taken by theBoard or any committee thereof without a meeting if the members thereof consent in writing thereto as contemplated by law.

3.10. Presumption of Assent. A director of the Company who is present at a meeting of the Board of Directors, or of anycommittee when corporate action is taken is deemed to have assented to the action taken unless either (i) the director objectsat the beginning of the meeting or promptly on the director’s arrival to holding it or transacting business at the meeting;(ii) the director’s dissent or abstention from the action taken is entered in the minutes of the meeting; or (iii) the directordelivers written notice of the director’s dissent or abstention to the presiding officer of the meeting before its adjournment orto the Company before 5:00 P.M. on the next business day after the meeting. The right of dissent or abstention is not availableto a director who votes in favor of the action taken.

3.11. Compensation. By resolution of the Board, the directors may be paid their expenses, if any, of attendance at eachmeeting of the Board of Directors, or of any committee, and may be paid a fixed sum for attendance at each such meetingand/or a stated salary as a director or committee member. No such payment will preclude any director from serving theCompany in any other capacity and receiving compensation therefor.

3.12. Removal. Any director or the entire Board of Directors may be removed, with or without cause, only at a specialmeeting of shareholders called for that purpose, if the votes cast in favor of such removal exceed the votes cast against suchremoval, except that if less than the entire Board of Directors is to be removed, no one of the

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directors may be removed if the votes cast against the director’s removal would be sufficient to elect the director if thencumulatively voted at an election for the class of directors of which the director is a part.

IV. OFFICERS — GENERAL

4.01. Elections and Appointments. The directors may elect or appoint one or more of the officers of the Companycontemplated in Part V below. Any such election or appointment will regularly take place at the annual meeting of thedirectors, but elections of officers may be held at any other meeting of the Board. A person elected or appointed to any officewill continue to hold that office until the election or appointment of his or her successor, subject to action earlier takenpursuant to Section 4.04 or 6.01 below. Any person may hold more than one office.

4.02. Additional Appointments. In addition to the officers contemplated in Part V below, the Board of Directors maycreate other corporate positions, and appoint persons thereto, with such authority to perform such duties as may be prescribedfrom time to time by the Board of Directors, by the President or by the superior officer of any person so appointed.Notwithstanding such additional appointments, only those persons whose offices are described in Part V are to be consideredan officer of the Company unless the resolution or other Board action appointing such person expressly states that suchperson is to be considered an officer of the Company. Each of such persons (in the order designated by the Board or thesuperior officer of such person) will be vested with all of the powers and charged with all of the duties of his or her superiorofficer in the event of such superior officer’s absence or disability.

4.03. Bonds and Other Requirements. The Board of Directors may require any officer or other appointee to give bond tothe Company (with sufficient surety, and conditioned upon the faithful performance of the duties of his or her office orposition) and to comply with such other conditions as may from time to time be required of him or her by the Board.

4.04. Removal or Delegation. Provided that a majority of the whole membership thereof concurs therein, the Board ofDirectors may remove any officer of the Company as provided by law and declare his or her office or offices vacant orabolished or, in the case of the absence or disability of any officer or for any other reason considered sufficient, maytemporarily delegate his or her powers and duties to any other officer or to any director. Similar action may be taken by theBoard of Directors in regard to appointees designated pursuant to Section 4.02 above.

4.05. Salaries. Officer salaries may from time to time be fixed by the Board of Directors or (except as to his or her own)be left to the discretion of the Chief Executive Officer or the President. No officer will be prevented from receiving a salaryby reason of the fact that he or she is also a director of the Company.

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V. SPECIFIC OFFICERS, FUNCTIONS AND POWERS

5.01. Chairman of the Board. The Board of Directors may elect a Chairman to serve as a general executive officer of theCompany and, if specifically designated as such by the Board, as the Chief Executive Officer of the Company. If elected, theChairman will preside at all meetings of the directors and be vested with such other powers and duties as the Board may fromtime to time delegate to him or her.

5.02. Chief Executive Officer. Subject to the control of the Board of Directors exercised as hereinafter provided, theChief Executive Officer of the Company will supervise its business and affairs and the performance of their respective dutiesby all other officers, by appointees designated pursuant to Section 4.02 above, and by such additional appointees to suchadditional positions (corporate, divisional or otherwise) as the Chief Executive Officer may designate, with authority on hisor her part to delegate the foregoing duty of supervision to such extent and to such person or persons as may be determinedby the Chief Executive Officer. Except as otherwise indicated from time to time by resolution of the Board of Directors, itsmanagement of the business and affairs of the Company will be implemented through the office of the Chief ExecutiveOfficer.

5.03. President and Vice Presidents. Unless specified to the contrary by resolution of the Board of Directors, thePresident will be the Chief Executive Officer of the Company. In addition to the supervisory functions above set forth on thepart of the Chief Executive Officer or in lieu thereof if a contrary specification is made by the Board relative to the ChiefExecutive Officer, the President will be vested with such powers and duties as the Board may from time to time designate.Vice Presidents may be elected by the Board of Directors to perform such duties as may be designated by the Board or beassigned or delegated to them by their respective superior officers. The Board may identify (i) one or more Vice Presidents as“Executive” or “Senior” Vice Presidents and (ii) the President or any Vice President as “General Manager” of the Companyand the title of any Vice President may include words indicative of his or her particular area of responsibility and authority.Vice Presidents will succeed to the responsibilities and authority of the President, in the event of his or her absence ordisability, in the order consistent with their respective titles or regular duties or as specifically designated by the Board ofDirectors.

5.04. Treasurer and Secretary. The Treasurer and Secretary each will perform all such duties normally associated withhis or her office (including, in the case of the Secretary, the giving of notice and the preparation and retention of minutes ofcorporate proceedings and the custody of corporate records and the seal of the Company) as are not assigned to a VicePresident of the Company, along with such other duties as may be designated by the Board or be assigned or delegated tothem by their respective superior officers. The Board may appoint one or more Assistant Treasurers or Assistant Secretaries,each of whom (in the order designated by the Board or their respective superior officers) will be vested with all of the powersand charged with all of the duties of the Treasurer or the Secretary (as the case may be) in the event of his or her absence ordisability.

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5.05. Specific Powers. Except as may otherwise be specifically provided in a resolution of the Board of Directors, any ofthe officers referred to in this Part V will be a proper officer to authenticate records of the Company and to sign on behalf ofthe Company any deed, bill of sale, assignment, option, mortgage, pledge, note, bond, debenture, evidence of indebtedness,application, consent (to service of process or otherwise), agreement, indenture or other instrument of importance to theCompany. Any such officer may represent the Company at any meeting of the shareholders or members of any corporation,association, partnership, joint venture or other entity in which this Company then has an interest, and may vote such interestin person or by proxy appointed by him or her, provided that the Board of Directors may from time to time confer theforegoing authority upon any other person or persons.

VI. RESIGNATIONS AND VACANCIES

6.01. Resignations. Any director, committee member or officer may resign from his or her office at any time by writtennotice as specified in accordance with Arizona Revised Statutes Sections 10-807 and 10-843. The acceptance of a resignationwill not be required to make it effective.

6.02. Vacancies. If the office of any director, committee member or officer becomes vacant by reason of his or her death,resignation, disqualification, removal or otherwise, the Board of Directors may choose a successor to hold office for theunexpired term.

VII. INDEMNIFICATION AND RATIFICATION

7.01. Indemnification. In order to induce qualified persons to serve the Company (and any other corporation, jointventure, partnership, trust or other enterprise at the request of the Company) as directors and officers, the Company shallindemnify any and all of its directors and officers, or former directors and officers to the fullest extent permitted by applicablelaw as it presently exists or may hereafter be amended.

7.02. Ratification; Special Committee. Any transaction involving the Company, any of its subsidiary corporations or anyof its directors, officers, employees or agents which at any time is questioned in any manner or context (including ashareholders derivative suit), on the ground of lack of authority, conflict of interest, misleading or omitted statement of fact orlaw, nondisclosure, miscomputation, improper principles or practices of accounting, inadequate records, defective or irregularexecution or any similar ground, may be investigated and/or ratified (before or after judgment), or an election may be madenot to institute or pursue a claim or legal proceedings on account thereof or to accept or approve a negotiated settlement withrespect thereto (before or after the institution of legal proceedings), by the Board of Directors or by a special committeethereof comprised of one or more disinterested directors (that is, a director or directors who did not participate in thequestioned transaction with actual knowledge of the questioned aspect or aspects thereof). Such a special committee may bevalidly formed and fully empowered to act, in accordance with the purposes and duties assigned thereto, by resolution orresolutions of the Board

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of Directors, notwithstanding (i) the inclusion of Board members who are not disinterested as aforesaid among those whoform a quorum at the meeting or meetings at which one or more members of such special committee are elected or appointedto the Board or to such special committee or at which such committee is formed or empowered, or their inclusion among thedirectors who vote upon or otherwise participate in taking any of the foregoing actions, or (ii) the taking of any of suchactions by the disinterested members of the Board (or a majority of such members) whose number is not sufficient toconstitute a quorum or a majority of the membership of the full Board. Any such special committee so comprised will, to thefull extent consistent with its purposes and duties as expressed in such resolution or resolutions, have all of the authority andpowers of the full Board and its Executive Committee (the same as though it were the full Board and/or its ExecutiveCommittee in carrying out such purposes and duties) and will function in accordance with Section 3.08 above. No otherprovisions of these Bylaws which may at any time appear to conflict with any provisions of this Section 7.02, and no defector irregularity in the formation, empowering or functioning of any such special committee, will serve to impede, impair orbring into question any action taken or purported to be taken by such committee or the validity of any such action. Anyratification of a transaction pursuant to this Section 7.02 will have the same force and effect as if the transaction has beenduly authorized originally. Any such ratification, and any election made pursuant to this Section 7.02 with respect to claims,legal proceedings or settlements, will be binding upon the Company and its shareholders and will constitute a bar to anyclaim or the execution of any judgment in respect of the transaction involved in such ratification or election.

VIII. SEAL

8.01. Form Thereof. The seal of the Company will have inscribed thereon the name of the Company, the state and year ofits incorporation and the words “SEAL”.

IX. STOCK CERTIFICATES

9.01. Form Thereof. Each certificate representing stock of the Company will be in such form conforming to law as mayfrom time to time be approved by the Board of Directors, and will bear the manual facsimile signatures and seal of theCompany as required or permitted by law.

9.02. Ownership. The Company will be entitled to treat the registered owner of any share as the absolute owner thereofand accordingly, will not be bound to recognize any beneficial, equitable or other claim to, or interest in, such share on thepart of any other person, whether or not it has notice thereof, except as may expressly be provided by Chapter 8 of Title 47,Arizona Revised Statutes (or its successor), as at the time in effect, or other applicable law.

9.03. Transfers. Transfer of stock will be made on the books of the Company only upon surrender of the certificatetherefor, duly endorsed by an appropriate person, with such assurance of the genuineness and effectiveness of theendorsement as the Company may require, all as contemplated by Chapter 8 of Title 47, Arizona Revised

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Statutes (or its successor), as at the time in effect, and/or upon submission of any affidavit, other document or notice whichthe Company considers necessary.

9.04. Lost Certificates. In the event of the loss, theft or destruction of any certificate representing capital stock of thisCompany, the Company may issue (or, in the case of any such stock as to which a transfer agent and/or registrar have beenappointed, may direct such transfer agent and/or registrar to countersign, register and issue) a replacement certificate in lieuof that alleged to be lost, stolen or destroyed, and cause the same to be delivered to the owner of the stock representedthereby, provided that the owner shall have submitted such evidence showing the circumstances of the alleged loss, theft ordestruction, and his or her ownership of the certificate as the Company considers satisfactory, together with any other factorswhich the Company considers pertinent, and further provided that an indemnity agreement and/or indemnity bond shall havebeen provided in form and amount satisfactory to the Company and to its transfer agent and/or registrar, if applicable.

X. EMERGENCY BYLAWS

10.01. Emergency Conditions. The emergency Bylaws provided in this Part X will be effective in the event of anemergency as prescribed in Arizona Revised Statutes Section 10-207.D. To the extent not inconsistent with the provisions ofthis Part X, these Bylaws will remain in effect during such emergency and upon its termination these emergency Bylaws willcease to be operative.

10.02. Board Meetings. During any such emergency, a meeting of the Board of Directors or any of its committees may becalled by any officer or director of the Company. Notice of the time and place of the meeting will be given by the personcalling the same to those of the directors whom it may be feasible to reach by any available means of communication. Suchnotice will be given so much in advance of the meeting as circumstances permit in the judgment of the person calling thesame. At any Board or committee meeting held during any such emergency, a quorum will consist of a majority of those whocould reasonably be expected to attend the meeting if they were willing to do so, but in no event more than a majority ofthose to whom notice of such meeting is required to have been given as above provided.

10.03. Certain Actions. The Board of Directors, either before or during any such emergency, may provide and from timeto time modify lines of succession in the event that during such an emergency any or all officers, appointees, employees oragents of the Company are for any reason rendered incapable of discharging their duties. The Board, either before or duringany such emergency, may, effective in the emergency, change the head office or designate several alternative head offices ofthe Company, or authorize the officers to do so.

10.04. Liability. No director, officer, appointee, employee or agent acting in accordance with these emergency Bylawswill be liable except for willful misconduct.

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10.05. Modifications. These emergency Bylaws will be subject to repeal or change by further action of the Board ofDirectors, but no such repeal or change will modify the provisions of Section 10.04 with respect to action taken prior to thetime of such repeal or change. Any amendment of these emergency Bylaws may make any further or different provisions thatmay be practical and necessary for the circumstances of the emergency.

XI. DIVIDENDS

11.01. Declaration. Subject to such restrictions or requirements as may be imposed by law or the Company’s Articles oras may otherwise be binding upon the Company, the Board of Directors may from time to time declare dividends on stock ofthe Company outstanding on the dates of record fixed by the Board, to be paid in cash, in property or in shares of theCompany’s stock on or as of such payment or distribution dates as the Board may prescribe.

XII. AMENDMENTS

12.01. Procedure. These Bylaws may be amended, supplemented, repealed or temporarily or permanently suspended, inwhole or in part, or new bylaws may be adopted, at any duly constituted meeting of the Board of Directors, the notice ofwhich meeting either includes mention of the proposed action relative to the Bylaws or is waived as provided in Section 3.04above. If, however, the chairman of any such meeting or a majority of directors in attendance thereat in good faith determinesthat any such action has arisen as a matter of necessity at the meeting and is otherwise proper, no notice of such action will berequired.

12.02. Amendment of Bylaws. These Bylaws may be altered, amended, supplemented, repealed, or temporarily orpermanently suspended, in whole or in part, or replacement Bylaw provisions adopted by: (i) the affirmative vote of amajority of the directors then in office; or (ii) the affirmative vote of a majority of the votes cast on such matter(s) at ameeting of shareholders.

