##### 



PINNACLE WEST CAPITAL CORPORATION
NON-GAAP FINANCIAL MEASURE RECONCILIATION  OPERATING INCOME
(GAAP MEASURE) TO GROSS MARGIN (NON-GAAP FINANCIAL MEASURE)
 TWELVE MONTHS ENDEDDECEMBER 31,
    
    
    Increase (Decrease)2006
    
    
    2005
    
    
    Pretax
    
    
    After TaxRECONCILIATION OF REGULATED ELECTRICITY SEGMENT GROSS MARGINOperating Income (closest GAAP measure)
    
    $
    618,870
    
    
    $
    515,289
    
    
    $
    103,581
    
    
    $
    63,133Plus:Operations and maintenance
    
    
    691,277
    
    
    
    635,827
    
    
    
    55,450
    
    
    
    33,797Real estate segment operations
    
    
    324,861
    
    
    
    278,366
    
    
    
    46,495
    
    
    
    28,339Depreciation and amortization
    
    
    358,644
    
    
    
    347,652
    
    
    
    10,992
    
    
    
    6,700Taxes other than income taxes
    
    
    128,395
    
    
    
    132,040
    
    
    
    (3,645
    )
    
    
    (2,222
    )Other expenses
    
    
    28,415
    
    
    
    51,987
    
    
    
    (23,572
    )
    
    
    (14,367
    )Regulatory disallowance
    
    
    
    
    
    
    138,562
    
    
    
    (138,562
    )
    
    
    (84,454
    )Marketing and trading fuel and purchased power
    
    
    290,637
    
    
    
    293,091
    
    
    
    (2,454
    )
    
    
    (1,496
    )Less:Real estate segment revenues
    
    
    399,798
    
    
    
    338,031
    
    
    
    61,767
    
    
    
    37,647Other revenues
    
    
    36,172
    
    
    
    61,221
    
    
    
    (25,049
    )
    
    
    (15,267
    )Marketing and trading revenues
    
    
    330,742
    
    
    
    351,558
    
    
    
    (20,816
    )
    
    
    (12,687
    )Regulated electricity segment gross margin
    
    $
    1,674,387
    
    
    $
    1,642,004
    
    
    $
    32,383
    
    
    $
    19,737RECONCILIATION OF MARKETING AND TRADING GROSS MARGINOperating Income (closest GAAP measure)
    
    $
    618,870
    
    
    $
    515,289
    
    
    $
    103,581
    
    
    $
    63,133Plus:Operations and maintenance
    
    
    691,277
    
    
    
    635,827
    
    
    
    55,450
    
    
    
    33,797Real estate segment operations
    
    
    324,861
    
    
    
    278,366
    
    
    
    46,495
    
    
    
    28,339Depreciation and amortization
    
    
    358,644
    
    
    
    347,652
    
    
    
    10,992
    
    
    
    6,700Taxes other than income taxes
    
    
    128,395
    
    
    
    132,040
    
    
    
    (3,645
    )
    
    
    (2,222
    )Other expenses
    
    
    28,415
    
    
    
    51,987
    
    
    
    (23,572
    )
    
    
    (14,367
    )Regulatory disallowance
    
    
    
    
    
    
    138,562
    
    
    
    (138,562
    )
    
    
    (84,454
    )Regulated electricity segment fuel and purchased power
    
    
    960,649
    
    
    
    595,141
    
    
    
    365,508
    
    
    
    222,777Less:Real estate segment revenues
    
    
    399,798
    
    
    
    338,031
    
    
    
    61,767
    
    
    
    37,647Other revenues
    
    
    36,172
    
    
    
    61,221
    
    
    
    (25,049
    )
    
    
    (15,267
    )Regulated electricity segment revenues
    
    
    2,635,036
    
    
    
    2,237,145
    
    
    
    397,891
    
    
    
    242,515Marketing and trading gross margin
    
    $
    40,105
    
    
    $
    58,467
    
    
    $
    (18,362
    )
    
    $
    (11,192
    )