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Exhibit 10.2.6

DEFERRED COMPENSATION PLAN OF 2005

FOR EMPLOYEES OF PINNACLE WEST CAPITAL CORPORATION AND AFFILIATES

TABLE OF CONTENTS Page

ARTICLE 1 Definitions 1 ARTICLE 2 Selection, Enrollment, Eligibility 4 2.1 Eligibility 4 2.2 Enrollment Requirements 4 2.3 Eligibility; Commencement of Participation 4 2.4 Loss of Eligibility to Participate 5 ARTICLE 3 Deferral Commitments/Interest Crediting 5 3.1 Deferral 5 3.2 Maximum Deferral 5 3.3 Election to Defer; Effect of Election Form 5 3.4 Withholding of Deferral Amounts 6 3.5 Interest Crediting Prior to Distribution 6 3.6 Change in Time and Form of Payment 6 3.7 Installment Distribution 6 3.8 FICA Taxes 7 ARTICLE 4 Short-Term Payout and Unforeseeable Financial Emergencies 8 4.1 Short-Term Payout 8 4.2 Withdrawal Payout; Suspensions for Unforeseeable Financial Emergencies 8 ARTICLE 5 Payment of Benefits 8 5.1 Payment of Termination Benefit 8 5.2 Death Prior to Pay Out 9 ARTICLE 6 Disability Credit 9 6.1 Disability Credit 9 ARTICLE 7 Beneficiary Designation 9 7.1 Beneficiary 10 7.2 Beneficiary Designation and Change; Spousal Consent 10 7.3 Acknowledgment 10 7.4 No Beneficiary Designation 10 7.5 Doubt as to Beneficiary 10 7.6 Discharge of Obligations 10 ARTICLE 8 Leave of Absence 10 8.1 Paid Leave of Absence 10 8.2 Unpaid Leave of Absence 10 8.3 Definition of Leave of Absence 11 ARTICLE 9 Termination, Amendment or Modification 11 9.1 Termination 11

2 Amendment 11 ARTICLE 10 Administration 11 10.1 Committee Duties 11 10.2 Agents 11 10.3 Binding Effect of Decisions 11 10.4 Indemnity of Committee 11 10.5 Employer Information 11 ARTICLE 11 Other Benefits and Agreements 12 11.1 Coordination with Other Benefits 12 ARTICLE 12 Claims Procedures 12 12.1 Claims 12 ARTICLE 13 Miscellaneous 12 13.1 Unsecured General Creditor 12 13.2 Employer’s Liability 12 13.3 Nonassignability 12 13.4 Not a Contract of Employment 12 13.5 Furnishing Information 13 13.6 Terms 13 13.7 Captions 13 13.8 Governing Law 13 13.9 Validity 13 13.10 Notice 13 13.11 Successors 13 13.12 Spouse’s Interest 13 13.13 Incompetent 13 13.14 Commencement of Payments 14 13.15 Interpretation of Plan Provisions 14

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DEFERRED COMPENSATION PLAN OF 2005 FOR EMPLOYEES OF

PINNACLE WEST CAPITAL CORPORATION AND AFFILIATES

Effective January 1, 1992, Pinnacle West Capital Corporation, an Arizona corporation (the “Company”), establishedthe Pinnacle West Capital Corporation, Arizona Public Service Company, SunCor Development Company and El DoradoInvestment Company Deferred Compensation Plan (the “Prior Plan”). Effective December 31, 2004, the Company restatedthe Prior Plan in its entirety to incorporate all prior amendments to the Prior Plan as in effect on October 3, 2004, and to ceasefuture deferrals thereunder after December 31, 2004. By this instrument, effective January 1, 2005, the Company intends toestablish a new deferred compensation plan that is substantially similar to the Prior Plan, except to the extent required bySection 409A of the Internal Revenue Code of 1986, as amended, and is known as the Deferred Compensation Plan of 2005for Employees of Pinnacle West Capital Corporation and Affiliates (“Plan”) for the purpose of providing specified benefits toa select group of management, highly compensated employees and Directors who contribute materially to the continuedgrowth, development and future business success of the Company, Arizona Public Service Company, SunCor DevelopmentCompany, El Dorado Investment Company, and their subsidiaries. The Plan applies to deferred compensation which waseither earned or first became vested after December 31, 2004, applying the rules set forth in Treasury Regulation Section1.409A-6. As a result, this Plan applies to any interest credits above the Crediting Rate with respect to the December 31, 2004Account Balance of any Participant who had less than five years of Plan Participation as of December 31, 2004. Otherwise,this Plan shall not apply to an individual’s December 31, 2004 Account Balance and any interest credited to such AccountBalance.

ARTICLE 1Definitions

For purposes hereof, unless otherwise clearly apparent from the context, the following phrases or terms shall have thefollowing indicated meanings:

1.1 “Account Balance” shall mean the sum of (i) the Deferral Amount, plus (ii) interest credited in accordance with all theapplicable interest crediting provisions of the Plan, reduced by all Short-Term Payouts, if made. This account shall be abookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts tobe paid to the Participant pursuant to this Plan.

1.2 “Annual Deferral” shall mean that portion of a Participant’s Base Annual Salary, Restricted Stock Units (but only ifdeferral of Restricted Stock Units is permitted by the Company), Year-End Bonus and/or Directors Fees that aParticipant elects to have and is deferred, in accordance with Article 3, for any one Plan Year. In the event of Disability,death or a Separation from Service prior to the end of a Plan Year and prior to 2008, such year’s Annual Deferral shallbe the actual amount withheld prior to such event.

1.3 “Base Annual Salary” shall mean the annual compensation, excluding bonuses, commissions, overtime, incentivepayments, non-monetary awards, Directors Fees and other fees paid to a Participant for employment services rendered toany Employer, before reduction for compensation deferred pursuant to all qualified, non-qualified and Code Section 125compensation plans of any Employer.

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1.4 “Beneficiary” shall mean one or more persons, trusts, estates or other entities, designated in accordance with Article 7,that are entitled to receive benefits under this Plan upon the death of a Participant.

1.5 “Beneficiary Designation Form’’ shall mean the form established from time to time by the Committee that a Participantcompletes, signs and returns to the Company to designate one or more Beneficiaries.

1.6 “Board” shall mean the Board of Directors of the Company.

1.7 “Bonus Rate” for a Plan Year shall mean an interest rate determined for each Plan Year by the Committee, in its solediscretion, which rate shall be determined on or before the first business day of the month that precedes the beginningof the Plan Year for which the rate applies.

1.8 “Change of Control” shall have the meaning set forth in the Key Executive Employment and Severance Agreementissued to certain employees of the Company.

1.9 “Claimant” shall have the meaning set forth in Section 12.1.

1.10 “Code” shall mean the Internal Revenue Code of 1986, as amended.

1.11 “Committee” shall mean the administrative committee appointed to manage and administer the Plan in accordance withits provisions pursuant to Article 10.

1.12 “Company” shall mean Pinnacle West Capital Corporation, an Arizona corporation.

1.13 “Crediting Rate” for a Plan Year shall mean a rate of interest equal to the ten-year U.S. Treasury Note rate as publishedon the last business day of the first week of October preceding a Plan Year.

1.14 “Deferral” shall mean the sum of all of a Participant’s Annual Deferrals.

1.15 “Director” shall mean any member of the board of directors of an Employer.

1.16 “Directors Fees” shall mean the annual fees paid by an Employer, including retainer fees and meetings fees, ascompensation for serving on a board of directors of an Employer.

1.17 “Disability” shall mean (i) in the case of a Participant who is an employee of an Employer, a period of disability duringwhich a Participant qualifies for benefits under the Participant’s Employer’s long-term disability plan, or (ii) in the caseof a Participant who is a Director, a period of disability during which the Participant would have qualified for benefitsunder such a plan, as determined in the sole discretion of the Committee, had the Participant been an employee of anEmployer.

1.18 “Disability Benefit” shall mean the benefit set forth in Article 6.

1.19 “Effective Date” shall mean January 1, 2005.

1.20 “Election Form” shall mean the form established from time to time by the Committee that a Participant completes, signsand returns to the Company to make an election under the Plan.

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1.21 “Employer” shall mean the Company, Arizona Public Service Company, an Arizona corporation, SunCor DevelopmentCompany, an Arizona corporation, El Dorado Investment Company, an Arizona corporation, and/or any subsidiaries ofsuch corporations that have been selected by the Board to participate in the Plan.

1.22 “Participant” shall mean any employee or Director of an Employer (i) who is selected to participate in the Plan, (ii) whoelects to participate in the Plan, and (iii) who signs an Election Form and a Beneficiary Designation Form.

1.23 “Plan” shall mean the Deferred Compensation Plan of 2005 for Employees of Pinnacle West Capital Corporation andAffiliates, which shall be evidenced by this instrument, as amended from time to time.

1.24 “Plan Year” shall begin on January 1 of each year and continue through December 31.

1.25 “Preferred Rate” for a Plan Year shall mean the Crediting Rate plus the Bonus Rate for such Plan Year.

1.26 “Restricted Stock Units” shall have the meaning assigned to that term under the Pinnacle West Capital Corporation2007 Long-Term Incentive Plan.

1.27 “Retirement” and “Retires” shall mean, with respect to an employee, Separation from Service for any reason other thana leave of absence, death or Disability on or after the earlier of the attainment of (a) age sixty-five (65) with five(5) Years of Service or (b) age fifty-five (55) with ten (10) Years of Service; and shall mean, with respect to a Directorwho is not an employee, Separation from Service with all Employers on or after the earlier of the attainment of (x) agesixty-five (65) with five (5) Years of Service as a Director or (y) age fifty-five (55) with ten (10) Years of Service as aDirector. If a Participant is both an employee and a Director, Retirement shall occur when he or she Retires as anemployee.

1.28 “Separation from Service” or “Separates from Service” shall mean the ceasing of employment by an employee with allEmployers or ceasing service as a Director of all Employers, voluntarily or involuntarily for any reason other thandeath. If a Participant is both an employee and a Director, a Separation from Service shall occur when he or sheterminates employment as an employee, and the Participant shall become an inactive Participant (as defined in the lastsentence of Section 2.4) at such point in time. Except as provided in the preceding sentence and the resolution of theBoard defining such term, “Separation from Service” and “Separates from Service” shall be determined in accordancewith the default rules set forth in the regulations issued under Code Section 409A.

1.29 “Short-Term Payout” shall mean the payout set forth in Section 4.1.

1.30 “Specified Employee” shall have the meaning set forth in Section 409A of the Code, the regulations issued thereunder,and the resolution issued by the Board defining such term.

1.31 “Termination Benefit” shall mean the benefit set forth in Article 5.

1.32 “Unforeseeable Financial Emergency” shall mean a severe financial hardship to the Participant resulting from (i) anillness or accident of the Participant, the Participant’s Beneficiary, or the Participant’s spouse or dependent (as definedin Code Section 152(a)), (ii) loss of the Participant’s property due to casualty or (iii) other similar extraordinary andunforeseeable

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circumstances arising as a result of events beyond the control of the Participant, all as determined in the sole discretionof the Committee.

1.33 “Year-End Bonus” shall mean compensation paid to a Participant who is an employee as an annual bonus under anyEmployer’s regular annual bonus and incentive plans. Special bonuses, nuclear-specific bonuses, estimated bonusespaid by SunCor Development Company, large asset bonus plan payments, and incentive payments made to a Participantshall not constitute “Year-End Bonuses.”

1.34 “Years of Plan Participation” shall mean the total number of full Plan Years a Participant has been a Participant in thePlan and has either (i) made deferral elections or (ii) had an Account Balance. For purposes of a Participant’s first PlanYear of participation only, any partial Plan Year of participation shall be treated as a full Plan Year. For purposes of aParticipant’s final Plan Year of participation only, a Participant shall be awarded a Year of Plan Participation if, and onlyif, he or she has been credited with 1,000 hours of service in such Plan Year. A single Plan Year of Plan participationdescribed above shall be referred to as a “Year of Plan Participation.”

1.35 “Years of Service” shall mean the total number of years of employment during which a Participant has been creditedwith at least 1,000 hours of service in each of those years. For purposes of this definition only, (i) Participants who areemployees shall be credited with ten (10) hours of service for each working day during which they are employed by theEmployer and Participants who are Directors shall be credited with ten (10) hours of service for each day (other thanweekend days) during which they serve as a Director, provided that no Participant shall be credited with more than1,000 hours of service in any one year of employment, and (ii) a year of employment shall be a 365 day period (or366 day period in the case of a leap year) that, for the first year of employment, commences on the employee’s date ofhiring or the date the Director begins his or her service as a Director and that, for any subsequent year, commences onan anniversary of that date.

ARTICLE 2Selection, Enrollment, Eligibility

2.1 Eligibility. Participation in the Plan shall be limited to a select group of management, highly compensated employeesand Directors of the Employers. All officers and members of the Senior Management Group may participate in the Plan,excluding presidents of subsidiaries of SunCor Development Company.

2.2 Enrollment Requirements. As a condition to participation, each selected employee or Director shall complete, executeand return to the Company an Election Form and a Beneficiary Designation Form. To the extent permitted by theCommittee, a selected employee or Director may enroll in the Plan and make elections by electronic means. In addition,the Committee, in its sole discretion, may establish from time to time such other enrollment requirements as itdetermines in its sole discretion are necessary.

2.3 Eligibility; Commencement of Participation. When an employee or Director first becomes eligible to participate in thePlan, that employee or Director may commence participation in the Plan at any time within 30 days after his or herinitial qualification for eligibility. When a Participant has ceased being eligible to participate in the Plan (other than bythe accrual of earnings), and subsequently becomes eligible to participate in the Plan again more than 24 months afterfirst not being eligible to participate in the Plan, the Participant will be treated as a new Participant and will be allowedto recommence participation in the Plan at any time within

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30 days after his or her requalification for eligibility. If an employee or Director fails to submit an Election Form to theCompany within 30 days after his or her initial qualification or requalification for eligibility, that employee or Directorshall not be eligible to submit an Election Form until the election period effective the following January 1.

2.4 Loss of Eligibility to Participate. If the status of a Participant changes, without a Separation from Service, so that he orshe is no longer an employee eligible to participate pursuant to Section 2.1, he or she shall become an inactiveParticipant as of the last day of the Plan Year in which such change of status occurred. Inactive Participants shallcontinue to participate in the Plan for all purposes other than for purposes of making deferrals under Section 3.1 and 3.2.

ARTICLE 3Deferral Commitments/Interest Crediting

3.1 Deferral. Subject to Section 3.2 below, a Participant may defer eligible compensation for each Plan Year starting withhis or her commencement of participation in the Plan and ending immediately prior to his or her death or Separationfrom Service.

3.2 Maximum Deferral. Subject to Section 3.3, for each Plan Year, a Participant may defer up to fifty percent (50%) of hisor her Base Annual Salary, up to one hundred percent (100%) of his or her Year-End Bonus, up to 100% of his or herRestricted Stock Units (if the Company allows deferrals of Restricted Stock Units), and/or up to one hundred percent(100%) of his or her Directors Fees.

3.3 Election to Defer; Effect of Election Form. In connection with a Participant’s initial commencement (or in certain casesdescribed in Section 2.3, recommencement) of participation in the Plan, the Participant may file an Election Form within30 days after becoming eligible to participate. If this initial Election Form is filed after the beginning of the calendaryear to which the Election Form relates, the Participant may elect only to defer his or her Base Annual Salary for payperiods commencing after the filing of his or her Election Form. For each succeeding Plan Year, a Participant may electto defer from his or her Base Annual Salary, Year-End Bonus and/or Directors Fees (and Restricted Stock Units to theextent permitted by the Company) an Annual Deferral by delivering to the Company a completed Election Form beforethe January 1 of the calendar year in which the Participant earns the compensation he or she is deferring, which electionand form shall be irrevocable during the Plan Year except as provided in Section 4.2. Notwithstanding the foregoing,with respect to Restricted Stock Units, the Committee may permit a Participant to file an Election Form on or before thethirtieth day after the Participant obtains the right to the Restricted Stock Units, provided that the Election Form is filedat least twelve months in advance of the earliest date at which the forfeiture condition with respect to the RestrictedStock Units could lapse. If no Election Form is delivered and accepted for a Plan Year, no Annual Deferral will bewithheld for that Plan Year. Any such Election Form shall designate the time and form of payment of the compensationdeferred. With respect to any interest credits above the Crediting Rate with respect to the December 31, 2004 AccountBalance of any Participant who had less than five years of Plan Participation as of December 31, 2004, the election ofthe form and time of payment made by such Participant with respect to the calendar year in which the Participant firstearns five years of Plan Participation shall govern the form and time of payment of such interest credits. Except asprovided in Section 3.6, such time and form of payment may not be changed, although a Participant may elect a differenttime and form of payment with respect to the Annual Deferral for each separate Plan Year.

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3.4 Withholding of Deferral Amounts. For each Plan Year, the Base Annual Salary portion of the Annual Deferral shall bewithheld periodically from the Participant’s Base Annual Salary. The Year-End Bonus, Restricted Stock Unit, and/orDirectors Fees portion of the Annual Deferral shall be withheld at the time the Year-End Bonus and/or Director Feesand/or compensation attributable to Restricted Stock Units are or would otherwise be paid to the Participant.

3.5 Interest Crediting Prior to Distribution. Prior to any distribution of benefits under Article 5, interest shall be credited inaccordance with rules established by the Company. The rate of interest for crediting shall be the Preferred Rate;provided, however in the case of a Participant who Separates from Service (other than at Retirement) more than sixmonths before any Change of Control and with less than five years of Plan Participation, the Crediting Rate shall beused with respect to his or her Termination Benefit. If a Short-Term Payout is made, for purposes of crediting interest,the Account Balance shall be reduced as of the first day of the Plan Year in which the Short-Term Payout is made.

3.6 Change in Time and Form of Payment. A Participant may change an election as to time and form of payment withrespect to Short-Term Payouts or Termination Benefits if such an Election Form is filed in accordance with rulesestablished by the Committee no later than December 31, 2008. Any such election must not defer benefits which wouldotherwise be payable in the calendar year of election to a later calendar year or accelerate benefits which would bepayable in a later calendar year into the calendar year of election. On and after January 1, 2009, a Participant maychange an election as to time and form of payment with respect to Termination Benefits under the Plan if an ElectionForm is filed in accordance with rules established by the Committee, provided (a) such election must not take effectuntil at least 12 months after the date on which the Election Form is properly filed, (b) the first payment with respect towhich such election is made must be deferred for a period of not less than 5 years from the date such payment wouldotherwise have been made, and (c) any election related to a payment that was otherwise to be made at a specified timemay not be made less than 12 months prior to the date of the first scheduled payment. For purposes of the precedingsentence, a series of installment payments shall be considered a single payment. Subject to the foregoing, the ElectionForm most recently filed with the Company for each calendar year shall govern the payout of all Termination Benefitsfor such calendar year.

3.7 Installment Distribution. In the event a benefit is paid in installments, installment payment amounts shall be determinedin the following manner:

(a) Interest Rate. The interest rate to be used to calculate installment payment amounts shall be a fixed interest rate thatis determined by averaging the Preferred Rates for the Plan Year in which a Participant becomes eligible to receivea benefit and the four (4) preceding Plan Years. If a Participant who Separates from Service other than on accountof Retirement has completed fewer than five (5) Years of Plan Participation, this average shall be determined usingthe Crediting Rates for the Plan Years during which the Participant participated in the Plan; provided, however, inthe event that installment payment amounts commence on or after the date which is six months before a Change ofControl, the interest rate to be used to calculate installment payment amounts shall be a fixed interest rate that isdetermined by averaging the Preferred Rates for the relevant Plan Years in which the Participant participated in thePlan.

(b) Installment Payments. For purposes of calculating installment payment amounts, each annual installment payment,starting with the first payment, which for this purpose is deemed to be paid as of the date that the Participantbecomes eligible to receive a benefit under this Plan without respect to any six-month delay in benefitcommencement for a

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Specified Employee (the “Eligibility Date”), and continuing thereafter for each additional year that starts on theanniversary of the Eligibility Date until the Participant’s Account Balance is paid in full, shall be deemed to havebeen paid prior to the crediting of interest for that year. (The result of this is that interest crediting shall be madeafter taking into account the annual installment payment for that year.)

(c) Amortization. Based on the interest rate determined in accordance with Section 3.7(b) above, the Participant’sAccount Balance shall be amortized in equal installment payments over the term of the specified payment period.The resulting number shall be the installment payment that is to be paid each year.

(d) Timing of Payments. The initial installment payment shall be made at the time set forth in Section 5.1(a).Installment payments for subsequent years shall be made in January of such year, subject to the requirement thatpayment of any installment amount following Separation from Service shall not be made prior to the date which issix (6) months after the date of the Participant’s Separation from Service in the case of a Participant who isdetermined to be a Specified Employee.

3.8 FICA Taxes. For each Plan Year in which an Annual Deferral is being withheld, the Participant’s Employer(s) shallwithhold from the Participant’s compensation that is not being deferred the Participant’s share of FICA taxes.

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ARTICLE 4Short-Term Payout and Unforeseeable Financial Emergencies

4.1 Short-Term Payout. At the same time as each election to defer an Annual Deferral, a Participant may elect to receive afuture Short-Term Payout from the Plan with respect to that Annual Deferral. The Short-Term Payout shall be a lumpsum payment in an amount that is equal to the Annual Deferral plus interest credited at the Preferred Rate, and it shall bepaid in January of the Plan Year that is five (5) years after the first day of the Plan Year in which the Annual Deferral isactually deferred; provided, however, that if the Participant Separates from Service or dies before the Plan Year in whicha Short-Term Payout is to be made, distribution will be made in accordance with Article 5 instead of this Section 4.1.Except as provided in Section 3.6, such election shall be irrevocable.

4.2 Withdrawal Payout; Suspensions for Unforeseeable Financial Emergencies. If the Participant experiences anUnforeseeable Financial Emergency, the Participant may petition the Committee to receive a partial or full payout fromthe Plan. The payout shall not exceed the lesser of (i) the Participant’s Account Balance, calculated as if such Participantwere receiving a Termination Benefit, or (ii) the amount reasonably needed to satisfy the Unforeseeable FinancialEmergency plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution, after taking intoaccount the extent to which such hardship is or may be relieved through reimbursement or compensation by insurance orotherwise or by liquidation of the Participant’s assets (to the extent the liquidation of such assets would not itself causesevere financial hardship) or by cessation of deferrals under this Plan. If the petition for a payout is approved, the payoutshall be made within sixty (60) days after the date of approval. In the event that the Participant takes an UnforeseeableFinancial Emergency withdrawal under this Plan, the Participant’s deferral election for the Plan Year shall immediatelyterminate for the remainder of such Plan Year.

ARTICLE 5Payment of Benefits

5.1 Payment of Termination Benefit.

(a) Lump Sum or Installments. A Participant may elect to receive his or her Termination Benefit in a lump sum or inequal annual payments over a period of five (5), ten (l0) or fifteen (15) years (the latter determined in accordancewith Section 3.7 above) by so electing on an Election Form. If a Participant elects a lump sum payment, he or sheshall specify whether the lump sum will be paid within 30 days following (i) his or her Separation from Service or,if later, (ii) his or her attainment of age fifty-five (55) following Separation from Service. If the Participant electsinstallment payments, they will begin within 30 days after the Participant’s 55th birthday (or his or her Separationfrom Service, if the Participant is over age fifty-five (55) upon his or her Separation from Service). The Participantmay change his or her election to an allowable alternative payout date or period by submitting a new Election Formto the Company in accordance with Section 3.6. Failure to make an election will result in the benefits being paid ina lump sum within 30 days after the Participant’s Separation from Service. Any election under this Section 5.1 shallbe irrevocable, except to the extent provided in Section 3.6. Notwithstanding the foregoing, payment of theTermination Benefit shall not be made or commence prior to the date which is six (6) months after the date of aParticipant’s

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Separation from Service in the case of a Participant who is determined to be a Specified Employee.

(b) Automatic Distribution of Termination Benefits. Notwithstanding any provision of this Section 5.2 to the contrary,if, upon a Participant’s Separation from Service, his or her Account Balance, as determined pursuant to Section 5.1,when added to his or her Retirement Account Balance Benefit under the Pinnacle West Capital CorporationSupplemental Excess Benefit Retirement Plan of 2005, does not exceed the amount specified in Code Section402(g) for the calendar year in which such Separation from Service occurs, the Participant’s Termination Benefitshall be distributed in a lump sum within thirty (30) days following his or her Separation from Service.Notwithstanding the foregoing, payment of the Termination Benefit shall not be made prior to the date which is six(6) months after the date of a Participant’s Separation from Service in the case of a Participant who is determined tobe a Specified Employee.

5.2 Death Prior to Pay Out.

(a) Death Prior to Commencement of Payments. If a Participant dies prior to the payout date that he or she elected forhis or her Termination Benefit, his or her Termination Benefit shall be paid to the Participant’s Beneficiary in thesurvivor form elected by the Participant (lump sum or installments over five, ten, or fifteen years) commencing inthe January immediately after the Participant’s death.

(b) Death After Commencement. If a Participant dies after the commencement of the payment of his or herTermination Benefit, but before the Termination Benefit is paid in full, the Participant’s unpaid Termination Benefitpayments shall continue and shall be paid to the Participant’s Beneficiary over the remaining number of years andin the same amounts as that benefit would have been paid to the Participant had the Participant survived.

ARTICLE 6Disability Credit

6.1 Disability Credit.

(a) Eligibility. By participating in the Plan, all Participants are eligible for this credit.

(b) Credit for Plan Year of Disability. A Participant who is determined to be suffering from a Disability, and who is notreceiving Base Annual Salary, Year-End Bonus and/or Directors Fees, shall be credited with an amount equal tothat portion of the Annual Deferral commitment that would otherwise have been withheld from the Participant’sBase Annual Salary, Year-End Bonus and/or Directors Fees for the Plan Year during which the Participant firstsuffers Disability, unless the Disability ceases in the Plan Year that it commences, in which case the crediting shallapply only for the period of Disability.

ARTICLE 7Beneficiary Designation

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7.1 Beneficiary. Each Participant shall have the right, at any time, to designate his or her Beneficiary (both primary as wellas contingent) to receive any benefits payable under the Plan to a Beneficiary upon the death of a Participant.

7.2 Beneficiary Designation and Change; Spousal Consent. A Participant shall designate his or her Beneficiary bycompleting and signing the Beneficiary Designation Form, and returning it to the Company or its designated agent. AParticipant shall have the right to change a Beneficiary by completing, signing and otherwise complying with the termsof the Beneficiary Designation Form and the Committee’s rules and procedures, as in effect from time to time. If theParticipant names, with respect to more than fifty percent (50%) of his or her benefit under this Plan, someone otherthan his or her spouse as a Beneficiary, a spousal consent, in the form designated by the Committee, must be signed bythat Participant’s spouse and returned to the Company. Upon submission to the Company of a new BeneficiaryDesignation Form, all Beneficiary designations previously filed shall be cancelled. The Committee shall be entitled torely on the last Beneficiary Designation Form filed by the Participant prior to his or her death.

7.3 Acknowledgment. No designation or change in designation of a Beneficiary shall be effective until received by theCompany or its designated agent.

7.4 No Beneficiary Designation. If a Participant fails to designate a Beneficiary as provided in Sections 7.1, 7.2 and 7.3above, or if all designated Beneficiaries predecease the Participant or die prior to complete distribution of theParticipant’s benefits, then the Participant’s designated Beneficiary shall be deemed to be his or her surviving spousewith respect to any undistributed benefits. If the Participant has no surviving spouse, the benefits remaining under thePlan to be paid to a Beneficiary shall be payable to the executor or personal representative of the Participant’s estate.

7.5 Doubt as to Beneficiary. If the Committee has any doubt as to the proper Beneficiary to receive payments pursuant tothis Plan, the Committee shall have the right, exercisable in its discretion, to cause the Participant’s Employer towithhold such payments until this matter is resolved to the Committee’s satisfaction.

7.6 Discharge of Obligations. The payment of benefits under the Plan to a Beneficiary shall fully and completely dischargeall Employers and the Committee from all further obligations under this Plan with respect to the Participant.

ARTICLE 8Leave of Absence

8.1 Paid Leave of Absence. If a Participant is authorized by the Participant’s Employer for any reason to take a paid leave ofabsence from the employment of the Employer, the Participant shall continue to be considered employed by theEmployer and the Annual Deferral shall continue to be withheld during such paid leave of absence in accordance withSection 3.3.

8.2 Unpaid Leave of Absence. If a Participant is authorized by the Participant’s Employer for any reason to take an unpaidleave of absence from the employment of the Employer, the Participant shall continue to be considered employed by theEmployer and the Participant shall be excused from making deferrals until the earlier of the date the leave of absenceexpires or the Participant returns to a paid employment status. Upon such expiration or return, deferrals shall resume forthe remaining portion of the Plan Year in which the expiration or return occurs, based on the deferral election, if any,made for that Plan Year prior to the leave of absence.

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8.3 Definition of Leave of Absence. Whether a Participant is on a leave of absence shall be determined in accordance withthe default rules under the regulations issued pursuant to Section 409A of the Code.

ARTICLE 9Termination, Amendment or Modification

9.1 Termination. Subject to the requirements of Code Section 409A, any Employer reserves the right to terminate the Plan atany time with respect to Participants whose services are retained by that Employer. Upon the termination of the Plan inaccordance with the requirements of Section 409A of the Code, a Participant’s Account Balance shall be paid out inaccordance with the regulations issued under Section 409A of the Code. The termination of the Plan shall not adverselyaffect any Participant or Beneficiary who has become entitled to the payment of any benefits under the Plan as of thedate of termination.

9.2 Amendment. The Company may, at any time, amend or modify the Plan in whole or in part with respect to anyEmployer or all Employers, provided, however, that no amendment or modification shall be effective to the extent itwould cause an amount to become taxable or be subject to additional taxes on account of such amendment under CodeSection 409A or the regulations or other guidance issued thereunder.

ARTICLE 10Administration

10.1 Committee Duties. This Plan shall be administered by a Committee, which shall consist of persons approved by theBoard. Members of the Committee may be Participants under this Plan. The Committee shall also have the discretionand authority to make, amend, interpret, and enforce all appropriate rules and regulations for the administration of thisPlan and decide or resolve any and all questions including interpretations of this Plan, as may arise in connection withthe Plan.

10.2 Agents. In the administration of this Plan, the Committee may, from time to time, employ agents and delegate to themsuch administrative duties as it sees fit and may from time to time consult with counsel who may be counsel to anyEmployer.

10.3 Binding Effect of Decisions. The decision or action of the Committee with respect to any question arising out of or inconnection with the administration, interpretation and application of the Plan and the rules and regulations promulgatedhereunder shall be final and conclusive and binding upon all persons having any interest in the Plan.

10.4 Indemnity of Committee. All Employers shall indemnify and hold harmless the members of the Committee against anyand all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Plan,except in the case of willful misconduct by the Committee or any of its members.

10.5 Employer Information. To enable the Committee to perform its functions, each Employer shall supply full and timelyinformation to the Committee on all matters relating to the compensation of its Participants, the date and circumstancesof the Retirement, Disability, death or Separation from Service of its Participants, and such other pertinent informationas the Committee may reasonably require.

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ARTICLE 11Other Benefits and Agreements

11.1 Coordination with Other Benefits. Except as provided in this Section, the benefits provided for a Participant andParticipant’s Beneficiary under the Plan are in addition to any other benefits available to such Participant under anyother plan or program for employees or directors of the Participant’s Employer. The Plan shall supplement and shall notsupersede, modify or amend any other such plan or program except as may otherwise be expressly provided.

ARTICLE 12Claims Procedures

12.1 Claims. Any Participant, Beneficiary or any authorized representative acting on behalf of the Participant or Beneficiary(“Claimant”) claiming benefits, eligibility, participation or any other right or interest under this Plan may file a writtenclaim setting forth the basis of the claim under the procedures set forth in the Pinnacle West Capital CorporationSavings Plan.

ARTICLE 13Miscellaneous

13.1 Unsecured General Creditor. Amounts payable to a Participant or his or her Beneficiary under this Plan shall be paidfrom the general assets of an Employer. Participants and their Beneficiaries, heirs, successors and assigns shall have nolegal or equitable rights, interest or claims in any property or assets of an Employer. Any and all of an Employer’sassets shall be, and remain, the general, unpledged, unrestricted assets of the Employer. An Employer’s obligationunder the Plan shall be merely that of an unfunded and unsecured promise to pay money in the future and Participantsand their Beneficiaries shall be unsecured creditors of the Participant’s Employer.

13.2 Employer’s Liability. An Employer’s liability for the payment of benefits shall be defined only by the Plan. AnEmployer shall have no obligation to a Participant under the Plan except as expressly provided in the Plan.

13.3 Nonassignability. Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer,pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt, theamounts, if any, payable hereunder, or any part thereof, and all rights to such amounts are expressly declared to beunassignable and non-transferable, except that the foregoing shall not apply to any family support obligations set forthin a court order which is determined by the Committee to be a qualified domestic relations order as defined in CodeSection 414(p). No part of the amounts payable shall, prior to actual payment, be subject to seizure or sequestration forthe payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, norbe transferable by operation of law in the event of a Participant’s or any other person’s bankruptcy or insolvency.

13.4 Not a Contract of Employment. The terms and conditions of this Plan shall not be deemed to constitute a contract ofemployment between any Employer and the Participant. Such employment is hereby acknowledged to be an “at will”employment relationship that can be terminated at any time for any reason, with or without cause, unless expresslyprovided in a written employment agreement. Nothing in this Plan shall be deemed to give a Participant the right to beretained in the service of any Employer or to be retained as a Director, or to interfere with the right of any Employer todiscipline or discharge the Participant at any time.

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13.5 Furnishing Information. A Participant will cooperate with the Committee by furnishing any and all informationrequested by the Committee and take such other actions as may be requested in order to facilitate the administration ofthe Plan and the payments of benefits hereunder, including but not limited to taking such physical examinations as theCommittee may deem necessary.

13.6 Terms. Whenever any words are used herein in the singular or in the plural, they shall be construed as though theywere used in the plural or the singular, as the case may be, in all cases where they would so apply.

13.7 Captions. The captions of the articles, sections and paragraphs of this Plan are for convenience only and shall notcontrol or affect the meaning or construction of any of its provisions.

13.8 Governing Law. The provisions of this Plan shall be construed and interpreted according to the laws of the State ofArizona to the extent not preempted by Federal law.

13.9 Validity. In case any provision of this Plan shall be illegal or invalid for any reason, said illegality or invalidity shallnot affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal and invalidprovision had never been inserted herein.

13.10 Notice. Any notice or filing required or permitted to be given to the Committee under this Plan shall be sufficient if inwriting and hand-delivered, or sent by registered or certified mail, to the addresses indicated below:

If a Participant’s Employer is Pinnacle West Capital Corporation or one of its subsidiaries, then to:

Pinnacle West Capital Corporation400 North 5th StreetP.O. Box 53999Phoenix, Arizona 85072-3999Attn: Manager of Benefit ServicesStation 8460

Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown onthe postmark on the receipt for registration or certification.

Any notice or filing required or permitted to be given to a Participant under this Plan shall be sufficient if in writingand hand-delivered, or sent by mail, to the last known address of the Participant.

13.11 Successors. The provisions of this Plan shall bind and inure to the benefit of the Participant’s Employer and itssuccessors and assigns and the Participant, the Participant’s Beneficiaries, and their permitted successors and assigns.

13.12 Spouse’s Interest. The interest in the benefits hereunder of a spouse of a Participant who has predeceased theParticipant shall automatically pass to the Participant and shall not be transferable by such spouse in any manner,including but not limited to such spouse’s will, nor shall such interest pass under the laws of intestate succession.

13.13 Incompetent. If the Committee, in its discretion, determines that a benefit under this Plan is to be paid to a minor, aperson declared incompetent or to a person incapable of handling the

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disposition of that person’s property, the Committee may direct payment of such benefit to the guardian, legalrepresentative or person having the care and custody of such minor, incompetent or incapable person. The Committeemay require proof of minority, incompetency, incapacity or guardianship, as it may deem appropriate prior todistribution of the benefit. Any payment of a benefit shall be a payment for the account of the Participant and theParticipant’s Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Plan for suchpayment amount.

13.14 Commencement of Payments. In all cases in which amounts are payable within a fixed month (for example, theJanuary after a Participant Separates from Service), payment is deemed to be made within the fixed month if thepayment is made on the first day of such month or a later date within the same calendar year or, if later, by thefifteenth day of the third calendar month following the first day of such fixed month (provided the Participant is notpermitted, directly or indirectly, to designate the taxable year of payment). In addition, a payment is treated as madeupon the date specified under the Plan if the payment is made no earlier than thirty (30) days before the first day ofsuch fixed month and the Participant is not permitted, directly or indirectly, to designate the taxable year of payment.

13.15 Interpretation of Plan Provisions. This Plan shall be interpreted in a manner consistent with the provisions ofSection 409A of the Code and the regulations thereunder.

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IN WITNESS WHEREOF the Company has caused this Plan to be executed by its duly authorized officers this 19thday of December 2008. PINNACLE WEST CAPITAL CORPORATION By: /s/ Barbara M. Gomez

Its: VP and Treasurer ATTEST: By: /s/ Donna L. Thomas

Its: HR Services Director

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Exhibit 10.3.2

PINNACLE WEST CAPITAL CORPORATION

SUPPLEMENTAL EXCESS BENEFIT

RETIREMENT PLAN OF 2005

TABLE OF CONTENTS PAGE

ARTICLE ONE — PREAMBLE 1 ARTICLE TWO — CONSTRUCTION 3 ARTICLE THREE — ELIGIBILITY AND PARTICIPATION 3

(a) Officers 3 (b) SMG Participants 4 (c) Commencement of Participation 4 (d) Status Change 4 (e) Rehires 4

ARTICLE FOUR — BENEFITS 4

(a) Officer Benefits 4 (1) Group A Participants 4 (2) Group B Participants 5 (3) Group C Participants 6 (4) Compensation 7 (5) Promotion to Officer Status 8

(b) SMG Participants 8 (c) Average Monthly Compensation 9 (d) Disability Accrual 9 (e) Recognition of Benefits under Separate Agreements 9

ARTICLE FIVE — PAYMENT OF BENEFITS ON AND AFTER JANUARY 1, 2009 10

(a) Officer Traditional Benefits Described in Sections 4(a)(1) and 4(a)(2)(i) 10 (1) Time for Commencement 10 (2) Form of Payment 11 (3) Actuarial Adjustments 11

(b) Spouse’s Benefit with Respect to Officer Traditional Benefits Described in Sections 4(a)(1) and4(a)(2)(i) 12

(c) Officer Retirement Account Balance Benefits Described in Sections 4(a)(2)(ii) and 4(a)(3) 13 (1) Time and Form of Payment 13 (2) Actuarial Adjustments 13 (3) Payment Upon Death 14

(d) SMG Traditional and Retirement Account Balance Benefits Described in Section 4(b) 15 (1) Form of Payment — Traditional Benefits 15 (2) Time of Payment — Traditional Benefits 15 (3) Form and Time of Payment — Retirement Account Balance Benefit 16 (4) Actuarial Adjustments 16 (5) Time and Form of Benefits Payable Upon Death 17

(e) Change in Time and Form of Payment 17 (f) Cash-Out Provisions 17 (g) Reemployment 18

ARTICLE SIX — PAYMENT OF BENEFITS BEFORE JANUARY 1, 2009 18

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PAGE

ARTICLE SEVEN — SECTION 409A COMPLIANCE 19 ARTICLE EIGHT — FUNDING 20 ARTICLE NINE — ADMINISTRATION 20 ARTICLE TEN — AMENDMENT AND TERMINATION OF THE PLAN 20 ARTICLE ELEVEN — ASSIGNMENT 21 ARTICLE TWELVE — WITHHOLDING 21 ARTICLE THIRTEEN — OTHER BENEFIT PLANS OF THE COMPANY 21 ARTICLE FOURTEEN — SPOUSAL CONSENT AND BENEFICIARY DESIGNATIONS 22 ARTICLE FIFTEEN — MISCELLANEOUS 22 ARTICLE SIXTEEN — EFFECTIVE DATE 22

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PINNACLE WEST CAPITAL CORPORATION

SUPPLEMENTAL EXCESS BENEFIT RETIREMENT PLAN OF 2005

ARTICLE ONE — PREAMBLE

Effective January 1, 1987, PINNACLE WEST CAPITAL CORPORATION (the “Company”) adopted the PINNACLEWEST CAPITAL CORPORATION SUPPLEMENTAL EXCESS BENEFIT RETIREMENT PLAN (the “Prior Plan”) for thepurpose of paying retirement benefits to certain employees in excess of the benefits permitted to be paid under the PinnacleWest Capital Corporation Retirement Plan (the “Retirement Plan”) by reason of Section 415 of the Internal Revenue Code(the “Code”). The Prior Plan was thereafter amended several times to provide additional benefits, thereby changing the PriorPlan from an “excess benefit plan” under the Employee Retirement Income Security Act of 1974, as amended (the “Act”), toa “top hat” plan under the Act.

Effective January 1, 1982, ARIZONA PUBLIC SERVICE COMPANY (“APS”) adopted the ARIZONA PUBLICSERVICE COMPANY SUPPLEMENTAL EXCESS BENEFIT RETIREMENT PLAN (the “APS Plan”) for the purpose ofpaying retirement benefits to certain employees in excess of the benefits permitted to be paid under the Arizona PublicService Company Employees’ Retirement Plan (the “APS Retirement Plan”) by reason of Section 415 of the Code. The APSPlan was thereafter amended several times to provide additional benefits, thereby changing the APS Plan from an “excessbenefit plan” under the Act to a “top hat” plan under the Act.

Effective January 1, 2000, the Company and APS amended and restated the Prior Plan and the APS Plan to merge theAPS Plan into the Prior Plan and to make other technical changes. The Prior Plan was amended several times thereafter.

Effective January 1, 2003, the Company amended the Prior Plan to add a new benefit structure.

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Effective December 31, 2004, the Company amended the Prior Plan to “grandfather” from the application of CodeSection 409A benefits with respect to only those participants who neither earned nor became vested in a supplemental excessbenefit after December 31, 2004. Only the benefits of such participants are provided under the terms of the Prior Plan.

This Plan applies to the entire benefit of any participant who either earned or became vested in all or any portion of hisor her benefits on or after January 1, 2005.

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ARTICLE TWO

CONSTRUCTION

Terms capitalized in this Plan shall have the meaning given in Article Two of the Retirement Plan, governingdefinitions and construction, except where such terms are otherwise defined in this Plan. If any provision of this Plan isdetermined to be invalid or unenforceable for any reason, the remaining provisions shall continue in full force and effect. Allof the provisions of this Plan shall be construed and enforced according to the laws of the State of Arizona, and shall beadministered according to the laws of such state, except as otherwise required by the Act, the Code or other applicable federallaw. It is the intention of the Company that the Plan, as adopted by the Company, shall constitute an “unfunded plan ofdeferred compensation for a select group of management and highly compensated employees” within the meaning ofSections 201(2) and 301(3) of the Act. Benefits under this Plan shall be paid from the Company’s general assets, and notfrom any trust fund or other segregated fund, unless paid out of a rabbi trust established by the Company. The assets of anysuch rabbi trust shall be subject to the claims of the general creditors of the Company. This Plan shall be construed in amanner consistent with the Company’s intention.

ARTICLE THREE

ELIGIBILITY AND PARTICIPATION

Employees of the Company or its Affiliates who are individually designated as Plan participants by the HumanResources Committee of the Board of Directors of the Company (“Committee”), in its discretion, shall be eligible toparticipate in the Plan, and such designated individuals shall be considered “Eligible Employees.”

(a) Officers. Except as provided by the Committee, Eligible Employees who are officers of the Company or an Affiliatewhich is a participating employer under the Retirement Plan shall be entitled to the benefits described in Section 4(a);provided, however, that presidents and other officers of APS Energy Services and subsidiaries of SunCor are not eligible toparticipate in the Plan and are

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therefore not considered officers for this purpose unless otherwise selected for participation by the Committee.

(b) SMG Participants. Except as provided by the Committee, Eligible Employees of the Company or an Affiliate whichis a participating employer under the Retirement Plan who are not officers shall be entitled to the benefits described inSection 4(b).

(c) Commencement of Participation. An Eligible Employee shall commence participation in this Plan as of the first dayof the Plan Year following the date the Committee designates him or her as a participant. Such participation shall continueuntil the date on which the participant is no longer designated as an Eligible Employee by the Committee.

(d) Status Change. Notwithstanding the foregoing, if the status of a participant changes for reasons other thanseparation from service with the Company or an Affiliate which is a participating employer under the Retirement Plan, so thathe or she no longer is eligible to participate in the Plan, his or her participation in the Plan shall cease but his or her benefitunder this Plan as of the date of his or her change of status shall not be canceled or distributed, but shall be determined uponhis or her separation from service with the Company or an Affiliate.

(e) Rehires. In the event that a Participant terminates employment and is later rehired, he or she shall not be eligible toparticipate in the Plan again unless such individual is again individually designated as a Plan participant by the Committeefollowing his or her rehire.

ARTICLE FOUR

BENEFITS

A participant whose entire benefit was both earned and vested on December 31, 2004 (as determined under regulationsissued under Code Section 409A) shall receive such benefit under the Prior Plan. All other participants shall receive theirentire benefit under the terms outlined below.

(a) Officer Benefits.

(1) Group A Participants. Subject to ARTICLE SEVEN, a participant who is eligible under Section 3(a) and who is aGroup A Participant under the Retirement Plan shall be

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entitled to a monthly benefit for life commencing at age 65 equal to the lesser of (i) or (ii), reduced by (iii), where

(i) Equals three percent (3%) of the participant’s Average Monthly Compensation multiplied by the participant’sYears of Service, not to exceed ten (10) Years of Service, plus two percent (2%) of the participant’s Average MonthlyCompensation multiplied by the participant’s Years of Service in excess of ten (10) Years of Service,

(ii) Equals sixty percent (60%) of the participant’s Average Monthly Compensation, and

(iii) Equals the amount of such participant’s monthly benefit for life at age 65 determined under the terms of theRetirement Plan.

(2) Group B Participants. Subject to ARTICLE SEVEN, a participant who is eligible under Section 3(a) and who is aGroup B Participant under the Retirement Plan shall be entitled to a monthly benefit for life commencing at age 65 equal tothe sum of (i) and (ii), where

(i) Equals the benefit determined under the formula set forth above in this Section 4(a)(1) for a Group AParticipant in the Retirement Plan based on the participant’s Years of Service as of March 31, 2003 (March 31, 2006 inthe case of a SunCor participant) and his or her Average Monthly Compensation as of the date of determination. Years ofService as of March 31, 2003 (March 31, 2006 in the case of a SunCor participant) shall equal his or her full Years ofService as of such date plus a partial Year of Service equal to the lesser of one (1) or a fraction, the numerator of whichis the participant’s Hours of Service earned during the period beginning on the day after the last day of his or herComputation Period ending prior to March 31, 2003 (March 31, 2006 in the case of a SunCor participant) and ending onMarch 31, 2003 (March 31, 2006 in the case of a SunCor participant), and the denominator of which is 1,000, and

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(ii) Equals the monthly benefit for life payable at age 65 which is the Actuarial Equivalent of a lump sum benefitequal to the participant’s Supplemental Retirement Account Balance minus the participant’s Retirement AccountBalance under the Retirement Plan. For the avoidance of doubt, if the amount under this Section 4(a)(2)(ii) is a negativenumber, it will serve as an offset against the amount payable under Section 4(a)(2)(i).

(3) Group C Participants. Subject to ARTICLE SEVEN, a participant who is eligible under Section 3(a) and who is aGroup C Participant under the Retirement Plan shall be entitled to a monthly benefit for life commencing at age 65 equal tothe Actuarial Equivalent of a lump sum benefit equal to (i) reduced by (ii), where

(i) Equals the participant’s Supplemental Retirement Account Balance, and

(ii) Equals the participant’s Retirement Account Balance under the Retirement Plan.

A participant’s Supplemental Retirement Account Balance shall be a notional account credited with MonthlyRetirement Account Balance Credits and Interest Credits. For purposes of this Plan, Monthly Retirement Account BalanceCredits shall be determined under the general methodology set forth in the Retirement Plan based on the participant’sMonthly Compensation for the month but using the following chart; provided that, except for a Group C Participant, aparticipant shall not receive a Monthly Retirement Account Balance Credit after the last day of the calendar year in whichhe or she is credited with twenty-five (25) Years of Service, with twenty-five years (25) Years of Service defined astwenty-five (25) full twelve (12) month periods in duration.

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Age at End of Plan Year in Percent of MonthlyWhich Month Occurs Compensation Contribution Rate

Less than 35 12%35-39 14%40-44 16%45-49 20%50-54 24%55 and over 28%

(4) Compensation. For purposes of this Section 4(a), Compensation and Monthly Compensation shall be determinedwithout regard to the limitation set forth in Section 401(a)(17) of the Code and shall be increased by any cash paymentsmade to the participant pursuant to “year-end” bonus or incentive plans maintained by the Company or an Affiliate whichis a participating employer under the Retirement Plan for employees generally and by any amounts deferred by theparticipant under any of the Company’s or such an Affiliate’s deferred compensation plans for employees. Bonus orincentive payments made in a form other than cash, bonus or incentive payments which are not “year-end” bonus orincentive payments, bonus or incentive payments under individual agreements between the Company or such an Affiliateand a participant, and large asset bonus plan payments shall not be taken into account as Compensation and MonthlyCompensation for purposes of this Plan unless the Company’s President or Chief Executive Officer determines, in his orher discretion, that such bonus or incentive payment shall be taken into account as Compensation and MonthlyCompensation under this Plan. Subject to the foregoing, (a) eligible bonuses and incentive payments (including eligiblebonuses and incentive payments paid after termination) shall be taken into account as Compensation and MonthlyCompensation in the year in which such amounts are paid rather than in the year in which they are earned, provided thatthe Company’s President or Chief Executive Officer shall have the authority to determine, in his or her discretion, that suchbonus or incentive payment shall be taken into account in the year in which such amounts are earned rather than in the yearin which they are paid, (b) Retention Unit Awards granted in a calendar month which become

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vested shall be counted as Compensation paid and earned in such calendar month; provided, however, that if RetentionUnit Awards are taken into account in determining a participant’s Average Monthly Compensation with respect to benefitsdescribed in Sections 4(a)(1) or 4(a)(2)(i), no more than two other year-end bonus or incentive payments will be taken intoaccount in determining such Average Monthly Compensation. Effective for SunCor bonuses earned in 2006 and lateryears, bonuses paid to the SunCor President and Executive Vice Presidents shall be included in Compensation or MonthlyCompensation only to the extent of 100% of base pay, and the bonuses paid to SunCor Vice Presidents shall be included inCompensation or Monthly Compensation only to the extent of 70% of base pay. The Company’s President or ChiefExecutive Officer shall have the sole and absolute discretion to determine whether a bonus or incentive payment made to aparticipant constitutes Compensation or Monthly Compensation for purposes of this Section 4(a) and may differentiateamong individuals in establishing the bonus or incentive payments that may be taken into account under the Plan.

(5) Promotion to Officer Status. In the event that an Eligible Employee is promoted to officer status, his or herTraditional Benefit and Retirement Account Balance Benefit shall be retroactively calculated as if he or she had served asan officer during the entire period of his or her employment with the Company or any of its Affiliates.

(b) SMG Participants.

Subject to ARTICLE SIX and ARTICLE SEVEN, any participant who is designated for participation pursuant toSection 3(b) and who receives a benefit under the Retirement Plan, or such participant’s surviving spouse or beneficiary inthe event of the participant’s death, shall be entitled to a benefit payable in accordance with this ARTICLE FOUR and withARTICLE FIVE equal to (i) reduced by (ii), where

(i) Equals the amount of such participant’s or surviving spouse’s or beneficiary’s benefit under the Retirement Plancomputed under the provisions of the Retirement Plan but without regard to the cap on Compensation in Section 2.1(n) andthe limitations in

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Section 5.13 of the Retirement Plan and the provisions of Sections 401(a)(17) and 415 of the Code; and

(ii) Equals the amount of such participant’s or surviving spouse’s or beneficiary’s benefit which would be payableunder the terms of the Retirement Plan if the participant or his or her surviving spouse or beneficiary were to receivepayment under the Retirement Plan at the same time and in the same form as benefits are payable under this Plan.

For purposes of this Section 4(b), Compensation shall include any amount of the participant’s regular salary that theparticipant elects to defer under any deferred compensation plans for employees of the Company or an Affiliate which is aparticipating employer under the Retirement Plan (including amounts deferred before participation in the Plan commences)and shall exclude all bonus or incentive payments paid to the participant.

(c) Average Monthly Compensation.

For purposes of computing a participant’s Average Monthly Compensation, such term shall have the same meaning asunder the Retirement Plan except that the highest 36 consecutive months of Compensation will be determined based on theparticipant’s entire period of employment (instead of only the most recent 120 consecutive months of employment asprovided in the Retirement Plan).

(d) Disability Accrual.

A participant who is earning a disability accrual under Section 4.5 of the Retirement Plan shall continue to accruebenefits under this Plan until the earlier of the date disability accrual ceases under the Retirement Plan or the date his or herbenefits commence under this Plan.

(e) Recognition of Benefits under Separate Agreements.

In the event that the Company or an Affiliate enters into a separate agreement with an Eligible Employee whichprovides that the payment of benefits under the Plan shall be modified as provided in such agreement, the Plan shall bedeemed to have been amended to reflect the terms of any such agreement.

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ARTICLE FIVE

PAYMENT OF BENEFITS ON AND AFTER JANUARY 1, 2009

(a) Officer Traditional Benefits Described in Sections 4(a)(1) and 4(a)(2)(i).

(1) Time for Commencement. A participant may elect the time for commencement of payment of benefits describedin Sections 4(a)(1) and 4(a)(2)(i) on or before the later of December 31, 2008 or the day before the Committee designatesthe individual as a participant in this Plan. Any such election shall be irrevocable except as provided in Section 5(e). Aparticipant desiring to make the election described in the preceding sentence may elect to receive his or her benefitsdescribed in Sections 4(a)(1) or 4(a)(2)(i) upon the later of separation from service or a specified age after age 55 (age 54for an individual who has severed from employment before 2009 and, as a result of such severance, has received anadditional year of age and service under the Retirement Plan and has therefore become entitled to receive TraditionalBenefits under the Retirement Plan at age 54) and on or before age 65. Such election of a commencement age before age65 will be effective only if the participant has ten Years of Service upon his or her separation from service. In the absenceof such an election, the participant’s benefits described in Section 4(a)(1) or 4(a)(2)(i) will commence as follows: (i) uponseparation from service if at the time of such separation from service he or she has either attained age sixty-five (65) or hasboth attained age fifty-five (55) and completed ten (10) Years of Service; or (ii) age sixty-five (65) if at the time of suchseparation from service he or she has neither attained age sixty-five (65) nor both attained age fifty-five (55) andcompleted ten (10) Years of Service. Such benefits shall be unreduced if they commence on or after the date on which theparticipant attains the age of sixty-five (65) years or attains the age of

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sixty (60) years and is credited with at least twenty (20) Years of Service. If benefits commence earlier than as provided inthe preceding sentence, the portion of his or her benefit calculated in accordance with Section 4(a)(1) or 4(a)(2)(i) shall bereduced by three percent (3%) for each year (or part thereof) by which the participant’s retirement age precedes the date onwhich he or she would have attained the age of sixty (60) years if he or she is credited with at least twenty (20) Years ofService or the date on which he or she would have attained the age of sixty-five (65) years if credited with less than twenty(20) Years of Service.

(2) Form of Payment. This section governs the election of the form of payment of benefits described inSections 4(a)(1) and 4(a)(2)(i). A participant may elect to receive such benefits in the form of a life annuity or any joint andsurvivor annuity form (with the participant’s spouse as joint annuitant) permitted under the Retirement Plan. In addition, aparticipant who commences benefits after 2007 shall have a five-year installment option with respect to any benefitspayable after 2008 under Sections 4(a)(1) or 4(a)(2)(i). However, a participant must elect the five-year installment form ofbenefit on or before the later of December 31, 2008 or the day before the Committee designates the individual as aparticipant in this Plan. If a participant has not elected the five-year installment form of benefit as provided in thepreceding sentence, then the participant may elect an annuity form of payment at any time up until the date payments arescheduled to commence. Except as provided in the preceding sentence or in Section 5(e), any such election of the form ofpayment shall be irrevocable. In the absence of an election regarding the form of payment, benefits payable to a singleparticipant under Section 4(a)(1) or Section 4(a)(2)(i) shall be payable as a life annuity and to a married participant as amonthly payment to the participant for his or her life equal to the amount determined under Section 4(a)(1) orSection 4(a)(2)(i) and upon his or her death, shall provide monthly payments to the participant’s spouse for life equal toone hundred percent (100%) of the monthly payment being received by the participant at the time of his or her death. Aparticipant may not elect to receive such benefits in any form not described in this Section, such as the ten-year certainform or the method described in Section 6.6 of the Retirement Plan (the “Over-and-Under Payment Method”).

(3) Actuarial Adjustments. The joint and 50% survivor annuity form shall be fully subsidized (i.e., the amount of thebenefit payable for the participant’s life under the joint

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and 50% survivor annuity shall be equal to the amount of the benefit payable for the participant’s life under the life onlybenefit). Alternate joint and survivor payment forms shall be actuarially equivalent to the joint and 50% survivor form,using the same actuarial adjustments as provided under the Retirement Plan. The five-year installment form shall beactuarially equivalent to the single life annuity (increased for this purpose by the subsidy for the joint and 50% survivorform), but using a discount rate assumption of 6.25% and the mortality table used by the Company for year-end financialreporting purposes for the calendar year preceding the year in which the five-year installment benefit commences.

(b) Spouse’s Benefit with Respect to Officer Traditional Benefits Described in Sections 4(a)(1) and 4(a)(2)(i).

If a participant entitled to benefits under Section 4(a)(1) or Section 4(a)(2)(i) dies while still employed by the Companyor an Affiliate, the participant’s spouse shall be entitled to a survivor annuity equal to one hundred percent (100%) of themonthly benefit that the participant would have received under Section 4(a)(1) or Section 4(a)(2)(i) had he or she terminatedemployment on the day before he or she died, survived to the age on which he or she would first be eligible to commencebenefits under this Section 5(a), elected to retire and commence benefits under the Plan and the Retirement Plan at that timein the form of a joint and 100% survivor annuity, and then died. Benefits payable to the surviving spouse shall commence onthe first day of the month following the participant’s date of death. Benefits payable to a terminated participant entitled tobenefits under Section 4(a)(1) or 4(a)(2)(i) who dies prior to commencing benefits shall be paid in the form of a survivorannuity equal to fifty percent (50%) of the monthly benefit for life which the participant would have received had he or shesurvived to the earliest date under this Section 5(a) upon which he or she could have commenced benefits. Such benefits shallcommence as follows: (i) upon death if at the time of such death the participant has either attained age sixty-five (65) or hasboth attained age fifty-five (55) and completed ten (10) Years of Service; or (ii) age sixty-five (65) if at the time of such deaththe participant has neither attained age sixty-five (65) nor both attained age fifty-five (55) and completed ten (10) Years ofService.

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(c) Officer Retirement Account Balance Benefits Described in Sections 4(a)(2)(ii) and 4(a)(3).

(1) Time and Form of Payment. The participant may elect the form and time of payment of benefits described inSection 4(a)(2)(ii) or Section 4(a)(3) on or before the later of December 31, 2008 or the day before the Committeedesignates the individual as a participant in this Plan. Any such election shall be irrevocable except as provided in the nextsentence or Section 5(e). Any election of an annuity form of benefit may be changed to any other actuarially equivalentannuity form of benefit on or before the date annuity payments are to begin. A participant may elect to receive benefitsdescribed in Section 4(a)(2)(ii) or Section 4(a)(3) at any time permitted under the Retirement Plan. A participant may electto receive benefits described in Section 4(a)(2)(ii) or Section 4(a)(3) in the form of a lump sum, a life annuity, or in anyjoint and survivor annuity form (with the participant’s spouse as joint annuitant) permitted under the Retirement Plan. Inaddition, a participant who commences benefits after 2007 shall have a five-year installment option with respect to anybenefits payable after 2008. A participant may not elect to receive such benefits in any other form, such as the ten-yearcertain form or the Over-and-Under Payment Method. In the absence of an election regarding the form of benefits,payments shall be made in a lump sum upon separation from service.

(2) Actuarial Adjustments. The life annuity form of benefit shall be actuarially equivalent to the participant’sRetirement Account Balance, using the actuarial factors set forth in the Retirement Plan. The joint and 50% survivorannuity form shall be fully subsidized (i.e., the amount of the benefit payable for the participant’s life under the joint and50% survivor annuity shall be equal to the amount of the benefit payable for the participant’s life under the life onlyannuity benefit). The other joint and survivor annuity forms of benefit shall be actuarially equivalent to the joint and 50%survivor annuity form of benefit, using the actuarial assumptions in the Retirement Plan. The five-year installment formshall be actuarially equivalent to the lump sum benefit (increased for this purpose by the subsidy for the joint and

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50% survivor form), but using a discount rate assumption of 6.25% and the mortality table used by the Company foryear-end financial reporting purposes for the calendar year preceding the year in which the five-year installment benefitcommences.

(3) Payment Upon Death. If a participant dies before commencement of benefits described in Sections 4(a)(2)(ii) or4(a)(3), such benefits shall be paid to the participant’s spouse or beneficiary in a lump sum upon the participant’s death.

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(d) SMG Traditional and Retirement Account Balance Benefits Described in Section 4(b).

(1) Form of Payment — Traditional Benefits. This section governs the election of the form of payment of SMGbenefits which supplement benefits described in Sections 5.1.1 and 5.1.2(a) of the Retirement Plan (“TraditionalBenefits”). A participant may elect to receive Traditional Benefits in any form permitted under the Retirement Plan exceptfor the Over-and-Under Payment Method. In addition, a participant who commences benefits after 2007 shall have afive-year installment option with respect to any Traditional Benefits payable after 2008. However, a participant must electthe five-year installment form of benefit on or before the later of December 31, 2008 or the day before the Committeedesignates the individual as a participant in this Plan. If a participant has not elected the five-year installment form ofbenefit as provided in the preceding sentence, then the participant may elect the annuity form of payment of TraditionalBenefits at any time up until the date payments are scheduled to commence. Except as provided in the preceding sentenceor in Section 5(e), any such election of the form of payment shall be irrevocable. In the absence of an election with respectto Traditional Benefits, Traditional Benefits payable to a single participant shall be payable as a life annuity and to amarried participant in the form of a joint and 50% survivor annuity with the participant’s spouse as beneficiary.

(2) Time of Payment — Traditional Benefits. The participant may elect the time for payment of Traditional Benefitson or before the later of December 31, 2008 or the day before the Committee designates the individual as a participant inthis Plan. Any such election shall be irrevocable except as provided in Section 5(e). A participant desiring to make theelection described in the preceding sentence may elect to receive his or her Traditional Benefits upon the later of separationfrom service or a specified age after age 55 and on or before age 65. Such election of a commencement age before age 65will be effective only if the participant has

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ten Years of Service upon his or her separation from service. In the absence of such an election, the participant’sTraditional Benefits will commence as follows: (i) upon separation from service if at the time of such separation fromservice he or she has either attained age sixty-five (65) or has both attained age fifty-five (55) and completed ten (10) Yearsof Service; or (ii) age sixty-five (65) if at the time of such separation from service he or she has neither attained agesixty-five (65) nor both attained age fifty-five (55) and completed ten (10) Years of Service.

(3) Form and Time of Payment — Retirement Account Balance Benefit. A participant may elect the time and formof payment of his or her benefit which supplements his or her Retirement Account Balance under the Retirement Plan(“Retirement Account Balance Benefit”) on or before the later of December 31, 2008 or the day before the Committeedesignates the individual as a participant in this Plan. A participant may elect to receive his or her Retirement AccountBalance Benefit at any time and in any form permitted under the Retirement Plan, except for the Over-and-Under PaymentMethod. In addition, a participant who commences benefits after 2007 shall have a five-year installment option withrespect to any benefits payable after 2008. However, a participant must elect the five-year installment form of benefit on orbefore the later of December 31, 2008 or the day before the Committee designates the individual as a participant in thisPlan. Any election of a form or time of payment for his or her Retirement Account Balance Benefit shall be irrevocableexcept as provided in the next sentence or Section 5(e). If a participant elects an annuity form of payment for his or herRetirement Account Balance Benefit, such election may be changed to another actuarially equivalent annuity formavailable under the Retirement Plan at any time on or before annuity payments are scheduled to commence. In the absenceof an election, his or her Retirement Account Balance Benefit shall be paid in a lump sum upon separation from service.

(4) Actuarial Adjustments. Alternate payment forms described in this Section 5(d) (other than the five-yearinstallment form) shall be actuarially equivalent using the assumptions provided under the Retirement Plan. The five-yearinstallment form shall be

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actuarially equivalent to the single life annuity for the Traditional Benefit or the lump sum for the Retirement AccountBalance Benefit, but using a discount rate assumption of 6.25% and the mortality assumption used by the Company foryear-end financial reporting purposes for the calendar year preceding the year in which the five-year installment benefitcommences.

(5) Time and Form of Benefits Payable Upon Death. In the event a participant dies before Traditional Benefitsdescribed in Section 4(b) commence, benefits shall be paid to the surviving spouse for his or her life commencing asfollows: (i) upon death if at the time of such death the participant has either attained age sixty-five (65) or has both attainedage fifty-five (55) and completed ten (10) Years of Service; or (ii) age sixty-five (65) if at the time of such death theparticipant has neither attained age sixty-five (65) nor both attained age fifty-five (55) and completed ten (10) Years ofService. In the event that the participant dies before Retirement Account Balance Benefits described in Section 4(b)commence to the participant, then such benefits shall be paid to the participant’s spouse or beneficiary in a lump sum uponthe participant’s death.

(e) Change in Time and Form of Payment.

A participant may change an election as to the time and form of payment of his or her benefits if an election is filed inaccordance with rules established by the Committee, provided (i) such election must not take effect until at least twelvemonths after the date on which the election is properly filed, (ii) the first payment with respect to which such election is mademust be deferred for a period of not less than five years from the date such payment would otherwise have been made, and(iii) any election related to a payment that was otherwise to be made at a specified time may not be made less than twelvemonths prior to the date of the first scheduled payment. Any such change in election must provide for payment at a timepermitted under the Retirement Plan and a form permitted under this Plan.

(f) Cash-Out Provisions.

(1) If the present value of a participant’s or Spouse’s or Vested Survivor’s vested Traditional Benefit under the Planis less than the limit described in Code Section 402(g)

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upon the participant’s death, retirement, or other separation from service which occurs after 2008, the participant’s orSpouse’s or Vested Survivor’s vested Traditional Benefit shall immediately be distributed in a single lump sum. If the valueof a participant’s or Spouse’s or Vested Survivor’s vested Retirement Account Balance Benefit plus the participant’s vestedbenefit under the Pinnacle West Capital Corporation Deferred Compensation Plan of 2005 for Employees of Pinnacle WestCapital Corporation and Affiliates is less than the limit described in Code Section 402(g) upon the participant’s retirement,death, or other separation from service which occurs after 2008, such vested Retirement Account Balance Benefit shallimmediately be distributed in a single lump sum. The benefits of a non-vested participant shall automatically be deemed tobe cashed out pursuant to this Section 5(f) upon such participant’s separation from service.

(2) For purposes of calculating the present value of a participant’s vested benefits, the Spouse’s Benefit or the VestedSurvivor’s Benefit, the actuarial assumptions incorporated by reference in Section 2.1(c) of the Retirement Plan shall beused, but in no event shall such present value be less than the present value calculated using the “applicable interest rate”and “applicable mortality table,” as defined in Section 5.19 of the Retirement Plan.

(g) Reemployment.

For the avoidance of doubt, once benefits under this Plan have commenced, such benefits shall not be suspended as aresult of the participant’s reemployment by the Company or an Affiliate.

ARTICLE SIX

PAYMENT OF BENEFITS BEFORE JANUARY 1, 2009

A participant who separates from service before January 1, 2009 and who begins receiving payment of his or herbenefits under the Retirement Plan before January 1, 2009 shall receive benefits under this Plan in the same manner and atthe same time as the participant’s benefits under the Retirement Plan are paid. Notwithstanding the foregoing, a participantwho terminated employment after December 31, 2007 will be entitled to change the form of payments of his or her unpaidbenefits as of December 31, 2008 under this Plan to the five-year installment option by filing a special election on or

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before December 31, 2008. Such special election shall only apply to benefits payable after December 31, 2008.

ARTICLE SEVEN

SECTION 409A COMPLIANCE

If a benefit becomes payable under this Plan to a specified employee, payments due within six months followingseparation from service shall be delayed and distributed as a single payment on the first day of the seventh monthimmediately following the participant’s separation from service, with simple interest added to such payments from the datethey otherwise would have been paid at the crediting rate in effect under the Retirement Plan. The terms “separation fromservice” and “specified employee” shall have the meaning set forth in Section 409A of the Code, the regulations thereunder,and the resolution issued by the Board of Directors of the Company defining such terms, except that a separation from serviceshall not include separation by reason of death. All provisions of this Plan shall be interpreted in a manner so as to beconsistent with Section 409A of the Code and the regulations issued thereunder.

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ARTICLE EIGHT

FUNDING

Benefits under this Plan shall be payable from the general assets of the Company and shall not be segregated in a trustfund or otherwise funded in any manner prior to the time of payment. No Plan participant shall have any vested rightshereunder nor any right hereunder to any specific assets of the Company.

ARTICLE NINE

ADMINISTRATION

The Plan will be administered by the Administrative Committee that administers the Retirement Plan. Except asotherwise expressly provided in this Plan, the Administrative Committee shall have the same powers and responsibilities as ithas under Sections 10.4 and 12.2 of the Retirement Plan. Claims for benefits under the Plan shall be determined in themanner set forth in Article Eleven of the Retirement Plan.

ARTICLE TEN

AMENDMENT AND TERMINATION OF THE PLAN

The Plan may be amended in whole or in part, prospectively or retroactively, by action of the Company’s Board ofDirectors, and may be terminated at any time by action of the Board of Directors in accordance with the requirements ofCode Section 409A and the regulations issued thereunder; provided, however, that no such amendment or termination shallreduce any amount payable hereunder to the extent such amount accrued prior to the date of amendment or termination. Allamendments shall be in writing, approved by the Company’s Board of Directors and executed by a duly authorized officer ofthe Company.

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ARTICLE ELEVEN

ASSIGNMENT

No Plan participant or beneficiary of a Plan participant shall have any right to assign, pledge, hypothecate, anticipate orany way create a lien on any amounts payable hereunder. No amounts payable hereunder shall be subject to assignment ortransfer or otherwise be alienable, either by voluntary or involuntary act, or by operation of law, or be subject to attachment,execution, garnishment, sequestration or other seizure under any legal, equitable or other process, or be liable in any way forthe debts or defaults of Plan participants and their beneficiaries. Notwithstanding the foregoing, assignments of the benefitsprovided under this Plan shall be permitted for purposes of satisfying family support obligations if such assignments arepursuant to a court order which satisfies the requirements for a “qualified domestic relations order” as defined inSection 206(d)(3) of the Act.

ARTICLE TWELVE

WITHHOLDING

Any taxes required to be withheld from payments to the Plan participants hereunder shall be deducted and withheld bythe Company.

ARTICLE THIRTEEN

OTHER BENEFIT PLANS OF THE COMPANY

Nothing contained in this Plan shall prevent a Plan participant prior to his or her death, or his or her spouse or otherbeneficiary after his or her death, from receiving, in addition to any payments provided for under this Plan, any paymentsprovided for under the Retirement Plan or under The Pinnacle West Capital Corporation Savings Plan, or which wouldotherwise be payable or distributable to him or her, his or her surviving spouse or beneficiary under any plan or policy of theCompany or otherwise. Nothing in this Plan shall be construed as preventing the Company or any

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of its subsidiaries from establishing any other or different plans providing for current or deferred compensation foremployees.

ARTICLE FOURTEEN

SPOUSAL CONSENT AND BENEFICIARY DESIGNATIONS

To the extent required by the Company, a participant must obtain the consent of his or her spouse to a form of benefitunder which the spouse does not receive a survivor annuity or to a beneficiary designation under which the spouse is notdesignated as the beneficiary. A participant may designate his or her beneficiary to receive Retirement Account Benefitswhich have not yet commenced upon his or her death. In the absence of any such beneficiary designation, the participant’sbeneficiary designation under the Retirement Plan shall control or, in the absence of any such designation under theRetirement Plan, the participant’s Retirement Account Benefits shall be paid to the same person or entity as under theRetirement Plan. A participant may also designate a beneficiary to receive any remaining installment payments due upon hisor her death under the five-year installment option. In the absence of any such designation, the remaining installmentpayments shall be paid to his or her spouse if he or she is living on the date of the participant’s death or, in the absence of anysuch spouse, to his or her estate.

ARTICLE FIFTEEN

MISCELLANEOUS

Nothing contained in this Plan shall be construed as a contract of employment between the Company and an employee,or as a right of any employee to be continued in the employment of the Company, or as a limitation of the right of theCompany to discharge any of its employees, with or without cause.

All of the provisions of this Plan shall be binding upon all persons who shall be entitled to any benefit hereunder, theirheirs and personal representatives.

ARTICLE SIXTEEN

EFFECTIVE DATE

The Plan, as amended and restated, shall be effective as of January 1, 2005.

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IN WITNESS WHEREOF, the Company has caused this Pinnacle West Capital Corporation Supplemental ExcessBenefit Retirement Plan, as amended and restated herein, to be executed by its duly authorized officer this 19th day ofDecember, 2008.

PINNACLE WEST CAPITALCORPORATION

By /s/ Barbara M. Gomez

Its VP and Treasurer

Attest: By /s/ Donna L. Thomas

Its HR Services Director

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Exhibit 10.4.10

SUPPLEMENTAL AGREEMENT

FOR RANDALL K. EDINGTON

Table of Contents Page

1. Definitions 1 2. Cash Bonuses 3 3. Compensation in lieu of Entergy Stock Options and Performance Shares 3 4. Deferred Compensation 4 5. Supplemental Pension Benefit 5 6. Specified Employee Rule 6 7. Special Medical Benefits in Certain Circumstances 6 8. Termination for Disability 6 9. Termination Not Giving Rise to Company Obligations 7 10. Termination Notice and Procedure 7 11. Obligations of Executive 7 12. Company Right of Offset 8 13. Amendment and Termination 8 14. Withholding 8 15. Venue; Governing Law 8 16. Notice 8 17. Funding 8 18. No Waiver 9 19. Claims Procedure 9 20. Administration and Interpretation of Agreement 9 21. Section 409A Compliance 9

i

SUPPLEMENTAL AGREEMENTFOR RANDALL K. EDINGTON

THIS AGREEMENT, made and entered into as of the 26th day of December, 2008 by and between Arizona PublicService Company, an Arizona corporation (hereinafter referred to as the “Company”) and Randall K. Edington (hereinafterreferred to as “Executive”):

W I T N E S S E T H

WHEREAS, the Company and Executive entered into two letter agreements (the “Letter Agreements”), the first datedDecember 20, 2006, under which employment was offered to and accepted by Executive, and the second dated July 18, 2008,under which additional compensation and benefits were offered to and accepted by Executive; and

WHEREAS, the Company and Executive deem it necessary and desirable to enter into this special supplementalagreement (the “Agreement”) to formally memorialize certain provisions of the Letter Agreements in accordance with therequirements of Code Section 409A.

NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements hereinafter setforth, the parties hereto mutually covenant and agree as follows:

1. Definitions.

(a) “Cause” shall mean (i) Executive’s unreasonable neglect in performing his duties, including, but not limited to grossnegligence, fraud, misappropriation or embezzlement involving property of the Company or an affiliate of theCompany, or (ii) any other intentional act by Executive that may impair the goodwill or business of the Company oran affiliate of the Company, or that may cause damage to any of their businesses.

(b) “Change of Control” shall have the same meaning as given to that term in the KEESA.

(c) “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time.

(d) “Deferred Compensation Account” shall mean an unfunded account established by the Company for the benefit ofExecutive in accordance with Section 4.

(e) “Disability” shall mean that Executive is unable to engage in any substantial gainful activity by reason of anymedically determinable physical or mental impairment which can be expected to result in death or can be expected tolast for a continuous period of not less than 12 months.

(f) “Employment Date” shall mean January 25, 2007.

(g) “Entergy” shall mean Entergy Corporation, its successors and assigns.

(h) “Final Average Pay” shall mean the average of the sum of:

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(i) Executive’s base salary payable during any 12-month period, disregarding any deductions therefrom for benefitsor taxes on either a pre-tax or after-tax basis, plus

(ii) Executive’s annual year-end bonus payable during such period, disregarding any deductions therefrom forbenefits or taxes on either a pre-tax or after-tax basis,

for three such periods within the ten years ending coincident with or next preceding Executive’s Termination Datewhich produce the highest such average. In calculating Final Average Pay, a consistent twelve-month period shall beused, and only three year-end bonuses shall be counted. If more than three year-end bonuses are included in the threeperiods used, only the three highest year-end bonuses shall be counted.

(i) “KEESA” shall mean that certain Key Employee Employment and Severance Agreement entered into by and betweenthe Company and Executive under date of November 5, 2007, as amended from time to time.

(j) “Qualified Plan” shall mean the Pinnacle West Capital Corporation Retirement Plan, as amended from time to time.

(k) “SEBRP” shall mean the Pinnacle West Capital Corporation Supplemental Excess Benefit Retirement Plan, asamended from time to time.

(l) “Section 409A” shall mean Section 409A of the Code and the regulations thereunder, as amended from time to time.

(m) “Spouse” shall mean the spouse to whom Executive was married on December 21, 2006. For the avoidance of doubt,if Executive and his Spouse divorce, such divorce shall not terminate the Spouse’s rights under this Agreement, andany subsequent spouse of Executive shall be entitled to no benefits under this Agreement.

(n) “Termination Date” shall mean the earliest of the following:

(i) Executive’s date of death;

(ii) sixty (60) days after the delivery of the Notice of Termination terminating Executive’s employment on accountof Disability, unless Executive returns full-time to the performance of his duties prior to the expiration of suchperiod;

(iii) the date of the Notice of Termination if Executive’s employment is terminated by Executive voluntarily; and

(iv) fifteen (15) days after the delivery of the Notice of Termination if Executive’s employment is terminated by theCompany (other than by reason of Disability).

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(o) “Year of Service” shall have the same meaning as given to that term in the Qualified Plan.

2 Cash Bonuses. If Executive has remained in continuous employment with the Company from his Employment Datethrough January 25, 2009, the Company shall pay Executive bonus compensation of $100,000 not later than March 15,2009.

3 Compensation in lieu of Entergy Stock Options and Performance Shares.

(a) If, as of the date specified in Column 1 of the table below:

(i) Executive has remained continuously employed by the Company since his Employment Date, and

(ii) the fair market value of one share of Entergy common stock on that date exceeds the amount shown in Column2, the Company shall pay Executive the difference between the amount shown in Column 2 and the fair marketvalue of one share of Entergy common stock on that date, multiplied by the number in Column 3.

Column 1 Column 2 Column 3

Description (vesting date) (strike price) (number of shares)

(2006 grant) January 26, 2009 $68.89 2,668

(b) If, as of the date specified in Column 1 of the table below, Executive has remained in continuous employment withthe Company since his Employment Date, then the Company shall pay Executive an amount determined by:

(i) adding

(A) the fair market value of one share of Entergy common stock on that date; plus

(B) the sum of all dividends paid on one share of Entergy common stock in the 36 months ending on that date;and

(ii) multiplying the sum determined in subparagraph (i) by the number in Column 2. Column 1 Column 2

Description (day after end of period) (number of shares)

(2006-2008 performance period) January 1, 2009 1,100

(c) (i) The fair market value of a share of Entergy common stock as of any date provided for in paragraph (a) or (b) shallbe based on the closing price therefor on that date, or if that date is a holiday for the New York Stock Exchange, thenext date on which the New York Stock Exchange is open for business, all as published in the Wall Street Journal.

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(ii) If there shall occur any merger, consolidation, liquidation, issuance of rights or warrants to purchase securities,recapitalization, reclassification, stock dividend, spin-off, split-off, stock split, reverse stock split or otherdistribution with respect to the shares of Entergy common stock, or any similar corporate transaction or event inrespect of Entergy common stock between Executive’s Employment Date and any date specified in the table setforth in paragraph (a) or (b), then a proportionate adjustment shall be made in Columns 2 and 3 of the chart inparagraph (a) and in Column 2 of the chart in paragraph (b), without change in the value represented therein.

(d) The Company shall pay the amount based on the price of Entergy common stock as of any date provided for inparagraph (a) or (b) not later than thirty (30) days following that date.

4. Deferred Compensation. The Company shall establish a hypothetical Deferred Compensation Account for the benefit ofExecutive in accordance with the following:

(a) The Deferred Compensation Account shall be credited with the following amounts as of the following specified dates,provided that Executive remains in continuous employment with the Company on the specified dates.

Specified Date AmountJuly 15, 2008 $1,000,000June 1, 2009 $1,000,000June 1, 2010 $1,000,000June 1, 2011 $1,000,000

(b) No interest, earnings or market value adjustments will be applied to the amounts in the Deferred CompensationAccount at any time.

(c) Executive’s Deferred Compensation Account shall become 100% vested as of the first to occur of the following dates(“Vesting Date”):

(i) June 1, 2012, provided that Executive is continuously employed with the Company from the date of thisAgreement through June 1, 2012, or

(ii) Executive’s Termination Date by reason of his death, Disability or involuntary termination without Cause.

(d) The amount payable to Executive under this Section 4 will be the amount of the Deferred Compensation Account onhis Vesting Date; provided, if vesting is caused by Executive’s death, the amount payable shall be $4,000,000,regardless of the date of death, and shall be paid to Executive’s Spouse, or if Executive is not survived by his Spouse,to Executive’s estate.

(e) The amount payable pursuant to this Section 4 shall be paid in the form of single sum within 30 days after the VestingDate.

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(f) The amount payable pursuant to this Section 4 shall not be taken into account for purposes of determining the amountavailable for deferral by Executive or the amount of the benefit accrued by Executive under any qualified ornon-qualified, funded or unfunded deferred compensation or retirement plan or welfare benefit plan in whichExecutive is eligible to participate.

(g) Upon Executive’s Termination Date for any reason other than death, Disability or involuntary termination withoutCause before occurrence of a Vesting Date, the Deferred Compensation Account shall be forfeited in its entirety.

5. Supplemental Pension Benefit.

(a) Notwithstanding anything in the SEBRP to the contrary, the form, amount and timing of payments of Executive’sSEBRP benefits shall be determined under this Section 5, which shall be deemed to modify the SEBRP with respectto Executive.

(b) If Executive’s Termination Date occurs for any reason after he has completed at least five (5) Years of Service,Executive shall be entitled to a supplemental pension valued on the basis of a single life annuity payable upon histermination of employment equal to the greater of (i) 10% of Executive’s Final Average Pay per Year of Service, to amaximum of 60% of Executive’s Final Average Pay, reduced by the actuarially equivalent benefit payable under theQualified Plan, or (ii) the Executive’s benefit payable under the SEBRP (determined solely by reference to the SEBRPdocument) converted to an actuarially equivalent life annuity payable upon his termination of employment. In noevent, however, shall Executive’s monthly benefit be less than the amount determined in Section 5(c).

Executive’s benefit under this Section 5(b) shall be payable 50% in the applicable annuity form described in the nextsentence and 50% in an actuarially equivalent single sum. If Executive’s Spouse is living on the Termination Date, theapplicable annuity form shall be an actuarially equivalent 100% joint and survivor annuity measured by the remaininglifetimes of Executive and his Spouse, and if Executive’s Spouse is not living on the Termination Date, the applicableannuity form shall be a single life annuity measured by Executive’s remaining lifetime.

If Executive’s employment terminates as a result of death, (i) the lump sum benefit described above shall be payableupon his death to his surviving Spouse, if she is then living, otherwise to his estate, and (ii) if Executive is survived byhis Spouse, she shall receive the survivor annuity portion of the 100% joint and survivor annuity described above.

(c) (i) If Executive’s Termination Date occurs before he has completed five (5) Years of Service for any reason other thanvoluntary resignation or termination for Cause, Executive shall be entitled to a supplemental pension equal to$24,226 per month payable for the remaining lifetime of Executive, and if Executive is survived by his Spouse, forthe remaining lifetime of the Spouse after Executive’s death, reduced as provided for in subparagraph (ii).

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(ii) The benefit payable pursuant to paragraph (i) shall be offset by the corresponding actuarially equivalent benefitspayable under the Qualified Plan, if vested on the Termination Date.

(iii) In the event Executive’s Termination Date occurs on or after the date he has completed three (3) Years of Servicebut before he has completed five (5) Years of Service on account of voluntary resignation or termination forCause, Executive shall receive his benefit payable under the SEBRP determined solely by reference to theSEBRP document converted to an actuarially equivalent joint and 100% survivor annuity for the lifetime ofExecutive and his Spouse. If Executive’s Termination Date occurs before he has completed five (5) Years ofService for any reason other than as described in the preceding sentence, Executive shall not receive a benefitcalculated under the SEBRP document, but instead shall receive the benefit described in Section 5(c)(i).

(d) Subject to Section 6, Executive’s benefits under this Section 5 shall commence on the first day of the month followinghis Termination Date. For the avoidance of doubt, Executive’s benefits under this Section 5 shall not be actuariallyreduced to reflect early commencement of benefits if he terminates employment before age 65.

(e) All determinations of actuarial equivalence provided for in this Section 5 shall be made on the basis of the actuarialassumptions in use as of the specified dates under the Qualified Plan.

6. Specified Employee Rule. Notwithstanding any provision of Section 5, if Executive is a specified employee as defined bythe Company for purposes of Section 409A on his Termination Date and his Termination Date is not caused by his deathor Disability, payments provided for in Section 5 shall not begin until 6 months after his Termination Date, and allamounts otherwise payable earlier than 6 months following his Termination Date shall be paid on the first day of theseventh full calendar month following his Termination Date.

7. Special Medical Benefits in Certain Circumstances. If Executive’s Termination Date occurs before January 25, 2012 byreason of involuntary termination without Cause, death, Disability or following a Change of Control, or for any reason onor after January 25, 2012, Executive and his Spouse, or if Executive’s Termination Date is caused by his death, his Spousealone, shall receive coverage available to retired Company executives of the same rank as Executive as of his TerminationDate or their widowed spouses, as the case may be, under the Company’s retiree medical plan in effect from time to timeor equivalent coverage funded by insurance, as determined by the Company in its sole discretion, subject to Executive’s orhis Spouse’s payment of contributions at the same rate as contributions for equivalent coverage due from such otherexecutives who commenced employment with the Company before 2003 and have 25 or more Years of Service (or theirspouses), as determined from time to time.

8. Termination for Disability. If Executive has been absent from his duties hereunder on a full-time basis for five(5) consecutive months on account of a Disability, the Company may

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provide a Notice of Termination which satisfies the requirements of Section 10, and Executive’s employment shall, forpurposes of this Agreement, terminate sixty (60) days thereafter, unless Executive returns to the performance of his dutieson a full-time basis prior to the end of the sixty (60) day period.

9. Termination Not Giving Rise to Company Obligations. If Executive’s employment is terminated for Cause or if Executivevoluntarily terminates his employment before January 25, 2012, subject to the procedures set forth in Section 10,Executive shall not be entitled to receive any amount or benefit otherwise due under this Agreement after the TerminationDate.

10. Termination Notice and Procedure. Any termination by the Company or Executive of Executive’s employment shall becommunicated by written Notice of Termination to Executive if such Notice is delivered by the Company and to theCompany if such Notice is delivered by Executive, all in accordance with the following procedures:

(a) The Notice of Termination shall indicate the specific termination provision in this Agreement relied upon and shall setforth in reasonable detail the facts and circumstances alleged to provide a basis for termination.

(b) Any Notice of Termination by the Company shall be approved in writing by its Chief Executive Officer and ChiefOperating Officer.

(c) If the Company shall give a Notice of Termination for Cause and Executive in good faith notifies the Company that adispute exists concerning such termination within the fifteen (15) day period following Executive’s receipt of suchnotice, then if it is thereafter determined that:

(i) the reason given by the Company for termination did exist, Executive’s Termination Date shall be the date setforth in the Company’s Notice of Termination for Cause; or

(ii) the reason given by the Company for termination did not exist, the employment of Executive shall be deemed tohave been terminated involuntarily without Cause on the date set forth in the Company’s Notice of Termination.

11. Obligations of Executive. Executive covenants and agrees, during Executive’s employment with the Company andfollowing his Termination Date, to hold in strict confidence any and all information in Executive’s possession as a resultof Executive’s employment with the Company; provided that nothing in this Agreement shall be construed as prohibitingExecutive from reporting any suspected instance of illegal activity of any nature, any nuclear safety concern, anyworkplace safety concern or any public safety concern to the United States Nuclear Regulatory Commission, UnitedStates Department of Labor or any federal or state governmental agency or prohibiting Executive from participating inany way in any state or federal administrative, judicial or legislative proceeding or investigation with respect to any suchclaims and matters.

7

12. Company Right of Offset. In the event that the Company has paid Executive more than the amount to which Executive isentitled under this Agreement, the Company shall have the right to recover all or any part of such overpayment fromExecutive or from whomsoever has received such amount.

13. Amendment and Termination. The term of this Agreement shall expire when all obligations of the Company andExecutive hereunder have been satisfied. This Agreement sets forth the entire agreement between Executive and theCompany with respect to the subject matter hereof, and supersedes all prior oral or written negotiations, commitments,understandings and writings with respect thereto. This Agreement may not be terminated, amended or modified duringits term as specified above except by written instrument executed by the Company and Executive.

14. Withholding. The Company shall be entitled to withhold from amounts to be paid to Executive under this Agreement anyfederal, state or local withholding or other taxes or charges which it is from time to time required to withhold.

15. Venue; Governing Law. This Agreement and Executive’s and Company’s respective rights and obligations hereundershall be governed by and construed in accordance with the laws of the State of Arizona. Any action concerning thisAgreement shall be brought in the Federal or state courts located in the County of Maricopa, Arizona, and each partyconsents to the venue and jurisdiction of such courts.

16. Notice. Notices given pursuant to this Agreement shall be in writing and (a) if hand delivered, shall be deemed givenwhen delivered, and (b) if mailed, shall be deemed delivered when placed in the United States mail, postage prepaid,addressed,

if to the Company, to:

Board of DirectorsPinnacle West Capital Corporation400 North Fifth StreetPhoenix, Arizona 85004Attention: Law Department

or if to Executive, to:

Randall K. Edington3853 North Sidney St.Buckeye, Arizona 85396

or to such other addresses as the parties may provide written notice of to each other, from time to time, in accordancewith this Section 16.

17. Funding. Amounts payable under this Agreement shall constitute an unfunded general obligation of the Companypayable from its general assets, and the Company shall not be required to establish any special fund or trust for purposesof paying benefits under this Agreement. The Executive shall not have any vested right to any particular assets of the

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Company as a result of execution of this Agreement and shall be a general creditor of the Company.

18. No Waiver. No waiver by either party at any time of any breach by the other party of, or compliance with, any conditionor provision of this Agreement to be performed by the other party shall be deemed a waiver of similar or dissimilarprovisions or conditions at the same time or any prior or subsequent time.

19. Claims Procedure Any claim for benefits under Sections 4 or 5 shall be processed under the Qualified Plan claimsprocedure.

20. Administration and Interpretation of Agreement. The Company acting through the Administrative Committee under theQualified Plan shall be responsible for and shall control and manage the operation and administration of this Agreement,except as otherwise specifically provided for herein. The Company shall administer the provisions of this Agreement inaccordance with its terms and shall have all powers necessary to carry out the provisions of this Agreement. TheAdministrative Committee shall interpret this Agreement and shall have the discretionary authority to determine allquestions arising in the administration, interpretation, and application of this Agreement. Any such determination by theAdministrative Committee shall presumptively be conclusive and binding on all persons.

21. Section 409A Compliance. This Agreement is designed to comply with Section 409A. Notwithstanding any otherprovision of this Agreement, all provisions of this Agreement shall be construed in a manner consistent withSection 409A.

IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer, andExecutive has executed this Agreement, on the date and year first above written. ARIZONA PUBLIC SERVICE COMPANY

By /s/ Donald Robinson Its Sr VP Planning & Administration /s/ Randall K. Edington Randy Edington

9

Exhibit 10.6.5

Summary of 2009 Incentive Plans

On January 21, 2009, the Board of Directors of Pinnacle West, acting on the recommendation of the Board’s HumanResources Committee (the “Committee”), approved the 2009 Pinnacle West Employee Incentive Plan (the “Pinnacle WestIncentive Plan”) and the 2009 APS Employee Incentive Plan (the “APS Incentive Plan”) (collectively, the “2009 Plans”). The2009 Plans provide incentive award opportunities for Pinnacle West and APS employees, including the following “namedexecutive officers” from the Company’s proxy statement relating to its 2009 Annual Meeting: James R. Hatfield, Senior VicePresident and Chief Financial Officer; Donald E. Brandt, Pinnacle West’s President and Chief Operating Officer and theChief Executive Officer of APS; Randall K. Edington, Executive Vice President and Chief Nuclear Officer of APS; andSteven M. Wheeler, Executive Vice President, Customer Service and Regulation, of APS. Mr. Post will be retiring this yearand will not be participating in the 2009 Plans.

From January 1, 2009 through April 30, 2009, Mr. Brandt’s incentive opportunities will be under the APS Incentive Plan.

As discussed above, Mr. Brandt will be assuming the positions of Chairman of the Board and Chief Executive Officer ofPinnacle West, effective April 30, 2009. As a result, Mr. Brandt’s incentive opportunities from May 1, 2009 throughDecember 31, 2009 will be under the Pinnacle West Incentive Plan. As required by the Committee’s Charter, the Committee,rather than the Board, approved the “Chairman and CEO” component of the Pinnacle West Incentive Plan for Mr. Brandt forthis eight-month period. Mr. Brandt’s incentive opportunities under the Pinnacle West Incentive Plan and the APS IncentivePlan will be pro-rated based on the number of months he is subject to each 2009 Plan.

The award opportunity for Mr. Brandt is based on APS’ 2009 earnings (while he is subject to the APS Incentive Plan) andon Pinnacle West’s 2009 earnings (while he is subject to the Pinnacle West Incentive Plan), excluding, in each case, impactsfrom certain Arizona Corporation Commission rate decisions. The Committee will evaluate impacts of unusual ornonrecurring adjustments on actual earnings. Once the earnings threshold is met, the achievement of the level of earningsgenerally determines what award, if any, the participant receives. However, the amount of the award, if any, is in the solediscretion of the Committee. Accordingly, the Committee may consider factors other than earnings, such as shareholder valuecreation, customer service, financial strength, operating performance, and safety. Subject to the foregoing, Mr. Brandt has anaward opportunity of up to 50% of his base salary if a threshold earnings level is met, up to 100% of his base salary if amidpoint earnings level is met, and up to 150% of his base salary if a maximum earnings level is met.

In the case of Messrs. Hatfield, Edington and Wheeler, the APS Incentive Plan is composed of two components, one ofwhich is based on APS’ 2009 earnings and the other on the achievement of specified business unit results. ForMessrs. Hatfield, Edington and Wheeler, once the specified APS earnings threshold is met (subject to the potential earningsadjustments discussed above), the achievement of the level of earnings and business unit results generally determines whataward, if any, they will receive. However, the amount of the award, if any, to each participant in the APS Incentive Plan is inthe sole discretion of the Committee. Accordingly, the Committee may consider factors other than APS earnings and theachievement

of business unit results, such as shareholder value creation, customer service, financial strength, operating performance,safety, and the Chief Executive Officer’s assessment of the officer’s individual performance during the year, to measureperformance. Subject to the foregoing, Mr. Hatfield, Mr. Edington and Mr. Wheeler each has an award opportunity of up to25% of his base salary if the midpoint earnings level is met and up to 50% of his base salary if the maximum earnings level ismet.

In the case of Mr. Hatfield, Mr. Edington and Mr. Wheeler, the APS Incentive Plan details “critical success indicators” forspecific business units. Once an APS earnings threshold is met, the Committee will consider the achievement of the criticalsuccess indicators, which the Committee may weigh as it deems appropriate in determining an incentive opportunity for eachindividual up to 50% of his base salary. In the case of Mr. Hatfield, the Committee will consider the following key criticalsuccess indicators in the Shared Services business unit: (i) the average of the Fossil business unit results (safety performance,environmental performance and production) and the Palo Verde business unit results (safety performance; performanceimprovement in other key areas, such as equipment reliability and plant metrics; production, including site capacity factorand outage durations; and financial performance); (ii) the Customer Service, Delivery and Regulatory business unit results(safety performance, customer experience survey, business performance trends, customer reliability, and environmentalperformance); (iii) shared services costs; and (iv) shared services safety. In the case of Mr. Edington, the Committee willconsider the following key critical success indicators in the Palo Verde Nuclear Generation Station business unit: safetyperformance; performance improvement in other key areas, such as equipment reliability and plant metrics; production,including site capacity factor and outage durations; and financial performance. In the case of Mr. Wheeler, the Committeewill consider the following key critical success indicators in the Customer Service, Delivery, and Regulatory business unit:safety performance; customer experience survey; business performance trends; customer reliability; and environmentalperformance.

Exhibit 12.1

PINNACLE WEST CAPITAL CORPORATIONCOMPUTATION OF EARNINGS TO FIXED CHARGES

(dollars in thousands) Twelve Months Ended December 31,

2008 2007 2006 2005 2004

Earnings: Income from continuing

operations $ 213,557 $ 298,744 $ 316,265 $ 227,288 $ 242,887 Income taxes 65,407 150,910 155,855 129,533 133,771 Fixed charges 241,976 235,705 225,119 214,430 214,803

Total earnings $ 520,940 $685,359 $ 697,239 $ 571,251 $ 591,461

Fixed Charges:

Interest expense $ 216,290 $ 208,521 $ 196,826 $ 185,087 $ 183,527 Estimated interest portion of

annual rents 25,686 27,184 28,293 29,343 31,276

Total fixed charges $ 241,976 $ 235,705 $ 225,119 $ 214,430 $ 214,803

Ratio of Earnings to Fixed Charges

(rounded down) 2.15 2.90 3.09 2.66 2.75

Exhibit 12.2

ARIZONA PUBLIC SERVICE COMPANYCOMPUTATION OF EARNINGS TO FIXED CHARGES

(dollars in thousands) Twelve Months Ended December 31,

2008 2007 2006 2005 2004

Earnings: Income from Continuing

Operations $ 262,344 $ 283,940 $ 269,730 $ 170,479 $ 199,627 Income taxes 107,261 151,157 138,927 98,010 120,030 Fixed charges 213,583 202,044 191,174 178,437 181,372

Total earnings $ 583,188 $ 637,141 $ 599,831 $ 446,926 $ 501,029

Fixed Charges:

Interest charges $ 183,503 $ 170,594 $ 158,769 $ 145,502 $ 146,983 Amortization of debt discount 4,702 4,639 4,363 4,085 4,854 Estimated interest portion of

annual rents 25,378 26,811 28,042 28,850 29,535


Ratio of Earnings to Fixed Charges

(rounded down) 2.73 3.15 3.13 2.50 2.76

Exhibit 12.3

PINNACLE WEST CAPITAL CORPORATIONCOMPUTATION OF EARNINGS TO FIXED CHARGES

AND PREFERRED STOCK DIVIDEND REQUIREMENTS(dollars in thousands)

Twelve Months Ended December 31,

2008 2007 2006 2005 2004

Earnings: Income from continuing

operations $ 213,557 $ 298,744 $ 316,265 $ 227,288 $ 242,887 Income taxes 65,407 150,910 155,855 129,533 133,771 Fixed charges 241,976 235,705 225,119 214,430 214,803

Total earnings $ 520,940 $ 685,359 $ 697,239 $ 571,251 $ 591,461

Fixed Charges:

Interest expense $ 216,290 $ 208,521 $ 196,826 $ 185,087 $ 183,527 Estimated interest portion of

annual rents 25,686 27,184 28,293 29,343 31,276


Preferred Stock Dividend

Requirements:

Income before income taxes $ 278,964 $ 449,654 $ 472,120 $ 356,821 $ 376,658 Net income from continuing

operations 213,557 298,744 316,265 227,288 242,887

Ratio of income before incometaxes to net income 1.306 1.505 1.493 1.570 1.551

Preferred stock dividends — — — — —

Preferred stock dividend

requirements — ratio(above) times preferred stockdividends $ — $ — $ — $ — $ —

Fixed Charges and Preferred Stock

Dividend Requirements: Fixed charges $ 241,976 $ 235,705 $ 225,119 $ 214,430 $ 214,803 Preferred stock dividend

requirements — — — — —

Total $ 241,976 $ 235,705 $ 225,119 $ 214,430 $ 214,803

Ratio of Earnings to Combined

Fixed Charges and PreferredStock Dividend Requirements(rounded down) 2.15 2.90 3.09 2.66 2.75

Exhibit 21.1

PNW has the following subsidiaries: 1) Arizona Public Service Company

2) APS Energy Services Company, Inc.

3) El Dorado Investment Company

4) Pinnacle West Energy Corporation (merged into PWCC 8/1/06)

5) SunCor Development Company

6) APSES Holdings, Inc.

APS Energy L.P. (dissolved 9/29/06)

7) Pinnacle West Marketing & Trading Co., LLC

Pinnacle West Energy affiliates: 1) GenWest, LLC } now under PWCC

2) APACS Holdings, LLC } now under PWCC

Arizona Public Service Company has the following subsidiaries/affiliates:

1) APS Foundation, Inc.

2) Axiom Power Solutions, Inc.

3) BIXCO, Inc.

4) PWE NEWCO, Inc.

5) Powertree Carbon Co., LLC

APS Energy Services Company has the following affiliates:

1) Apex Power LLC

2) Northwind Phoenix LLC (a Delaware LLC/subsidiary of APSES)

3) Tucson District Energy, LLC (an Arizona LLC/subsidiary of Northwind Phx LLC)

4) Crest Power, LLC

El Dorado has or has had the following investments/affiliates:

1) Acoustic Locating Services, LLC

2) Aegis Technologies, Inc.

3) Arizona Business Accelerator

4) Arizona Professional Baseball Ltd Partnership

5) Dominion Fund II (Dissolved as of 12/31/02)

6) El Dorado Ventures / El Dorado Ventures II (Dissolved as of 12/31/02)

7) El Dorado Ventures III (Dissolving)

8) Gateway Data Sciences Corp. (Dissolved as of 12/31/02)

9) NAC Holding Inc./ NAC International Inc. (All stock sold on 11/18/04 to USEC, Inc)

10) NxtPhase Corporation

11) Phoenix Downtown Theater LLC

12) Phoenix Suns Ltd Partnership (Sold on 6/30/04)

13) PowerOneData, Inc.

14) Serveron Corporation

15) Underground Imaging Technologies, LLC (Vermeer Manufacturing Company)

SunCor has the following subsidiaries and other related entities:

1. Avimor Water Reclamation Company (fka Foothills Sewer Company, Inc.)

2. Centrepoint Associates, LLC (Kimco)

3. Club West Golf Course, LLC

4. Coral Canyon HD, LLC (SITLA)

5. Golf de Mexico, S.A. de C.V.

6. Hayden Ferry Lakeside, LLC (SunCor is Sole Member- purchased Benton-Robb interest)

Lakeside Residential Communities, LLC

BV at Hayden Ferry Lakeside, LLC

Edgewater at Hayden Ferry Lakeside, LLC

Waterford at Hayden Ferry Lakeside, LLC

Hayden Ferry Lakeside II, LLC

Hayden Ferry Lakeside III, LL

7. Hidden Hills of Scottsdale, LLC

8. Highland Water Company, Inc.

9. Kabuto SunCor JV (Kabuto Int’l Corp.)

10. Marina Heights, LLC

11. Palm Valley 303 Building 1, LLC

12. Palm Valley Golf Club, Inc.

13. Palm Valley Professional Plaza, LLC

14. Ranch Communities of America, LLC (NZ Legacy, LLC)

15. Rancho Viejo de Santa Fe, Inc.

Rancho Viejo Village Center, LLC (Dissolved 04-04-05)

Ranchland Utility Company

Santa Fe Water Resource Alliance, LLC

16. Riverside Distribution Center, LLC (Ryan Buckeye, LLC)

17. Scottsdale Mountain Limited Partnership

18. SDC Prescott, LLC

19. SDC Prescott Valley, LLC

20. SDC Yavapai, LLC

21. Sedona Golf Resort LC (Sedona Assoc. LP)

22. StoneRidge Commercial, LLC (WLD Prescott, LLC)

23. StoneRidge — Prescott Valley LLC (WLD Prescott, LLC)

StoneRidge Golf Course, LLC

24. SunCor Homes, Inc. (fka Golden Heritage Homes, Inc.)

SunCor Construction AZ, Inc. (fka Golden Heritage Construction, Inc.)

Golden Heritage Construction Nevada, LLC

SunCor Financial, LLC (fka HFS Mortgage, LLC)

25. SunCor Construction, Inc. (fka SCM, Inc.)

26. SunCor Golf, Inc.

Westworld Golf Course, LLC

27. SunCor Idaho, Inc.

Avimor, LLC (fka SunCor Idaho, LLC and Spring Valley Development, LLC)

SunCor Realty & Management Idaho, LLC

28. SunCor New Mexico, Inc.

SunCor Albuquerque, LLC

SunCor Construction NM, LLC

29. SunCor Realty & Management Company

30. SunCor Utah, Inc.

Coral Canyon Town Center, LLC (SITLA and Southern

Utah Homebuilders Association)

Coral Canyon Town Center II, LLC (SITLA)

31. SunRidge Canyon, LLC

32. Talavi Associates, LLC (WLD Partners)

33. TypeTwo, Inc. (Kabuto Int’l Corp.)

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNlTING FIRM

We consent to the incorporation by reference in Registration Statement Nos. 333-134206, 333-155641 on Form S-3; and inRegistration Statement Nos. 33-54307, 333-143432, 333-91786, 333-138089, and 333-157151 on Form S-8 of our reportdated February 19, 2009, relating to the consolidated financial statements and financial statement schedules of Pinnacle WestCapital Corporation and the effectiveness of Pinnacle West Capital Corporation’s internal control over financial reporting(which report expresses an unqualified opinion and includes an explanatory paragraph relating to the Company’s adoption ofStatement of Financial Accounting Standards No. 158) appearing in this Annual Report on Form 10-K of Pinnacle WestCapital Corporation for the year ended December 31, 2008.

/s/ DELOITTE & TOUCHE LLP

Phoenix, ArizonaFebruary 19, 2009

Exhibit 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Post-Effective Amendment No. 1 to Registration StatementNo. 333-134206-01 on Form S-3; and in Registration Statement No. 333-46161 on Form S-8 of our report dated February 19,2009 relating to the financial statements and financial statement schedule of Arizona Public Service Company, and theeffectiveness of Arizona Public Service Company’s internal control over financial reporting (which report expresses anunqualified opinion and includes an explanatory paragraph relating to the Company’s adoption of Statement of FinancialAccounting Standards No. 158) appearing in this Annual Report on Form 10-K of Arizona Public Service Company for the

year ended December 31, 2008.

/s/ DELOITTE & TOUCHE LLP

Phoenix, ArizonaFebruary 19, 2009

Exhibit 31.1

CERTIFICATION

I, William J. Post, certify that:

1. I have reviewed this Annual Report on Form 10-K of Pinnacle West Capital Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly presentin all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, theperiods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (asdefined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designedunder our supervision, to ensure that material information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularly during the period in which this reportis being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting tobe designed under our supervision, to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered bythis report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred duringthe registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) thathas materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financialreporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control overfinancial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or personsperforming the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize andreport financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting.

Date: February 20, 2009. /s/ William J. Post William J. Post Chairman and Chief Executive Officer

2

Exhibit 31.2

CERTIFICATION

I, James R. Hatfield, certify that:

1. I have reviewed this Annual Report on Form 10-K of Pinnacle West Capital Corporation;









Date: February 20, 2009. /s/ James R. Hatfield James R. Hatfield

Senior Vice President & Chief FinancialOfficer

Exhibit 31.3

CERTIFICATION

I, Donald E. Brandt, certify that:

1. I have reviewed this Annual Report on Form 10-K of Arizona Public Service Company;









Date: February 20, 2009. /s/ Donald E. Brandt Donald E. Brandt Chief Executive Officer

Exhibit 31.4

CERTIFICATION

I, James R. Hatfield, certify that:

1. I have reviewed this Annual Report on Form 10-K of Arizona Public Service Company;









Date: February 20, 2009. /s/ James R. Hatfield James R. Hatfield Senior Vice President & Chief Financial Officer

Exhibit 32.1

CERTIFICATIONOF

CHIEF EXECUTIVE OFFICERAND

CHIEF FINANCIAL OFFICERPURSUANT TO 18 U.S.C. 1350,AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, William J. Post, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002, that the Annual Report on Form 10-K of Pinnacle West Capital Corporation for the fiscal year ended December 31,2008 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and thatinformation contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial conditionand results of operations of Pinnacle West Capital Corporation.

Date: February 20, 2009. /s/ William J. Post William J. Post Chairman and Chief Executive Officer

I, James R. Hatfield, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002, that the Annual Report on Form 10-K of Pinnacle West Capital Corporation for the fiscal year ended December 31,2008 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and thatinformation contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial conditionand results of operations of Pinnacle West Capital Corporation.


Senior Vice President and Chief FinancialOfficer

Exhibit 32.2

CERTIFICATIONOF

CHIEF EXECUTIVE OFFICERAND

CHIEF FINANCIAL OFFICERPURSUANT TO 18 U.S.C. 1350,AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Donald E. Brandt, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002, that the Annual Report on Form 10-K of Arizona Public Service Company for the fiscal year ended December 31, 2008fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that informationcontained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results ofoperations of Arizona Public Service Company.

Date: February 20, 2009. /s/ Donald E. Brandt Donald E. Brandt Chief Executive Officer

I, James R. Hatfield, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002, that the Annual Report on Form 10-K of Arizona Public Service Company for the fiscal year ended December 31, 2008fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that informationcontained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results ofoperations of Arizona Public Service Company.


Senior Vice President andChief Financial Officer

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